<PAGE> 1
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 March 31, 1997
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to _________
Commission File Number: 1-11849
AMERICAN RESIDENTIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 76-0484996
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(Address of principal executive offices) (Zip Code)
</TABLE>
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 /X/ No / /
At May 13, 1997, 12,015,347 shares of Common Stock, par value
$.001 per share, of the Registrant were outstanding.
<PAGE> 2
AMERICAN RESIDENTIAL SERVICES, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
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, 1996 and March 31, 1997 (Unaudited) . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the Three Months Ended March 31, 1996 and 1997 (Unaudited) . . . . . 3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1996 and 1997 (Unaudited) . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 10
Part II - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5 - Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
i
<PAGE> 3
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
On September 27, 1996, American Residential Services, Inc. ("ARS" or
"the Company") acquired seven residential services businesses (together with the
common parent of two of those businesses, the "Founding Companies") in separate
transactions (the "Initial Acquisitions") simultaneously with the closing of
ARS's initial public offering (the "IPO") of its common stock, par value $.001
per share ("Common Stock"). For financial statement presentation purposes,
Atlas Services, Inc. ("Atlas"), one of the Founding Companies, has been
identified as the accounting acquiror. The acquisitions of the remaining
Founding Companies have been accounted for using the purchase method of
accounting, with the results of operations included from September 30, 1996, the
effective closing date of those acquisitions for accounting purposes.
Subsequent to the acquisition of the Founding Companies, the Company
acquired 13 additional residential services businesses in the fourth quarter of
1996 (the "Fourth Quarter 1996 Acquisitions") and 10 additional residential
services businesses in the first quarter of 1997 (the "First Quarter 1997
Acquisitions" and, together with the Founding Companies and the Fourth Quarter
1996 Acquisitions, the "Acquired Businesses"). For accounting purposes, the
Fourth Quarter 1996 Acquisitions and two of the First Quarter 1997 Acquisitions
were also accounted for using the purchase method of accounting. The remaining
eight First Quarter 1997 Acquisitions (the "Pooled Companies") were accounted
for under the pooling-of-interests method of accounting with the historical
financial statements of ARS retroactively restated for the effects thereof.
The accompanying consolidated financial statements reflect the Company
on a historical basis with Atlas as the accounting acquiror, restated for the
effect of the eight acquisitions accounted for as pooling-of-interests.
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 those rules and 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 recurring
adjustments that are necessary for a fair presentation of the results for the
interim periods ended March 31, 1996 and 1997.
Operating results for interim periods are not necessarily indicative of
the results for a full year. In addition, the pro forma combined financial
statement data for the three months ended March 31, 1996 presented herein is not
necessarily indicative of the results the Company would have obtained had the
events included in such pro forma data actually occurred when assumed or of the
Company's future results. It is suggested that these consolidated financial
statements be read in conjunction with the Consolidated Financial Statements of
the Company and the related notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
1
<PAGE> 4
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31 March 31
1996 1997
--------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 7,860 $ 2,872
Accounts receivable ..................................................
Trade, net ........................................................ 22,001 23,200
Other receivables ................................................. 1,658 1,868
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................................. 853 1,367
Inventories .......................................................... 10,488 12,138
Prepaid expenses and other current assets ............................ 1,903 1,972
Net assets of discontinued operations ................................ 338 233
---------------- -----------------
Total current assets ........................................... 45,101 43,650
PROPERTY AND EQUIPMENT, net .............................................. 19,223 20,203
GOODWILL, net ............................................................ 131,193 131,473
OTHER NONCURRENT ASSETS .................................................. 1,340 2,165
---------------- -----------------
Total assets .................................................. $ 196,857 $ 197,491
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations .......................... $ 982 $ 152
Accounts payable and accrued liabilities ............................. 22,466 21,600
Unearned revenue on service and warranty contracts ................... 3,850 3,559
Billings in excess of costs and estimated earnings on
uncompleted contracts ............................................. 1,547 1,931
---------------- -----------------
Total current liabilities ...................................... 28,845 27,242
LONG-TERM OBLIGATIONS, net of current maturities ......................... 52,931 54,341
UNEARNED REVENUE ON SERVICE AND WARRANTY
CONTRACTS ......................................................... 633 613
DEFERRED INCOME TAXES .................................................... 2,392 2,392
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock $.001 par value, 10,000,000 shares authorized;
none issued and outstanding........................................ -- --
