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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File No. 000-21173
SERVICE EXPERTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1639453
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
111 WESTWOOD PLACE - SUITE 420, BRENTWOOD, TENNESSEE 37027
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (615) 371-9990
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 8, 1997
COMMON STOCK, $.01 PAR VALUE 13,888,704
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
---------
(In thousands, except per share data)
1996 1997
---- ----
Net revenues $ 5,134 $ 33,355
Cost of goods sold 3,392 20,913
------- --------
Gross margin 1,742 12,442
Selling, general and
administrative expenses 1,714 9,635
------- --------
Income from operations 28 2,807
Other income (expense):
Interest expense (8) (87)
Interest income 2 127
Other income 17 100
------- --------
11 140
Income before income taxes 39 2,947
Provision (benefit) for
income taxes:
Current 6 1,688
Deferred - (568)
------- --------
6 1,120
------- --------
Net income $ 33 $ 1,827
======= ========
Net income per common share $ 0.02 $ 0.15
======= ========
Weighted average shares
used in net income per
common share computation 1,561 12,269
======= ========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1996 1997
(UNAUDITED)
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 10,726 $ 33,155
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $620 in 1996 and $632 in 1997 9,048 12,176
Related party 129 62
Employee 113 237
Other 208 310
-------- --------
9,498 12,785
Inventories 3,923 6,266
Costs and estimated earnings in excess of billings 283 1,148
Prepaid expenses and other current assets 697 1,872
Current portion of notes receivable - related parties 14 14
Current portion of notes receivable - other 286 285
Deferred income taxes 1,893 2,426
-------- --------
Total current assets 27,320 57,951
Property, buildings and equipment:
Land 10 105
Buildings 67 1,578
Furniture and fixtures 841 1,793
Machinery and equipment 1,913 2,223
Vehicles 5,339 7,032
Leasehold improvements 620 856
-------- --------
8,790 13,587
Less accumulated depreciation and amortization (2,461) (3,571)
-------- --------
6,329 10,016
Notes receivable - related parties, net of
current portion 352 327
Notes receivable - other, net of current portion 500 508
Investment in affiliate 674 573
Goodwill 33,032 47,460
Unallocated purchase price - 8,054
Other assets 297 703
-------- --------
Total assets $ 68,504 $125,592
======== ========
See accompanying notes.
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DECEMBER 31, MARCH 31,
1996 1997
(UNAUDITED)
---- ----
(In thousands, except share data)
LIABILITIES AND STOCKHOLERS' EQUITY
Current liabilities:
Notes payable $ - $ 183
Trade accounts payable and accrued liabilities 5,174 5,383
Cash consideration payable 1,495 1,120
Accrued compensation 1,601 3,642
Accrued warranties 963 1,361
Income taxes payable 1,723 2,475
Deferred revenue 3,502 4,978
Billings in excess of costs and estimated earnings 340 732
Current portion of long-term debt and capital
lease obligations 135 243
-------- ---------
Total current liabilities 14,933 20,117
Long-term debt and capital lease obligations, net
of current portion 140 137
Deferred income taxes 360 583
Commitments and contingencies (see note 9)
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized, no shares issued and
outstanding - -
Common stock, $.01 par value; 30,000,000
shares authorized, 11,050,326 shares
issued and outstanding at December 31, 1996
and 13,694,377 shares issued and outstanding
at March 31, 1997 111 137
Additional paid-in-capital 48,566 98,382
Retained earnings 4,409 6,236
Equity notes receivable (15) -
-------- ---------
Total stockholders' equity 53,071 104,755
-------- ---------
Total liabilities and stockholders' equity $ 68,504 $ 125,592
======== =========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
(UNAUDITED)
---------
1996 1997
---- ----
(In thousands)
NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES $ 762 $ 1,173
INVESTING ACTIVITIES:
Payments on notes receivable - 119
Purchase of property, buildings, and equipment (116) (2,638)
Purchase of investments 10 3
Cash acquired through purchase of business - 1,224
Payment of cash for acquired companies - (12,701)
(Increase) decrease in other assets 28 (22)
------- --------
Net cash used in investing activities (78) (14,015)
FINANCING ACTIVITIES:
Issuance of stock, net of issuance costs - 35,518
Proceeds of long-term debt and capital leases 87 130
Payments of long-term debt and capital leases - -
Proceeds on notes payable to related parties - -
Payments on notes payable to related parties - (375)
------- --------
Net cash provided by financing activities 87 35,273
Increase in cash and cash equivalents 771 22,431
Cash and cash equivalents at beginning of period 445 10,724
------- --------
Cash and cash equivalents at end of period $ 1,216 $ 33,155
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 19 $ 88
======= ========
Income taxes paid $ 6 $ 1,201
======= ========
Acquisition of companies:
Fair value of assets acquired $ - $ 31,973
Cash paid - 12,701
Common stock issued - 12,481
------- --------
Liabilities assumed $ - $ 6,791
======= ========
See accompanying notes.
