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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1998
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. 001-13037
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)
SIX CADILLAC DRIVE - SUITE 400, 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 AUGUST 12, 1998
COMMON STOCK, $.01 PAR VALUE 16,629,085
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FORM 10-Q/A
The registrant has filed this report to increase the number of weighted
average shares outstanding used to calculate basic and diluted net income per
share for the three month period ended March 31, 1997 to include shares issued
in connection with the acquisition in 1997 of five HVAC businesses accounted for
as poolings of interests. This inadvertent omission had no impact on the
previously reported basic and diluted net income per share for the year ended
December 31, 1997 and for the three months ended March 31, 1998.
The registrant hereby amends the following items of its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, as set forth in the pages
attached hereto:
Part I - Financial Information
Item 1. Financial Statements (to amend the March 31, 1997
weighted average shares outstanding and net income
per share)
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K (to amend Exhibit 27.2
Amended Financial Data Schedule March 31, 1997 for net
income per share)
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31,
1997 1998
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 11,192 $ 21,678
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $1,550,000 in 1997 and $1,362,000 in 1998 29,129 29,541
Related party 202 297
Employee 365 430
Other 2,099 3,061
--------- ---------
31,795 33,329
Inventories 11,570 20,287
Costs and estimated earnings in excess of billings 1,805 2,423
Prepaid expenses and other current assets 2,458 3,525
Current portion of notes receivable - related parties 14 14
Current portion of notes receivable - other 284 284
Deferred income taxes 3,896 3,940
--------- ---------
Total current assets 63,014 85,480
Property, buildings and equipment:
Land 1,365 1,484
Buildings 3,252 3,611
Furniture and fixtures 5,900 7,654
Machinery and equipment 5,718 5,775
Vehicles 14,754 16,420
Leasehold improvements 2,477 2,775
--------- ---------
33,466 37,719
Less accumulated depreciation and amortization (8,986) (10,685)
--------- ---------
24,480 27,034
Notes receivable - related parties, net of
current portion 338 334
Notes receivable - other, net of current portion 591 551
Goodwill 105,158 120,943
Other assets 1,229 1,496
--------- ---------
Total assets $ 194,810 $ 235,838
========= =========
See accompanying notes.
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DECEMBER 31, MARCH 31,
1997 1998
---- ----
(UNAUDITED)
(IN THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 17,821 $ 13,080
Accrued compensation 6,129 3,616
Accrued warranties 2,139 2,436
Income taxes payable 608 1,867
Deferred revenue 6,816 7,238
Billings in excess of costs and estimated earnings 1,282 1,091
Current portion of long-term debt and capital
lease obligations 274 274
-------- --------
Total current liabilities 35,069 29,602
Long-term debt and capital lease obligations, net
of current portion 15,663 46,771
Deferred income taxes 1,676 1,781
Commitments and contingencies (see note 7)
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, 15,422,269 shares
issued and outstanding at December 31, 1997
and 15,931,231 shares issued and outstanding
at March 31, 1998 154 159
Additional paid-in capital 122,673 134,833
Retained earnings 19,575 22,692
-------- --------
Total stockholders' equity 142,402 157,684
-------- --------
Total liabilities and stockholders' equity $194,810 $235,838
======== ========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Net revenue $ 41,963 $ 68,660
Cost of goods sold 27,519 45,158
-------- --------
Gross margin 14,444 23,502
Selling, general and
administrative expenses 11,193 18,178
-------- --------
Income from operations 3,251 5,324
Other income (expense):
Interest expense (90) (260)
Interest income 129 97
Other income 104 120
-------- --------
143 (43)
Income before income taxes 3,394 5,281
Provision (benefit) for income taxes:
Current 1,785 2,077
Deferred (568) 87
-------- --------
1,217 2,164
-------- --------
Net income $ 2,177 $ 3,117
======== ========
Net income per share:
Basic $ 0.17 $ 0.20
======== ========
Diluted $ 0.17 $ 0.20
======== ========
Weighted average shares outstanding:
Basic 12,708 15,733
======== ========
Diluted 12,851 15,903
======== ========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
(UNAUDITED)
(IN THOUSANDS)
NET CASH FLOW PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 1,524 ($11,649)
INVESTING ACTIVITIES:
Payments on notes receivable 104 44
Purchase of property, buildings, and equipment (2,703) (2,313)
Cash acquired through purchase of business 1,224 972
Payment of cash for acquired companies (15,126) (7,132)
Increase in other assets (20) (229)
-------- --------
Net cash used in
investing activities (16,521) (8,658)
FINANCING ACTIVITIES:
Issuance of stock, net of issuance costs 38,220 --
Proceeds of long-term debt 93 30,899
Payments of long-term debt and capital leases (167) (106)
Payments on notes payable to related parties (389) --
-------- --------
Net cash provided by
financing activities 37,757 30,793
Increase in cash and cash equivalents 22,760 10,486
Cash and cash equivalents at beginning of period 10,806 11,192
-------- --------
Cash and cash equivalents at end of period $ 33,566 $ 21,678
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 90 $ 260
======== ========
Income taxes paid $ 534 $ 1,043
======== ========
See accompanying notes.
