1
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 SEPTEMBER 30, 1999
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 NOVEMBER 15, 1999
----- --------------------------------
Common Stock, $.01 Par Value 18,183,374
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 8,408 $ 16,402
Accounts receivable
Trade, net of allowance for doubtful accounts
of $2,050 in 1998 and $3,873 in 1999 .......... 50,211 64,556
Related parties ................................. 312 206
Employees ....................................... 581 1,100
Other ........................................... 6,351 6,147
--------- ---------
57,455 72,009
Refundable income taxes ............................ 2,836 --
Inventories ........................................ 29,715 31,864
Costs and estimated earnings in excess of billings . 5,911 9,886
Prepaid expenses and other current assets .......... 6,558 6,460
Current portion of note receivable - related party . 14 14
Current portion of notes receivable - other ........ 140 52
Deferred income taxes .............................. 4,008 3,970
--------- ---------
Total current assets ......................... 115,045 140,657
Property, buildings and equipment:
Land ............................................... 1,904 1,904
Buildings .......................................... 5,001 5,486
Furniture and fixtures ............................. 13,801 16,974
Machinery and equipment ............................ 8,150 11,544
Vehicles ........................................... 23,197 29,251
Leasehold improvements ............................. 3,850 5,730
--------- ---------
55,903 70,889
Less accumulated depreciation and amortization ..... (17,283) (24,517)
--------- ---------
38,620 46,372
Note receivable - related party, net of current
portion ............................................. 324 332
Notes receivable - other, net of current portion ...... 508 486
Goodwill, net of accumulated amortization of $5,609
in 1998 and $9,355 in 1999 .......................... 191,016 255,306
Unallocated purchase price ............................ 8,738 --
Other assets .......................................... 2,304 1,259
--------- ---------
Total Assets ................................. $ 356,555 $ 444,412
========= =========
See accompanying notes.
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3
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term note payable ............................ $ 2,418 $ --
Trade accounts payable and accrued liabilities ..... 17,677 24,529
Accrued compensation ............................... 5,523 8,073
Accrued warranties ................................. 2,847 3,809
Billings in excess of costs and estimated earnings . 1,268 1,677
Current portion of long-term debt and capital
lease obligations ................................ 2,275 3,761
--------- ---------
Total current liabilities .................... 32,008 41,849
Long-term debt and capital lease obligations, net of
current portion ........................................ 104,479 157,066
Deferred revenue ......................................... 9,883 14,411
Deferred income taxes .................................... 3,682 3,939
Commitments and contingencies (Note 8)
Minority interest ........................................ 121 --
Stockholders' equity:
Common stock, $.01 par value; 30,000,000 shares
authorized, 17,450,664 shares issued and outstanding
at December 31, 1998 and 18,183,374 shares issued and
outstanding at September 30, 1999 ...................... 175 182
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding ........... -- --
Additional paid-in-capital ............................... 163,302 173,821
Deferred compensation .................................... (941) (218)
Retained earnings ........................................ 43,865 53,362
Accumulated other comprehensive income (loss) ............ (19) --
--------- ---------
Total stockholders' equity ............................... 206,382 227,147
--------- ---------
Total liabilities and stockholders' equity ............... $ 356,555 $ 444,412
========= =========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTH ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue .......................... $ 120,048 $ 160,923 $ 293,604 $ 429,876
Cost of goods sold ................... 76,834 111,044 188,083 291,852
--------- --------- --------- ---------
Gross margin ......................... 43,214 49,879 105,521 138,024
Selling, general and
administrative expenses ............ 29,382 42,963 73,660 114,359
--------- --------- --------- ---------
Income from operations ............... 13,832 6,916 31,861 23,665
Other income (expense):
Interest expense .................. (1,188) (3,148) (2,395) (7,140)
Interest income ................... 64 70 355 177
Other income ...................... 194 221 483 1,285
--------- --------- --------- ---------
(930) (2,857) (1,557) (5,678)
--------- --------- --------- ---------
Income before income taxes ........... 12,902 4,059 30,304 17,987
Provision for income taxes:
Current ........................... 4,935 2,589 11,637 8,265
Deferred .......................... 237 30 504 227
--------- --------- --------- ---------
5,172 2,619 12,141 8,492
--------- --------- --------- ---------
Net income ........................... $ 7,730 $ 1,440 $ 18,163 $ 9,495
========= ========= ========= =========
Net income per common share:
Basic ............................. $ 0.45 $ 0.08 $ 1.09 $ 0.54
========= ========= ========= =========
Diluted ........................... $ 0.45 $ 0.08 $ 1.07 $ 0.53
========= ========= ========= =========
Weighted average shares outstanding:
Basic ............................. 17,103 18,032 16,684 17,716
--------- --------- --------- ---------
Diluted ........................... 17,303 18,074 16,922 17,932
--------- --------- --------- ---------
Proforma net income data, reflecting
pro forma tax provision on income
of a pooled company previously
taxed as a Subchapter S
corporation:
Historical net income applicable
to Common Stock .................. $ 7,730 $ 1,440 $ 18,163 $ 9,495
Pro forma adjustment to provision
for income taxes ................. (140) -- (320) --
--------- --------- --------- ---------
Pro forma net income applicable to
Common Stock ...................... $ 7,590 $ 1,440 $ 17,843 $ 9,495
--------- --------- --------- ---------
Pro forma net income per common share:
Basic ............................. $ 0.44 $ 0.08 $ 1.07 $ 0.54
========= ========= ========= =========
Diluted ........................... $ 0.44 $ 0.08 $ 1.05 $ 0.53
========= ========= ========= =========
See accompanying notes.