Common Stock, $.001 par value, 50,000,000 shares authorized;
11,653,303 and 11,679,617 shares issued and outstanding ........... 12 12
Additional paid-in capital ........................................... 122,569 123,214
Retained deficit...................................................... (10,525) (10,323)
---------------- -----------------
Total stockholders' equity ........................................ 112,056 112,903
---------------- -----------------
Total liabilities and stockholders' equity ..................... $ 196,857 $ 197,491
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 5
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
------------------------------------------
Pro Forma*
1996 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES ....................................... $ 13,648 $ 33,151 $ 55,446
COST OF SERVICES ................................ 9,716 23,907 38,955
------------- ------------- ------------
Gross profit................................ 3,932 9,244 16,491
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..... 3,205 8,067 14,572
------------- ------------- ------------
Operating income ........................... 727 1,177 1,919
OTHER INCOME (EXPENSE):
Interest expense ........................... (73) (281) (1,110)
Interest income ............................ 8 110 15
Other ...................................... 72 102 176
------------- ------------- ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES .......................... 734 1,108 1,000
PROVISION FOR INCOME TAXES ...................... 298 591 441
------------- ------------- ------------
NET INCOME FROM CONTINUING
OPERATIONS ................................... 436 517 559
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX ............................ -- -- (32)
------------- ------------- ------------
NET INCOME ...................................... $ 436 $ 517 $ 527
============= ============= ============
WEIGHTED AVERAGE SHARES
OUTSTANDING .................................. 2,349 10,362 12,157
============= ============= ============
EARNINGS PER SHARE:
Continuing Operations ........................ $ 0.19 $ 0.05 $ 0.05
Discontinued Operations ...................... -- -- (0.01)
------------- ------------- ------------
Total .................................... $ 0.19 $ 0.05 $ 0.04
============= ============= ============
</TABLE>
- ------------------------
* Pro forma combined results above include the results of (i) Atlas,
retroactively restated for the Pooled Companies and (ii) the remaining
Founding Companies combined as of January 1, 1996 and adjusted to reflect
prospective reductions in compensation and rent agreed to in connection
with the acquisitions of those Companies, certain other non-recurring
charges, goodwill amortization, interest expense and the impact of federal
and state tax provisions on the pro forma operating results.
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 6
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
-------------------------------
1996 1997
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 436 $ 527
Adjustments to reconcile net income to net cash provided by (used in)
operating activities-
Depreciation and amortization . . . . . . . . . . . . . . . . . . 351 1,934
Deferred tax expense (benefit) . . . . . . . . . . . . . . . . . . (362) 239
Loss (gain) on sale of property and equipment. . . . . . . . . . . (12) 201
Current taxes for S Corporations . . . . . . . . . . . . . . . . . -- 135
Changes in operating assets and liabilities-
(Increase) decrease in -
Accounts receivable, net . . . . . . . . . . . . . . . . . (410) (974)
Cost and estimated earnings in excess of billings
on uncompleted contracts. . . . . . . . . . . . . . . . 82 (513)
Inventories . . . . . . . . . . . . . . . . . . . . . . . (317) (1,463)
Prepaid expenses and other current assets . . . . . . . . 21 (66)
Increase (decrease) in -
Accounts payable and accrued liabilities . . . . . . . . . 1,209 (1,536)
Unearned revenue on service and warranty contracts . . . . (11) (362)
Billings in excess of costs and estimated earnings
on uncompleted contracts . . . . . . . . . . . . . . . (35) 384
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35) (610)
--------------- -------------
Net cash provided by (used in) operating activities . . . . . 917 (2,104)
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment . . . . . . . . . . . . . . . (272) (1,990)
Proceeds from sales of property and equipment . . . . . . . . . . 46 47
Cash paid for business acquisitions, net of cash acquired . . . . -- (673)
--------------- -------------
Net cash used in investing activities . . . . . . . . . . . . (226) (2,616)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations . . . . . . . . . . . (299) (37,466)
Proceeds from long-term obligations . . . . . . . . . . . . . . . 290 37,630
S corporation dividends paid by Founding Companies and
Pooled Companies . . . . . . . . . . . . . . . . . . . . . . . (133) (325)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 (107)
--------------- -------------
Net cash used in financing activities . . . . . . . . . . . . (24) (268)
--------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . 667 (4,988)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . 1,120 7,860
--------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $ 1,787 $ 2,872
=============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42 $ 658
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 150 323
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 7
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions (the "Initial Acquisitions") seven
residential service businesses (together with Enterprises Holding Company
("EHC"), which is the common parent of two of the businesses acquired, the
"Founding Companies") in exchange for consideration consisting of a combination
of cash and shares of its common stock, par value $.001 per share ("Common
Stock"). The Company's initial public offering (the "IPO") of Common Stock
closed simultaneously with the closing of the Initial Acquisitions.
