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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE 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) 830-9600
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 [ ]
The number of shares outstanding of the issuer's common stock, as of
August ___, 1998, was____________.
<PAGE>
COMFORT SYSTEMS USA, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PAGE
Part I -- Financial Information
Item 1 -- Financial Statements
COMFORT SYSTEMS USA, INC. PRO FORMA COMBINED
Introduction to Pro Forma Combined Statements of
Operations............................................ 1
Pro Forma Combined Statements of Operations............ 3
Note to Pro Forma Combined Statements of Operations.... 4
COMFORT SYSTEMS USA, INC.
Condensed Consolidated Balance Sheets.................. 5
Condensed Consolidated Statements of Operations........ 6
Condensed Consolidated Statements of Stockholders'
Equity................................................ 7
Condensed Consolidated Statements of Cash Flows........ 8
Notes to Condensed Consolidated Financial Statements... 9
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results Of Operations................. 15
Part II -- Other Information
Item 1 -- Legal Proceedings.................................... 20
Item 2 -- Recent Sales of Unregistered Securities.............. 20
Item 6 -- Exhibits and Reports on Form 8-K..................... 20
Item 9 -- Changes and Disagreements with Accountants on
Accounting and Financial Disclosure................ 20
Signature...................................................... 21
<PAGE>
COMFORT SYSTEMS USA, INC.
PART I, ITEM 1 -- FINANCIAL INFORMATION
GENERAL INFORMATION
INTRODUCTION TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
Comfort Systems USA, Inc. ("Comfort Systems" and collectively with its
subsidiaries, the "Company") 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 July 2, 1997, the Company completed the initial public offering (the
"IPO") of its common stock (the "Common Stock") and simultaneously acquired 12
companies (collectively referred to as the "Founding Companies") engaged
principally in the commercial and industrial HVAC business. The closing of the
acquisitions of the Founding Companies and the IPO occurred on July 2, 1997. The
acquisitions of the Founding Companies have been accounted for using the
purchase method of accounting.
Subsequent to July 2, 1997, and through June 30, 1998, the Company acquired
55 additional HVAC and complementary businesses (collectively with the Founding
Companies referred to as the "Acquired Companies"). Of these additional
businesses acquired, 14 acquisitions were accounted for as pooling-of-interests
(the "Pooled Companies"). The remaining businesses acquired were accounted for
as purchases (the "Purchased Companies").
On June 16, 1998, the company completed a second public offering (the "Second
Public Offering") of 400,000 shares of its Common Stock. The net proceeds from
this offering of $7.6 million were used to repay debt.
The following unaudited pro forma combined statements of operations assume
that the IPO and the acquisitions of the Founding Companies were consummated on
January 1, 1997. This pro forma presentation also gives effect to the
retroactive restatement to January 1, 1997, of 13 of the 14 Pooled Companies and
reflects the acquisitions of the Purchased Companies acquired subsequent to the
IPO through June 30, 1998, from the date of their respective acquisitions. This
presentation is not intended to be in accordance with the regulations
promulgated by the Securities and Exchange Commission.
The Acquired Companies were managed prior to their acquisitions as
independent private companies. Therefore, historical selling, general and
administrative expenses for the periods presented in the condensed consolidated
statements of operations reflect compensation and related benefits those owners
received from their respective businesses prior to acquisition. Historical
selling, general and administrative expenses also include the non-recurring,
non-cash compensation charge of $11.6 million recorded by Comfort Systems in the
first quarter of 1997 related to Common Stock issued to management of and
consultants to the Company (the "Compensation Charge") prior to the IPO. The pro
forma combined adjustments reflect (a) a decrease in selling, general and
administrative expenses to exclude the Compensation Charge for the first quarter
of 1997, (b) certain reductions in salaries and benefits to the former owners of
the Acquired Companies which they agreed would take effect as of the date of
acquisition (the "Compensation Differential"), (c) pro forma combined
compensation expense of $430,000 for the six months ended June 30, 1997, to
reflect the ongoing salaries received by corporate management of the Company as
though those salaries were paid prior to the IPO, (d) amortization of goodwill
related to the Founding Companies, and (e) pro forma interest expense on
borrowings that would have been necessary to fund certain S Corporation
Distributions related to the Founding Companies, as if those distributions had
been made on January 1, 1997. In addition, an incremental tax provision has been
recorded as if all applicable Purchased and Founding Companies, and Pooled
Companies which were C Corporations had been subject to federal and state income
taxes.
Historical and pro forma interim periods results are not necessarily
indicative of future results because, among other things, the Acquired Companies
were not under common control or management prior to their
1
<PAGE>
acquisition. The Company's results of operations historically have been subject
to seasonal fluctuations. These pro forma combined statements of operations
should be read in conjunction with the additional information and the respective
financial statements and related notes of Comfort Systems and the Founding
Companies included in the Annual Report on Form 10-K as filed with the
Securities and Exchange Commission.
2
<PAGE>
COMFORT SYSTEMS USA, INC.
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Revenues ........................................................ $ 142,162 $ 294,575
Cost of services ................................................ 102,566 221,613
--------- ---------
Gross profit .................................................... 39,596 72,962
Selling, general and administrative expenses .................... 25,897 47,407
Goodwill amortization ........................................... 1,748 2,768
--------- ---------
Operating income ................................................ 11,951 22,787
Other income (expense), net ..................................... (523) (1,881)
--------- ---------
Income before taxes ............................................. 11,428 20,906
Provision for income taxes ...................................... 4,771 9,187
--------- ---------
Pro forma combined net income ................................... $ 6,657 $ 11,719
========= =========
Pro Forma Combined Net Income Per Share:
Basic ........................................................ $ .29 $ .40
========= =========
Diluted ...................................................... $ .29 $ .40
========= =========
Shares Used in Computing Pro Forma Combined Net Income Per Share:
Basic ........................................................ 22,760 29,095
========= =========
Diluted ...................................................... 22,760 29,598
========= =========
</TABLE>
This pro forma combined financial information may not be comparable to and
may not be indicative of the Company's future results of operations because
these Acquired Companies were not under common control or management prior to
their acquisition.