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SERVICE EXPERTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1999
---- ----
(UNAUDITED)
(IN THOUSANDS)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ....... $ (6,807) $ 16,867
INVESTING ACTIVITIES
Payments on notes receivable .............................. 135 102
Purchase of property, buildings and equipment ............. (9,650) (9,282)
Proceeds from sale of property, buildings and equipment ... 109 386
Proceeds from sale of investment .......................... -- 1,594
Cash acquired through acquisitions ........................ 3,333 3,490
Payment of cash for acquired companies .................... (42,581) (48,440)
(Increase) decrease in other assets ....................... (5,580) 986
--------- --------
Net cash used in investing activities ............ (54,234) (51,164)
--------- --------
FINANCING ACTIVITIES
Decrease in short-term debt ............................... -- (2,418)
Proceeds of long term debt ................................ 118,160 --
Payments of long term debt and capital leases ............. (62,392) --
Issuance of stock pursuant to options exercised ........... -- 1,390
Issuance of stock, employee stock purchase plan ........... -- 123
Net increase in line of credit ............................ -- 43,196
--------- --------
Net cash provided by financing activities ........ 55,768 42,291
--------- --------
Increase (decrease) in cash and cash equivalents .......... (5,273) 7,994
Cash and cash equivalents at beginning of year ............ 11,297 8,408
--------- --------
Cash and cash equivalents at end of period ................ $ 6,024 $ 16,402
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid ............................................. $ 2,555 $ 3,413
========= ========
Income taxes paid ......................................... $ 12,087 $ 8,265
========= ========
See accompanying notes.
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SERVICE EXPERTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 (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 nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. All intercompany transactions have
been eliminated in consolidation.
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.
3 - MARKETABLE SECURITIES
At December 31, 1998, the Company's investments in marketable equity securities
totaled approximately $994,000. During the first quarter of 1999, the Company
sold the securities for a gain of approximately $619,000.
4 - ACQUISITIONS
From January 1, 1999 through September 30, 1999, the Company acquired 116
heating, ventilating and air conditioning businesses. The following table
displays pertinent information regarding acquisitions accounted for under the
purchase method during 1998 and 1999:
SERVICE TOTAL
CENTERS COMPANIES TOTAL SHARES TOTAL CASH CONVERTIBLE TOTAL
ACQUIRED ACQUIRED ISSUED CONSIDERATION DEBT CONSIDERATION
-------- -------- ------ ------------- ---- -------------
(IN THOUSANDS)
1998
First Quarter .... 10 19 389,000 $ 8,585 $ -- $19,243
Second Quarter ... 12 34 593,000 25,077 -- 43,504
Third Quarter .... 8 29 222,000 11,710 667 19,314
Fourth Quarter ... 12 23 232,000 11,681 5,497 22,034
1999
First Quarter .... 12 31 -- 20,620 7,304 27,924
Second Quarter ... 9 66 42,000 17,626 5,459 23,895
Third Quarter .... 2 19 226,000 5,742 510 9,172
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OTHER INFORMATION REGARDING ACQUISITIONS
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 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 Company's Service Centers 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 federal and state taxes as certain of the Service Centers
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
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
1998 1999
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net revenue .............................. $409,196 $451,181
Net income ............................... $ 23,529 $ 9,905
Net income per common share:
Basic .............................. $ 1.29 $ 0.54
Diluted ............................ $ 1.28 $ 0.54
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5 - NET INCOME PER COMMON SHARE
The following table sets forth the computation of basic and diluted net income
per share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income .............................. $ 7,730 $ 1,440 $18,163 $ 9,495
------- ------- ------- -------
Numerator for basic income per share -
Income available to common stockholders
after assumed conversions ............... 7,730 1,440 18,163 9,495
======= ======= ======= =======
Numerator for diluted income per share:
Net income .............................. 7,730 1,440 18,163 9,495
Add: interest on subordinated convertible
securities, net of tax ............. -- -- -- 38
------- ------- ------- -------
Income available to common stockholders
after assumed conversions ............... $ 7,730 $ 1,440 $18,163 $ 9,533
======= ======= ======= =======
Denominator:
Denominator for basic income per share -
weighted average shares .............. 17,103 18,032 16,684 17,716
Effect of dilutive securities:
Employee stock options .................. 146 41 144 89
Warrants ................................ 54 1 55 12
Contingent shares ....................... -- -- 39 1
Convertible debt ........................ -- -- -- 114
------- ------- ------- -------
Dilutive potential common shares
Denominator for diluted income per share-
adjusted ............................. 200 42 238 216
------- ------- ------- -------
Weighted-average shares and assumed
conversions .......................... 17,303 18,074 16,922 17,932
======= ======= ======= =======
Basic net income per share ................. $ 0.45 $ 0.08 $ 1.09 $ 0.54
======= ======= ======= =======
Diluted net income per share ............... $ 0.45 $ 0.08 $ 1.07 $ 0.53
======= ======= ======= =======
6 - INCOME TAXES
The Company's effective tax rate for the three and nine months ended September
30, 1999 was significantly impacted by revised, downward earnings forecasts. As
a result of revised earnings forecasts, the nondeductible goodwill
amortization, as a percentage of pretax book income, significantly increased
over the amount in the three and nine months ended September 30, 1998. In
addition to the nondeductible goodwill amortization, the Company's effective
tax rate differed from the federal statutory rate of 35% as a result of the
provision for state income taxes.