For financial statement purposes, Atlas Services, Inc. ("Atlas"), one
of the Founding Companies, has been identified as the accounting acquiror. The
acquisitions of the remaining Founding Companies were accounted for using the
purchase method of accounting, with the results of operations included from
September 30, 1996, the effective date of the acquisitions for accounting
purposes. The allocation of the purchase price to the assets acquired and
liabilities assumed in certain purchase transactions has been initially 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.
Subsequent to the Initial Acquisitions and the IPO, ARS acquired 13
residential service businesses during the fourth quarter of 1996 (the "Fourth
Quarter 1996 Acquisitions") and an additional ten residential service businesses
during the first quarter of 1997 (the "First Quarter 1997 Acquisitions" and
collectively with the Fourth Quarter 1996 Acquisitions and the Founding
Companies, the "Acquired Businesses"). For accounting purposes, the Fourth
Quarter 1996 Acquisitions and two of the First Quarter 1997 Acquisitions were
accounted for using the purchase method of accounting. The remaining eight
companies acquired as part of the First Quarter 1997 Acquisitions (the "Pooled
Companies") have been accounted for under the pooling-of-interests method of
accounting, with the historical financial statements of ARS retroactively
restated for the effects thereof.
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 2 of the Notes to Consolidated Financial Statements of American
Residential Services, Inc. and Subsidiaries in ARS's Annual Report on Form 10-K
for the year ended December 31, 1996.
5
<PAGE> 8
3. LONG-TERM DEBT
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks, including NationsBank of Texas, N.A.
("NationsBank"), who acts as the agent. On March 3, 1997, the Company increased
the total commitment of the Credit Facility from $55.0 million, which was in
place at December 31, 1996, to $100.0 million. Borrowings under the Credit
Facility may be used for general corporate purposes, including the funding of
any cash that may be paid in connection with acquisitions, the refinancing of
indebtedness of businesses acquired, capital expenditures and working capital.
Loans under the Credit Facility bear interest, at the Company's option, at the
designated variable base rate plus a margin ranging from 0 to 50 basis points,
or at a designated London interbank offering rate (LIBOR) plus a margin ranging
from 100 to 200 basis points, with margins depending on the ratio of the
Company's interest-bearing debt to its trailing twelve-month earnings before
interest, taxes, depreciation and amortization. The margin is reset on a
quarterly basis and also may be reset upon the closing of an acquisition
involving cash consideration in excess of $5.0 million or upon a principal
repayment in excess of $5.0 million. Commitment fees of 30 to 50 basis points
per annum are payable on the unused portion of the line of credit. The Credit
Facility has a $5.0 million sublimit for standby letters of credit. The Credit
Facility also requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of dividends by the
Company (except for dividends payable in Common Stock and certain preferred
stock), does not permit the Company to incur or assume other indebtedness in
excess of 5% of consolidated net worth and requires 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, and the Company has pledged the stock of its operating
subsidiaries as collateral for its obligations under the Credit Facility. As of
March 31, 1997, the Company had $54.0 million in outstanding borrowings under
the Credit Facility, bearing interest at a weighted average rate of
approximately 7.78%.
6
<PAGE> 9
4. EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for
each of the periods presented (in thousands).
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED MARCH 31
--------------------------------------
PRO FORMA
1996 1996 1997
---- ---- ----
<S> <C> <C> <C>
Shares issued in the acquisition of Atlas . . . . . . . . . . . . 1,067 1,067 1,067
Shares issued in acquisitions accounted for under the
pooling-of-interests method . . . . . . . . . . . . . . . . . . 1,282 1,282 1,282
Shares issued in the formation of ARS . . . . . . . . . . . . . . - 1,267 1,267
Shares issued to the remaining stockholders of the
Founding Companies . . . . . . . . . . . . . . . . . . . . . . - 1,876 1,876
Shares sold in the IPO . . . . . . . . . . . . . . . . . . . . . - 4,830 4,830
Shares awarded to certain employees and consultants . . . . . . . - 40 40
Shares issued in connection with the Fourth Quarter
1996 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . - - 1,283
Stock options and warrant, net of assumed repurchases of
common shares as treasury stock . . . . . . . . . . . . . . . . - - 512
----- ------ ------
Weighted average shares outstanding . . . . . . . . . . . . . . . 2,349 10,362 12,157
===== ====== ======
</TABLE>
In February 1997, the Financial Standards Accounting Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 revises the methodology to be used in computing earnings
per share (EPS) such that the computations required for primary and fully
diluted EPS are to be replaced with "basic" and "diluted" EPS. Basic EPS is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted EPS is computed in the same
manner as fully diluted EPS, except that, among other changes, the average
share price for the period is used in all cases when applying the treasury
stock method to potentially dilutive outstanding options.
