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):
March 9, 1999
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)
Six Cadillac Drive
Suite 400
Brentwood, Tennessee 37027
--------------------------------------------------
(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)
================================================================================
2
ITEM 5. OTHER EVENTS.
Service Experts, Inc., a Delaware corporation (the "Company"), operates
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 (Registration No. 333-12319). 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
See Pages F-2 through F-48.
(b) Pro Forma Financial Information
See Pages F-49 through F-56.
2
3
INDEX TO FINANCIAL STATEMENTS
PAGE
----
FRAS-AIR CONTRACTING, INC. -- FINANCIAL STATEMENTS FOR
THE YEAR ENDED SEPTEMBER 30, 1998
Report of Independent Auditors...................................... F-2
Balance Sheet....................................................... F-3
Statement of Operations............................................. F-5
Statement of Stockholders' Equity................................... F-6
Statement of Cash Flows............................................. F-7
Notes to Financial Statements....................................... F-8
TRITON MECHANICAL, INC. -- FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1997
Report of Independent Auditors...................................... F-19
Balance Sheet....................................................... F-20
Statement of Income................................................. F-22
Statement of Stockholder's Equity................................... F-23
Statement of Cash Flows............................................. F-24
Notes to Financial Statements....................................... F-25
BILL'S COMMERCIAL AIR CONDITIONING, INC. -- FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
Report of Independent Auditors...................................... F-35
Balance Sheets...................................................... F-36
Statements of Income................................................ F-38
Statements of Stockholder's Equity.................................. F-39
Statements of Cash Flows............................................ F-40
Notes to Financial Statements....................................... F-41
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation............................................... F-49
Unaudited Pro Forma Combined Balance Sheet as of September 30,
1998.............................................................. F-52
Unaudited Pro Forma Combined Statements of Income for the
Nine Months ended September 30, 1998 and for the Year
ended December 31, 1997........................................... F-53
Notes to Unaudited Pro Forma Combined Financial
Statements........................................................ F-55
F-1
4
Report of Independent Auditors
The Stockholders
Fras-Air Contracting, Inc.
We have audited the accompanying balance sheet of Fras-Air Contracting, Inc. as
of September 30, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year ended September 30, 1998. 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 Fras-Air Contracting, Inc. at
September 30, 1998, and the results of its operations and its cash flows for the
year ended September 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 6, 1999
F-2
5
Fras-Air Contracting, Inc.
Balance Sheet
September 30, 1998
ASSETS
Current assets:
Cash $ 31,500
Accounts receivable:
Trade, net of allowance for doubtful accounts of $29,581 545,183
Related party and stockholders 14,688
Other 30,708
----------
590,579
Inventories 301,213
Costs and estimated earnings in excess of billings 53,517
Prepaid expenses and other current assets 1,639
----------
Total current assets 978,448
Property and equipment:
Furniture and fixtures 231,170
Machinery and equipment 218,217
Vehicles 707,554
Leasehold improvements 70,262
----------
1,227,203
Less accumulated depreciation and amortization (886,064)
----------
341,139
Other assets 675
----------
Total assets $1,320,262
==========
F-3
6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 35,000
Trade accounts payable and accrued liabilities 372,835
Accrued compensation 114,815
Accrued warranties 35,000
Income taxes payable 3,012
Deferred revenue 85,032
Billings in excess of costs and estimated earnings 66,048
Demand note payable--stockholder 23,666
Current portion of related party note payable 14,280
Current portion of long-term debt and capital lease obligations 113,988
----------
Total current liabilities 863,676
Related party note payable, net of current 10,720
Long-term debt and capital lease obligations, net of current 173,227
Stockholders' equity:
Common stock, no par value, 2,500 shares authorized, 99 shares
issued and outstanding 7,450
Retained earnings 265,189
----------
Total stockholders' equity 272,639
----------
Total liabilities and stockholders' equity $1,320,262
==========
See accompanying notes.
F-4
7
Fras-Air Contracting, Inc.
Statement of Operations
Year ended September 30, 1998
Net revenue $ 4,507,916
Cost of goods sold 3,118,768
-----------
Gross margin 1,389,148
Selling, general and administrative expenses 1,391,452
-----------
Loss from operations (2,304)
Other income (expense):
Interest expense (34,103)
Interest income 591
Other income 31,000
-----------
(2,512)
-----------
Loss before taxes (4,816)
Provision for income tax:
Current 18,181
Deferred -0-
-----------
Total income taxes 18,181
-----------
Net loss $ (22,997)
===========
See accompanying notes.
F-5
8
Fras-Air Contracting, Inc.
Statement of Stockholders' Equity
Common Stock
No Par Value Retained
Shares Amount Earnings Total
-------------------------------------------------------------------
Balance at October 1, 1997 99 $7,450 $ 288,186 $ 295,636
Net loss - - (22,997) (22,997)
-------------------------------------------------------------------
Balance at September 30, 1998 99 $7,450 $ 265,189 $ 272,639
===================================================================
See accompanying notes.
F-6
9
Fras-Air Contracting, Inc.
Statement of Cash Flows
Year ended September 30, 1998
Operating activities
Net loss $ (22,997)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 112,767
Provision for loss on accounts receivable 28,745
Gain on asset disposals (5,300)
Changes in assets and liabilities:
Accounts receivable 94,046
Inventories 14,726
Prepaid expenses and other current assets 53,421
Trade accounts payable and accrued liabilities (199,153)
Accrued compensation 62,522
Accrued warranties 11,000
Income taxes payable 3,012
Deferred revenue 22,032
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings 22,740
---------
Net cash provided by operating activities 197,561
Investing activities
Purchase of property and equipment (159,477)
Proceeds from sale of property, and equipment 5,300
---------
Net cash used in investing activities (154,177)
Financing activities
Payments on line of credit (55,000)
Payments on long-term debt and capital leases (147,329)
Proceeds from long-term debt 163,610
Payments on related party note payable (14,295)
---------
Net cash used in financing activities (53,014)
Decrease in cash and cash equivalents (9,630)
Cash at beginning of year 41,130
---------
Cash at end of year $ 31,500
=========
Supplemental cash flow information
Interest paid $ 36,112
=========
Income taxes paid $ 14,000
=========
See accompanying notes.
F-7
10
Fras-Air Contracting, Inc.
