1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 26, 1997
SERVICE EXPERTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 001-13037 62-1639453
- ---------------- ---------------- -----------------
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification
Incorporation) Number)
111 Westwood Place
Suite 420
Brentwood, Tennessee 37027
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(Address of principal executive offices) (Zip Code)
(615) 371-9990
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
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2
ITEM 5. OTHER EVENTS.
Service Experts, Inc., a Delaware corporation (the "Company"), operates
residential heating, ventilating and air conditioning ("HVAC") service and
replacement businesses. In connection with the acquisition of HVAC businesses,
the Company plans to offer shares of the Company's Common Stock, $.01 par value
per share (the "Common Stock"), warrants to purchase shares of Common Stock and
debt securities convertible into shares of Common Stock pursuant to its
Registration Statement on Form S-4. In order to comply with the disclosure
requirements of the Securities and Exchange Commission regarding the financial
statements of businesses acquired or to be acquired, the Company is filing this
Current Report containing the following audited and pro forma financial
statements:
(a) Financial Statements of Businesses Acquired or to be Acquired
See Pages F-1 through F-49.
(b) Pro Forma Financial Information
See Pages F-50 through F-57.
2
3
INDEX TO FINANCIAL STATEMENTS
PAGE
----
MARTIN MECHANICAL CONTRACTORS, INC.
Financial Statements for the Year ended February 28, 1997
Report of Independent Auditors.............................. F-2
Balance Sheet............................................... F-3
Statement of Income......................................... F-4
Statement of Stockholders' Equity........................... F-5
Statement of Cash Flows..................................... F-6
Notes to Financial Statements............................... F-7
PTM ENTERPRISES, INC.
Financial Statements for the Six Months ended August 31,
1997 (unaudited)
Balance Sheet............................................... F-12
Statement of Operations..................................... F-13
Statement of Stockholder's Equity........................... F-14
Statement of Cash Flows..................................... F-15
Notes to Financial Statements............................... F-16
E.L. PAYNE COMPANY
Financial Statements for the Year ended December 31, 1996
and Six Months ended June 30, 1997 (unaudited)
Report of Independent Auditors.............................. F-18
Balance Sheets.............................................. F-19
Statements of Operations.................................... F-20
Statements of Stockholder's Deficit......................... F-21
Statements of Cash Flows.................................... F-22
Notes to Financial Statements............................... F-23
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
Financial statements for the year ended August 31, 1996 and
nine months ended May 31, 1997 (unaudited)
Report of Independent Auditors.............................. F-29
Balance Sheets.............................................. F-30
Statements of Income........................................ F-31
Statements of Stockholders' Equity.......................... F-32
Statements of Cash Flows.................................... F-33
Notes to Financial Statements............................... F-34
TEAYS VALLEY HEATING AND COOLING, INC.
Financial statements for the year ended December 31, 1996
and six months ended June 30, 1997 (unaudited)
Report of Independent Auditors.............................. F-40
Balance Sheets.............................................. F-41
Statements of Income........................................ F-42
Statements of Stockholders' Equity.......................... F-43
Statements of Cash Flows.................................... F-44
Notes to Financial Statements............................... F-45
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation....................................... F-50
Unaudited Pro Forma Combined Balance Sheet as of June 30,
1997...................................................... F-52
Unaudited Pro Forma Combined Statements of Income for the
Six Months ended June 30, 1997 and for the Twelve Months
ended December 31, 1996................................... F-53
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-55
F-1
4
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Martin Mechanical Contractors, Inc.
We have audited the accompanying balance sheet of Martin Mechanical
Contractors, Inc. as of February 28, 1997, and the related statements of income,
stockholders' equity, and cash flows for the year ended February 28, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 Martin Mechanical
Contractors, Inc. at February 28, 1997, and the results of its operations and
its cash flows for the year ended February 28, 1997, in conformity with
generally accepted accounting principles.
Nashville, Tennessee
September 22, 1997
F-2
5
MARTIN MECHANICAL CONTRACTORS, INC.
BALANCE SHEET
FEBRUARY 28,
1997
------------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,203,463
Receivables:
Trade, net of allowance for doubtful accounts of
$75,000............................................... 1,908,281
Other receivables...................................... 10,525
----------
1,918,806
Inventories................................................. 33,935
Costs and estimated earnings in excess of billings.......... 101,153
Prepaid expenses and other current assets................... 49,828
----------
Total current assets.............................. 3,307,185
Property and equipment:
Leasehold improvements.................................... 57,728
Furniture and fixtures.................................... 82,084
Machinery and equipment................................... 230,544
Vehicles.................................................. 69,323
----------
439,679
Less accumulated depreciation and amortization............ (397,139)
----------
42,540
Goodwill.................................................... 10,423
Deferred income taxes....................................... 271,491
----------
Total assets...................................... $3,631,639
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $1,032,908
Accrued compensation...................................... 32,007
Accrued taxes, other than income.......................... 19,717
Accrued warranties........................................ 70,890
Deferred revenue.......................................... 169,007
Deferred income taxes..................................... 683,635
Billings in excess of costs and estimated earnings........ 504,902
----------
Total current liabilities......................... 2,513,066
----------
Stockholders' equity:
Common stock, $10 par value, 5,000 shares authorized,
1,476 shares issued and outstanding.................... 14,760
Retained earnings......................................... 1,103,813
----------
Total stockholders' equity........................ 1,118,573
----------
Total liabilities and stockholders' equity........ $3,631,639
==========
See accompanying notes.
F-3
6
MARTIN MECHANICAL CONTRACTORS, INC.
STATEMENT OF INCOME
YEAR ENDED
FEBRUARY 28,
1997
------------
Net revenues................................................ $14,783,470
Cost of goods sold.......................................... 12,379,758
-----------
Gross margin................................................ 2,403,712
Selling, general and administrative expenses................ 1,661,267
Bad debt expense............................................ 4,298
-----------
Income from operations...................................... 738,147
Interest income............................................. 31,723
-----------
Income before taxes......................................... 769,870
Provision for income tax:
Current................................................... --
Deferred.................................................. 296,680
-----------
Total income taxes................................ 296,680
-----------
Net income........................................ $ 473,190
===========
See accompanying notes.
F-4
7
MARTIN MECHANICAL CONTRACTORS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
$10 PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ---------- ----------
Balance at March 1, 1996.............................. $1,476 $14,760 $ 630,623 $ 645,383
Net income.......................................... -- -- 473,190 473,190
------ ------- ---------- ----------
Balance at February 28, 1997.......................... 1,476 14,760 1,103,813 1,118,573
====== ======= ========== ==========
See accompanying notes.
F-5
8
MARTIN MECHANICAL CONTRACTORS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED
FEBRUARY 28,
1997
------------
OPERATING ACTIVITIES
Net income.................................................. $ 473,190
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,818
Provision for deferred income taxes....................... 296,680
Provision for loss on accounts receivable................. 4,299
Changes in assets and liabilities:
Accounts receivable.................................... 612,373
Inventories............................................ (1,692)
Prepaid expenses and other current assets.............. (23,199)
Trade accounts payable and accrued liabilities......... (131,170)
Accrued compensation................................... 32,007
Accrued taxes, other than income....................... (639)
Deferred revenue....................................... 36,127
Accrued warranties..................................... 65,770
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings.... (328,043)
----------
Net cash flow provided by operating activities.............. 1,042,521
INVESTING ACTIVITIES
Purchase of property, equipment............................. (26,112)
----------
Net cash used in investing activities....................... (26,112)
----------
Increase in cash and cash equivalents....................... 1,016,409
Cash and cash equivalents at beginning of period............ 187,054
----------
Cash and cash equivalents at end of Period.................. $1,203,463
==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ --
==========
Income taxes paid........................................... $ --
==========
See accompanying notes.
F-6
9
MARTIN MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Martin Mechanical Contractors, Inc. ("the Company") operates a commercial
construction company. The contract jobs include HVAC, plumbing and electrical.
In addition, the Company has two divisions which are primarily engaged in the
installation and servicing of air conditioning and heating systems for
commercial and residential customers primarily in the Atlanta and Athens,
Georgia areas.
RECOGNITION OF INCOME
Revenues on all of the Company's commercial contracts ("Contracts") are
recognized on the percentage-of-completion method in the ratio that total
incurred costs bear to total estimated costs. Revenues on all of the Company's
heating and air conditioning installation for residential installation and
service and maintenance revenue are recognized upon completion of the services,
which is usually within one to two days.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 12 to 18 months.
Trade accounts receivable includes billings and billed retainage on
Contracts. The Company classifies these amounts as current assets because all
balances are expected to be collected in the current year. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base, and their
dispersions across many different industries and geographies.
The asset, "cost and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings" represent
billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheet for accounts receivable
and accounts payable approximate fair value.
CONCENTRATIONS OF CREDIT
At February 28, 1997, the Company had approximately $2 million on deposit
with banks in excess of FDIC insurance limits.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
F-7
10
MARTIN MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method and declining-balance
methods over the following useful lives:
YEARS
-----
Leasehold improvements...................................... 5
Furniture and fixtures...................................... 5-7
Machinery and equipment..................................... 5
Vehicles.................................................... 5
ACCRUED COMPENSATION
Accrued compensation consists of salary, bonus, commission and vacation
expenses payable to various employees.
