UNITED STATES
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, 1996
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 Number: 1-11849
AMERICAN RESIDENTIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0484996
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5850 SAN FELIPE, SUITE 500, HOUSTON, TEXAS 77057-8003
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 599-0100
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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [X*]
* The Registrant became subject to the reporting requirements of
Section 13 of the Securities Exchange Act of 1934 on September 24, 1996.
The number of shares of Common Stock of the Registrant, par value $.001
per share, outstanding at November 11, 1996 was 9,279,622.
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I - Financial Information.....................................................................1
Item 1 - Financial Statements ..................................................................1
General Information...........................................................................1
Consolidated Balance Sheets as of December 31, 1995 and September 30, 1996 (unaudited) .......2
Consolidated Statements of Operations for the Three Months and Nine Months
Ended September 30, 1995 and 1996 (unaudited) ............................................3
Pro Forma Combined Statements of Operations for the Three Months and Nine
Months Ended September 30, 1995 and 1996 (unaudited) .....................................4
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1995
and 1996 (unaudited)......................................................................5
Notes to Consolidated Financial Statements....................................................6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................8
Part II - Other Information.......................................................................12
Item 1 - Legal Proceedings.....................................................................12
Item 4 - Submission of Matters to a Vote of Security Holders..................................12
Item 6 - Exhibits and Reports on Form 8-K......................................................13
Signature.........................................................................................17
</TABLE>
i
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AMERICAN RESIDENTIAL SERVICES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
On September 27, 1996, American Residential Services, Inc. ("ARS" or the
"Company") acquired simultaneously with the closing of its initial public
offering (the "Offering") of its common stock, par value $.001 per share (the
"Common Stock"), seven established businesses: General Heating & Engineering
Company, Inc., Atlas Services, Inc. ("Atlas"), Services Enterprises, Inc. (doing
business as "Crown Services"), Florida Heating and Air Conditioning, Inc., DIAL
ONE Meridian and Hoosier, Inc., Adcot, Inc. (doing business as "A-ABC
Appliances"), and Climatic Corporation of Vero Beach (collectively, the
"Founding Companies"). Service Enterprises, Inc. and Adcot, Inc. were acquired
through the acquisition of Enterprises Holding Company ("EHC"), an affiliate of
ARS. The consideration for acquisitions of the Founding Companies consisted of a
combination of cash and Common Stock. For financial statement presentation
purposes, Atlas has been identified as the accounting acquiror. The acquisitions
of ARS and the remaining Founding Companies are being accounted for using the
purchase method of accounting. Unless the context otherwise requires, all
references herein to the Company include ARS and the Founding Companies.
September 30, 1996 has been used as the effective date of the
acquisitions for accounting purposes because management has determined that
effective control of the operations of the Founding Companies transferred to ARS
on that date. The accompanying statements of operations for the three and nine
months ended September 30, 1995 and 1996 reflect (1) the Company on a historical
basis with Atlas as the accounting acquiror, with the results of operations of
all purchased companies included from the effective date of acquisition, and (2)
the pro forma combined results of the Company on a historical basis adjusted for
the effects of the acquisition of the Founding Companies (including those
acquired through the acquisition of EHC), the Offering and certain assumptions
that management deems reasonable and appropriate.
The consolidated financial statements herein have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Pursuant to such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the presentation and disclosures
herein are adequate to make the information not misleading, and the financial
statements reflect all elimination entries and normal adjustments that are
necessary for a fair presentation of the results for the interim periods ended
September 30, 1995 and 1996.
Operating results for interim periods are not necessarily indicative of
the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the Pro Forma Combined Financial
Statements of the Company and the related notes thereto, the Financial
Statements of ARS and each of the Founding Companies and related notes thereto,
and management's discussion and analysis related thereto, all of which are
included in the Company's Registration Statement on Form S-1 (No. 333-06195), as
amended (the "Registration Statement"), filed with the SEC in connection with
the Offering.
1
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 241,263 $ 2,376,090
Accounts receivable..................................