Notes to Financial Statements
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Fras-Air Contracting, 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 in the Manville, New
Jersey area.
RECOGNITION OF REVENUE
Revenue on all of the Company's heating and air conditioning installation
contracts for commercial buildings ("Commercial Contracts") is recognized on
the percentage-of-completion method in the ratio that total incurred costs bear
to total estimated costs. Revenue on all of the Company's contracts 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 Commercial Contracts are reviewed throughout the
terms of the Commercial Contracts, and any required adjustments are reflected in
the periods in which they first become known. When estimates indicate a probable
loss on a Commercial Contract, the full amount thereof is accrued in the period
in which it is first determined. Most Commercial Contracts are completed within
six to 12 months.
Trade accounts receivable includes billings and billed retainage on Commercial
Contracts. The Company classifies these amounts as current assets because all
balances are expected to be collected in the current year.
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," represents
billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheet for cash approximate fair
value.
F-8
11
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Accounts Receivable, Notes Payable, Accounts Payable, and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
CONCENTRATIONS AND CREDIT RISKS
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits.
The Company primarily purchases HVAC units and materials from one supplier.
Purchases of equipment and materials from this supplier during 1998 totaled
approximately $480,000.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended September 30, 1998, amounts charged to bad debt expense
totaled $28,745, and accounts written off, net of recoveries, were approximately
$26,000.
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 over the following useful lives:
Years
-----
Furniture and fixtures 7
Machinery and equipment 7
Vehicles 5
Leasehold improvements 5
F-9
12
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
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 and equipment and has determined that
there were no indications of impairment as of September 30, 1998.
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.
WARRANTIES
The Company generally provides customers with a one year warranty on parts and
labor from the date of installation of a commercial HVAC unit and a five year
warranty on parts and labor for a residential HVAC unit. These warranties run
concurrent with the manufacturer's warranty on parts for one year. 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.
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-10
13
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1998, the Company
expensed approximately $120,000.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS 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. The adoption of SFAS No. 130 is
not expected to have an effect on the Company's financial statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
September 30,
1998
---------
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts and estimated earnings $916,450
Less applicable billings 928,981
--------
$(12,531)
========
F-11
14
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
2. CONTRACTS IN PROCESS (CONTINUED)
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts $ 53,517
Billings in excess of costs and estimated earnings on uncompleted contracts (66,048)
--------
$(12,531)
========
Progress billings on contracts bear a relation to costs incurred, but are not
indicative of the ultimate profit or loss on a contract.
3. DEBT
Long-term debt consists of:
September 30,
1998
---------
Installment and equipment notes $250,164
Related party note payable 25,000
--------
275,164
Less current portion 94,963
========
$180,201
========
The Company has a $150,000 line of credit with a financial institution. The line
of credit bears interest at a variable rate of 8.75% as of September 30, 1998.
The outstanding balance on the line of credit was $35,000 at September 30, 1998.
The line of credit is collateralized by substantially all assets of the Company
and a collateral mortgage on certain real estate owned by the Company's
stockholders. The line is guaranteed by the stockholders of the Company and
Fraser Electric Corporation T/A Pro-Energy Design ("Pro-Energy"), a related
party. The stockholders of the Company are 50% stockholders in Pro-Energy.
The Company has various installment and equipment loans to various lenders. One
loan with an outstanding principal balance of $82,500 at September 30, 1998 is
secured by substantially all assets of the Company and a collateral mortgage on
certain real estate owned by the Company's stockholders. This note is guaranteed
by the stockholders of the Company and Pro-Energy, a related party. The
remaining loans are secured by vehicles and equipment. These loans bear interest
at various fixed rates ranging from 4.8% to 8.95% per annum or at variable rates
ranging from 9.25% to 9.5% at September 30, 1998. These loans require monthly
payments ranging from $379 to $2,500 and are due through March 2003.
F-12
15
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
The Company has a $23,666 non-interest bearing demand note payable to the
Company's President, who is also a stockholder.
The Company also has a note payable to the President with a balance of $25,000
at September 30, 1998. The note payable requires monthly payments of $1,190 plus
accrued interest at 9.5%.
As of September 30, 1998, the aggregate amounts of annual principal maturities
of long-term debt are as follows:
Related
Long-term Party Note
Debt Payable
--------- -----------
1999 $ 80,683 $ 14,280
2000 84,007 10,720
2001 67,461 --
2002 12,893 --
2003 5,120 --
Thereafter -- --
-------- --------
$250,164 $ 25,000
======== ========
F-13
16
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
4. LEASES
Total rental expense for all operating leases was $87,481 for 1998. The Company
leases certain vehicles and equipment under terms of noncancelable operating and
capital lease agreements which expire at various dates through 2001. The Company
leases its office and warehouse facilities under the terms of a noncancelable
operating lease from a stockholder of the Company. The minimum rental
commitments at September 30, 1998 under capital and operating leases having an
initial noncancelable term of one year or more are as follows:
Capital Operating Related
Leases Leases Party
-------------------------------------------------
1999 $34,896 $9,115 $ 72,000
2000 3,789 - 36,000
2001 316 - -
Thereafter - - -
-------------------------------------------------
39,001 $9,115 $108,000
=============================
Amounts representing interest 1,950
-------
Present value of net minimum rentals
(including $33,305 classified as
current) $37,051
=======
F-14
17
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
4. LEASES (CONTINUED)
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
September 30,
1998
---------
Vehicles, machinery and equipment $189,348
Less accumulated amortization 97,438
--------
Net equipment under capital leases $ 91,910
========
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. 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 1.5% of total contributions by a
plan member, to a maximum of 1.5% of the employee's total calendar year
compensation. The Company's matching contributions totaled $9,580 for 1998.
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.
The Company is contingently liable on both a mortgage and a loan payable by the
Company's stockholders. At September 30, 1998, the mortgage balance was
approximately $417,000 and the loan balance was approximately $25,000. The
Company has also guaranteed a $50,000 bank line of credit of Pro-Energy.