WARRANTIES
The Company offers the retail customer an optional 5 year extended warranty
on parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the manufacturer's
warranty on parts. The Company recognizes the revenue associated with these
contracts over the period of the agreement. The costs of services performed
under the contracts are charged to expense as incurred.
EXTENDED SERVICE AGREEMENTS
The Company provides the customer with one to five year extended service
agreements. The Company recognizes the revenue associated with these contracts
over the period of the agreement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
GOODWILL
Goodwill is being amortized using the straight-line method over 15 years.
INCOME TAXES
The Company uses the liability method of accounting for federal and state
income taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under
the liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Amounts charged to bad debt expense totaled $4,299 for fiscal 1997.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During fiscal 1997, the
Company expensed $102,897.
F-8
11
MARTIN MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from transactions from
owners) and includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation adjustments.
Management of the Company does not expect the adoption of FAS No. 130 to have a
material impact on the Company's financial statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
FEBRUARY 28,
1997
------------
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts...................... $ 6,814,803
Estimated earnings........................................ 1,737,607
-----------
8,552,410
Less applicable billings.................................... (8,956,159)
-----------
$ (403,749)
===========
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 101,153
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (504,902)
-----------
$ (403,749)
===========
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
3. LEASES
Total rental expense for all operating leases was $581,705 for the year
ended February 28, 1997. The Company leases certain vehicles, equipment, and
office and warehouse facilities from a stockholder of the Company under terms of
noncancelable operating lease agreements which expire at various dates through
February 2000. Minimum rental commitments at February 28, 1997 under operating
leases having an initial noncancelable term of one year or more are as follows:
OPERATING
LEASES
---------
1998........................................................ $227,706
1999........................................................ 143,724
2000........................................................ 68,042
--------
$439,472
========
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
F-9
12
MARTIN MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Income tax expense consists of the following at February 28, 1997:
FEBRUARY 28,
1997
------------
Deferred.................................................... $296,680
========
Significant components of the deferred tax assets and liabilities as of
February 28, 1997, are as follows:
Deferred tax liabilities:
Contract billings......................................... $765,941
Prepaid expenses.......................................... 12,976
--------
Deferred tax liabilities.................................... 778,917
Deferred tax assets:
Accounts receivable....................................... 28,470
Compensation and deferred revenue......................... 66,811
Goodwill.................................................. 3,796
Contribution carryforward................................. 19,665
NOL carryforward.......................................... 248,031
--------
Total gross deferred tax assets................... 366,773
Valuation allowance......................................... --
--------
Deferred tax assets......................................... 366,773
--------
Net deferred tax liabilities................................ $412,144
========
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized during the carryforward period.
Accordingly, no valuation allowance has been recorded for the year ended
December 31, 1996.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
FEBRUARY 28,
1997
------------
Tax provision at statutory rate............................. $261,756
State income tax less applicable federal tax benefit........ 30,794
Adjustment to eliminate S corporation....................... 7,715
Other, net.................................................. (3,585)
--------
$296,680
========
The Company has net operating loss carryforwards in the amount of 653,400
which begin to expire in the year 2010 through 2012.
6. RELATED PARTY TRANSACTIONS
During fiscal 1997 the Company paid a management fee of $200,000 to the
majority stockholder of the Company. This fee is included in selling, general
and administrative expenses. In addition, as disclosed in note 3, the Company
leases certain vehicles, equipment, and office and warehouse facilities.
7. SUBSEQUENT EVENT
Subsequent to year end, the Company transferred the assets of residential
division of the Company to Paul Martin, the majority owner of the Company, in
exchange for the majority owners' stock of the Company in a noncash transaction.
On March 1, 1997 Paul Martin contributed the former assets and liabilities of
the
F-10
13
MARTIN MECHANICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
residential division of Martin Mechanical Contractors, Inc. to two Sub Chapter S
corporations, Bulldog Heating and Air Conditioning, Inc. ("Bulldog") and Macy's
Air Conditioning and Heating, Inc. ("Macy's"). On July 1, 1997 Bulldog and
Macy's were merged into PTM Enterprises, Inc. In connection with the transfer of
the residential division of the Company, the lessor, who was previously the
majority stockholder of the Company, agreed to terminate the lease agreement for
assets used in the residential division effective March 1, 1997.
Martin Mechanical Contractors, Inc.'s residential division's results of
operations for the year ended February 28, 1997 included net sales and operating
income of $3,834,779 and $109,340 respectively. Net assets of the residential
division at February 28, 1997 consisted of the following:
Cash........................................................ $ 500
Accounts receivable, net of allowances...................... 521,341
Accounts payable............................................ (169,796)
Deferred revenue............................................ (239,897)
---------
$ 112,148
=========
Subsequent to year end, PTM Enterprises, Inc. has signed a Letter of Intent
with Service Experts, Inc. to sell all of the Company's stock. In accordance
with the Letter of Intent, the Company will become a wholly-owned subsidiary of
Service Experts, Inc.
F-11
14
PTM ENTERPRISES, INC.
BALANCE SHEET
(UNAUDITED)
AUGUST 31,
1997
----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 508,221
Trade receivables, net of allowance for doubtful accounts
of $15,000............................................. 485,453
Inventories................................................. 58,256
----------
Total current assets.............................. 58,256
Property and equipment:
Furniture and fixtures.................................... 84,520
Vehicles.................................................. 302,158
----------
386,678
Less accumulated depreciation............................. 12,334
----------
374,344
Deferred income taxes....................................... 5,694
----------
Total assets...................................... $1,431,968
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $ 435,589
Accrued compensation...................................... 34,298
Accrued taxes, other than income.......................... 14,334
Income taxes payable...................................... 69,993
Deferred revenue.......................................... 151,201
Notes payable............................................. 165,449
----------
Total current liabilities......................... 870,864
----------
Stockholder's equity:
Common stock, no par value, 1,000,000 shares authorized,
580,000 shares issued and outstanding.................. 580,000
Retained deficit.......................................... (18,896)
----------
Total stockholder's equity........................ 561,104
----------
Total liabilities and stockholder's equity........ $1,431,968
==========
See accompanying notes.
F-12
15
PTM ENTERPRISES, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
SIX MONTHS
ENDED AUGUST 31,
1997
-----------------
Net revenues................................................ $ 2,298,598
Cost of goods sold.......................................... 1,749,292
-----------
Gross margin................................................ 549,306
Selling, general and administrative expenses................ 483,767
Bad debt expense............................................ 20,136
-----------
Income before taxes......................................... 45,403
Provision (benefit) for income tax:
Current................................................... 69,993
Deferred.................................................. (5,694)
-----------
Total income taxes................................ 64,299
-----------
Net loss.......................................... $ (18,886)
===========
See accompanying notes.
F-13
16
PTM ENTERPRISES, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(UNAUDITED)
COMMON STOCK
NO PAR VALUE
------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- -------- -------- --------
Balance at March 1, 1997............................... -- $ -- $ -- $ --
------- -------- -------- --------
Capital stock issued................................. -- 580,000 -- 580,000
Net loss (unaudited)................................. -- -- (18,896) (18,896)
------- -------- -------- --------
Balance at August 31, 1997 (unaudited)................. -- $580,000 $(18,896) $561,104
======= ======== ======== ========
See accompanying notes.
F-14
17
PTM ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED
AUGUST 31,
1997
----------
OPERATING ACTIVITIES
Net loss.................................................... $ (18,896)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 12,334
Benefit for deferred income taxes......................... (5,694)
Provision for loss on accounts receivable................. 15,000
Changes in assets and liabilities:
Accounts receivable.................................... 20,888
Inventories............................................ (58,256)
Trade accounts payable and accrued liabilities......... 265,783
Accrued compensation................................... 34,298
Accrued taxes, other than income....................... 14,344
Deferred revenue....................................... (88,696)
Income taxes payable................................... 69,993
----------
Net cash flow provided by operating activities.............. 261,098
INVESTING ACTIVITIES
Purchase of property, equipment............................. (12,678)
----------
Net cash (used in) investing activities..................... (12,678)
FINANCING ACTIVITIES:
Proceeds on short term debt................................. 165,449
Issuance of Company Stock................................... 93,852
==========
Net cash provided by financing activities................... 259,301
Increase in cash and cash equivalents....................... 507,721
Cash and cash equivalents at beginning of period............ 500
----------
Cash and cash equivalents at end of Period.................. $ 508,221
==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ --
==========
Income taxes paid........................................... $ --
==========
Accounts receivable contributed............................. $ 521,341
==========
Accounts payable contributed................................ $ 169,796
==========
Deferred revenue contributed................................ $ 239,897
==========
Issuance of common stock for net assets assumed............. $ 112,148
==========
Issuance of common stock for Property, plant and
equipment................................................. $ 374,000
==========
See accompanying notes.
F-15
18
PTM ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
PTM Enterprises, Inc. is primarily engaged in the installation and
servicing of air conditioning and heating systems for residential customers
primarily in the Atlanta and Athens, Georgia areas.
