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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 JUNE 30, 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: 1-13011
COMFORT SYSTEMS USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0526487
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
THREE RIVERWAY
SUITE 200
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (713) 964-2685
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 H No H
The number of shares outstanding of the issuer's common stock, as of August 14,
1997, was 20,975,774.
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<PAGE>
COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PAGE
----
Part I -- Financial Information
Item 1 -- Financial Statements General Information .................... 1
Financial Statements --
Balance Sheets -- Comfort Systems USA, Inc., as of
December 31, 1996, and June 30, 1997, and Pro Forma
as of June 30, 1997 ....................................... 2
Statements of Operations -- Comfort Systems USA, Inc.,
for the Three Months Ended June 30, 1997, and Pro
Forma for the Three Months Ended June 30, 1996 and 1997 ... 3
Statements of Operations -- Comfort Systems USA, Inc.,
for the Six Months Ended June 30, 1997, and Pro Forma
for the Six Months Ended June 30, 1996 and 1997 ........... 4
Statements of Cash Flows -- Comfort Systems USA, Inc.,
for the Three and Six Months Ended June 30, 1997 .......... 5
Notes to Financial Statements ............................... 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 9
Part II -- Other Information
Item 1 -- Legal Proceedings ........................................... 12
Item 2 -- Recent Sales of Unregistered Securities ..................... 12
Item 6 -- Exhibits and Reports on Form 8-K ............................ 12
Signature ............................................................. 13
(i)
<PAGE>
COMFORT SYSTEMS USA, INC.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Comfort Systems USA, Inc. ("Comfort Systems") was founded in December
1996 to become a leading national provider of heating, ventilation and air
conditioning ("HVAC") services, focusing primarily on the commercial and
industrial markets. On June 27, 1997, Comfort Systems completed the initial
public offering (the "Offering") of its common stock, par value $.01 per share
(the "Common Stock") and simultaneously acquired 12 businesses (the
"Acquisitions"): Quality Air Heating and Cooling, Inc. ("Quality"), Atlas
Comfort Services USA, Inc., which does business as Atlas Air Conditioning Co.
("Atlas"), Tri-City Mechanical, Inc. ("Tri-City"), S. M. Lawrence Co., Inc.
and Lawrence Service, Inc. (together "Lawrence"), Accurate Air Systems, Inc.
("Accurate"), Freeway Heating and Air Conditioning, Inc. ("Freeway"),
Eastern Heating and Cooling Inc. ("Eastern"), Contract Service Inc., which
does business as C.S.I. Heating and Air Conditioning and Bonneville Heating and
Cooling ("CSI/Bonneville"), Tech Heating and Air Conditioning, Inc. and Tech
Mechanical, Inc. (together "Tech"), Seasonair, Inc. ("Seasonair"), Western
Building Services, Inc. ("Western") and Standard Heating and Air Conditioning
Co. ("Standard" and together with Quality, Atlas, Tri-City, Lawrence,
Accurate, Freeway, Eastern, CSI/Bonneville, Tech, Seasonair and Western,
collectively referred to as the "Founding Companies"). Unless the context
otherwise indicated, all references herein to the Company include Comfort
Systems and the Founding Companies.
Comfort Systems acquired the Founding Companies using a combination of cash
and Common Stock. Because the stockholders of the Founding Companies owned a
majority of the outstanding shares of Common Stock following the Offering and
the Acquisitions and the stockholders of Comfort Systems received the greatest
number of shares of Common Stock among the stockholders of the Founding
Companies, for financial statement presentation purposes, Comfort Systems has
been identified as the accounting acquirer. The allocations of purchase prices
to the assets acquired and liabilities assumed of the Founding Companies have
been recorded based on preliminary estimates of fair value, and may be changed
as additional information becomes available. The Acquisitions of the Founding
Companies will be accounted for using the purchase method of accounting as of
July 2, 1997 (the "Closing Date"). Therefore, the accompanying historical
financial statements as of December 31, 1996, and June 30, 1997, and for the
three- and six-month periods ended June 30, 1997, of Comfort Systems are
presented as the historical financial statements of the registrant.