Trade, net........................................ 2,163,990 14,155,657
Shareholder and affiliate......................... 211,939 -
Other receivables................................. - 416,097
Inventories.......................................... 531,819 5,345,255
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 254,039 469,894
Prepaid expenses and other current assets............ 146,283 741,540
------------- ---------------
Total current assets............................ 3,549,333 23,504,533
PROPERTY AND EQUIPMENT, net.............................. 3,136,363 13,041,445
GOODWILL, net............................................ 49,194 60,973,453
OTHER NONCURRENT ASSETS.................................. 357,122 1,132,322
NET ASSETS OF DISCONTINUED OPERATIONS.................... - 77,793
------------- ---------------
Total assets.................................... $ 7,092,012 $ 98,729,546
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations.......... $ 596,941 $ 294,671
Short-term debt...................................... 209,948 -
Accounts payable and accrued liabilities............. 2,391,955 14,908,477
Unearned revenue on service and warranty contracts... 162,755 1,833,801
Current billings in excess of cost and estimated
earnings on uncompleted contracts................. 475,731 1,793,152
Deferred income taxes................................ - 301,937
------------- ---------------
Total current liabilities....................... 3,837,330 19,132,038
LONG-TERM OBLIGATIONS, net of current maturities......... 1,564,309 7,608,563
UNEARNED REVENUE ON SERVICE AND WARRANTY CONTRACTS,
NONCURRENT........................................ - 612,942
DEFERRED INCOME TAXES, net of current portion............ 187,237 262,367
OTHER NONCURRENT LIABILITIES............................. - 20,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value, 100,000 shares authorized,
24,303 issued and outstanding, and $.001 par value,
50,000,000 shares authorized, 8,449,622 shares
issued and outstanding............................ 24,303 8,450
Additional paid-in capital........................... 105,040 81,578,718
Retained earnings (deficit) ......................... 1,373,793 (10,493,532)
------------- ---------------
Total stockholders' equity........................ 1,503,136 71,093,636
------------- ---------------
Total liabilities and stockholders' equity...... $ 7,092,012 $ 98,729,546
============= ===============
</TABLE>
- --------------
For financial statement presentation purposes, Atlas Services, Inc. has been
identified as the accounting acquiror. The effective date of the acquisitions
for accounting purposes is September 30, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ --------------------------------
1995 1996 1995 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES ............................................. $ 5,609,303 $ 9,233,483 $ 15,963,449 $ 23,325,855
COST OF SERVICES ..................................... 4,537,755 7,219,742 12,947,027 18,576,719
----------- ----------- ------------ ------------
Gross profit ..................................... 1,071,548 2,013,741 3,016,422 4,749,136
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE* ......................................... 732,732 4,587,042 2,171,958 6,855,015
----------- ----------- ------------ ------------
Operating income (loss) .......................... 338,816 (2,573,301) 844,464 (2,105,879)
OTHER INCOME (EXPENSE):
Interest expense* ................................ (26,789) (4,334,535) (107,445) (4,430,985)
Interest income .................................. 6,250 -- 12,272 4,308
Other ............................................ (8,962) 118,686 29,289 162,926
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT)........... 309,315 (6,789,150) 778,580 (6,369,630)
PROVISION (BENEFIT) FOR INCOME TAXES ................. 119,395 (36,342) 308,617 113,858
----------- ----------- ------------ ------------
NET INCOME (LOSS) .................................... $ 189,920 $(6,752,808) $ 469,963 $ (6,483,488)
=========== =========== ============ ============
</TABLE>
- --------------
*Includes the consideration paid by ARS for Enterprises Holding Company, an
affiliate of ARS.