7 - FINANCING ARRANGEMENTS
From January 1, 1999 through September 30, 1999, the Company issued convertible
subordinated notes ("Notes") totaling approximately $13,273,000 as consideration
in certain acquisitions. Principal is payable in four equal annual installments
beginning one year from the date of issuance. Interest at an average rate of
5.09% (ranging from 4.51% to 5.96%) is payable quarterly. The Notes are
convertible, at the option of the holder, into the Company's Common Stock at any
time, at an average conversion price of $25.24 per share (ranging from $14.93 to
$38.95), subject to adjustment in certain events. If the closing sales price of
a share of Common Stock exceeds the conversion price for periods ranging from
five to 20 consecutive trading days, the Company may elect to convert the Notes
into shares of Common Stock at the conversion price. In September 1999, the
Company elected to convert Notes in an aggregate principal amount of $5,631,596
into 340,786 shares of the Company's Common Stock.
8
9
At September 30, 1999, the Company had a $200.0 million unsecured revolving
credit facility with a syndicate of banks available through May 31, 2002 (the
"Credit Facility"). At September 30, 1999, $103.5 million was available under
the Credit Facility. Borrowings under the Credit Facility bear interest at
either (i) the higher of the agent's base lending rate or the federal funds rate
plus a variable margin of from 0 to .375 basis points depending on the Company's
net funded debt to EBITDA ratio determined on a quarterly basis or (ii) a
variable rate equal to the 30, 60, 90 or 180-day LIBOR, as such rate changes
from time to time, plus a variable margin of from 100.0 to 237.5 basis points
depending on the Company's net funded debt to EBITDA ratio determined on a
quarterly basis, at the election of the Company. All of the Company's
subsidiaries have guaranteed the repayment of indebtedness under the Credit
Facility. The Credit Facility contains covenants customary for financing of this
type, including covenants with respect to (i) the maintenance of certain
financial ratios and specified net worth, (ii) the limitation of (A) the
aggregate outstanding principal balance of the senior notes (issued June 23,
1998) to $50.0 million and (B) the aggregate outstanding principal balance of
any debt issued by the Company directly to sellers of acquired HVAC businesses
to $100.0 million, (iii) the sale of substantial assets, consolidations or
mergers by the Company and (iv) the payment of dividends.
8 - 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 an adequate provision for losses has been provided to the extent
necessary.
9 - SUBSEQUENT EVENT
On October 26, 1999, the Company entered into a definitive merger agreement with
Lennox International Inc. ("Lennox") pursuant to which Lennox will acquire the
Company, and each share of the Company's Common Stock will be exchanged for 0.67
of a share of Lennox Common Stock. The Company expects the merger to be
completed during the first quarter of 2000, subject to customary closing
conditions, including regulatory approvals and approval by the stockholders of
both companies.
Upon completion of the merger with Lennox, the outstanding balance of the
Credit Facility will become due and payable. Lennox has agreed to refinance or
repay the Credit Facility at or prior to the closing of the merger.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
On October 26, 1999, the Company entered into a definitive merger agreement with
Lennox International Inc. pursuant to which Lennox will acquire the Company, and
each share of the Company's Common Stock will be exchanged for 0.67 of a share
of Lennox Common Stock. The Company expects the merger to be completed during
the first quarter of 2000, subject to customary closing conditions, including
regulatory approvals and approval by the stockholders of both companies.
Historically, the Company has aggressively acquired HVAC businesses. Because the
merger agreement with Lennox restricts the Company's ability to make
acquisitions and because of the current market value of the Company's common
stock, the number of HVAC businesses the Company expects to acquire in the
future will be substantially less than the Company has acquired historically.
In 1998, the Company acquired 106 HVAC businesses (the "1998 Acquired
Companies"), of which 43 are Service Centers. The consideration paid by the
Company for the 1998 Acquired Companies was approximately $110.1 million,
consisting of approximately 1.8 million shares of Common Stock, $6.2 million in
notes convertible into shares of Common Stock, and approximately $56.3 million
in cash. One of the Acquired Companies was accounted for using the pooling of
interests method and the remainder were accounted for using the purchase method.
Approximately $85.5 million of the consideration paid by the Company was
allocated to intangible assets which are being amortized over a 40-year period.
From January 1, 1999 through June 30, 1999, the Company acquired 97 HVAC
businesses, of which 21 are Service Centers. The consideration paid by the
Company for these businesses was approximately $51.8 million, consisting of
approximately 42,000 shares of Common Stock, approximately $12.8 million in
notes convertible into shares of Common Stock and approximately $38.2 million in
cash. All of these acquisitions were accounted for using the purchase method.
Approximately $41.9 million of the consideration paid by the Company for these
businesses was allocated to intangible assets which are amortized over a 40-year
period.
9
10
From July 1, 1999 through September 30, 1999, the Company acquired 19 HVAC
businesses (collectively, with the 97 HVAC businesses acquired in the first
quarter and the second quarter of 1999, the "1999 Acquired Companies"), of which
two are Service Centers. The consideration paid by the Company for these
businesses was approximately $6.5 million, consisting of approximately 46,000
shares of Common Stock, approximately $510,000 in notes convertible into shares
of Common Stock and approximately $5.7 million in cash. All of these
acquisitions were accounted for using the purchase method. Approximately $3.9
million of the consideration paid by the Company for acquired Service Centers
and approximately $840,000 of the consideration paid by the Company for spoke
acquisitions was allocated to intangible assets which are amortized over a
40-year period. In addition, the Company issued approximately 180,000 shares of
Common Stock valued at approximately $2.7 million in connection with an earnout
related to a Service Center purchased in 1998.