Both historical and pro forma operating results for interim periods are not
necessarily indicative of full year results. The financial statements in this
report should be read in conjunction with the following additional information
in the Company's Registration Statement on Form S-1 (no. 333-24021), as amended
(the "Registration Statement"), filed with the Securities and Exchange
Commission in connection with the Offering:
o the pro forma combined financial statements of the Company and the
related notes
o the financial statements of Comfort Systems and the Founding Companies
and related notes
o management's discussion and analysis of financial condition and
results of operations
1
<PAGE>
COMFORT SYSTEMS USA, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA,
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Cash and cash equivalents............ $ 1 $ 42 $ 38,002
Accounts receivable.................. -- -- 30,110
Less -- Allowance............... -- -- 375
------------ ----------- -----------
Accounts receivable, net... -- -- 29,735
Other receivables.................... -- -- 136
Inventories.......................... -- -- 4,990
Prepaid expenses and other........... -- -- 640
Costs in excess of billings.......... -- -- 4,418
Prepaid federal income taxes......... -- -- 1,400
Deferred offering costs.............. 177 4,936 --
Other................................ -- -- 834
------------ ----------- -----------
Total current assets....... 178 4,978 80,155
PROPERTY AND EQUIPMENT, net.......... -- -- 5,301
GOODWILL............................. -- -- 139,261
OTHER NONCURRENT ASSETS.............. -- -- 693
------------ ----------- -----------
Total assets............... $ 178 $ 4,978 $ 225,410
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current maturities of long-term
debt................................. $-- $ -- $ 141
Accounts payable..................... -- -- 13,155
Accrued compensation and benefits.... -- -- 3,074
Other accrued expenses............... -- -- 2,493
Accrued offering costs............... 177 4,936 --
Payables to stockholder/affiliate.... -- -- 24
Billings in excess of costs and
earnings............................. -- -- 3,199
Income taxes payable................. -- -- 1,509
Other................................ -- -- 559
------------ ----------- -----------
Total current
liabilities................ 177 4,936 24,154
Deferred income taxes................ -- -- 17
Long-term debt, net of current
maturities........................... -- -- 18,944
Payable to stockholder/affiliate..... -- -- 1,302
------------ ----------- -----------
Total liabilities.......... 177 4,936 44,417
------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par,
5,000,000 shares authorized,
none issued and outstanding... -- -- --
Common stock, $.01 par,
52,969,912 shares authorized,
121,139, 121,139 and
20,975,774 shares issued and
outstanding, respectively..... 1 42 202
Additional paid-in capital...... -- 11,556 180,791
Retained earnings............... -- (11,556) --
------------ ----------- -----------
Total stockholders'
equity..................... 1 42 180,993
------------ ----------- -----------
Total liabilities and
stockholders' equity....... $ 178 $ 4,978 $ 225,410
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS THREE MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- --------------------
HISTORICAL PRO FORMA
------------- --------------------
1997 1996 1997
------------- --------- ---------
REVENUES................................ $-- $ 43,939 $ 47,395
COST OF SERVICES........................ -- 31,100 33,595
------------- --------- ---------
Gross profit.................. -- 12,839 13,800
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. -- 6,755 7,583
GOODWILL AMORTIZATION................... -- 874 874
------------- --------- ---------
Income from operations........ -- 5,210 5,343
OTHER INCOME (EXPENSE):
Interest income.................... -- 72 95
Interest expense................... -- (447) (419)
Other.............................. -- 58 30
------------- --------- ---------
Other income (expense)........ -- (317) (294)
------------- --------- ---------
INCOME BEFORE INCOME TAXES.............. -- 4,893 5,049
PROVISION FOR INCOME TAXES.............. -- 2,408 2,289
------------- --------- ---------
NET INCOME.............................. $-- $ 2,485 $ 2,760
============= ========= =========
NET INCOME PER SHARE.................... $ 0.14 $ 0.15
========= =========
SHARES USED IN COMPUTING PRO FORMA NET
INCOME PER SHARE...................... 18,252 18,252
========= =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
SIX MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------- --------------------
HISTORICAL PRO FORMA
------------- --------------------
1997 1996 1997
------------- --------- ---------
REVENUES............................. $ -- $ 78,738 $ 86,900
COST OF SERVICES..................... -- 56,859 62,395
------------- --------- ---------
Gross profit............... -- 21,879 24,505
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 11,556 13,255 15,397
