AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1996
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
1711
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
DELAWARE 76-0484996
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION
OR ORGANIZATION)
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN D. HELD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
AMERICAN RESIDENTIAL SERVICES, INC.
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C> <C>
Common Stock, par value $.001
per share(2)............................. 5,000,000 shares $22.875 $114,375,000 $34,660
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c), the offering price and registration fee are
computed on the basis of the average of the high and low prices of the
Common Stock on December 18, 1996, as reported on The New York Stock
Exchange, Inc. Composite Transactions Reporting System.
(2) Includes the associated rights to purchase preferred stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
PROSPECTUS
5,000,000 SHARES
[LOGO] -- ARS
COMMON STOCK
------------------------
American Residential Services, Inc. ("ARS"and, collectively with its
subsidiaries, the "Company") may offer and issue the shares of its common
stock, $.001 par value per share (the "Common Stock"), covered by this
Prospectus in business combination transactions involving its acquisition,
directly or indirectly, of businesses or other operating assets. It anticipates
these acquisitions will consist principally of businesses that provide (i)
maintenance, repair and replacement services for heating, ventilating and air
conditioning ("HVAC") systems, including indoor air quality services, and
plumbing, electrical and other systems primarily in homes and small commercial
buildings and (ii) new installation services of those systems in homes and small
commercial facilities under construction. ARS expects that (i) the terms of
these acquisitions will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and (ii) the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of the shares. It does not expect to pay any
underwriting discounts or commissions, but may pay finder's fees from time to
time with respect to specific acquisitions. Any person receiving any such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). ARS will pay all expenses of this
offering.
As of December 20, 1996, 10,370,865 shares of Common Stock were issued and
outstanding, of which 4,830,000 are registered and available for unrestricted
trading in the public markets unless owned by affiliates of the Company. The
Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "ARS." Application will be made to list the shares of Common Stock
offered hereby on the NYSE. On December 20, 1996, the last reported sales price
of the Common Stock on the NYSE was $25.50 per share.
Persons receiving shares of the Common Stock offered hereby may be
contractually required to hold some portions of those shares for periods of up
to two years.
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESEN TATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE>
ADDITIONAL INFORMATION
ARS is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). These reports, proxy statements and other information,
once filed, may be inspected, without charge, at the public reference facilities
of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and its regional offices at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of all or any portion
of these documents can be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains an Internet web site
that contains such reports, proxy statements and other information regarding
issuers (including ARS) filed electronically with the SEC. The address of that
site is http://www.sec.gov.
ARS has filed a Registration Statement on Form S-4 under the Securities Act
with the SEC with respect to this offering. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, or the exhibits and schedules thereto, in accordance
with the rules and regulations of the SEC, and reference hereby is made to that
omitted information. The statements made in this Prospectus concerning documents
filed as exhibits to the Registration Statement accurately describe the material
provisions of those documents and are qualified in their entirety by reference
to those exhibits for complete statements of their provisions. The Registration
Statement and the exhibits and schedules thereto may be inspected and copied at
the principal office of the SEC in Washington, D.C., as described above, and are
also available at the SEC's Internet web site described above.
The Common Stock is listed on the NYSE. Proxy statements, reports and other
information concerning the Company that are filed under the Exchange Act can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 9
Price Range of Common Stock.......... 10
Dividend Policy...................... 10
Capitalization....................... 11
Selected Financial Information....... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 13
Business............................. 25
Management........................... 35
Certain Transactions................. 39
Security Ownership of Certain
Beneficial Owners and Management... 41
Shares Eligible for Future Sale...... 42
Description of Capital Stock......... 43
Plan of Distribution................. 48
Legal Matters........................ 48
Experts.............................. 48
Index to Financial Statements........ F-1
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offer contained herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company. This Prospectus does not constitute an offer of any securities other
than those to which it relates or an offer to sell, or a solicitation of an
offer to buy, in any state to any person to whom it is not lawful to make such
offer in such state. The delivery of this Prospectus at any time does not imply
that the information herein is correct as of any time subsequent to its date.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION RESPECTING
THE COMPANY'S OPERATIONS GIVES EFFECT TO THE COMPANY'S ACQUISITIONS COMPLETED TO
DATE.
THE COMPANY
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for heating, ventilating and air
conditioning ("HVAC"), plumbing, electrical and indoor air quality systems and
major home appliances for residential customers. ARS was founded in October 1995
to create the leading national provider of these services, primarily in homes
and small commercial buildings, including those under construction
(collectively, "residential services"). To achieve this goal, the Company has
embarked on an aggressive acquisition program and is implementing a national
operating strategy designed to increase internal growth and capitalize on cost
efficiencies. On September 27, 1996, ARS acquired seven residential services
businesses (together with the common parent of two of those businesses, the
"Founding Companies") in separate transactions (the "Initial Acquisitions")
simultaneously with the closing of ARS's initial public offering of Common Stock
(the "IPO"). See "The Company -- Founding Companies." During the fourth quarter
of 1996, the Company acquired an additional 13 residential services businesses
(together with the Founding Companies, the "Acquired Businesses"). See "The
Company -- Recent Acquisitions."
The Company believes, on the basis of information provided by its
operational management and available industry data, the HVAC, plumbing and
electrical industries in the United States represent an annual market in excess
of $40 billion, of which maintenance, repair and replacement services account
for in excess of $25 billion. It believes this market is served by over 50,000
companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It also believes the majority of owners in its industry have limited
access to adequate capital for modernization, training and expansion and limited
opportunities for liquidity in their businesses.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service technicians and providing a full complement of
high-quality residential services in an industry that has been characterized by
inconsistent quality, reliability and pricing. It also believes the highly
fragmented nature of the residential services industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to achieve its goal of becoming the leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a national operating
strategy that enhances internal revenue growth and profitability and achieves
cost efficiencies.
GROWTH THROUGH ACQUISITION. The Company has implemented an aggressive
acquisition program targeting large metropolitan and high-growth suburban areas
with attractive residential demographics. The Company's acquisition strategy
involves entering new geographic markets and expanding within existing markets.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential services and having the
critical mass necessary to be a core business with which other
residential service operations can be consolidated. An important
criterion for these acquisition candidates is superior operational
management personnel, whom the Company generally seeks to retain.
3
<PAGE>
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and the range of services it offers in that market. The
Company also will pursue "tuck-in" acquisitions of smaller
residential services companies whose operations can be incorporated
into the Company's existing operations without a significant increase
in infrastructure.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The Company has
implemented a national operating strategy employing "best practices" designed
to increase internal growth and profitability through enhanced operations and
the achievement of cost efficiencies.
o INTERNAL GROWTH. The Company reviews its operations at the local and
regional operating levels in order to identify certain "best
practices" that will be implemented throughout its operations. For
example, the Company intends to provide 24-hour emergency service at
each of its locations and to monitor service call quality by
attempting to contact each of its service customers promptly following
a service call. In addition, the Company is developing a national
training program to improve and keep current the technical, selling
and customer relations skills of its service technicians. The Company
also intends to use specialized computer technology at each of its
locations to improve communications, vehicle dispatch and service
quality and responsiveness. Management believes these practices will
enable the Company to provide superior customer service and maximize
sales opportunities. This service-oriented strategy also will allow
the Company to reinforce its brand images at the local level while
fostering its efforts to develop a national brand name.
o COST EFFICIENCIES. The Company believes it should be able to reduce
the total operating expenses of acquired businesses by eliminating
duplicative administrative functions in tuck-in acquisitions and
consolidating certain functions performed separately by each business
prior to its acquisition. In addition, the Company believes that, as a
large, national residential services company, it should experience
reduced costs (as a percentage of revenues) compared to those of
individual acquired businesses in such areas as: the purchase of HVAC
and other equipment for resale, service vehicles, parts and tools;
vehicle and equipment maintenance; financing arrangements; employee
benefits; and insurance and bonding.
------------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
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4
<PAGE>
SUMMARY UNAUDITED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
For financial reporting purposes, Atlas Services, Inc., one of the Founding
Companies, is presented as the acquiror in all the acquisitions by ARS and the
effective date of the Initial Acquisitions is September 30, 1996. Consequently,
the Company's historical financial statements for periods ended on or before
September 30, 1996 are the consolidated historical financial statements of
Atlas, and the Company's consolidated historical balance sheet as of September
30, 1996 is the consolidated historical balance sheet of Atlas, as adjusted to
give effect to the consummation of the Initial Acquisitions in accordance with
the purchase method of accounting and the closing of the IPO and the application
of its proceeds by the Company. As used in this discussion, the "Company" means
(i) Atlas prior to September 30, 1996 and (ii) ARS and its consolidated
subsidiaries on that date and thereafter. See "Selected Financial Information"
and the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
STATEMENTS OF OPERATIONS DATA
(PRO FORMA COMBINED(1)):
Revenues........................ $184,774 $ 160,570
Gross profit.................... 51,734 45,559
Selling, general and
administrative expenses(2)..... 38,080 33,237
Goodwill amortization(3)........ 2,945 2,208
Operating income................ 10,709 10,114
Interest income and other
expense, net................... 798 704
Interest expense(4)............. (3,279) (2,460)
Income from continuing
operations..................... $ 4,058 $ 4,377
============ =============
Income per share from continuing
operations..................... $ .39 $ .42
============ =============
Shares used in computing pro
forma income per share from
continuing operations(4)....... 10,371 10,371
============ =============
SEPTEMBER 30, 1996
-------------------------
PRO FORMA
HISTORICAL COMBINED(1)
--------- ------------
BALANCE SHEET DATA:
Working capital................. $ 4,373 $ 13,299
Total assets.................... 98,729 178,154
Total debt, including current
portion........................ 7,904 44,018
Stockholders' equity............ 71,094 106,605
- ------------
(1) The pro forma combined statements of operations data assume the acquisition
of each of the Acquired Businesses and the IPO were closed on January 1 of
each period presented, while the pro forma combined balance sheet data
assume the following events that occurred in the fourth quarter of 1996
occurred on September 30, 1996: (i) the issuance and sale of Common Stock
pursuant to the exercise of the underwriters' overallotment option in
connection with the IPO and the exercise of a warrant; (ii) the payment of
additional working capital adjustments in connection with the Initial
Acquisitions; and (iii) the acquisition of 13 Acquired Businesses in the
fourth quarter of 1996 and the financing and payment of the related purchase
prices. The pro forma combined financial statement data presented (i) are
not necessarily indicative of the results the Company would have obtained
had these events actually occurred when assumed or of the Company's future
results, (ii) are based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate and (iii)
should be read in conjunction with the other historical and pro forma
financial statements and notes thereto included elsewhere herein.
(2) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain
non-recurring expenses.
(3) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(4) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED COMBINED OPERATING HISTORY
ARS, incorporated in Delaware in October 1995, conducted no operations
prior to the closing of the IPO on September 27, 1996 other than in connection
with the IPO and the Initial Acquisitions. The Acquired Businesses operated as
separate, independent businesses prior to their acquisition by the Company, and
the Company used the purchase method of accounting to record the acquisitions.
Consequently, the historical financial information herein may not be indicative
of the Company's future operating results and financial condition. The success
of the Company will depend, in part, on the extent to which the Company is able
to centralize its accounting and other administrative functions, eliminate the
unnecessary duplication of other functions and otherwise integrate the Acquired
Businesses and such additional businesses as it may acquire in the future into a
cohesive, efficient enterprise. No assurance can be given the Company's
management group will be able to manage effectively the combined entity or
completely implement the Company's acquisition or national operating strategy.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring residential services
businesses that maintain, repair, replace and install HVAC, plumbing, electrical
and other systems and equipment in homes and small commercial buildings in its
existing and in new markets. Its acquisition strategy presents risks that,
singly or in any combination, could materially adversely affect the Company's
business and financial performance. These risks include the possibility of the
adverse effect on existing operations of the Company from the diversion of
management attention and resources to acquisitions, the possible loss of
acquired customer bases and key personnel, including service technicians, and
the contingent and latent risks associated with the past operations of and other
unanticipated problems arising in the acquired businesses. The success of the
Company's acquisition strategy will depend on the extent to which it is able to
acquire, successfully absorb and profitably manage additional businesses, and no
assurance can be given the Company's strategy will succeed. In this connection,
competition for acquisition candidates could cause the cost of acquiring
businesses to increase materially. See "Business -- Business Strategy."
NEED FOR ADDITIONAL FINANCING
The Company currently intends to use shares of its Common Stock, including
the shares covered by this Prospectus, in making future acquisitions. The extent
to which the Company will be able or willing to use the Common Stock for this
purpose will depend on its market value from time to time and the willingness of
potential sellers to accept it as full or partial payment. To the extent the
Company is unable to use its Common Stock to make future acquisitions, its
ability to grow may be limited by the extent to which it is able to raise
capital for this purpose, as well as to expand existing operations, through debt
or additional equity financings. The Company has a $55 million bank credit
facility (the "Credit Facility"), underwritten by NationsBank of Texas, N.A.
("NationsBank"), which may be used for acquisitions, working capital and other
corporate purposes. At January , 1997, outstanding borrowings under the Credit
Facility totaled $ million. No assurance can be given the Company will be able
to obtain the capital it will need to finance a successful acquisition program
and its other cash needs in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Consolidated."
6
<PAGE>
DEPENDENCE ON HOUSING STARTS
The extent to which the Company is able to maintain or increase revenues
from new installation services for homebuilders will depend on the levels of
housing starts from time to time in the markets in which it operates and likely
will reflect the cyclical nature of the homebuilding industry. That industry is
affected significantly by changes in general and local economic conditions, such
as employment and income levels, the availability and cost of financing for home
buyers, consumer confidence and housing demand. Unless the Company is able
through implementation of its growth strategy to continue to reduce the relative
importance of new installation services to its overall operating results,
downturns in the levels of housing starts could have a material adverse effect
on its results of operations.
FACTORS AFFECTING INTERNAL GROWTH
The factors affecting the Company's ability to generate internal growth
will include the extent to which it is able to expand the range of services
offered to customers, increase existing customer bases through the development
and implementation of cost-effective advertising and other marketing programs
and reduce operating and overhead costs of acquired businesses. Factors
affecting the ability of the Company to expand services will include the extent
to which it is able to attract and retain qualified operational management and
service and installation technicians in new areas of operation and leverage its
relationships with existing customers to provide them services they currently
obtain from others.
COMPETITION
The markets for the residential services the Company provides are highly
competitive and are served principally by small, owner-operated private
companies. Certain of these smaller competitors may have lower overhead cost
structures and, consequently, may be able to provide their services at lower
rates than the Company. The Company believes the residential services industry
is subject to rapid consolidation on both a national and a regional scale. The
Company believes three other public companies currently are focused on providing
residential services in some of the service lines provided by the Company. Other
companies, including unregulated affiliates of electric and gas public
utilities, which have objectives the same as or similar to the Company's
objectives, may enter the industry. These entrants may have greater financial
resources than the Company to finance acquisition and internal growth
opportunities and might be willing to pay higher prices than the Company for the
same opportunities. Consequently, the Company may encounter significant
competition in its efforts to achieve its growth objectives. See "Business --
Competition."
SEASONALITY
The Company's installation, maintenance, repair and replacement operations
are subject to different seasonal variations in the different lines of service.
Except in certain areas of the southern United States, the demand for new
installations can be substantially lower during the winter months. Demand for
HVAC services is generally higher in the second and third quarters. Accordingly,
the Company expects its revenues and operating results generally will be lower
in its first and fourth quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management of its principal operating subsidiaries, and
the Company likely will depend on the senior management of any significant
businesses it acquires in the future. The business or prospects of the Company
could be affected adversely if any of these persons does not continue in his or
her management role after joining the Company and the Company is unable to
attract and retain qualified replacements. The success of the Company's growth
strategy, as well as the Company's current operations, will depend on the extent
to which the Company is able to retain, recruit and train qualified service and
installation technicians who meet the Company's standards of conduct and service
to its customers. See "Business -- Hiring, Training and Safety."
7
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of December 20, 1996, 10,370,865 shares of Common Stock were
outstanding. The 4,830,000 shares sold in the IPO (other than shares held by
affiliates of the Company) are freely tradable. The remaining shares outstanding
may be resold publicly only following their effective registration under the
Securities Act or pursuant to an available exemption (such as provided by Rule
144 following a holding period for unregistered shares) from the registration
requirements of that act. The holders of 2,805,053 of those unregistered shares
have certain rights to have their shares registered in the future under the
Securities Act (see "Shares Eligible for Future Sale"), but may not exercise
such registration rights, and have agreed with ARS that, except for limited
private transfers, they will not sell, transfer or otherwise dispose of any of
their shares during the two-year period ending September 27, 1998 (or during
such shorter period as the SEC may prescribe as the holding period for
restricted securities under Rule 144). Sales made pursuant to Rule 144 must
comply with its applicable volume limitations and other requirements. The
holders of substantially all the remaining unregistered shares also have certain
rights to have their shares registered in the future under the Securities Act,
and those holders have agreed with ARS that, except for limited private
transfers, they will not sell, transfer or otherwise dispose of any of their
shares until they have held them for at least two years.
As of December 20, 1996, options to purchase up to 1,504,500 unissued
shares, and a warrant to purchase up to 100,000 unissued shares, of Common Stock
from ARS were outstanding, of which only the warrant is currently exercisable.
The exercise prices of these securities range from $8.00 to $23.50 per share.
See "Management -- Option Grants."
The shares of Common Stock covered hereby will, when issued, generally be
freely tradable unless their resale is contractually restricted or unless they
are held by parties to the acquisition or affiliates thereof, in which case they
may be sold pursuant to Rule 145 under the Securities Act. The Company currently
expects persons acquiring shares of Common Stock in this offering to agree to
hold a portion of those shares for periods of up to two years after the date of
acquisition.
The effect, if any, the availability for sale, or sale, of the shares of
Common Stock eligible for future sale will have on the market price of the
Common Stock prevailing from time to time is unpredictable, and no assurance can
be given the effect will not be adverse.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock markets experience significant price and volume
volatility from time to time, which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
The Restated Certificate of Incorporation of ARS authorizes its Board of
Directors to issue, without stockholder approval, one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions and voting rights) as the Board of
Directors may determine. See "Description of Capital Stock -- Preferred
Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS
ARS has a stockholder rights plan in effect. This plan and provisions of
the Restated Certificate of Incorporation and Bylaws of ARS and the Delaware
General Corporation Law (the "DGCL") (under which ARS is organized) may have
the effect of delaying, discouraging, inhibiting, preventing or rendering more
difficult an attempt to obtain control of the Company by means of a tender
offer, business combination, proxy contest or otherwise. These provisions
include the charter authorization of "blank check" preferred stock and
classification of the Board of Directors, a Bylaw restriction on the ability of
8
<PAGE>
stockholders to take actions by written consent and a DGCL provision imposing
restrictions on business combinations with certain interested parties. See
"Description of Capital Stock."
THE COMPANY
ARS. The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and
indoor air quality systems and major home appliances for residential customers.
ARS was founded in October 1995 to create the leading national provider of
residential services through the implementation of both an aggressive
acquisition program and a national operating strategy. Concurrently with the
closing of the IPO, ARS acquired the seven Founding Companies in the
transactions described in "Certain Transactions -- Organization of the
Company." ARS is a Delaware corporation. Its executive offices are located at
Post Oak Tower, Suite 725, 5051 Westheimer, Houston, Texas 77056-5604, and its
telephone number at that address is (713) 599-0100.
THE FOUNDING COMPANIES. The Founding Companies are General Heating & Air
Conditioning Company, Inc. ("General Heating"), Atlas Services, Inc.
("Atlas"), Service Enterprises, Inc., which does business as "Crown
Services"("Crown"), Florida Heating & Air Conditioning, Inc. (together with
its affiliated companies, "Florida HAC"), Meridian & Hoosier Heating and Air
Conditioning Company ("Meridian & Hoosier"), ADCOT, Inc., which does business
as "A-ABC Appliance"("A-ABC"), and Climatic Corporation of Vero Beach
("Climatic"). The Founding Companies have been in business an average of 31
years and provide various residential services in and around Houston (Crown and
A-ABC), the Washington-Baltimore metropolitan area and Richmond, Virginia
(General Heating), throughout South Carolina (Atlas), southeast Florida (Florida
HAC and Climatic) and central Indiana (primarily Indianapolis) (Meridian &
Hoosier).
General Heating is a leading installer of HVAC systems and equipment for
residential and light commercial construction markets in its region. It also
provides comprehensive HVAC maintenance, repair and replacement services to
those markets. Atlas is a leading provider of electric, HVAC and plumbing
installation services to residential and light commercial construction markets
throughout South Carolina. It also provides comprehensive plumbing, HVAC and
electrical maintenance, repair and replacement services. Crown is the largest
single provider of residential plumbing, HVAC and electrical maintenance, repair
and replacement services to the residential and light commercial markets in the
Houston metropolitan area, while A-ABC is among the leading providers of home
appliance, HVAC and plumbing maintenance, repair and replacement services to the
residential and light commercial markets in the greater Houston and surrounding
areas. Neither Crown nor A-ABC provides new installation services. Florida HAC
is a leading installer of HVAC systems and equipment for the residential
construction market, and a leading provider of HVAC maintenance, repair and
replacement services to the residential and light commercial markets, in
southeast Florida, including Broward, Dade and Palm Beach Counties, while
Climatic is a provider of HVAC maintenance, repair and replacement services
(including internal air quality ("IAQ") services) to the residential and light
commercial markets in the four-county area in Florida known as the Treasure
Coast region (Indian River, St. Lucie, Martin and Palm Beach Counties). Climatic
also installs HVAC systems and equipment for the residential and light
commercial construction markets. Meridian & Hoosier is a leading provider of
HVAC maintenance, repair and replacement services to the residential and light
commercial markets, and also installs HVAC systems and equipment for the
residential construction market, in central Indiana, including Indianapolis.
Meridian & Hoosier is the only Founding Company that currently maintains,
repairs and replaces commercial heating and air conditioning units in large
commercial facilities.
RECENT ACQUISITIONS. During the fourth quarter of 1996, the Company
acquired an additional 13 residential service businesses for a total
consideration of $41.6 million in cash and short-term notes and 1,282,910 shares
of Common Stock. The companies acquired included Metro Heating and Air
Conditioning, Inc. ("Metro") and Sasso Air Conditioning, Inc. ("Sasso").
Metro is the leading provider of HVAC installation, maintenance, repair and
replacement services in the Raleigh/Durham, North Carolina area,
9
<PAGE>
while Sasso provides these services in the West Palm Beach, Florida area and
represents a major addition to the Company's Florida operations. The acquisition
of a plumbing maintenance and repair business in Ft. Lauderdale and an HVAC
maintenance, repair and installation business in Miami also have added to these
operations. The Company has expanded its Indiana operations to include a
provider of HVAC and plumbing installation, maintenance, repair and replacement
services, an additional provider of HVAC installation, maintenance, repair and
replacement and services and a plumbing company in Indianapolis and a provider
of residential and light commercial HVAC, electrical and plumbing maintenance,
repair, replacement and installation services in Fort Wayne. It has expanded its
Houston operations with two additional providers of HVAC maintenance, repair and
replacement services and entered the Chicago area through its acquisition of a
provider of residential and light commercial HVAC maintenance, repair and
replacement services. Atlas has expanded its HVAC services with a tuck-in
acquisition, and the Company has expanded its Washington-Baltimore metropolitan
area HVAC installation, maintenance, repair and replacement services through the
addition of a Virginia-based business.
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sale prices for
the Common Stock on the NYSE (as reported on the Composite Transactions
Reporting System) for the periods indicated:
HIGH LOW
--------- ---------
Year ending December 31, 1996:
3rd quarter (September 25 to
September 30).................. $ 19.625 $ 16.500
4th quarter (through December
20)............................ 26.000 16.625
As of December 20, 1996 there were approximately 100 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar for
the Common Stock. The number of record holders does not bear any relationship to
the number of beneficial owners of the Common Stock.
DIVIDEND POLICY
ARS has not paid or declared any dividends since the completion of the IPO
and currently intends to retain earnings to finance the expansion of its
business. Any future dividends will be at the discretion of the Board of
Directors after taking into account various factors, including, among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs and expansion plans, the income
tax laws then in effect, the requirements of Delaware law, the restrictions
imposed by the Credit Facility and any restrictions that may be imposed by the
Company's future credit facilities or debt instruments. The Credit Facility
prohibits the payment of dividends (except for dividends payable in Common Stock
and certain preferred stock). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
10
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization as of September 30, 1996 of (i) the Company on an
historical basis and (ii) the Company on a pro forma basis as adjusted to give
effect to (a) the issuance and sale of Common Stock pursuant to the exercise of
the underwriters' overallotment option in connection with the IPO, (b) the
acquisition of 13 Acquired Businesses in the fourth quarter of 1996 and the
financing and payment of the related purchase prices, (c) the issuance of Common
Stock as part of consideration in those acquisitions and on the exercise of a
warrant and (d) the incurrence of debt in the fourth quarter of 1996. This table
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
SEPTEMBER 30, 1996
------------------------
PRO FORMA
HISTORICAL COMBINED
---------- ---------
(IN THOUSANDS)
Current maturities of long-term
obligations........................ $ 295 $ 295
========== =========
Long-term obligations, less current
maturities......................... 7,609 43,723
Stockholders' equity:
Preferred Stock: $0.001 par
value, 10,000,000 shares
authorized; none issued or
outstanding....................
Common Stock: $0.001 par value,
50,000,000 shares authorized;
8,449,622 shares issued and
outstanding; and 10,370,865
shares issued and outstanding,
pro forma(1)................... 8 10
Additional paid-in capital...... 81,579 118,622
Retained deficit................ (10,493) (12,027)
---------- ---------
Total stockholders'
equity.................. 71,094 106,605
---------- ---------
Total
capitalization..... $ 78,703 $ 150,328
========== =========
- ------------
(1) Excludes (i) an aggregate of 1,504,500 shares of Common Stock subject to
options outstanding under the Company's 1996 Incentive Plan, and (ii) a
warrant to purchase up to 100,000 shares of Common Stock at a purchase price
of $15.00 per share, issued by ARS in connection with the Company's start-up
funding. See "Management -- Option Grants," "Certain
Transactions -- Organization of the Company."
11
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS, with September 30, 1996 as the effective date of the
Initial Acquisitions. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas, and the Company's
consolidated historical balance sheet as of September 30, 1996 is the
consolidated historical balance sheet of Atlas, as adjusted to give effect to
the consummation of the Initial Acquisitions in accordance with the purchase
method of accounting and the closing of the IPO and the application of its
proceeds by the Company. As used in this discussion, the "Company" means (i)
Atlas prior to September 30, 1996 and (ii) ARS and its consolidated subsidiaries
on that date and thereafter. The following selected historical financial
information of Atlas as of June 30, 1994 and 1995 and December 31, 1995, for
each year in the three-year period ended June 30, 1995 and for the year ended
December 31, 1995 has been derived from the audited financial statements of
Atlas included elsewhere herein. The remaining following selected historical
financial information of Atlas has been derived from unaudited financial
statements of Atlas, which have been prepared on the same basis as the audited
financial statements and, in the opinion of Atlas, reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
that information.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPT. 30
----------------------------------------------------- DECEMBER 31, ---------
1991 1992 1993 1994 1995 1995 1995
--------- --------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues.............................. $ 6,037 $ 7,865 $ 10,210 $ 15,625 $ 21,229 $ 22,048 $ 15,963
Gross profit.......................... 999 1,448 2,027 2,948 3,514 4,237 3,016
Selling, general and administrative
expenses............................ 1,003 1,252 1,761 2,421 2,985 3,022 2,172
Income (loss) from operations......... (4) 196 266 527 529 1,215 844
Interest income and other expense,
net................................. 18 (3) (16) 39 179 37 41
Interest expense...................... (152) (154) (190) (129) (143) (134) (107)
Net income (loss)..................... $ (134) $ 35 $ 35 $ 267 $ 342 $ 684 $ 470
========= ========= ========= ========= ========= ============ =========
PRO FORMA COMBINED(1):
Revenues..................................................................................... $184,774
Gross profit................................................................................. 51,734
Selling, general and administrative expenses(2).............................................. 38,080
Goodwill amortization(3)..................................................................... 2,945
Operating income............................................................................. 10,709
Interest income and other expense, net....................................................... 798
Interest expense(4).......................................................................... (3,279)
Income from continuing operations............................................................ $ 4,058
============
Income per share from continuing operations.................................................. $ .39
============
Shares used in computing pro forma income per share from continuing operations(4)............ 10,371
============
</TABLE>
1996
---------
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues.............................. $ 23,326
Gross profit.......................... 4,749
Selling, general and administrative
expenses............................ 6,855
Income (loss) from operations......... (2,106)
Interest income and other expense,
net................................. (167)
Interest expense...................... (4,431)
Net income (loss)..................... $ (6,483)
=========
PRO FORMA COMBINED(1):
Revenues.............................. $ 160,570
Gross profit.......................... 45,559
Selling, general and administrative ex 33,237
Goodwill amortization(3).............. 2,208
Operating income...................... 10,114
Interest income and other expense, net 704
Interest expense(4)................... (2,460)
Income from continuing operations..... $ 4,377
=========
Income per share from continuing opera $ .42
=========
Shares used in computing pro forma inc 10,371
=========
<TABLE>
<CAPTION>
SEPTEMBER
30, 1996
JUNE 30, ----------
----------------------------------------------------- DECEMBER 31,
1991 1992 1993 1994 1995 1995 HISTORICAL
--------- --------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $ (397) $ (376) $ (575) $ (604) $ (564) $ (288) $ 4,373
Total assets..................... 3,868 3,992 4,328 6,335 7,141 7,092 98,729
Total debt, including current
portion........................ 2,688 2,423 2,486 2,846 2,530 2,371 7,904
Stockholders' equity............. 463 500 405 681 1,058 1,503 71,094
</TABLE>
PRO FORMA
COMBINED(1)
-----------
BALANCE SHEET DATA:
Working capital.................. $ 13,299
Total assets..................... 178,154
Total debt, including current
portion........................ 44,018
Stockholders' equity............. 106,605
(FOOTNOTES ON FOLLOWING PAGE)
12
<PAGE>
- ------------
(1) The pro forma combined statements of operations data assume the acquisition
of each of the Acquired Businesses and the IPO were closed on January 1 of
each period presented, while the pro forma combined balance sheet data
assume the following events that occurred in the fourth quarter of 1996
occurred on September 30, 1996: (i) the issuance and sale of Common Stock
pursuant to the exercise of the underwriters' overallotment option in
connection with the IPO and the exercise of a warrant; (ii) the payment of
additional working capital adjustments in connection with the Initial
Acquisitions; and (iii) the acquisition of 13 Acquired Businesses in the
fourth quarter of 1996 and the financing and payment of the related purchase
prices. The pro forma combined financial statement data presented (i) are
not necessarily indicative of the results the Company would have obtained
had these events actually occurred when assumed or of the Company's future
results, (ii) are based on preliminary estimates of fair value, available
information and certain assumptions management deems appropriate and (iii)
should be read in conjunction with the other historical and pro forma
financial statements and notes thereto included elsewhere herein.