The accompanying note is an integral part of these pro
forma combined statements of operations.
3
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTE TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The computation of the weighted average shares outstanding for pro forma
combined net income per share for the six months ended June 30, 1997 and 1998,
is calculated as follows (in thousands):
SIX MONTHS ENDED
JUNE 30,
1997 1998
------ ------
Shares issued in connection with the acquisitions of the
Founding Companies .......................................... 9,721 9,721
Shares sold pursuant to the IPO .............................. 6,100 6,100
Shares held by Notre Capital Ventures II, L.L.C. ("Notre"),
Comfort Systems' management and consultants ................. 4,240 4,240
Shares issued in connection with the acquisitions
of the Pooled Companies ..................................... 4,507 4,507
Shares sold in connection with the underwriter's overallotment
for the IPO ................................................. -- 915
Weighted average portion of shares issued in connection with
the acquisition of the Purchased Companies .................. -- 3,586
Weighted average portion of shares sold in the
Second Public Offering ...................................... -- 26
Less: Shares sold in the IPO that were not used for the
cash portion of the acquisition of the Founding Companies ... 1,808 --
------ ------
Weighted average shares outstanding - Basic .................. 22,760 29,095
Weighted average portion of shares related to stock options
under the treasury stock method ............................. -- 503
------ ------
Weighted average shares outstanding - Diluted ................ 22,760 29,598
====== ======
4
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................... $ 14,533 $ 6,319
Accounts receivable, less allowance of $1,034 and $2,358 ........ 72,792 141,499
Other receivables ............................................... 884 1,862
Inventories ..................................................... 6,214 10,333
Prepaid expenses and other ...................................... 4,428 6,126
Costs and estimated earnings in excess of billings .............. 12,050 22,262
-------- --------
Total current assets ...................................... 110,901 188,401
PROPERTY AND EQUIPMENT, net ........................................ 12,046 19,864
GOODWILL, less accumulated amortization of $1,851 and $4,619 ....... 163,126 273,098
OTHER NONCURRENT ASSETS ............................................ 1,707 9,631
-------- --------
Total assets .............................................. $287,780 $490,994
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................ $ 869 $ 476
Accounts payable ................................................ 22,805 41,564
Accrued compensation and benefits ............................... 5,622 12,787
Billings in excess of costs and estimated earnings .............. 10,100 23,406
Income taxes payable ............................................ 4,928 4,129
Other current liabilities ....................................... 9,302 16,150
-------- --------
Total current liabilities ................................. 53,626 98,512
DEFERRED INCOME TAXES .............................................. 960 591
LONG-TERM DEBT, NET OF CURRENT MATURITIES .......................... 20,326 104,797
OTHER LONG-TERM LIABILITIES ........................................ 200 358
-------- --------
Total liabilities ......................................... 75,112 204,258
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock $.01 per 5,000,000 shares authorized, none
issued and outstanding ........................................ -- --
Common stock, $.01 par, 102,969,912 shares authorized, 26,575,669
and 31,212,226 shares issued and outstanding, respectively .... 266 312
Additional paid-in capital ...................................... 205,709 268,012
Retained earnings ............................................... 6,693 18,412
-------- --------
Total stockholders' equity ................................ 212,668 286,736
-------- --------
Total liabilities and stockholders' equity ................ $287,780 $490,994
======== ========
</TABLE>
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1998 1997 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES ........................... $ 29,111 $ 176,737 $ 55,513 $ 294,575
COST OF SERVICES ................... 20,410 132,203 40,220 221,613
-------- --------- -------- ---------
Gross profit .............. 8,701 44,534 15,293 72,962
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 6,841 26,712 26,327 47,407
GOODWILL AMORTIZATION .............. -- 1,598 -- 2,768
-------- --------- -------- ---------
Operating income (expense) 1,860 16,224 (11,034) 22,787
OTHER INCOME (EXPENSE):
Interest income .............. 97 184 182 378
Interest expense ............. (103) (1,576) (170) (2,353)
Other ........................ 7 42 (7) 94
-------- --------- -------- ---------
Other income (expense) .... 1 (1,350) 5 (1,881)
-------- --------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES .. 1,861 14,874 (11,029) 20,906
PROVISION (BENEFIT) FOR INCOME TAXES 604 6,533 (145) 9,187
-------- --------- -------- ---------
NET INCOME (LOSS) .................. $ 1,257 $ 8,341 $(10,884) $ 11,719
======== ========= ======== =========
NET INCOME (LOSS) PER SHARE:
Basic ........................ $ .14 $ .28 $ (1.24) $ .40
======== ========= ======== =========
Diluted ...................... $ .14 $ .27 $ (1.24) $ .40
======== ========= ======== =========
SHARES USED IN COMPUTING NET INCOME
(LOSS) PER SHARE:
Basic ........................ 8,747 30,258 8,747 29,095
======== ========= ======== =========
Diluted ...................... 8,747 30,842 8,747 29,598
======== ========= ======== =========
</TABLE>
Reflects a 121.1387-for-one stock split effective on March 19,1997
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
---------- ------ --------- --------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 ................. 4,628,545 $ 46 $ 96 $ 11,215 $ 11,357
Issuance of Common Stock:
Initial Public Offering ................ 7,015,000 70 79,805 -- 79,875
Acquisition of Founding Companies ...... 9,720,927 98 100,999 -- 101,097
Issuance of management shares .......... 4,118,708 41 11,556 -- 11,597
Acquisition of Purchased Companies ..... 1,092,489 11 13,253 -- 13,264
S Corporation distributions made by certain
Pooled Companies ....................... -- -- -- (1,692) (1,692)
Net loss .................................. -- -- -- (2,830) (2,830)
---------- ------ --------- --------- -------------
BALANCE AT DECEMBER 31, 1997 ................. 26,575,669 266 205,709 6,693 212,668
Issuance of Common Stock:
Second Public Offering ................. 400,000 4 7,608 -- 7,612
Acquisition of Purchased Companies ..... 4,236,557 42 54,695 -- 54,737
Net income ................................ -- -- -- 11,719 11,719
---------- ------ --------- --------- -------------
BALANCE AT JUNE 30, 1998 ..................... 31,212,226 $ 312 $ 268,012 $ 18,412 $ 286,736
========== ====== ========= ========= =============
</TABLE>
Reflects a 121.1387-for-one stock split effective on March 19, 1997
The accompanying notes are an integral part of these
condensed consolidated financial statements.