For financial statement presentation purposes, Atlas Services, Inc. has been
identified as the accounting acquiror. The effective date of the acquisitions
for accounting purposes is September 30, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- --------------------------
1995 1996 1995 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
REVENUES ................................................. $30,869 $36,725 $84,725 $ 98,261
COST OF SERVICES ......................................... 22,827 26,526 63,193 72,020
------- ------- ------- --------
Gross profit ......................................... 8,042 10,199 21,532 26,241
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE .............................................. 5,814 7,869 17,003 21,047
------- ------- ------- --------
Operating income ..................................... 2,228 2,330 4,529 5,194
OTHER INCOME (EXPENSE):
Interest expense ..................................... -- -- -- (125)
Interest income ...................................... 128 -- 252 52
Other ................................................ 38 224 114 313
------- ------- ------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ......................................... 2,394 2,554 4,895 5,434
PROVISION FOR INCOME TAXES ............................... 1,124 1,133 2,268 2,492
------- ------- ------- --------
INCOME FROM CONTINUING OPERATIONS ........................ $ 1,270 $ 1,421 $ 2,627 $ 2,942
======= ======= ======= ========
WEIGHTED AVERAGE SHARES
OUTSTANDING .............................................. 9,080 9,080 9,080 9,080
======= ======= ======= ========
EARNINGS PER SHARE ....................................... $ .14 $ .16 $ .29 $ .32
======= ======= ======= ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
PRO FORMA COMBINED FINANCIAL STATEMENTS.
4
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1995 1996
--------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................................... $ 469,963 $ (6,483,488)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities-
Depreciation and amortization ..................................................... 347,041 511,226
Compensation and financing fees on purchase of Enterprises
Holding Company ................................................................. -- 6,275,790
Deferred tax expense .............................................................. 12,941 42,345
Changes in operating assets and liabilities-
(Increase) decrease in -
Accounts receivable, net ................................................... (850,898) (1,879,738)
Cost and estimated earnings in excess of billings .......................... 506,909 (196,287)
Inventory .................................................................. (98,348) (333,153)
Prepaid and other current assets ........................................... (14,968) (260,708)
Increase (decrease) in -
Accounts payable and accrued liabilities ................................... (105,941) 1,085,011
Deferred revenue ........................................................... 364,723 295,058
Other, net ........................................................................ 18,216 43,037
--------- ------------
Net cash provided by (used in) operating activities ........................... 649,638 (900,907)
--------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............................................... (206,586) (828,203)
Proceeds from sales of property and equipment ..................................... -- 136,998
Cash paid for business acquisitions, net of cash acquired ......................... -- (28,467,699)
--------- ------------
Net cash used in investing activities ......................................... (206,586) (29,158,904)
--------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ....................................... (965,355) (21,722,606)
Proceeds from long-term obligations ............................................... 647,755 7,048,616
Issuances of Common Stock, net of offering costs .................................. 79,078 52,724,965
Distribution to Founding Company stockholders ..................................... -- (5,383,837)
Other, net ........................................................................ -- (472,500)
--------- ------------
Net cash provided by (used in) investing activities ........................... (238,522) 32,194,638
--------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................................. 204,530 2,134,827
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................................ 73,406 241,263
--------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................ $ 277,936 $ 2,376,090
========= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest ...................................................................... $ 132,773 $ 165,147
Income taxes .................................................................. 188,813 473,234
</TABLE>
- ---------------
For financial statement presentation purposes, Atlas Services, Inc. has been
identified as the accounting acquiror. The effective date of the acquisitions
for accounting purposes is September 30, 1996.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In October 1995, ARS was founded to create a leading national provider
of (i) comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning ("HVAC") systems, plumbing, electrical and
other systems in homes and small commercial buildings and (ii) new installation
services of those systems in homes and small commercial facilities under
construction. On September 27, 1996, ARS acquired in separate transactions the
Founding Companies (including those acquired through the acquisition of EHC) in
exchange for consideration consisting of a combination of cash and shares of its
Common Stock. The closing of the Offering also occurred on that date.
For financial statement presentation purposes, Atlas, one of the
Founding Companies, has been identified as the accounting acquiror. The
acquisition of the Founding Companies was accounted for using the purchase
method of accounting, with the results of operations included from September 30,
1996, the effective closing date of the acquisitions for accounting purposes.
The allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of fair
value and may be revised as additional information concerning the valuation of
such assets and liabilities becomes available. Also, the purchase price is based
on preliminary estimates of value assigned to the Company's Common Stock issued
in such transactions which carry certain restrictions regarding disposition by
the holders, and such value may be revised as additional information becomes
available.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 3 of Notes to Unaudited Pro Forma Combined Financial Statements and Note
2 of Notes to Financial Statements of ARS and each of the Founding Companies
included in the Registration Statement.