(2) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain
nonrecurring expenses.
(3) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(4) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Financial Information"
appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from (i) owners and occupants
of homes and small commercial buildings and (ii) builders and developers of new
homes, residential developments and small commercial buildings. Cost of services
consists primarily of salaries and benefits of service and installation
technicians, parts and materials, subcontracted services, depreciation,
maintenance, fuel and equipment rentals. Selling, general and administrative
expenses consist primarily of compensation and related benefits for owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
Prior to their acquisition by ARS, the Acquired Businesses were managed as
independent private businesses, and their results of operations reflect
different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
Certain owners agreed to reductions in their compensation and benefits in
connection with the acquisition of their businesses by ARS.
ARS, which conducted no operations prior to September 27, 1996 other than
in connection with the IPO and the Initial Acquisitions, is in the process of
integrating the Acquired Businesses and their operations and administrative
functions. This integration process may present opportunities to reduce costs
through the elimination of duplicative functions and through economies of scale,
particularly in obtaining additional contracts through shared customer lists and
greater volume discounts from material suppliers, but will necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost-savings may make
comparison of historical operating results not comparable to, or indicative of,
future performance. Accordingly, neither the anticipated savings nor the
anticipated costs have been included in the unaudited pro forma financial
information presented herein.
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS and September 30, 1996 is the effective date of the
Initial Acquisitions. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical
13
<PAGE>
financial statements of Atlas and the Company's consolidated historical balance
sheet as of September 30, 1996 is the consolidated historical balance sheet of
Atlas, as adjusted to give effect to the consummation of the Initial
Acquisitions in accordance with the purchase method of accounting and the
closing of the IPO and the application of its proceeds by the Company. As used
in this discussion, the "Company" means (i) Atlas prior to September 30, 1996
and (ii) ARS and its consolidated subsidiaries on that date and thereafter.
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED JUNE 30 YEAR ENDED 30
------------------------------------------ DECEMBER 31, --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 10,210 100.0% $ 15,625 100.0% $ 22,048 100.0% $ 15,963 100.0%
Cost of services..................... 8,183 80.1 12,677 81.1 17,811 80.8 12,947 81.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,027 19.9 2,948 18.9 4,237 19.2 3,016 18.9
Selling, general and administrative
expenses........................... 1,761 17.2 2,421 15.5 3,022 13.7 2,172 13.6
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 266 2.7 527 3.4 1,215 5.5 844 5.3
Interest income and other expense,
net................................ (16) (0.2) 39 0.2 37 0.2 42 0.3
Interest expense..................... (190) (1.9) (129) (0.8) (134) (0.6) (107) (0.7)
--------- --------- --------- --------- --------- --------- --------- ---------
Pretax income........................ 60 0.6 437 2.8 1,118 5.1 779 4.9
Income taxes......................... 25 0.2 170 1.1 434 2.0 309 1.9
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 35 0.4 $ 267 1.7 $ 684 3.1 $ 470 3.0
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 23,326 100.0%
Cost of services..................... 18,577 79.6
--------- ---------
Gross profit......................... 4,749 20.4
Selling, general and administrative
expenses........................... 6,855 29.4
--------- ---------
Income from operations............... (2,106) (9.0)
Interest income and other expense,
net................................ 167 0.7
Interest expense..................... (4,431) (19.0)
--------- ---------
Pretax income........................ (6,370) (27.3)
Income taxes......................... 114 0.5
--------- ---------
Net income........................... $ (6,484) (27.8)
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $7.3 million, or 45.6%, from $16.0 million
for the nine months ended September 30, 1995 to $23.3 million for the nine
months ended September 30, 1996. The increase was attributable to several large
new installation projects and the addition of approximately $1.9 million of
revenues resulting from the acquisition of three businesses in early 1996.
COST OF SERVICES -- Cost of services increased $5.6 million, or 44.2%, from
$12.9 million for the nine months ended September 30, 1995 to $18.6 million for
the nine months ended September 30, 1996. The increase in cost of services was
consistent with the percentage increase in revenue. As a percentage of revenues,
cost of services declined 1.5% from 81.1% to 79.6% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $4.7 million, or 213.6%, from $2.2 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. This increase was primarily attributable to an
adjustment for non-recurring, non-cash compensation charges of $3.1 million
related to common stock issued to the shareholders of Enterprises Holding
Company ("EHC") in connection with the acquisition of EHC by the Company
(including a $0.3 million estimated working capital adjustment) and $0.6 million
for the issuance of 39,987 shares of Common Stock to employees, three officers
and consultants of ARS and its affiliates. The remaining increase was
attributable to added administrative staff at several operating locations, the
added administrative staff resulting from the 1996 acquisitions by the Company
and approximately $0.4 million of additional owner's compensation in 1996.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.1 million between the nine months ended September
30, 1995 and 1996.
INTEREST EXPENSE -- Interest expense increased from $0.1 million for the
nine months ended September 30, 1995 to $4.4 million for the nine months ended
September 30, 1996. This increase was attributable to (i) non-recurring,
non-cash financing charges of $4.2 million paid to the holder of EHC preferred
stock in connection with the acquisition of EHC and
14
<PAGE>
(ii) an increase in outstanding debt resulting from fixed asset purchases and
the acquisitions of three businesses in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES -- Revenues increased $6.4 million, or 41.0%, from $15.6 million
in 1994 to $22.0 million in 1995. Part of this increase was attributable to the
new operating facility in Hilton Head, South Carolina (opened in April 1994).
The addition of several large new home builder customers accounted for the
majority of the remaining increase.
COST OF SERVICES -- Cost of services increased $5.1 million, or 40.2%, from
$12.7 million in 1994 to $17.8 million in 1995. The increase in cost of services
was consistent with the increase in revenue, and as a percentage of revenues,
cost of services declined 0.3% from 81.1% to 80.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 25.0%, from $2.4 million in
1994 to $3.0 million in 1995. As a percentage of revenues, selling, general and
administrative expenses decreased 1.8% from 15.5% in 1994 to 13.7% in 1995. The
dollar increase in selling, general and administrative expense in 1995 was
primarily attributable to the addition of an administrative infrastructure in
Hilton Head and the expansion of office space at an additional location.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net was virtually unchanged at $0.04 million in both 1994 and 1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.1
million in both 1994 and 1995.
YEAR ENDED JUNE 30, 1994 COMPARED TO YEAR ENDED JUNE 30, 1993.
REVENUES -- Revenues increased $5.4 million, or 52.9%, from $10.2 million
in 1993 to $15.6 million in 1994. Part of this increase ($1.8 million) was
attributable to the first full year of operations of the Greenville, South
Carolina location, and the addition of several large new home builder customers
accounted for the majority of the remaining increase.
COST OF SERVICES -- Cost of services increased $4.5 million, or 54.9%, from
$8.2 million in 1994 to $12.7 million in 1995. As a percentage of revenues, cost
of services increased from 80.1% in 1993 to 81.1% in 1994. The increase in cost
of services as a percentage of revenues was attributable to increased employee
turnover and under-utilization of assets at the Greenville location.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, from $1.8 million in 1994 to
$2.4 million in 1995, but decreased as a percentage of revenues from 17.2% in
1993 to 15.5% in 1994. The dollar increase in selling, general and
administrative expenses was primarily attributable to the addition of an
administrative infrastructure in Greenville.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net changed by $0.06 million from an expense of $0.02 million in 1993
to income of $0.04 million in 1994. The change primarily resulted from a $0.05
million loss on the sale of certain real estate in 1993.
INTEREST EXPENSE -- Interest expense decreased $0.1 million from $0.2
million in 1993 to $0.1 million in 1994.
RESULTS OF OPERATIONS -- UNAUDITED PRO FORMA COMBINED
The following should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements and the notes thereto included elsewhere herein,
and reference is hereby made to those financial statements and notes for
information regarding the basis of and the assumptions underlying the pro forma
results of operations.
15
<PAGE>
The following tables set forth certain selected pro forma financial data of
the Company and that data as a percentage of the Company's pro forma revenues
for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
OTHER OTHER
THE FOUNDING SUBSEQUENT
COMPANY COMPANIES METRO ACQUISITIONS
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 22,048 100.0% $ 92,588 100.0% $ 20,550 100.0% $ 49,588 100.0%
Cost of services........................ 17,811 80.8 67,409 72.8 14,367 69.9 33,453 67.5
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............................ 4,237 19.2 25,179 27.2 6,183 30.1 16,135 32.5
Selling, general and administrative
expenses.............................. 3,022 13.7 21,327 23.0 4,085 19.9 13,894 28.0
Goodwill amortization................... -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations.................. 1,215 5.5 3,852 4.2 2,098 10.2 2,241 4.5
Interest expense........................ (134) (0.6) (240) (0.3) (35) (0.2) (194) 0.4
Pretax income........................... 1,118 5.1 4,188 4.5 2,079 10.1 2,216 4.5
</TABLE>
PRO
FORMA
COMBINED
--------------------
Revenues................................ $ 184,774 100.0%
Cost of services........................ 133,040 72.0
--------- ---------
Gross profit............................ 51,734 28.0
Selling, general and administrative
expenses.............................. 38,080 20.6
Goodwill amortization................... 2,945 1.6
--------- ---------
Income from operations.................. 10,709 5.8
Interest expense........................ (3,279) (1.8)
Pretax income........................... 8,228 4.4
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------------
OTHER OTHER
THE FOUNDING SUBSEQUENT
COMPANY COMPANIES METRO ACQUISITIONS
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 23,326 100.0% $ 74,935 100.0% $ 19,383 100.0% $ 42,926 100.0%
Cost of services........................ 18,577 79.6 53,443 71.3 13,894 71.7 29,097 67.8
Gross profit............................ 4,749 20.4 21,492 28.7 5,489 28.3 13,829 32.2
Selling, general and administrative
expenses.............................. 3,826 16.4 21,852 29.2 3,888 20.0 11,449 26.7
Goodwill amortization................... -- -- 140 0.2 -- -- -- --
Income (loss) from operations........... 923 4.0 (500) (0.7) 1,601 8.3 2,380 5.5
Interest expense........................ (165) 0.7 (5,242) (7.0) (70) (0.4) (153) (0.4)
Pretax income........................... 917 3.9 (5,468) (7.3) $ 1,546 8.0 2,483 5.8
</TABLE>
PRO
FORMA
COMBINED
--------------------
Revenues................................ $ 160,570 100.0%
Cost of services........................ 115,011 71.6
Gross profit............................ 45,559 28.4
Selling, general and administrative
expenses.............................. 33,286 20.7
Goodwill amortization................... 2,208 1.4
Income (loss) from operations........... 10,065 6.3
Interest expense........................ (2,460) (1.5)
Pretax income........................... 8,309 5.2
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the nine months ended September 30, 1996, net cash used in operating
activities was $0.9 million, capital expenditures totaled $0.8 million and net
repayment of debt amounted to $14.7 million. The Company anticipates capital
expenditures (exclusive of acquisitions) of approximately $0.5 million during
the remainder of 1996, primarily for computer equipment, leasehold improvements
and furniture and fixtures.
On September 27, 1996, ARS completed the IPO, which involved the issuance
of 4,200,000 shares of Common Stock at a price of $15.00 per share (before
deducting underwriting discounts and commissions). On October 7, 1996, ARS sold
an additional 630,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions) pursuant to the
underwriters' overallotment option granted by ARS in connection with the IPO.
The proceeds from these transactions, net of underwriting discounts and
commissions of $1.05 per share and after deducting estimated expenses of the
IPO, were approximately $61.0 million. Of this amount, $34.8 million was used to
fund the cash portion of the purchase prices relating to the acquisitions of the
Founding Companies. The Company made additional aggregate payments to the former
owners of the Founding Companies of $4.7 million, representing working capital
adjustments based on the September 30, 1996 balance sheets of the Founding
Companies, pursuant to the agreements relating to the acquisitions. At September
30, 1996, approximately $3.0 million of these working capital adjustments had
been paid. The remaining balance was paid in the fourth quarter.
On September 17, 1996, the Company entered into the Credit Facility with
NationsBank. The Credit Facility provides the Company with an unsecured
revolving line of credit of up to $55 million, which may be used for general
corporate purposes, including the refinancing of Founding Company indebtedness,
future acquisitions, capital expenditures and working capital. Loans under the
Credit Facility bear interest at a designated variable base rate plus margins
ranging from 0 to 25 basis points, depending on the ratio of the
16
<PAGE>
Company's interest-bearing debt to its trailing earnings before interest, taxes,
depreciation and amortization. At the Company's option, the loans may bear
interest based on a designated London interbank offering rate plus a margin
ranging from 75 to 175 basis points, depending on the same ratio. Commitment
fees of 25 to 50 basis points per annum are payable on the unused portion of the
line of credit. The Credit Facility contains a sublimit for standby letters of
credit of up to $5.0 million. The Credit Facility also prohibits the payment of
dividends by the Company (except for dividends payable in Common Stock and
certain preferred stock), will not permit the Company to incur or assume other
indebtedness in excess of any amount equal to 5% of its consolidated net worth
and will require the Company to comply with certain financial convenants. The
Credit Facility will terminate and all amounts outstanding, if any, thereunder
will be due and payable in September 1999. The Company's subsidiaries have
guaranteed the repayment of all amounts due under the Credit Facility. As of
September 30, 1996, the Company had $6.3 million in outstanding borrowings under
the Credit Facility, bearing interest at a weighted average rate of
approximately 8.25% (the prime rate).
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.6 million in cash and
short-term notes and 1,282,910 shares of Common Stock. See "The Company --
Recent Acquisitions." Funding of the cash portion of the purchase prices and
repayment of indebtedness assumed in connection with the acquisitions was
provided by borrowings under the Credit Facility. In addition, the Company
intends to fund the repayment of the short-term notes issued in the acquisitions
by additional borrowings under the Credit Facility. After giving effect to these
anticipated borrowings, the remaining availability under the Credit Facility as
of December 20, 1996 would have been less than $2.4 million. While the Company
believes its cash flow from operations is sufficient to support its ongoing
operations and anticipated capital expenditures, the Company will need
additional borrowing availability to support its aggressive acquisition program.
The Company has initiated discussions with NationsBank to evaluate additional
financing opportunities, including a possible increase in the borrowing limit
under the Credit Facility.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings, including the unborrowed portion of
the Credit Facility and the possible public or private sale of debt securities,
as well as issuances of additional equity.
Due to the relatively low levels of inflation experienced in 1993, 1994 and
1995 and the first nine months of 1996, inflation did not have a significant
effect on the results of any of the Acquired Businesses in those periods.
SEASONALITY
The Founding Companies have in the past experienced, and the Company
expects that it will in the future experience, quarterly fluctuations in
revenues, operating income and cash flows as a result of changes in weather
conditions. Except in Florida and South Carolina, the demand for new
installations is lower in the winter months because new construction activity is
lower as a result of colder weather. Demand for HVAC services is generally
higher in the second and third quarters.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding Atlas,
which is presented above) is derived from the respective audited financial
statements of the individual Founding Companies included elsewhere herein. The
selected historical financial information presented in the tables below for the
quarterly periods of the Founding Companies is derived from the respective
unaudited interim financial statements of the Founding Companies, which include
all adjustments the Company considers necessary for a fair presentation of the
results of operations and cash flows of those companies for those periods. The
following discussion should be read in conjunction with the separate company
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
17
<PAGE>
RESULTS OF OPERATIONS -- GENERAL HEATING
The following table sets forth certain historical selected financial data
of General Heating and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 34,642 100.0% $ 36,334 100.0% $ 35,159 100.0% $ 25,534 100.0%
Cost of services..................... 27,393 79.1 29,928 82.4 28,866 82.1 20,965 82.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 7,249 20.9 6,406 17.6 6,293 17.9 4,569 17.9
Selling, general and administrative
expenses........................... 5,011 14.5 5,245 14.4 5,280 15.0 3,902 15.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 667 2.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 27,054 100.0%
Cost of services..................... 21,814 80.6
--------- ---------
Gross profit......................... 5,240 19.4
Selling, general and administrative
expenses........................... 4,512 16.7
--------- ---------
Income (loss) from operations........ $ 728 2.7
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.6 million, or 6.3%, from $25.5 million
for the nine months ended September 30, 1995, to $27.1 million for the nine
months ended September 30, 1996. This increase was attributable to a $0.6
million increase in new installation revenues, a $0.6 million increase in HVAC
replacement revenues and a $0.4 million increase in other revenues.
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) an $0.5 million adjustment to write off
certain obsolete inventory; (ii) increased depreciation on replacement of fully
depreciated trucks; (iii) an increase in payroll and related employee benefits;
and (iv) an increase in the cost of delivery of parts and materials, as the
Company's operations were spread over a larger geographic region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 4.0%, from $5.0 million in
1993 to $5.2 million in 1994. This increase was
18
<PAGE>
consistent with the percentage increase in revenues and was attributable to
increases in payroll and related employee benefits.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL HEATING
The following table sets forth selected information from General Heating
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 0.9 $ 2.1 $ 2.9 $ 1.4 $ (0.5)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) (1.2) 1.9
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.6) (4.3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ (0.4) $ (2.9)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, General Heating
generated $5.4 million in cash from operating activities and used $2.6 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $8.0 million.
Cash used in investment activities was primarily attributable to the
purchase and replacement of trucks in General Heating's fleet. In addition, in
1994, General Heating invested approximately $2.5 million in short-term
investment securities.
Cash used in financing activities consists primarily of S corporation
distributions to General Heating's stockholders.
Prior to the closing of the Initial Acquisitions, General Heating made
distributions to its stockholders in respect of its estimated S corporation
accumulated adjustment account as of the date of the closing. These
distributions (approximately $10.9 million as of September 30, 1996) were funded
primarily through working capital, cash provided by General Heating's operating
activities and short-term debt.
General Heating had working capital of $1.8 million as of September 30,
1996. It historically funded its operations with cash flows from operations.
RESULTS OF OPERATIONS -- CROWN
The following table sets forth certain historical selected financial data
of Crown and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 16,268 100.0% $ 16,844 100.0% $ 19,124 100.0% $ 14,420 100.0%
Cost of services..................... 10,332 63.5 10,314 61.2 11,333 59.3 8,603 59.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 5,936 36.5 6,530 38.8 7,791 40.7 5,818 40.3
Selling, general and administrative
expenses........................... 5,698 35.0 5,837 34.7 6,165 32.2 4,574 31.7
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 1,244 8.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 15,556 100.0%
Cost of services..................... 9,636 61.9
--------- ---------
Gross profit......................... 5,920 38.1
Selling, general and administrative
expenses........................... 4,335 27.9
--------- ---------
Income from operations............... $ 1,585 10.2
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 8.3%, from $14.4 million
for the nine months ended September 30, 1995 to $15.6 million for the nine
months ended September 30, 1996. This increase was attributable to increases of
$0.6 million each in plumbing and HVAC revenues.
19
<PAGE>
COST OF SERVICES -- Cost of services increased $1.0 million, or 11.6%, from
$8.6 million for the nine months ended September 30, 1995 to $9.6 million for
the nine months ended September 30, 1996, and increased as a percentage of
revenues from 59.7% in the nine months ended September 30, 1995 to 61.9% in the
nine months ended September 30, 1996. The increase in cost of services as a
percentage of revenue was primarily attributable to a reduction in the pricing
of services in order to increase market share.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.3 million, or 6.5%, from $4.6 million for
the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996, but declined as a percentage of revenues from 31.7% in
the nine months ended September 30, 1995 to 27.9% in the nine months ended
September 30, 1996. This percentage reduction was primarily attributable to a
$0.3 million reduction in owner compensation.
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.3 million, or 13.7%, from $16.8 million
in 1994 to $19.1 million in 1995. The increase in revenues was primarily
attributable to increases of $1.3 million and $0.9 million in HVAC revenues and
plumbing revenues, respectively.
COST OF SERVICES -- Cost of services increased $1.0 million, or 9.7%, from
$10.3 million in 1994 to $11.3 million in 1995, but decreased as a percentage of
revenues from 61.2% in 1994 to 59.3% in 1995. The percentage decrease was
attributable to a change in the mix of services provided from lower-margin
services to higher-margin services and an increase in the use of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ -- $1.0 $ 1.0 $ (0.3) $ (1.8)
========= ==== ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
20
<PAGE>
The change in net cash provided by (used in) investing activities was
primarily attributable to purchases/sales of investments and marketable
securities and proceeds from the sale of property and equipment.
The change in net cash provided by (used in) financing activities was
attributable to net borrowings and repayments of debt obligations and
advances/payments to/from the sole shareholder of Crown.
Crown had working capital of $0.6 million as of September 30, 1996. It
historically funded its operations with cash flows from operations and
borrowings from lenders and its sole shareholder.
RESULTS OF OPERATIONS -- FLORIDA HAC
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1994 1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 15,845 100.0% $ 14,510 100.0% $ 11,057 100.0% $ 11,267 100.0%
Cost of services..................... 12,079 76.2 10,541 72.6 8,248 74.6 8,438 74.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,766 23.8 3,969 27.4 2,809 25.4 2,829 25.1
Selling, general and administrative
expenses........................... 3,321 21.0 3,738 25.8 2,697 24.4 2,839 25.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 445 2.8 $ 231 1.6 $ 112 1.0 $ (10) (0.1)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $.2 million, or 1.8%, from $11.1 million for
the nine months ended September 30, 1995 to $11.3 million for the nine months
ended September 30, 1996.
COST OF SERVICES -- Cost of services increased $.2 million, or 2.4%, from
$8.2 million for the nine months ended September 30, 1995 to $8.4 million for
the nine months ended September 30, 1996 and increased 0.3% as a percentage of
revenues from 74.6% for the nine months ended September 30, 1995 to 74.9% for
the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 3.7% from $2.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.3 million, or 8.2%, from $15.8 million in
1994 to $14.5 million in 1995. The decrease in revenues was primarily
attributable to a decrease in apartment complex installations.
COST OF SERVICES -- Cost of services decreased $1.6 million, or 13.2%, from
$12.1 million in 1994 to $10.5 million in 1995 and decreased 3.6% as a
percentage of revenues from 76.2% for 1994 to 72.6% for 1995. These decreases
were primarily attributable to a change in the mix of services from lower margin
apartment complexes to higher margin residential homes and improvements in
vendor pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 12.1%, from $3.3 million in
1994 to $3.7 million in 1995. This increase resulted primarily from increases in
compensation paid to shareholders.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- FLORIDA HAC
The following table sets forth selected information from Florida HAC's
statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities....................... $ 0.6 $ 0.5 $ 0.5 $ 0.1
Net cash used in investing
activities....................... (0.2) (0.2) (0.2) (0.1)
Net cash provided by (used in)
financing activities............. (0.1) 0.0 (0.5) (0.6)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................. $ 0.3 $ 0.3 $ (0.2) $ (0.6)
========= ========= ========= =========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment. Net cash provided
by (used in) financing activities resulted from borrowing and repayments of
long-term obligations and capital lease obligations and advances to/from the
shareholders of the Company.
Florida HAC had working capital of $0.3 million as of September 30, 1996.
Florida HAC historically funded its operations with cash flows from operations
and borrowings from lenders and its stockholders.
RESULTS OF OPERATIONS -- MERIDIAN & HOOSIER
The following table sets forth certain historical selected financial data
of Meridian & Hoosier and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,066 100.0% $ 10,133 100.0% $ 7,499 100.0% $ 11,508 100.0%
Cost of services..................... 5,797 71.9 7,281 71.9 5,357 71.4 7,795 67.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,269 28.1 2,852 28.1 2,142 28.6 3,713 32.3
Selling, general and administrative
expenses........................... 1,988 24.6 2,350 23.2 1,660 22.1 2,785 24.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 281 3.5 $ 502 4.9 $ 482 6.5 $ 928 8.1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $4.0 million, or 53.3%, from $7.5 million
for the nine months ended September 30, 1995, to $11.5 million for the nine
months ended September 30, 1996. Approximately $1.5 million of this increase was
attributable to the purchase of Sagamore Heating & Cooling ("Sagamore") on
January 1, 1996, and a majority of the remaining increase was due to increased
sales of residential replacement services.
COST OF SERVICES -- Cost of services increased $2.4 million, or 44.4%, from
$5.4 million for the nine months ended September 30, 1995 to $7.8 million for
the nine months ended September 30, 1996, but declined 3.7% as a percentage of
revenues from 71.4% for the nine months ended September 30, 1995 to 67.7% for
the nine months ended September 30, 1996. The dollar increase in cost of
services was primarily attributable to the increased sales for the nine months
ended September 30, 1996. The decrease as a percentage of revenues was primarily
attributable to improvements in equipment purchasing resulting from the Sagamore
acquisition and changes in the mix of services provided.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $1.1 million, or 64.7%, from $1.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996. This increase was primarily attributable to added
administrative staff resulting from the acquisition of Sagamore and increased
marketing and selling expenses.
22
<PAGE>
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.0 million, or 24.7%, from $8.1 million in
1994 to $10.1 million in 1995. The increase in revenues was primarily
attributable to increased residential equipment replacement sales of
approximately $1.2 million and the start-up of a new construction division.
COST OF SERVICES -- Cost of services increased $1.5 million, or 25.9%, from
$5.8 million in 1994 to $7.3 million in 1995 and was consistent with the
increase in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.3 million, or 15.0%, from $2.0 million in
1994 to $2.3 million in 1995. This increase resulted from increased marketing
efforts to improve market share.
LIQUIDITY AND CAPITAL RESOURCES -- MERIDIAN & HOOSIER
The following table sets forth selected information from Meridian &
Hoosier's statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.4 $ 0.7 $ 0.3 $ 0.9
Net cash used in investing
activities........................ (0.5) (0.2) (0.1) (1.1)
Net cash provided by (used in)
financing activities.............. 0.3 (0.1) (0.1) 0.8
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. $ 0.2 $ 0.4 $ 0.1 0.6
========= ========= ========= =========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment and the acquisition
in 1996 of Sagamore. Net cash provided by (used in) financing activities
resulted from borrowing and repayments of long-term obligations and capital
lease obligations.