The Company will adopt SFAS No. 128 effective December 15, 1997, and
will restate EPS for all periods presented.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31
-------------------------------------------------------
PRO FORMA
1996 1996 1997
----------------- ------------------ -----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income from continuing operations . . . . $ 436 $ 436 $ 517 $ 517 $ 559 $ 559
Loss from discontinued operations . . . . . . -- -- -- -- (32) (32)
------ ------ ------- ------- ------- -------
Net income . . . . . . . . . . . . . . . . . $ 436 $ 436 $ 517 $ 517 $ 527 $ 527
====== ====== ======= ======= ======= =======
Shares outstanding . . . . . . . . . . . . . 2,349 2,349 10,362 10,362 11,645 12,157
====== ====== ======= ======= ======= =======
Earning Per Share:
Continuing operations . . . . . . . . . . $ 0.19 $ 0.19 $ 0.05 $ 0.05 $ 0.05 $ 0.05
Discontinued operations . . . . . . . . . -- -- -- -- -- (0.01)
------ ------ ------- ------- ------- -------
Total $ 0.19 $ 0.19 $ 0.05 $ 0.05 $ 0.05 $ 0.04
====== ====== ======= ======= ======= =======
</TABLE>
5. 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.
Certain of the businesses acquired in pooling-of-interests transactions
were S Corporations for income tax purposes prior to their acquisition by the
Company. Accordingly, any income tax liabilities for the periods prior to the
acquisition date are the responsibility of the respective stockholders. For
purposes of these consolidated financial statements, federal and state income
taxes have been reflected as if these companies had filed C Corporation tax
returns for the pre-acquisition periods, with the current income tax expense
of those S Corporations reflected as an increase to additional paid-in capital.
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division is included in
the statements of operations under discontinued operations and therefore
revenues, costs of sales, selling, general and administrative expenses, other
income and expense, and income taxes exclude amounts associated with the
discontinued division. Revenues from this division were approximately $2.4
million for the three months ended March 31, 1997. Certain expenses have been
allocated to discontinued operations, which were allocated based upon estimated
divisional usage. All assets of the operations are expected to be sold in
1997.
7. BUSINESS COMBINATIONS
POOLINGS
During the first three months of 1997, ARS acquired all the outstanding
capital stock of the Pooled Companies in exchange for an aggregate of 1,282,438
shares of Common Stock. These companies provide installation and maintenance,
repair and replacement of plumbing, air conditioning and heating and electrical
systems. These acquisitions have been accounted for as pooling-of-interests
transactions and the results of operations of the eight Pooled Companies are
included in all periods herein. The combined revenues and net income of the
Pooled Companies for the pre-acquisition period for the three months ended March
31, 1996 and 1997 were (in millions):
7
<PAGE> 10
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
----------------------------
1996 1997
------ ------
<S> <C> <C>
Revenues............................... $7.1 $4.2
Net Income............................. 0.1 0.1
</TABLE>
Previously reported financial information for the three months ended
March 31, 1996 and 1997 has been restated.
PURCHASES
Between the date of the IPO and March 31, 1997, the Company completed
15 acquisitions accounted for under the purchase method of accounting. The
aggregate consideration paid in those transactions consisted of $41.8 million in
cash and 1,309,224 shares of Common Stock. The accompanying balance sheet as of
March 31, 1997 includes preliminary estimates of fair value and may be revised
as additional information concerning the valuation of the assets and liabilities
of the businesses acquired becomes available. Also, the purchases are based on
preliminary estimates of value assigned to the Company's Common Stock issued in
all acquisitions accounted for under the purchase method of accounting that
carry certain restrictions regarding the disposition of such stock by the
holders, and such value may be revised as additional information becomes
available.
Subsequent to March 31, 1997 and through the date of filing of this
Quarterly Report on Form 10-Q, the Company completed seven additional
acquisitions (the "Subsequent Acquisitions") for approximately $12.3 million in
cash and 335,730 shares of Common Stock. The Company will account for those
acquisitions as purchases. The businesses acquired in the Subsequent
Acquisitions contributed approximately $6.9 million and $6.7 million in revenues
to the pro forma financial information set forth below for the three months
ended March 31, 1996 and 1997, respectively.