On March 1, 1997 Paul Martin contributed the former assets and liabilities
of the residential division of Martin Mechanical Contractors, Inc. into two Sub
Chapter S Corporations, Bulldog Heating and Air Conditioning, Inc. ("Bulldog")
and Macy's Air Conditioning and Heating, Inc. ("Macy's") at the carryover basis
from Martin Mechanical Contractors, Inc. The results of operations for the six
months ended August 31, 1997 are the combined results of Bulldog and Macy's for
the four months ended June 30, 1997 and PTM Enterprises for the three months
ended August 31, 1997. On June 1, 1997 Bulldog and Macy's were merged into PTM
Enterprises, Inc. at the carryover basis.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services, which is usually within one to two days.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersions across many different industries and geographies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheet for accounts receivable
and accounts payable approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
provided on the straight-line method and declining-balance methods over the
following useful lives:
YEARS
-----
Furniture and fixtures...................................... 5-7
Vehicles.................................................... 5
ACCRUED COMPENSATION
Accrued compensation consists of salary, bonus, commission and vacation
expenses payable to various employees.
F-16
19
PTM ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EXTENDED SERVICE AGREEMENTS
The Company provides the customer with one to five year extended service
agreements. The Company recognizes the revenue associated with these contracts
over the period of the agreement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state
income taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under
the liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the six months ended June 30, 1997, amounts charged to bad debt
expense totaled $20,136.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During the six months
ended August 31, 1997 the Company expensed $30,606.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from transactions from
owners) and includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation adjustments.
Management of the Company does not expect the adoption of FAS No. 130 to have a
material impact on the Company's financial statements.
2. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
3. LETTER OF INTENT
The Company has signed a Letter of Intent with Service Experts, Inc. to
sell all of the Company's stock. In accordance with the Letter of Intent, the
Company will become a wholly-owned subsidiary of Service Experts, Inc.
F-17
20
REPORT OF INDEPENDENT AUDITORS
The Stockholder
E.L. Payne Company
We have audited the accompanying balance sheet of E.L. Payne Company (the
"Company") as of December 31, 1996, and the related statements of operations,
stockholder's deficit, 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 E.L. Payne Company at December
31, 1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 2, the
Company has a working capital deficiency and a net stockholder deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Nashville, Tennessee
September 19, 1997
F-18
21
E.L. PAYNE COMPANY
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $ -- $ 25,139
Receivables:
Trade, net of allowance for doubtful accounts of $8,000
and $7,000 at December 31, 1996 and June 30, 1997,
respectively........................................... 104,429 88,214
Employee receivables.................................... -- 500
----------- -----------
104,429 88,714
Inventories................................................. 89,050 89,878
Note receivable............................................. 8,500 --
Prepaid expenses and other current assets................... 27,972 41,941
----------- -----------
Total current assets............................... 229,953 245,672
Property and equipment:
Furniture and fixtures.................................... 328,954 346,022
Machinery and equipment................................... 93,285 101,421
Vehicles.................................................. 457,017 457,017
----------- -----------
879,256 904,460
Less accumulated depreciation and amortization............ (661,454) (699,333)
----------- -----------
217,802 205,127
----------- -----------
Total assets....................................... $ 447,753 $ 450,799
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Cash overdraft............................................ $ 94,400 $ --
Trade accounts payable and accrued liabilities............ 452,103 570,114
Accrued compensation...................................... 83,149 140,779
Accrued taxes, other than income.......................... 15,858 14,044
Accrued warranties........................................ 35,000 35,006
Deferred revenue.......................................... 658,869 658,869
Due to officer............................................ 245,000 245,000
Current portion of long-term liabilities.................. 68,281 68,281
----------- -----------
Total current liabilities.......................... 1,652,660 1,732,093
Loan payable.............................................. 30,433 27,137
Capital lease obligations................................. 88,088 56,826
Deferred compensation..................................... 1,040,050 1,029,005
Legal settlements payable................................. 159,000 146,000
----------- -----------
Total liabilities.................................. 2,970,231 2,991,061
Stockholder's deficit:
Class A Common, $100 par value, 2,000 shares authorized,
68 shares issued, 34 shares outstanding................. 6,800 6,800
Class B Common, $100 par value, 2,000 shares authorized,
680 shares issued, 340 shares outstanding............... 68,000 68,000
Additional paid-in capital................................ 95,013 95,013
Retained deficit.......................................... (723,175) (740,959)
Less: Cost of treasury stock, at cost, 34 Class A Common,
340 shares Class B Common............................... (1,969,116) (1,969,116)
----------- -----------
Total stockholder's deficit........................ (2,522,478) (2,540,262)
----------- -----------
Total liabilities and stockholder's deficit........ $ 447,753 $ 450,799
=========== ===========
See accompanying notes.
F-19
22
E.L. PAYNE COMPANY
STATEMENTS OF OPERATIONS
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
Net revenues................................................ $5,941,096 $2,770,876
Cost of goods sold.......................................... 3,136,775 1,690,431
---------- ----------
Gross margin................................................ 2,804,321 1,080,445
Selling, general and administrative expenses................ 2,727,093 1,061,958
Bad debt expense............................................ 27,321 2,422
---------- ----------
Income from operations...................................... 49,907 16,065
Other income (expense):
Interest income........................................... -- 438
Interest expense.......................................... (62,469) (34,909)
Other income.............................................. 3,295 622
---------- ----------
(59,174) (33,849)
---------- ----------
Net loss.................................................... $ (9,267) $ (17,784)
========== ==========
See accompanying notes.
F-20
23
E.L. PAYNE COMPANY
STATEMENTS OF STOCKHOLDER'S DEFICIT
CLASS A CLASS B
COMMON COMMON
$100 PAR VALUE $100 PAR VALUE ADDITIONAL TREASURY STOCK
--------------- ---------------- PAID-IN RETAINED --------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------ ------- ---------- --------- ------ ----------- -----------
Balance at January 1, 1996... 68 $6,800 680 $68,000 $95,013 $(713,908) 374 $(1,969,116) $(2,513,211)
Net loss................... -- -- -- -- -- (9,267) -- -- (9,267)
--- ------ ---- ------- ------- --------- ---- ----------- -----------
Balance at December 31,
1996....................... 68 6,800 680 68,000 95,013 (723,175) 374 (1,969,116) (2,522,478)
Net loss (unaudited)....... -- -- -- -- -- (17,784) -- -- (17,784)
--- ------ ---- ------- ------- --------- ---- ----------- -----------
Balance at June 30, 1997
(unaudited)................ 68 $6,800 680 $68,000 $95,013 $(740,959) 374 $(1,969,116) $(2,540,262)
=== ====== ==== ======= ======= ========= ==== =========== ===========
See accompanying notes.
F-21
24
E.L. PAYNE COMPANY
STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss.................................................. $ (9,267) $(17,784)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................ 70,099 37,880
Provision for loss on accounts receivable............ 8,000 7,000
Gain on asset disposals.............................. -- (622)
Deferred compensation................................ 127,050 (11,045)
Changes in assets and liabilities:
Accounts and notes receivable........................ 18,232 17,215
Inventories.......................................... 68,087 (826)
Prepaid expenses and other current assets............ (2,736) (13,969)
Trade accounts payable and accrued liabilities....... 10,567 120,017
Accrued compensation................................. 19,302 57,630
Accrued taxes, other than income..................... (42,998) (1,808)
Deferred revenue..................................... (43,652) --
-------- --------
Net cash flow provided by operating activities.............. 222,684 193,688
INVESTING ACTIVITIES:
Purchase of property and equipment.......................... (160,958) (30,206)
Proceeds from sale of property and equipment................ -- 5,624
-------- --------
Net cash used in investing activities....................... (160,958) (24,582)
FINANCING ACTIVITIES:
Payments on short-term debt................................. (95,065) (2,009)
Payments on long-term debt and capital leases............... -- (47,558)
Proceeds from long-term debt................................ 30,606 --
-------- --------
Net cash used in financing activities....................... (64,459) (49,567)
-------- --------
Increase (decrease) in cash (cash overdraft)................ (2,733) 119,539
Cash overdraft at beginning of period....................... (91,667) (94,400)
-------- --------
Cash (cash overdraft) at end of period...................... $(94,400) $ 25,139
======== ========
Supplemental Cash Flow Information:
Interest paid............................................. $ 48,703 $ 18,274
======== ========
Purchase of Equipment through Capital Leases.............. $104,946 $ --
======== ========
See accompanying notes.
F-22
25
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
E.L. Payne Company ("the Company") operates in one industry segment and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for commercial and residential customers in the West Hills,
California area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of June 30, 1997 and the related statements of
operations and cash flows for the six months then ended (interim financial
statements) have been prepared by the Company's management and are unaudited.
Management believes the interim financial statements include all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the interim results.
Certain information and footnote disclosures normally included in financial
statements prepared with generally accepted accounting principles have been
condensed or omitted from the interim financial statements. The interim
financial statements should be read in conjunction with the December 31, 1996
audited financial statements appearing herein. The results of the six months
ended June 30, 1997 may not be indicative of operating results for the full
year.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for residential installation and Service and maintenance revenue are recognized
upon completion of the services, which is usually within one to two days.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersions across many different industries and geographical locations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash approximate
fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
F-23
26
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation and amortization
are provided on the straight-line method and declining-balance methods over the
following useful lives:
YEARS
-----
Furniture and fixtures...................................... 3-7
Machinery and equipment..................................... 5
Vehicles.................................................... 5
ACCRUED COMPENSATION
Accrued compensation consists of salary, bonus, commission and vacation
expenses payable to various employees.