7
<PAGE>
COMFORT SYSTEMS USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $(10,884) $ 11,719
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization expense ......................... 562 5,193
Bad debt expense .............................................. 45 182
Compensation expense related to issuance of management shares . 11,556 --
Deferred tax expense (benefit) ................................ (691) (424)
Loss (gain) on sale of property and equipment ................. 7 (60)
Changes in operating assets and liabilities, net of effects of
acquisitions of Founding and Purchased Companies--
(Increase) decrease in --
Receivables, net ........................................ (3,010) (17,368)
Inventories ............................................. 111 (1,091)
Prepaid expenses and other current assets ............... 961 3,993
Cost and estimated earnings in excess of billings ....... (589) (4,092)
Other noncurrent assets ................................. (4,956) (675)
Increase (decrease) in --
Accounts payable and accrued liabilities ................ 9,470 (10,106)
Billings in excess of costs and estimated earnings ...... 444 147
Other, net .............................................. (663) 395
-------- --------
Net cash provided by (used in) operating activities .............. 2,363 (12,187)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........................... (803) (3,509)
Proceeds from sales of property and equipment ................. 58 284
Cash paid for Purchased Companies, net of cash acquired ....... -- (44,746)
-------- --------
Net cash used in investing activities ...................... (745) (47,971)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt .................................... (1,607) (35,071)
Borrowings of long-term debt .................................. 2,853 79,403
Proceeds from issuance of Common Stock ........................ 41 7,612
-------- --------
Net cash provided by financing activities ........................ $ 1,287 $ 51,944
-------- --------
NET INCREASE (DECREASE) IN CASH .................................. $ 2,905 $ (8,214)
CASH AND CASH EQUIVALENTS, beginning of year ..................... 6,141 14,533
-------- --------
CASH AND CASH EQUIVALENTS, end of year ........................... $ 9,046 $ 6,319
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
8
<PAGE>
COMFORT SYSTEMS USA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
The Company is a national provider of comprehensive HVAC installation and
maintenance, repair and replacement services. Founded in December 1996, the
Company is consolidating the fragmented commercial and industrial HVAC markets,
and performs most of its services within manufacturing plants, office buildings,
retail centers, apartment complexes, and healthcare, education and government
facilities. In addition to standard HVAC services, the Company also provides
specialized applications such as process cooling, control systems, electronic
monitoring and process piping. Certain locations also perform related services
such as electrical and plumbing.
On July 2, 1997, Comfort Systems completed the IPO and simultaneously
acquired the 12 Founding Companies. Subsequent to the IPO and through June 30,
1998, the Company has acquired 55 HVAC and complementary businesses.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
These interim statements should be read in conjunction with the historical
Consolidated Financial Statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
There were no significant changes in the accounting policies of the Company
during the periods presented. For a description of the significant accounting
policies of the Company, refer to Note 2 of Notes to Consolidated Financial
Statements of Comfort Systems included in the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
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.
The results of operations for interim periods are not necessarily indicative
of the results for the fiscal year.
CASH FLOW INFORMATION
Cash paid for interest for the six months ended June 30, 1997 and 1998 was
approximately $0.2 million and $0.1 million, respectively. Cash paid for income
taxes for the six months ended June 30, 1997 and 1998 was approximately $0.5
million and $3.6 million, respectively.
9
<PAGE>
3. BUSINESS COMBINATIONS:
POOLINGS
During the second half of 1997, the Company acquired all of the outstanding
stock of the 14 Pooled Companies in exchange for 4,507,406 shares of Common
Stock. These acquisitions have been accounted for as poolings-of-interests as
described in Note 2 of Notes to Consolidated Financial Statements of Comfort
Systems included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. These companies provide HVAC and complementary services.
There were no acquisitions for the six months ended June 30, 1998 which were
accounted for as poolings-of-interests.
PURCHASES
Simultaneous with the IPO, Comfort Systems acquired the 12 Founding Companies
for $45.3 million in cash and 9,720,927 shares of Common Stock. The Founding
Companies provide HVAC and complementary services.
Subsequent to the IPO and through December 31, 1997, Comfort Systems acquired
13 of the Purchased Companies. These companies provide HVAC and complementary
services. The aggregate consideration paid in these transactions was $14.5
million in cash, 1,092,489 shares of Common Stock valued at $13.3 million and
$5.0 million in the form of convertible subordinated notes (the "Notes"). These
Notes are convertible at various dates in the fourth quarter of 1998 or 1999 and
thereafter into 225,473 or 220,449 shares of Common Stock, respectively.