F-15
18
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
Income tax expense for 1998 consists of the following:
Current
Federal $ 11,610
State 6,571
--------
$ 18,181
========
Significant components of the deferred tax assets and liabilities as of
September 30, 1998, are as follows:
Deferred tax liabilities:
Depreciation and amortization $27,752
Deferred tax assets:
Allowance for doubtful accounts 11,815
Compensation and warranty reserves 13,979
Deferred revenue and accrued expenses 70,495
-------
Total gross deferred tax assets 96,289
Valuation allowance (68,537)
-------
Deferred tax assets 27,752
-------
Net deferred tax assets $ -0-
=======
Management has evaluated whether the deferred tax assets would likely be
realized and determined that the deferred tax assets would not likely be
realized through tax planning strategies, the carryback of existing deductible
temporary differences to prior years taxable income, or through the use of
future pretax book income. Accordingly, the Company has recorded a valuation
allowance of $68,537 against the gross deferred tax assets. The valuation
allowance increased $23,599 during the year ended September 30, 1998.
F-16
19
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
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 for 1998 are summarized as follows:
Tax benefit at statutory rate $ (1,637)
State income tax less applicable federal tax benefit 827
Nondeductible expenses 6,372
Effect of graduated income tax rates (10,980)
Change in valuation allowance 23,599
--------
$ 18,181
========
8. RELATED PARTY TRANSACTIONS
The Company performs certain administrative and accounting functions for
Pro-Energy and charges Pro-Energy a monthly management fee. Total management fee
income from Pro-Energy during fiscal 1998 was $27,500. At September 30, 1998,
accounts receivable from Pro-Energy totaled $5,688.
9. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
F-17
20
Fras-Air Contracting, Inc.
Notes to Financial Statements (continued)
9. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
The Company relies upon its vendors to keep its inventories at appropriate
levels to meet customer demand. It is essential that the Company's vendors have
systems that will accept Year 2000 dates from the Company's purchase orders so
they may respond to the Company's requests for goods. The Company plans to
obtain written verification from each of its significant vendors to determine
whether there will be any interruption in the supply of inventory to the
Company. Based on the responses received, the Company will evaluate whether the
use of certain vendors should be suspended as well as what impact vendor
readiness may have on required inventory levels. The Company expects to be
completed with the accumulation and analysis of this information as well as the
resolution of any issues identified no later than September 30, 1999.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors.
If the Company's plan to install new systems which effectively address the Year
2000 issue is not successfully or timely implemented, the Company may need to
devote more resources to the process and additional costs may be incurred. The
Company believes that the Year 2000 issue is being appropriately addressed and
does not expect the Year 2000 issue to have a material adverse effect on the
financial position, results of operations or cash flows of the Company in future
periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
10. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Agreement and Plan of Merger with
Service Experts, Inc. ("Service Experts"). In accordance with the Agreement and
Plan of Merger, the Company became a wholly-owned subsidiary of Service Experts
effective December 21, 1998.
In connection with the business combination of the Company with Service Experts,
Service Experts paid all notes payable outstanding.
F-18
21
Report of Independent Auditors
The Stockholder of
Triton Mechanical, Inc.
We have audited the accompanying balance sheet of Triton Mechanical, Inc. as of
December 31, 1997, and the related statements of income, stockholder's equity,
and cash flows for the year ended December 31, 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 Triton Mechanical, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 6, 1999
F-19
22
Triton Mechanical, Inc.
Balance Sheet
December 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $ 87,723
Accounts receivable:
Trade, net of allowance for doubtful accounts of $10,000 785,538
Employees 2,964
Other 2,144
----------
790,646
Inventories 52,010
Costs and estimated earnings in excess of billings 186,769
Prepaid expenses and other current assets 14,624
----------
Total current assets 1,131,772
Property and equipment:
Machinery and equipment 67,756
Vehicles 228,864
----------
296,620
Less accumulated depreciation (177,245)
----------
119,375
----------
Total assets $1,251,147
==========
F-20
23
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 584,414
Accrued compensation and benefits 23,763
Accrued warranties 32,562
Income taxes payable 34,402
Deferred revenue 22,276
Billings in excess of costs and estimated earnings 21,121
Deferred income taxes 80,548
Current portion of long-term debt 18,890
----------
Total current liabilities 817,976
Long-term debt, net of current 53,640
Deferred income taxes 7,559
Stockholder's equity:
Common stock, no par value, 200 shares authorized, 50 shares
issued and outstanding 1,000
Retained earnings 370,972
----------
Total stockholder's equity 371,972
----------
Total liabilities and stockholder's equity $1,251,147
==========
See accompanying notes.
F-21
24
Triton Mechanical, Inc.
Statement of Income
Year Ended
December 31,
1997
----------
Net revenue $3,999,656
Cost of goods sold 3,027,880
----------
Gross margin 971,776
Selling, general and administrative expenses 810,903
----------
Income from operations 160,873
Other income (expense):
Interest expense (7,774)
Interest income 1,590
Other income 333
----------
Income before taxes 155,022
----------
Provision (benefit) for income tax:
Current 59,350
Deferred (4,607)
----------
Total income taxes 54,743
----------
Net income $ 100,279
==========
See accompanying notes.
F-22
25
Triton Mechanical, Inc.
Statement of Stockholder's Equity
Common Stock
No Par Value Retained
Shares Amount Earnings Total
-------------------------------------------------------------------
Balance at January 1, 1997 50 $1,000 $270,693 $ 271,693
Net income - - 100,279 100,279
-------------------------------------------------------------------
Balance at December 31, 1997 50 $1,000 $370,972 $ 371,972
===================================================================
See accompanying notes.
F-23
26
Triton Mechanical, Inc.
Statement of Cash Flows
Year Ended
December 31,
1997
----------
Operating activities
Net income $ 100,279
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 35,353
Benefit for deferred income taxes (4,607)
Provision for loss on accounts receivable 9,458
Changes in assets and liabilities:
Accounts receivable (418,168)
Inventories (10,430)
Prepaid expenses and other current assets (4,614)
Trade accounts payable and accrued liabilities 301,866
Accrued compensation (8,261)
Accrued warranties 4,275
Deferred revenue 16,805
Income taxes payable 25,533
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings (157,433)
----------
Net cash flow used in operating activities (109,944)
Investing activities
Purchase of property and equipment (93,574)
----------
Net cash used in investing activities (93,574)
Financing activities
Payments on long-term debt (45,982)
Proceeds from long-term debt 84,558
----------
Net cash provided by financing activities 38,576
Decrease in cash and cash equivalents (164,942)
Cash and cash equivalents at beginning of year 252,665
----------
Cash and cash equivalents at end of year $ 87,723
==========
Supplemental cash flow information
Interest paid $ 7,774
==========
Income taxes paid $ 24,948
==========
See accompanying notes.