The 1998 and 1999 Acquired Companies (collectively, the "Acquired Companies")
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.
Owners and certain key employees of the Acquired Companies have agreed to
certain reductions in their compensation in connection with the acquisitions.
COMPONENTS OF INCOME
Net revenue has been derived primarily from the installation, service and
maintenance of central air conditioners, furnaces and heat pumps in existing
homes and commercial businesses. 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, legal and professional
fees, insurance expense and promotion and advertising expenses.
RESULTS OF OPERATIONS
Because of the significant effect and timing of 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 integration of acquired HVAC businesses 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. Pending the merger with Lennox, the
number of HVAC businesses acquired will be substantially less than the Company
has acquired historically.
THREE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1999
---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Revenue ................................ $120.0 100.0% $160.9 100.0%
Cost of goods sold ..................... 76.8 64.0 111.0 69.0
------ ------ ------ ------
Gross profit ........................... 43.2 36.0 49.9 31.0
Selling, general and administrative
expenses ............................ 29.4 24.5 43.0 26.7
------ ------ ------ ------
Income from operations ................. 13.8 11.5 6.9 4.3
Other income (expense) ................. (.9) (.8) (2.9) (1.8)
------ ------ ------ ------
Income before taxes .................... 12.9 10.7 4.0 2.5
Provision for income taxes ............. 5.2 4.3 2.6 1.6
------ ------ ------ ------
Net income ............................. $ 7.7 6.4% $ 1.4 0.9%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net Revenue. Net revenue increased $40.9 million, or 34.1%, from $120.0 million
for the three months ended September 30, 1998 to $160.9 million for the three
months ended September 30, 1999. Approximately $7.9 million of the increase is
attributable to reported revenue from Service Centers owned and operated by the
Company during both periods and their spoke acquisitions completed after June
30, 1998, approximately $8.4 million of the increase is attributable to Service
Centers
10
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acquired during the third quarter of 1998 reporting results for a full three
months in the third quarter of 1999 and approximately $24.6 million of the
increase is attributable to the acquisition of new Service Centers between
October 1, 1998 and September 30, 1999.
Cost of Goods Sold. Cost of goods sold increased $34.2 million, or 44.5%, from
$76.8 million for the three months ended September 30, 1998 to $111.0 million
for the three months ended September 30, 1999. Approximately $17.8 million of
this increase is attributable to the acquisition of new Service Centers between
October 1, 1998 and September 30, 1999 and the remaining $16.4 million is
attributable to Service Centers acquired prior to October 1, 1998. As a
percentage of net revenue, cost of goods sold increased 5.0% from 64.0% for the
three months ended September 30, 1998 to 69.0% for the three months ended
September 30, 1999. The 5.0% increase in cost of goods sold as a percentage of
net revenue is comprised of increases in parts and equipment of 1.5%, labor of
3.1% and other cost of goods sold expenses of 0.4%.
Gross Margin. Gross margin increased $6.7 million, or 15.5%, from $43.2 million
for the three months ended September 30, 1998 to $49.9 million for the three
months ended September 30, 1999. The change is comprised of an $8.3 million
increase attributable to the acquisition of new Service Centers between October
1, 1998 and September 30, 1999, net of a $1.6 million decrease attributable to
Service Centers acquired prior to October 1, 1998. As a percentage of net
revenue, gross margin decreased 5.0% from 36.0% for the three months ended
September 30, 1998 to 31.0% for the three months ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13.6 million, or 46.3%, from $29.4 million
for the three months ended September 30, 1998 to $43.0 million for the three
months ended September 30, 1999. As a percentage of net revenue, selling,
general and administrative expenses increased from 24.5% for the three months
ended September 30, 1998 to 26.7% for the three months ended September 30, 1999.
This increase is primarily attributable to increased volume associated with
acquired Service Centers, $1.6 million of severance costs, an increase of
approximately $575,000 of goodwill amortization and an increase of approximately
$400,000 of administrative overhead.
Income from Operations. Income from operations decreased $6.9 million, or 50.0%,
from $13.8 million for the three months ended September 30, 1998 to $6.9 million
for the three months ended September 30, 1999. Income from operations as a
percentage of net revenue decreased 7.2% from 11.5% for the three months ended
September 30, 1998 to 4.3% for the three months ended September 30, 1999. The
decrease in income from operations is the result of cost of goods sold and
selling, general and administrative increases discussed above and includes a
1.8% decrease in income from operations at seven Service Centers with a high
content of light commercial revenue and a 0.7% decrease in income from
operations of certain Service Centers which were merged into three separate
locations.
Other Income (Expense). Other expense increased $2.0 million, or 222.2%, from
($0.9) million for the three months ended September 30, 1998 to ($2.9) million
for the three months ended September 30, 1999. Other expense as a percentage of
net revenue increased from (0.8%) for the three months ended September 30, 1998
to (1.8%) for the three months ended September 30, 1999. This increase is
primarily a result of approximately $2.0 million of increased interest costs
incurred on debt used to fund acquisitions.