3. LONG-TERM DEBT
On September 17, 1996, the Company entered into a credit facility with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility provides
the Company with an unsecured revolving line of credit of up to $55 million,
which may be used for general corporate purposes, including the refinancing of
Founding Company indebtedness, future acquisitions, capital expenditures and
working capital. Loans under the Credit Facility bear interest at a designated
variable base rate plus margins ranging from 0 to 25 basis points, depending on
the ratio of the Company's interest-bearing debt to its trailing earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 to 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a sublimit for
standby letters of credit of up to $5.0 million. The Credit Facility also
prohibits the payment of dividends by the Company (except for dividends payable
in Common Stock and certain preferred stock), will not permit the Company to
incur or assume other indebtedness in excess of any amount equal to 5% of its
consolidated net worth and will require the Company to comply with certain
financial covenants. The Credit Facility will terminate and all amounts
outstanding, if any, thereunder will be due and payable in September 1999. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the Credit Facility. As of September 30, 1996, the Company had $6.3 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 8.25% (the prime rate).
4. CAPITAL STOCK
On September 27, 1996, ARS completed the Offering, which involved the
sale by ARS of 4,200,000 shares of Common Stock at a price to the public of
$15.00 per share. The net proceeds to ARS from the Offering (after deducting
underwriting discounts and commissions and offering expenses) were approximately
$52.2 million. Of this amount, $34.8 million was used to pay the cash portion of
the purchase prices relating to the acquisitions for the Founding Companies. On
October 7, 1996, ARS sold an additional 630,000 shares of Common Stock at $15.00
per share (which represents net proceeds to the Company of $8.8 million after
underwriting discounts and commissions) pursuant to an overallotment option
granted by ARS to the underwriters in connection with the Offering.
5. PRO FORMA EARNINGS PER SHARE
The computation of pro forma net income per share for the three and nine
months ended September 30, 1995 and 1996 is based on 9,079,622 weighted average
shares of Common Stock outstanding, which includes (i) 422,480 shares issued to
the founders of ARS, (ii) 844,962 shares issued on conversion of part of an ARS
convertible note, (iii) 2,805,053 shares issued as consideration in the
acquisitions of the Founding Companies, (iv) 137,140 shares issued in exchange
6
<PAGE>
for $2.1 million of preferred stock of Enterprises Holding Company, the
predecessor owner of two of the Founding Companies, (v) 39,987 shares awarded
under the Company's 1996 Incentive Plan to certain employees and consultants of
the Company, (vi) 4,200,000 shares sold in the Offering and (vii) 630,000 shares
sold pursuant to the overallotment option.
6. INCOME TAXES
The Company files a consolidated federal income tax return, which
includes the operations of all acquired businesses for periods subsequent to the
respective dates of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition dates.
7. SUBSEQUENT EVENTS
Subsequent to September 30, 1996, the Company acquired the business
operations of two companies for an aggregate of approximately $3,565,000 in cash
and 200,000 shares of Common Stock. These companies provide residential air
conditioning and heating services in Houston, Texas and residential plumbing
repair, maintenance and replacement services in Indianapolis, Indiana. The pro
forma effects of these acquisitions are not reflected in the Unaudited Pro Forma
Combined Statements of Income presented in this Quarterly Report on Form 10-Q.
7
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Pro
Forma Combined Financial Statements of the Company and related notes thereto,
the Financial Statements of ARS and each of the Founding Companies and related
notes thereto, and the management's discussion and analysis related thereto, all
of which are included in the Registration Statement, and the financial
statements and notes thereto contained herein. Statements regarding future
financial performance and results and the other statements that are not
historical facts contained in this discussion are forward-looking statements.
These forward-looking statements are subject to numerous risks and
uncertainties, including but not limited to the availability of attractive
acquisition opportunities, successful integration and profitable management of
acquired businesses, improvement of operating efficiencies, availability of
working capital and funding for future acquisitions, ability to grow internally
through expansion of services and customer bases and reduction of overhead,
cyclical nature of the homebuilding industry, and level and nature of
competition from other residential services providers and other factors
discussed in the Registration Statement.