For the three months ended March 31, 1998, Comfort Systems acquired 11
additional companies, which were accounted for as purchase transactions. These
companies also provide HVAC and complementary services. The aggregate
consideration in these transactions was $16.6 million in cash, 2,220,416 shares
of Common Stock valued at $25.8 million, and $1.9 million in Notes.
Approximately $1.3 million of these Notes are convertible at various dates in
2000, 2001 and 2002 into 77,800 shares of Common Stock, respectively. The
allocation of the respective purchase prices to the assets assumed and
liabilities acquired resulted in $43.7 million of goodwill related to the
companies acquired during the first three months of 1998.
For the three months ended June 30, 1998, Comfort Systems acquired 17
additional companies, which were accounted for as purchase transactions. These
companies also provide HVAC and complementary services. The aggregate
consideration in these transactions was $36.8 million in cash, 2,016,141 shares
of Common Stock valued at $29.1 million, and $17.7 million in Notes.
Approximately all of these Notes are convertible at various dates in 1999, 2000
and 2001 into 603,430 shares of Common Stock. The allocation of the respective
purchase prices to the assets assumed and liabilities acquired resulted in $69.0
million of goodwill related to the companies acquired during the second quarter
of 1998.
The accompanying balance sheets include allocations of the respective
purchase prices to the assets acquired and liabilities assumed based on
preliminary estimates of fair value and is subject to final adjustment.
The unaudited pro forma data presented below consists of the income statement
data presented in these consolidated financial statements plus income statement
data for the Founding Companies and Purchased Companies as if those companies
had been acquired on January 1, 1997 through the respective dates of
acquisitions (in thousands, except per share data):
10
<PAGE>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1998
-------- --------
(UNAUDITED)
Revenues ....................................... $300,719 $356,886
Net income ..................................... $ 11,557 $ 10,995
Net income per share - Diluted ................. $ .40 $ .35
Shares used in computing net income - Diluted .. 28,591 31,341
Pro forma adjustments included in the preceding tables regarding the Acquired
Companies primarily relate to (a) the Compensation Differential relating to the
former owners of the Acquired Companies which they agreed would take effect as
of the acquisition date, (b) pro forma compensation expense of $430,000 for the
six months ended June 30, 1997, to reflect the ongoing salaries received by
corporate management as though those salaries were being paid prior to the IPO,
(c) amortization of goodwill related to the Purchased and Founding Companies,
(d) elimination of the non-recurring, non-cash Compensation Charge of $11.6
million recorded by Comfort Systems in the first quarter of 1997 related to
Common Stock issued to management of and consultants to the Company, (e)
interest expense on borrowings of $22.8 million that would have been necessary
to fund certain S Corporation Distributions of the Acquired Companies as if
those distributions had occurred on January 1, 1997, (f) interest expense on
borrowings of $53.3 million related to the purchase price of the Purchased
Companies acquired during the first half of 1998, and (g) interest expense
related to the subordinated convertible notes issued in connection with the
acquisition of certain Acquired Companies. In addition, an incremental tax
provision has been recorded as if all applicable Purchased and Founding
Companies, and Pooled Companies which were C Corporations had been subject to
federal and state corporate income taxes for the applicable periods presented.
The pro forma combined results presented above are not necessarily indicative
of actual results which might have occurred had the operations and management
teams of the Company and the Acquired Companies been combined at the beginning
of the periods presented.
ADDITIONAL ACQUISITIONS
Subsequent to June 30, 1998, and through August 8, 1998, the Company
completed 6 additional acquisitions (the "Additional Acquisitions") for
approximately $8.8 million in cash and 768,664 shares of Common Stock.
Annualized revenues from the businesses acquired in the Additional Acquisitions
were approximately $35 million. One of these acquisitions will be accounted for
as a pooling-of-interest and the remainder will be accounted for as purchase
transactions.
4. LONG-TERM DEBT OBLIGATIONS:
Long-term debt obligations consist of the following (in thousands):
DECEMBER 31, JUNE 30,
1997 1998
-------- --------
Revolving credit facility .................. $ 15,300 $ 78,100
Notes ...................................... 4,978 24,639
Other ...................................... 917 2,534
-------- --------
Total long-term ............................ 21,195 105,273
Less: current maturities .................. 869 476
-------- --------
$ 20,326 $104,797
======== ========
In July 1997, the Company entered into a credit agreement with Bank One,
Texas, N.A. (the "Credit Facility"). The Credit Facility was amended and
restated in September 1997 primarily to provide for additional banks to lend to
the
11
<PAGE>
Company under the Credit Facility. The Credit Facility was further amended in
April 1998 in order to increase borrowing capacity and to provide for additional
banks to lend to the Company under the Credit Facility. The Credit Facility
provides the Company with an unsecured revolving line of credit of $175 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. 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 0.75 to 1.5 percentage points. The amount of percentage points added
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. 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 facility. The Credit Facility prohibits the
payment of dividends by the Company without lender's approval and requires the
Company to comply with certain financial covenants. The Credit Facility expires
on April 14, 2001, at which time all amounts outstanding under the facility are
due.
As of June 30, 1998, the Company had borrowed $78.1 million under the Credit
Facility at an average interest rate of approximately 6.5% per annum for the
first half of 1998. As of August 8, 1998, $78.3 million was outstanding under
this facility.
Notes in the amount of $24.6 million referred to above were issued to former
owners of certain Purchased Companies as partial consideration for the
acquisition of their companies. Of these Notes, $24.0 million bear interest,
payable quarterly, at a weighted average interest rate of 6.0% and are
convertible by the holder into shares of the Company's Common Stock at a
weighted average price of $27.59 per share. The terms of these Notes require
$6.3 million of principal payments in 1999, $10.7 million of principal payments
in 2000, $6.1 million of principal payments in 2001 and $0.4 million of
principal payments in 2002 and 2003. The remaining Notes of $0.6 million are
non-interest bearing and $0.2 million of principal payments are due in 1999, and
the remainder is due in four equal installments beginning in 2000.