Provision for Income Taxes. The Company's effective tax rate for the three
months ended September 30, 1999 of 64.5% was significantly impacted by revised,
downward earnings forecasts. As a result of revised earnings forecasts, the
nondeductible goodwill amortization, as a percentage of pretax book income,
significantly increased over the amount in the three months ended September 30,
1998. In addition to the nondeductible goodwill amortization, the Company's
effective tax rate differed from the federal statutory rate of 35% as a result
of the provision for state income taxes.
The effective tax rate of 40.1% for the three months ended September 30, 1998
differed from the federal statutory rate of 35% primarily as a result of
goodwill amortization, portions of which are not deductible for federal income
tax purposes, and state income taxes, and offset by income of a Subchapter S
corporation accounted for using the pooling of interests method which is not
subject to federal income tax.
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NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1999
---- ----
(DOLLAR AMOUNTS IN MILLIONS)
Revenue ................................ $293.6 100.0% $429.9 100.0%
Cost of goods sold ..................... 188.1 64.1 291.9 67.9
------ ------ ------ ------
Gross profit ........................... 105.5 35.9 138.0 32.1
Selling, general and administrative
expenses ............................ 73.7 25.1 114.3 26.6
------ ------ ------ ------
Income from operations ................. 31.8 10.8 23.7 5.5
Other income (expense) ................. (1.5) (.5) (5.7) (1.3)
------ ------ ------ ------
Income before taxes .................... 30.3 10.3 18.0 4.2
Provision for income taxes ............. 12.1 4.1 8.5 2.0
------ ------ ------ ------
Net income ............................. $ 18.2 6.2% $ 9.5 2.2%
====== ====== ====== ======
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Revenue. Net revenue increased $136.3 million, or 46.4%, from $293.6 million
for the nine months ended September 30, 1998 to $429.9 million for the nine
months ended September 30, 1999. Approximately $51.3 million of the increase is
attributable to reported revenue from Service Centers owned and operated by the
Company during both periods and their spoke acquisitions completed after June
30, 1998, approximately $24.8 million of the increase is attributable to Service
Centers acquired during the third quarter of 1998 reporting results for a full
nine months in 1999 and $60.2 million of the increase is attributable to the
acquisition of new Service Centers between October 1, 1998 and September 30,
1999.
Cost of Goods Sold. Cost of goods sold increased $103.8 million, or 55.2%, from
$188.1 million for the nine months ended September 30, 1998 to $291.9 million
for the nine months ended September 30, 1999. Approximately $39.7 million of
this increase is attributable to the acquisition of new Service Centers between
October 1, 1998 and September 30, 1999 and the remaining $64.1 million is
attributable to Service Centers acquired prior to October 1, 1998. As a
percentage of net revenue, cost of goods sold increased 3.8% from 64.1% for the
nine months ended September 30, 1998 to 67.9% for the nine months ended
September 30, 1999. The 3.8% increase in cost of goods sold is comprised of
increases in parts and equipment of 0.9%, labor of 2.1% and other cost of goods
sold expenses of 0.8%.
Gross Margin. Gross margin increased $32.5 million, or 30.8%, from $105.5
million for the nine months ended September 30, 1998 to $138.0 million for the
nine months ended September 30, 1999. Approximately $20.6 million of this
increase is attributable to the acquisition of new Service Centers between
October 1, 1998 and September 30, 1999 and the remaining $11.9 million is
attributable to Service Centers acquired prior to October 1, 1998. As a
percentage of net revenue, gross margin decreased 3.8% from 35.9% for the nine
months ended September 30, 1998 to 32.1% for the nine months ended September 30,
1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $40.6 million, or 55.1%, from $73.7 million
for the nine months ended September 30, 1998 to $114.3 million for the nine
months ended September 30, 1999. As a percentage of net revenue, selling,
general and administrative expenses increased from 25.1% for the nine months
ended September 30, 1998 to 26.6% for the nine months ended September 30, 1999.
This increase is primarily attributable to increased volume associated with
acquired Service Centers, $1.6 million of severance costs, an increase of
approximately $1.7 million of goodwill amortization and an increase of
approximately $2.0 million of administrative overhead.
Income from Operations. Income from operations decreased $8.1 million, or 25.5%,
from $31.8 million for the nine months ended September 30, 1998 to $23.7 million
for the nine months ended September 30, 1999. Income from operations as a
percentage of net revenue decreased 5.3% from 10.8% for the nine months ended
September 30, 1998 to 5.5% for the nine months ended September 30, 1999. The
5.3% decrease in income from operations resulted from cost of goods sold and
selling, general and administrative expense increases discussed above and
includes a 1.0% decrease in income
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from operations at seven Service Centers with a high content of light commercial
revenue and a 2.6% decrease in income from operations of certain Service Centers
which were merged into three separate locations.
Other Income (Expense). Other expense increased $4.2 million, or 280.0%, from
($1.5) million for the nine months ended September 30, 1998 to ($5.7) million
for the nine months ended September 30, 1999. Other expense as a percentage of
net revenue increased from (0.5%) for the nine months ended September 30, 1998
to (1.3%) for the nine months ended September 30, 1999. This increase is
primarily a result of approximately $4.7 million of increased interest costs
incurred on debt used to fund acquisitions, offset by a $619,000 gain realized
on the sale of marketable equity securities.