WARRANTIES
The Company provides the retail customer with a one year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts.
The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state
income taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under
the liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
are expected to reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1996, amounts charged to bad debt
expense totaled $8,691 and recoveries of accounts previously written off were
$4,073.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1996, the
Company expensed $20,082.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of
F-24
27
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
general purpose financial statements. Statement No. 130 is effective for interim
and annual periods beginning after December 15, 1997. Comprehensive income
encompasses all changes in stockholders' equity (except those arising from
transactions from owners) and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. Management of the Company does not expect the adoption of FAS No.
130 to have a material impact on the Company's financial statements.
2. MANAGEMENT'S PLANS
At December 31, 1996, the Company had a working capital deficit of
$1,422,707 and a total Stockholder's deficit of $2,522,478. In addition, the
Company experienced a cash flow deficiency of $2,733 in 1996. As described in
Note 8, the Company resolved certain litigation in 1997 which will require
monthly payments of $4,000 for 24 months. Accordingly, there is substantial
doubt as to the Company's ability to continue as a going concern for the next
year.
Management plans to seek additional capital from the stockholder of the
Company or to negotiate a sale of the Company (see Note 10) to ensure timely
payment of its future obligations as they become due.
3. DEBT
Debt consists of:
DECEMBER 31,
1996
------------
Due to officer (see Note 6)................................. $245,000
Installment loan............................................ 37,191
--------
282,191
Less current portion........................................ 251,758
--------
Long-term debt.............................................. $ 30,433
========
The Company has an installment loan which is secured by a vehicle. The loan
bears a fixed interest rate of 9.8% per annum at December 31, 1996. The loan
requires monthly payment of $842 and is due through July 2001.
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
1997........................................................ $251,758
1998........................................................ 7,451
1999........................................................ 8,216
2000........................................................ 9,058
2001........................................................ 5,708
--------
$282,191
========
F-25
28
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. LEASES
Total rental expense for all operating leases was $122,982 for 1996. The
Company leases certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating and capital lease agreements which expire
at various dates through 2001. Minimum rental commitments at December 31, 1996
under capital and operating leases having an initial noncancelable term of one
year or more are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
1997........................................................ $ 80,893 $ 48,655
1998........................................................ 80,867 48,655
1999........................................................ 32,584 48,655
2000........................................................ 16,922 47,657
2001........................................................ -- 41,855
-------- --------
211,266 $235,477
========
Amounts representing interest............................... (61,655)
--------
Present value of net minimum rentals
(including $61,524 classified as current)................. $149,611
========
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
DECEMBER 31,
1996
------------
Machinery and equipment..................................... $ 257,856
Less accumulated amortization............................... (117,140)
---------
Net equipment under capital leases.......................... $ 140,716
=========
Amortization of the assets under capital leases is included in depreciation
expense.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may make contributions, on a
tax deferred basis, not to exceed the maximum established by the Internal
Revenue Service. The Company provides matching contributions of 20% of total
contributions by a plan member, which totaled $21,984 for 1996.
6. RELATED PARTY TRANSACTIONS
In June 1995, the Company entered into a promissory note agreement in the
amount of $245,000 due to an officer of the Company. Interest on the principal
is accrued at 9% per annum and paid monthly. The entire principal of the note is
due October 31, 1997.
7. DEFERRED COMPENSATION
In 1991 the Company entered into a salary continuation agreement with a
nonshareholder officer whereby the Company will make annual payments of $103,000
to the officer for the remainder of the officer's life. The deferred liability
is classified as long-term and totaled $831,843 at December 31, 1996. The amount
charged to expense in 1996 relating to this agreement was $102,850.
F-26
29
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
In April 1995, a former employee of the Company filed a lawsuit against the
Company for wrongful termination. The case was settled in April 1997 for
$96,000. The $96,000 has been accrued as of December 31, 1996.
In addition, the Company is a defendant in legal proceedings in connection
with royalty payments payable to a vendor. The parties are in settlement
discussions and the plaintiffs are demanding $58,000 to settle the case. In the
opinion of management, the resolution of this proceeding will not have a
material adverse effect on the financial position or results of operations.
9. INCOME TAXES
Income tax expense consists of the following at December 31, 1996:
DECEMBER 31,
1996
------------
Current:
Federal................................................... $ --
State..................................................... --
Deferred.................................................... --
---------
$ --
=========
Significant components of the deferred tax assets and liabilities as of
December 31, 1996, are as follows:
Deferred tax assets:
Accounts receivable....................................... 147,897
Deferred compensation..................................... 333,902
Net operating loss carryforward........................... 114,118
Depreciation and amortization............................. 17,861
Legal settlements payable................................. 63,823
--------
Total gross deferred tax assets............................. 677,601
Valuation allowance......................................... (677,601)
--------
Deferred tax assets......................................... --
--------
Net deferred tax assets..................................... $ --
========
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
DECEMBER 31,
1996
------------
Tax provision at statutory rate............................. $ 5,077
State income tax less applicable federal tax benefit........ 4,194
NOL carryforward and other.................................. (9,271)
--------
$ --
========
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely not be realized during the carryforward period. Accordingly, a
valuation allowance of $677,601 has been recorded for the year ended December
31, 1996. The valuation allowance was decreased by 6,478 during the year ended
December 31, 1996.
F-27
30
E.L. PAYNE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, the Company has $284,300 of regular tax net operating
loss carryforwards which expire from 2005 to 2010.
10. SUBSEQUENT EVENTS
On July 4, 1997, the Company purchased all of the outstanding stock of
George & Son Refrigeration Corporation (the "Acquired Company") for $200,000
subject to adjustment based on the operating performance of the Acquired Company
during the 12 month period following the closing. This transaction will be
accounted for as a purchase. Pro forma unaudited information, as if the
acquisition were completed at the beginning of 1996 for all periods presented,
is reflected as follows:
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
1996 JUNE 30, 1997
------------ ----------------
Operating revenues............................ $6,432,676 $ 3,016,666
========== ===========
Net loss...................................... $ (17,320) $ (49,199)
========== ===========
The Acquired Company has been named as a defendant in a civil suit asserted
by a customer. Management of the Company believes that all settlement and legal
costs will be covered by the Acquired Company's insurance carrier.
Subsequent to year-end, the Company entered into letters of intent to
purchase two heating and air conditioning companies. There can be no assurance
that the Company will be able to consummate these acquisitions.
Subsequent to year end the Company signed a Letter of Intent with Service
Experts, Inc. to sell all of the Company's stock. In accordance with the Letter
of Intent, the Company will become a wholly-owned subsidiary of Service Experts,
Inc.
F-28
31
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Getzschman Heating & Sheet Metal Contractors, Inc.
We have audited the accompanying balance sheet of Getzschman Heating &
Sheet Metal Contractors, Inc. as of August 31, 1996, and the related statements
of income, stockholders' equity, and cash flows for the year ended August 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 Getzschman Heating & Sheet
Metal Contractors, Inc. at August 31, 1996, and the results of its operations
and its cash flows for the year ended August 31, 1996, in conformity with
generally accepted accounting principles.
Nashville, Tennessee
September 21, 1997
F-29
32
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
BALANCE SHEETS
AUGUST 31, MAY 31,
1996 1997
---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 45,559 $ 9,987
Receivables:
Trade, net of allowance for doubtful accounts of $5,000
at August 31, 1996 and May 31, 1997 (unaudited)....... 418,006 630,263
Employee............................................... 1,483 --
---------- ----------
Total accounts receivable................................... 419,489 630,263
Inventories................................................. 261,462 272,396
Notes receivable from stockholder........................... -- 3,572
Costs and estimated earnings in excess of billings.......... 130,295 25,869
Refundable income taxes..................................... -- 27,262
Prepaid expenses and other current assets................... 4,092 4,102
Deferred income taxes....................................... 28,819 29,364
---------- ----------
Total current assets........................................ 889,716 1,002,815
Property, buildings and equipment:
Leasehold improvements.................................... 18,322 18,322
Land...................................................... 7,000 7,000
Buildings................................................. 21,077 21,077
Machinery and equipment................................... 227,030 270,816
Vehicles.................................................. 233,067 286,568
---------- ----------
506,496 603,783
Less accumulated depreciation and amortization............ (293,095) (347,378)
---------- ----------
213,401 256,405
Deferred income taxes....................................... 3,862 8,397
Other assets................................................ 37,972 24,655
---------- ----------
Total assets...................................... $1,144,951 $1,292,272
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $ 411,018 $ 533,171
Accrued compensation...................................... 34,493 39,222
Accrued taxes, other than income.......................... 58,744 29,016
Accrued warranties........................................ 14,000 14,000
Income taxes payable...................................... 17,528 --
Deferred revenue.......................................... 48,737 58,591
Billings in excess of costs and estimated earnings........ 33,215 33,428
Liability to Company's benefit plan....................... 40,000 --
Note payable to employee.................................. -- 8,367
Notes payable to stockholders............................. 37,757 --
Current portion of long-term debt and capital lease
obligations............................................ 90,424 217,614
---------- ----------
Total current liabilities................................... 785,906 933,409
Long-term debt and capital lease obligations, net of
current................................................... 114,664 121,000
Stockholders' equity:
Common stock, $100 par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 10,000 10,000
Retained earnings......................................... 234,381 227,863
---------- ----------
Total stockholders' equity.................................. 244,381 237,863
---------- ----------
Total liabilities and stockholders' equity........ $1,144,951 $1,292,272
========== ==========
See accompanying notes.