Other long-term debt of $2.5 million referred to above includes secured debt,
unsecured debt and capitalized lease obligations of the Company.
5. COMMITMENTS AND CONTINGENCIES:
CLAIMS AND LAWSUITS
The Company is from time to time party to litigation in the ordinary course
of business. There are currently no pending legal proceedings that, in
management's opinion, would have a material adverse effect on the Company's
operating results or financial condition. The Company maintains various
insurance coverages in order to minimize financial risk associated with certain
claims. The Company has provided accruals for probable losses and legal fees
associated with certain of these actions in the accompanying consolidated
financial statements.
6. STOCKHOLDERS' EQUITY:
COMMON STOCK AND PREFERRED STOCK
Comfort Systems effected a 121.1387-for-one stock split on March 19, 1997 for
each share of Common Stock of the Company then outstanding. In addition, the
Company increased the number of authorized shares of Common Stock to 102,969,912
and authorized 5,000,000 shares of $.01 par value preferred stock. The effects
of the Common Stock split and the increase in the number of shares of authorized
Common Stock have been retroactively reflected on the balance sheet and in the
accompanying notes as applicable.
12
<PAGE>
In connection with the organization and initial capitalization of Comfort
Systems, the Company issued 121,139 shares of Common Stock at $.01 per share to
Notre. In January 1997, the Company issued 2,848,773 additional shares to Notre
for $.01 per share.
In January and February 1997, the Company issued a total of 1,269,935 shares
of Common Stock to management of and consultants to the Company at a price of
$.01 per share. As a result, the Company recorded a non-recurring, non-cash
compensation charge of $11.6 million in the first quarter of 1997, representing
the difference between the amount paid for the shares and the estimated fair
value of the shares on the date of sale.
RESTRICTED COMMON STOCK
In March 1997, Notre exchanged 2,742,912 of its shares of Common Stock for an
equal number of shares of restricted voting common stock ("Restricted Voting
Common Stock"). The holder of Restricted Voting Common Stock is entitled to
elect one member of the Company's Board of Directors and to 0.55 of one vote for
each share on all other matters on which they are entitled to vote. Holders of
Restricted Voting Common Stock are not entitled to vote on the election of any
other directors.
Each share of Restricted Voting Common Stock will automatically convert to
Common Stock on a share-for-share basis (i) in the event of a disposition of
such share of Restricted Voting Common Stock by the holder thereof (other than a
distribution which is a distribution by a holder to its partners or beneficial
owners, or a transfer to a related party of such holders (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as amended)),
(ii) in the event any person acquires beneficial ownership of 15% or more of the
total number of outstanding shares of Common Stock of the Company, or (iii) in
the event any person offers to acquire 15% or more of the total number of
outstanding shares of Common Stock of the Company. After July 1,1998, the Board
of Directors may elect to convert any remaining shares of Restricted Voting
Common Stock into shares of Common Stock in the event 80% or more of the
originally outstanding shares of Restricted Voting Common Stock have been
previously converted into shares of Common Stock.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards 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 previously 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 has adopted SFAS No. 128
and restated EPS for all periods presented.
13
<PAGE>
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1997 1998 1997 1998
----- ------ ----- ------
<S> <C> <C>
Shares issued in connection with the acquisitions
of the Founding Companies .................... -- 9,721 -- 9,721
Shares sold pursuant to the IPO ................ -- 6,100 -- 6,100
Shares held by Notre, Comfort Systems'
management and consultants ................... 4,240 4,240 4,240 4,240
Shares issued in connection with the acquisitions
of Pooled Companies .......................... 4,507 4,507 4,507 4,507
Shares sold in connection with the underwriter's
overallotment for the IPO .................... -- 915 -- 915
Weighted average portion of shares issued in
connection with the acquisition of the
Purchased Companies .......................... -- 4,722 -- 3,586
Weighted average portion of shares sold in the
Second Public Offering ....................... -- 53 -- 26
----- ------ ----- ------
Weighted average shares outstanding - Basic .... 8,747 30,258 8,747 29,095
Weighted average portion of shares related to stock
options under the treasury stock method ...... -- 584 -- 503
----- ------ ----- ------
Weighted average shares outstanding - Diluted .. 8,747 30,842 8,747 29,598
===== ====== ===== ======
</TABLE>
7. SUBSEQUENT EVENTS:
Subsequent to June 30, 1998, and through August 8, 1998, the Company
completed 6 additional acquisitions (the "Additional Acquisitions") for
approximately $8.8 million in cash and 768,664 shares of Common Stock.
Annualized revenues from the businesses acquired in the Additional Acquisitions
were approximately $35 million. One of these acquisitions will be accounted for
as a pooling-of-interest and the remainder will be accounted for as purchase
transactions.
On July 21, 1998, the underwriters exercised their overallotment option in
connection with the Second Public Offering which was completed in June 1998. An
additional 461,479 shares of Common Stock was sold and the net proceeds of $8.8
million were used to repay debt.
14
<PAGE>
COMFORT SYSTEMS USA, 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
historical and pro forma combined financial statements of the Company and
related notes thereto included elsewhere in this Form 10-Q and the Annual Report
on Form 10-K for the year ended December 31, 1997 (the "Form 10-K"). This
discussion contains forward-looking statements regarding the business and
industry of the Company within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements are based on the current plans and
expectations of the Company and involve risks and uncertainties that could cause
actual future activities and results of operations to be materially different
from those set forth in the forward-looking statements. Important factors that
could cause actual results to differ include risks set forth in "Factors Which
May Affect Future Results," included in the Form 10-K.