The pro forma financial information and the following discussion for the
three and nine months ended September 30, 1995 and 1996 include the results of
Atlas combined with the results of the other Founding Companies and ARS. The pro
forma combined financial data discussed below include the effects of (i) the
acquisition of the Founding Companies on a historical basis, (ii) the Offering,
(iii) certain reductions in salaries and benefits to the former owners of the
Founding Companies, to which they have agreed prospectively, (iv) the
disribution of assets to and the assumption of certain leases by the former
owners of certain of the Founding Companies, and (v) the amortization of
goodwill resulting from the acquisition of the Founding Companies.
8
<PAGE>
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
The following table sets forth various items as a percentage of the
Company's pro forma revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- ----------------------
1995 1996 1995 1996
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0%
Cost of services............................. 73.9 72.2 74.6 73.3
--------- ------- --------- ---------
Gross profit............................ 26.1 27.8 25.4 26.7
Selling, general and administrative expenses. 17.6 18.2 18.7 18.6
Corporate overhead........................... - 2.1 - 1.6
Goodwill amortization........................ 1.3 1.2 1.4 1.2
--------- ------- --------- ---------
Adjusted operating income 7.2% 6.3% 5.3% 5.3%
========= ======= ========= =========
</TABLE>
Pro forma revenues increased by 18.8% from $30.9 million for the three
months ended September 30, 1995 to $36.7 million for the three months ended
September 30, 1996. Pro forma revenues increased 16.1% from $84.7 million for
the nine months ended September 30, 1995 to $98.3 million for the nine months
ended September 30, 1996. For the three and nine months ended September 30,
1996, approximately $1.5 million and $3.5 million, respectively, of the
increases resulted from the inclusion of revenues from companies acquired by
certain Founding Companies in transactions accounted for as purchases during
1996. The remainder of the increase was primarily attributable to the addition
of several large new installation projects at the Company's Virginia and South
Carolina locations and increased demand for plumbing and HVAC residential
services at the Company's Houston locations.
Pro forma cost of services increased 16.2% and 14.0% to $26.5 million
and $72.0 million for the three and nine months ended September 30, 1996,
respectively, as compared to the corresponding periods in the prior year, in
relation to the higher level of revenues. Pro forma gross profit, as a
percentage of pro forma revenues, increased from 26.1% for the three months
ended September 30, 1995 to 27.8% for the three months ended September 30, 1996
and 25.4% for the nine months ended September 30, 1995 to 26.7% for the nine
months ended September 30, 1996. The improvement in pro forma gross profit was
attributable to the improvements in equipment purchasing resulting from the
increase in services.
Selling, general and administrative expenses increased $2.1 million and
$4.0 million to $7.9 million and $21.0 million, respectively, for the three and
nine months ended September 30, 1996, as compared to the corresponding periods
in the prior year. The increases were due to the addition of companies acquired
in purchase transactions subsequent to September 30, 1995, coupled with the
addition of ARS' corporate personnel and administrative infrastructure.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 1996, net cash used in
operating activities was $0.9 million, capital expenditures totaled $0.8 million
and net repayment of debt amounted to $14.7 million. The Company anticipates
capital expenditures (exclusive of acquisitions) of approximately $0.5 million
during the remainder of 1996, primarily for computer equipment, leasehold
improvements and furniture and fixtures.
On September 27, 1996, ARS completed the Offering, which involved the
issuance of 4,200,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions). On October 7, 1996,
ARS sold an additional 630,000 shares of Common Stock at a price of $15.00 per
share (before deducting underwriting discounts and commissions) pursuant to an
overallotment option granted by the Company in connection with the Offering. The
proceeds from these transactions, net of underwriting discounts and commissions
of $1.05 per share and after deducting estimated expenses of the Offering, were
approximately $61.0 million. Of this amount, $34.8 million was used to fund the
cash portion of the purchase prices relating to the acquisitions of the Founding
Companies. The Company estimates that additional aggregate payments to the
former owners of the Founding Companies of $3.5 million, representing working
capital adjustments based on the September 30, 1996 balance sheets of the
Founding Companies, will be required pursuant to the agreements relating to the
acquisitions. At September 30, 1996, approximately $3.0 million of these working
capital adjustments have been paid. The remaining balance will be paid in the
fourth quarter.