Meridian & Hoosier had working capital of $0.6 million as of September 30,
1996. It historically funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder.
RESULTS OF OPERATIONS -- A-ABC
The following table sets forth certain historical selected financial data
of A-ABC and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 10,900 100.0% $ 8,676 100.0% $ 8,707 100.0% $ 6,534 100.0%
Cost of services..................... 6,921 63.5 5,574 64.2 5,709 65.6 4,314 66.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,979 36.5 3,102 35.8 2,998 34.4 2,220 34.0
Selling, general and administrative
expenses........................... 2,830 26.0 2,444 28.2 2,348 27.0 1,722 26.4
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.... $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 498 7.6
========= ========= ========= ========= ========= ========= ========= =========
Loss from discontinued operations.... $ (1,452) $ (142) $ (115) $ (54)
========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 6,855 100.0%
Cost of services..................... 3,733 54.4
--------- ---------
Gross profit......................... 3,121 45.5
Selling, general and administrative
expenses........................... 2,084 30.4
--------- ---------
Income from continuing operations.... $ 1,037 15.1
========= =========
Loss from discontinued operations.... $ (271)
=========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.4 million, or 6.1%, from $6.5 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily attributable to
a $0.2 increase in HVAC installations and a $0.1 million increase in appliance
service.
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<PAGE>
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees
resulting in reduced labor costs as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million or 23.5%, from $1.7 million for
the nine months ended September 30, 1995 to $2.1 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues remained constant at $8.7 million for 1994 and 1995.
COST OF SERVICES -- Cost of services increased $0.1 million, or 1.8%, from
$5.6 million in 1994 to $5.7 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to a
decrease of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million to $5.6 million in 1994 and was consistent as a percentage of
revenue with the reduction in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.4 million, or 14.3%, from $2.8 million in
1993 to $2.4 million in 1994. This decrease resulted from a $0.4 million
reduction in advertising expense.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- Loss from discontinued
operations decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993
to a $0.1 million loss for 1994. The decrease in the loss was primarily
attributable to reductions of $0.6 million, $0.1 million and $0.3 million in
salary and benefit cost, rent and property tax expense and advertising expense,
respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
Net cash provided by operating
activities....................... $0.8 $0.3 $0.6 $ 0.1 $ 0.5
Net cash provided by (used in)
investing activities............. (1.2) 0.2 (0.4) (0.2) (0.6)
Net cash used in financing
activities....................... 0.4 (0.4) (0.1) 0.0 (0.1)
---- ---- ---- ----- -----
Net increase (decrease) in cash and
cash equivalents................. $0.0 $0.1 $0.1 $(0.1) $(0.2)
==== ==== ==== ===== =====
From 1993 through the nine months ended September 30, 1996, A-ABC generated
$2.2 million in net cash from operating activities.
Cash used in investment activities was primarily attributable to purchasing
additional trucks and the net change in the cash provided by (used in)
discontinued operations.
Cash used in financing activities consisted primarily of S corporation
distributions to the Company's sole shareholder and net borrowings and
repayments of long-term obligations.
A-ABC had a working capital deficit of $1.2 million at September 30, 1996.
It historically funded its operations with cash flows from operations and
borrowings from lenders and its shareholder.
24
<PAGE>
BUSINESS
GENERAL
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and IAQ
systems and major home appliances for residential customers. ARS was founded in
October 1995 to create the leading national provider of these services,
primarily in homes and small commercial buildings, including those under
construction (collectively, "residential services"). To achieve this goal, the
Company has embarked on an aggressive acquisition program and has implemented a
national operating strategy to increase internal growth and capitalize on cost
efficiencies.
On September 27, 1996, ARS acquired the Founding Companies simultaneously
with the closing of the IPO. See the "Company -- Founding Companies." During
the year ended December 31, 1995, the Company's pro forma combined revenues
attributable to the Founding Companies totaled $114.6 million, of which
maintenance, repair and replacement services accounted for approximately 48% and
new installation services accounted for approximately 52%. During the fourth
quarter of 1996, the Company acquired an additional 13 residential services
businesses. With the inclusion of those acquisitions, maintenance, repair and
replacement services currently account for approximately 55% of the Company's
total revenues and new installation services currently account for approximately
45%. The Company believes the profitability of its maintenance, repair and
replacement business benefits from its installation services operations as a
result of (i) the significant volume of purchases of HVAC systems for its
high-volume installation services and (ii) the addition of new customer and
equipment information in the Company's marketing database. This database
provides the Company with valuable information that can be used to expand the
Company's future residential services revenue base. In addition, new
installation services provide the Company with cooperative advertising credits
from the HVAC system manufacturers which it uses for promoting its maintenance,
repair and replacement services for residential HVAC systems. Through leveraging
these benefits, acquiring new service companies and internal development, the
Company intends to emphasize the growth of its higher-margin maintenance, repair
and replacement services business.
INDUSTRY OVERVIEW
The Company believes, on the basis of information provided by its
operational management and available industry data, the HVAC, plumbing and
electrical industries in the United States represent an annual market in excess
of $40 billion, of which maintenance, repair and replacement services account
for in excess of $25 billion. It also believes this market is served by over
50,000 companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It believes the majority of owners in its industry have limited access
to adequate capital for modernization, training and expansion and limited
opportunities for liquidity in their businesses.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service technicians and providing a full complement of
high-quality residential services in an industry that has been characterized by
inconsistent quality, reliability and pricing. It also believes the highly
fragmented nature of the residential services industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to achieve its goal of becoming the leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a national operating
strategy that enhances internal revenue growth and profitability and achieves
cost efficiencies.
GROWTH THROUGH ACQUISITION. The Company has implemented an aggressive
acquisition program targeting large metropolitan and high-growth suburban areas
with attractive residential demographics. The
25
<PAGE>
Company's acquisition strategy involves entering new geographic markets and
expanding within existing markets.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential services and having the
critical mass necessary to be a core business with which other
residential service operations can be consolidated. An important
criterion for these acquisition candidates is superior operational
management personnel, whom the Company generally seeks to retain.
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and range of services it offers in that market. The
Company also will pursue "tuck-in" acquisitions of smaller
residential services companies whose operations can be incorporated
into the Company's existing operations without any significant
increase in infrastructure.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The Company has
implemented a national operating strategy employing "best practices"designed
to increase internal growth and profitability through enhanced operations and
the achievement of cost efficiencies.
o INTERNAL GROWTH. The Company continually reviews its operations at
the local and regional operating levels in order to identify certain
"best practices" that will be implemented throughout its operations.
For example, the Company intends to provide 24-hour emergency service
at each of its locations and to monitor service call quality by
attempting to contact each of its service customers promptly following
a service call. In addition, the Company is developing a national
training program to improve and keep current the technical, selling
and customer relations skills of its service technicians. The Company
intends to use specialized computer technology at each of its
locations to improve communications, vehicle dispatch and service
quality and responsiveness. Management believes these practices will
enable the Company to provide superior customer service and maximize
sales opportunities. This service-oriented strategy will also allow
the Company to reinforce its brand image at the local level while
fostering its efforts to develop a national brand name.
o COST EFFICIENCIES. The Company believes it should be able to reduce
the total operating expenses of acquired businesses by eliminating
duplicative administrative functions in tuck-in acquisitions and
consolidating certain functions performed separately by each business
prior to its acquisition. In addition, the Company believes that, as a
large, national residential services company, it should experience
reduced costs (as a percentage of revenues) compared to those of
individual acquired businesses in such areas as: the purchase of
equipment for resale, service vehicles, parts and tools; vehicle and
equipment maintenance; financing arrangements; employee benefits; and
insurance and bonding.
ACQUISITION STRATEGY
Given the large size and fragmentation of the residential services
industry, the Company believes there are numerous potential acquisition
candidates both within the markets currently served by the Company and in other
large metropolitan and high-growth suburban markets. The Company has implemented
an aggressive acquisition program to expand into these new markets and to
enhance its position in existing markets.
In new markets, the Company targets for acquisition one or more leading
local or regional residential services companies. Generally, these companies are
run by successful entrepreneurs whom the Company endeavors to retain and are of
sufficient size to provide the basis for future Company expansion within a given
market. Through implementation of its national operating strategy, the Company
seeks to aid the acquired companies (operating on a decentralized basis) in
increasing their revenues and improving their
profitability. Once the Company has entered a market, it seeks to acquire other
residential services providers in order to expand its share of that market and
increase the range of services offered in that market. Some of
26
<PAGE>
the acquisitions within existing markets are large enough to warrant their own
operating and management structure while other acquisitions are small enough to
be folded into an existing operation without significantly increasing the
Company's infrastructure. If an acquisition is large enough to warrant its own
operating structure, the Company seeks to develop a regional operating plan
whereby these companies can benefit from regional operating efficiencies such as
shared marketing efforts, centralized maintenance, local purchasing power,
expanded service line management expertise and other economies of scale.
Each of the Company's acquisition candidates are expected to demonstrate
potential for revenue growth and profitability. The Company also evaluates
certain qualitative characteristics of acquisition candidates, including their
reputations in their respective geographic regions, the size and other
characteristics of customer bases, the quality and experience levels of
operational management and service technicians, the amount, type and condition
of their equipment and facilities and their operating histories. The Company
believes there are numerous acquisition candidates that meet the Company's
acquisition criteria.
The Company believes it is regarded by many owners of residential services
businesses as an attractive acquiror because of: (i) the Company's strategy for
creating a large, professionally managed company with national name recognition
and a reputation for quality service and customer satisfaction; (ii)
management's experience in consolidations; (iii) the Company's decentralized
operating strategy; (iv) the Company's increased visibility and access to
financial resources as a public company; (v) the potential for increased
profitability due to centralized administrative functions, enhanced systems
capabilities and access to increased marketing resources; and (vi) depending on
the size of the acquisition, the ability of the business being acquired to
participate in the Company's growth and expansion, while realizing liquidity.
The Company has analyzed various data on the residential services industry
and individual businesses within the industry and believes it is well positioned
to implement its acquisition program. On the basis of the Company's experience
in connection with the acquisitions of the Acquired Businesses, the Company
believes its operational management will be instrumental in identifying and
completing future acquisitions. Several of these executives have had leadership
roles in both national and regional residential services trade associations,
which have allowed these principals to become personally acquainted with other
owners of residential services businesses across the country. The Company
believes that the visibility of these individuals within these associations will
increase the industry's awareness of the Company and its acquisition program,
thereby attracting interest from owners of other residential services companies.
In addition, several members of the Company's executive management team have
worked together for a number of years and have significant experience in
negotiating, closing and integrating acquisitions in various industries. The
timing, size and success of the Company's acquisition efforts and the associated
potential capital commitments cannot be readily predicted.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors being historical operating results, the future prospects of the business
to be acquired and the ability of that business to complement the services
offered by the Company. See "Risk Factors -- Dependence on Acquisitions for
Growth," " -- Need for Additional Financing" and " -- Potential Effect of
Shares Eligible for Future Sale on Price of Common Stock."
SERVICES PROVIDED
The Company provides a variety of maintenance, repair and replacement
services for HVAC, plumbing, electrical and other systems in homes and small
commercial buildings. It also installs such operating systems in new homes and
small commercial buildings under construction. The Company's maintenance, repair
and replacement services include: checkups, cleaning, repair and replacement of
HVAC systems and associated parts; maintenance, repair and replacement of
electrical switches, outlets, lines, panels and fixtures; repair and replacement
of bathroom fixtures, water filters and water heaters; cleaning, repair and
replacement of pipes, sewer lines and residential sanitary systems; and
maintenance, repair and replacement of other residential systems, including home
appliances and fireplaces. In connection with its repair and replacement
services, the Company sells on a retail basis a wide range of HVAC, plumbing,
27
<PAGE>
electrical and other equipment, including complete heating and air conditioning
systems and a variety of HVAC, plumbing and electrical parts and system
components. As a subcontractor to builders, it installs complete central heating
and air conditioning systems, electrical systems, plumbing systems and other
systems in newly constructed homes and small commercial buildings.
The following table shows, by region, the range of maintenance, repair and
replacement services and new installation services provided by the Company as of
the date of this Prospectus.
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
MAINTENANCE, REPAIR AND REPLACEMENT
SERVICES:
Houston Metropolitan Area............ X X X X
Washington-Baltimore Metropolitan
Area and
Richmond, Virginia................. X
Chicago.............................. X
Raleigh/Durham, North Carolina....... X
South Carolina....................... X X X
Southeast Florida.................... X X
Indiana (Indianapolis and Fort
Wayne)............................. X X X
NEW INSTALLATION SERVICES:
Washington-Baltimore Metropolitan
Area and
Richmond, Virginia................. X X
Raleigh/Durham, North Carolina....... X
South Carolina....................... X X X
Southeast Florida.................... X X
Indiana (Indianapolis and Fort
Wayne)............................. X X X
An important element of the Company's growth strategy is to increase the
range of residential services, particularly the maintenance, repair and
replacement services it provides, in each of its regions through acquisitions
and internally generated growth. Accordingly, the mix of services reflected in
the foregoing table is expected to change over time as the Company implements
its growth strategy. In addition, the Company intends to provide a full range of
these services in new geographic areas into which it will expand, principally by
acquisitions. See " -- Business Strategy."
One strategy by which the Company will attempt to increase the reach of its
residential services is through the utilization of its ARS Energy Services
Company ("ARS Energy") subsidiary. This subsidiary has been organized for the
purpose of formulating and implementing strategic alliances with major national
and regional companies that may be able to integrate the Company's residential
services with their own products or services and thereby make the Company's
services available to their customers. These participants may include utilities,
equipment manufacturers, home remodeling companies, home supply distributors,
realtors, insurance companies, restaurant chains and other multi-location
retailers.
Meridian & Hoosier is the only Founding Company that currently maintains,
repairs and replaces commercial heating and air conditioning units in large
commercial facilities. As a result of acquisitions or otherwise, the Company's
provision of these and other services to such facilities may be expanded.
OPERATIONS
The Company operates on a decentralized basis, with the management of each
operating location responsible for its day-to-day operations, profitability and
growth. Local management is supported by the Company's marketing and advertising
strategies and programs and is provided support in developing optimal pricing
strategies. Financial resources for improved systems and expansion of services,
training programs, financial controls, purchasing information and operating
expertise is shared among locations to improve productivity, lower operating
costs and improve customer satisfaction to stimulate internal growth.
28
<PAGE>
While the local management operates with a high degree of autonomy and is
empowered to make the necessary operating decisions, adherence to Company
training, safety, customer satisfaction, accounting and internal control
policies is required. Frequent communication with the Company's executive
management team is integral to the Company's achieving the benefits that are
anticipated by the consolidation of these businesses into a single company.
The Company's residential service operations are coordinated by local
operations centers, which are staffed by order entry and customer service
personnel, operations or service coordinators, and inventory, vehicle
maintenance and office personnel. These centers use specialized computer and
communications technology to process orders, arrange service calls, ensure
timely delivery of required repair parts or new equipment, communicate with
customers and service technicians and invoice customers. A typical maintenance,
repair or replacement service call begins with either the customer telephoning a
local operations center and requesting an estimate or placing an order for
repair service or the Company calling the customer to make an appointment for
periodic service agreement maintenance. Coordination and deployment of service
technicians are managed by the operations center through communications systems
linked to the center's computer system, cellular telephone, pager or radio.
Service personnel work out of service vehicles, which are equipped with an
inventory of equipment and commonly required tools, parts and supplies needed to
complete a variety of jobs. The service technician assigned to a service call is
generally responsible for driving to the service location, initiating the
customer contact, analyzing the problem and job requirements, providing the
price quotation, overseeing the work and collecting payment for the service.
Payment for maintenance, repair and replacement services not covered by a
service contract is generally made in cash or by check or credit card at the job
site, except for certain well-established customers.
The Company's service technicians respond to three general types of
maintenance, repair and replacement service calls: requests for services under
the Company's monitoring service contracts, requests for service under the
Company's warranty service contracts and requests for emergency or other
services not under contract. A substantial majority of these service calls are
for emergency or other services not under contract. Service calls cover a wide
variety of services, including the replacement of entire HVAC systems. Service
histories on past customers are generally available to the customer service
representatives in a continuously updated computer database matched to addresses
in the local service area.
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. Typically, new installation
service begins with the customer providing the architectural plans or mechanical
drawings for the particular home or an entire tract of homes or other facility
to be constructed and either requesting a bid or entering into direct
negotiation for the work required. The Company's new installation personnel
analyze the plans to determine the labor, materials and equipment type and size
required for the installation of the system specified, price the job and either
bid for or negotiate the written contract for the job. In HVAC installations,
most of the required air ducts are fabricated and, together with the other
equipment to be installed, partially pre-assembled in the Company's facilities
and readied for delivery to the job site. The equipment and supplies necessary
for the particular job are ordered from the suppliers or manufacturers, and
delivery generally is timed according to the builder's schedule. The
installation work is coordinated with the builder's construction supervisors.
Scheduled draw payments for these services generally are obtained within 30 days
of completing the installation, at which time any mechanics' and materialmen's
liens securing the rights to such payments are released. Interim payments are
often obtained to cover the Company's labor and materials costs on large
installation projects.
Except for the air ducts fabricated by the Company for use in its
installation services operations, substantially all the equipment and component
parts the Company sells or installs are purchased from manufacturers and other
outside suppliers. As a result of the implementation of its operating
strategies, the Company has begun to consolidate the number of manufacturers and
other outside suppliers from which it obtains equipment and other items. The
Company is not, however, materially dependent on any of these outside sources.
See " -- Sources of Supply."
29
<PAGE>
SALES AND MARKETING
The Company believes that, in each of its current geographic markets, it
has well known and established businesses that, other than in Chicago, are
leading providers of one or more residential services in their markets. The
Company intends to build on this foundation through the use of advertising to
expand name recognition and the adoption of best practices to increase the
quality of services provided. For example, the Company intends to implement the
uniform practice whereby the Company's customers each receive prompt follow-up
inquiries to determine customer-satisfaction levels and to arrange for follow-up
service calls if necessary. The Company believes this practice can be uniformly
implemented at each of its service locations without material cost to the
Company.
In each of the market areas in which the Company provides residential
maintenance, repair and replacement services, vigorous advertising campaigns
traditionally have been emphasized by the Acquired Businesses. These campaigns
have used mailouts, yellow pages, newspapers, radio and television to promote
the services offered under their particular trade names or service marks. These
advertising campaigns have been effective in creating name recognition and
customer identification with the these companies for the quality of the services
they offer in their local areas. The Company expects for the foreseeable future
to retain the trade names and service marks of these companies in its
advertising and promotional materials in their local areas, but intends over
time to promote and establish the Company's name and service marks nationally.
See " -- Intellectual Property."
The Company also views its existing service contracts as an important way
of retaining its customer base. The Company has several general types of service
contracts: "maintenance and repair" contracts whereby the Company maintains
and repairs selected residential HVAC, plumbing, electrical and other systems
for a period of time for a fixed fee and "maintenance only" or "repair only"
contracts whereby the Company makes periodic inspections of a residential system
and provides certain preventative maintenance for a period of time for a fixed
fee. The Company believes that such service contracts provide the Company with
flexibility in determining the timing for delivery of its services, thereby
generating greater stability in the level of demand for services throughout
different seasons of the year. See " -- Seasonality." Certain states regulate
the provision of service under residential services warranty contracts. See
" -- Governmental Regulation and Environmental Matters."
With respect to its new installation business, the Company's marketing
strategy focuses on cultivating long-term relationships with its national,
regional and local home builder and general contractor customers. The Company's
marketing efforts with these customers primarily involve direct sales contacts
emphasizing the Company's quality of services and reliability. In addition,
labels with the Company's name and phone number are applied to newly installed
equipment, and direct telemarketing sales efforts for service contracts are
timed to closely coincide with the expiration of manufacturer warranties on
Company installed equipment. Therefore, the Company believes new installation
business generally leads to maintenance, repair and replacement business.
The Company has numerous customers. No single customer accounted for more
than 10% of the Company's revenues during fiscal 1995.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all service technicians it uses meet safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company reviews prospective permanent service
technicians to ensure they are trained thoroughly in their trades, the Company's
procedures and customer satisfaction standards, possess the required trade
licenses and have acceptable driving records.
The Company has developed continuous training programs to provide initial,
refresher and upgrade training programs to trainees, apprentices and service and
installation technicians. These programs typically are presented by the
Company's senior master plumbers, electricians, heating and air conditioning
service technicians and safety supervisors. For example, in Houston, the Company
operates a 150-seat classroom and training facility incorporating "hands on"
training stations where service personnel, apprentices and
30
<PAGE>
new trainees can work on functioning HVAC, plumbing, electrical and other
systems under the supervision of skilled tradesmen. A safety supervisor at this
facility conducts both initial and continuous comprehensive training classes for
all personnel and works with operating management to observe and evaluate safety
procedures in an effort to constantly improve the effectiveness of the Company's
safety programs.
VEHICLES AND FACILITIES
The Company operates a fleet of owned or leased service trucks, vans and
support vehicles in its operations. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the Company's
current operations.
The Company owns certain of its facilities and leases the remainder of its
facilities under leases with remaining terms ranging from several months (in the
case of certain facilities being consolidated with others) to 10 years on terms
the Company believes to be commercially reasonable. Some of these leases are
with officers and directors of the Company who became associated with the
Company in connection with the Acquired Businesses. See "Certain
Transactions -- Real Estate and Other Transactions." Total rental expense for
the Company's facilities leases in fiscal 1995 (excluding certain discontinued
retail appliance operations) was approximately $1.6 million.
The Company's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company's principal operating
facilities include (i) a 60,000 square foot facility owned by the Company and
located in Houston, Texas, which is the primary base for the Company's Houston
operations, (ii) a 36,000 square foot leased facility in Manassas, Virginia,
which serves as the principal fabrication and production facility for General
Heating, (iii) a 36,000 square foot leased facility in Savage, Maryland, which
serves as a distribution, fabrication, production and administrative facility
for General Heating, (iv) a 68,000 square foot leased facility in Raleigh, North
Carolina, which is the principal operating base for Metro, (v) a 62,500 square
foot leased facility in Charleston, South Carolina, which is the headquarters
for Atlas, (vi) a 29,000 square foot leased facility in Margate, Florida, which
serves as the principal office and fabrication facility for Florida HAC and
(vii) a 20,000 square foot leased facility in the West Palm Beach, Florida area,
which is the operational base for Sasso. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
The Company leases its principal executive and administrative offices in
Houston, Texas.
INTELLECTUAL PROPERTY
The Company owns various trademarks, service marks and trade names, which
it uses in its local operations, advertising and promotions. Initially, the
Founding Companies and subsequently acquired businesses will continue to use
their respective trade names and service marks in their local areas. The Company
intends to adopt and implement throughout its operations uniform service names
and markings for use on its vehicles and in its advertising and promotional
materials. See "Business -- Sales and Marketing."
EMPLOYEES
As of December 20, 1996, the Company had approximately 2,200 employees. As
it implements its internal growth and acquisition strategies, the Company
expects that the number of employees will increase. The Company is not a party
to any collective bargaining agreements. The Company has not experienced any
strikes or work stoppages and believes its relationship with its employees is
good.
The residential services business is characterized by, among other things,
high turnover rates among service technicians. A substantial majority of the
service technician turnover experienced by the Acquired Businesses in recent
years has been during the extended screening period in the first year of
employment. The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians and
operational management personnel. One way by which the Company hopes to attract,
retain and motivate such personnel is by offering them a more comprehensive
benefits
31
<PAGE>
package at less cost to the employee than is typical in the industry. The
Company is able to offer such a package in a cost effective manner because of
the large number of persons it employs.
SOURCES OF SUPPLY
The raw materials used in the Company's operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain raw materials through volume
purchases. The Company does not currently have any significant company-wide
contracts relating to the supply of equipment or materials. The Company has not
experienced any significant difficulty in obtaining adequate supplies to conduct
its operations.
SEASONALITY
The Company's installation, maintenance, repair and replacement operations
are subject to different seasonal variations in the different lines of service.
Except certain areas in the southern United States, the demand for new
installations is lower during the winter months because new construction
activity is lower as a result of colder weather. Demand for HVAC services is
generally higher in the second and third quarters. Accordingly, the Company
expects its revenues and operating results generally will be correspondingly
lower in its first and fourth quarters.
COMPETITION
The market for residential services is highly competitive. The Company
believes that the principal competitive factors in the residential services
industry are (i) timeliness, reliability and quality of services provided, (ii)
range of services provided, (iii) market share and visibility and (iv) price.
The Company believes its strategy of creating a leading national provider of
comprehensive residential services directly addresses these factors. The ability
of the Company to recruit, train and retain highly motivated service technicians
to provide quality services should be enhanced by its ability to utilize
professionally managed recruiting and training programs. In addition, the
Company offers compensation, health and savings benefits that are more
comprehensive than most offered in the industry. See "Business -- Hiring,
Training and Safety." Quality of service should be enhanced by the
implementation and continuous reinforcement of customer satisfaction policies,
retraining and follow-up with the customer. Competitive pricing is possible
through the implementation of the cost saving opportunities that exist across
each of the service lines offered and from productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single local geographic area. Certain of these smaller
competitors may have lower overhead cost structures and, consequently, may be
able to provide their services at lower rates. Moreover, many homeowners have
traditionally relied on individual persons or small repair service firms with
whom they have long-established relationships for a variety of home repairs. The
Company believes there are currently only three public companies, Chemed
Corporation (through a subsidiary, Roto-Rooter, Inc.), Service Experts, Inc. and
Baltimore Gas & Electric Company (through a subsidiary), focused on providing
residential services in some of the same services lines provided by the Company.
There are a number of national chains, such as Home Depot, Sears and Builders
Square, that sell a variety of plumbing fixtures and equipment, and heating and
air conditioning equipment for residential use and offer, either directly or
through various subcontractors, installation, warranty and repair services.
Other companies or trade groups engage in franchising their names and marketing
programs in some residential services lines. In the future, competition may be
encountered from, among others, other public residential service companies with
aggressive acquisition programs, the unregulated business segments of regulated
gas and electric utilities or from newly deregulated utilities in those
industries entering into various residential service areas. Certain of the
Company's competitors and potential competitors have greater financial resources
than the Company to finance residential services acquisition and development
opportunities, to pay higher prices for the same opportunities or to develop and
support their own residential services operations if they decide to enter the
business.
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GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their respective
trades, (ii) building, HVAC, plumbing and electrical codes and zoning
ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and protection
of the environment.
The Company believes it has all required permits and licenses to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services trades require various permits and licenses to be held by individuals.
In some cases, a required permit or license held by a single individual may be
sufficient to authorize specified activities for all the Company's service
technicians who work in the geographic area covered by the permit or licenses.
The Company is in the process of implementing a policy to ensure that, where
allowed, any such permits or licenses that may be material to the Company's
operations in a particular geographic region are held by at least two persons
within that region.
The Company's operations are affected by numerous federal, state and local
environmental laws and regulations, including those governing vehicle emissions
and the use and handling of refrigerants. The technical requirements of these
laws and regulations are becoming increasingly expensive, complex and stringent.
Federal and state environmental laws include statutes intended to allocate the
cost of remedying contamination among specifically identified parties. The
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") imposes strict, joint and several liability on
owners or operators of facilities at, from, or to which a release of hazardous
substances has occurred, on parties who generated hazardous substances that were
released at such facilities, and on parties who arranged for the transportation
of hazardous substances to such facilities. A majority of states have adopted
"Superfund" statutes comparable to and, in some cases, more stringent than
CERCLA. If the Company were to be found to be a responsible party under CERCLA
or a similar state statute, the Company could be held liable for all
investigative and remedial costs associated with addressing such contamination.
In addition, claims alleging personal injury or property damage may be brought
against the Company as a result of alleged exposure to hazardous substances
resulting from the Company's operations. The Company has not been notified that
it is a potentially responsible party under CERCLA or any similar state statute.
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons and certain
other refrigerants ("CFCs"). Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
systems, equipment and appliances containing these refrigerants and also
regulate the containment and recycling of these refrigerants. These requirements
have increased the Company's training expenses and expenditures for containment
and recycling equipment. The Clean Air Act is intended to ultimately eliminate
the use of CFCs in the United States and require alternative refrigerants to be
used in replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is expected
to continue to increase such costs in the future. As a result, the number of
conversions of existing HVAC systems which use CFCs to systems using alternative
refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles in
large vehicle fleets to use "alternative fuels," such as compressed natural gas
("CNG") or propane, and to meet reduced emissions standards. A significant
proportion of the vehicles in the Crown fleet that are currently in service have
been converted to use either CNG or gasoline. The Company does not anticipate
that the cost of additional fleet conversion that may be required under current
laws will be material. Future costs of compliance with these laws will be
dependent
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<PAGE>
upon the number of vehicles purchased in the future for use in the covered
geographic regions, as well as the number and size of future business
acquisitions by the Company in these regions. The Company cannot determine to
what extent its future operations and earnings may be affected by new
regulations or changes in existing regulations relating to vehicle emissions.