Set forth below are unaudited pro forma combined revenues and net income
data reflecting the pro forma effect of all 22 purchase transactions discussed
above on the Company's results of operations for the three months ended March
31, 1996 and 1997. The unaudited pro forma data for the three months ended March
31, 1996 set forth below consists of (i) the historical income statement data
for the three months ended March 31, 1996 (which have been retroactively
restated for the acquisition of the Pooled Companies) included in the
consolidated financial statements presented herein; (ii) the income statement
data of the Founding Companies for the three months ended March 31, 1996; (iii)
the income statement data for the three months ended March 31, 1996 of the 13
Fourth Quarter 1996 Acquisitions and two First Quarter 1997 Acquisitions
accounted for as purchases; and (iv) the income statement data for the three
months ended March 31, 1996 of the Subsequent Acquisitions, in each case in
(ii), (iii) and (iv), as if all acquisitions were effective on the first day of
the period reported. The unaudited pro forma data for the three months ended
March 31, 1997 set forth below consists of (i) the historical income statement
data for the three months ended March 31, 1997 included in the consolidated
financial statements present herein; (ii) the income statement data for the
three months ended March 31, 1997 for the two First Quarter 1997 Acquisitions
accounted for as purchases; and (iii) the income statement data for the three
months ended March 31, 1997 of the Subsequent Acquisitions, in each case in
(ii) and (iii), as if all acquisitions were effective on the first day of the
period reported.
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
----------------------------
(in millions, except per
share amounts)
(unaudited)
----------------------------
1996 1997
------ ------
<S> <C> <C>
Pro forma revenues . . . . . . . . . . . . $58.1 $62.8
----- -----
Pro forma net income from continuing
operations . . . . . . . . . . . . . . . 0.4 0.5
----- -----
Pro forma net income per share from
continuing operations . . . . . . . . . . 0.03 0.04
----- -----
</TABLE>
8
<PAGE> 11
Pro forma adjustments included in the amounts above primarily relate
to: (a) compensation differentials, reflecting reduced compensation amounts
agreed on in connection with the acquisitions, (b) adjustment for rent expense
on certain leased facilities, reflecting reductions in rent agreed on in
connection with the acquisitions, (c) adjustments for the effects of assets
distributed to and costs of certain leases assumed by owners of certain of the
Acquired Businesses and businesses acquired in the Subsequent Acquisitions, (d)
adjustments for pro forma goodwill amortization expense using a 40-year
estimated life, (e) eliminations of historical interest expense related to
certain obligations that were repaid or not assumed by the Company, reduced by
interest expense on borrowed funds used to pay the cash portion of the purchase
price for the Acquired Businesses and the Subsequent Acquisitions, and (f)
adjustments to the federal and state income tax provisions on pro forma
operating results. Net income per share for the three months ended March 31,
1996 and 1997 assumes all shares issued for the acquisitions of the Acquired
Businesses and in the Subsequent Acquisitions had been outstanding for the
periods presented.
The pro forma results presented are not necessarily indicative of
actual results that might have occurred had the operations and management teams
of the Company, the Acquired Businesses and the Subsequent Acquisitions been
combined at the beginning of the periods presented.
8. SUBSEQUENT EVENTS
Convertible Subordinated Notes
On April 2, 1997, the Company issued a series of 7 1/4% convertible
subordinated notes due 2004 (the "7 1/4% Notes") in the aggregate principal
amount of $55.0 million. The 7 1/4% Notes are unsecured obligations and are
convertible at $25.50 per share into an aggregate of 2,156,862 shares of Common
Stock of the Company based on certain conditions. The Company used
substantially all of the net proceeds of the offering of the 7 1/4% Notes to
repay indebtedness outstanding under the Credit Facility.
9
<PAGE> 12
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
Consolidated Financial Statements of American Residential Services, Inc. and
Subsidiaries and related notes thereto included in this Quarterly Report on Form
10-Q and the Financial Statements of ARS and each of the Founding Companies and
related notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (the "1996 Form 10-K"). 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 1996 Form 10-K.
The Company's revenues are primarily derived from (i) owners and
occupants of homes and small commercial buildings and (ii) builders and
developers of new homes, residential developments and small commercial
buildings. Cost of services consists primarily of salaries and benefits of
service and installation technicians, parts and materials, subcontracted
services, depreciation, maintenance, fuel and equipment rentals. Selling,
general and administrative expenses consist primarily of compensation and
related benefits for owners, administrative salaries and benefits, advertising,
office rent and utilities, communications and professional fees.
Prior to their acquisition by the Company, the Acquired Businesses
were managed as independent private businesses, and their results of operations
reflect different tax structures (S corporations and C corporations), which
have influenced, among other things, their historical levels of owners'
compensation. Certain owners agreed to reductions in their compensation and
benefits in connection with the acquisition of their businesses by the Company.