F-24
27
Triton Mechanical, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Triton Mechanical, 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 in the Amherst, New
York area.
RECOGNITION OF REVENUE
Revenue on all of the Company's heating and air conditioning installation
contracts for commercial buildings ("Commercial Contracts") is recognized on
the percentage-of-completion method in the ratio that total incurred costs bear
to total estimated costs. Revenue on all of the Company's contracts 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 Commercial Contracts are reviewed throughout the
terms of the Commercial Contracts, and any required adjustments are reflected in
the periods in which they first become known. When estimates indicate a probable
loss on a Commercial Contract, the full amount thereof is accrued in the period
in which it is first determined. Most Commercial Contracts are completed within
six to 12 months.
Trade accounts receivable includes billings and billed retainage on Commercial
Contracts. Trade accounts receivable also includes unbilled retainage of
approximately $34,000 at December 31, 1997. The Company classifies these amounts
as current assets because all balances are expected to be collected in the
current year.
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," represents
billings in excess of revenue recognized on in-progress contracts.
F-25
28
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheet for cash approximate fair
value.
Accounts Receivable, Notes Payable, Accounts Payable, and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
CONCENTRATIONS AND CREDIT RISKS
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. At December 31, 1997, the Company had a cash bank balance of
approximately $144,000 on deposit with a bank in excess of FDIC insurance
limits.
The Company primarily purchases HVAC units and materials from two primary
suppliers. Purchases of equipment and materials from these suppliers during 1997
totaled approximately $1,739,000.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
approximated $9,500, and net accounts receivable recoveries totaled
approximately $500.
Inventories
Inventories which consist entirely of finished goods 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-26
29
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is provided
on the straight-line method over the following useful lives:
Years
------
Machinery and equipment 5 - 7
Vehicles 5
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
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 and equipment and has determined that
there were no indications of impairment as of December 31, 1997.
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.
WARRANTIES
The Company generally provides customers 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.
F-27
30
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $3,300.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in stockholder's
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. The adoption of SFAS No. 130 is
not expected to have an effect on the Company's financial statements.
F-28
31
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
December 31,
1997
----------
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts $ 747,758
Estimated earnings 145,849
----------
893,607
Less applicable billings (727,959)
----------
$ 165,648
==========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 186,769
Billings in excess of costs and estimated earnings on uncompleted
contracts (21,121)
----------
$ 165,648
==========
Progress billings on contracts bear a relation to costs incurred, but are not
indicative of the ultimate profit or loss on a contract.
F-29
32
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
3. DEBT
Debt consists of:
December 31,
1997
----------
Installment notes $ 72,530
Less current portion (18,890)
----------
$ 53,640
==========
The Company has various installment loans from various lenders which are secured
by vehicles. These loans bear interest at various fixed rates ranging from 9.75%
to 10.75% per annum at December 31, 1997. These loans require monthly payments
ranging from $387 to $473 and are due through January 2002.
As of December 31, 1997, the aggregate amounts of annual principal maturities of
long-term debt are as follows:
1998 $18,890
1999 20,909
2000 18,799
2001 13,163
2002 769
-------
$72,530
=======
F-30
33
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
4. LEASES
Total rental expense for all operating leases was approximately $42,500 for
1997. The Company leases certain vehicles, office and warehouse facilities under
terms of noncancelable operating lease agreements which expire at various dates
through February 2003. The office facility is leased from the Company's
stockholder. Rental payments of $24,000 related to this lease were made during
the year ended December 31, 1997. Minimum rental commitments at December 31,
1997 under operating leases having an initial noncancelable term of one year or
more are as follows:
Operating Related
Leases Party
-------- --------
1998 $ 9,768 $ 29,000
1999 7,074 30,000
2000 -- 30,000
2001 -- 30,000
2002 -- 30,000
Thereafter -- 5,000
------- --------
$16,842 $154,000
======= ========
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue 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 25% of total contributions by a
plan member. The Company's matching contributions totaled $10,300 for 1997.
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.
F-31
34
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
Income tax expense (benefit) consists of the following at December 31, 1997:
December 31,
1997
--------
Current:
Federal $ 44,504
State 14,846
Deferred (4,607)
--------
$ 54,743
========
Significant components of the deferred tax assets and liabilities as of December
31, 1997, are as follows:
Deferred tax liabilities:
Depreciation and amortization $ 7,559
Inventory 20,430
Deferred revenue 91,080
--------
Total gross deferred tax liabilities 119,069
Deferred tax assets:
Accounts receivable 3,928
Compensation and warranty reserves 15,361
Accrued expenses 11,673
--------
Total gross deferred tax assets 30,962
Valuation allowance --
--------
Deferred tax assets 30,962
--------
Net deferred tax liabilities $88,107
========
F-32
35
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
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,
1997
--------
Tax provision at statutory rate $ 52,707
State income tax less applicable federal tax benefit 9,179
Nondeductible expenses 4,104
Effect of graduated tax rates (11,247)
--------
$ 54,743
========
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
F-33
36
Triton Mechanical, Inc.
Notes to Financial Statements (continued)
8. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
The Company relies upon its vendors to keep its inventories at appropriate
levels to meet customer demand. It is essential that the Company's vendors have
systems that will accept Year 2000 dates from the Company's purchase orders so
they may respond to the Company's requests for goods. The Company plans to
obtain written verification from each of its significant vendors to determine
whether there will be any interruption in the supply of inventory to the
Company. Based on the responses received, the Company will evaluate whether the
use of certain vendors should be suspended as well as what impact vendor
readiness may have on required inventory levels. The Company expects to be
completed with the accumulation and analysis of this information as well as the
resolution of any issues identified no later than September 30, 1999.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors.
If the Company's plan to install new systems which effectively address the Year
2000 issue is not successfully or timely implemented, the Company may need to
devote more resources to the process and additional costs may be incurred. The
Company believes that the Year 2000 issue is being appropriately addressed and
does not expect the Year 2000 issue to have a material adverse effect on the
financial position, results of operations or cash flows of the Company in future
periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
9. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Agreement and Plan of Merger with
Service Experts, Inc. ("Service Experts"). In accordance with the Agreement and
Plan of Merger, the Company became a wholly-owned subsidiary of Service Experts
effective March 3, 1998.