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SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1997 (UNAUDITED)
1 - BASIS OF PRESENTATION
OVERVIEW
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997.
Service Experts, Inc. (the "Company") was incorporated on March 27, 1996. As a
result of the adoption of Securities and Exchange Commission Staff Accounting
Bulletin No. 97 ("SAB 97") on July 31, 1996, 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. (the "Acquiring Company") and subsequent acquisitions
accounted for as poolings of interests (See Note 3). On August 21, 1996 and
simultaneous with the closing of its initial public offering, the Company
acquired in separate transactions, 12 heating, ventilating and air conditioning
("HVAC") replacement and service businesses and Contractor Success Group, Inc.
(collectively, the "Predecessor Companies") in exchange for shares of the
Company's Common Stock and cash (the "Combination"). The Acquiring Company was
treated as the acquiror entity in this transaction in accordance with SAB 97.
The operations of the acquired companies have been included in the Company's
financial statements from the date of acquisition. The above mentioned
acquisitions have been accounted for using the historical cost basis of the
acquired companies in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 48 ("SAB 48"). The Company operates in one industry
segment and is primarily engaged in the replacement and servicing of HVAC
systems for residential and commercial customers. The Company has service
centers located in cities across the United States.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. All intercompany transactions
have been eliminated in consolidation. Investments in affiliates less than 50%
owned are generally recorded on the equity method.
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.
NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("Statement 128"), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be
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excluded. The pro forma primary earnings per share for the first quarter ended
March 31, 1996 and March 31, 1997 would be $0.02 and $0.15 per share,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share is not expected to be material.
3 - MERGERS
In December 1996, the Company completed mergers with Custom Air Conditioning,
Inc. ("Custom") and Freschi Air Systems, Inc. ("Freschi") (collectively, the
"Pooled Companies"), through the exchange of 230,049 and 177,765 shares,
respectively, of the Company's Common Stock.
These mergers have been accounted for as poolings of interests and, accordingly,
the consolidated financial statements for the periods presented have been
restated to include the accounts of Custom and Freschi. The following is a
summary of results of operations of the separate entities for the period prior
to the mergers.
THREE MONTHS
ENDED
MARCH 31, 1996
--------------
(In thousands)
Net Revenue Net Income
(Loss)
Service Experts $ 3,098 $ 16
Custom 1,173 (37)
Freschi 863 54
------- -------
Combined $ 5,134 $ 33
======= =======
4 - RECAPITALIZATION, INITIAL PUBLIC OFFERING AND SECONDARY STOCK OFFERING
On August 21, 1996, the Company completed an initial public offering ("IPO") of
2,587,500 shares of Common Stock at $13.00 per share. Simultaneously with the
closing of the IPO, the Company issued 3,369,358 shares of Common Stock and
distributed $18.7 million cash for the stock of the Predecessor Companies
(exclusive of 1,153,098 shares of Common Stock and $5,027,947 cash distributed
to the former stockholders of the Acquiring Company). The exchange was
accounted for utilizing the historical cost basis in accordance with SAB 48
with the stock being valued at the historical cost of the net assets exchanged.
Cash consideration given in these acquisitions was treated for accounting
purposes as a dividend from the Company.