The consolidated financial information and the following discussion
relating to the three months ended March 31, 1996 and 1997 reflect the Company
on a historical basis with Atlas as the accounting acquiror, restated for the
effect of the acquisitions of the eight Pooled Companies.
10
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
The following table sets forth various items as a percentage of the
Company's revenues:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31
-----------------------
1996 1997
-------- --------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of services . . . . . . . . . . . . . . . . . 71.2 70.3
-------- --------
Gross profit . . . . . . . . . . . . . . . . 28.8 29.7
Selling, general and administrative expenses . . . 23.5 21.8
Corporate overhead . . . . . . . . . . . . . . . . -- 3.0
Goodwill amortization . . . . . . . . . . . . . . . -- 1.4
-------- --------
Operating income. . . . . . . . . . . . . . . . 5.3% 3.5%
======== ========
</TABLE>
Revenues increased by 407.4% from $13.6 million for the three months
ended March 31, 1996 to $55.4 million for the three months ended March 31, 1997.
Approximately $37.0 million of the increase from the first quarter of 1996 to
the corresponding period in 1997 resulted from the inclusion of revenues from
the Founding Companies, the Fourth Quarter 1996 Acquisitions and the First
Quarter 1997 Acquisitions accounted for as purchase acquisitions. The remainder
of the increase was primarily attributable to increases in new installation
projects in Virginia and South Carolina. These increases were partially offset
by revenue reductions in Texas and Florida resulting from the mild spring
weather experienced in those states.
Cost of services increased 302.1% to $39.0 million for the three months
ended March 31, 1997, as compared to the corresponding period in the prior
year, reflecting increased costs associated with the higher level of revenues.
Gross profit, as a percentage of revenues, increased from 28.8% for the three
months ended March 31, 1996 to 29.7% for the three months ended March 31, 1997.
The improvement in gross profit in the first quarter of 1997 was attributable
to the purchase acquisitions of businesses providing higher margin maintenance,
repair and replacement services, which generate higher margins than new
installation services.
Selling, general and administrative expenses increased $11.4 million to
$14.6 million for the three months ended March 31, 1997, as compared to the
corresponding period in the prior year. The increase was primarily due to the
acquisition of the Founding Companies, the Fourth Quarter 1996 Acquisitions and
the First Quarter 1997 Acquisitions accounted for as purchase acquisitions,
coupled with the addition of ARS's corporate personnel and administrative
infrastructure.
Interest expense increased $1.0 million, from $0.1 million for the
three months ended March 31, 1996 to $1.1 million for the three months ended
March 31, 1997. The increase was attributable to the use of debt to fund the
cash portion of the Fourth Quarter 1996 Acquisitions and First Quarter 1997
Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 1997, net cash used in
operating activities was $2.1 million, capital expenditures totaled $2.0
million and net borrowings of debt amounted to $0.3 million. The Company
anticipates capital expenditures (exclusive of
11
<PAGE> 14
acquisitions) of approximately $6.0 million during the remainder of 1997,
primarily for computer equipment, leasehold improvements and furniture and
fixtures.
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks, including NationsBank of Texas, N.A.
("NationsBank"), who acts as the agent. On March 3, 1997, the Company increased
the size of the Credit Facility from $55.0 million to $100.0 million.
Borrowings under the Credit Facility may be used for general corporate purposes,
including the funding of any cash paid in connection with acquisitions,
refinancing indebtedness of businesses acquired, capital expenditures and
working capital. Loans under the Credit Facility bear interest at a designated
variable base rate plus a margin ranging from 0 to 50 basis points, depending on
the ratio of the Company's interest-bearing debt to its trailing twelve-month
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 100 to 200 basis points,
depending on the same ratio. The margin is reset on a quarterly basis and also
may be reset upon the closing of an acquisition involving cash consideration in
excess of $5.0 million or upon a principal repayment in excess of $5.0 million.
Commitment fees of 30 to 50 basis points per annum are payable on the unused
portion of the line of credit. The Credit Facility has a $5.0 million sublimit
for standby letters of credit. The Credit Facility also requires the consent of
the lenders for acquisitions exceeding a certain level of cash consideration,
prohibits the payment of dividends by the Company (except for dividends payable
in Common Stock and certain preferred stock), does not permit the Company to
incur or assume other indebtedness in excess of any amount equal to 5% of its
consolidated net worth and requires 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, and the Company has pledged the stock of its operating subsidiaries as
collateral for its obligations under the Credit Facility. At March 31, 1997,
the Company's outstanding borrowings under the Credit Facility were $54.0
million, bearing interest at a weighted average rate of 7.78%. As of May 13,
1997, the Company had outstanding borrowings under the Credit Facility in the
amount of $22.1 million, bearing interest at a weighted average rate of 7.59%.