GOODWILL AMORTIZATION................ -- 1,748 1,748
------------- --------- ---------
Income (loss) from
operations.............. (11,556) 6,876 7,360
OTHER INCOME (EXPENSE):
Interest income................. -- 172 167
Interest expense................ -- (814) (789)
Other........................... -- 130 92
------------- --------- ---------
Other income (expense)..... -- (512) (530)
------------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.... (11,556) 6,364 6,830
PROVISION FOR INCOME TAXES........... -- 3,191 3,209
------------- --------- ---------
NET INCOME (LOSS).................... $ (11,556) $ 3,173 $ 3,621
============= ========= =========
NET INCOME PER SHARE................. $ 0.17 $ 0.20
========= =========
SHARES USED IN COMPUTING PRO FORMA
NET INCOME PER SHARE............... 18,252 18,252
========= =========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
COMFORT SYSTEMS USA, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1997 1997
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................... $-- $(11,556)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities --
Compensation expense related
to issuance of management
shares..................... -- 11,556
Changes in assets and
liabilities --
Increase in other
assets................ (2,070) (4,936)
Increase in other
liabilities........... 2,070 4,936
-------------- --------------
Net cash provided
by operating
activities....... -- --
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock.................. -- 41
-------------- --------------
Net cash provided
by financing
activities....... -- 41
-------------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................... -- 41
CASH AND CASH EQUIVALENTS, beginning of
period................................ 42 1
-------------- --------------
CASH AND CASH EQUIVALENTS, end of
period................................ $ 42 $ 42
============== ==============
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
Comfort Systems was formed in December 1996 to become a national provider
of HVAC services, focusing primarily on the commercial and industrial markets.
On June 27, 1997, Comfort Systems completed an initial public offering of Common
Stock. At the same time, Comfort Systems acquired the Founding Companies using
cash and Common Stock. The closing of the Acquisitions and the Offering occurred
on July 2, 1997.
For financial statement purposes, Comfort Systems has been identified as
the accounting acquirer. Accordingly, the historical financial statements
represent those of Comfort Systems prior to the Acquisitions and the Offering.
The Acquisitions were accounted for using the purchase method of accounting. The
allocations of the purchase prices to the assets acquired and liabilities
assumed of the Founding Companies have been recorded based on preliminary
estimates of fair value and may be changed as additional information becomes
available.
The regulations for unaudited interim financial statements such as those in
this report allow certain information and footnotes required by generally
accepted accounting principles for year end financial statements to be excluded.
The Company believes all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
These interim statements should be read in conjunction with the financial
statements and related notes included in the Registration Statement.
The pro forma financial information for the three months and six months
ended June 30, 1996, and June 30, 1997, includes the results of Comfort Systems
combined with the Founding Companies as if the Acquisitions had occurred on
January 1 of each respective period. This pro forma combined financial
information includes the effects of (a) the Acquisitions, (b) the Offering, (c)
certain reductions in salaries and benefits to the former owners of the Founding
Companies which they agreed would take effect as of the Acquisitions (d)
amortization of goodwill resulting from the Acquisitions (e) elimination of the
compensation expense related to the non-cash compensation charge of $11.6
million recorded by Comfort Systems in the first quarter of 1997 because it is
non-recurring, (f) pro forma compensation expense of $215,000 and $430,000 for
the three months and six months ended June 30, 1997, respectively, related to
the ongoing salaries of the management personnel of Comfort Systems who joined
the Company prior to the Offering, and (g) interest expense on borrowings of
$11.0 million that would have been necessary to fund the S Corporation
Distributions if they had occurred at the beginning of each period presented.
The pro forma financial information may not be comparable to and may not be
indicative of the Company's post-Acquisition results of operations because the
Founding Companies were not under common control or management and had different
tax and capital structures during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
There were 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 Notes to Financial Statements of Comfort Systems and each of the Founding
Companies included in the Company's Registration Statement.