On September 17, 1996, the Company entered into a credit facility with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility provides
the Company with an unsecured revolving line of credit of up to $55 million,
which may be used for general corporate purposes, including the refinancing of
Founding Company indebtedness, future acquisitions, capital expenditures and
working capital. Loans under the Credit Facility bear interest at a designated
variable base rate plus margins ranging from 0 to 25 basis points, depending on
the ratio of the Company's interest-bearing debt to its trailing earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 75 to 175 basis points, depending on the same ratio.
Commitment fees of 25 to 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility contains a sublimit for
standby letters of credit of up to $5.0 million. The Credit Facility also
prohibits the payment of dividends by the Company (except for dividends payable
in Common Stock and certain preferred stock), will not permit the Company to
incur or assume other indebtedness in excess of any amount equal to 5% of its
consolidated net worth and will require the Company to comply with certain
financial covenants. The Credit Facility will terminate and all amounts
outstanding, if any, thereunder will be due and payable in September 1999. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the Credit Facility. As of September 30, 1996, the Company had $6.3 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 8.25% (the prime rate).
On October 31, 1996, the Company acquired the business operations of two
companies for an aggregate of approximately $3,565,000 in cash and 200,000
shares of Common Stock. These companies provide residential air conditioning and
heating services in Houston, Texas, and residential plumbing repair, maintenance
and replacement services in Indianapolis, Indiana. Funding
10
<PAGE>
of the cash portion of the acquisitions was provided by borrowings under the
Credit Facility. The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings, including the unborrowed portion of
the Credit Facility, as well as issuances of additional equity.
During the fourth quarter of 1996, the Company intends to register
5,000,000 additional shares of Common Stock under the Securities Act of 1933, as
amended, for its use in connection with future acquisitions. After their
issuance, those registered shares generally will be freely tradeable by persons
not affiliated with the Company unless the Company contractually restricts the
resale.
SEASONALITY
The Founding Companies have in the past experienced, and the Company
expects that it will in the future experience, quarterly fluctuations in
revenues, operating income and cash flows as a result of changes in weather
conditions. Except in Florida and South Carolina, the demand for new
installations is lower in the winter months because new construction activity is
lower as a result of colder weather. Demand for HVAC services is generally
higher in the second and third quarters.
11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsidiaries of ARS are named defendants in lawsuits arising in the
ordinary course of business. While the outcome of such lawsuits cannot be
predicted with certainty, management does not expect these matters to have a
material adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Prior to the closing of the Offering, the stockholders of the Company
approved a number of matters during the period covered by this Quarterly Report
on Form 10-Q. On July 23, 1996, the stockholders unanimously approved by written
consent (i) the amendment and restatement of the Company's Certificate of
Incorporation to, among other things, (A) increase the number of authorized
shares of capital stock to 60,000,000 shares, consisting of 50,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock, and (B) change the par
value of both Common Stock and Preferred Stock to $.001 per share; (ii) the
amendment and restatement of the Company's Bylaws; (iii) the form, term and
provisions of indemnification agreements to be entered into by the Company and
each of the current and future directors of the Company; (iv) ratify all acts
previously taken by the directors and officers of the Company in connection with
the 333-for-1 stock split of the Company's Common Stock in February 1996 and the
1.348414-for-one stock split of the Company's Common Stock in June 1996; (v) the
adoption of the Company's Deferred Compensation Plan, Executive Supplemental
Life Insurance Plan and Executive Supplemental Disability Plan; and (vi) the
grant of Common Stock having a value of $600,000 pursuant to the Company's 1996
Incentive Plan to certain employees and consultants of the Company in
consideration of services performed. On August 15, 1996, the Annual Meeting of
the Stockholders for 1996 was held, at which the stockholders unanimously
elected the following directors of the Company (who were then the only directors
of the Company continuing after the meeting): C. Clifford Wright, Jr., Howard S.
Hoover, Jr. and William P. McCaughey. On September 24, 1996, the stockholders
unanimously approved by written consent an amendment to the Company's Restated
Certificate of Incorporation electing a one-for-.940898 reverse stock split of
the Company's Common Stock. The Company's first Annual Meeting of the
Stockholders as a public company will be held in 1997.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Climatic, Inc., Climatic Corporation of Vero Beach and the
stockholders named therein. (Filed under the identical exhibit number to
the Company's Registration Statement No. 333-06195 and incorporated herein
by reference.)