In connection with the business combination of the Company with Service Experts,
Service Experts paid all notes payable outstanding.
F-34
37
Report of Independent Auditors
The Stockholder
Bill's Commercial Air Conditioning, Inc.
We have audited the accompanying balance sheet of Bill's Commercial Air
Conditioning, Inc. as of December 31, 1997, and the related statements of
income, stockholder's equity, and cash flows for the year ended December 31,
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 Bill's Commercial Air
Conditioning, Inc. at December 31, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 5, 1999
F-35
38
Bill's Commercial Air Conditioning, Inc.
Balance Sheets
December 31, September 30,
1997 1998
---------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 396,021 $ 360,099
Accounts receivable:
Trade, net of allowance for doubtful accounts of $3,600 and
$8,400 at December 31, 1997 and September 30, 1998,
respectively 341,150 524,884
Employee 20,767 14,017
---------- ----------
361,917 538,901
Inventories 133,482 123,582
Costs and estimated earnings in excess of billings 3,935 1,118
---------- ----------
Total current assets 895,355 1,023,700
Property, buildings and equipment:
Land 10,116 10,116
Buildings and improvements 116,658 116,658
Furniture and fixtures 63,182 71,042
Machinery and equipment 135,259 137,400
Vehicles 401,924 487,477
---------- ----------
727,139 822,693
Less accumulated depreciation (492,277) (546,277)
---------- ----------
234,862 276,416
---------- ----------
Total assets $1,130,217 $1,300,116
========== ==========
F-36
39
December 31, September 30,
1997 1998
---------- ----------
(Unaudited)
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 182,863 $ 186,539
Accrued compensation and benefits 44,597 35,409
Accrued warranties 23,100 28,500
Customer deposits 63,225 --
Billings in excess of costs and estimated earnings 39,340 22,449
---------- ----------
Total current liabilities 353,125 272,897
Stockholder's equity:
Common stock, no par value, 50 shares authorized,
issued and outstanding 98,563 98,563
Retained earnings 678,529 928,656
---------- ----------
Total stockholder's equity 777,092 1,027,219
---------- ----------
Total liabilities and stockholder's equity $1,130,217 $1,300,116
========== ==========
See accompanying notes.
F-37
40
Bill's Commercial Air Conditioning, Inc.
Statements of Income
Nine months
Year ended ended
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
Net revenue $3,695,297 $3,481,424
Cost of goods sold 2,149,308 1,886,483
---------- ----------
Gross margin 1,545,989 1,594,941
Selling, general and administrative expenses 1,245,617 1,024,071
---------- ----------
Income from operations 300,372 570,870
Other income:
Interest income 25,882 14,839
Other income 1,118 10,717
---------- ----------
27,000 25,556
---------- ----------
Net income $ 327,372 $ 596,426
========== ==========
See accompanying notes.
F-38
41
Bill's Commercial Air Conditioning, Inc.
Statement of Stockholder's Equity
Common Stock
No Par Value Retained
Shares Amount Earnings Total
---------------------------------------------------------------
Balance at January 1, 1997 50 $98,563 $ 663,540 $ 762,103
Capital distributions - - (312,383) (312,383)
Net income - - 327,372 327,372
---------------------------------------------------------------
Balance at December 31, 1997 50 98,563 678,529 777,092
Capital distributions (unaudited) - - (346,299) (346,299)
Net income (unaudited) - - 596,426 596,426
---------------------------------------------------------------
Balance at September 30, 1998
(unaudited) 50 $98,563 $ 928,656 $ 1,027,219
===============================================================
See accompanying notes.
F-39
42
Bill's Commercial Air Conditioning, Inc.
Statements of Cash Flows
Nine months
Year ended ended
December 31, September 30,
1997 1998
---------- ----------
(Unaudited)
Operating activities
Net income $ 327,372 $ 596,426
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 70,950 54,000
Provision for loss on accounts receivable 3,598 8,850
Changes in assets and liabilities:
Accounts and notes receivable 57,964 (185,834)
Inventories 32,371 9,900
Trade accounts payable and accrued liabilities (92,097) 3,676
Accrued compensation (4,043) (9,188)
Accrued warranties (5,700) 5,400
Customer deposits 5,840 (63,225)
Billings in excess of costs and estimated earnings and
costs and estimated earnings in excess of billings (112,343) (14,074)
---------- ----------
Net cash provided by operating activities 283,912 405,931
Investing activities
Purchase of property, buildings and equipment (46,396) (95,554)
---------- ----------
Net cash used in investing activities (46,396) (95,544)
Financing activities
Payments on line of credit -- (157,636)
Proceeds from line of credit -- 157,636
Distribution to stockholders (312,383) (346,299)
---------- ----------
Net cash used in financing activities (312,383) (346,299)
Decrease in cash and cash equivalents (74,867) (35,922)
Cash and cash equivalents at beginning of period 470,888 396,021
---------- ----------
Cash and cash equivalents at end of period $ 396,021 $ 360,099
========== ==========
Supplemental cash flow information
Interest paid $ -- $ 489
========== ==========
See accompanying notes.
F-40
43
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Bill's Commercial Air Conditioning, 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 in
the Daytona Beach, Florida area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the related statements of income,
stockholder's 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 December 31,
1997 audited financial statements appearing herein. The results of the nine
months ended September 30, 1998 may not be indicative of operating results for
the full year.
RECOGNITION OF REVENUE
Revenue on all of the Company's heating and air conditioning installation
contracts for commercial buildings ("Commercial Contracts") is recognized on
the percentage-of-completion method in the ratio that total incurred costs bear
to total estimated costs. Revenue on all of the Company's contracts 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 Commercial Contracts are reviewed throughout the
terms of the Commercial Contracts, and any required adjustments are reflected in
the periods in which they first become known. When estimates indicate a probable
loss on a Commercial Contract, the full amount thereof is accrued in the period
in which it is first determined. Most Commercial Contracts are completed within
six to 12 months.
F-41
44
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE (CONTINUED)
Trade accounts receivable includes billings and billed retainage on Commercial
Contracts. Trade accounts receivable also includes unbilled retainage of
approximately $170,000 at December 31, 1997. The Company classifies these
amounts as current assets because all balances are expected to be collected in
the current year.