The Company is a leading national provider of comprehensive HVAC
installation, as well as maintenance, repair and replacement services. Founded
in December 1996, the Company is consolidating the fragmented commercial and
industrial HVAC markets and performs most of its services within manufacturing
plants, office buildings, retail centers, apartment complexes, and healthcare,
education and government facilities. In addition to standard HVAC services, the
Company also provides specialized applications such as process cooling, control
systems, electronic monitoring and process piping. Certain locations also
perform related services such as electrical and plumbing.
On July 2, 1997, the Company completed its IPO and simultaneously acquired
the 12 Founding Companies. Subsequent to the IPO, and through December 31, 1997,
the Company acquired 27 additional HVAC and complementary businesses. Of these
additional acquisitions, 14 are the Pooled Companies and the remaining 13
acquisitions have been accounted for as purchases. The historical financial
statements of the Company have not been retroactively restated to give effect to
the operations of one of the Pooled Companies which is considered immaterial.
Subsequent to December 31, 1997 and through June 30, 1998, the Company acquired
28 additional HVAC businesses, all of which have been accounted for as
purchases.
Pro forma combined and historical results are not necessarily indicative of
future results of the Company because, among other things, the Acquired
Companies were not under common control or management prior to their
acquisition. The Company's results of operations historically have been subject
to seasonal fluctuations.
The timing and magnitude of acquisitions, assimilation costs, and the
seasonal nature of the HVAC industry may materially affect operating results.
Accordingly, the operating results for any period are not necessarily indicative
of the results that may be achieved for any subsequent period.
PRO FORMA COMBINED RESULTS OF OPERATIONS
The following unaudited pro forma combined information is presented
supplementally to reflect the pro forma results of operations as if the
acquisition of the Founding Companies occurred on January 1, 1997, as reflected
in the Company's publicly disclosed earnings announcements. Therefore, the
accompanying unaudited pro forma combined statements of operations and the
related management's discussion and analysis of the Company for the three and
six months ended June 30, 1998 and 1997, respectively, include the combined
operations of the Pooled Companies and the Founding Companies from January 1,
1997, and the Purchased Companies acquired through date of presentation from the
dates of their acquisitions. One of the Pooled Companies is considered
immaterial and has not been restated for all periods presented.
15
<PAGE>
The Acquired Companies were managed prior to their acquisitions as
independent private companies. Therefore, historical selling, general and
administrative expenses for the periods presented in the condensed consolidated
financial statements of the Company reflect compensation and related benefits
the owners of those businesses received prior to acquisition. Historical
selling, general and administrative expenses also include the Compensation
Charge recorded by the Company in the first quarter of 1997 related to Common
Stock issued to management of and consultants to the Company prior to the IPO.
The pro forma combined results of operations reflect: (i) the Compensation
Differential of the Founding and Pooled Companies which the former owners of
those companies agreed would take effect as of the date of acquisitions, (ii)
pro forma combined compensation expense of $215,000 and $430,000 for the three
months and six months ended June 30, 1997, respectively, to reflect the ongoing
salaries received by the corporate management as though those salaries were
being paid prior to the IPO, (iii) interest expense on borrowings of $11.0
million that would have been necessary to fund various S Corporation
Distributions of the Founding Companies as if they had occurred on January 1,
1997, (iv) amortization of goodwill related to the Founding Companies, and (v)
the elimination of the Compensation Charge referred to above. In addition, an
incremental tax provision has been recorded as if all applicable Purchased and
Founding Companies and the Pooled Companies that were C Corporations, had been
subject to federal and state income taxes.
PRO FORMA COMBINED (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------- ----------------------------------------
1997 1998 1997 1998
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................. $ 76,256 100.0% $ 176,737 100.0% $ 142,162 100.0% $ 294,575 100.0%
Cost of Services ......... 53,957 70.8 132,203 74.8 102,566 72.1 221,613 75.2
-------- ----- --------- ----- --------- ----- --------- -----
Gross Profit .......... 22,299 29.2 44,534 25.2 39,596 27.9 72,962 24.8
Selling, general and
administrative expenses . 13,137 17.2 26,712 15.1 25,897 18.2 47,407 16.1
Goodwill amortization .... 874 1.1 1,598 0.9 1,748 1.2 2,768 0.9
-------- ----- --------- ----- --------- ----- --------- -----
Operating income ......... 8,288 10.9 16,224 9.2 11,951 8.4 22,787 7.7
Other income (expense) .. (277) (0.4) (1,350) (0.8) (523) 0.4 (1,881) (0.6)
-------- ----- --------- ----- --------- ----- --------- -----
Income before taxes ...... 8,011 10.5 14,874 8.4 11,428 8.0 20,906 7.1
Provision for income taxes 3,351 -- 6,533 -- 4,771 -- 9,187 --
-------- ----- --------- ----- --------- ----- --------- -----
Net income ............... $ 4,660 6.1% $ 8,341 4.7% $ 6,657 4.7% $ 11,719 4.0%
======== ===== ========= ===== ========= ===== ========= =====
</TABLE>
PRO FORMA COMBINED REVENUES - Pro forma combined revenues increased $100.5
million, or 131.8%, to $176.7 million for the three months ended June 30, 1998
and increased $152.4 million, or 107.2%, to $294.6 million for the first half of
1998, compared to the same periods of the prior year. Revenues from the Founding
Companies and Pooled Companies increased approximately 14% and 16% for the three
months and six months ended June 30, 1998, respectively, primarily due to
greater demand for specialized multi-unit installation services in Texas and the
Northeast, strong general activity in the Houston, Grand Rapids and Memphis
markets and higher demand for commercial and industrial design and build
services in the Company's Tennessee-based operations. The acquisition of the
Purchased Companies acquired subsequent to the IPO through the end of the second
quarter of 1998 contributed approximately $87.0 million and $130.3 million of
revenue for the three months and six months ended June 30, 1998, respectively.