Prior to entering into the agreements relating to the Acquired Businesses,
the Company evaluated the properties to be acquired and property leases to be
assumed in the Acquired Businesses, and engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions at
certain properties owned or operated by the Acquired Businesses. No material
environmental problems were discovered in these reviews, and the Company is not
otherwise aware of any actual or potential environmental liabilities of the
Acquired Businesses that would be material to the Company. The Company in the
process of implementing various programs to promote compliance with applicable
health and worker safety regulations and to increase employee safety awareness.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1995 were not material. The Company does not
currently anticipate any material adverse effect on its business or consolidated
financial position as a result of future compliance with existing environmental
laws and regulations controlling the discharge of materials into the
environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may be
material.
LITIGATION AND INSURANCE
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. The Company is
not currently involved in any litigation the Company believes will have a
material adverse effect on its financial condition or results of operations.
The Company maintains various worker safety and quality control programs in
an attempt to reduce the risk of potential damage to persons and property. In
addition, the Company maintains insurance in such amounts and against such risks
as it deems prudent. No assurance can be given such insurance will be sufficient
under all circumstances to protect the Company against significant claims for
damages. The occurrence of a significant event not fully insured against could
materially and adversely affect the Company's financial condition and results of
operations. Moreover, no assurance can be given the Company will be able to
maintain adequate insurance in the future at commercially reasonable rates or on
acceptable terms.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer of ARS (ages are as of December 31, 1996):
NAME AGE POSITION
- --------------------------------- --- ----------------------------------------
C. Clifford Wright, Jr........... 44 Director(1)(2), President and Chief
Executive Officer
Howard S. Hoover, Jr............. 58 Director(1)(2)(3) and Chairman of the
Board
Gorden H. Timmons................ 47 Director(1) and Chief Operating Officer
William P. McCaughey............. 38 Director(2), Executive Vice President
and Chief Financial Officer
John D. Held..................... 34 Senior Vice President, General Counsel
and Secretary
Frank N. Menditch................ 45 Director(3); President of General
Heating
Elliot Sokolow................... 54 Director(3); President of Florida HAC
A. Jefferson Walker III.......... 34 Treasurer
Michael Mamaux................... 30 Controller
Thomas N. Amonett................ 54 Director(4)(5)
Robert J. Cruikshank............. 66 Director(2)(4)
Randall B. Hale.................. 34 Director(4)
Nolan Lehmann.................... 52 Director(5)
Don D. Sykora.................... 66 Director(1)(5)
- ------------
(1) Member of the Board's Executive Committee.
(2) Member of the Board's Nominating Committee.
(3) Member of the Board's Industry Relations Committee.
(4) Member of the Board's Audit Committee.
(5) Member of the Board's Compensation Committee.
C. CLIFFORD WRIGHT, JR. has been President and Chief Executive Officer and
a director since November 1995. From 1991 to 1995, Mr. Wright was Vice President
and Chief Financial Officer of American Ecology Corporation. From 1990 to 1991,
Mr. Wright was a Director of Corporate Finance with KPMG Peat Marwick. Prior
thereto, he was a divisional vice president in finance and planning of
Browning-Ferris Industries, Inc. ("BFI"). Mr. Wright is a Certified Public
Accountant.
HOWARD S. HOOVER, JR. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by BFI and served during his
tenure as a director and in various management capacities as a member of the
Senior Management Committee, Senior Vice President, General Counsel and
Secretary. From 1992 until 1995, Mr. Hoover was engaged in various business
development and consulting activities.
GORDEN H. TIMMONS has served as Chief Operating Officer and a director
since September 1996. He founded Atlas in 1976 and served as its President until
September 1996. Mr. Timmons was a founder of the Charleston Chapter of the Air
Conditioning Contractors of America ("ACCA") and is a past President of that
Chapter. Mr. Timmons has been active in computer systems development for HVAC
companies and is a frequent speaker at national industry conventions.
WILLIAM P. MCCAUGHEY has been Executive Vice President and Chief Financial
Officer since October 1996. He served as Executive Vice President -- Planning
and Development from November 1995 until October 1996. Mr. McCaughey has been a
director since November 1995. From 1992 to 1995, Mr. McCaughey was Treasurer of
American Ecology Corporation. From 1991 to 1992, he was President of
Environmental Financial Services, Inc., a research and consulting firm. He
served as Vice President and Corporate Treasurer of Republic Waste Industries,
Inc. from 1990 to 1991 and, prior thereto, was employed by BFI in several
financial positions from 1982 to 1990. Mr. McCaughey is a Chartered Financial
Analyst.
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<PAGE>
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
since March 1996. From October 1995 to March 1996, he was an associate at the
law firm of Liddell, Sapp, Zivley, Hill and LaBoon, LLP. Mr. Held was Associate
General Counsel of American Ecology Corporation from 1994 to 1995 and was an
associate at the law firm of Baker & Botts, L.L.P. prior thereto.
FRANK N. MENDITCH has been a director since September 1996. He has been
President of General Heating for more than the past five years. Mr. Menditch is
a past president of the National Capital Chapter of ACCA and of the Metro
Washington Heat Pump Association.
ELLIOT SOKOLOW has been a director since September 1996. He was a founder
of Florida HAC in 1970 and has served as its president since 1977. Mr. Sokolow
served as national President of ACCA in 1992 and 1993 and is the President-Elect
of the Florida Air Conditioning Contractors Association.
A. JEFFERSON WALKER III joined the Company in April 1996 as Treasurer and
was a consultant to the Company from January 1996 to March 1996. From 1993 to
January 1996, he was employed by American Ecology Corporation as a
Manager-Financial Analysis and Assistant Treasurer. From 1990 to 1993, Mr.
Walker served as a Senior Financial Analyst and Assistant Banking Officer of
Mellon Bank Corporation in Houston, Texas. Mr. Walker was a financial analyst at
BFI from 1988 to 1989.
MICHAEL MAMAUX joined the Company in April 1996 as Controller. From 1995
until April 1996, Mr. Mamaux was an assistant corporate controller at U.S.
Delivery Systems, Inc. Prior thereto, he was a Senior Auditor at Arthur Andersen
LLP. Mr. Mamaux is a Certified Public Accountant.
THOMAS N. AMONETT has been a director since September 1996. He has served
as President and a director of Reunion Resources Company (previously known as
Buttes Gas and Oil Company), a Houston-based company primarily engaged in
manufacturing high volume, precision plastic products; providing engineered
plastic services; oil and gas exploration, development and production; and wine
grape vineyard development, since 1992 and as acting Chief Executive Officer of
Weatherford Enterra, Inc. since July 1996. Previously, he was Of Counsel with
the law firm of Fulbright & Jaworski L.L.P. from 1986 to 1992. Prior thereto, he
was President and a director of Houston Oil Fields Company, an oil and gas
exploration and production company, from 1982 to 1986. Mr. Amonett also
currently serves as a director of Air-Cure Technologies, Inc., PetroCorp
Incorporated and Weatherford Enterra, Inc.
ROBERT J. CRUIKSHANK has been a director since September 1996. He is
primarily engaged in managing his personal investments in Houston. Prior to his
retirement in 1993, he was a Senior Partner in the accounting firm of Deloitte &
Touche. Mr. Cruikshank serves as a director of Houston Industries Incorporated,
MAXXAM Inc., Kaiser Aluminum Corporation, Compass Bank-Houston and Texas
Biotechnology Corporation.
RANDALL B. HALE has been a director since September 1996. He has been a
Vice President of Equus Capital Management Corporation ("ECMC") and Equus II
Incorporated ("Equus II") (see "Certain Transactions" and "Security
Ownership of Certain Beneficial Owners and Management") since 1992 and a
director of ECMC since February 1996. Mr. Hale currently serves as an officer or
director of several private businesses. From 1985 to 1992, he was employed by
Arthur Andersen LLP. Mr. Hale is a Certified Public Accountant. Mr. Hale was
appointed to the Board of Directors pursuant to the funding agreement between
ARS and Equus II (the "Equus Funding Agreement"), which terminated pursuant to
its terms on completion of the IPO. See "Certain Transactions -- Organization
of the Company."
NOLAN LEHMANN has been a director since September 1996. He has been the
President of ECMC since its formation in 1983 and of Equus II since its
formation in 1991 (see "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"). Prior thereto, Mr. Lehmann was
employed by Service Corporation International, where he held various positions,
including vice president -- regional manager and vice president -- corporate
development. Mr. Lehmann currently serves as a director of a number of public
and private companies, including Allied Waste Industries, Inc., Champion
Healthcare Corporation, Drypers Corporation and Garden Ridge Corporation. Mr.
Lehmann is a Certified Public Accountant. Mr. Lehmann was appointed to the Board
of Directors pursuant to the Equus Funding Agreement.
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<PAGE>
DON D. SYKORA has been a director since September 1996. He is currently a
consultant to Houston Industries Incorporated ("HII"). He served as President
and Chief Operating Officer of HII from 1993 until his retirement in 1995. From
1990 to 1993, Mr. Sykora was President and Chief Operating Officer of HII's
principal operating subsidiary, Houston Lighting & Power Company. Mr. Sykora is
currently serving as a director of Powell Industries, Inc., Pool Oilfield
Services, Inc. and TransTexas Gas Corp.
The Board of Directors is divided into three classes, each of which,
following a transitional period, will serve for three years, with one class
being elected each year at the annual stockholders' meeting. The term of the
Class I directors (Messrs. Wright, Sokolow and Amonett) will expire at the 1997
meeting. The term of the Class II directors (Messrs. Hoover, Menditch,
Cruikshank and Hale) will expire at the 1998 meeting. The term of the Class III
directors (Messrs. Timmons, McCaughey, Lehmann and Sykora) will expire at the
1999 meeting.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") receives a fee of $1,500 for each Board
meeting attended and $1,000 for each Board committee meeting attended (unless
held on the same day as a Board meeting) and will be periodically granted
options to purchase Common Stock pursuant to the Company's 1996 Incentive Plan
(the "Incentive Plan"). All directors are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board or Board committees and for
other expenses incurred in their capacity as directors.
EXECUTIVE COMPENSATION
ARS was incorporated in October 1995 and, prior to the IPO, did not conduct
any operations other than activities related to the IPO and the Initial
Acquisitions. The Company did not pay any compensation to its senior executive
officers in 1995. In 1996, the Company paid Mr. Wright his annual base salary
accrued from November 1, 1995 to December 31, 1995 at an annual rate of
$175,000. The Company's most highly compensated executive officers and their
annualized base salaries for 1996 are: Mr. Wright -- $175,000; Mr.
Timmons -- $175,000; Mr. Hoover -- $160,000; Mr. Menditch -- $150,000; and Mr.
Sokolow -- $150,000. Each of these officers is eligible to earn additional
performance-based incentive compensation for 1996.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Wright, Hoover, Timmons,
McCaughey, Menditch, Sokolow and Held, copies of which are included as exhibits
to the Registration Statement of which this Prospectus is a part. Each of these
agreements (i) provides for an annual minimum base salary, (ii) entitles the
employee to participate in all the Company's compensation plans (as defined) in
which executive officers of ARS participate and (iii) has a continuous
three-year term subject to the right of either party to terminate the employee's
employment at any time. If the employee's employment is terminated by the
Company without cause (as defined) or by the employee with good reason (as
defined), the employee will be entitled, during each of the years in the
three-year period beginning on the termination date, to (i) periodic payments
equal to his average annual cash compensation (as defined) from the Company,
including bonuses, if any, during the two years (or such shorter period of
employment) preceding the termination date and (ii) continued participation in
all the Company's compensation plans (other than the granting of new awards
under the Incentive Plan or any other performance-based plan). Except in the
case of a termination for cause, any stock options previously granted to the
employee under the Incentive Plan that have not been exercised and are
outstanding as of the time immediately prior to the date of his termination will
remain outstanding (and continue to become exercisable pursuant to their
respective terms) until exercised or the expiration of their term, whichever is
earlier. If a change of control (as defined) of the Company occurs, the employee
may terminate his employment at any time during the 365-day period following
that event and receive a lump sum payment equal to three times his highest
annual base salary under the agreement (plus such amounts as may be necessary to
hold the employee harmless from the consequences of any resulting
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<PAGE>
excise or other similar purpose tax relating to "parachute payments" under the
Internal Revenue Code of 1986, as amended. Each employment agreement contains a
covenant limiting competition with the Company for a period of one year
following termination of employment.
The Company also has employment agreements with Messrs. Walker and Mamaux
and with certain managers of the Company's principal operating facilities.
OPTION GRANTS
Options to purchase a total of 1,504,500 shares of Common Stock are
outstanding under the Incentive Plan. All these options have 10-year terms. Of
the shares subject to these options, 495,000 may be purchased at $8.00 per
share, 150,000 may be purchased at prices ranging from $9.60 to $10.80 per
share, 800,000 may be purchased at $15.00 per share (the IPO price to the
public) and 59,500 may be purchased at prices ranging from $18.63 to $23.50 per
share. The following sets forth information respecting the options granted to
certain executive officers:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES UNDERLYING TOTAL OPTIONS
NAME DATE OF GRANT OPTIONS GRANTED OUTSTANDING EXERCISE PRICE
- ------------------------------------- ------------------ ----------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... January 31, 1996 200,000 13.3% $8.00
Howard S. Hoover, Jr................. January 31, 1996 150,000 10.0% $8.00
William P. McCaughey................. January 31, 1996 120,000 8.0% $8.00
A. Jefferson Walker III.............. January 31, 1996 25,000 1.7% $8.00
</TABLE>
The options granted to Messrs. Wright, Hoover, McCaughey, Walker and one
other executive officer are exercisable in 50% increments on March 27, 1997 and
March 27, 1998, respectively. The options granted to Nonemployee Directors will
become exercisable in 33 1/3% annual increments beginning in 1997, while the
other outstanding options generally will become exercisable in 20% annual
increments beginning in 1997.
BONUS AWARDS
In June 1996, the Board of Directors granted Messrs. Wright, Hoover,
McCaughey and Held incentive cash bonus awards for 1996 which are based, subject
to the overall performance of the Company, on the performance of the Common
Stock after the Offering as compared to the performance of each of the stocks
included in the Standard & Poor's 500 Stock Index (the "S&P 500"). The amount
of each award will be determined by multiplying the officer's salary earned from
September 27, 1996 through December 31, 1996 by a percentage determined by
ranking the Common Stock's price performance including reinvested dividends, if
any ("Total Stockholder Return"), among Total Stockholder Returns of all the
stocks in the S&P 500, as follows:
PERCENTILE RANKING OF PERCENTAGE OF BASE
COMPANY'S TOTAL SALARY AS
STOCKHOLDER RETURN BONUS AWARD
- ------------------------------------- ------------------
50% or less.......................... 0%
51% - 65%............................ 50%
66% - 74%............................ 100%
75% - 89%............................ 150%
90% - 95%............................ 200%
96% - 100%........................... 250%
For 1996, the incentive bonus award calculation will be made from September
27, 1996 through December 31. The officers granted these awards will not be
eligible to participate in any other Company cash bonus award program in 1996.
The 1996 bonus for Mr. Timmons, if any, will be determined in accordance with
50% of the above formula and paid in January 1997 and the balance of such
officer's 1996 bonus award, if any, will be based upon performance standards
established by the Compensation Committee
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<PAGE>
of the Board of Directors. The 1996 bonuses for other officers and key employees
of the Company will be based upon the performance standards established by the
Compensation Committee.
1996 INCENTIVE PLAN
The objectives of the Incentive Plan, which was approved by the Board of
Directors and stockholders of ARS and generally is administered by the
Compensation Committee of the Board of Directors, are to (i) attract and retain
the services of key employees, qualified independent directors and qualified
consultants and other independent contractors and (ii) encourage the sense of
proprietorship in and stimulate the active interest of those persons in the
development and financial success of the Company by making awards ("Awards")
designed to provide participants in the Incentive Plan with a proprietary
interest in the growth and performance of the Company.
The Company has reserved 1,550,000 shares of Common Stock for use in
connection with the Incentive Plan. Beginning with the Company's last fiscal
quarter of 1996 and continuing each fiscal quarter thereafter, the number of
shares available for use in connection with the Incentive Plan will be the
greater of 1,550,000 or 15% of the number of shares of Common Stock outstanding
on the last day of the preceding calendar quarter. Shares subject to Awards that
are forfeited or terminated, exchanged for Awards that do not involve Common
Stock or expire unexercised, or are settled in cash in lieu of Common Stock or
otherwise such that the shares covered thereby are not issued, again become
available for Awards.
Persons available for Awards are (i) employees holding positions of
responsibility with the Company or any of its subsidiaries and whose performance
can have a significant effect on the success of the Company as well as
individuals who have agreed to become employees within six months of the date of
grant, (ii) Nonemployee Directors and (iii) nonemployee consultants and other
independent contractors providing, or who will provide, services to the Company
or any of its subsidiaries.
Awards may be in the form of (i) options to purchase a specified number of
shares of Common Stock at a specified price, which may be denominated in one or
both of Common Stock or units denominated in Common Stock, (ii) rights to
receive a payment, in cash or Common Stock, equal to the fair market value or
other specified value of a number of shares of Common Stock on the rights'
exercise date over a specified exercise price, (iii) restricted or unrestricted
grants of Common Stock or units denominated in Common Stock, (iv) grants
denominated in cash and (v) grants denominated in cash, Common Stock, units
denominated in Common Stock or any other property which are made subject to the
attainment of one or more performance goals.
OTHER PLANS
The Company has adopted deferred compensation, supplemental disability,
supplemental life and retirement or other benefit or welfare plans, including a
Section 401(k) savings plan, in which executive officers of the Company will be
eligible to participate.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
ARS was initially capitalized in October 1995 with $1,000 provided by
Messrs. Wright, Hoover and McCaughey. As a result of stock splits, the 1,000
shares initially issued by ARS to its founders total 422,483 shares of Common
Stock. Prior to the IPO, Equus II advanced funds to ARS pursuant to a $2.6
million commitment to enable ARS to pay various expenses incurred in connection
with its efforts to create the Company and effect the IPO. On the closing of the
IPO, $0.5 million of this note was converted into 844,962 shares of Common
Stock, and ARS repaid the balance of the note with proceeds from the IPO. As a
part of its funding arrangements with Equus II, ARS issued a warrant to Equus II
in March 1996 to purchase up to 100,000 shares of Common Stock at $15 per share.
That warrant will expire in 2001 to the extent not exercised.
The aggregate consideration paid by ARS to acquire the Founding Companies
consisted of (i) approximately $39.5 million in cash (including approximately
$4.7 million paid as a result of working
39
<PAGE>
capital adjustments) and (ii) 2,942,192 shares of Common Stock (including
137,139 shares into which the preferred stock of EHC was converted). In
addition, the Company also assumed all the indebtedness and preferred stock
payment obligations of the Founding Companies (approximately $22.3 million) and
repaid substantially all such indebtedness and obligations.
Pursuant to the agreements relating to the Initial Acquisitions, all
stockholders of each of the Founding Companies (other than Equus II and the
minority interest owners in Atlas) agreed not to compete with the Company prior
to September 24, 2000.
In connection with the Initial Acquisitions and as consideration for their
interests in the Founding Companies, certain directors of ARS, together with a
family trust in one case, received cash and shares of Common Stock, as follows:
Mr. Menditch -- $5.24 million and 222,222 shares; Mr. Timmons -- $5.83 million
and 820,027 shares; and Mr. Sokolow -- $6.68 million and 266,666 shares. In
addition, the following, together with family trusts in one case, received as
consideration for their interests in EHC, the following: Mr. Wright -- 52,300
shares and $237,000; Mr. Hoover -- 34,866 shares and $158,000; Mr.
McCaughey -- 52,300 shares and $237,000; and Equus II -- 376,073 shares and
$1.27 million. The consideration paid by ARS for EHC also included the repayment
or assumption of $13.2 million of indebtedness and other obligations EHC had
incurred to purchase Crown in March 1996 and A-ABC in May 1996. In addition, ARS
issued a warrant (since exercised) to purchase 8,333 shares of Common Stock at a
total purchase price of $83.33 in exchange for a warrant previously issued by
EHC to NationsBank (which, together with Equus II, had financed EHC's purchases
of Crown and A-ABC). EHC had paid $17.5 million in cash to purchase Crown and
certain real estate used in its business and $2.0 million in cash to purchase
A-ABC. For purposes of purchasing EHC, ARS valued EHC on a basis consistent with
the other Initial Acquisitions, using the same multiple of cash flow, as
adjusted for owners' compensation and other nonrecurring items and for working
capital and the fair market value of real estate, if any, being acquired.
On the closing of the IPO, the Company issued 39,987 shares of Common Stock
pursuant to the Company's Incentive Plan to employees, three officers (other
than Messrs. Wright, Hoover and McCaughey) and consultants of ARS and its
affiliates and recognized $600,000 of compensation expense.
REAL ESTATE AND OTHER TRANSACTIONS
Atlas leases office and warehouse space at two locations from a company in
which Mr. Timmons has a 50% ownership interest. Rentals under these leases,
which extend to May 2005 and May 2006, respectively, currently total $183,800
annually and will increase if a specified prime interest rate increases to 11%
or above. Atlas also leases office and warehouse space from a partnership in
which members of Mr. Timmons' immediate family have a 50% ownership interest.
This lease extends to February 2006 and provides for total annual rentals of
$42,000. Office space at another location is leased by Atlas from a partnership
in which Mr. Timmons owns a 90% interest. The lease commenced in November 1996
for a three-year term, with initial annual rentals of $25,600. Atlas had a
receivable from Mr. Timmons of approximately $195,000 as of December 31, 1995,
which he subsequently paid in full.
General Heating leases office and warehouse space under four leases from a
limited partnership owned by Mr. Menditch, his brothers and trusts for the
benefit of their children. Annual rentals under the leases, which expire at the
end of 2005, currently total $491,373 and will increase a minimum of 4% each
year. General Heating had receivables from Mr. Menditch of approximately
$308,139 as of December 31, 1995, which he subsequently paid in full.
Florida HAC leases its principal office and warehouse space from a limited
partnership 80% owned by Mr. Sokolow. The annual rental under the lease, which
is scheduled to expire May 31, 2005, currently is $224,856 and will increase 5%
each year. Florida HAC had borrowings outstanding from Mr. Sokolow of
approximately $641,804 as of December 31, 1995. Florida HAC subsequently repaid
this amount.
The Company believes the rentals provided under the leases described above
are fair market rentals.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 20, 1996, the "beneficial
ownership" (as defined by the SEC) of the Common Stock of (i) each person known
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all executive
officers and directors of the Company as a group.
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ------------------------------------- ----------- -------
Equus II Incorporated(2)............. 1,321,037 12.7%
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Gorden H. Timmons(3)................. 820,027 7.9%
Elliot Sokolow....................... 266,666 2.6%
Frank N. Menditch.................... 222,222 2.1%
C. Clifford Wright, Jr............... 210,731 2.0%
William P. McCaughey................. 210,731 2.0%
Howard S. Hoover, Jr................. 140,725 1.4%
John D. Held......................... 5,333 *
A. Jefferson Walker III.............. 3,666 *
Michael Mamaux....................... 3,000 *
Nolan Lehmann........................ 2,000 *
Robert J. Cruikshank................. 2,000 *
Randall B. Hale...................... 1,000 *
Thomas N. Amonett.................... 1,000 *
Don D. Sykora........................ 1,000 *
All executive officers and directors
as a group(3) (14 persons)......... 1,890,101 18.2%
- ------------
* Less than 1%.
(1) Shares shown do not include shares that could be acquired upon exercise of
currently outstanding stock options which do not vest within 60 days hereof.
(2) Shares shown include 100,000 shares obtainable on exercise of a warrant
exercisable at $15.00 per share. Nolan Lehmann, a director of the Company,
is the President of Equus II and thus may be deemed to be the beneficial
owner of shares held by Equus II. Mr. Lehmann disclaims beneficial ownership
of all those shares.
(3) Includes shares held by a trust of which Mr. Timmons is the trustee and may
be deemed the beneficial owner.
Except as otherwise indicated, the address of each person listed in the
above tables is c/o American Residential Services, Inc., Post Oak Tower, Suite
725, 5051 Westheimer, Houston, Texas 77056-5604. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of December 20, 1996, 10,370,865 shares of Common Stock were
outstanding. The 4,830,000 shares sold in the IPO (other than to affiliates of
the Company) are freely tradable by the public. The remaining outstanding shares
of Common Stock (collectively, the "Restricted Shares") have not been
registered under the Securities Act and may be resold publicly only following
their effective registration under that act or pursuant to an available
exemption from the registration requirements of that act (such as Rule 144
thereunder).
The shares of Common Stock reserved or to be available for issuance
pursuant to the Incentive Plan are registered for issuance under the Securities
Act. These shares generally may be sold in the open market by holders who are
not affiliates of the Company and, subject to the volume and other limitations
of Rule 144, by holders who are affiliates of the Company.
In general, under Rule 144 as currently in effect, if a minimum of two
years has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who may
be deemed "affiliates" of the Company, would be entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock and (ii) the
average weekly trading volume during a preceding period of four calendar weeks.
Sales under Rule 144 are also subject to certain provisions as to the manner of
sale, notice requirements and the availability of current public information
about the Company. In addition, under Rule 144(k), if a period of at least three
years has elapsed since the later of the date restricted securities were
acquired from the Company or the date they were acquired from an affiliate of
the Company, a stockholder who is not an affiliate of the Company at the time of
sale and has not been an affiliate for at least three months prior to the sale
would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof. The SEC has proposed an amendment to Rule 144 that
would shorten the three- and two-year holding periods described above to two
years and one year, respectively.
The Company has agreed not to offer or sell any shares of Common Stock
during the 180-day period following September 24, 1996 (the "Lockup Period")
without the prior written consent of Smith Barney Inc., except that the Company
may issue Common Stock in connection with acquisitions or on the exercise of
options or warrants outstanding as of September 27, 1996. Further, all the
executive officers of ARS, substantially all the former owners of the Founding
Companies and Equus II are contractually prohibited from selling the shares
they own during the Lockup Period. In addition, the holders of the 2,805,053
shares of Common Stock issued in connection with the Initial Acquisitions have
agreed with the Company that, except for limited private transfers, they will
not sell, transfer or otherwise dispose of any of their shares during the
two-year period ending September 27, 1998 (or during such shorter period as the
SEC may prescribe as the holding period for restricted securities under Rule
144). The holders of substantially all the shares of Common Stock issued in 1996
in connection with acquisitions subsequent to the Initial Acquisitions have
agreed with the Company that, except for limited private transfers, they will
not sell, transfer or otherwise dispose of any of their shares until they have
held them for at least two years.
The Company has entered into a registration rights agreement with most of
the former owners of the Acquired Businesses (the "Registration Rights
Agreement"), which provides certain registration rights with respect to the
Common Stock issued to such stockholders in connection with the acquisitions of
those businesses. The Registration Rights Agreement provides for a single demand
registration right, exercisable by the holders of a majority of the shares of
Common Stock subject to the agreement, pursuant to which the Company will file a
registration statement under the Securities Act to register the sale of shares
by those requesting stockholders and any other holders of Common Stock subject
to the agreement who desire to sell pursuant to such registration statement. The
demand request may not be made until the expiration of two years after September
24, 1996 (subject to a corresponding reduction if the two-year holding period
for restricted securities under Rule 144 is reduced by the Commission). In
addition, subject to certain
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<PAGE>
conditions and limitations, the Registration Rights Agreement will provide the
holders of Common Stock subject to the agreement with the right to participate
in registrations by the Company of its equity securities in underwritten
offerings. The registration rights conferred by the Registration Rights
Agreement will terminate on December 31, 2000. In addition, pursuant to separate
registration rights agreements with Equus II and NationsBank, both Equus II and
NationsBank have the right, in the event the Company proposes to register under
the Securities Act any Common Stock for its own account or for the account of
others, subject to certain exceptions, to require the Company to include shares
owned by them in the registration.
In the case of each registration rights agreement described above, the
Company is generally required to pay the costs associated with such an offering
other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. In
addition, in the case of the separate registration rights agreements with Equus
II and NationsBank, the Company is obligated to pay the fees and expenses of
legal counsel for the selling stockholders thereunder. Each registration rights
agreement provides that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter determines that market conditions require such a
limitation. Under each agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the registration rights agreement.