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," represents
billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheet for cash approximate fair
value.
Accounts Receivable, Accounts Payable, and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
accounts payable, and accrued liabilities approximate fair value. Accounts
receivable are generally unsecured.
CONCENTRATIONS AND CREDIT RISKS
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. At December 31, 1997, the Company had approximately $235,000 on deposit
with a bank in excess of FDIC insurance limits.
The Company primarily purchases HVAC units and materials from two suppliers.
Purchases of equipment and materials from these suppliers during 1997 totaled
approximately $622,000.
F-42
45
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled $3,598.
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
is provided on the straight-line method over the following useful lives:
Years
------
Buildings and improvements 5 - 39
Furniture and fixtures 5 - 7
Machinery and equipment 5 - 7
Vehicles 3 - 5
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of"
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
F-43
46
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS (CONTINUED)
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
December 31, 1997.
WARRANTIES
The Company generally provides customers 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.
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 stockholder of the Company has elected under Subchapter S of the Internal
Revenue Code to include the Company's income in his own income for federal
income tax purposes. Accordingly, the Company is not subject to federal income
taxes.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $32,000.
F-44
47
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in stockholder's
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. The adoption of SFAS No. 130 in
1998 did not have an effect on the Company's financial statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
December 31,
1997
---------
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts $ 533,181
Estimated earnings 281,632
---------
814,813
Less applicable billings 850,218
---------
$ (35,405)
=========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 3,935
Billings in excess of costs and estimated earnings on
uncompleted contracts (39,340)
---------
$ (35,405)
=========
Progress billings on contracts bear a relation to costs incurred, but are not
indicative of the ultimate profit or loss on a contract.
F-45
48
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
3. LEASES
The Company leases certain equipment and warehouse facilities under terms
of one year noncancelable operating lease agreements. Total rental expense for
all operating leases was approximately $11,300 for 1997.
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.
5. 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 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 taxable income of $490,448 for 1997. Had the Company
filed federal and state income tax returns as a regular corporation for 1997,
income tax expense under the provisions of SFAS No. 109 would have been
$124,499.
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
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 September 30, 1998, the deferred tax
liability would have been approximately $191,000.
6. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
F-46
49
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
6. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
The Company relies upon its vendors to keep its inventories at appropriate
levels to meet customer demand. It is essential that the Company's vendors have
systems that will accept Year 2000 dates from the Company's purchase orders so
they may respond to the Company's requests for goods. The Company plans to
obtain written verification from each of its significant vendors to determine
whether there will be any interruption in the supply of inventory to the
Company. Based on the responses received, the Company will evaluate whether the
use of certain vendors should be suspended as well as what impact vendor
readiness may have on required inventory levels. The Company expects to be
completed with the accumulation and analysis of this information as well as the
resolution of any issues identified no later than September 30, 1999.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors.
If the Company's plan to install new systems which effectively address the Year
2000 issue is not successfully or timely implemented, the Company may need to
devote more resources to the process and additional costs may be incurred. The
Company believes that the Year 2000 issue is being appropriately addressed and
does not expect the Year 2000 issue to have a material adverse effect on the
financial position, results of operations or cash flows of the Company in future
periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
F-47
50
Bill's Commercial Air Conditioning, Inc.
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENT
During 1998, the Company entered into a $150,000 revolving line of credit
agreement with a financial institution. The line of credit bears interest at a
variable rate of 0.5% over the lender's prime rate. The line is collateralized
by the Company's cash and cash equivalents. On February 5, 1999, there were no
amounts outstanding under the line.
Subsequent to year end, the Company signed an Agreement with Service Experts,
Inc. ("Service Experts"). In accordance with the Agreement, Service Experts
purchased certain assets and assumed certain liabilities of the Company on
December 21, 1998.
F-48
51
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
Service Experts, Inc. (the "Company") was incorporated on March 27, 1996.
The Company operates in one industry segment and is primarily engaged in the
replacement and servicing of HVAC units for residential and commercial
customers. The Company has Service Centers located in cities across the United
States. The operations of the Company's subsidiaries other than Pooled Companies
(as defined below) have been included in the Company's financial statements from
their respective effective dates of acquisition. The Company's historical
financial statements have been restated for all periods presented by including
the historical results of the 1997 Pooled Companies and the 1998 Pooled Company
(see Table I).
The following unaudited pro forma combined financial statements give effect
to the acquisition by the Company of 44 Acquired Companies (as defined below)
in exchange for shares of the Company's Common Stock, cash, warrants to purchase
shares of Common Stock, convertible subordinated notes and the assumption of
certain debt.
The unaudited pro forma combined balance sheet as of September 30, 1998
gives effect to the acquisition of 18 Acquired Companies closed effective after
September 30, 1998 (see Table I). The unaudited pro forma combined statement of
income for the nine months ended September 30, 1998 gives effect to the
acquisition of 26 Acquired Companies closed effective during the nine month
period ended September 30, 1998 (see Table I), and the 18 Acquired Companies
which were closed effective after September 30, 1998 as if such transactions had
occurred as of January 1, 1998. The unaudited pro forma combined statement of
income for the 12 months ended December 31, 1997 gives effect to the acquisition
of the 1997 and 1998 Pooled Companies as described below, 32 Acquired Companies
closed during 1997 (see Table I), the 26 Acquired Companies closed effective
during the nine month period ended September 30, 1998 and the 18 Acquired
Companies closed effective after September 30, 1998 as if such transactions had
occurred on January 1, 1997.
TABLE I
The 1997 Pooled Companies
*1. C. Iapaluccio Company, Inc.
2. Hawk Heating & Air Conditioning, Inc.
*3. TML, Inc.
*4. Parrott Mechanical, Inc.
5. McAlister Heat & Air, Inc.
The 1998 Pooled Company
*1. Dodge Heating and Air Conditioning, Inc., et al. and
DH&A, Inc.
18 Acquired Companies closed subsequent to September 30, 1998
*1. Climate Design Systems, Inc.
2. Eveready Corporation
3. Austin Brothers, Inc.
4. Womack - O'Bannon, Inc.
*5. Womack - O'Bannon & Choco, Inc.
*6. Ben Peer Heating, Inc.
*7. PTM Enterprises, Inc.