F-30
33
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
STATEMENTS OF INCOME
YEAR ENDED NINE MONTHS
AUGUST 31, ENDED MAY 31,
1996 1997
---------- -------------
. (UNAUDITED)
Net revenues................................................ $4,490,519 $3,327,803
Cost of goods sold.......................................... 3,232,350 2,486,616
---------- ----------
Gross margin................................................ 1,258,169 841,187
Selling, general and administrative expenses................ 1,122,264 802,757
---------- ----------
Income from operations...................................... 135,905 38,430
Other income (expense):
Interest expense.......................................... (22,953) (17,149)
Interest income........................................... 1,642 1,850
Other expense............................................. (11,608) (22,395)
---------- ----------
(32,919) (37,694)
---------- ----------
Income before taxes......................................... 102,986 736
Provision (benefit) for income tax:
Current................................................... 54,505 --
Deferred.................................................. (16,016) (5,080)
---------- ----------
Total income taxes.......................................... 38,489 (5,080)
---------- ----------
Net income.................................................. $ 64,497 $ 5,816
========== ==========
See accompanying notes.
F-31
34
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
Balance at September 1, 1995.............................. 100 $10,000 $169,884 $179,884
Net income.............................................. -- -- 64,497 64,497
--- ------- -------- --------
Balance at August 31, 1996................................ 100 10,000 234,381 244,381
Capital distributions (unaudited)....................... -- -- (12,334) (12,334)
Net income (unaudited).................................... -- -- 5,816 5,816
--- ------- -------- --------
Balance at May 31, 1997 (unaudited)....................... 100 $10,000 $227,863 $237,863
=== ======= ======== ========
See accompanying notes.
F-32
35
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS
AUGUST 31, ENDED MAY 31,
1996 1997
----------- -------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................................. $ 64,497 $ 5,816
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................. 62,011 54,283
Benefit for deferred income taxes......................... (16,016) (5,080)
Allowance for doubtful accounts........................... 4,901 3,890
Changes in assets and liabilities:
Accounts and notes receivable.......................... 501,406 (218,236)
Inventories............................................ (111,585) (10,934)
Prepaid expenses and other current assets.............. (634) --
Trade accounts payable and accrued liabilities......... (185,719) 90,520
Accrued compensation................................... 34,493 4,729
Accrued taxes, other than income....................... 16,671 (29,728)
Accrued warranties..................................... 3,000 --
Deferred revenue....................................... 21,079 9,854
Income taxes payable................................... (14,941) (44,780)
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings.... (267,168) 104,639
-------- --------
Net cash flow provided by (used in) operating activities.... 111,995 (35,027)
INVESTING ACTIVITIES
Purchase of property, buildings and equipment............... (163,512) (97,287)
Cash value on life insurance................................ 1,788 13,307
-------- --------
Net cash used in investing activities....................... (161,724) (83,980)
FINANCING ACTIVITIES
Distribution to stockholders................................ -- (12,334)
Payments on other debt...................................... (6,053) (37,757)
Payments on long-term debt and capital leases............... (49,528) (33,496)
Proceeds from long-term debt................................ 102,284 167,022
-------- --------
Net cash provided by financing activities................... 46,703 83,435
-------- --------
Decrease in cash and cash equivalents....................... (3,026) (35,572)
Cash and cash equivalents at beginning of period............ 48,585 45,559
-------- --------
Cash and cash equivalents at end of period.................. $ 45,559 $ 9,987
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 21,608 $ 17,150
======== ========
Income taxes paid........................................... $ 67,461 $ --
======== ========
Purchase of equipment through capital leases................ $ 17,628 $ --
======== ========
See accompanying notes.
F-33
36
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Getzschman Heating & Sheet Metal Contractors, Inc. ("the Company") operates
in one industry segment and is primarily engaged in the installation and
servicing of air conditioning and heating systems as well as sheet metal and
roofing material for commercial and residential customers in the states of
Nebraska and Iowa.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of May 31, 1997 and the related statements of income,
stockholders' equity, and cash flows for the nine months then ended (interim
financial statements) have been prepared by the Company's management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the August 31,
1996 audited financial statements appearing herein. The results of the nine
months ended May 31, 1997 may not be indicative of operating results for the
full year.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
contracts ("Contracts") for commercial buildings are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues on all of the Company's heating and air
conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services, which is
usually within one to two days.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 6 to 18 months.
Trade accounts receivable includes billings and billed retainage on
Contracts. The Company classifies these amounts as current assets because all
balances are expected to be collected in the current year. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Company's customer base, and their
dispersions across many different industries and geographies.
The asset, "cost and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings" represent
billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amount reported in the balance sheets for cash and cash
equivalents approximate fair value.
F-34
37
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the balance sheets for accounts
receivable, accounts payable and accrued liabilities approximate fair value.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line method and
accelerated methods over the following useful lives:
YEARS
-----
Leasehold improvements...................................... 5-15
Building.................................................... 31.5
Machinery and equipment..................................... 4-7
Vehicles.................................................... 5-7
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
requires that companies consider whether indicators of impairment of long-lived
assets held for use are present. If such indicators are present, companies
determine whether the sum of the estimated undiscounted future cash flows
attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property, buildings and equipment and has
determined that there were no indications of impairment as of August 31, 1996.
ACCRUED COMPENSATION
Accrued compensation consists of salary, bonus, commission and vacation
expenses payable to various employees.
WARRANTIES
The Company provides the retail customer with a two year warranty on labor
from the date of installation of the heating and air conditioning unit. The
Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
F-35
38
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state
income taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under
the liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended August 31, 1996, amounts charged to bad debt expense
totaled $386 and accounts written-off net of recoveries were ($98).
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1996, the
Company expensed $64,284.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from transactions from
owners) and includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation adjustments.
Management of the Company does not expect the adoption of FAS No. 130 to have a
material impact on the Company's financial statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
AUGUST 31,
1996
----------
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts...................... $588,152
Estimated earnings........................................ 188,952
--------
777,104
Less applicable billings.................................... (680,024)
--------
$ 97,080
========
Included in the accompanying balance sheet under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $130,295
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (33,215)
--------
$ 97,080
========
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
F-36
39
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of:
AUGUST 31,
1996
----------
Line of credit.............................................. $ 45,000
Mortgage note payable....................................... 19,982
Installment and equipment notes............................. 120,517
--------
189,499
Less current portion........................................ 86,496
--------
$ 99,003
========
The Company has a line of credit with a financial institution with a total
borrowing limit of $100,000. The line of credit bears interest at a variable
rate, 9.7% at August 31, 1996.
The Company has a mortgage note payable which is secured by the Company's
satellite office building and land. This loan requires monthly installments of
$351, including principal and interest (10.4% at August 31, 1996) through April,
2003.
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various variable rates ranging from 6.3% to 18.6% at August 31, 1996. These
loans require monthly payments ranging from $331 to $2,266 and are due through
2003.
As of August 31, 1996, the aggregate amounts of annual principal maturities
of long-term debt are as follows:
1997........................................................ $ 86,496
1998........................................................ 36,697
1999........................................................ 32,413
2000........................................................ 21,360
2001........................................................ 3,519
Thereafter.................................................. 5,014
--------
$185,499
========
4. LEASES
Total rental expense for all operating leases was $28,209 for 1996. The
Company leases certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating and capital lease agreements which expire
at various dates through November 1998. Minimum rental commitments at August 31,
1996 under capital and operating leases having an initial noncancelable term of
one year or more are as follows:
CAPITAL OPERATING
LEASES LEASES
-------- ---------
1997........................................................ $ 5,275 $ 25,871
1998........................................................ 12,338 11,535
-------- --------
17,613 $ 37,406
========
Amounts representing interest............................... (1,952)
--------
Present value of net minimum rentals (including $3,928
classified as current).................................... $ 15,661
========
F-37
40
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
AUGUST 31,
1996
----------
Machinery and equipment..................................... $17,628
Less accumulated amortization............................... 3,526
-------
Net equipment under capital leases.......................... $14,102
=======
Amortization of the assets under capital leases is included in depreciation
expense.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may make contributions, on a
tax deferred basis, not to exceed the maximum established by the Internal
Revenue Service. The Company provides matching contributions of certain
percentages of employee contributions at the discretion of the board of
directors. The Company's accrual for matching contributions totaled $40,000 for
1996.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
7. INCOME TAXES
Income tax expense consists of the following at August 31, 1996:
AUGUST 31,
1996
----------
Current:
Federal................................................... $ 42,978
State..................................................... 11,527
Deferred.................................................... (16,016)
--------
$ 38,489
========
Significant components of the deferred tax assets and liabilities as of
August 31, 1996, are as follows:
Deferred tax assets:
Investments............................................... 3,862
Compensation and warranty reserves........................ 25,884
Contract billings......................................... 2,935
--------
Total gross deferred tax assets............................. 32,681
Valuation allowance......................................... --
--------
Deferred tax assets......................................... 32,681
--------
Net deferred tax assets..................................... $ 32,681
========
F-38
41
GETZSCHMAN HEATING & SHEET METAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized during the carryforward period.