Provision for Income Taxes. The Company's effective tax rate for the nine
months ended September 30, 1999 of 47.2% was significantly impacted by revised,
downward earnings forecasts. As a result of revised earnings forecasts, the
nondeductible goodwill amortization, as a percentage of pretax book income,
increased over the amount in the nine months ended September 30, 1998. In
addition to the nondeductible goodwill amortization, the Company's effective
tax rate differed from the federal statutory rate of 35% as a result of the
provision for state income taxes.
The Company's effective tax rate of 40.1% for the nine months ended September
30, 1998 differed from the federal statutory rate of 35% primarily as a result
of goodwill amortization, portions of which are not deductible for federal
income tax purposes, and state income taxes, and offset by income of a
Subchapter S corporation accounted for using the pooling of interests method
which is not subject to federal income tax.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $98.8 million,
including cash and cash equivalents of $16.4 million. The ratio of current
assets to current liabilities was 3.4 to 1.0 at September 30, 1999 and 3.6 to
1.0 at December 31, 1998.
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 and
capital expenditures.
Pending the merger with Lennox, the number of HVAC businesses acquired will be
substantially less than the Company has acquired historically. The merger
agreement restricts the Company's ability to acquire HVAC businesses prior to
the closing of the merger. A number of other factors also may affect the
Company's ability to acquire new HVAC businesses, including the ability of
management of the Company to identify favorable target businesses and to
negotiate favorable acquisition terms, the market value of the Company's Common
Stock, the availability of adequate financing and other factors, many of which
are beyond the control of the Company. In addition, there can be no assurance
that Lennox will continue the Company's acquisition strategy or that the Company
will be successful in identifying and acquiring HVAC businesses, that the
Company can integrate such new HVAC businesses into the Company's operations or
that the Company's new HVAC businesses will generate sales revenue or profit
margins consistent with those of the Company's existing HVAC businesses.
The Company currently has a $200.0 million unsecured revolving credit facility
with a syndicate of banks available through May 31, 2002 (the "Credit
Facility"), of which $96.5 million was outstanding at September 30, 1999. At
September 30, 1999, $103.5 million was available under the Credit Facility.
Borrowings under the Credit Facility bear interest at either (i) the higher of
the agent's base lending rate or the federal funds rate plus a variable margin
of 0 to .375 basis points depending on the Company's net funded debt to EBITDA
ratio determined on a quarterly basis or (ii) a variable rate equal to the 30,
60, 90 or 180-day LIBOR, as such rates change from time to time, plus a variable
margin of from 100.0 to 237.5 basis points depending on the Company's net funded
debt to EBITDA ratio determined on a quarterly basis, at the election of the
Company. All of the Company's subsidiaries have guaranteed the repayment of
indebtedness under the Credit Facility. The Credit Facility contains covenants
customary for financing of this type including covenants with respect to (i) the
maintenance of certain financial ratios and specified net worth (funded debt to
EBITDA was 2.75 as of September 30, 1999), (ii) the limitation of (A) the
aggregate outstanding principal balance of the Senior Notes (as defined below)
to $50.0 million and (B) the aggregate outstanding principal balance of any debt
issued by the Company directly to sellers of acquired HVAC businesses to $100.0
million, (iii) the sale of substantial assets, consolidations or mergers by the
Company and (iv) the payment of dividends. Upon completion of the merger with
Lennox, the outstanding balance of the Credit Facility will become due and
payable. Lennox has agreed to refinance or repay the Credit Facility at or prior
to the closing of the merger.
On June 23, 1998, the Company issued $32.5 million of 6.97% senior unsecured
notes, due June 15, 2003, and $17.5 million of 7.13% senior unsecured notes, due
June 15, 2005 (collectively, the "Senior Notes"), in a private placement to a
group of
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institutional investors. The Senior Notes provide for interest to be paid on
December 15 and June 15 of each year, with principal due at maturity. All of the
Company's subsidiaries have guaranteed the repayment of the Senior Notes. The
Note Purchase Agreement, pursuant to which the Senior Notes were issued,
contains covenants with respect to maintaining certain financial ratios and
specified net worth and limiting the incurrence of additional indebtedness and
the sale of substantial assets, consolidations or mergers by the Company.
Following execution of the merger agreement with Lennox and pursuant to the
terms of the Note Purchase Agreement, the Company provided notice to the holders
of Senior Notes of its offer to prepay the Senior Notes upon closing of the
merger.
During 1998, the Company issued convertible subordinated notes ("Notes")
totaling approximately $6,164,000 as consideration in certain acquisitions.
Principal is payable in four equal annual installments beginning one year from
the date of issuance. Interest, at an average rate of 4.85% (ranging from 4.51%
to 5.54%), is payable quarterly. The Notes are convertible, at the option of the
holder, into the Company's Common Stock at any time, at an average conversion
price of $36.70 per share (ranging from $31.56 to $42.09), subject to adjustment
in certain events. If the closing sales price of a share of Common Stock exceeds
the conversion price for five consecutive trading days, the Company may elect to
convert the Notes into shares of Common Stock at the conversion price.
From January 1, 1999 through March 31, 1999, the Company issued Notes totaling
approximately $7,304,000 as consideration in certain acquisitions. Principal is
payable in four equal annual installments beginning one year from the date of
issuance. Interest at an average rate of 4.85% (ranging from 4.71% to 5.12%) is
payable quarterly. The Notes are convertible, at the option of the holder, into
the Company's Common Stock at any time, at an average conversion price of $18.85
per share (ranging from $14.93 to $32.15), subject to adjustment in certain
events. If the closing sales price of a share of Common Stock exceeds the
conversion price for periods ranging from five to ten consecutive trading days,
the Company may elect to convert the Notes into shares of Common Stock at the
conversion price.