On March 18, 1997, the Company completed a secondary public stock offering,
which involved a sale to the public of 1,850,000 shares of Common Stock at
$22.00 per share which resulted in $37.7 million in net proceeds to the
Company. A portion of the net proceeds was used to pay the cash portion of
the consideration for acquisitions and to repay certain indebtedness arising
from acquisitions. The remaining proceeds will be used to fund the Company's
planned capital expenditures, future acquisitions and for general corporate
purposes.
The Company's stock is currently traded on The Nasdaq Stock Market's National
Market under the symbol SERX.
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5 - ACQUISITIONS
On November 18, 1996, the Company filed a Registration Statement on Form S-4
(the "Shelf Registration Statement") covering securities with a collective
aggregate offering price of $50.0 million for use in acquisitions, including
the acquisition of 23 unrelated HVAC replacement and service businesses. Of
the 23 companies to be acquired, the Company completed the acquisition of 15 of
these companies as of December 31, 1996. Two of these acquisitions completed
by December 31, 1996 were accounted for as poolings of interests as discussed
in Note 3. In connection with the 13 acquisitions accounted for using the
purchase method of accounting, the Company issued shares at a fair market value
of $34.1 million excluding stock issuance cost of $1.6 million, and cash of
$1.5 million.
In January 1997, the Company completed the remaining eight acquisitions
included in the Shelf Registration Statement and accounted for these
acquisitions using the purchase method of accounting. In connection with these
acquisitions, the Company issued shares of stock at a fair value of $13.0
million, excluding stock issuance cost of $239,000, and cash of $4.0 million.
In the first quarter of 1997, the Company entered into agreements in principle
to acquire 13 HVAC businesses for approximately $17.9 million in cash and
354,000 shares of Common Stock. In March 1997, the Company completed the
acquisitions of Roland J. Down, Inc. and Mark's Air Conditioning, Inc. for
$11.2 million and $350,000 cash, respectively. Both of these acquisitions were
accounted for using the purchase method. Of the remaining 11 acquisitions, 10
are expected to be accounted for under the purchase method of accounting and
one as a pooling of interests.
As of May 8, 1997, the Company has completed the acquisitions of 10 of the 13
businesses.
OTHER INFORMATION REGARDING ACQUISITIONS
All of the foregoing acquisitions were accounted for using the purchase method
of accounting except as indicated in Note 3. The allocation of the purchase
price associated with the acquisitions has been determined by the Company based
upon available information and is subject to further refinement. The operating
results of the acquisitions, except for the Pooled Companies, have been
included in the accompanying consolidated statements of income from the
respective dates of acquisition. The following unaudited pro forma results of
operations give effect to the operations of the entities acquired, through
March 31, 1997, as if the respective transactions had occurred as of the
beginning of the periods presented. The pro forma results of operations have
been adjusted for additional income tax provisions for state and federal taxes
as certain of the acquired companies previously were taxed as subchapter S
corporations. The pro forma results of operations neither purport to represent
what the Company's results of operations would have been had such transactions
in fact occurred at the beginning of the periods presented nor purport to
project the Company's results of operations in any future period.
PRO FORMA RESULTS OF OPERATIONS
THREE MONTHS
ENDED
MARCH 31,
1996 1997
---- ----
(In thousands, except per share data)
Net revenues $30,036 $35,398
Net income 1,645 1,845
Net income per common share $ .14 $ .15
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6 - NET INCOME PER COMMON SHARE
Net income per share has been computed based on the weighted average shares
outstanding.
7 - INCOME TAXES
The income tax provision recorded for the three months ended March 31, 1997
differs from the expected income tax provision due to permanent differences and
the provision for state income taxes. The income tax provision recorded for
the three months ended March 31, 1996 differs from the expected income tax
provision due to election under Subchapter S of the Internal Revenue Code by
AC Service & Installation Co., Inc. and Internal Revenue Code by AC Service &
Installation Co., Inc. and the Pooled Companies, permanent differences, and the
provision for state income taxes.