Accordingly, no valuation allowance has been recorded for the year ended
December 31, 1996.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
AUGUST 31,
1996
----------
Tax provision at statutory rate............................. $37,060
State income tax less applicable federal tax benefit........ 5,692
Nondeductible expenses...................................... 4,829
Graduated Tax Rates Effect.................................. (9,092)
-------
$38,489
=======
8. RELATED PARTY TRANSACTIONS
The Company leases its primary office facility from its stockholders.
Rental payments of $23,400 related to this lease were made in the year ended
August 31, 1996.
Current liabilities include notes payable to stockholders and officers of
the Company totaling $37,757 at August 31, 1996.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Letter of Intent with Service
Experts, Inc. to sell all of the Company's stock. In accordance with the Letter
of Intent, the Company will become a wholly-owned subsidiary of Service Experts,
Inc.
F-39
42
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Teays Valley Heating and Cooling, Inc.
We have audited the accompanying balance sheet of Teays Valley Heating and
Cooling, Inc. (a Subchapter S corporation) as of December 31, 1996, and the
related statements of income, stockholders' equity, and cash flows for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Teays Valley Heating and
Cooling, Inc. at December 31, 1996, and the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
Nashville, Tennessee
September 18, 1997
F-40
43
TEAYS VALLEY HEATING AND COOLING, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $127,240 $ 78,577
Receivables:
Trade, net of allowance for doubtful
accounts of $22,164 and $21,947 at
December 31, 1996 and June 30, 1997 (unaudited),
respectively.......................................... 173,192 221,903
Other receivables...................................... 9,970 36,447
-------- --------
183,162 258,350
Inventories................................................. 169,306 167,873
Other assets................................................ 23,799 24,004
-------- --------
Total current assets.............................. 503,507 528,804
Property and equipment:
Furniture and fixtures.................................... 86,774 93,567
Machinery and equipment................................... 204,970 214,594
Vehicles.................................................. 308,948 352,776
-------- --------
600,692 660,937
Less accumulated depreciation............................. (435,818) (471,178)
-------- --------
164,874 189,759
Intangibles................................................. 106,600 106,600
Other assets................................................ 15,000 15,000
-------- --------
Total assets...................................... $789,981 $840,163
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $181,109 $139,360
Accrued compensation...................................... 32,588 36,457
Accrued taxes, other than income.......................... 10,718 47,234
Accrued warranties........................................ 31,736 30,694
Deferred revenue.......................................... 47,966 47,327
Billings in excess of costs and estimated earnings........ -- 43,817
Current portion of long-term debt and capital lease
obligations............................................ 129,131 115,579
-------- --------
Total current liabilities......................... 433,248 460,468
Long-term debt and capital lease obligations, net of
current................................................... 191,003 173,162
Other long term liabilities................................. 106,600 106,600
Stockholders' equity:
Common stock, $100 par value, 100 shares authorized, 100
shares issued and outstanding.......................... 10,000 10,000
Additional paid-in capital................................ 29,543 29,543
Retained earnings......................................... 19,587 60,390
-------- --------
Total stockholders' equity........................ 59,130 99,933
-------- --------
Total liabilities and stockholders' equity........ $789,981 $840,163
======== ========
See accompanying notes.
F-41
44
TEAYS VALLEY HEATING AND COOLING, INC.
STATEMENTS OF INCOME
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
Net revenues................................................ $3,108,173 $1,498,534
Cost of goods sold.......................................... 2,429,965 1,082,317
---------- ----------
Gross margin................................................ 678,208 416,217
Selling, general and administrative expenses................ 568,196 309,819
Bad debt expense............................................ 12,375 14,427
---------- ----------
Income from operations...................................... 97,637 91,971
Other income (expense):
Interest expense.......................................... (46,981) (15,166)
Interest income........................................... 893 1,073
Other income.............................................. 12,551 12,377
---------- ----------
Net income.................................................. $ 64,100 $ 90,255
========== ==========
See accompanying notes.
F-42
45
TEAYS VALLEY HEATING AND COOLING, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK
$100 PAR VALUE ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- -------- --------
Balance at January 1, 1996...................... 100 $10,000 $29,543 $(23,686) $ 15,857
Capital distributions......................... -- -- -- (20,827) (20,827)
Net income.................................... -- -- -- 64,100 64,100
--- ------- ------- -------- --------
Balance at December 31, 1996.................... 100 10,000 29,543 19,587 59,130
Capital distributions (unaudited)............. -- -- -- (49,452) (49,452)
Net income (unaudited)........................ -- -- -- 90,255 90,255
--- ------- ------- -------- --------
Balance at June 30, 1997 (unaudited)............ 100 $10,000 $29,543 $ 60,390 $ 99,933
=== ======= ======= ======== ========
See accompanying notes.
F-43
46
TEAYS VALLEY HEATING AND COOLING, INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1996 1997
------------ --------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................................. $ 64,100 $ 90,255
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 83,547 41,774
Provision for loss on accounts receivable................. 12,375 14,427
Gain on asset disposals................................... (55,820) --
Changes in assets and liabilities:
Accounts receivable.................................... (2,356) (89,615)
Inventories............................................ 48,493 1,433
Other current assets................................... (1,221) (205)
Trade accounts payable and accrued liabilities......... (5,484) (41,749)
Accrued compensation................................... 12,241 3,869
Accrued taxes, other than income....................... (4,017) 36,516
Deferred revenue....................................... 14,169 (639)
Accrued warranties..................................... 236 (1,042)
Billings in excess of costs and estimated earnings..... -- 43,817
---------- ----------
Net cash flow provided by operating activities.............. 166,263 98,841
INVESTING ACTIVITIES
Purchase of property and equipment.......................... -- (66,659)
Proceeds from sale of property, buildings and equipment..... 164,142 --
---------- ----------
Net cash provided by (used in) investing activities......... 164,142 (66,659)
FINANCING ACTIVITIES
Distribution to stockholders................................ (20,827) (49,452)
Payments on long-term debt and capital leases............... (233,978) (48,311)
Proceeds from long-term debt................................ -- 16,918
---------- ----------
Net cash used in financing activities....................... (254,805) (80,845)
Increase (decrease) in cash and cash equivalents............ 75,600 (48,663)
Cash and cash equivalents at beginning of period............ 51,640 127,240
---------- ----------
Cash and cash equivalents at end of period.................. $ 127,240 $ 78,577
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 45,425 $ 16,825
========== ==========
See accompanying notes.
F-44
47
TEAYS VALLEY HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Teays Valley Heating and Cooling, Inc. (the "Company") operates in one
industry segment and is primarily engaged in the installation and servicing of
air conditioning and heating systems for commercial and residential customers
throughout West Virginia.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of June 30, 1997 and the related statements of income,
stockholders' equity, and cash flows for the six months then ended (interim
financial statements) have been prepared by the Company's management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1996 audited financial statements appearing herein. The results of the six
months ended June 30, 1997 may not be indicative of operating results for the
full year.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
contracts ("Contracts") for commercial buildings are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues on all of the Company's heating and air
conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services, which is
usually within one to two days.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within one month. At December 31, 1996,
there were no uncompleted contracts.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersions across many different industries and geographies.
The liability "billings in excess of costs and estimated earnings"
represents billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
F-45
48
TEAYS VALLEY HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method and declining-balance
methods over the following useful lives:
YEARS
-----
Furniture and fixtures...................................... 5-7
Machinery and equipment..................................... 5-7
Vehicles.................................................... 5-7
INTANGIBLES
In connection with the purchase of the Company by the current stockholders
in 1992, the Company entered into a five year covenant not to compete with the
former owner of the Company. The agreement provides for the Company to pay the
former owner semi-annual payments of $7,500 over ten years upon his retirement
from the Company. The non-compete agreement is reflected in the accompanying
balance sheet as both a long-term liability and an intangible asset. The asset
will be amortized on a straight-line basis over five years after the former
owner's retirement date.
ACCRUED COMPENSATION
Accrued compensation consists of salary, bonus and commission expenses
payable to various employees.
WARRANTIES
The Company provides the retail customer with a one year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts.
The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-46
49
TEAYS VALLEY HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The shareholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the company's income in their own income for
federal income tax purposes. Accordingly, the Company is not subject to federal
income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1996, amounts charged to bad debt
expense totaled $12,375 and accounts written off, net of recoveries were $2,475.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1996, the
Company expensed $125,919.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued FAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. Statement No. 130 is effective for interim and annual
periods beginning after December 15, 1997. Comprehensive income encompasses all
changes in shareholders' equity (except those arising from transactions from
owners) and includes net income, net unrealized capital gains or losses on
available for sale securities and foreign currency translation adjustments.
Management of the Company does not expect the adoption of FAS No. 130 to have a
material impact on the Company's financial statements.
2. DEBT
Debt consists of:
DECEMBER 31,
1996
------------
Line of credit.............................................. $165,000
Installment notes........................................... 67,409
Other long-term debt........................................ 65,973
--------
298,382
Less current portion........................................ 114,846
--------
$183,536
========
The Company has a line of credit with a financial institution with a total
borrowing limit of $225,000. The line of credit bears interest at a fixed rate
of 12.9%. The line of credit requires monthly payments of $5,000 plus interest.