From April 1, 1999 through June 30, 1999, the Company issued Notes totaling
approximately $5,459,000 as consideration in certain acquisitions. Principal is
payable in four equal annual installments beginning one year from the date of
issuance. Interest at an average rate of 5.33% (ranging from 5.22% to 5.37%) is
payable quarterly. The Notes are convertible, at the option of the holder, into
the Company's Common Stock at any time, at an average conversion price of $34.06
per share (ranging from $26.81 to $38.95), subject to adjustment in certain
events. If the closing sales price of a share of Common Stock exceeds the
conversion price for periods ranging from five to 20 consecutive trading days,
the Company may elect to convert the Notes into shares of Common Stock at the
conversion price.
From July 1, 1999 through September 30, 1999, the Company issued Notes totaling
approximately $510,000 as consideration in certain acquisitions. Principal is
payable in four equal annual installments beginning one year from the date of
issuance. Interest at a rate of 5.96% is payable quarterly. The Notes are
convertible, at the option of the holder, into the Company's Common Stock at any
time, at a conversion price of $22.42 per share, subject to adjustment in
certain events. If the closing sales price of a share of Common Stock exceeds
the conversion price for periods ranging from five to 20 consecutive trading
days, the Company may elect to convert the Notes into shares of Common Stock at
the conversion price.
In September 1999, the Company elected to convert Notes in an aggregate
principal amount of $5,631,596 into 340,786 shares of the Company's Common
Stock.
The conversion of all Notes outstanding on September 30, 1999 into shares of the
Company's Common Stock would result in the issuance of approximately 410,000
shares of Common Stock. Subsequent to September 30, 1999, the trading price of
the Company's Common Stock has not resulted in the Company having the option to
convert any additional Notes into shares of Common Stock.
For the nine months ended September 30, 1999, net cash provided by operations
was $16.9 million compared to cash used in operations of $6.8 million during the
nine months ended September 30, 1998.
For the nine months ended September 30, 1999, net cash used in investing
activities totaled $51.2 million as compared to $54.2 million for the nine
months ended September 30, 1998. Approximately $46.1 million of the cash used in
investing activities during the nine months ended September 30, 1999 is
attributable to the purchase of HVAC businesses.
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For the nine months ended September 30, 1999, net cash provided by financing
activities was $42.3 million as compared to $55.8 million for the nine months
ended September 30, 1998. Cash provided by financing activities during the nine
month period ended September 30, 1999 is primarily attributable to borrowing
against the Credit Facility.
The Company currently has on file with the Securities and Exchange Commission a
shelf registration statement on Form S-4 (Registration No. 333-12319) (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, the Company may issue shares
of Common Stock, warrants to purchase Common Stock and debt securities
convertible into shares of Common Stock 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. Prior to
September 1998, such acquisitions were predominantly funded by issuing shares of
Common Stock and cash. Since September 1998, the Company predominantly has used
convertible subordinated notes and cash to fund its acquisitions. Future
acquisitions could be effected using Common Stock, warrants, debt securities or
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.
IMPACT OF YEAR 2000
The following disclosure is designated as Year 2000 readiness disclosure for
purposes of the Year 2000 Information and Readiness Disclosure Act.
Many computer systems in use today were designed and developed using two digits,
rather than four, to specify the year. As a result, such systems will recognize
the Year 2000 as "00" and may assume that the year is 1900 rather than 2000.
This could cause many computer applications to fail completely or to create
erroneous results unless corrective measures are taken. The Company recognizes
the need to minimize the risk that its operations will be adversely affected by
Year 2000 software failures and is in the process of preparing for the Year
2000.
The Company has evaluated its Year 2000 risk in three separate categories:
information technology systems ("IT"), non-IT systems ("Non-IT") and material
third party relationships. The Company has developed a plan in which the risks
in each of these categories are being reviewed and addressed by the appropriate
level of management as follows:
IT. The Company is actively engaged in developing and installing new financial,
information and operational systems which are expected to be completed and
installed in all Service Centers by June 30, 2000. The Company's new financial,
information and operational systems are Year 2000 compliant and have been
installed at the SEI Management Company support center and at 56 locations. The
Company is prioritizing the installation of its new systems at Service Centers
which are not Year 2000 compliant to minimize its IT risk. The Company expects
that approximately 46 centers will not be on its new systems by December 31,
1999. The Company has assessed Year 2000 software readiness at 44 of the 46
centers which will not be on its new systems and has determined that one center
is not Year 2000 compliant. The assessment of the other two centers will be
completed by December 1, 1999. These three centers may not be Year 2000
compliant by year end. We will reduce the potential for business impact from any
centers which are not Year 2000 compliant at year end through contingency
planning for those specific centers. In the event that these three centers are
severely impacted by Year 2000 issues, these centers will be converted within
two weeks to our Year 2000 compliant systems through an emergency process.
The Company is assessing its Year 2000 hardware exposure by inventorying and
testing all computer systems in all of its Service Centers. To date, 51 of 114
centers have been inventoried. Only minor issues have been found with hardware
that is not Year 2000 compliant. Management of the Company estimates that any
additional hardware that is not Year 2000 compliant can be replaced within 10
working days of when the equipment is identified. The Company will complete the
efforts to inventory all of its Service Centers by mid-December 1999.