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SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 (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, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
2 - NEWLY ISSUED ACCOUNTING STANDARDS
Service Experts, Inc. ("the Company") adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" on January 1, 1998 which had
no impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board ("the FASB") issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("Statement 131"). Statement 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company will
adopt Statement 131 beginning with its year ending December 31, 1998. Management
of the Company is presently evaluating the new standard in order to determine
its effect, if any, on the way the Company might report its operations in the
future.
3 - SECONDARY STOCK OFFERING
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 $38.0 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 were used to fund the Company's capital
expenditures, acquisitions and for general corporate purposes.
4 - ACQUISITIONS
The following table sets forth certain information regarding acquisitions in
1997 and 1998:
Service Total Total
Centers Companies Shares Cash Total
Acquired Acquired Issued Consideration Consideration
-------- --------- ------ ------------- -------------
(in thousands)
1997
First Quarter 7 13 772,000 $ 15,126 $28,287
Second Quarter` 9 18 470,000 10,788 21,625
Third Quarter 10 20 717,000 10,252 30,254
Fourth Quarter 12 20 540,000 6,949 22,612
1998
First Quarter 10 19 389,000 8,626 19,242
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OTHER INFORMATION REGARDING ACQUISITIONS
All of the foregoing acquisitions were accounted for using the purchase method
of accounting, except for five acquisitions in 1997 which were accounted for as
poolings of interests. 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. In computing the purchase price for
accounting purposes, the value of shares is determined using the value of shares
set forth in the acquisition agreement, less a discount ranging from 0% to 20%
(as determined by an independent investment banking firm), because of
restrictions on the sale and transferability of the shares issued. The discount
to the purchase price on acquisitions from January 1, 1998 through March 31,
1998 is $1.4 million. Asset and equity balances have been reduced accordingly,
with no impact on net income. This reduction in goodwill will impact
amortization expense in future periods. The operating results of the
acquisitions, except for the five 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 these entities 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,
1997 1998
---- ----
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
Net revenue $66,754 $71,097
Gross margin 23,480 24,238
Net income 2,367 3,120
Net income per share:
Basic $0.17 $0.20
Diluted $0.17 $0.19
5 - INCOME TAXES
The income tax provisions recorded for the three months ended March 31, 1997 and
1998 differ from the expected income tax provision due primarily to goodwill
amortization, a portion of which is non deductible for Federal income tax
purposes and the provision for state income taxes.
6 - NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share:
THREE MONTHS ENDED
MARCH 31,
1997 1998
---- ----
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
Numerator:
Net income $2,177 $3,117
------ ------
Numerator for basic income per share - income available
to common stockholders 2,177 3,117
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Numerator for diluted income per share - income available
to common stockholders after assumed conversions 2,177 3,117
----- -----
Denominator:
Denominator for basic income per share - weighted average
shares 12,708 15,733
Effect of dilutive securities:
Employee stock options 117 118
Warrants 26 52
------ ------
Dilutive potential common shares 143 170
Denominator for diluted income per share - adjusted
weighted-average shares and assumed conversions 12,851 15,903
====== ======
Basic net income per share $ 0.17 $ 0.20
====== ======
Diluted net income per share $ 0.17 $ 0.20
====== ======
7 - 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.
8 - SUBSEQUENT EVENTS
On April 28, 1998, the Company renegotiated an increase in its line of credit
agreement with a banking syndication from $50.0 million to $100.0 million and
extended the maturity date through April 30, 2001. The line is used for working
capital purposes, acquisitions, or such other purposes as may be approved by the
banking syndication.
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PART II
OTHER INFORMATION
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 Registrant's
subsidiaries, a wholly-owned subsidiary of the Registrant and the
Registrant(c)
10.2 -- Form of Stock Purchase Agreement between the former stockholders
of certain of the Registrant's subsidiaries and the Registrant(d)
27.1 -- Financial Data Schedule March 31, 1998 (for SEC use only)
27.2 -- Amended Financial Data Schedule March 31, 1997 (for SEC use only)
- ------------
(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.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
File No. 001-13037.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on January 8, 1998
containing the Selected Consolidated Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations and consolidated
financial statements of the Company giving retroactive effect to certain
business combinations accounted for as poolings of interests and the audited
financial statements of an acquired company pursuant to Item 5 of Form 8-K.
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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
Anthony M. Schofield
Chief Financial Officer
Date: August 14, 1998
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EXHIBIT INDEX
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 Registrant's
subsidiaries, a wholly-owned subsidiary of the Registrant and the
Registrant(c)
10.2 -- Form of Stock Purchase Agreement between the former stockholders
of certain of the Registrant's subsidiaries and the Registrant(d)
27.1 -- Financial Data Schedule March 31, 1998 (for SEC use only)
27.2 -- Amended Financial Data Schedule March 31, 1997 (for SEC use only)
- ------------
(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.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997,
File No. 001-13037.