On April 2, 1997, the Company issued $55.0 million aggregate principal
amount of its 7 1/4% Convertible Subordinated Notes due 2004 (the "7 1/4%
Notes"). These notes are unsecured obligations of ARS and are convertible into
an aggregate of 2,156,862 shares of Common Stock of the Company at a conversion
price of $25.50 per share. The Company used substantially all the net proceeds
of the offering of the 7 1/4% Notes to repay indebtedness outstanding under the
Credit Facility.
In January 1997, the Company registered 5,000,000 shares of its Common
Stock pursuant to a shelf registration statement on Form S-4 (the "Shelf
Registration Statement") for issuance from time to time for future
acquisitions. As of the date of filing of this Quarterly Report on Form 10-Q,
3,355,518 shares remain available for issuance under the Shelf Registration
Statement.
Following the end of the first quarter of 1997 to the date of the
filing of this Quarterly Report on Form 10-Q, the Company has acquired an
additional seven companies for an aggregate consideration of $12.3 million in
cash and 335,730 shares of Common Stock, all of which were issued under the
Shelf Registration Statement. Each of those acquisitions was accounted for
under the purchase method of accounting. Funding of the cash portion of the
purchase prices and repayment of
12
<PAGE> 15
indebtedness assumed in connection with those acquisitions was provided by
borrowings under the Credit Facility. The Company believes its cash flow from
operations and the borrowings available under the Credit Facility are sufficient
to support its ongoing operations and anticipated capital expenditures for the
remainder of 1997.
The Company intends to continue to pursue attractive acquisition
opportunities of both residential and commercial maintenance services
businesses. The timing, size or success of any acquisitions 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 and the possible public or private sale of
additional debt securities, as well as issuances of additional equity,
including shares under the Shelf Registration Statement.
SEASONALITY
The Company has experienced, and 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 for certain areas of the
southern United States, the demand for new residential installations is lower
in the winter months because new construction activity is lower as a result of
colder weather (although the Company expects that such reduction in demand may
be partially offset by increases in the demand for commercial replacement
services generally experienced in the winter months). Demand for HVAC services
is generally higher in the second and third quarters. In addition to the
effects of seasonality, the Company's quarterly results may fluctuate as a
result of a number of other factors, including the timing of acquisitions.
Accordingly, quarterly comparisons of the Company's revenues and operating
results should not be relied on as an indication of future performance, and the
results of any quarterly period may not be indicative of the results to be
expected for a full year.
13
<PAGE> 16
AMERICAN RESIDENTIAL SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
From April 1, 1997 to the date of the filing of this Quarterly Report,
the Company acquired an additional seven companies for an aggregate
consideration of $12.3 million in cash and 335,730 shares of stock. Each of
these acquisitions was accounted for under the purchase method of accounting.
The acquired companies include a commercial HVAC services provider operating in
Colorado, Texas and Arizona, representing the Company's initial acquisition of a
business focused on commercial maintenance services. Other companies acquired
include a provider of residential and commercial HVAC services for the
Indianapolis, Indiana metropolitan area, a provider of residential and some
commercial HVAC and plumbing services in San Diego, California, a provider of
residential and commercial HVAC services for the San Bernardino-Riverside,
California metropolitan area (which represents a new market for the Company),
and three providers of residential HVAC services, one in Hilton Head, South
Carolina, another in the Charlotte, North Carolina metropolitan area (which
represents a new market for the Company), and a third in the greater Los
Angeles, California market.
14
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
- ----- -----------------------------------------------------------------------------------------
<S> <C>
*2.1 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which American Residential Services, Inc. ("ARS") and Climatic
Corporation of Vero Beach are parties (Form S-1, Reg. No. 333-06195,
Ex. 2.1).
*2.2. Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Florida Heating and Air Conditioning, Inc. are parties
(Form S-1, Reg. No. 333-06195, Ex. 2.2).
*2.3 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Atlas Services, Inc. are parties (Form S-1, Reg. No.
333-06195, Ex. 2.3).
*2.4 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and DIAL ONE Meridian and Hoosier, Inc. are parties (Form
S-1 , Reg. No. 333-06195, Ex. 2.4).
*2.5 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Bullseye Air Conditioning, Inc. are parties (Form S-1,
Reg. No. 333-06195, Ex. 2.5).
*2.6 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Florida Heating and Air Conditioning Duct, Inc. are
parties (Form S-1, Reg. No. 333-06195, Ex. 2.6).