2.2 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS FHAC Inc., Florida Heating and Air Conditioning, Inc. and
the stockholders named therein. (Filed under the identical exhibit number
to the Company's Registration Statement No. 333-06195 and incorporated
herein by reference.)
2.3 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Atlas, Inc., Atlas Services, Inc. and the stockholders
named therein. (Filed under the identical exhibit number to the Company's
Registration Statement No. 333-06195 and incorporated herein by reference.)
2.4 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS DIAL Inc., DIAL ONE Meridian and Hoosier, Inc. and the
stockholders named therein. (Filed under the identical exhibit number to
the Company's Registration Statement No. 333-06195 and incorporated herein
by reference.)
2.5 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Bullseye Inc., Bullseye Air Conditioning, Inc. and the
stockholders named therein. (Filed under the identical exhibit number to
the Company's Registration Statement No. 333-06195 and incorporated herein
by reference.)
2.6 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Duct Inc., Florida Heating and Air Conditioning Duct, Inc.
and the stockholders named therein. (Filed under the identical exhibit
number to the Company's Registration Statement No. 333-06195 and
incorporated herein by reference.)
2.7 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Services Inc., Florida Heating and Air Conditioning
Service, Inc. and the stockholders named therein. (Filed under the
identical exhibit number to the Company's Registration Statement No.
333-06195 and incorporated herein by reference.)
2.8 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS General Inc., General Heating Engineering Company, Inc.
and the stockholders named therein. (Filed under the identical exhibit
number to the Company's Registration Statement No. 333-06195 and
incorporated herein by reference.)
2.9 Agreement and Plan of Reorganization dated as of June 13, 1996 by and among
the Company, ARS Acquisition Inc., Enterprises Holding Company and the
stockholders named therein. (Filed under the identical exhibit number to
the Company's Registration Statement No. 333-06195 and incorporated herein
by reference.)
2.10 Form of Uniform Provisions for the Acquisition of Founding Companies.
(Filed under the identical exhibit number to the Company's Registration
Statement No. 333-06195 and incorporated herein by reference.)
13
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of the Company. (Filed under the
identical exhibit number to the Company's Amendment No. 2 to the
Registration Statement No. 333-06195 and incorporated herein by reference.)
3.2 Bylaws of the Company. (Filed under the identical exhibit number to the
Company's Amendment No. 2 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
3.3 Certificate of Designation of Series A Junior Participating Preferred
Stock. (Filed under the identical exhibit number to the Company's Amendment
No. 2 to the Registration Statement No. 333-06195 and incorporated herein
by reference.)
4.1 Form of Certificate representing Common Stock. (Filed under the identical
exhibit number to the Company's Amendment No. 1 to the Registration
Statement No. 333-06195 and incorporated herein by reference.)
4.2 Rights Agreement between the Company and ChaseMellon Shareholder Services,
L.L.C. (Filed as Exhibit No. 4.4 to the Company's Registration Statement on
Form S-8 (No. 333-13299) and incorporated herein by reference.)
4.3 Form of Registration Rights Agreement among the Company and the
stockholders listed on the signature pages thereto. (Filed under the
identical exhibit number to the Company's Registration Statement No.
333-06195 and incorporated herein by reference.)
4.4 Stock Registration Agreement dated as of March 19, 1996 between American
Residential Services, Inc. and Equus II Incorporated. (Filed under the
identical exhibit number to the Company's Registration Statement No.
333-06195 and incorporated herein by reference.)
4.5 Stock Piggyback Registration Agreement dated as of March 19, 1996 between
Enterprises Holding Company and NationsBank of Texas, N.A. (Filed under the
identical exhibit number to the Company's Registration Statement No.
333-06195 and incorporated herein by reference.)
4.6 Revolving Loan Agreement dated September 17, 1996 among the Company and
NationsBank of Texas, N.A. and the other parties designated therein. (Filed
under the identical exhibit number to the Company's Amendment No. 3 to the
Registration Statement No. 333-06195 and incorporated herein by reference.)