Persons receiving shares of Common Stock offered hereby in connection with
an acquisition will ordinarily be required to agree to hold portions of such
shares for periods of up to two years after the date of such acquisition. These
agreements may be modified by the Company in connection with any particular
business combination. Absent an agreement to hold the shares of Common Stock for
some period or after the expiration of such period, such shares generally will
be freely tradeable by persons not affiliated with the Company.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of ARS consists of 50,000,000 shares of Common
Stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share (the "Preferred Stock"). At December 20, 1996,
10,370,865 shares of Common Stock were issued and outstanding. The following
summary is qualified in its entirety by reference to the Restated Certificate of
Incorporation of ARS (the "Certificate of Incorporation"), which is included
as an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, and each share has one
vote. The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive
rights, is not convertible, redeemable, assessable or entitled to the benefits
of any sinking fund. The holders of Common Stock are entitled to dividends in
such amounts and at such times as may be declared by the Board of Directors out
of funds legally available therefore. See "Dividend Policy" for information
regarding the Company's dividend policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and limitations prescribed by law, the Board
of Directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions),
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<PAGE>
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the Preferred Stock, in each case without
any further action or vote by the holders of Common Stock.
Although ARS has no present intention to issue shares of Preferred Stock,
the issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For example, the issuance of a series of Preferred Stock might impede a business
combination by including class voting rights that would enable the holders to
block such a transaction; or such issuance might facilitate a business
combination by including voting rights that would provide a required percentage
vote of the stockholders. In addition, under certain circumstances, the issuance
of Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of ARS, the Board of Directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then-market
price of such stock. The Board of Directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which the securities of
ARS are traded.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from ARS a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock"), at a purchase price of
$40.00 per Fractional Share, subject to adjustment in certain events (the
"Purchase Price"). The following summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement between ARS and a Rights Agent (the "Rights Agreement"), the
form of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur upon the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of Common Stock (the date of the announcement being the "Stock Acquisition
Date") or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as Equus II, together with all affiliates
and associates thereof, remains the beneficial owner of 15% or more of the
outstanding shares of Common Stock, Equus II shall not be or become an Acquiring
Person unless and until it, together with all affiliates and associates thereof,
becomes the beneficial owner of additional shares of Common Stock constituting
1% or more of the then-outstanding shares of Common Stock or any other person
who is the beneficial owner of at least 1% of the then outstanding shares of
Common Stock shall become an affiliate or associate of Equus II. In certain
circumstances the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 30, 2006, unless earlier redeemed or exchanged
by the Company as described below.
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<PAGE>
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board of Directors, no other
shares of Common Stock issued after the Distribution Date will be issued with
Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board of Directors determines to be fair to and otherwise in the
best interests of the Company and its stockholders (a "Permitted Offer")),
each holder of a Right will thereafter have the right to receive, on exercise of
that Right, a number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a Current Market Price
(as defined in the Rights Agreement) equal to two times the exercise price of
the Right. Notwithstanding the foregoing, following the occurrence of any
Triggering Event, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person (or by
certain related parties) will be null and void in the circumstances set forth in
the Rights Agreement. Rights are not exercisable following the occurrence of any
Flip-In Event until such time as the Rights are no longer redeemable by the
Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) the Company is acquired in a merger
or other business combination transaction (other than certain mergers that
follow a Permitted Offer) or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as set forth above) shall thereafter have the right
to receive, on exercise of such Right, a number of shares of common stock of the
acquiring company having a Current Market Price equal to two times the exercise
price of the Right. Flip-In Events and Flip-Over Events are collectively
referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
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<PAGE>
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, and/or other equity securities
deemed to have the same value as one share of Common Stock, per Right, subject
to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors only in order to cure
any ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.
The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Company's Board of Directors. As a result, the
overall effect of the Rights may be to render more difficult or discourage any
attempt to acquire the Company, even if such acquisition may be favorable to the
interests of the Company's stockholders. Because the Board of Directors can
redeem the Rights or approve a Permitted Offer, the Rights should not interfere
with a merger or other business combination approved by the Board. The Rights
are being issued to protect the Company's stockholders from coercive or abusive
takeover tactics and to afford the Company's Board of Directors more negotiating
leverage in dealing with prospective acquirors.
STATUTORY BUSINESS COMBINATION PROVISION
ARS is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination"(as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary
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damages for conduct constituting gross negligence in the exercise of their duty
of care. Delaware law enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of directors of ARS to ARS or its
stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of ARS will not be personally liable for monetary damages for breach
of a director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to ARS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the DGCL or (iv)
for any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited ARS and its stockholders.
The Bylaws of ARS provide indemnification to its officers and directors and
certain other persons with respect to certain matters, and ARS has entered into
agreements with each of its directors and executive officers providing for
indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board, the President or a majority of the Board of
Directors.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. As a result,
it is currently contemplated that approximately one-third of the Company's Board
of Directors will be elected each year. The classified board provision could
prevent a party who acquires control of a majority of the outstanding voting
stock of ARS from obtaining control of the Board of Directors until the second
annual stockholders meeting following the date the acquiror obtains the
controlling interest. See "Management -- Directors and Executive Officers."
The Certificate of Incorporation provides that the number of directors
shall be as determined by the Board of Directors from time to time, but shall
not be less than three. It also provides that directors may be removed only for
cause, and then only by the affirmative vote of the holders of at least a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of the Certificate of Incorporation authorizing
the Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain provisions (i) requiring that advance notice be
delivered to ARS of any business to be brought by a stockholder before an annual
meeting of stockholders and (ii) establishing certain procedures to be followed
by stockholders in nominating persons for election to the Board of Directors.
Generally, such advance notice provisions provide that written notice must be
given to the Secretary of ARS by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting, not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders (with certain exceptions if the date of the annual meeting is
different by more than specified amounts from the anniversary date), and (ii) in
the event of nominations of persons for election to the Board of Directors by
any stockholder, (a) with respect to an election to be held at the annual
meeting of stockholders, not less than 90 days prior to the anniversary date of
the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than specified
amounts from the anniversary date), and (b) with respect to an election to be
held at a special meeting of stockholders for the election of directors, not
later than the close of business on the 10th day following the day on which
notice of the date of the special meeting was mailed to stockholders or public
disclosure of the date of the special meeting was made, whichever first occurs.
Such notice must set forth specific information regarding
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such stockholder and such business or director nominee, as described in the
Bylaws. The foregoing summary is qualified in its entirety by reference to the
Bylaws, which are included as an exhibit to the Registration Statement of which
this Prospectus is a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 5,000,000 shares of
Common Stock, which ARS may issue from time to time in connection with future
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions.
ARS expects that the terms on which it may issue the shares of Common Stock
covered hereby will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and that the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of shares.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by John D. Held, Esq., Senior Vice President, General
Counsel and Secretary of the Company. Mr. Held owns 5,333 shares of Common Stock
and Incentive Plan options to purchase 75,000 shares of Common Stock.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation........... F-3
Pro Forma Combined Balance Sheet
as of September 30, 1996
(unaudited).................... F-4
Pro Forma Combined Statement of
Operations for the Year Ended
December 31, 1995
(unaudited).................... F-5
Pro Forma Combined Statement of
Operations for the Nine Months
Ended September 30, 1996
(unaudited).................... F-6
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-7
Historical Financial Statements
American Residential Services,
Inc. and Subsidiaries
Consolidated Balance
Sheets..................... F-9
Consolidated Statements of
Operations................. F-10
Pro Forma Combined
Statements of Operations... F-11
Consolidated Statements of
Cash Flows................. F-12
Notes to Consolidated
Financial Statements....... F-13
American Residential Services,
Inc.
Report of Independent
Public Accountants......... F-15
Balance Sheets............. F-16
Statements of Operations... F-17
Statements of Shareholders'
Deficit.................... F-18
Statements of Cash Flows... F-19
Notes to Financial
Statements................. F-20
General Heating Engineering
Company, Inc.
Report of Independent
Public Accountants......... F-25
Balance Sheets............. F-26
Statements of Operations... F-27
Statements of Shareholders'
Equity..................... F-28
Statements of Cash Flows... F-29
Notes to Financial
Statements................. F-30
Atlas Services, Inc., and
Subsidiary
Report of Independent
Public Accountants......... F-35
Consolidated Balance
Sheets..................... F-36
Consolidated Statements of
Operations................. F-37
Consolidated Statements of
Shareholders' Equity....... F-38
Consolidated Statements of
Cash Flows................. F-39
Notes to Consolidated
Financial Statements....... F-40
F-1
<PAGE>
PAGE
-----
Enterprises Holding Company and
Subsidiaries
Consolidated Balance
Sheet...................... F-48
Consolidated Statement of
Operations................. F-49
Consolidated Statement of
Shareholders' Equity....... F-50
Consolidated Statement of
Cash Flows................. F-51
Notes to Consolidated
Financial Statements....... F-52
Service Enterprises, Inc., and
Subsidiaries
Report of Independent
Public Accountants......... F-60
Consolidated Balance
Sheets..................... F-61
Consolidated Statements of
Operations................. F-62
Consolidated Statements of
Shareholder's Equity....... F-63
Consolidated Statements of
Cash Flows................. F-64
Notes to Consolidated
Financial Statements....... F-65
Florida Heating and Air
Conditioning, Inc., and Related
Companies
Report of Independent
Public Accountants......... F-72
Combined Balance Sheets.... F-73
Combined Statements of
Operations................. F-74
Combined Statements of
Shareholders' Equity....... F-75
Combined Statements of Cash
Flows...................... F-76
Notes to Combined Financial
Statements................. F-77
DIAL ONE Meridian and Hoosier,
Inc.
Report of Independent
Public Accountants......... F-83
Balance Sheets............. F-84
Statements of Operations... F-85
Statements of Shareholder's
Equity..................... F-86
Statements of Cash Flows... F-87
Notes to Financial
Statements................. F-88
ADCOT, Inc.
Report of Independent
Public Accountants......... F-95
Balance Sheets............. F-96
Statements of Operations... F-97
Statements of Shareholder's
Deficit.................... F-98
Statements of Cash Flows... F-99
Notes to Financial
Statements................. F-100
Metro Heating and Air
Conditioning, Inc.
Report of Independent
Public Accountants......... F-104
Balance Sheets............. F-105
Statements of Operations... F-106
Statements of Shareholders'
Equity..................... F-107
Statements of Cash Flows... F-108
Notes to Financial
Statements................. F-109
F-2
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by American Residential Services, Inc. ("ARS"), of
substantially all the net assets of seven residential services businesses
(together with the common parent of two of those businesses, the "Founding
Companies") in separate transactions (the "Initial Acquisitions")
simultaneously with the closing of ARS's initial public offering of its Common
Stock (the "Offering") on September 27, 1996. The acquisitions were accounted
for using the purchase method of accounting, and Atlas Services, Inc., one of
the Founding Companies, has been identified as the acquiror for financial
statement presentation purposes. During the fourth quarter of 1996, ARS acquired
an additional 13 residential service businesses (together with the Founding
Companies, the "Acquired Businesses") which also were accounted for using the
purchase method of accounting. One of the 13 businesses acquired, Metro Heating
and Air Conditioning, Inc. ("Metro"), is deemed, pursuant to the applicable
rules of the Securities and Exchange Commission, to be a "significant
subsidary." Accordingly, Metro has been shown separately in the accompanying
unaudited pro forma combined financial statements and the audited historical
financial statements of Metro are included separately herein. The other 12
acquisitions completed subsequent to September 30, 1996 are presented as "Other
Subsequent Acquisitions" in the pro forma presentation.
The unaudited pro forma combined balance sheet gives effect to the
following events that occurred in the fourth quarter of 1996 as if they had
occurred on September 30, 1996: (i) the issuance and sale of (a) 630,000 shares
of Common Stock for net proceeds of $8.8 million pursuant to the exercise of the
underwriters' overallotment option in connection with the IPO and (b) 8,333
shares of Common Stock for nominal consideration pursuant to the exercise of a
warrant; (ii) the payment of $1.8 million as additional working capital
adjustments in connection with the Initial Acquisitions; and (iii) the
acquisition of Metro and the Other Subsequent Acquisitions and the financing and
payment of the related purchase prices. The allocation of purchase price to the
assets acquired and liabilities assumed has been initially assigned and recorded
based on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available. Also, the purchase price is based on available information, certain
assumptions management deems appropriate and preliminary estimates of fair value
assigned to the shares of ARS Common Stock issued in such transactions which
carry certain restrictions regarding disposition by their holders, and such
value may be revised as additional information becomes available. The unaudited
pro forma combined statements of operations give effect to the Acquired
Businesses as if they had occurred at the beginning of each period presented.
The unaudited pro forma combined financial information presented herein
does not purport to represent what the Company's financial position or results
of operations would have actually been had such events occurred at the beginning
of the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Acquired Businesses. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. Also see "Risk Factors"
included elsewhere herein.
F-3
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
ARS AND SUBSEQUENT PRO FORMA
SUBSIDIARIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
------------ --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,376 $ 891 $ 3,683 $ (1,760)(a) $ 5,190
Accounts receivable --
Trade, net of allowance.... 14,156 2,565 5,541 -- 22,262
Other receivables.......... 416 81 145 -- 642
Inventories..................... 5,345 1,887 3,008 -- 10,240
Prepaid expenses and other
current assets................ 742 -- 527 -- 1,269
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 470 63 -- -- 533
------------ --------- ------------ ----------- ---------
Total current
assets............. 23,505 5,487 12,904 (1,760) 40,136
PROPERTY AND EQUIPMENT, net.......... 13,041 2,512 2,735 -- 18,288
OTHER NONCURRENT ASSETS.............. 1,132 2 592 125(c) 1,851
GOODWILL............................. 60,973 -- 376 226(a) 117,801
56,226(b)
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 78 -- -- -- 78
------------ --------- ------------ ----------- ---------
Total assets.......... $ 98,729 $ 8,001 $ 16,607 $ 54,817 $ 178,154
============ ========= ============ =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term
debt.......................... $ 295 $ 1,000 $ 1,602 $ (2,602)(b) $ 295
Accounts payable and accrued
expenses...................... 14,908 1,799 4,897 (60)(b) 21,544
Unearned revenue on service and
warranty contracts, current... 1,834 316 332 (3)(b) 2,479
Billings in excess of cost and
estimated earnings on
uncompleted contracts......... 1,793 25 85 -- 1,903
Deferred income taxes........... 302 -- 314 -- 616
------------ --------- ------------ ----------- ---------
Total current
liabilities........ 19,132 3,140 7,230 (2,665) 26,837
LONG-TERM DEBT, net of current
maturities......................... 7,609 -- 1,924 42,979(b) 43,723
(8,789)(d)
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS NONCURRENT............... 612 -- 95 -- 707
DEFERRED INCOME TAXES................ 262 -- -- -- 262
OTHER NON-CURRENT LIABILITIES........ 20 -- -- -- 20
SHAREHOLDERS' EQUITY
Common stock.................... 8 6 147 (152)(b) 10
1(d)
Additional paid-in capital...... 81,579 -- 174 27,956(b) 118,622
125(c)
8,788(d)
Retained earnings (deficit)..... (10,493) 4,855 7,037 (1,534)(a) (12,027)
(11,892)(b)
------------ --------- ------------ ----------- ---------
Total shareholders'
equity............. 71,094 4,861 7,358 23,292 106,605
------------ --------- ------------ ----------- ---------
Total liabilities and
shareholders'
equity............. $ 98,729 $ 8,001 $ 16,607 $ 54,817 $ 178,154
============ ========= ============ =========== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
FOUNDING SUBSEQUENT PRO FORMA
ATLAS COMPANIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
--------- --------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 22,048 $92,588 $ 20,550 $ 49,588 -- $184,774
COST OF SERVICES..................... 17,811 67,409 14,367 33,453 -- 133,040
--------- --------- --------- ------------ ----------- ---------
Gross Profit..................... 4,237 25,179 6,183 16,135 -- 51,734
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,022 21,327 4,085 13,894 (3,543)(e) 38,080
(221)(g)
(484)(h)
GOODWILL AMORTIZATION................ -- -- -- -- 2,945(i) 2,945
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 1,215 3,852 2,098 2,241 1,303 10,709
OTHER INCOME (EXPENSE):
Interest income.................. 17 445 12 6 -- 480
Interest expense................. (134) (240) (35) (194) (2,676)(j) (3,279 )
Other............................ 20 131 4 163 -- 318
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 1,118 4,188 2,079 2,216 (1,373) 8,228
PROVISION FOR INCOME TAXES........... 434 866 -- 832 2,038(k) 4,170
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 684 $ 3,322 $ 2,079 $ 1,384 $(3,411) $ 4,058
========= ========= ========= ============ =========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .39
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 10,371 (l)
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
FOUNDING SUBSEQUENT PRO FORMA
ATLAS COMPANIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
------- --------- ------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $23,326 $74,935 $19,383 $42,926 $-- $160,570
COST OF SERVICES..................... 18,577 53,443 13,894 29,097 -- 115,011
------- --------- ------- ------------- ----------- ---------
Gross Profit..................... 4,749 21,492 5,489 13,829 45,559
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,826 21,852 3,888 11,449 (3,099) (e) 33,286
(3,064)(f)
(1,003)(g)
(563)(h)
GOODWILL AMORTIZATION................ -- 140 -- -- 2,068(i) 2,208
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 923 (500) 1,601 2,380 5,661 10,065
OTHER INCOME (EXPENSE):
Interest income.................. (4) 213 9 5 -- 223
Interest expense................. (165) (5,242) (70) (153) 4,221(f) (2,460 )
(1,051)(j)
Other............................ 163 61 6 251 -- 481
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 917 (5,468) 1,546 2,483 8,831 8,309
PROVISION FOR INCOME TAXES........... 344 874 -- 936 1,827(k) 3,981
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 573 $(6,342) $ 1,546 $ 1,547 $ 7,004 $ 4,328
======= ========= ======= ============= =========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .42
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 10,371 (l)
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. AMERICAN RESIDENTIAL SERVICES, INC. BACKGROUND:
American Residential Services, Inc. (ARS and, together with its
subsidiaries, the "Company") was formed to create a leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning, plumbing, electrical and other systems in
homes and commercial buildings and (ii) new installation services of those
systems in homes and commercial facilities under construction. On September 27,
1996, ARS acquired seven residential services businesses (together with the
common parent of two of those businesses, the "Founding Companies") in separate
transactions (the "Initial Acquisitions") simultaneously with the closing of
ARS's initial public offering (the "Offering") of its common stock ("Common
Stock"). During the fourth quarter of 1996, ARS acquired an additional 13
residential services businesses (together with the Founding Companies, the
"Acquired Businesses"). ARS conducted no operations prior to September 30, 1996
except in connection with the Offering and the Initial Acquisitions.
2. ACQUISITION OF ACQUIRED BUSINESSES:
For financial statement presentation purposes, Atlas Services, Inc., one of
the Founding Companies, is treated as the accounting acquiror, and the effective
date of the Initial Acquisitions is September 30, 1996.
The estimated purchase price for the Acquired Businesses is subject to
certain purchase price adjustments following closing. The allocation of purchase
price to the assets acquired and liabilities assumed has been initially assigned
and recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available. Also, the purchase price is based on preliminary estimates of
value assigned to the shares of Common Stock issued in such transactions which
carry certain restrictions regarding disposition by their holders, and such
value may be revised as additional information becomes available. See "Certain
Transactions -- Organization of the Company."
Based upon management's preliminary analysis, ARS anticipates that the
historical carrying value of the Acquired Businesses' assets and liabilities
will approximate fair value. The amount allocated to goodwill is $117.8 million.
Management of ARS has not identified any other material tangible or identifiable
intangible assets of the Acquired Businesses to which a portion of the purchase
price could reasonably be allocated.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the distribution of remaining working capital payments
to the previous owners of the Founding Companies.
(b) Records the allocation of purchase price to Metro Heating and
Air Conditioning, Inc. (Metro) and the 12 other residential services
businesses (the Other Subsequent Acquisitions) by the Company in the fourth
quarter of 1996 as if their acquisition occurred on September 30, 1996.
(c) Records the exercise of a warrant to purchase shares of Common
Stock having a value of $125,000 and recorded as a financing fee.
(d) Records the issuance of 630,000 shares of common stock at $13.95
per share (net of underwriting discounts and commissions)(representing net
proceeds to ARS of $8.8 million) pursuant to the exercise of the
underwriters' overallotment option in connection with the Offering.
F-7
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS ADJUSTMENTS:
(e) Adjusts compensation to the level the owners of certain of the
Acquired Businesses have agreed to receive subsequent to the acquisitions
of the Acquired Businesses.
(f) To adjust for non-recurring, non-cash charges relating to shares
of Common Stock issued to the shareholders of Enterprises Holding Company,
including working capital adjustments of $1.2 million.
(g) Adjusts rent expense on certain facilities leased from certain
previous owners and adjusts for other non-recurring expenses.
(h) Adjusts for the effect of assets distributed to and the costs of
certain leases assumed by the owners of certain Acquired Businesses.
(i) Records the pro forma goodwill amortization expense using a
40-year estimated life.
(j) Records change in interest expense for pro forma adjustments to
debt.
(k) Records the incremental provision for federal and state income
taxes relating to the compensation differential, S corporation income and
other pro forma adjustments.
(l) The number of shares outstanding on completion of the Offering
and the purchase of the Subsequent Acquisitions includes the following, but
excludes a warrant to purchase 100,000 shares that became exercisable
immediately after the Offering and an aggregate 1,504,500 shares subject to
options granted under the Company's 1996 Incentive Plan as the effect of
such options is less than three percent of total shares outstanding.
Outstanding (as adjusted to reflect
a stock split).................... 422,480
Issued in the Offering............. 4,830,000
Issued to acquire Founding
Companies......................... 2,805,053
Conversion of a portion of an ARS
convertibile note................. 844,962
Conversion of a portion of the EHC
Preferred Stock................... 137,140
Shares awarded under Company's 1996
Incentive Plan.................... 39,987
Exercise of lender's warrant....... 8,333
Shares issued in the Metro and
Other Subsequent Acquisition
transactions...................... 1,282,910
------------
Shares estimated to be
outstanding....................... 10,370,865
============
F-8
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 241,263 $ 2,376,090
Accounts receivable.............
Trade, net................. 2,163,990 14,155,657
Shareholder and
affiliate............... 211,939 --
Other receivables.......... -- 416,097
Inventories..................... 531,819 5,345,255
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 254,039 469,894
Prepaid expenses and other
current assets................ 146,283 741,540
------------ -------------
Total current assets....... 3,549,333 23,504,533
PROPERTY AND EQUIPMENT, net.......... 3,136,363 13,041,445
GOODWILL, net........................ 49,194 60,973,453
OTHER NONCURRENT ASSETS.............. 357,122 1,132,322
NET ASSETS OF DISCONTINUED
OPERATIONS......................... -- 77,793
------------ -------------
Total assets............... $7,092,012 $ 98,729,546
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
obligations................... $ 596,941 $ 294,671
Short-term debt................. 209,948 --
Accounts payable and accrued
liabilities................... 2,391,955 14,908,477
Unearned revenue on service and
warranty contracts............ 162,755 1,833,801
Current billings in excess of
cost and estimated earnings on
uncompleted contracts......... 475,731 1,793,152
Deferred income taxes........... -- 301,937
------------ -------------
Total current
liabilities............. 3,837,330 19,132,038
LONG-TERM OBLIGATIONS, net of current
maturities......................... 1,564,309 7,608,563
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS, NONCURRENT..... -- 612,942
DEFERRED INCOME TAXES, net of current
portion............................ 187,237 262,367
OTHER NONCURRENT LIABILITIES......... -- 20,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value,
100,000 shares authorized,
24,303 issued and outstanding,
and $.001 par value,
50,000,000 shares authorized,
8,449,622 shares issued and
outstanding................... 24,303 8,450
Additional paid-in capital...... 105,040 81,578,718
Retained earnings (deficit)..... 1,373,793 (10,493,532)
------------ -------------
Total stockholders'
equity.................. 1,503,136 71,093,636
------------ -------------
Total liabilities and
stockholders' equity.... $7,092,012 $ 98,729,546
============ =============
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- ------------------------------
1995 1996 1995 1996
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 5,609,303 $ 9,233,483 $ 15,963,449 $ 23,325,855
COST OF SERVICES..................... 4,537,755 7,219,742 12,947,027 18,576,719
------------ -------------- -------------- --------------
Gross Profit.................... 1,071,548 2,013,741 3,016,422 4,749,136
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES*.......................... 732,732 4,587,042 2,171,958 6,855,015
------------ -------------- -------------- --------------
Operating income (loss)......... 338,816 (2,573,301) 844,464 (2,105,879)
OTHER INCOME (EXPENSE):
Interest expense*............... (26,789) (4,334,535) (107,445) (4,430,985)
Interest income................. 6,250 -- 12,272 4,308
Other........................... (8,962) 118,686 29,289 162,926
------------ -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT).......................... 309,315 (6,789,150) 778,580 (6,369,630)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 119,395 (36,342) 308,617 113,858
------------ -------------- -------------- --------------
NET INCOME (LOSS).................... $ 189,920 $ (6,752,808) $ 469,963 $ (6,483,488)
============ ============== ============== ==============
</TABLE>
- ------------
* Includes $3.1 million and $4.2 million in compensation and finance costs,
respectively, related to the purchase of Enterprises Holding Company, an
affiliate of ARS.
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- --------------------
1995 1996 1995 1996
--------- --------- --------- ---------
REVENUES........................... $ 30,869 $ 36,725 $ 84,725 $ 98,261
COST OF SERVICES................... 22,827 26,526 63,193 72,020
--------- --------- --------- ---------
Gross Profit.................. 8,042 10,199 21,532 26,241
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 5,814 7,869 17,003 21,047
--------- --------- --------- ---------
Operating income.............. 2,228 2,330 4,529 5,194
OTHER INCOME (EXPENSE):
Interest expense.............. -- -- -- (125)
Interest income............... 128 -- 252 52
Other......................... 38 224 114 313
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.............. 2,394 2,554 4,895 5,434
PROVISION FOR INCOME TAXES......... 1,124 1,133 2,268 2,492
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS.. $ 1,270 $ 1,421 $ 2,627 $ 2,942
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,080 9,080 9,080 9,080
========= ========= ========= =========
EARNINGS PER SHARE................. $ .14 $ .16 $ .29 $ .32
========= ========= ========= =========
The accompanying notes are an integral part of these pro forma combined
financial statements.
F-11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
1995 1996
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 469,963 $ (6,483,488)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization... 347,041 511,226
Compensation and financing fees
on purchase of Enterprises
Holding Company............... -- 6,275,790
Deferred tax expense............ 12,941 42,345
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable,
net................ (850,898) (1,879,738)
Cost and estimated
earnings in excess
of billings........ 506,909 (196,287)
Inventory............. (98,348) (333,153)
Prepaid and other
current assets..... (14,968) (260,708)
Increase (decrease) in --
Accounts payable and
accrued
liabilities........ (105,941) 1,085,011
Deferred revenue...... 364,723 295,058
Other, net...................... 18,216 43,037
------------ --------------
Net cash provided by (used
in) operating
activities.............. 649,638 (900,907)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment..................... (206,586) (828,203)
Proceeds from sales of property
and equipment................. -- 136,998
Cash paid for business
acquisitions, net of cash
acquired...................... -- (28,467,699)
------------ --------------
Net cash used in investing
activities.............. (206,586) (29,158,904)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
obligations................... (965,355) (21,722,606)
Proceeds from long-term
obligations................... 647,755 7,048,616
Issuances of Common Stock, net
of offering costs............. 79,078 52,724,965
Distribution to Founding Company
stockholders.................. -- (5,383,837)
Other, net...................... -- (472,500)
------------ --------------
Net cash provided by (used
in) investing
activities.............. (238,522) 32,194,638
------------ --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 204,530 2,134,827
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 73,406 241,263
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 277,936 $ 2,376,090
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest................... $ 132,773 $ 165,147
Income taxes............... 188,813 473,234
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In October 1995, ARS was founded to create a leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning ("HVAC") systems, plumbing, electrical and
other systems in homes and small commercial buildings and (ii) new installation
services of those systems in homes and small commercial facilities under
construction. On September 27, 1996, ARS acquired in separate transactions the
Founding Companies (including those acquired through the acquisition of EHC) in
exchange for consideration consisting of a combination of cash and shares of its
Common Stock. The closing of the Offering also occurred on that date.
For financial statement presentation purposes, Atlas Services, Inc., one of
the Founding Companies, has been identified as the accounting acquiror. The
acquisition of the Founding Companies was accounted for using the purchase
method of accounting, with the results of operations included from September 30,
1996, the effective closing date of the acquisitions for accounting purposes.