6
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CREDIT FACILITY:
At the same time as the Offering, the Company entered into a credit
agreement with Bank One, Texas, N.A. (the "Credit Facility"). The Credit
Facility provides the Company with an unsecured revolving line of credit of $75
million. The Company has a choice of two interest rate options when borrowing
under the Credit Facility. Under one option, the interest rate is determined
based on the higher of the Federal Funds Rate plus one-half percentage point or
the bank's prime rate. An additional margin of zero to one-quarter percentage
point is then added to the higher of these two rates. The additional margin
depends on the ratio of the Company's debt to earnings before interest, taxes,
depreciation and amortization for the preceding twelve months ("EBITDA"). For
purposes of this ratio, EBITDA may include the preceding twelve months' results
for any companies acquired during the last year. Under the other interest rate
option, borrowings bear interest based on designated short-term Eurodollar rates
(which generally approximate the London Interbank Offered Rates or LIBOR, as
published in major financial media) plus one to two percentage points, again
depending on the ratio of debt to EBITDA. In addition, commitment fees of 0.125%
to 0.375% per annum, also depending on the ratio of debt to EBITDA, are payable
on the unused portion of the line of credit. The Credit Facility prohibits the
payment of dividends by the Company and requires the Company to comply with
certain financial covenants. The Credit Facility expires on July 2, 2000, at
which time all amounts outstanding under the facility are due. Subsequent to the
Offering, the Company borrowed $17.3 million under the Credit Facility at an
interest rate of approximately 6.7 percent to repay existing debt of the
Founding Companies.
4. CAPITAL STOCK:
On June 27, 1997, Comfort Systems sold 6,100,000 shares of Common Stock to
the public at $13.00 per share (the Offering). The net proceeds to Comfort
Systems from the Offering (after deducting underwriting commissions and offering
expenses) were $69.7 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies.
In connection with the Offering, the Company had granted its underwriters
an option to sell an additional 915,000 shares at $13.00 per share. On July 9,
the underwriters exercised this option. Net proceeds to the Company from this
sale of shares were $11.1 million after deducting underwriting commissions.
5. EARNINGS PER SHARE:
For historical periods through June 30, 1997, Comfort Systems' results of
operations compared to its Common Stock result in earnings per share amounts
that are not meaningful. As a result, historical earnings per share for these
periods have not been presented.
The computation of pro forma net income per share for the three months and
six months ended June 30, 1996 and 1997 is based on 18,252,311 shares of Common
Stock outstanding, which is calculated as follows:
Shares issued in consideration for
Acquisitions of Founding
Companies.......................... 9,720,927
Shares sold pursuant to the
Offering........................... 6,100,000
Shares held by Notre Capital Ventures
II, L.L.C.......................... 2,969,912
Shares sold to management and
consultants........................ 1,269,935
------------
Subtotal........................ 20,060,774
Less shares sold in the Offering that
were not used for the cash portion
of the Acquisitions................ (1,808,463)
------------
18,252,311
============
7
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES:
Prior to the Acquisitions, certain Founding Companies' stockholders were
taxed under the provisions of Subchapter S of the Internal Revenue Code. Under
these provisions, the stockholders paid income taxes on their proportionate
share of their companies' earnings. Because the stockholders were taxed
directly, their Founding Companies paid no federal income tax and only certain
state income taxes. Beginning with the Acquisitions, these Founding Companies
will pay federal corporate and state corporate income taxes.
The Company intends to file a consolidated federal income tax return which
includes the operations of the Founding Companies for periods subsequent to the
acquisition date. The Founding Companies will each file a "short period" federal
income tax return through their respective acquisition dates.
The provision for income taxes included in the pro forma statements of
operations for the three months and six months ended June 30, 1996 and 1997 is
an estimate of the federal and state taxes that would have been applicable to
the Company had the Acquisitions occurred at the beginning of each respective
period. The tax rates indicated by these provisions differ from statutory
federal and state rates primarily because amortization of goodwill related to
the Acquisitions is not deductible for tax purposes.
7. COMMITMENTS AND CONTINGENCIES:
The Company is involved in various legal proceedings that have arisen in the
ordinary course of business. The Company does not believe that any of these
proceedings will have a material adverse effect on the financial position or
results of operations of the Company.
8. NEW PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which
revises the calculations used in determining earning per share ("EPS").