PRO FORMA COMBINED GROSS PROFIT - Pro forma combined gross profit increased
$22.2 million, or 100.0%, to $44.5 million for the three months ended June 30,
1998 and increased $33.4 million, or 84.3%, to $73.0 million for the first half
of 1998, primarily due to increased revenues at the Founding Companies, the
addition of the Purchased Companies and incremental increases at some of the
Pooled Companies. As a percentage of revenues, pro forma combined gross profit
decreased from 29.2% in the second quarter of 1997 to 25.2% in the second
quarter of 1998 and from 27.9% in the first half of 1997 to 24.8% in the first
half of 1998. These declines resulted primarily form the acquisition of the
Purchased Companies whose gross margins are lower than the Company's historical
average.
16
<PAGE>
PRO FORMA COMBINED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) Pro
forma combined SG&A, excluding goodwill amortization, increased $13.6 million,
or 103.3%, to $26.7 million for the second quarter of 1998 and increased $21.5
million or 83.1% to $47.4 million for the first half of 1998. These increases
were due principally to the addition of the Purchased Companies along with
corporate office and management expenses associated with the Company's
establishment as a public company. As a percentage of revenues, pro forma
combined SG&A, excluding goodwill amortization, decreased from 17.2% to 15.1% in
the second quarter of 1998, and from 18.2% to 16.1% in the first half of 1998,
compared to the same period of the prior year. This decrease is due to the
Company's acquisition of the Purchased Companies whose SG&A as a percentage of
revenues is lower than the Company's historical average.
PRO FORMA COMBINED OTHER INCOME (EXPENSE) - Pro forma combined other expense,
net increased to $1.4 million for the second quarter of 1998 and to $1.9 million
for the first half of 1998 primarily due to the increase in interest expense
related to the acquisition of the Purchased Companies acquired subsequent to the
IPO through the end of the second quarter of 1998.
HISTORICAL RESULTS OF OPERATIONS (IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------- ----------------------------------------
1997 1998 1997 1998
--------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $29,111 100.0% $ 176,737 100.0% $ 55,513 100.0% $ 294,575 100.0%
Cost of Services ............. 20,410 70.1 132,203 74.8 40,220 72.5 221,613 75.2
------- ----- --------- ----- -------- ----- --------- -----
Gross Profit .............. 8,701 29.9 44,534 25.2 15,293 27.5 72,962 24.8
Selling, general and
administrative expenses ..... 6,841 23.5 26,712 15.1 26,327 47.4 47,407 16.1
Goodwill amortization ........ -- -- 1,598 0.9 -- -- 2,768 0.9
Operating income (loss) ...... 1,860 6.4 16,224 9.2 (11,034) (19.9) 22,787 7.7
Other income (expense) ...... 1 -- (1,350) (0.8) 5 -- (1,881) (0.6)
------- ----- --------- ----- -------- ----- --------- -----
Income (loss) before taxes ... 1,861 6.4 14,874 8.4 (11,029) (19.9) 20,906 7.1
Provision (benefit) for income
taxes ....................... 604 -- 6,533 -- (145) -- 9,187 --
------- ----- --------- ----- -------- ----- --------- -----
Net income (loss) ............ $ 1,257 4.3% $ 8,341 4.7% $(10,884) (19.6)% $ 11,719 4.0%
======= ===== ========= ===== ======== ===== ========= =====
</TABLE>
REVENUES - Revenues increased $147.6 million, or 507.1%, to $176.7 million
for the three months ended June 30, 1998 and increased $239.1 million, or
430.6%, to $294.6 million for the first half of 1998, compared to the same
periods of the prior year. The increase in revenues was primarily due to the
acquisition of the Founding Companies and Purchased Companies.
GROSS PROFIT - Gross profit increased $35.8 million, or 411.8%, to $44.5 for
the three months ended June 30, 1998 and increased $57.7 million, or 377.1%, to
$73.0 million for the first six months of 1998, compared to the same periods of
the prior year. The increase in gross profit was primarily due to the
acquisitions described above. As a percentage of revenues, gross profit
decreased from 29.9% in the second quarter of 1997 to 25.2% in the second
quarter of 1998 and from 27.5% in the first half of 1997 to 24.8% in the first
half of 1998. These declines resulted primarily form the acquisition of the
Purchased Companies whose gross margins are lower than the Company's historical
average.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - SG&A, excluding goodwill
amortization, for the three months and six months ended June 30, 1997 includes
$1.2 million and $4.2 million, respectively, of Compensation Differential which
will be eliminated prospectively. Additionally, the Company recorded the
non-recurring, non-cash Compensation Charge of $11.6 million in the first
quarter of 1997. Excluding the Compensation Differential, the Compensation
Charge, and goodwill amortization, SG&A increased $21.1 million, to $26.7
million for the three months ended June 30, 1998 and increased $36.8 million to
$47.4 million for the six months ended June 30, 1998. Most of this increase was
related to the Founding
17
<PAGE>
Companies and Purchased Companies acquired since the IPO along with corporate
office and management expenses associated with the Company's establishment as a
public company.
OTHER INCOME (EXPENSE) - Other expense, net increased to $1.4 million and
$1.9 million for the three months and six months ended June 30, 1998 primarily
due to the increase in interest expense related to the acquisition of the
Purchased Companies.
LIQUIDITY AND CAPITAL RESOURCES - HISTORICAL
For the six months ended June 30, 1998, net cash used in operating activities
was $12.2 million due to a decrease in accounts payable and accrued liabilities
of $10.1 million and an increase in accounts receivables of $17.4 million.
Accounts payable balances decreased from the date of acquisition at various
locations as certain companies took advantage of the consolidated cash
management system to receive cash discounts for early payments.