The allocation of purchase price to the assets acquired and liabilities assumed
has been initially assigned and recorded based on preliminary estimates of fair
value and may be revised as additional information concerning the valuation of
such assets and liabilities becomes available. Also, the purchase price is based
on preliminary estimates of value assigned to the Company's Common Stock issued
in such transactions which carry certain restrictions regarding disposition by
the holders, and such value may be revised as additional information becomes
available.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 2 of Notes to Financial Statements of ARS as of, and for the periods
ended December 31, 1995 and June 30, 1996 and each of the Founding Companies'
historical financial statements included herein.
3. LONG-TERM DEBT
On September 17, 1996, the Company entered into a credit facility with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility
provides the Company with an unsecured revolving line of credit of up to $55
million, which may be used for general corporate purposes, including the
refinancing of Founding Company indebtedness, future acquisitions, capital
expenditures and working capital. Loans under the Credit Facility bear interest
at the designated variable base rate plus margins ranging from 0 to 25 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. At the
Company's option, the loans may bear interest based on a designated London
interbank offering rate plus a margin ranging from 75 to 175 basis points,
depending on the same ratio. Commitment fees of 25 to 50 basis points per annum
are payable on the unused portion of the line of credit. The Credit Facility
contains a sublimit for standby letters of credit of up to $5.0 million. The
Credit Facility also prohibits the payment of dividends by Company (except for
dividends payable in Common Stock and certain preferred stock), will not permit
the Company to incur or assume other indebtedness in excess of any amount equal
to 5% of its consolidated net worth and will require the Company to comply with
certain financial covenants. The Credit Facility will terminate and all amounts
outstanding, if any, thereunder will be due and payable in September 1999. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the Credit Facility. As of September 30, 1996, the Company had $6.3 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 8.25% (the prime rate).
F-13
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
4. CAPITAL STOCK
On September 27, 1996, ARS completed the Offering, which involved the sale
by ARS of 4,200,000 shares of Common Stock at a price to the public of $15.00
per share. The net proceeds to ARS from the Offering (after deducting
underwriting discounts and commissions and offering expenses) were approximately
$52.2 million. Of this amount, $34.8 million was used to pay the cash portion of
the purchase prices relating to the acquisitions for the Founding Companies. On
October 7, 1996, ARS sold an additional 630,000 shares of Common Stock at $15.00
per share (which represents net proceeds to the Company of $8.8 million after
underwriting discounts and commissions) pursuant to an overallotment option
granted by ARS to the underwriters in connection with the Offering.
5. PRO FORMA EARNINGS PER SHARE
The computation of pro forma net income per share for the three and nine
months ended September 30, 1995 and 1996 is based on 9,079,622 weighted average
shares of Common Stock outstanding, which includes (i) 422,480 shares issued to
the founders of ARS, (ii) 844,962 shares issued on conversion of part of an ARS
convertible note, (iii) 2,805,053 shares issued as consideration in the
acquisitions of the Founding Companies, (iv) 137,140 shares issued in exchange
for $2.1 million of preferred stock of Enterprises Holding Company, the
predecessor owner of two of the Founding Companies, (v) 39,987 shares awarded
under the Company's 1996 Incentive Plan to certain employees and consultants of
the Company, (vi) 4,200,000 shares sold in the Offering and (vii) 630,000 shares
sold pursuant to the overallotment option.
6. INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective dates of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition dates.
7. SUBSEQUENT EVENTS
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.6 million in cash and
short-term notes and 1,282,910 shares of Common Stock. Funding of the cash
portion of the purchase prices and repayment of indebtedness assumed in
connection with the acquisitions was provided by borrowings under the Credit
Facility. In addition, the Company intends to fund the repayment of the
short-term notes issued in the acquisitions by additional borrowings under the
Credit Facility. After giving effect to these anticipated borrowings, the
remaining availability under the Credit Facility would be less than $2.4
million. While the Company believes its cash flow from operations is sufficient
to support its ongoing operations and anticipated capital expenditures, the
Company may need additional borrowing availability to support the Company's
aggressive acquisition program. The Company has initiated discussions with
NationsBank to evaluate additional financing opportunities, including a possible
increase in the borrowing limit under the Credit Facility.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying balance sheets of American Residential
Services, Inc. (a Delaware corporation), as of December 31, 1995 and June 30,
1996, and the related statements of operations, shareholders' deficit and cash
flows from Inception (October 24, 1995) through December 31, 1995 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Residential
Services, Inc. as of December 31, 1995 and June 30, 1996 and the results of its
operations and its cash flows from Inception through December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1996 (except with respect
to the matter discussed in Note 7,
as to which the date is September 9, 1996)
F-15
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1995 1996
------------ --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 9,784 $ 235,088
Prepaid expenses and other
current assets................ 3,327 46,957
------------ --------------
Total current assets....... 13,111 282,045
PROPERTY AND EQUIPMENT, net.......... -- 45,141
OTHER NONCURRENT ASSETS.............. 19,325 3,297,698
------------ --------------
Total assets............... $ 32,436 $ 3,624,884
============ ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 50,000 $ 1,200,000
Accounts payable and accrued
expenses...................... 141,077 3,437,334
------------ --------------
Total current
liabilities............. 191,077 4,637,334
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred Stock: $.001 par
value, 10,000,000 shares
authorized; none issued or
outstanding................... -- --
Common stock, $.001 par value,
50,000,000 shares authorized,
449,471 shares issued and
outstanding................... 449 449
Additional paid-in capital...... 551 551
Deficit......................... (159,641) (1,013,450)
------------ --------------
Total shareholders'
deficit................. (158,641) (1,012,450)
------------ --------------
Total liabilities and
shareholders' deficit... $ 32,436 $ 3,624,884
============ ==============
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
INCEPTION SIX
(OCTOBER 24, 1995) MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ ------------
REVENUES............................. $ -- $ --
COST OF SERVICES..................... -- --
------------------ ------------
Gross profit.................... -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 159,641 833,997
OPERATING LOSS....................... (159,641) (833,997)
------------------ ------------
INTEREST EXPENSE..................... -- (19,812)
------------------ ------------
NET LOSS............................. $ (159,641) $ (853,809)
================== ============
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, Inception,
October 24, 1995................... -- $ -- $-- $ -- $ --
Stock Issuance.................. 449,471 449 551 -- 1,000
Net loss........................ -- -- -- (159,641) (159,641)
--------- ------- ----------- -------------- -------------
BALANCE, December 31, 1995........... 449,471 449 551 (159,641) (158,641)
Net loss........................ -- -- -- (853,809) (853,809)
--------- ------- ----------- -------------- -------------
BALANCE, June 30, 1996............... 449,471 $ 449 $ 551 $ (1,013,450) $ (1,012,450)
========= ======= =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCEPTION
(OCTOBER 24, 1995) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (159,641) $ (853,809)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation and amortization... -- 2,606
Changes in operating assets and
liabilities --
Increase in --
Prepaid expenses and other
current assets.......... (3,327) (43,630)
Other noncurrent assets.... (19,325) (3,278,373)
Increase in --
Accounts payable and
accrued expenses........ 141,077 3,296,257
------------------ -----------
Net cash used in operating
activities.................... (41,216) (876,949)
------------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... -- (47,747)
------------------ -----------
Net cash used in investing
activities.................... -- (47,747)
------------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 50,000 1,150,000
Proceeds from issuance of common
stock......................... 1,000 --
------------------ -----------
Net cash provided by
financing activities.... 51,000 1,150,000
------------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 9,784 225,304
CASH AND CASH EQUIVALENTS, beginning
of period.......................... -- 9,784
------------------ -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 9,784 $ 235,088
================== ===========
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Residential Services, Inc. (ARS or the Company), was founded on
October 24, 1995 to create a leading national provider of (i) comprehensive
maintenance, repair and replacement services for heating, ventilating and air
conditioning, plumbing, electrical, and other systems in homes and commercial
buildings and (ii) new installation services of those systems in homes and
commercial facilities under construction. ARS intends to acquire seven local and
regional residential services companies (the Acquisitions), complete an initial
public offering (the Offering) of its common stock and, subsequent to the
Offering, continue to acquire, through merger or purchase, similar companies to
expand its national and regional operations. In June 1996, ARS filed a
registration on Form S-1 for the sale of its common stock.
ARS's primary assets at December 31, 1995 and June 30, 1996 are cash and
deferred offering costs. ARS has not conducted any operations, and all
activities to date have related to the Acquisitions and the Offering. Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
4). There is no assurance that the Acquisitions discussed below will be
completed and that ARS will be able to generate future operating revenues.
Funding for the deferred offering costs has been provided by Equus II
Incorporated (Equus II). ARS is dependent upon the Offering to fund the amounts
due to Equus II, the pending acquisitions and future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for current year losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-20
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but
does not require, a fair value-based method of accounting for employee stock
option plans which results in compensation expense recognition when stock
options are granted. As permitted by SFAS No. 123, the Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Prepaid expenses and other current assets consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Prepaid insurance.................... $-- $ 39,291
Other................................ 3,327 7,666
------------- ----------
$ 3,327 $ 46,957
============= ==========
Other noncurrent assets consists of
the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Deferred offering costs.............. $19,325 $3,225,040
Other................................ -- 72,658
------------- ----------
$19,325 $3,297,698
============= ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Accrued accounting and legal
expense............................ $ -- $ 3,134,310
Accrued compensation and benefits.... 79,167 249,643
Other accrued expenses............... 61,910 53,381
------------ ------------
$141,077 $ 3,437,334
============ ============
SHORT-TERM DEBT:
The Company had borrowings from Equus II under a $2.6 million credit
facility totaling $50,000 and $1,200,000 at December 31, 1995 and June 30, 1996,
respectively. The borrowings are unsecured, bear interest at prime plus .25
percent (8.5 percent at June 30, 1996) and mature December 31, 1996. A portion
of this facility is convertible into 10 percent of the outstanding common stock
of ARS prior to completion of the Offering.
F-21
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' DEFICIT:
In connection with the organization and initial capitalization of ARS, the
Company issued 1,000 shares of common stock for $1,000 (see Note 7).
5. COMMITMENTS AND CONTINGENCIES:
BONUS AWARDS
In June 1996, the Board of Directors granted certain key employees
incentive cash bonus awards for 1996 which are based, subject to the overall
performance of the Company, on the performance of the Common Stock after the
Offering as compared to the performance of each of the stocks included in the
Standard & Poor's 500 Stock Index (the S&P 500). The amount of each award will
be determined by multiplying the officer's annual base salary by a percentage
determined by ranking the Common Stock's price performance, including reinvested
dividends, if any (Total Stockholder Return), among Total Stockholder Returns of
all the stocks in the S&P 500.
6. RELATED PARTY TRANSACTION:
The Company has signed a definitive agreement to acquire Enterprises
Holding Company (EHC), a related company through common ownership, to be
effective with the Offering. EHC will be acquired for a total consideration,
subject to a working capital adjustment, consisting of 378,400 shares of Common
Stock and the assumption and/or repayment of approximately $17.3 million of
indebtedness and other obligations (including $2.6 million of EHC preferred
stock being converted into 137,139 shares of Common Stock and $0.5 million
cash), approximately $14.3 million of which will be repaid either out of a
portion of the net proceeds of the Offering or through bank borrowings.
7. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS:
ARS effected a 333-for-one-stock split on February 2, 1996, and an
approximately 1.35 for-one-stock split on June 14, 1996 of its common stock for
each share of common stock then outstanding. In addition, on February 2, 1996,
authorized shares were increased from 1,000 to 50,000,000. The effects of the
common stock dividends have been retroactively reflected on the balance sheet
and in the accompanying notes.
F-22
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approved the 1996 Incentive Plan (the Plan), which amends
and restates the 1996 Stock Option Plan and provides for the granting or
awarding of stock options and stock appreciation rights to nonemployee
directors, officers and other key employees (including officers of the Founding
Companies) and independent contractors. The number of shares authorized and
reserved for issuance under the Plan is limited to the greater of 1,550,000
shares or 15 percent of the number of shares of Common Stock outstanding on the
last day of the preceding calendar quarter. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of September 9, 1996, the
Company has granted 10 year options covering an aggregate of 1,445,000 shares of
common stock. Management believes the option price of the options granted is
equal to or in excess of the market value of the stock at the date of grant.
OPTIONS OPTION
DATE OF GRANT GRANTED PRICE
- ------------------------------------- --------- --------------
January 31, 1996..................... 495,000 $ 8.00
March 6, 1996........................ 75,000 9.60
March 29, 1996....................... 25,000 10.20
April 30, 1996....................... 50,000 10.80
June 12, 1996........................ 655,000 Offering Price
July 15, 1996........................ 85,000 Offering Price
August 30, 1996...................... 15,000 Offering Price
September 9, 1996.................... 45,000 Offering Price
---------
1,445,000
=========
ARS and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the Founding Companies) to be
effective with the Offering. The Founding Companies are General Heating
Engineering Company, Inc.; Atlas Services, Inc., and Subsidiary; Service
Enterprises, Inc. and subsidiaries (Crown); Florida Heating and Air
Conditioning, Inc., and Related Companies; DIAL ONE Meridian and Hoosier, Inc.;
ADCOT, Inc. (A-ABC); and Climatic Corporation of Vero Beach. Crown and A-ABC
will be acquired indirectly through the direct acquisition of their parent
corporation, EHC. The aggregate consideration that will be paid by ARS to
acquire the Founding Companies is, subject to working capital adjustments,
approximately $34.8 million in cash and 2,805,065 shares of ARS common stock
(based on an assumed initial public offering price of $15 per share, the
midpoint of the estimated initial public offering price range).
On March 19, 1996, the Company issued to Equus II a warrant to purchase
100,000 shares of Common Stock exercisable at the Offering price. The warrants
are exercisable at any time after the closing of the Offering of the Company
until five years from such date. The number of shares represented by the warrant
is subject to adjustment for stock dividends and stock splits.
Subsequent to December 31, 1995, the Company has incurred additional costs,
including professional fees and travel, associated with the acquisition of the
Founding Companies and the Offering. Accordingly, accrued liabilities and
amounts due to Equus II have increased to approximately $1.2 million as of June
30, 1996. A portion of this note will be converted into 844,965 shares of ARS
Common Stock in connection with the Offering.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On September 27, 1996, ARS completed the Offering, which involved the
issuance of 4,200,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions). On October 7, 1996,
ARS sold an additional 630,000 shares of Common Stock at a price of $15.00 per
share (before deducting underwriting discounts and commissions) pursuant to an
overallotment option
F-23
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted by the Company in connection with the Offering. The proceeds from these
transactions, net of underwriting discounts and commissions of $1.05 per share
and after deducting estimated expenses of the Offering, were approximately $61.0
million. Of this amount, $34.8 million was used to fund the cash portion of the
purchase prices relating to the acquisitions of the Founding Companies. The
Company also has paid to the former owners approximately $4.7 million as working
capital adjustments of which approximately $1.8 million was paid in the fourth
quarter of 1996. In addition, a portion of the Equus II note was converted to
844,965 shares of ARS Common Stock.
On September 17, 1996, the Company entered into a credit facility (the
"Credit Facility") with NationsBank of Texas, Inc. ("NationsBank"). The Credit
Facility provides the Company with an unsecured revolving line of credit of up
to $55 million, which may be used for general corporate purposes, including the
refinancing of Founding Company indebtedness, future acquisitions, capital
expenditures and working capital. Loans under the Credit Facility bear interest
at a designated variable base rate plus margins ranging from 0 to 25 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. At the
Company's option, the loans may bear interest based on a designated London
interbank offering rate plus a margin ranging from 75 to 175 basis points,
depending on the same ratio. Commitment fees of 25 to 50 basis points per annum
are payable on the unused portion of the line of credit. The Credit Facility
contains a sublimit for standby letters of credit of up to $5.0 million. The
Credit Facility also prohibits the payment of dividends by the Company (except
for dividends payable in Common Stock and certain preferred stock), will not
permit the Company to incur or assume other indebtedness in excess of any amount
equal to 5% of its consolidated net worth and will require the Company to comply
with certain financial convenants. The Credit Facility will terminate and all
amounts outstanding, if any, thereunder will be due and payable in September
1999. The Company's subsidiaries have guaranteed the repayment of all amounts
due under the Credit Facility. As of September 30, 1996, the Company had $6.3
million in outstanding borrowings under the Credit Facility, bearing interest at
a weighted average rate of approximately 8.25% (the prime rate).
During the fourth quarter of 1996, the Company acquired the business
operations of 13 companies for an aggregate of approximately $41.6 million in
cash and short-term notes and 1,282,910 shares of Common Stock. Funding of the
cash portion of the purchase prices and repayment of indebtedness assumed in
connection with the acquisitions was provided by borrowings under the Credit
Facility. In addition, the Company intends to fund the repayment of the
short-term notes issued in the acquisitions by additional borrowings under the
Credit Facility. After giving effect to these anticipated borrowings, the
remaining availability under the Credit Facility would be less than $2.4
million. While the Company believes its cash flow from operations is sufficient
to support its ongoing operations and anticipated capital expenditures, the
Company may need additional borrowing availability to support the Company's
aggressive acquisition program. The Company has initiated discussions with
NationsBank to evaluate additional financing opportunities, including a possible
increase in the borrowing limit under the Credit Facility.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To General Heating Engineering Company, Inc.:
We have audited the accompanying balance sheets of General Heating
Engineering Company, Inc. (a Delaware corporation), as of December 31, 1994 and
1995, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Heating Engineering
Company, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-25
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
BALANCE SHEETS
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,258,467 $ 3,369,929
Investments..................... 2,475,000 2,000,000
Accounts receivable --
Trade, net of allowance of
$159,910 and
$126,650............... 4,129,536 3,740,406
Other receivables.......... 129,308 47,588
Notes receivable --
Shareholders............... 92,500 308,139
Other...................... -- 39,870
Inventories..................... 2,375,590 2,215,659
Prepaid expenses and other
current assets................. 17,331 13,871
-------------- --------------
Total current
assets............ 11,477,732 11,735,462
PROPERTY AND EQUIPMENT, net.......... 1,941,076 2,100,638
OTHER NONCURRENT ASSETS.............. 376,017 483,014
-------------- --------------
Total assets.......... $ 13,794,825 $ 14,319,114
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses....................... $ 2,736,479 $ 3,248,968
Unearned revenue on service and
warranty contracts............. 797,820 894,766
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 319,323 139,764
-------------- --------------
Total current
liabilities....... 3,853,622 4,283,498
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $20 par value,
5,000 shares
authorized, 2,752 shares
issued, 462 shares
outstanding.................... 55,040 55,040
Additional paid-in capital...... 666,913 666,913
Retained earnings............... 10,811,994 10,906,407
Treasury stock, 2,290 shares at
cost........................... (1,592,744) (1,592,744)
-------------- --------------
Total shareholders'
equity............ 9,941,203 10,035,616
-------------- --------------
Total liabilities and
shareholders'
equity............ $ 13,794,825 $ 14,319,114
============== ==============
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 34,642,267 $ 36,333,827 $ 35,159,389 $ 25,533,943 $ 27,053,588
COST OF SERVICES..................... 27,393,298 29,927,352 28,866,207 20,964,789 21,814,017
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 7,248,969 6,406,475 6,293,182 4,569,154 5,239,571
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,011,270 5,244,776 5,280,402 3,901,706 4,511,968
-------------- -------------- -------------- -------------- --------------
Income from operations.......... 2,237,699 1,161,699 1,012,780 667,448 727,603
OTHER INCOME:
Interest income................. 189,223 177,149 299,116 224,281 106,461
Other........................... 7,891 66,724 58,517 -- 30,406
-------------- -------------- -------------- -------------- --------------
NET INCOME........................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK SHAREHOLD-
----------------- PAID-IN RETAINED --------------------- ERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------- ----------- ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,752 $55,040 $ 648,912 $ 9,811,451 (2,290) $ (1,592,744) $ 8,922,659
Dividend......................... -- -- -- (1,744,798) -- -- (1,744,798)
Net income....................... -- -- -- 2,434,813 -- -- 2,434,813
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1993........... 2,752 55,040 648,912 10,501,466 (2,290) (1,592,744) 9,612,674
Capital contributions............ -- -- 18,001 -- -- -- 18,001
Dividends........................ -- -- -- (1,095,044) -- -- (1,095,044)
Net income....................... -- -- -- 1,405,572 -- -- 1,405,572
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1994........... 2,752 55,040 666,913 10,811,994 (2,290) (1,592,744) 9,941,203
Dividends........................ -- -- -- (1,276,000) -- -- (1,276,000)
Net income....................... -- -- -- 1,370,413 -- -- 1,370,413
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1995........... 2,752 $55,040 $ 666,913 $ 10,906,407 (2,290) $ (1,592,744) $ 10,035,616
====== ======= =========== ============ ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 465,076 495,396 508,497 388,446 386,082
Loss on sale of investments...... -- -- 13,626 -- --
(Gain) loss on sale of property
and equipment.................. 4,811 (38,978) 56,152 -- (30,406)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ (1,427,017) 210,329 470,850 50,590 (1,064,511)
Inventories.................... (416,216) 49,258 159,931 (590,681) (367,755)
Prepaid expenses and other
current assets.............. (37,843) (1,907) 3,460 (478,475) (84,556)
Other noncurrent assets........ (83,112) (22,741) (106,997) 9,865 (17,106)
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 631,061 143,263 512,489 1,030,329 (193,889)
Unearned revenue on service and
warranty contracts.......... 17,782 31,739 96,946 428,742 (14,721)
Billings in excess of costs and
estimated earnings on
uncompleted contracts....... (732,654) (152,605) (179,559) (319,323) 50,339
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
operating activities........ 856,701 2,119,326 2,905,808 1,411,222 (472,053)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 5,000 112,530 42,533 26,607 41,900
Additions of property and
equipment........................ (941,748) (786,863) (766,744) (483,169) (186,357)
Purchase of investments............ -- (2,475,000) (4,193,948) (3,975,000) (1,000,000)
Proceeds from sale of
investments...................... -- -- 4,655,322 3,225,000 3,000,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
investing activities........ (936,748) (3,149,333) (262,837) (1,206,562) 1,855,543
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- -- -- -- 3,524,063
(Increase) decrease in notes
receivable....................... -- 882,500 (255,509) -- --
Dividends.......................... (1,744,798) (1,095,044) (1,276,000) (622,000) (7,773,469)
Capital contributions.............. -- 18,001 -- -- --
------------ ------------ ------------ ----------- ------------
Net cash used in financing
activities.................. (1,744,798) (194,543) (1,531,509) (622,000) (4,249,406)
------------ ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,824,845) (1,224,550) 1,111,462 (417,340) (2,865,916)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 5,307,862 3,483,017 2,258,467 2,258,467 3,369,929
------------ ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 3,483,017 $ 2,258,467 $ 3,369,929 $ 1,841,127 $ 504,013
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
General Heating Engineering Company, Inc. (a Delaware corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of air conditioning, heating and fireplace systems in new and
preexisting residential and commercial buildings in Washington, D.C. and the
surrounding area.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are valued at the lower of cost or market using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-30
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. A reserve for warranty costs is recorded upon
completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, each shareholder reports his share of the
Company's taxable earnings or losses in his personal federal and state tax
returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............ 7 $ 3,258,907 $ 3,376,461
Furniture and fixtures.............. 7 159,227 169,453
Leasehold improvements.............. 20 800,370 879,938
Machinery and equipment............. 10 858,033 919,393
Computer and telephone equipment.... 5 442,853 467,219
------------ ------------
5,519,390 5,812,464
Less -- Accumulated depreciation and
amortization...................... 3,578,314 3,711,826
------------ ------------
Property and equipment,
net....................... $ 1,941,076 $ 2,100,638
============ ============
F-31
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Adoption of this standard did not materially impact the Company's financial
statements. The following is a summary of investment securities:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Certificates of deposit.............. $ -- $ 2,000,000
U.S. Treasury notes.................. 2,475,000 --
------------ ------------
$ 2,475,000 $ 2,000,000
============ ============
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
--------------------------------------
1993 1994 1995
---------- ------------ ------------
Balance at beginning of year......... $ 146,848 $ 127,443 $ 159,910
Additions charged to costs and
expenses........................... 45,996 104,613 71,930
Deductions for uncollectible
receivables
written off........................ (67,954) (103,848) (127,810)
Bad debt recoveries.................. 2,553 31,702 22,620
---------- ------------ ------------
$ 127,443 $ 159,910 $ 126,650
========== ============ ============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Accounts payable, trade.............. $ 1,586,930 $ 1,998,941
Accrued compensation and benefits.... 823,476 916,013
Warranty accrual..................... 292,895 292,895
Other accrued expenses............... 33,178 41,119
-------------- --------------
$ 2,736,479 $ 3,248,968
============== ==============
Installation contracts in progress are as follows:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Costs incurred on contracts in
progress........................... $ 19,975,656 $ 18,705,791
Estimated earnings, net of losses.... 9,912,429 8,989,404
-------------- --------------
29,888,085 27,695,195
Less -- Billings to date............. 30,207,408 27,834,959
-------------- --------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... $ (319,323) $ (139,764)
============== ==============
5. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company, up to a maximum liability of 1 percent of each
participating employee's annual compensation. The Company has the right to
F-32
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
make additional discretionary contributions. Total contributions by the Company
under this plan to provide contributions and pay expenses were approximately
$42,000, $67,000 and $78,000 during 1993, 1994 and 1995, respectively. Amounts
due to this plan were approximately $50,000 and $30,000 for the years ended
December 31, 1994 and 1995, respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical or life insurance, dental and short-term disability
benefits. The funds withheld are used to pay actual claims, administrative
expenses and stop-loss insurance protection premiums. Such stop-loss insurance
covers claims to a maximum aggregate liability of $1,000,000 and $35,000 per
participant. For the years ended December 31, 1993, 1994 and 1995, the Company
contributed approximately $57,000, $91,000 and $129,000, respectively, to this
plan in addition to amounts withheld from employees. Contributions due to this
plan were approximately $91,000 and $216,000 for the years ended December 31,
1994 and 1995, respectively.
6. LEASES:
The Company conducts a portion of its operations in leased facilities under
operating lease agreements with a company primarily owned by the shareholders.
Total amounts paid under these related-party leases were approximately $261,000,
$387,000 and $384,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. In January 1996, the Company extended each of these leases,
commencing January 1, 1996, for 10 years. The following schedule shows the
future minimum rentals to be made under these leases:
Year ending December 31 --
1996.......................... $ 517,281
1997.......................... 517,505
1998.......................... 531,468
1999.......................... 552,728
2000.......................... 574,837
Thereafter.................... 3,367,564
------------
$ 6,061,383
============
7. RELATED-PARTY TRANSACTIONS:
The Company has notes receivable from its shareholders in the amounts of
$92,500 and $308,139 as of December 31, 1994 and 1995, respectively. These notes
are unsecured, bear interest at 7 percent per annum and are due upon demand.
Interest income recognized by the Company on these notes during the years ended
December 31, 1994 and 1995, was approximately $1,000 and $12,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-33
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
At December 31, 1995, the Company had an outstanding letter of credit of
$75,000 to secure the purchase of certain inventories.
9. SALES TO SIGNIFICANT CUSTOMERS:
During 1993, 1994 and 1995, one customer accounted for approximately 13
percent, 16 percent and 21 percent, respectively, of the Company's revenue.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of the cash surrender value of life insurance,
with a total carrying value of approximately $387,000. In addition, the Company
made distributions in respect of the Company's estimated S Corporation
accumulated adjustment account of approximately $8,488,000 at the time of
closing. As of September 30,1996, additional distributions in the aggregate
amount of $2,642,000 had been accrued but had not yet been distributed.