Consistent with the provisions of SFAS No. 128, the Company will begin using the
new EPS calculation effective December 31, 1997, and will restate EPS for all
periods presented at that time. EPS amounts for the periods ending June 30, 1996
and 1997 calculated under the new pronouncement and presented at that time will
be unchanged from the amounts shown in these financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for the
reporting of comprehensive income in a company's financial statements.
Comprehensive income includes all changes in a company's equity during the
period that result from transactions and other economic events other than
transactions with its stockholders. For the Company, SFAS No. 130 will be
effective for the year beginning January 1, 1998. The Company has not completed
its analysis of the impact of this new pronouncement. However, based on a
preliminary review, the Company believes the implementation of SFAS No. 130 will
not have a significant effect on its current financial reporting.
8
<PAGE>
COMFORT SYSTEMS USA, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
INTRODUCTION
The following discussion should be read in conjunction with the pro forma
financial statements of the Company and related notes as well as the financial
statements of Comfort Systems and Founding Companies and related notes, both of
which are included in the Company's Registration Statement.
This discussion contains statements regarding future financial performance
and results. The realization of outcomes consistent with these forward-looking
statements is subject to numerous risks and uncertainties to the Company
including, but not limited to, the availability of attractive acquisition
opportunities, the successful integration and profitable management of acquired
businesses, improvement of operating efficiencies, the availability of working
capital and financing for future acquisitions, the Company's ability to grow
internally through expansion of services and customer bases and reduction of
overhead, seasonality and other risk factors discussed in the Registration
Statement.
The pro forma financial information for the three months and six months
ended June 30, 1996, and June 30, 1997, includes the results of Comfort Systems
combined with the Founding Companies as if the Acquisitions had occurred on
January 1, of each respective period. This pro forma combined financial
information includes the effects of (a) the Acquisitions, (b) the Offering, (c)
certain reductions in salaries and benefits to the former owners of the Founding
Companies which they agreed would take effect as of the Acquisitions, (d)
amortization of goodwill resulting from the Acquisitions (e) elimination of the
compensation expense related to the non-cash compensation charge of $11.6
million recorded by Comfort Systems in the first quarter of 1997 because it is
non-recurring, (f) pro forma compensation expense of $215,000 and $430,000 for
the three months and six months ended June 30, 1997, respectively, related to
the ongoing salaries of the management personnel of Comfort Systems who joined
the Company prior to the Offering, and (g) interest expense on borrowings of
$11.0 million that would have been necessary to fund the S Corporation
Distributions if they had occurred at the beginning of each period presented.
The pro forma financial information may not be comparable to and may not be
indicative of the Company's post-Acquisitions results of operations because the
Founding Companies were not under common control or management and had different
tax and capital structures during the period presented.
Quarterly results may also be materially affected by the timing and
magnitude of acquisitions, assimilation costs, and the seasonal and cyclical
nature of the HVAC industry. Accordingly, the operating results for any
three-month period are not necessarily indicative of the results that may be
achieved for any subsequent three-month period or for a full year.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
AND 1997 (PRO FORMA)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------------------ ------------------------------------------
1996 1997 1996 1997
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 43,939 100.0% $ 47,395 100.0% $ 78,738 100.0% $ 86,900 100.0%
Cost of services........................ 31,100 70.8 33,595 70.9 56,859 72.2 62,395 71.8
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 12,839 29.2 13,800 29.1 21,879 27.8 24,505 28.2
Selling, general and administrative
expenses.............................. 6,755 15.4 7,583 16.0 13,255 16.8 15,397 17.7
Goodwill amortization................... 874 2.0 874 1.8 1,748 2.2 1,748 2.0
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. $ 5,210 11.9% $ 5,343 11.3% $ 6,876 8.7% $ 7,360 8.5%
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
REVENUES -- Pro forma combined revenues increased $3.5 million, or 7.9%,
from $43.9 million for the three months ended June 30, 1996, to $47.4 million
for the three months ended June 30, 1997. This resulted primarily from increases
in revenues at Tri-City and Lawrence, net of a decline at Quality. Revenues at
Tri-City increased $5.5 million primarily due to two design/build installation
projects. One of these projects is
9
<PAGE>
for a large nationally-known healthcare organization and involves the first
major facility on what is expected to be a medical campus covering more than 100
acres. The second project is at a new fabrication facility for a major
semiconductor manufacturer. Revenues at Lawrence increased $1.0 million
primarily due to a design/build installation project for a nationally known
consumer products company. Revenues at Quality declined $1.1 million as
Quality's second quarter 1996 results included a large design/build project for
an automotive industry client. As discussed further below, while Quality's
revenue declined from the second quarter of 1996, year-to-date revenues and
profitability increased in 1997 as Quality was able to be more selective on the
projects it accepted in 1997.