The Company has various installment loans to various lenders which are
secured by vehicles. These loans bear interest at various fixed rates ranging
from 7.25% to 12.9% per annum at December 31, 1996. These loans require monthly
payments ranging from $102 to $565 and are due through June 1999.
The Company has a note payable to a former owner which is unsecured. This
installment loan requires monthly installments of $1,553, including interest
(9.5% at December 31, 1996) through April 2001.
F-47
50
TEAYS VALLEY HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
1997........................................................ $ 114,846
1998........................................................ 95,651
1999........................................................ 64,639
2000........................................................ 17,157
2001........................................................ 6,089
---------
$ 298,382
=========
3. LEASES
Total rental expense for all operating leases was $17,000 for 1996. The
Company also leases certain vehicles and equipment under terms of capital lease
agreements which expire at various dates through April 1999. Minimum rental
commitments at December 31, 1996 under capital leases having an initial
noncancelable term of one year or more are as follows:
CAPITAL
LEASES
-------
1997........................................................ $15,486
1998........................................................ 6,197
1999........................................................ 2,066
-------
23,749
Amounts representing interest............................... 1,997
-------
Present value of net minimum rentals (including $14,285
classified as current).................................... $21,752
=======
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
DECEMBER 31,
1996
------------
Machinery and equipment..................................... $82,180
Less accumulated amortization............................... 44,475
-------
Net equipment under capital leases.......................... $37,705
=======
Amortization of the assets under capital leases is included in depreciation
expense.
4. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code (the "Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may make contributions, on a
tax deferred basis, not to exceed the maximum established by the Internal
Revenue Service. The Company provides matching contributions of 33 1/3% of total
contributions by a plan member, to a maximum of 3% of the employee's total
calendar year compensation. The Company's matching contributions totaled $6,056
for 1996.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
F-48
51
TEAYS VALLEY HEATING AND COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Company operates under Subchapter S of the Internal Revenue Code and is
not subject to corporate federal income tax. In connection with the proposed
combination, the Subchapter S election will be terminated. As a result, the
Company will be subject to corporate income taxes subsequent to the termination
of S corporation status. The Company had net operating income for income tax
purposes of $65,545 for 1996.
Had the Company filed federal and state income tax returns as a regular
corporation for 1996, income tax expense under the provisions of SFAS No. 109
would have been $24,881.
At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and tax reporting basis of assets and liabilities. Such
deferred taxes will be based on the cumulative temporary differences at the date
of termination of S corporation status. The effect of recognizing the deferred
taxes will be recorded as an adjustment to goodwill in purchase accounting. If
the termination of S corporation status had occurred at June 30, 1997, the
deferred tax asset would have been approximately $33,553.
7. RELATED PARTY TRANSACTIONS
The Company leases its office facility under a cancelable operating lease
from a former stockholder who is now an employee of the Company. Rental payments
of $17,000 related to this lease were made in the year ended December 31, 1996.
8. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Letter of Intent with Service
Experts, Inc. to sell all of the Company's stock. In accordance with the
proposed Combination Agreement, the Company will become a wholly-owned
subsidiary of Service Experts, Inc.
F-49
52
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
Service Experts Inc. (the "Company") was incorporated on March 27, 1996. On
August 21, 1996, and simultaneous with the closing of its initial public
offering of Common Stock, the Company acquired the Predecessor Companies (as
defined below). In accordance with the provisions of Securities and Exchange
Commission (the "Commission") Staff Accounting Bulletin No. 97, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc. (collectively, the "Acquiring Company").
Such historical financial statements have been restated for the Pooled Companies
(as defined below), which were acquired in December 1996 and May 1997 in
business combinations accounted for as poolings of interests. The operations of
the Company's subsidiaries other than the Pooled Companies have been included in
the Company's financial statements from their respective effective dates of
acquisition. The acquisitions of the Predecessor Companies have been accounted
for using the historical cost basis of the Predecessor Companies in accordance
with Commission Staff Accounting Bulletin No. 48. The Predecessor Companies are
the Acquiring Company; Hardwick Air Masters, Inc. d/b/a Airmasters, Inc.;
Norrell Heating and Air Conditioning Company, Inc.; Vision Holding Company,
Inc.; Comerford's Heating and Air Conditioning, Inc.; Rolf Coal and Fuel Corp.;
Brand Heating and Air Conditioning, Inc.; Coastal Air Conditioning Service,
Inc.; Contractor Success Group, Inc.; and Service Experts of Palm Springs, Inc.
The Pooled Companies are Custom Air Conditioning, Inc., Freschi Air Systems,
Inc. and C. Iapaluccio Company, Inc.
The following unaudited pro forma combined financial statements give effect
to the acquisition by the Company of 32 Acquired Companies (as defined below)
and to six HVAC businesses with which the Company has entered into agreements in
principle (the "Pending Acquisitions") in exchange for shares of the Company's
Common Stock, cash, warrants to purchase shares of Common Stock and the
assumption of certain debt. The pro forma combined financial statements do not
give effect to the acquisition of 10 HVAC businesses with which the Company has
entered into agreements in principle which had aggregate residential service and
replacement revenue in 1996 of approximately $27.5 million and an estimated
aggregate purchase price of $22.2 million.
The unaudited pro forma combined balance sheet as of June 30, 1997 gives
effect to the acquisition of six Acquired Companies closed subsequent to June
30, 1997 and the six Pending Acquisitions. The six Acquired Companies which were
closed subsequent to June 30, 1997 are Artic Aire of Chico, Inc., All American
Air Conditioning & Heating, Inc., A-1 Air Conditioning, Inc., Mid Fla Heating
and Air, Inc., S&W Air Conditioning, Inc., and Berkshire Air Conditioning
Company. The six Pending Acquisitions are J.M. Jenks Incorporated dba J.M.
Mechanical Systems, Holmes Sales & Service, Inc., PTM Enterprises, Inc.
(formerly the residential division of Martin Mechanical Contractors, Inc.), E.L.
Payne Company, Getzshman Heating & Sheet Metal Contractors, Inc. and Teays
Valley Heating and Cooling, Inc. The unaudited pro forma combined statement of
income for the six months ended June 30, 1997 gives effect to the acquisition of
15 Acquired Companies closed during the six month period ended June 30, 1997,
six Acquired Companies which were closed subsequent to June 30, 1997 and six
Pending Acquisitions as if such transactions had occurred as of January 1, 1996.
The 15 Acquired Companies closed during the six month period ended June 30, 1997
are Dial One Raymond's Plumbing, Heating & Cooling, Inc., Gaddis Co., Automated
Air, Inc., Bauer Heating & Air Conditioning, Incorporated, Sylvester's Corp., B.
W. Heating & Air Conditioning, Inc., Parker Heating & Air Conditioning,
Incorporated, Roland J. Down, Inc., Claire's Air Conditioning and Refrigeration,
Inc., Claire & Sanders, Inc., Royden Inc., Service Experts of Raleigh, Inc.,
Stark Services Company, Inc., ProAir Services, L.P. and Superior Air
Conditioning Co., Inc. The unaudited pro forma combined statement of income for
the 12 months ended December 31, 1996 gives effect to the acquisition of the
Predecessor Companies as described above, 11 Acquired Companies closed during
1996, 15 Acquired Companies closed during the six month period ended June 30,
1997, six Acquired Companies closed subsequent to June 30, 1997 and six Pending
Acquisitions as if such transactions had occurred on January 1, 1996. The 11
Acquired Companies closed during 1996 are Service Experts of Indianapolis, Inc.,
Frees Service Experts, Inc., Comfortech, Inc., Sunbeam Service Experts, Inc.,
Falso Service Experts, Inc., Gordon's
F-50
53
Specialty Company, Pardee Refrigeration Company Incorporated, Sanders Indoor
Comfort, Inc., Island Air Conditioning, Inc., Air-Conditioning and Heating
Unlimited, Inc. and B&B Air Conditioning, Inc.
The unaudited pro forma combined financial statements have been prepared by
the Company based on the historical financial statements of the Company and the
companies referred to above and certain preliminary estimates and assumptions
deemed appropriate by management of the Company. These pro forma combined
financial statements may not be indicative of results that would have been
achieved had these acquisitions occurred on the dates indicated or of results
which may be realized in the future. Neither expected benefits nor cost
reductions anticipated by the Company following consummation of these
acquisitions have been reflected in the pro forma combined financial statements.
The pro forma combined financial statements should be read in conjuction
with the historical financial statements of the Company.