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Services, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Services, Inc. (a South Carolina corporation), and subsidiary as of June 30,
1994 and 1995, and December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1995, and the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the consolidated financial position
of Atlas Services, Inc., and subsidiary as of June 30, 1994 and 1995, and
December 31, 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended June 30, 1995, and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-35
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 204,883 $ 383,190 $ 241,263
Accounts receivable --
Trade, net of allowance of
$29,989, $39,866 and $39,866.. 1,634,219 2,098,213 2,163,990
Affiliates...................... 188,829 178,554 211,939
Inventories........................ 478,447 474,093 531,819
Prepaid expenses and other current
assets.......................... 20,763 112,207 146,283
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 323,901 382,653 254,039
------------ ------------ ------------
Total current assets....... 2,851,042 3,628,910 3,549,333
PROPERTY AND EQUIPMENT, net.......... 3,203,143 3,169,128 3,136,363
OTHER NONCURRENT ASSETS.............. 280,321 342,776 406,316
------------ ------------ ------------
Total assets............... $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 577,545 $ 619,851 $ 596,941
Short-term debt.................... 220,807 207,335 209,948
Accounts payable and accrued
expenses........................ 2,328,709 2,859,998 2,391,955
Unearned revenue on service and
warranty contracts.............. 135,487 150,628 162,755
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 192,408 355,186 475,731
------------ ------------ ------------
Total current
liabilities............. 3,454,956 4,192,998 3,837,330
LONG-TERM DEBT, net of current
maturities......................... 2,047,763 1,702,324 1,564,309
DEFERRED INCOME TAXES................ 150,506 187,806 187,237
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000
shares authorized, 2,254, 2,345
and 24,303 shares issued and
outstanding..................... 2,254 2,345 24,303
Additional paid-in capital......... 48,011 81,877 105,040
Retained earnings.................. 631,016 973,464 1,373,793
------------ ------------ ------------
Total shareholders'
equity.................. 681,281 1,057,686 1,503,136
------------ ------------ ------------
Total liabilities and
shareholders'
equity.................. $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------------- DECEMBER 31, --------------------------
1993 1994 1995 1995 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,209,885 $ 15,625,211 $ 21,228,756 $22,048,103 $ 15,963,449 $ 23,325,855
COST OF SERVICES..................... 8,182,867 12,676,789 17,714,515 17,810,928 12,947,027 18,567,719
------------ ------------ ------------ ------------ ------------ ------------
Gross profit..................... 2,027,018 2,948,422 3,514,241 4,237,175 3,016,422 4,749,136
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,760,805 2,421,016 2,985,258 3,021,692 2,171,958 3,826,413
------------ ------------ ------------ ------------ ------------ ------------
Income from operations........... 266,213 527,406 528,983 1,215,483 844,464 922,723
OTHER INCOME (EXPENSE):
Interest income.................. 12,086 12,742 13,004 16,671 12,272 (3,927)
Interest expense................. (189,927) (129,303) (143,123) (134,236) (107,445) (165,147)
Other............................ (27,690) 26,814 165,821 20,327 29,289 162,926
------------ ------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 60,682 437,659 564,685 1,118,245 778,580 916,575
PROVISION FOR INCOME TAXES........... 24,914 170,478 222,237 434,258 308,617 344,000
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 469,963 $ 572,575
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992............... 2,191 $ 2,191 $ 32,611 $ 328,067 $ 362,869
Stock issuance.................. 30 30 6,850 -- 6,880
Net income...................... -- -- -- 35,768 35,768
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1993............... 2,221 2,221 39,461 363,835 405,517
Stock issuance.................. 33 33 8,550 -- 8,583
Net income...................... -- -- -- 267,181 267,181
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1994............... 2,254 2,254 48,011 631,016 681,281
Stock issuance.................. 91 91 33,866 -- 33,957
Net income...................... -- -- -- 342,448 342,448
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1995............... 2,345 $ 2,345 $ 81,877 $ 973,464 $1,057,686
====== ======= ========== ========== ==============
BALANCE, December 31, 1994........... 2,345 $ 2,345 $ 81,877 $ 689,806 $ 774,028
Stock split (10 for 1).......... 21,105 21,105 (21,105) -- --
Stock issuance.................. 853 853 44,268 -- 45,121
Net income...................... -- -- -- 683,987 683,987
------ ------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 24,303 $24,303 $ 105,040 $1,373,793 $1,503,136
====== ======= ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------- DECEMBER 31, ----------------------
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 469,963 $ 572,575
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 271,683 375,186 501,796 490,554 347,041 516,285
Deferred income taxes
(benefit)....................... (1,144) 20,022 (22,265) (50,894) 12,941 42,345
Loss on sale of property and
equipment....................... 54,786 -- -- -- -- (393)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (13,227) (822,197) (453,719) (505,195) (850,898) (1,671,231)
Inventories................. (175,733) (134,837) 4,354 (139,118) (98,348) (333,153)
Prepaid expenses and other
current assets............. 13,350 (1,800) (31,878) 7,150 (14,968) (260,708)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (27,506) (276,261) (58,752) 539,181 506,909 196,287
Other noncurrent assets..... (62,020) (63,362) (101,110) (66,703) -- 105,716
Increase (decrease) in --
Accounts payable and accrued
expenses................... 211,091 1,233,347 531,289 (219,215) (105,941) 1,182,536
Unearned revenue on service
and warranty contracts..... 49,963 53,271 15,141 (10,274) 18,216 (48,301)
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... (10,909) 51,603 162,778 52,327 364,723 343,359
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
operating activities... 346,102 702,153 890,082 781,800 649,638 252,743
---------- ---------- ---------- ------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 173,037 -- -- -- -- 136,998
Additions to property and
equipment......................... (439,920) (980,761) (429,127) (258,257) (206,586) (828,203)
Cash paid for acquisitions, net of cash acquired.. -- -- -- -- -- (131,065)
---------- ---------- ---------- ------------ ---------- ----------
Net cash used in
investing activities... (266,883) (980,761) (429,127) (258,257) (206,586) (822,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long- and short-term
debt.............................. 478,187 887,990 347,001 442,394 647,755 728,010
Principal payments of long- and
short-term debt................... (513,870) (529,624) (663,606) (843,201) (965,355) (604,002)
Proceeds from stock issuance....... 6,880 8,583 33,957 45,121 79,078 --
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
(used in) financing
activities............. (28,803) 366,949 (282,648) (355,686) (238,522) 124,008
---------- ---------- ---------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 50,416 88,341 178,307 167,857 204,530 (445,519)
CASH AND CASH EQUIVALENTS, beginning
of period........................... 66,126 116,542 204,883 73,406 73,406 241,263
---------- ---------- ---------- ------------ ---------- ----------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 116,542 $ 204,883 $ 383,190 $ 241,263 $ 277,936 $ (204,256)
========== ========== ========== ============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 286,112 $ 210,549 $ 225,374 $ 177,031 $ 132,773 $ 165,147
Income taxes..................... $ -- $ 56,477 $ 271,924 $ 251,750 $ 188,813 $ 473,234
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Atlas Services, Inc., (a South Carolina corporation) and subsidiary (the
Company), are primarily engaged in the installation and maintenance, repair and
replacement of plumbing, air conditioning and heating and electrical systems in
new and preexisting residential and commercial buildings throughout South
Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Atlas Services, Inc., and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the results of operations and cash flows with
respect to the consolidated interim financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the contract on a straight-line basis.
F-40
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK-SPLIT
During 1995, the Company effected a ten-for-one stock split of the
Company's Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-41
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30
USEFUL LIVES ---------------------------- DECEMBER 31,
IN YEARS 1994 1995 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Land and land improvements........... -- $ 508,129 $ 508,129 $ 508,129
Buildings and leasehold
improvements....................... 40 1,387,578 1,396,235 1,387,599
Transportation equipment............. 5 1,703,373 1,955,070 2,068,795
Machinery and equipment.............. 5 - 7 591,299 666,548 738,347
Furniture and fixtures............... 5 - 10 233,373 290,961 313,025
------------- ------------- -------------
4,423,752 4,816,943 5,015,895
Less -- Accumulated depreciation..... 1,220,609 1,647,815 1,879,532
------------- ------------- -------------
Property and equipment, net..... $ 3,203,143 $ 3,169,128 $ 3,136,363
============= ============= =============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------- DECEMBER 31,
1993 1994 1995 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of year......... $ 0 $ 0 $ 29,989 $ 29,989
Additions charged to costs and
expenses........................... 79,128 84,119 45,952 40,381
Deductions for uncollectible
receivables written off............ (79,128) (54,130) (36,075) (30,504)
---------- ---------- ---------- ------------
$ 0 $ 29,989 $ 39,866 $ 39,866
========== ========== ========== ============
</TABLE>
Accounts payable and accrued expenses consist of the following:
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
Accounts payable, trade............ $ 1,707,084 $ 2,113,376 $ 1,600,736
Accrued compensation and benefits.. 369,780 236,780 224,767
Accrued insurance.................. 98,456 257,741 269,135
Other accrued expenses............. 153,389 252,101 297,317
------------- ------------- -------------
$ 2,328,709 $ 2,859,998 $ 2,391,955
============= ============= =============
Installation contracts in progress are as follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
Costs incurred on contracts in
progress........................... $ 1,293,427 $ 2,592,291 $ 2,411,212
Estimated earnings, net of losses.... 586,972 719,579 1,077,841
------------- ------------- ------------
1,880,399 3,311,870 3,489,053
Less -- Billings to date............. 1,748,906 3,284,403 3,710,745
------------- ------------- ------------
$ 131,493 $ 27,467 $ (221,692)
============= ============= ============
</TABLE>
F-42
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are included in the accompanying balance sheets under the
following captions:
JUNE 30
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 323,901 $ 382,653 $ 254,039
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (192,408) (355,186) (475,731)
----------- ----------- ------------
$ 131,493 $ 27,467 $ (221,692)
=========== =========== ============
5. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving line of credit payable to a bank,
due July 21, 1996, with interest due monthly at 9.375 percent and is secured by
accounts receivable and inventory. The amounts outstanding as of June 30, 1994
and 1995, and December 31, 1995, are $220,807, $207,335 and $209,948,
respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
Mortgage note payable to a bank, with
monthly installments of $8,056
principal plus interest at 7.25%,
secured by real estate and life
insurance policies, due December
1998............................... $ 1,401,667 $ 1,305,000 $ 1,256,666
Mortgage note payable to a bank, with
monthly installments of $1,000
principal plus interest at prime
plus 1.25% (9.75% at December 31,
1995), secured by real estate, due
May 1997........................... 103,400 93,400 87,977
Mortgage note payable to a bank, with
monthly installments of $581,
bearing interest at 9.5%, secured
by real estate, due June 2017...... 56,775 56,173 53,185
Transportation equipment notes
payable and capitalized leases,
with monthly installments totaling
$48,255, due from July 1994 to
January 1998, bearing interest from
5.9% to 13.3%, secured by
transportation equipment........... 816,486 675,929 574,953
Note payable on equipment, with
monthly installments of $2,083
principal plus interest at prime
plus 1.50% (10% at December 31,
1995), secured by equipment, due
June 1998.......................... 100,000 75,000 62,500
Other................................ 146,980 116,673 125,969
------------- ------------- ------------
2,625,308 2,322,175 2,161,250
Less -- Current maturities........... 577,545 619,851 596,941
------------- ------------- ------------
$ 2,047,763 $ 1,702,324 $ 1,564,309
============= ============= ============
</TABLE>
F-43
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 596,941
1997............................ 334,907
1998............................ 158,688
1999............................ 110,343
2000............................ 109,567
Thereafter...................... 850,804
-------------
$ 2,161,250
=============
Management estimates that the fair value of its debt obligations
approximates the historical value of $2,371,198 at December 31, 1995.
6. RETIREMENT PLANS:
The Company has a defined contribution profit-sharing plan covering
substantially all employees. The Company's contribution for each of the years
ended June 30, 1993, 1994 and 1995, and December 31, 1995, amounted to
approximately $25,000, $35,000, $30,000 and $21,000, respectively.
7. LEASES:
The Company leases four facilities under noncancelable leases, which expire
in January 1998, January 2005, May 2005 and February 2006. Rental expense for
the years ended June 30, 1993, 1994 and 1995, and December 31, 1995, was
approximately $44,000, $72,000, $127,000 and $174,000, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of $0,
$2,000, $39,000 and $82,000 for the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, respectively. The following represents future minimum
rental payments under noncancelable operating leases:
Year ending December 31 --
1996............................ $ 259,577
1997............................ 266,680
1998............................ 230,187
1999............................ 228,600
2000............................ 228,600
Thereafter...................... 1,045,550
-------------
$ 2,259,194
=============
F-44
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain owned facilities under three noncancelable
leases to third parties, which expire in September 1997, October 1998 and
November 2000. Rental income received for the years ended June 30, 1993, 1994
and 1995, and December 31, 1995, was approximately $148,000, $135,000, $105,000
and $86,000, respectively. The following represents future minimum rental income
under noncancelable leases:
Year ending December 31 --
1996............................ $ 167,250
1997............................ 148,500
1998............................ 83,875
1999............................ 42,000
2000............................ 38,500
-----------
$ 480,125
===========
8. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ 23,106 $ 129,390 $ 215,040 $419,486
Deferred........................ (3,107) 18,236 (19,913) (43,440)
State --
Current......................... 2,952 21,066 29,462 65,666
Deferred........................ 1,963 1,786 (2,352) (7,454)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Tax provision at the statutory
rate............................... $ 20,632 $ 148,804 $ 191,993 $380,203
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction........ 3,244 15,081 17,892 38,420
Nondeductible expenses.......... 5,272 14,264 33,308 29,088
Other........................... (4,234) (7,671) (20,956) (13,453)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
</TABLE>
F-45
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Accruals and reserves not deductible
until paid......................... $ (65,224) $ (127,289) $ (180,124)
Depreciation and amortization........ 157,365 196,365 195,771
Other................................ 42,609 43,409 45,944
----------- ------------ ------------
Total deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Deferred tax assets --
Current......................... $ (79,907) $ (163,948) $ (235,433)
Long-term....................... (1,865) (1,865) (6,723)
----------- ------------ ------------
Total..................... (81,772) (165,813) (242,156)
----------- ------------ ------------
Deferred tax liabilities --
Current......................... 64,151 88,627 109,787
Long-term....................... 152,371 189,671 193,960
----------- ------------ ------------
Total..................... 216,522 278,298 303,747
----------- ------------ ------------
Net deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
9. RELATED-PARTY TRANSACTIONS:
The Company has a receivable from its majority shareholder in the amount of
approximately $172,000, $171,000 and $195,000 as of June 30, 1994 and 1995, and
December 31, 1995, respectively. This receivable accrues interest at 8 percent.
Interest income recognized during the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, was approximately $10,000, $13,000, $13,000 and $17,000,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. SALES TO SIGNIFICANT CUSTOMERS:
During the years ended June 30, 1993 and 1995, one customer accounted for
approximately 11 percent, and 11 percent, respectively, of the Company's
revenue.
F-46
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of cash surrender value of life insurance and
equipment net of distributed liabilities, with a total net carrying value of
approximately $101,000 and $22,000 as of September 30, 1996.
F-47
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30,
1996
------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 324,283
Accounts receivable --
Trade, net of allowance of
$58,675................... 500,795
Other receivables.......... 322,311
Inventories..................... 1,472,638
Prepaid expenses and other
current assets................. 263,547
------------
Total current
assets............... 2,883,574
PROPERTY AND EQUIPMENT, net.......... 5,055,957
GOODWILL, net........................ 12,636,127
OTHER NONCURRENT ASSETS.............. 322,372
------------
Total assets.......... $ 20,898,030
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... 1,832,231
Accounts payable and accrued
expenses....................... 2,184,207
Unearned revenue on extended
warranty contracts, current.... 304,745
------------
Total current
liabilities.......... 4,321,183
LONG-TERM DEBT, net of current
maturities......................... 12,947,631
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 612,942
DEFERRED INCOME TAXES................ 114,133
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... 92,060
COMMITMENTS AND CONTINGENCIES
SERIES A PREFERRED STOCK $100 par;
49,810 shares authorized, 25,381
issued and outstanding............. 2,538,100
SERIES B PREFERRED STOCK, $100 par;
190 shares authorized, issued and
outstanding........................ 19,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
1,000,000 shares authorized,
1,000 issued and outstanding... 1,000
Retained earnings............... 251,981
------------
Total shareholders'
equity............... 252,981
------------
Total liabilities and
shareholders'
equity............... $ 20,898,030
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
---------------------
(UNAUDITED)
REVENUES............................. $22,410,865
COST OF SERVICES..................... 13,369,713
---------------------
Gross profit.................... 9,041,152
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,629,887
---------------------
Income from operations.......... 2,411,265
OTHER INCOME (EXPENSE):
Interest income................. 28,652
Interest expense................ (776,957)
Other........................... 19,477
---------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 1,682,437
PROVISION FOR INCOME TAXES........... 537,034
---------------------
NET INCOME FROM CONTINUING
OPERATIONS......................... 1,145,403
INCOME FROM DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ----------------- -------------
<S> <C> <C> <C> <C>
Balance, Inception, February 16, 1996
(unaudited)........................ -- $ -- $ -- $ --
Stock issuance (unaudited)...... 1,000 1,000 -- 1,000
Preferred stock dividends
(unaudited)................... -- -- (57,100) (57,100)
Net income (unaudited).......... -- -- 309,081 309,081
------ ------ ----------------- -------------
Balance, June 30, 1996 (unaudited)... 1,000 $1,000 $ 251,981 $ 252,981
====== ====== ================= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
--------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 758,327
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 304,146
Gain on sale of property and
equipment...................... (16,672)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ (57,763)
Inventories................ 268,404
Prepaid expenses and other
current assets............... 85,495
Other noncurrent assets.... 254,755
Increase (decrease) in --
Accounts payable and
accrued expenses......... (525,250)
Unearned revenue on
extended warranty
contracts................ (61,675)
--------------------
Net cash provided by
operating
activities.......... 1,016,767
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment.................. 16,672
Additions of property and
equipment...................... (74,464)
Cash paid for acquisitions, net
of cash acquired............... (17,367,498)
--------------------
Net cash used in
investing
activities.......... (17,425,290)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 16,047,000
Principal payments of long-term
debt........................... (1,782,403)
Dividends....................... (108,102)
Proceeds from stock issuance.... 2,558,100
--------------------
Net cash provided by
financing
activities.......... 16,714,595
--------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 306,072
CASH AND CASH EQUIVALENTS, beginning
of period.......................... --
--------------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 306,072
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 756,197
Income taxes............... $ 349,735
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Enterprises Holding Company (EHC or "the Company") (a Texas corporation),
and subsidiaries was formed February 16, 1996 solely for the purpose of
acquiring the operations of Service Enterprises, Inc. (SEI) and subsidiaries.
On March 19, 1996, EHC acquired all of the outstanding stock of SEI and
certain real estate owned by the former shareholder of SEI for $17,500,000. (See
SEI's financial statements elsewhere herein.) SEI is primarily engaged in the
maintenance, repair and replacement service-related activities of plumbing, air
conditioning, electrical repair and other home improvement services in Houston
and the surrounding areas.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. (ADCOT) for $2,000,000. (See ADCOT's financial statements included
elsewhere herein.)
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS.
All outstanding shares of EHC's common stock and preferred stock will be
exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Enterprises Holding Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the period from
inception, February 16, 1996, through September 30, 1996 are unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
INVENTORIES
Inventories consist of parts and service related supplies held for use in
the ordinary course of business and are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-52
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSET ACQUIRED
The excess of the aggregate purchase price paid by the Company in the
acquisition of businesses, accounted for as a purchase, over the fair market
value of the net assets acquired is amortized on a straight-line basis over 40
years. As of June 30, 1996, accumulated amortization was approximately $87,000.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
F-53
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES JUNE 30,
IN YEARS 1996
------------- --------------
Land................................. -- $1,433,246
Building and improvements............ 20 1,756,260
Leasehold improvements............... 5 - 10 405,580
Equipment............................ 3 - 7 3,652,650
Furniture and fixtures............... 3 - 7 1,160,701
--------------
8,408,437
Less -- Accumulated depreciation and
amortization....................... 3,352,480
--------------
Property and equipment,
net..................... $5,055,957
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
1996
----------
Balance at inception, February 16,
1996.................................. $ 0
Balance acquired at acquisition date.... 53,495
Additions charged to costs and
expenses.............................. 10,273
Deductions for uncollectible receivables
written off........................... (5,093)
----------
$ 58,675
==========
Prepaid expenses and other current assets consist of the following:
JUNE 30,
1996
----------
Prepaid insurance....................... $ 174,800
Deferred income taxes................... 39,068
Other prepaid assets.................... 49,679
----------
$ 263,547
==========
Accounts payable and accrued expenses consist of the following:
JUNE 30,
1996
------------
Accounts payable, trade................. $ 971,331
Accrued compensation and benefits....... 282,453
Other accrued expenses.................. 930,423
------------
$ 2,184,207
============
5. DISCONTINUED OPERATIONS:
Subsequent to the purchase of ADCOT by SEI, the board of directors of EHC
approved the disposition of ADCOT's retail appliance sales division. The
allocation of purchase price to the fair market value of the net assets of ADCOT
acquired by SEI will be based on preliminary estimates of fair value and may be
F-54
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
revised when additional information concerning asset and liability valuations is
obtained. Accordingly, any gain or loss on the sale of the appliance sales
division will be considered an adjustment of purchase price.
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
Note payable to Equus II Incorporated,
with quarterly installments of
$187,500 beginning June 19, 1999,
bearing interest at 12% payable
quarterly, due March 19, 2003,
unsecured and subordinated to notes
payable to a bank..................... $ 4,800,000
Revolving credit facility of $5,000,000,
bearing interest at prime plus 1%
(9.25% at June 30, 1996) due June 15,
1999, secured by equipment, inventory
and accounts receivable............... 4,372,500
Note payable to a bank, with quarterly
installments of $34,208 beginning
January 15, 1997, bearing interest at
8.34% payable quarterly, due June 15,
1999, secured by real estate.......... 2,025,500
Notes payable to former shareholder of
Crown, with quarterly installments of
$100,000, bearing interest at prime
(8.25% at June 30, 1996), due March
19, 1999, unsecured................... 1,000,000
Note payable to a bank with quarterly
installments of $46,688, beginning
January 15, 1997, bearing interest at
prime plus 1%, due June 1999, secured
by accounts receivable inventory and
property.............................. 747,000
Note payable to a bank, with quarterly
installments of $17,571 beginning
January 15, 1997, bearing interest at
prime plus 1% payable quarterly, due
June 15, 1999, secured by real
estate................................ 474,500
Note payable to a bank, bearing interest
at prime plus 1%, due October 15, 1996
secured by accounts receivable,
inventory and equipment............... 1,000,000
Various notes payable, bearing interest
at rates ranging from 8.0% to 9.0%,
due from February 1998 to August 1999,
secured by equipment.................. 360,362
--------------
Total.................... 14,779,862
Less -- Current maturities.............. (1,832,231)
--------------
Long-term debt, net of
current maturities.... $ 12,947,631
==============
F-55
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The aggregate maturities of long-term debt as of June 30, 1996, are as
follows:
December 31,
1997............................... $ 1,832,231
1998............................... 1,659,731
1999............................... 7,050,400
2000............................... 750,000
2001............................... 750,000
Thereafter......................... 2,737,500
--------------
$ 14,779,862
==============
Management estimates that the fair value of its debt obligations
approximates the historical value of $14,779,862 at June 30, 1996.
8. SHAREHOLDERS' EQUITY
In connection with the organization and initial capitalization of EHC, the
Company issued 1,000 shares of common stock for a total of $1,000 in February
1996.
As an amendment to the Company's certificate of incorporation, on March 19,
1996, the Company created an additional series of preferred stock designated as
Series B Preferred Stock and increased the total number of authorized shares to
1,050,000 shares, consisting of 1,000,000 shares of common stock, par value $.01
per share, and 50,000 shares of preferred stock, par value $100 per share. The
first series of preferred stock is the Series A Preferred Stock with authorized
shares of 49,810 and the second series of preferred stock is the Series B
Preferred Stock with authorized shares of 190.
SERIES A PREFERRED STOCK
On March 19, 1996, the Company issued 24,810 shares of voting, Series A
Preferred Stock, par value $100 per share, (Series A). The holder of the Series
A shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year, commencing June 30, 1996. On June 30, 1996, the
Company recorded a dividend of $56,700 payable in 567 shares of Series A
Preferred Stock.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
SERIES B PREFERRED STOCK
On March 19, 1996, the Company issued 190 shares of voting Series B
Preferred Stock, par value $100 per share, (Series B). The holder of the Series
B shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year,
F-56
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
commencing June 30, 1996. On June 30, 1996, the Company recorded a dividend of
$400 payable in 4 shares of Series A Preferred Stock.
The holder of Series B shares has the right and option to convert all of
the then outstanding shares of Series B Preferred Stock into an aggregate number
of shares of common stock equal to 95% of the number of shares of common stock
outstanding at the conversion date if the IPO date does not occur before March
1, 1997 or a default occurs before March 1, 1997.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
9. LEASES:
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized in the period from inception
(February 16, 1996) through June 30, 1996 was approximately $10,350.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
Six months ended 1996.............. $ 20,700
1997............................... 35,700
1998............................... 25,000
---------
$ 81,400
=========
10. INCOME TAXES:
Federal and state income taxes are as follows:
FOR THE
NINE MONTHS
ENDED
JUNE 30,
1995
-------------
Federal --
Current............................ $ 210,740
Deferred........................... --
State --
Current............................ 18,595
Deferred........................... --
-------------
$ 229,335
=============
F-57
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
Provision (benefit) at the statutory
rate.................................. $ 181,136
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. 15,983
Nondeductible expenses............. 32,216
Other...................................
-------------------
$ 229,335
===================
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1996
----------
Depreciation and amortization........... $ 36,213
Net operating loss carryforward......... (33,098)
Accruals and reserves not deductible
until paid............................ (40,685)
Other................................... 112,635
----------
Net deferred income tax
liabilities............ $ 75,065
==========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1996
----------
Deferred tax assets --
Current............................ $ 39,068
Long-term.......................... 100,640
----------
Total.................... 139,708
Deferred tax liabilities, long-term..... 214,773
----------
Net deferred income tax
liabilities............ $ 75,065
==========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-58
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
GUARANTEES
SEI's former shareholder is required to make seven annual payments of
$75,000 each under a lawsuit settlement. SEI's former shareholder is also
required under this settlement to make four annual payments of $20,000 each,
beginning in 2003. The Company has guaranteed these settlement payments.
12. SUBSEQUENT EVENT:
The acquisition of the Company by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Service Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Service
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Enterprises, Inc., and subsidiaries as of December 31, 1994 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-60
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,093,394 $ 2,100,996
Certificates of deposit......... 1,100,000 1,100,000
Accounts receivable --
Trade, net of allowance of
$53,257 and $58,575..... 340,961 411,139
Shareholder and
affiliates.............. 278,187 10,308
Other receivables.......... 53,780 59,737
Inventories..................... 632,614 737,495
Prepaid expenses and other
current assets................. 194,038 251,941
------------ ------------
Total current
assets............ 3,692,974 4,671,616
PROPERTY AND EQUIPMENT, net.......... 988,147 1,277,677
OTHER NONCURRENT ASSETS.............. 185,333 193,333
------------ ------------
Total assets.......... $ 4,866,454 $ 6,142,626
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ -- $ 129,000
Short-term debt................. 620,312 251,562
Accounts payable and accrued
expenses....................... 672,082 890,945
------------ ------------
Total current
liabilities....... 1,292,394 1,271,507
LONG-TERM DEBT, net of current
maturities......................... -- 366,451
DEFERRED INCOME TAXES................ 130,367 114,133
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Preferred stock, $.01 par;
1,000,000 shares authorized,
none issued.................... -- --
Common stock, $.01 stated value;
2,000,000 and 50,000,000 shares
authorized, 2,000,000 and
14,000,000 issued and
outstanding.................... 20,000 140,000
Additional paid-in capital...... 1,205,760 1,085,760
Retained earnings............... 2,217,933 3,164,775
------------ ------------
Total shareholder's
equity............ 3,443,693 4,390,535
------------ ------------
Total liabilities and
shareholder's
equity............ $ 4,866,454 $ 6,142,626
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 16,268,452 $ 16,843,520 $ 19,123,858 $ 3,555,446 $ 4,152,017
COST OF SERVICES..................... 10,331,520 10,314,231 11,333,228 2,155,171 2,643,026
-------------- -------------- -------------- ------------ ------------
Gross profit.................... 5,936,932 6,529,289 7,790,630 1,400,275 1,508,991
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,698,182 5,836,643 6,164,598 1,347,708 1,519,226
-------------- -------------- -------------- ------------ ------------
Income from operations.......... 238,750 692,646 1,626,032 52,567 (10,235)
OTHER INCOME (EXPENSE):
Interest income................. 149,124 93,370 119,074 23,506 15,957
Interest expense................ (158,943) (76,544) (58,065) (14,401) (16,248)
Equity in losses of
unconsolidated affiliate...... (130,022) (61,751) -- -- --
Other........................... (661,414) 156,796 (10,546) (1,490) (9,220)
-------------- -------------- -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (562,505) 804,517 1,676,495 60,182 (19,746)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (215,106) 589,241 629,653 23,298 (4,170)
-------------- -------------- -------------- ------------ ------------
NET INCOME (LOSS).................... $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
============== ============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,000,000 $ 20,000 $ 982,010 $2,650,056 $3,652,066
Net loss........................ -- -- -- (347,399) (347,399)
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1993........... 2,000,000 20,000 982,010 2,302,657 3,304,667
Capital contribution............ -- -- 223,750 -- 223,750
Dividend........................ -- -- -- (300,000) (300,000)
Net income...................... -- -- -- 215,276 215,276
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1994........... 2,000,000 20,000 1,205,760 2,217,933 3,443,693
Dividend........................ -- -- -- (100,000) (100,000)
Stock split (7 for 1)........... 12,000,000 120,000 (120,000) -- --
Net income...................... -- -- -- 1,046,842 1,046,842
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 14,000,000 140,000 1,085,760 3,164,775 4,390,535
========== ======== ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-63
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization.... 328,882 364,708 371,402 82,558 93,532
Deferred income taxes
(benefit)...................... (233,911) 55,319 7,309 -- --
Equity in losses of
unconsolidated affiliate....... 130,022 61,751 -- -- --
Loss on sale of real estate...... 475,159 18,114 -- -- --
Gain on sale of property and
equipment...................... (99,629) (21,069) (13,699) -- --
Gain on sale of investment....... -- (219,125) -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... 59,245 (51,248) (76,135) 98,071 34,162
Inventories................. 3,113 158,356 (104,881) (153,073) (94,646)
Prepaid expenses and other
current assets............ 50,525 72,648 (89,446) (240,528) 499
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 85,821 11,014 218,863 469,611 13,498
------------ ------------ ----------- ----------- ------------
Net cash provided by
operating activities.... 451,828 665,744 1,360,255 293,523 31,469
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real
estate........................... -- 978,727 -- -- --
Proceeds from sale of property and
equipment........................ 115,906 38,628 24,793 -- --
Additions of property and
equipment........................ (861,640) (233,903) (672,026) -- --
(Purchase) sale of certificates of
deposit.......................... -- (1,100,000) -- -- 1,100,000
Proceeds from sale of investment... -- 450,961 -- -- --
Purchase of marketable
securities....................... -- (110,188) -- -- --
Proceeds from note receivable...... -- 100,000 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in)
investing activities.... (745,734) 124,225 (647,233) -- 1,100,000
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Advances) payments of receivable
from shareholder
and affiliates................... (558,319) 1,636,469 267,879 (184,852) (2,113,308)
Borrowings of long- and short-term
debt............................. 1,804,649 137,500 495,451 -- --
Principal payments of long- and
short-term debt.................. (1,006,266) (1,495,266) (368,750) (97,187) (747,013)
Dividends.......................... -- (300,000) (100,000) -- --
Capital contribution............... -- 223,750 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in)
financing activities.... 240,064 202,453 294,580 (282,039) (2,860,321)
------------ ------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (53,842) 992,422 1,007,602 11,484 (1,728,852)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 154,814 100,972 1,093,394 1,093,394 2,100,996
------------ ------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 100,972 $ 1,093,394 $ 2,100,996 $ 1,104,878 $ 372,144
============ ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 98,522 $ 78,294 $ 61,230 $ 14,401 $ 23,399
Income taxes..................... $ 135,000 $ 220,951 $ 540,000 $ -- $ 10,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-64
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Service Enterprises, Inc. (SEI) (a Texas corporation), and subsidiaries
(the Company) are primarily engaged in the maintenance, repair and replacement
service-related activities of plumbing, air conditioning, electrical repair and
other home improvement services in Houston and the surrounding areas.