Pro forma combined revenues increased $8.2 million, or 10.4% from $78.7
million for the six months ended June 30, 1996, to $86.9 million for the six
months ended June 30, 1997. This resulted primarily from increases in revenues
at Tri-City, Lawrence and Quality, net of a decline at Accurate. Revenues at
Tri-City increased $5.8 million primarily due to the projects discussed above.
Revenues at Lawrence increased $2.2 million over the same six month period as a
result of the project discussed above, and a design/build installation project
at a manufacturing facility in North Carolina which was substantially complete
at March 31, 1997. Quality's revenues increased $1.4 million over 1996 due to
broad-based growth in its design/build activity and its maintenance, repair and
replacement service, net of the decline in second quarter revenues discussed
above. These increases were partially offset by a decline of $1.2 million at
Accurate due to inclement and unseasonably cool weather in Houston, its primary
market, during the first six months of 1997.
GROSS PROFIT -- Pro forma combined gross profit as a percentage of revenues
in the second quarter of 1997 versus 1996 reflects increases at Atlas, Lawrence,
Quality and Eastern, net of a decline at Tri-City. The combined effect of these
changes resulted in an essentially flat gross margin from 1996 to 1997. Atlas'
gross margin increased as a result of its ability to be more selective in
accepting projects in design/build installation for multi-unit facilities.
Lawrence's gross margin was up as a result of its ability to earn better margins
on design/build work from a growing client base. Quality's gross margin improved
due to increasing demand for its services in its market and because its gross
margin during the first half of 1996 was somewhat lower due to narrower margins
on the large automotive industry project it completed in the second quarter of
1996. Eastern's gross margin improved as a result of proportionately more
service work in the second quarter of 1997 and because the second quarter of
1996 included some larger jobs with increased amounts of lower margin
subcontract activity. These increases were partially offset by a decrease in
gross margin at Tri-City where the medical facility project referred to above
included a significant amount of revenue related to subcontract work and
procured equipment, both of which typically carry lower margins.
Pro forma combined gross profit as a percentage of revenues for the first
six months of 1997 increased to 28.2% from 27.8% in 1996. This resulted
primarily from the gains in gross margin discussed above at Atlas, Quality and
Lawrence, net of the decline at Tri-City, also discussed above. In addition,
Accurate also contributed to the increase in six-month gross margin through the
use of less subcontracting.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) -- Pro forma combined
SG&A expenses increased $0.8 million, or 12.3%, from $6.8 million for the three
months ended June 30, 1996, to $7.6 million for the three months ended June 30,
1997 and increased $2.1 million or 16.2% from the six months ended June 30, 1996
to the six months ended June 30, 1997. These increases were due principally to
additions to personnel and infrastructure at Quality, Atlas, Tri-City, and
Lawrence to support growth in their commercial and industrial design/build
activity. Pro forma combined SG&A also included $0.2 million and $0.4 million
for the three and six months ended June 30, 1997, respectively, as pro forma
adjustments for the ongoing salaries of the management personnel who joined
Comfort Systems prior to the Offering. In the second quarter, SG&A as a
percentage of sales increased to 16.0% from 15.4% in 1996 primarily due to the
pro forma adjustment for Comfort Systems management. For the six months ended
June 30, 1997, SG&A as a percentage of sales increased to 17.7% from 16.8% in
1996 due primarily to SG&A additions at Quality and the pro forma adjustment for
Comfort Systems management. Quality's increases in revenues and gross
10
<PAGE>
margin for the first six months of 1997 compared to 1996 exceeded its SG&A
increases. As a result, operating income at Quality increased by more than 22%.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
During the six months ended June 30, 1997, net cash provided by operating
activities was $4.8 million, capital expenditures were $1.1 million and net
borrowings of debt amounted to $11.8 million. Additionally, payments for S
Corporation Distributions were $20.6 million.