8. Jansen's Heating & Air Conditioning, Inc.
9. Local Furnance Co., Inc.
10. R&M Climate Control, Incorporated
11. Climate Masters Service Company, Inc.
12. McPhee, Inc.
13. Shelburne Refrigeration, Inc.
14. 1st Call Heating & Cooling, Inc.
*15. Bill's Commerical Air Conditioning, Inc.
*16. Fras-Air Contracting, Inc.
17. Gregory's Plumbing Co., Inc.
18. Lake Arbor Heating, Inc.
F-49
52
26 Acquired Companies closed during the nine month period ended
September 30, 1998
*1. Gulf Coast Cooling, Inc.
2. Jack Nelson Co., Inc.
3. Dan Jacobs Heating & Cooling, Inc.
4. Becht Heating & Cooling, Inc.
*5. Davis the Plumber, Inc.
6. Lee Voisard Plumbing & Heating, Inc.
*7. Climate Control, Inc.
*8. Triton Mechanical, Inc.
*9. Strand Brothers, Inc.
10. Astron Residential, Inc.
11. Doler Plumbing & Heating, Inc.
12. Atlantic Air Conditioning and Heating, Inc.
*13. Steel City Heating & Air, Inc.
14. Deland Heating & Air Conditioning Company
15. Kozon, Inc.
16. Royden Commercial Services, Inc.
17. Albritten Plumbing Heating and Air Conditioning, Inc.
18. Alert Heating Service, Inc.
19. Russell Mechanical, Inc.
20. Andros Refrigeration, Inc.
*21. Epperson, Inc.
*22. Midland Heating & Air Conditioning, Inc.
23. Economy Heating and Air Conditioning, Inc.
24. Mathews Air Conditioning and Heating, Inc.
*25. Matz Sheet Metal Works, Inc. and Right Way Heating
and Air Conditioning Service, Inc.
26. Warshaw's Energy Savings Design, Inc.
32 Acquired Companies closed during 1997
*1. B.W. Heating & Cooling, Inc.
*2. Chief/Bauer Heating & Air Conditioning, Inc.
*3. Gaddis Co.
*4. Dial One Raymond Plumbing, Heating & Cooling, Inc.
*5. Parker Heating & Air Conditioning Incorporated
*6. Sylvester Corp.
*7. Roland J. Down, Inc.
*8. Stark Services Company, Inc.
*9. Claire's Air Conditioning and Refrigeration, Inc.
*10. Claire & Sanders, Inc.
*11. Piedmont Air Conditioning Company
12. Royden, Inc.
13. Superior Air Conditioning, Inc.
*14. ProAir Services, Inc.
*15. Artic Aire of Chico, Inc.
16. A-1 Air Conditioning, Inc.
*17. Mid Fla Heating & Air, Inc.
18. All American Air Conditioning & Heating, Inc.
19. The McElroy Service Company
20. Bill Ingraham Service Company, Inc.
*21. S & W Conditioning, Inc.
*22. Berkshire Air Conditioning Company
*23. J.M. Jenks Incorporated
*24. Teays Valley Heating and Cooling, Inc.
25. Ainsley & Son Heating, Inc.
26. Knochelmann, Inc.
27. Stanley Heating and Air Conditioning, Inc.
28. George B. Givens Company, Inc.
*29. Holmes Sales & Service, Inc.
*30. Getzschman Heating & Sheet Metal Contractors
31. Thompson and Sons Heating and Air Conditioning Company
32. Air Experts, Inc.
* Indicates that audited financial statements for the Acquired Companies
previously have been filed in a Form 8-K or Form S-4.
F-50
53
The unaudited pro forma combined financial statements have been prepared by
the Company based on the historical financial statements of the Company and of
the companies referred to in Table I and certain preliminary estimates and
assumptions deemed appropriate by management of the Company. The pro forma
combined financial statements presented herein have been prepared based on
certain assumptions and include certain pro forma adjustments. The Company has
not completed all the evaluations necessary for the final purchase price
allocations related to certain of the acquired businesses; accordingly, actual
adjustments that reflect final evaluations of the purchased assets and assumed
liabilities may differ from the pro forma adjustments reflected herein.
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.
The pro forma combined financial statements should be read in conjunction
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
SEPTEMBER 30, 1998
Acquired Pro Forma Pro Forma
Company Companies Adjustments As Adjusted
-------------------------------------------------------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents............ $ 6,024 $ 2,612 $ (18,378) (a) $ 200
(2,058) (b)
12,000 (c)
Receivables:
Trade Receivables, net............. 46,454 4,451 -- 50,905
Related Party...................... 340 38 -- 378
Employee........................... 533 113 -- 646
Other.............................. 4,999 47 -- 5,046
------------ ------------- -------------- ------------
52,326 4,649 -- 56,975
Inventories 25,594 2,685 -- 28,279
Cost and estimated earnings in excess of
billings.............................. 4,885 119 -- 5,004
Prepaid expenses and other current assets 5,675 321 -- 5,996
Current portion of notes receivable --
related parties 14 -- -- 14
Current portion of notes receivable-other 177 -- -- 177
Deferred income taxes 3,972 (5) (12)(e) 3,955
------------ ------------- -------------- ------------
Total current assets....... 98,667 10,381 (8,448) 100,600
Property, buildings and equipment, net 34,940 3,569 (52) (d) 38,457
Notes receivable--related parties........ 334 2 -- 336
Notes receivable--other.................. 567 -- -- 567
Goodwill................................. 169,766 1,242 25,845 (a) 197,271
418 (e)
Other assets............................. 6,889 569 -- 7,458
------------ -------------- -------------- ------------
Total assets............... $ 311,163 $ 15,763 $ 17,763 $ 344,689
============ ============== ============== ============
Liabilities and Stockholders Equity
Current liabilities:
Short-term debt...................... $ -- $ 104 $ (104) (b) $ (0)
Trade accounts payable & accrued
liabilities...................... 16,292 4,871 -- 21,163
Accrued compensation................. 8,287 296 -- 8,583
Accrued warranties................... 3,260 312 -- 3,572
Income taxes payable................. 1,118 124 307 (e) 1,549
Deferred revenue..................... 10,295 675 -- 10,970
Deferred income taxes................ 80 -- -- 80
Billings in excess of costs and
estimated earnings............... 1,663 91 1,754
Current portion of long-term debt.... 274 478 (478) (b) 12,274
12,000 (c)
------------ ------------- --------------- -----------
Total current liabilities: 41,269 6,951 11,725 59,945
Long-term debt, and capital lease
obligations, net of current.......... 73,302 1,476 7,504 (a) 80,806
(1,476) (b)
Deferred income taxes.................... 1,875 -- 99 (e) 1,974
Common stock......................... 171 804 (801) (a) 174
Additional paid-in-capital........... 155,424 189 7,107 (a) 162,720
Treasury stock....................... (146) 146 (a) --
Retained earnings.................... 39,122 6,489 (6,489) (a) 39,070
(52) (d)
----------- -------------- --------------- -----------
Total stockholders'
equity................. 194,717 7,336 (89) 201,964
----------- -------------- --------------- -----------