8 - FINANCING ARRANGEMENTS
The Company has a Revolving Line of Credit agreement with a Nashville,
Tennessee bank for up to $10 million to be used for working capital purposes
and acquisitions. The Company also has a Discretionary Line of Credit
agreement with a Nashville, Tennessee bank for up to $10 million to be used for
acquisitions or such other purposes as may be approved by the bank. Management
believes that its existing cash balances and cash generated from operations
will be sufficient to fund the Company's planned capital expenditures through
the remainder of 1997.
9 - COMMITMENTS AND CONTINGENCIES
The Company currently, and from time to time, is expected to be subject to
claims and suits arising in the ordinary course of business. Management
continually evaluates contingencies based on the best available evidence and
believes that adequate provision for losses has been provided to the extent
necessary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Simultaneous with the IPO in August 1996, the Company acquired the Predecessor
Companies in the Combination. Prior to the Combination, the Company had no
operations. The consideration paid by the Company for the Predecessor
Companies was approximately $77.5 million, consisting of 4.5 million shares of
Common Stock and $18.7 million in cash. No intangible assets were recorded as
a result of the Combination due to the accounting treatment in accordance with
SAB 48. On a pro forma basis, these companies, together with the Pooled
Companies, generated revenue in 1996 of approximately $77.0 million and
contributed operating income of approximately $8.7 million.
In December 1996 and January 1997, the Company acquired 23 HVAC businesses.
The consideration paid by the Company for these 23 businesses was approximately
$58.7 million, consisting of 3.2 million shares of Common Stock and $5.6
million in cash. Two of the transactions were accounted for as poolings of
interests and the remainder were accounted for using the purchase method. Of
the purchase price, $45.1 million was allocated to intangible assets which are
to be amortized over a 40-year period. On a pro forma basis, these
acquisitions (excluding the Pooled Companies) generated revenue in 1996 of
approximately $63.7 million and contributed operating income of approximately
$4.6 million.
In February and March 1997, the Company entered into agreements in principle to
acquire 13 HVAC businesses for approximately $17.9 million in cash and
354,000 shares of Common Stock. As of May 8, the Company has completed the
acquisitions of 10 of the 13 businesses, including Roland J. Down, Inc., which
was closed effective March 1, 1997. The consideration paid by the Company for
these businesses was
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approximately $21.4 million, consisting of approximately 228,000 shares of
Common Stock and $16.3 million in cash. The acquisitions were accounted for
using the purchase method. The remaining three pending acquisitions are
subject to the execution of definitive agreements containing customary
conditions, and there can be no assurance that the Company will be able to
consummate all of the acquisitions or to successfully integrate the businesses
of the acquired companies.
FINANCIAL STATEMENT PRESENTATION
The Combination was accounted for using the historical cost basis of the
Predecessor Companies in accordance with SAB 48. On July 31, 1996, SAB 97 was
adopted to replace SAB 48 for certain combination transactions. In accordance
with the provisions of SAB 97, the presentation of financial information for
the Company reflects the Acquiring Company as the acquiror of the other
Predecessor Companies. The operation of the Predecessor Companies and other
acquired companies (except for those companies accounted for as poolings of
interests) have been included in the Company's financial statements from their
respective effective dates of acquisition.
The Company's Service Centers historically have been managed as independent
private companies and, as such, their results of operations reflect different
tax structures which have influenced, among other things, their historical
levels of owner's compensation.
COMPONENTS OF INCOME
Net revenue of the Service Centers has been derived primarily from the
following sources (i) the installation of central air conditioners, furnaces
and heat pumps primarily in existing homes and (ii) the service and maintenance
of central air conditioners, furnaces and heat pumps primarily in existing
homes. Net revenue and associated income from operations are subject to
seasonal fluctuations resulting from increased demand for the Company's
services during warmer weather in the summer months and during colder weather
in winter months, particularly in the beginning of each season. Cost of goods
sold primarily consists of purchased materials such as replacement air
conditioning units and heat pumps and the labor associated with both
installations and repair orders. The main components of selling, general and
administrative expenses include administrative salaries, insurance expense and
promotion and advertising expenses.