On June 27, 1997, Comfort Systems sold 6,100,000 shares of Common Stock to
the public at $13.00 per share (the Offering). The net proceeds to Comfort
Systems from the Offering (after deducting underwriting commissions and offering
expenses) were $69.7 million. Of this amount, $45.3 million was used to pay the
cash portion of the purchase prices of the Founding Companies.
In connection with the Offering, the Company had granted its underwriters
an option to sell an additional 915,000 shares at $13.00 per share. On July 9,
the underwriters exercised this option. Net proceeds to the Company from this
sale of shares were $11.1 million after deducting underwriting commissions.
At the same time as the Offering, the Company entered into a credit
agreement with Bank One, Texas, N.A. (the "Credit Facility"). The Credit
Facility provides the Company with an unsecured revolving line of credit of $75
million. The Company has a choice of two interest rate options when borrowing
under the Credit Facility. Under one option the interest rate is determined
based on the higher of the Federal Funds Rate plus one-half percentage point or
the bank's prime rate. An additional margin of zero to one-quarter percentage
point is then added to the higher of these two rates. The additional margin
depends on the ratio of the Company's debt to earnings before interest, taxes,
depreciation and amortization for the preceding twelve months ("EBITDA"). For
purposes of this ratio, EBITDA may include the preceding twelve months' results
for any companies acquired during the last year. Under the other interest rate
option, borrowings bear interest based on designated short-term Eurodollar rates
(which generally approximate the London Interbank Offered Rates or LIBOR, as
published in major financial media) plus one to two percentage points, again
depending on the ratio of debt to EBITDA. In addition, commitment fees of 0.125%
to 0.375% per annum, also depending on the ratio of debt to EBITDA, are payable
on the unused portion of the line of credit. The Credit Facility prohibits the
payment of dividends by the Company and requires the Company to comply with
certain financial covenants. The Credit Facility expires on July 2, 2000, at
which time all amounts outstanding under the facility are due. Subsequent to the
Offering, the Company borrowed $17.3 million under the Credit Facility at an
interest rate of approximately 6.7 percent to repay existing debt of the
Founding Companies.
The Company intends to pursue acquisition opportunities. The Company
expects to fund future acquisitions through the issuance of additional common
stock, working capital, cash flow from operations and borrowings, including use
of amounts available under the Credit Facility. The Company anticipates that its
cash flow from operations will provide cash in excess of the Company's normal
working capital needs, debt service requirements and planned capital
expenditures for equipment.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonable variations. Specifically, the
demand for new installations and for replacement is generally lower during the
winter months due to reduced construction activities during inclement weather
and less use of air conditioning during the colder months. Demand for HVAC
services is generally higher in the second and third quarters due to increased
construction activity and increased use of air conditioning during the warmer
months. Accordingly, the Company expects its revenues and operating results
generally will be lower in the first and fourth quarters.
Historically, the construction industry has been highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new installation projects in various geographic regions of the United States.
11
<PAGE>
COMFORT SYSTEMS USA, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings that have arisen in
the ordinary course of business. The Company does not believe that any of these
proceedings will have a material adverse effect on the financial position or
results of operations of the Company.
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the three months ended June 30, 1997, that were not
registered under the Securities Act of 1933, as amended (the "Securities
Act").
On June 27, 1997, the Company issued 9,557,133 shares of Common Stock to
the stockholders of the Founding Companies as part of the consideration for the
Acquisitions. The Company also issued a total of 163,794 shares of Common Stock
to one of the Founding Companies' profit-sharing plan. These shares of Common
Stock were issued without registration under the Securities Act in reliance on
the exemption provided by Section 4(2) of the Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMFORT SYSTEMS USA, INC.
By: /s/ J. GORDON BEITTENMILLER
J. GORDON BEITTENMILLER
SENIOR VICE PRESIDNET AND
FINANCIAL OFFICER
Dated: August 14, 1997
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE FINANCIAL STATEMENTS OF COMFORT SYSTEMS USA, INC. AS OF JUNE 30, 1997
AND THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 42
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,978
<PP&E> 0
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<TOTAL-ASSETS> 4,978
<CURRENT-LIABILITIES> 4,936
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0
0
<COMMON> 42
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