4.7 Convertible Promissory Note dated as of March 6, 1996 issued by the Company
to Equus II Incorporated. (Filed under the identical exhibit number to the
Company's Amendment No. 3 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
4.8 Promissory Note dated as of July 22, 1996 issued by the Company to Equus II
Incorporated. (Filed under the identical exhibit number to the Company's
Amendment No. 3 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
The Company and certain of its subsidiaries are parties to certain debt
instruments under which the total amount of securities authorized does not
exceed 10% of the total assets of the Company and its subsidiaries on a
consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of
Regulation S-K, the Company agrees to furnish a copy of such instruments to
the Commission upon request.
14
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.1 American Residential Services, Inc. 1996 Incentive Plan. (Filed under the
identical exhibit number to the Company's Amendment No. 1 to the
Registration Statement No. 333-06195 and incorporated herein by reference.)
10.2 Employment Agreement dated as of November 1, 1995 between the Company and
Howard S. Hoover, Jr., as amended. (Filed under the identical exhibit
number to the Company's Amendment No. 1 to the Registration Statement No.
333-06195 and incorporated herein by reference.)
10.3 Employment Agreement dated as of November 1, 1995 between the Company and
C. Clifford Wright, Jr., as amended. (Filed under the identical exhibit
number to the Company's Amendment No. 1 to the Registration Statement No.
333-06195 and incorporated herein by reference.)
10.4 Employment Agreement dated as of November 1, 1995 between the Company and
William P. McCaughey, as amended. (Filed under the identical exhibit number
to the Company's Amendment No. 1 to the Registration Statement No.
333-06195 and incorporated herein by reference.)
10.5 Employment Agreement dated as of March 6, 1996 between the Company and John
D. Held, as amended. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.6 Employment Agreement dated as of March 6, 1996 between the Company and A.
Jefferson Walker III. (Filed under the identical exhibit number to the
Company's Registration Statement No. 333-06195 and incorporated herein by
reference.)
10.7 Employment Agreement dated as of April 5, 1996 between the Company and
Michael Mamaux. (Filed under the identical exhibit number to the Company's
Registration Statement No. 333-06195 and incorporated herein by reference.)
10.8 Employment Agreement dated as of June 13, 1996 between the Company and
Elliot Sokolow. (Filed under the identical exhibit number to the Company's
Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.9 Employment Agreement dated as of June 13, 1996 between the Company and
Howard W. Hauser. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.10 Employment Agreement dated as of June 13, 1996 between the Company and
Gorden H. Timmons. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.11 Employment Agreement dated as of June 13, 1996 between the Company and
Gary Daymon. (Filed under the identical exhibit number to the Company's
Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.12 Employment Agreement dated as of June 13, 1996 between the Company and
Frank N. Menditch. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.13 Employment Agreement dated as of June 13, 1996 between the Company and
Howard C. Menditch. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
15
<PAGE>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
10.14 Employment Agreement dated as of June 13, 1996 between the Company and
Bruce L. Menditch. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.15 Form of Indemnification Agreement between the Company and each of its
directors and officers. (Filed under the identical exhibit number to the
Company's Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.16 Executive Supplemental Disability Plan of American Residential Services,
Inc. (Filed under the identical exhibit number to the Company's Amendment
No. 1 to the Registration Statement No. 333-06195 and incorporated herein
by reference.)
10.17 Executive Supplemental Life Insurance Plan of American Residential
Services, Inc. (Filed under the identical exhibit number to the Company's
Amendment No. 1 to the Registration Statement No. 333-06195 and
incorporated herein by reference.)
10.18 American Residential Services, Inc. Deferred Compensation Plan. (Filed
under the identical exhibit number to the Company's Amendment No. 1 to the
Registration Statement No. 333-06195 and incorporated herein by reference.)
+27.1 Financial Data Schedule.
- ------------
+ Filed herewith
(b) Reports.
No reports on Form 8-K were filed during the quarter ended September 30,
1996.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, American Residential Services, Inc., has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN RESIDENTIAL SERVICES, INC.
Dated: November 14, 1996 By: /s/ Michael Mamaux
Michael Mamaux
Controller
(Chief Accounting Officer)
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