F-51
54
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ADJUSTMENTS PRO FORMA
-------- --------- ------------ ----------- ---------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents............................ $ 18,795 $ 533 $ 752 $(13,799)(a) $ 1,444
(4,837)(b)
Receivables:
Trade receivables, net............................... 20,815 2,260 2,456 25,531
Related party........................................ 38 86 42 166
Employee............................................. 268 34 7 309
Other................................................ 1,749 31 38 1,818
-------- ------ ------ -------- --------
22,870 2,411 2,543 -- 27,824
Inventories............................................ 7,413 1,158 925 9,496
Cost and estimated earnings in excess of billings...... 723 154 4 881
Prepaid expenses and other current assets.............. 1,797 64 177 2,038
Current portion of notes receivable -- related
parties.............................................. 14 -- -- 14
Current portion of notes receivable.................... 260 -- -- 260
Deferred income taxes.................................. 2,461 102 10 2,573
-------- ------ ------ -------- --------
Total current assets........................... 54,333 4,422 4,411 (18,636) 44,530
Property, buildings and equipment, net................. 13,504 1,726 1,912 17,142
Notes receivable -- related parties.................... 330 23 -- 353
Notes receivable -- other.............................. 509 -- 12 521
Investment in affiliate................................ 573 -- -- 573
Deferred income taxes.................................. -- 79 6 85
Goodwill............................................... 68,981 14 -- 28,789(a) 97,784
Other assets........................................... 785 85 225 1,095
-------- ------ ------ -------- --------
Total assets................................... $139,015 $6,349 $6,566 $ 10,153 $161,344
======== ====== ====== ======== ========
Current liabilities:
Short-term debt...................................... $ 27 $ 64 $ 260 $ (324)(b) $ 27
Trade accounts payable and accrued liabilities....... 9,939 1,265 2,299 13,503
Accrued compensation................................. 4,586 161 375 5,122
Accrued warranties................................... 1,646 128 129 1,903
Income taxes payable................................. 1,295 219 70 1,584
Deferred revenue..................................... 6,849 166 950 7,965
Billings in excess of costs and estimated earnings... 1,100 241 177 1,518
Current portion of long-term debt and capital lease
obligations........................................ 460 561 585 (1,146)(b) 460
-------- ------ ------ -------- --------
Total current liabilities...................... 25,902 2,805 4,845 (1,470) 32,082
Long-term debt and capital lease obligations, net of
current.............................................. 252 528 1,952 (2,480)(b) 252
Related parties notes.................................. -- 544 343 (887)(b) --
Deferred income taxes.................................. 583 406 6 995
Other long term liabilities............................ -- -- 107 107
Common stock........................................... 142 -- -- 6(a) 148
Additional paid-in-capital............................. 101,658 -- -- 16,363(a) 118,021
Retained earnings...................................... 10,478 2,066 (687) (1,379)(a) 10,478
-------- ------ ------ -------- --------
$139,015 $6,349 $6,566 $ 10,153 $161,344
======== ====== ====== ======== ========
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-52
55
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITIONS ADJUSTMENTS PRO FORMA
------- --------- ------------ ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues............................. $86,235 $16,289 $12,758 -- $115,282
Cost of goods sold....................... 54,606 11,442 8,982 4(d) 75,034
------- ------- ------- ------ --------
Gross margin............................. 31,629 4,847 3,776 (4) 40,248
Selling, general and administrative
expenses............................... 22,310 4,768 3,298 (561)(e) 29,815
------- ------- ------- ------ --------
Income from operations................... 9,319 79 478 557 10,433
Other income (expense):
Interest expense....................... (109) (167) (94) 261(f) (109)
Interest income........................ 441 26 5 -- 472
Other income (expense)................. 190 (124) 1 -- 67
------- ------- ------- ------ --------
522 (265) (88) 261 430
------- ------- ------- ------ --------
Income (loss) before tax................. 9,841 (186) 390 818 10,863
Provision for income taxes............... 3,755 90 80 306(h) 4,231
------- ------- ------- ------ --------
Net income (loss)........................ $ 6,086 $ (276) $ 310 $ 580 $ 6,632
======= ======= ======= ====== ========
Pro forma net income per share........... $ 0.46 $ 0.45
Pro forma weighted average shares
outstanding............................ 13,237 1,662(i) 14,899
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-53
56
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
ACQUIRED PENDING PRO FORMA
COMPANY COMPANIES ACQUISITION ADJUSTMENTS PRO FORMA
------- --------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues.............................. $49,446 $151,747 $35,591 $(10,949)(c) $225,835
Cost of goods sold........................ 32,004 100,576 26,721 (9,785)(d) 149,516
------- -------- ------- -------- --------
Gross margin.............................. 17,442 51,171 8,870 (1,164) 76,319
Selling, general and administrative
expenses................................ 13,504 44,320 7,561 (6,947)(e) 58,438
------- -------- ------- -------- --------
Income from operations.................... 3,938 6,851 1,309 5,783 17,881
Other income (expense):
Interest expense........................ (66) (622) (203) 825(f) (66)
Interest income......................... 336 289 41 -- 666
Other income (expense).................. 189 (146) (1) 40(g) 82
------- -------- ------- -------- --------
459 (479) (163) 865 682
------- -------- ------- -------- --------
Income before tax......................... 4,397 6,372 1,146 6,648 18,563
Provision for income taxes................ 1,204 763 296 5,424(h) 7,687
------- -------- ------- -------- --------
Net income................................ $ 3,193 $ 5,609 $ 850 $ 1,263 $ 10,876
======= ======== ======= ======== ========
Pro forma net income per share............ $ 0.70 $ 0.74
Pro forma weighted average shares
outstanding............................. 4,544 10,247(j) 14,791
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-54
57
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the payments to owners of six Acquired Companies and six
Pending Acquisitions of $13,799,000 in cash and 628,000 shares of common stock
resulting in an increase in Goodwill of $28,789,000 which is amortized over 40
years. The allocation of the purchase price associated with the acquisitions has
been determined by the Company based on available information and is subject to
further refinement.
(b) Reflects the assumed payment of all outstanding debt.
F-55
58
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- ----------
(IN THOUSANDS)
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(c) REFLECTS THE FOLLOWING ADJUSTMENTS TO REVENUES:
(i) Elimination of division not acquired........................ $(10,949) $ --
(d) REFLECTS THE FOLLOWING ADJUSTMENTS TO COST OF GOODS SOLD:
(i) Adjust rent expense per new leases.......................... $ (105) $ --
(ii) (Elimination) addition of real estate depreciation.......... (19) 4
(iii) Elimination of division not acquired........................ (9,661) --
-------- --------
$ (9,785) $ 4
======== ========
(e) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $(13,734) $ (1,364)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 4,642 657
(iii) Additional lease expense on real estate sold by AC Service &
Installation Co., Inc. and Vision Holding Company, Inc...... 53 --
(iv) Elimination of depreciation expense on real estate sold by
AC Service & Installation Co., Inc. and Vision Holding
Company, Inc................................................ (24) --
(v) Elimination of non-competition fees resulting from buyout of
non-compensation agreements................................. (43) --
(vi) Corporate office overhead expenses.......................... 270 --
(vii) Corporate office compensation............................... 366 --
(viii) Elimination of management fees paid by Air Experts, a United
Services Co., Inc. and Service Experts of Palm Springs, Inc.
to parent companies or affiliates which are part of the
corporate office adjustments................................ (36) --
(ix) Goodwill amortization....................................... 2,659 506
(x) Elimination of general and administrative expenses including
elimination of division not acquired........................ (1,800) (360)
(xi) Three regional vice presidents and one MIS director......... 700 --
-------- --------
$ (6,947) $ (561)
======== ========
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE RELATED TO:
(i) Elimination of debt distributed to shareholder of Vision
Holding Company, Inc........................................ $ 45 $ --
(ii) Elimination of interest on debt distributed to shares of AC
Service & Installation Co., Inc. and Custom Air
Conditioning, Inc........................................... 15 --
(iii) Elimination of all other debt assumed in the transaction to
be paid at closing.......................................... 1,369 261
(iv) Additional interest on debt incurred associated with the
transaction................................................. (604) --
-------- --------
$ 825 $ 261
======== ========
F-56
59
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
TWELVE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- ----------
(IN THOUSANDS)
(g) REFLECTS THE FOLLOWING ADJUSTMENT TO OTHER INCOME:
(i) The addition of income from its 37% investment in Future
University.................................................. $ 40 $ --
======== ========
(h) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 38% as certain Acquired
Companies and the Pending Acquisition previously which were
taxed as Subchapter S corporations.......................... $ 2,359 $ 152
(ii) Additional income taxes on adjustments (c) thru (g)......... 2,142 37
(iii) Additional income tax provision for state and federal taxes
due to the non-deductibility of goodwill.................... 923 117
-------- --------
$ 5,424 $ 306
======== ========
(i) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 490,000 shares and the dilutive effect of warrants
issued to the owners of the Acquired Companies, (ii) 391,000
shares issued to the owners of the Pending Acquisitions,
(iii) 781,000 additional shares to reflect the shares issued
in the Secondary Offering as outstanding for the entire
period.
(j) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 1,329,000 shares and the dilutive effect of warrants
issued to the owners of the Acquired Companies, (ii) 391,000
shares issued to the owners of the Pending Acquisitions,
(iii) 1,850,000 shares issued in the Secondary Offering,
(iv) 6,677,000 additional shares to reflect the shares
issued in the Initial Public Offering to the Predecessor
Companies and shares issued to the 11 Acquired Companies
closed in 1996 as outstanding for the entire period.
F-57
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SERVICE EXPERTS, INC.
By: /s/ Anthony M. Schofield
----------------------------------
Anthony M. Schofield
Chief Financial Officer, Secretary
and Treasurer
Date: September 26, 1997
3
61
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
23 Consent of Ernst & Young LLP