Total liabilities and
stockholders' equity... $ 311,163 $ 15,763 $ 17,763 $ 344,689
=========== ============== =============== ===========
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 NINE MONTHS ENDED SEPTEMBER 30, 1998
Acquired Pro Forma Pro Forma
Company Companies Adjustments Adjusted
-----------------------------------------------------------------
(in thousands, except per share data)
Net Revenue.................................... $ 293,604 $ 66,730 $ -- $ 360,334
Cost of goods sold ............................ 188,083 43,344 -- 231,427
---------- --------- ------- ----------
Gross margin .................................. 105,521 23,386 -- 128,907
Selling, general and administrative expenses... 73,660 18,758 (2,836) (f) 89,582
---------- --------- ------- ----------
Income from operations ........................ 31,861 4,628 2,836 39,325
Other income (expense):
Interest expense ............................ (2,395) (607) (215) (g) (3,217)
Interest income ............................. 355 71 -- 426
Other income ................................ 483 431 -- 914
---------- --------- ------- ----------
(1,557) (105) (215) (1,877)
---------- --------- ------- ----------
Income before income taxes .................... 30,304 4,523 2,621 37,448
Provision for income taxes .................... 12,141 1,557 1,831 (h) 15,529
---------- --------- ------- ----------
Net income .................................... $ 18,163 $ 2,966 $ 790 $ 21,919
========== ========= ======= ==========
Pro forma net income per share:
Basic ....................................... $ 1.09 $ 1.26
Diluted ..................................... $ 1.07 $ 1.24
Pro forma weighted average shares outstanding:
Basic ....................................... 16,684 695 (i) 17,379
Diluted ..................................... 16,922 697 (j) 17,619
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 YEAR ENDED DECEMBER 31, 1997
Acquired Pro Forma Pro Forma
Company Companies Adjustments Adjusted
-------- --------- ----------- ---------
(in thousands, except per share data)
Net Revenue......................... $248,110 $181,079 $ -- $429,189
Cost of goods sold.................. 161,281 120,559 -- 281,840
-------- -------- -------- --------
Gross margin........................ 86,829 60,520 -- 147,349
Selling, general and administrative
expenses.......................... 62,103 49,461 (3,298)(f) 108,266
-------- -------- -------- --------
Income from operations.............. 24,726 11,059 3,298 39,083
Other income (expense):
Interest expense.................. (772) (967) (129)(g) (1,868)
Interest income................... 793 164 -- 957
Other income...................... 578 509 -- 1,087
-------- -------- -------- --------
.................................... 599 (294) (129) 176
-------- -------- -------- --------
Income before income taxes.......... 25,325 10,765 3,169 39,259
Provision for income taxes.......... 9,380 2,904 3,834 (h) 16,118
-------- -------- -------- --------
Net income.......................... $ 15,945 $ 7,861 $ (665) $ 23,141
======== ======== ======== ========
Pro forma net income per share:
Basic............................. $ 1.08 $ 1.38
Diluted........................... $ 1.07 $ 1.36
Pro forma weighted average shares
outstanding:
Basic............................. 14,774 2,052 (k) 16,826
Diluted........................... 14,922 2,093 (l) 17,015
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-54
57
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the payments to owners of 18 Acquired Companies of $18,378,000
in cash, 288,000 shares of Common Stock and $7,504,000 in convertible debt
resulting in an increase in Goodwill of $25,845,000 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 acquired outstanding debt.
(c) Reflects borrowings on line-of-credit.
(d) Reflects adjustment for real estate not purchased with acquisitions.
(e) Reflects adjustments to record deferred taxes and income taxes payable
on certain Acquired Companies previously taxed as subchapter S
corporations.
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1997 1998
------------- -------------
(in thousands)
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES:
(i) Elimination of historical owners' compensation.............. $(12,000) $ (5,190)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 7,168 3,029
(iii) Adjust rent expense per new leases.......................... 73 95
(iv) Corporate office overhead expenses.......................... 1,811 667
(v) Goodwill amortization....................................... 2,652 897
(vi) Elimination of general and administrative expenses.......... (3,002) (2,334)
-------- --------
$ (3,298) $ (2,836)
======== ========
F-55
58
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Twelve Months Nine Months
Ended Ended
December 31, September 30,
1997 1998
------------- -------------
(in thousands)
(g) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE RELATED TO:
(i) Elimination of all other debt assumed in the transaction to
be paid at closing.......................................... $ 967 $ 607
(ii) Additional interest on debt incurred with transaction....... (1,096) (822)
-------- --------
$ (129) $ (215)
======== ========
(h) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 40% as certain Acquired
Companies previously taxed as Subchapter S corporations..... $ 1,402 $ 252
(ii) Additional income taxes on adjustments (f) and (g).......... 1,371 1,220
(iii) Additional income tax provision for state and federal taxes
due to the non-deductibility of goodwill.................... 1,061 359
-------- --------
$ 3,834 $ 1,831
======== ========
(i) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 695,000 shares issued to the owners of the Acquired
Companies.
(j) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 695,000 shares issued to the owners of the Acquired
Companies.
(ii) 2,000 shares representing dilutive effect of warrants
issued to the owners of the Acquired Companies.
(k) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 2,052,000 shares issued to the owners of the Acquired
Companies.
(l) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 2,052,000 shares issued to the owners of the Acquired
Companies.
(ii) 41,000 shares representing dilutive effect of warrants
issued to the owners of the Acquired Companies.
F-56
59
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 and
Secretary
Date: March 9, 1999
60
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
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23 Consent of Ernst & Young LLP