*2.7 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Florida Heating and Air Conditioning Service, Inc. are
parties (Form S-1, Reg. No. 333-06195, Ex. 2.7).
*2.8 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and General Heating Engineering Company, Inc. are parties
(Form S-1, Reg. No. 333-06195, Ex. 2.8).
*2.9 Agreement and Plan of Reorganization dated as of June 13, 1996 to
which ARS and Enterprises Holding Company ("EHC") are parties (Form
S-1, Reg. No. 333-06195, Ex. 2.9).
*2.10 Form of Uniform Provisions for the Acquisition of Founding Companies
(Form S-1, Reg. No. 333-06195, Ex. 2.10).
*2.11 Agreement and Plan of Reorganization dated as of December 11, 1996 to
which ARS and Metro Heating and Air Conditioning, Inc. are parties
(Form S-4, Reg. No. 333-18623, Ex. 2.11).
*3.1 Restated Certificate of Incorporation of ARS (Form S-1, Reg. No.
333-06195, Ex. 3.1).
*3.2 Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 Certificate of Designation of Series A Junior Participating Preferred
Stock (Form S-1, Reg. No. 333-06195, Ex. 3.3).
*4.1 Form of Certificate representing Common Stock (Form S-1, Reg. No.
333-06195, Ex. 4.1).
*4.2 Rights Agreement of ARS, including form of Rights Certificate as
Exhibit B thereto (Form S-8, Reg. No. 333- 13299, Ex. 4.4).
*4.3 Registration Rights Agreement among ARS and the stockholders listed on
the signature pages thereto (Form S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4. Stock Registration Agreement dated as of March 6, 1996 between ARS and
Equus II Incorporated (Form S-1, Reg. No. 333-06195, Ex. 4.4).
*4.5 Stock Piggyback Registration Agreement dated as of March 19, 1996
between EHC and NationsBank of Texas, N.A. ("NationsBank") (Form S-1,
Reg. No. 333-06195, Ex. 4.5).
*4.6 Revolving Loan Agreement dated March 3, 1997 among ARS, NationsBank and the other parties designated
therein (Form 10-K for 1996, File No. 1-11849, Ex. 4.6).
*4.7 First Amendment to Revolving Loan Agreement dated March 24, 1997, among ARS, Nationsbank and the other
parties designated therein (Form 10-K for 1996, File No. 1-11849, Ex. 4.7).
*4.8 Indenture dated as of April 1, 1997 from ARS to U.S. Trust Company of Texas, N.A., as Trustee (Form S-4,
Reg. No. 333-18623, Ex. 4.8).
*4.9 Registration Rights Agreement dated as of April 1, 1997 between ARS and Smith Barney Inc., Goldman, Sachs &
Co. and Montgomery Securities (Form S-4, Reg. No. 333-18623, Ex. 4.9).
ARS and certain of its subsidiaries are parties to certain debt instruments under which the total amount of
its securities authorized does not exceed 10% of the total assets of ARS and its subsidiaries on a
consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, ARS agrees to
furnish a copy of such instruments to the Commission upon request.
*10.1 Amended and Restated Employment Agreement dated as of April 1, 1997 between ARS and Harry O. Nicodemus, IV
(Form S-4, Reg. No. 333-18623, Ex. 10.4).
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference.
(b) Reports.
The Company filed a Current Report on Form 8-K dated March 4, 1997
to announce the Company's proposed private placement of
convertible subordinated notes.
15
<PAGE> 18
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: May 15, 1997 By: /s/ HARRY O. NICODEMUS, IV
------------------------------------
Harry O. Nicodemus, IV
Vice President
(Chief Financial Officer and
Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN RESIDENTIAL SERVICES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,872
<SECURITIES> 0
<RECEIVABLES> 24,153
<ALLOWANCES> 953
<INVENTORY> 12,138
<CURRENT-ASSETS> 43,650
<PP&E> 40,562
<DEPRECIATION> 20,359
<TOTAL-ASSETS> 197,491
<CURRENT-LIABILITIES> 27,242
<BONDS> 54,341
0
0
<COMMON> 12
<OTHER-SE> 112,214
<TOTAL-LIABILITY-AND-EQUITY> 197,491
<SALES> 55,446
<TOTAL-REVENUES> 55,446
<CGS> 38,955
<TOTAL-COSTS> 38,955
<OTHER-EXPENSES> 14,572
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,110
<INCOME-PRETAX> 1,000
<INCOME-TAX> 441
<INCOME-CONTINUING> 559
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527
<EPS-PRIMARY> .05
<EPS-DILUTED> .04
</TABLE>