Cash used in investing activities was $48.0 million for the six months ended
June 30, 1998, primarily in connection with the acquisition of the Acquired
Companies for $44.7 million, net of cash acquired. The remainder of cash used in
the investing activities was for additions to equipment.
Cash provided by financing activities for the six months ended June 30, 1998
was $51.9 million and was primarily attributable to the net borrowings of
long-term debt.
At June 30, 1998, working capital was $89.9 million and total debt
outstanding was $105.3 million.
Subsequent to June 30, 1998, and through August 8, 1998, the Company
completed the acquisition of 6 companies for approximately $8.8 million in cash
and 768,664 shares of Common Stock. One of these acquisitions will be accounted
for as a pooling-of-interests and the remainder will be accounted for as
purchase transactions.
In July 1997, the Company entered into the Credit Facility with Bank One,
Texas, N.A. which was amended and restated in September 1997 primarily to
provide for additional banks to lend to the Company. The Credit Facility was
further amended in April 1998 to increase borrowing capacity and to provide for
additional banks to lend to the Company. The Credit Facility provides the
Company with an unsecured revolving line of credit of $175 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. Under the other interest rate option, borrowings bear interest based on
designated short-term Eurodollar rates (which generally approximate LIBOR) plus
0.75 to 1.5 percentage points. The amount of percentage points added depends on
the ratio of the Company's debt to EBITDA for the preceding twelve months. For
purposes of this ratio, EBITDA may include the preceding twelve months' results
for any companies acquired during the last year. In addition, commitment fees of
0.125% to 0.325% per annum, also depending on the ratio of debt to EBITDA, are
payable on the unused portion of the Credit Facility. The Credit Facility
prohibits the payment of dividends by the Company without lender's approval and
requires the Company to comply with certain financial covenants. The Credit
Facility expires on April 14, 2001, at which time, all amounts outstanding under
the facility are due. As of June 30, 1998, $78.1 million was outstanding under
the Credit Facility. As of August 8, 1998, $78.3 million was outstanding under
the Credit Facility.
The Company intends to pursue additional acquisition opportunities, the cash
portion of which will be financed with borrowings under the Credit Facility as
well as cash flow from operations. The Company anticipates that 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.
Should the Company accelerate or revise its acquisition program, the Company may
need to seek financing in addition to the Credit Facility through the public or
private sale of equity or debt securities. There can be no
18
<PAGE>
assurance that the Company can secure financing if and when needed, or that such
financing will be available on terms the Company deems acceptable.
YEAR 2000
The Company is currently implementing a Year 2000 program to ensure that the
Company's computer systems and applications will function properly beyond 1999.
The Company expects its Year 2000 date conversion program will be successfully
completed on a timely basis. There can, however, be no assurance that this will
be the case. The Company does not expect to incur significant expenditures to
address this issue. The ability of third parties with whom the Company transacts
business to address adequately their Year 2000 issues is outside of the
Company's control. There can be no assurance that the failure of the Company or
such third parties to address adequately their respective Year 2000 issues will
not have a material adverse effect on the Company's financial condition or
results of operations.
SEASONALITY AND CYCLICALITY
The HVAC industry is subject to seasonal variations. Specifically, the demand
for new installation and replacement is generally lower during the winter months
due to reduced construction activity 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 calendar 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 calendar 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.
19
<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
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders in Houston, Texas on May
21, 1998. The following sets forth matters submitted to a vote of the
stockholders:
(a)The following individuals were elected to the Board of Directors as stated
in the company's Proxy Statement dated April 27, 1998, for terms expiring at
the 2001 annual stockholders' meeting or until their successors have been
elected and qualified - Class I Directors: Fred M. Ferreira, Brian S. Atlas,
Robert R. Cook, Charles W. Klapperich and John Mercadante, Jr.
Every Director was elected by more than a majority of the outstanding shares
of Common Stock of the Company. Mr. Ferreira had 23,356,901 shares voted in
favor, with 26,642 shares withheld, and the remaining directors had
23,379,023 shares voted in favor, with 5,520 shares withheld.
(b)The stockholders approved the 1998 Employee Stock Purchase Plan by a vote of
22,899,146 shares, being more than a majority of the outstanding shares of
Common Stock of the Company, with 301,050 shares voted against and 184,347
shares abstaining.
(c)The stockholders approved an amendment to the Company's Second Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of Common Stock of the Company from 50,000,000 to 100,000,000 by a
vote of 22,669,172 shares, being more than a majority of the outstanding
shares of Common Stock of the Company, with 638,201 shares voted against and
77,170 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule. (Filed herewith)
(b) Reports on Form 8-K
None.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<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 PRESIDENT AND
CHIEF FINANCIAL OFFICER
Dated: August 13, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q SIX MONTHS ENDED JUNE 30,1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,319
<SECURITIES> 0
<RECEIVABLES> 143,857
<ALLOWANCES> 2,358
<INVENTORY> 10,333
<CURRENT-ASSETS> 188,401
<PP&E> 53,568
<DEPRECIATION> (33,704)
<TOTAL-ASSETS> 490,994
<CURRENT-LIABILITIES> 98,512
<BONDS> 104,797
0
0
<COMMON> 312
<OTHER-SE> 286,424
<TOTAL-LIABILITY-AND-EQUITY> 490,994
<SALES> 294,575
<TOTAL-REVENUES> 294,575
<CGS> 221,613
<TOTAL-COSTS> 221,613
<OTHER-EXPENSES> 49,993
<LOSS-PROVISION> 182
<INTEREST-EXPENSE> 1,975
<INCOME-PRETAX> 20,906
<INCOME-TAX> 9,187
<INCOME-CONTINUING> 11,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,719
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