RESULTS OF OPERATIONS
Because of the significant effect of the Combination, acquisitions
subsequent to the Combination and the anticipated effect of the pending
acquisitions on the Company's results of operations, the Company's historical
results of operations and period-to-period comparisons will not be indicative
of future results and may not be meaningful. The Company plans to continue
acquiring Service Centers in the future. The integration of acquired Service
Centers and the addition of management personnel to support existing and future
acquisitions may positively or negatively affect the Company's results of
operations during the period immediately following acquisition.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
Net Revenue. Net revenue increased $28.2 million or 549.7% from $5.1
million for the three months ended March 31, 1996 to $33.4 million for the
three months ended March 31, 1997. Management believes that the significant
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increase in net revenues and related expenses was primarily the result of the
acquisition of 33 heating, ventilating and air conditioning businesses between
August, 1996 and April, 1997.
Cost of Goods Sold. Cost of goods sold increased $17.5 million or
516.5% from $3.4 million for the three months ended March 31, 1996 to $20.9
million for the three months ended March 31, 1997. Management believes that the
significant increase in cost of goods sold from 1996 to 1997 was primarily the
result of the acquisition of 33 heating, ventilating and air conditioning
businesses between August, 1996 and April, 1997. As a percentage of net
revenue, cost of goods sold decreased 3.4% from 66.1% for the three months
ended March 31, 1996 to 62.7% for the three months ended March 31, 1997.
Gross Margin. Gross margin increased from $1.7 million for the three
months ended March 31, 1996 to $12.4 million for the three months ended March
31, 1997, an increase of $10.7 million or 614.2%. As a percentage of net
revenue, gross margin increased from 33.9% for the three months ended March 31,
1996 to 37.3% for the three months ended March 31, 1997. The primary factor for
this increase in percent of revenue is a more favorable product mix with a
higher percentage content of residential business for the three months ended
March 31, 1997 compared to the three months ended March 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $7.9 million or 462.1% from $1.7 million for
the three months ended March 31, 1996 to $9.6 million for the three months
ended March 31, 1997. As a percentage of net revenue, selling, general and
administrative expenses decreased from 33.4% for the three months ended March
31, 1996 to 28.9% for the three months ended March 31, 1997. Management
believes this decrease in percent of revenue is primarily attributed to a
leverage of administrative cost due to consolidation along with a reduction in
former owners' compensation expense post acquisition.
Income from Operations. Income from operations increased from $28,000
for the three months ended March 31, 1996 to $2.8 million for the three months
ended March 31, 1997, an increase of 9,925.0%. Income from operations as a
percent of net revenue increased from 0.5% for the three months ended March 31,
1996 to 8.4% for the three months ended March 31, 1997.
Other Income and Expense. Other income and expense increased from
$11,000 for the three months ended March 31, 1996 to $140,000 for the three
months ended March 31, 1997, an increase of $129,000 or 1,172.7%. Other income
and expense as a percent of net revenue increased from 0.2% for the three
months ended March 31, 1996 to 0.4% for the three months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs arise from the acquisition of new HVAC
businesses and the costs associated with such expansion. Cash used in investing
activities was primarily attributable to the acquisition of HVAC businesses.
On August 21, 1996, the Company completed the IPO at $13.00 per share. The
proceeds to the Company, net of expenses and underwriting discounts and
commissions, were approximately $28.1 million. Of the net proceeds, $18.7
million was used to pay the cash portion of the consideration for the
Predecessor Companies, including $1.2 million which was used to repay certain
indebtedness arising from the Combination. The Company is using (used) the
remaining proceeds for working capital and capital expenditures, including the
acquisition of additional HVAC service and replacement businesses.
The Company's ability to acquire new Service Centers will depend on a number of
factors, including the ability of management of the Company to identify
favorable target businesses and to negotiate favorable acquisition terms, the
availability of adequate financing and other factors, many of which are beyond
the control of the Company. Thus far, the Company has been very active in
acquiring Service Centers. Management does not expect, however, to continue to
acquire Service Centers at its current rate. In addition, there can be no
assurance that the Company will be successful in identifying and acquiring
Service Centers, that the Company can integrate such new Service Centers into
the Company's operations or that the Company's new Service Centers will
generate sales revenue or profit margins consistent with those of the Company's
existing Service Centers.