The Company has approximately 20 Service Centers using payroll systems which
have not been assessed for Year 2000 compliance. The Company will complete their
assessments of those payroll software packages by November 30, 1999. In the
event that any of these payroll software packages are not Year 2000 compliant,
the Company plans to convert the payroll for these centers to the Company's Year
2000 compliant third party payroll processor by December 31, 1999.
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Non-IT. Non-IT systems involve embedded technologies, such as microcontrollers
or microprocessors. Examples of Non-IT systems include telephones, time clocks
and security systems. Management believes the Company's Non-IT risks are
minimal. The Company is in the process of performing an inventory and assessment
of the embedded systems at the Service Centers and SEI Management Company
support center. The assessment effort is 70% complete and is scheduled to be
completed by December 1, 1999. The Company expects to complete any required
upgrade or replacement of Non-IT systems by the end of 1999. The actual
completion date may be affected by the number of non-Year 2000 ready embedded
systems identified during the assessment. The Company estimates the costs to be
incurred for the review and modification of the Company's Non-IT systems will
not exceed $100,000.
The Company may acquire additional HVAC businesses during the remainder of 1999.
Each new HVAC business will be assessed for Year 2000 readiness, and the Company
expects that any required IT or Non-IT systems upgrades or replacements will be
made before January 1, 2000.
Third Party Risk. The Company's review of its third party risk includes detailed
review of material relationships with vendors and certain business partners
("Material Relationships"). To operate its business, the Company relies upon
government agencies, utility companies, providers of telecommunication services,
suppliers and other third party service providers, over which it can assert
little control. The Company's ability to conduct its core business is dependent
upon the ability of these third party providers to fix their Year 2000 issues to
the extent they affect the Company. The Company has identified, contacted and
received oral or written responses from those third party providers that would
most significantly impact the Company's operations if not ready. The vast
majority of the responses received indicate that the third party providers are
Year 2000 compliant. All of the responses from the Material Relationships
indicate that such vendors are Year 2000 compliant.
If the steps taken by the Company and its Material Relationships 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, inability to service customers
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. Management believes that the Year 2000 issue
is being appropriately addressed through the implementation of its new systems
and software development or the upgrade of current systems in place and by its
Material Relationships. Management 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's forward-looking statements
regarding Year 2000 issues are dependent on many factors, including the ability
of the Company's vendors to achieve Year 2000 compliance, the proper functioning
of the new IT and Non-IT systems installed by the Company, and the integration
of such systems, some of which are beyond the Company's control.
Through September 30, 1999, the Company has incurred approximately $555,000 of
systems and related costs that address Year 2000 compliance plans. The Company
expects to spend an additional $445,000 to complete its Year 2000 compliance
plans. The Company expenses costs associated with Year 2000 system compliance as
the costs are incurred.
The costs of Year 2000 compliance and the date on which the Company believes it
will complete the project are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
supplier compliance and contingency actions and similar uncertainties. The
Company's total Year 2000 project costs do not include the estimated costs and
time associated with anticipated third party Year 2000 issues based on currently
available information.
Effective delivery of the Company's primary services are not heavily dependent
on technology. We will therefore develop only limited contingency plans to
reduce the impact of business risks not addressed through our Year 2000 program.
The contingency plan will focus on the most likely Year 2000 scenarios, based on
current information available to the Company. The Company's contingency plans
have not yet been fully developed. Management expects its limited contingency
planning to be complete before December 31, 1999.
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INFLATION
The HVAC industry is labor intensive. Wages and other expenses increase during
periods of inflation and when shortages in marketplaces occur. In addition,
suppliers pass along rising costs to the Company in the form of higher prices.
The Company has generally been able to offset increases in operating costs by
increasing charges, expanding services and implementing cost control measures to
curb such increases. The Company cannot predict its ability to offset or control
future cost increases.
SUBSEQUENT EVENT
On October 26, 1999, the Company entered into a definitive merger agreement with
Lennox pursuant to which Lennox will acquire the Company and each share of the
Company's Common Stock will be exchanged for 0.67 of a share of Lennox Common
Stock. The Company expects the merger to be completed during the first quarter
of 2000, subject to customary closing conditions, including regulatory approvals
and approval by the stockholders of both companies.
FORWARD LOOKING STATEMENTS
This discussion contains certain forward-looking statements, including those
relating to the pending merger with Lennox and 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. These statements are based on current expectations that are
subject to risks and uncertainties. Actual results could vary because of many
factors including uncertainties relating to the successful completion of the
proposed merger with Lennox, the successful integration of acquired companies,
weather patterns, the possibility of continued erosion in margins, the ability
to obtain and retain key management personnel, the adequacy of the Company's
capital resources and other issues discussed in the Company's Annual Report on
Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes to the quantitative and qualitative
disclosures about market risks presented in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 or the Company's Quarterly Report on
Form 10-Q for the three months ended March 31, 1999.
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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 -- Financial Data Schedule for the Nine Months Ended September 30,
1999 (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
Annual Report on Form 10-K for the year ended December 31, 1998,
File No. 001-13037.
(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 year ended December 31, 1997,
File No. 001-13037.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the three
months ended September 30, 1999.
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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: November 15, 1999
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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 -- Financial Data Schedule for the Nine Months Ended September 30,
1999 (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
Annual Report on Form 10-K for the year ended December 31, 1998, File No.
001-13037.
(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 year ended December 31, 1997, File No.
001-13037.
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