On March 18, 1997, the Company completed a secondary offering of 1,850,000
shares of its Common Stock at $22.00 per share. The proceeds to the Company,
net of expenses and underwriters discounts and commissions, were approximately
$37.7 million. The Company plans to use the proceeds for planned capital
expenditures, future acquisitions and general corporate purposes.
Working capital at March 31, 1997 was $38.9 million and cash, cash equivalents
and short-term investments were $33.2 million. Net cash generated from
operations during the first quarter was $2.8 million.
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The Company's principal capital needs arise from the acquisition of new HVAC
businesses and the costs associated with such expansion. During the first three
months of 1997, the Company's capital expenditures were $2.6 million.
At March 31, 1997 the Company had $380,000 of outstanding notes payable.
The Company has a $10 million unsecured revolving credit facility and an
additional $10 million unsecured discretionary revolving credit facility with
SunTrust Bank, Nashville, N.A. ("SunTrust") available through September 10,
1998 (together, the "Credit Facilities"). Borrowings under the Credit
Facilities bear interest at a variable rate equal to the 30-day LIBOR, as such
rate changes from time to time, plus a variable margin of from 125 to 250 basis
points depending on the Company's funded debt to EBITDA ratio determined on a
quarterly basis. Certain of the Company's subsidiaries have guaranteed the
repayment of indebtedness under the Credit Facilities. At March 31, 1997,
there were no amounts outstanding on the above lines of credit. The Credit
Facilities contain covenants with respect to the maintenance of certain
financial ratios and specified net worth and limiting the incurrence of
additional indebtedness, the sale of substantial assets, consolidations or
mergers by the Company and the payments of dividends. The Company currently is
negotiating with SunTrust to increase the amount available under the Credit
Facilities, but there can be no assurance that such negotiations will be
successful.
The Company currently has on file with the Commission the Shelf Registration
Statement covering securities with a collective aggregate offering price of
$50.0 million for use in future acquisitions of HVAC businesses. Under the
Shelf Registration Statement, as proposed to be amended by the Company, the
Company may issue shares of Common Stock, warrants to purchase Common Stock and
debt securities in connection with acquisitions.
Management believes that the Company's existing cash balances, cash generated
from operations and additional borrowings will be sufficient to fund the
Company's operating needs, planned capital expenditures and debt service
requirements for the next 12 months. Management continually evaluates
potential strategic acquisitions as part of the Company's growth strategy. To
date, such acquisitions have been predominantly funded by issuing shares of
Common Stock, although future acquisitions could be effected using greater
amounts of cash. Although the Company believes that its financial resources
will enable it to consider potential acquisitions, should the Company's actual
results of operations fall short of, or its rate of expansion significantly
exceed, its plans, or should its costs or capital expenditures exceed
expectations, the Company may need to seek additional financing in the future.
In negotiating such financing, there can be no assurance that the Company will
be able to raise additional capital on terms satisfactory to the Company.
Failure to obtain additional financing on reasonable terms could have a
negative effect on the Company's plans to acquire additional HVAC businesses.
This discussion contains certain forward-looking statements, including those
relating to the acquisition of additional HVAC service and replacement
businesses, each of which is accompanied by specific, cautionary language that
could cause different results than expected by the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
No disclosure is required.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4 -- Form of Common Stock Certificate(b)
10.1 -- Form of Agreement and Plan of Merger among certain of the
Company's subsidiaries, a wholly-owned subsidiary of the
Company and the Company(c)
10.2 -- Form of Combination Agreement between certain of the
Company's subsidiaries and the Company(c)
10.3 -- Form of Employment Agreement between the Company and
certain of its employees(a)
10.4 -- Form of Escrow Agreement between the Company, each of the
stockholders of the Company's subsidiaries and the escrow
agent(a)
11 -- Statement re Computation of Per Share Earnings
27 -- Financial Data Schedule (for SEC use only)
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(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, File No. 333-12319.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the
quarter ended March 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SERVICE EXPERTS, INC.
By: /s/ Anthony M. Schofield
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Anthony M. Schofield
Chief Financial Officer
Date: May 8, 1997
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