On March 19, 1996, all of the outstanding stock of SEI and certain real
estate owned by the former shareholder of SEI was acquired by Enterprises
Holding Company (EHC) for $17,500,000. EHC was formed solely for the purpose of
acquiring the Company and has no other operations. The accompanying unaudited
financial statements of the Company for the quarter ended March 31, 1996, do not
reflect the effect of the purchase of the Company by EHC.
In April 1996, the Company entered into a stock purchase agreement with
ADCOT, Inc. (ADCOT), to purchase all of the outstanding common stock of ADCOT
for $2,000,000. (See ADCOT's financial statements included elsewhere herein.)
EHC intends to enter into a definitive agreement with American Residential
Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS. All
outstanding shares of EHC's common stock and a portion of EHC's preferred stock
will be exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Service Enterprises, Inc., and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1995 and March 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the results of operations and cash
flows with respect to the consolidated interim financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-65
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues when services are performed.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK SPLIT
During 1994, the Company effected a seven-for-one stock split of Company
Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------- ------------ ------------
Leasehold improvements............... 5 - 10 $ 140,983 $ 140,333
Transportation equipment............. 5 1,357,588 1,930,724
Tools and equipment.................. 3 - 7 182,797 181,893
Telephone equipment.................. 5 - 7 230,582 181,886
Furniture and fixtures............... 3 - 7 509,423 453,034
------------ ------------
2,421,373 2,887,870
Less -- Accumulated depreciation and
amortization....................... 1,433,226 1,610,193
------------ ------------
Property and
equipment, net..... $ 988,147 $ 1,277,677
============ ============
F-66
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT IN AFFILIATED COMPANY:
During July 1994, the Company sold a portion of its investment in American
Natural Gas Power, Inc. (ANGP), for $225,000 and an unsecured
noninterest-bearing note receivable for $35,000 due on demand or, if no demand
is made, due in June 1996. After the sale, the Company's interest in ANGP
decreased from approximately 33 percent at December 31, 1993, to approximately 8
percent at December 31, 1994, and accordingly is no longer accounted for under
the equity method. Included in other income is a net realized gain on sale of
$228,353 for the year ended December 31, 1994.
5. NOTE RECEIVABLE:
In January 1994, the Company sold an investment in real estate to an
individual. The consideration included a note receivable for $300,000,
collateralized by a second lien on the real estate, which bears interest at 4
percent, payable monthly, with principal due January 1999.
In the event that the aggregate of all principal payments made on or before
the third anniversary of this note, January 25, 1997, equals $200,000, this note
shall be discounted such that the note is fully discharged by the prepayment of
such $200,000 within the initial three-year period. This note has been recorded
at its prepayment value of $200,000, discounted to a market rate of interest,
and is included in other noncurrent assets on the accompanying consolidated
balance sheet.
Management estimates that the fair value of its note receivable
approximates its discounted historical carrying value of $193,000 at December
31, 1995.
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
-------------------------------
1993 1994 1995
--------- --------- ---------
Balance at beginning of year......... $ 22,000 $ 38,080 $ 53,257
Additions charged to costs and
expenses........................... 36,429 55,407 46,996
Deductions for uncollectible
receivables written off............ (24,118) (54,212) (53,495)
Bad debt recoveries.................. 3,769 13,982 11,817
--------- --------- ---------
$ 38,080 $ 53,257 $ 58,575
========= ========= =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 303,280 $ 507,810
Accrued compensation and benefits.... 120,501 143,708
Accrued income taxes................. 29,809 71,781
Accrued taxes other than income
taxes.............................. 146,389 131,388
Other accrued expenses............... 72,103 36,258
---------- ----------
$ 672,082 $ 890,945
========== ==========
F-67
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
$850,000 demand line of credit with
bank; collateralized by
transportation equipment, accounts
receivable and inventory, interest
at prime plus 1% (9.5% at December
31, 1995), payable monthly,
principal due June 1996............ $ 200,000 $ 200,000
Demand note payable to bank;
cross-collateralized with the line
of credit, bearing interest at
prime plus 1%, principal of $25,000
plus interest, payable in monthly
installments through January
1996............................... 300,000 --
Demand note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, payable monthly, principal due
September 1996..................... 120,312 51,562
---------- ----------
$ 620,312 $ 251,562
========== ==========
Long-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, interest only through June
1996, payable monthly, then
principal of $21,500, plus
interest, payable in monthly
installments through June 1998..... $ -- $ 495,451
Less -- Current portion......... -- 129,000
---------- ----------
$ -- $ 366,451
========== ==========
The aggregate maturities of long-term debt are as follows:
Year ending December 31 --
1996............................ $ 129,000
1997............................ 258,000
1998............................ 108,451
----------
$ 495,451
==========
In connection with the bank indebtedness, the Company has entered into an
agreement which provides for certain affirmative covenants and restrictions,
including certain required financial ratios and restrictions on retained
earnings. As of December 31, 1995, the Company was in compliance with these
covenants.
The notes payable have been personally guaranteed by the Company's
shareholder.
Management estimates that the fair value of its debt obligations
approximates the historical value of $747,013 at December 31, 1995.
8. LEASES:
The Company operates in leased facilities under an agreement with its
shareholder and affiliates. The amount paid under these leases was $291,600,
$291,600 and $301,600 in 1993, 1994 and 1995, respectively. These leases were
canceled concurrent with the purchase of the Company and the leased facilities
by EHC.
F-68
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, the Company renewed a parking lot lease agreement with an
affiliated company, which expired September 30, 1995. The Company continued its
lease on a month-to-month basis. Amounts paid under this lease in 1993, 1994 and
1995 totaled $22,500, $30,000 and $25,000, respectively.
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized during 1993, 1994 and 1995 was
approximately $13,650, $11,400 and $16,400, respectively.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
1996............................ $ 41,400
1997............................ 35,700
1998............................ 25,000
----------
$ 102,100
==========
9. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Federal --
Current......................... $ 18,602 $ 466,159 $ 553,973
Deferred........................ (205,440) 48,585 6,419
State --
Current......................... 203 67,764 68,371
Deferred........................ (28,471) 6,733 890
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Provision (benefit) at the statutory
rate............................... $ (191,252) $ 273,536 $ 570,008
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction......... (18,657) 49,169 45,713
Nondeductible expenses.......... 6,553 184,418 18,743
Related-party gain on sale...... -- 76,075 --
Other................................ (11,750) 6,043 (4,811)
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
F-69
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 56,200 $ 36,213
Net operating loss carryforward...... (33,098) (33,098)
Accruals and reserves not deductible
until paid......................... (65,203) (40,685)
Other................................ 109,857 112,635
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 62,611 $ 39,068
Long-term....................... 103,598 100,640
---------- ----------
Total................. 166,209 139,708
Deferred tax liabilities,
long-term.......................... 233,965 214,773
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
10. RELATED-PARTY TRANSACTIONS:
The Company has receivables from its shareholder and from certain
affiliated entities related through common ownership and control in the amount
of $278,187 and $10,308 at December 31, 1994 and 1995, respectively. Receivables
from shareholder accrue interest at 5.5 percent. Interest income recognized
during 1993, 1994 and 1995 was approximately $147,800, $54,000 and $27,000,
respectively.
The Company acquired an investment in real estate held for sale from its
shareholder for $1,750,000 in January 1993. In January 1994, the investment was
sold for approximately $1,275,000, net of closing costs. At December 31, 1993,
the investment was written down to its net realizable value resulting in an
unrealized loss of approximately $475,000 included in other income (expense) on
the consolidated statement of operations.
In 1991, the Company received 250,000 shares of registered Exploration
Company of Louisiana (Exploration) common stock valued at $125,000 from its
shareholder in exchange for shares of stock in ANGP. During March 1994, the
Company sold the 250,000 shares of common stock of Exploration to its
shareholder for $348,750 resulting in a gain of $223,750 which has been
accounted for as additional paid-in capital.
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
F-70
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
GUARANTEES
The Company's former shareholder is required to make seven annual payments
of $75,000 each under a lawsuit settlement. The Company's former shareholder is
also required under this settlement to make four annual payments of $20,000
each, beginning in 2003. The Company has guaranteed these settlement payments.
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On March 19, 1996, Enterprise Holding Company ("EHC") acquired all of the
outstanding stock of SEI and certain real estate owned by the former shareholder
of SEI for $17,500,000.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. for $2,000,000.
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC would be acquired by
ARS. The acquisition of EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Florida Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Florida Heating
and Air Conditioning, Inc. (a Florida corporation), and related companies as of
December 31, 1994 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Florida
Heating and Air Conditioning, Inc., and related companies as of December 31,
1994 and 1995, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-72
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 735,749 $ 1,022,154
Accounts receivable --
Trade, net of allowance of
$41,305, $41,305 and
$41,305................. 1,418,022 1,394,895
Other receivables.......... 376,211 444,680
Inventories..................... 269,295 306,523
Prepaid expenses and other
current assets................. 61,056 52,992
------------ ------------
Total current
assets............ 2,860,333 3,221,244
PROPERTY AND EQUIPMENT, net.......... 458,964 495,110
OTHER NONCURRENT ASSETS.............. 27,896 38,509
------------ ------------
Total assets.......... $ 3,347,193 $ 3,754,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 52,477 $ 100,166
Accounts payable and accrued
expenses....................... 1,296,472 1,626,569
Payable to shareholder.......... 640,447 641,804
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 508,209 367,519
Deferred income taxes........... 256,022 287,454
------------ ------------
Total current
liabilities....... 2,753,627 3,023,512
LONG-TERM DEBT, net of current
maturities......................... 45,689 18,017
DEFERRED INCOME TAXES................ 68,015 42,339
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.................... 9,800 9,800
Additional paid-in capital...... 4,000 4,000
Retained earnings............... 466,062 657,195
------------ ------------
Total shareholders'
equity............ 479,862 670,995
------------ ------------
Total liabilities and
shareholders'
equity............ $ 3,347,193 $ 3,754,863
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-73
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 15,845,183 $ 14,510,455 $ 11,057,138 $ 11,266,545
COST OF SERVICES..................... 12,079,290 10,541,122 8,248,236 8,437,954
-------------- -------------- -------------- --------------
Gross profit.................... 3,765,893 3,969,333 2,808,902 2,828,591
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,321,394 3,738,253 2,697,057 2,838,858
-------------- -------------- -------------- --------------
Income from operations.......... 444,499 231,080 111,845 (10,267)
OTHER INCOME (EXPENSE):
Interest expense................ (23,338) (11,743) (10,303) (20,126)
Other........................... 12,833 (8,238) (4,008) 13,933
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES........... 433,994 211,099 97,534 (16,460)
PROVISION FOR INCOME TAXES........... 3,832 13,966 10,053 9,000
-------------- -------------- -------------- --------------
NET INCOME........................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-74
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,600 $9,800 $4,000 $ 90,960 $104,760
Dividend........................ -- -- -- (55,060) (55,060)
Net income...................... -- -- -- 430,162 430,162
------ ------ ---------- --------- --------------
BALANCE, December 31, 1994........... 2,600 9,800 4,000 466,062 479,862
Dividend........................ -- -- -- (6,000) (6,000)
Net income...................... -- -- -- 197,133 197,133
------ ------ ---------- --------- --------------
BALANCE, December 31, 1995........... 2,600 $9,800 $4,000 $ 657,195 $670,995
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-75
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 183,860 195,662 144,785 135,500
Deferred income taxes........... 1,274 5,756 364,260 --
Gain on sale of property and
equipment..................... 25,241 (12,303) (12,303) (307)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........... (331,298) (45,342) (207,121) (191,897)
Inventories................... (33,374) (37,228) (549,819) (45,901)
Prepaid expenses and other
current assets............. 112,642 8,064 261,902 18,949
Other noncurrent assets....... (4,915) (10,613) (4,837) 27,024
Increase (decrease) in --
Accounts payable and accrued
expenses................... (15,654) 330,097 343,316 151,116
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... 269,917 (140,690) 87,372 68,221
------------ ------------ ------------ ------------
Net cash provided by operating
activities.................... 637,855 490,536 515,036 137,245
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 38,190 16,704 16,704 28,778
Additions of property and
equipment....................... (199,281) (236,209) (222,551) (151,498)
------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (161,091) (219,505) (205,847) (122,720)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... -- 1,357 (547,643) (641,804)
Borrowings of long-term debt....... 276,291 185,511 185,511 (161,352)
Principal payments of long-term
debt............................ (346,573) (165,494) (133,392) 203,251
Dividends.......................... (55,060) (6,000) (6,000) (6,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (125,342) 15,374 (501,524) (605,905)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 351,422 286,405 (192,335) (591,380)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 384,327 735,749 735,749 1,022,154
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 735,749 $ 1,022,154 $ 543,414 $ 430,774
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 25,931 $ 11,743 $ 5,871 $ 20,126
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-76
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Florida Heating and Air Conditioning, Inc. (a Florida corporation) and its
three affiliated companies (collectively, the Company), are primarily engaged in
the installation and maintenance, repair and replacement of air conditioning and
heating systems in new and preexisting residential and commercial buildings in
Southeast Florida.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Florida Heating and Air Conditioning, Inc., and its affiliated
companies (see Note 11) which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim combined financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
F-77
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the companies in the affiliated group have elected S Corporation
status as defined by the Internal Revenue Code, whereby the Company is not
subject to taxation for federal purposes. Under S Corporation status, the
shareholders report their share of the Company's taxable earnings or losses in
their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-78
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............. 5 $ 869,115 $ 1,051,880
Machinery and equipment.............. 7 115,186 115,774
Computer and telephone equipment..... 5 - 7 343,166 354,674
Leasehold improvements............... 7 57,151 57,151
Furniture and fixtures............... 7 39,308 39,308
------------ ------------
1,423,926 1,618,787
Less -- Accumulated depreciation and
amortization....................... 964,962 1,123,677
------------ ------------
Property and
equipment, net..... $ 458,964 $ 495,110
============ ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 41,305 $ 41,305
Additions to costs and expenses...... 53,132 25,038
Deductions for uncollectible
receivables written off............ (53,132) (25,038)
---------- ----------
$ 41,305 $ 41,305
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Accounts payable, trade.............. $ 1,002,209 $ 1,283,034
Accrued compensation and benefits.... 150,638 198,175
Other accrued expenses............... 143,625 145,360
------------ ------------
$ 1,296,472 $ 1,626,569
============ ============
Installation contracts in progress are as follows:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Costs incurred on contracts in
progress........................... $ 1,680,864 $ 985,003
Estimated earnings, net of losses.... 575,928 351,711
------------ ------------
2,256,792 1,336,714
Less -- Billings to date............. 2,765,002 1,704,233
------------ ------------
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. $ (508,210) $ (367,519)
============ ============
F-79
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $10,500. The notes bear interest at
rates ranging from 7 percent to 9 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 100,166
1997............................ 18,017
----------
$ 118,183
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $118,183 at December 31, 1995.
The Company has a $200,000 line of credit with a financial services
company. The line of credit expires August 31, 1996, and bears interest at prime
plus 1 percent per annum. The line of credit is secured by a lien on accounts
receivable and inventory and is guaranteed by the shareholders. There was no
balance outstanding under this line of credit at December 31, 1995.
6. LEASES:
The Company leases facilities from a company which is owned by the
shareholders. The lease expires in 2000 and provides for rents increasing at 5
percent per year. Total amounts paid under this related-party lease were
approximately $198,000 and $198,000 for the years ended December 31, 1994 and
1995, respectively. The Company also leases a facility from a third party, which
expires in 1997. The rent paid under this lease was approximately $15,000 per
year for the year ended December 31, 1994 and 1995. The leases provide for the
Company to pay taxes, maintenance, insurance and certain other operating costs
of the leased property. The leases contain renewal provisions.
The Company leases vehicles for a shareholder and affiliates. The lease
payments under these vehicle leases were approximately $31,000 and $45,000 for
the years ended December 31, 1994 and 1995, respectively.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 234,897
1997............................ 204,438
1998............................ 184,252
1999............................ 193,465
2000............................ 82,242
-----------
$ 899,294
===========
F-80
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The S Corporation in the affiliated group will terminate its S Corporation
status concurrent with the effective date of the Offering. The Company is
subject to taxation in certain states based upon the jurisdiction in which
revenues are earned.
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995
--------- ---------
Federal --
Current......................... $ 2,098 $ 6,733
Deferred........................ 1,088 4,915
State --
Current......................... 460 1,477
Deferred........................ 186 841
--------- ---------
$ 3,832 $ 13,966
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------
1994 1995
------------ ----------
Provision at the statutory rate...... $ 147,558 $ 71,774
Increase (decrease) resulting from --
Income of S Corporation......... (143,878) (59,557)
State income tax, net of benefit
for federal deduction......... 370 1,398
Other........................... (218) 351
------------ ----------
$ 3,832 $ 13,966
============ ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Loss from limited partnership
investment......................... $ 192,585 $ 230,844
Cash to accrual adjustment........... 189,614 136,674
Other................................ (58,162) (37,725)
---------- ----------
Net deferred income tax
liabilities.......................... $ 324,037 $ 329,793
========== ==========
F-81
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 16,275 $ 11,972
Long-term....................... 27,975 25,998
---------- ----------
Total...................... 44,250 37,970
Deferred tax liabilities --
Current......................... 272,297 299,426
Long-term....................... 95,990 68,337
---------- ----------
Total...................... 368,287 367,763
---------- ----------
Net deferred income tax
liabilities............. $ 324,037 $ 329,793
========== ==========
8. RELATED-PARTY TRANSACTIONS:
One of the shareholders loans the Company funds as needed. The loans are
payable on demand and, under certain conditions, bear interest at prime plus 1
percent. The amount payable to the shareholder is $640,447 and $641,804 at
December 31, 1994 and 1995, respectively. No interest was incurred or paid
during the years ended December 31, 1994 and 1995, related to these loans.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1994 two customers accounted for approximately 22% of the Company's
sales. During 1995, one customer accounted for approximately 14% of the
Company's sales.
11. SHAREHOLDERS' EQUITY:
The common stock ownership of the corporate entities is as follows:
AS OF DECEMBER 31, 1995 AND 1994
------------------------------------
SHARES SHARES PAR
AUTHORIZED OUTSTANDING VALUE
----------- ----------- ------
Florida Heating and Air Conditioning,
Inc. .............................. 1,000 800 $10.00
Florida Heating and Air Conditioning
Service, Inc. ..................... 600 600 1.00
Florida Heating and Air Duct, Inc.... 10,000 600 1.00
Bullseye Air Conditioning, Inc. ..... 600 600 1.00
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company entered into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIAL ONE Meridian and Hoosier, Inc.:
We have audited the accompanying balance sheets of DIAL ONE Meridian and
Hoosier, Inc. (an Indiana corporation), as of December 31, 1994 and 1995, and
the related statements of operations, shareholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIAL ONE Meridian and
Hoosier, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-83
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427,005 $ 856,754
Investments..................... 150,000 --
Accounts receivable --
Trade, net of allowance of
$41,595 and $54,050..... 869,316 989,963
Shareholder and
affiliates.............. 6,316 14,261
Other receivables.......... 19,098 26,459
Inventories..................... 345,934 249,773
Prepaid expenses and other
current assets................. 72,239 96,545
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 42,717 16,825
------------ ------------
Total current
assets............ 1,932,625 2,250,580
PROPERTY AND EQUIPMENT, net.......... 829,316 919,238
OTHER NONCURRENT ASSETS.............. 28,567 18,819
------------ ------------
Total assets.......... $ 2,790,508 $ 3,188,637
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 262,046 $ 266,830
Accounts payable and accrued
expenses....................... 488,197 638,224
Unearned revenue on service
contracts...................... 353,045 423,259
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 78,049 32,131
------------ ------------
Total current
liabilities....... 1,181,337 1,360,444
LONG-TERM DEBT, net of current
maturities......................... 610,180 544,483
DEFERRED INCOME TAXES................ -- 13,309
OTHER NONCURRENT LIABILITIES......... -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value;
1,000 shares authorized, 598
shares issued and 588
outstanding.................... 7,201 7,201
Additional paid-in capital...... 35,000 35,000
Retained earnings............... 956,890 1,228,300
Treasury stock, 10 shares at
cost........................... (100) (100)
------------ ------------
Total shareholder's
equity............ 998,991 1,270,401
------------ ------------
Total liabilities and
shareholder's
equity............ $ 2,790,508 $ 3,188,637
============ ============
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
---------------------------- ----------------------------
1994 1995 1995 1996
------------ -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,066,155 $ 10,132,706 $ 7,499,254 $ 11,508,090
COST OF SERVICES..................... 5,797,066 7,280,888 5,357,009 7,795,049
------------ -------------- ------------ --------------
Gross profit.................... 2,269,089 2,851,818 2,142,245 3,713,041
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,988,791 2,349,482 1,660,059 2,784,557
------------ -------------- ------------ --------------
Income from
operations......... 280,298 502,336 482,186 928,484
OTHER INCOME (EXPENSE):
Interest income................. 8,517 23,399 13,820 25,642
Interest expense................ (56,585) (86,097) (64,725) (111,835)
Other........................... 36,817 10,259 13,371 18,000
------------ -------------- ------------ --------------
INCOME BEFORE INCOME TAXES........... 269,047 449,897 444,652 860,291
PROVISION FOR INCOME TAXES........... 110,365 178,487 176,442 328,208
------------ -------------- ------------ --------------
NET INCOME........................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
============ ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 588 $7,201 $ 35,000 $ 798,208 $ (100) $ 840,309
------ ------ ---------- ---------- -------- --------------
Net income...................... -- -- -- 158,682 -- 158,682
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1994........... 588 7,201 35,000 956,890 (100) 998,991
Net income...................... -- -- -- 271,410 -- 271,410
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1995........... 588 $7,201 $ 35,000 $1,228,300 $ (100) $1,270,401
====== ====== ========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
-------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 205,310 245,028 190,423 242,023
Deferred income taxes........... 108,303 45,302 32,890 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivables....... (183,259) (128,008) (772,782) (583,573)
Inventories................ (129,922) 96,161 58,137 (5,756)
Prepaid expenses and other
current assets.......... (14,768) (29,873) 30,511 33,694
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 29,530 25,892 28,577 18,615
Other noncurrent assets.... 2,606 (16,678) (2,589) --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 86,294 150,027 161,430 373,482
Unearned revenue on service
contracts............... 60,469 70,214 44,661 140,661
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 27,852 (45,918) 217,618 161,757
Other noncurrent
liabilities............. -- -- -- --
------------ ------------ ------------ --------------
Net cash provided by operating
activities.................... 351,097 683,557 257,086 912,986
------------ ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... (318,444) (334,950) (224,668) (783,078)
Purchase of investment.......... (150,000) -- -- --
Proceeds from sale of
investment.................... -- 150,000 150,000 --
Cash paid for acquisition, net
of cash acquired.............. -- -- -- (297,496)
------------ ------------ ------------ --------------
Net cash used in investing
activities.............. (468,444) (184,950) (74,668) (1,080,574)
------------ ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 451,815 200,639 126,226 1,065,854
Principal payments of long-term
debt.......................... (183,134) (261,552) (199,865) (258,375)
(Advances) payments of
receivable from shareholder
and affiliates................ 17,940 (7,945) -- (7,622)
------------ ------------ ------------ --------------
Net cash provided by (used
in) financing
activities.............. 286,621 (68,858) (73,639) 799,857
------------ ------------ ------------ --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 169,274 429,749 108,779 632,269
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 257,731 427,005 427,005 856,754
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 427,005 $ 856,754 $ 535,784 $ 1,489,023
============ ============ ============ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 56,585 $ 86,097 $ 54,290 $ 99,632
Income taxes.................... $ 20,000 $ 126,137 $ 6,280 $ 152,758
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
DIAL ONE Meridian and Hoosier, Inc., (an Indiana corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of residential and commercial air conditioning and heating systems
in Indianapolis and the surrounding areas.
The Company and its shareholder intend to enter into a definitive agreement
with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of parts and supplies for use in the ordinary course of
business and are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-88
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
WARRANTY COSTS
The Company warrants labor for one or five years after installation on new
air conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Land and building.................... 30 $ 145,920 $ 183,320
Leasehold improvements............... 10 191,823 212,461
Transportation equipment............. 3 - 4 827,628 950,262
Machinery and equipment.............. 7 162,243 165,367
Furniture and fixtures............... 5 280,527 369,956
Telephone equipment.................. 7 - 10 47,291 109,016
------------ ------------
1,655,432 1,990,382
Less -- Accumulated depreciation and
amortization......................... 826,116 1,071,144
------------ ------------
Property and equipment,
net..................... $ 829,316 $ 919,238
============ ============
F-89
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 13,609 $ 41,595
Additions charged to costs and
expenses........................... 43,451 32,071
Deductions for uncollectible
receivables written off............ (15,465) (19,616)
---------- ----------
$ 41,595 $ 54,050
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 128,155 $ 185,409
Accrued compensation and benefits.... 228,886 254,393
Warranty accrual..................... 60,754 79,102
Other accrued expenses............... 70,402 119,320
---------- ----------
$ 488,197 $ 638,224
========== ==========
Installation contracts in progress are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs incurred on contracts in
progress............................. $ 195,350 $ 243,727
Estimated earnings, net of losses.... 93,439 96,263
---------- ----------
288,789 339,990
Less -- Billings to date............. 324,121 355,296
---------- ----------
$ (35,332) $ (15,306)
========== ==========
The following are included in the accompanying balance sheets under the
following captions:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 42,717 $ 16,825
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (78,049) (32,131)
---------- ----------
$ (35,332) $ (15,306)
========== ==========
F-90
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable, due in monthly
installments of $4,167 plus
interest at prime plus 1.25% (9.75%
at December 31, 1995) and secured
by accounts receivable, inventory
and equipment, matures November 30,
1999............................... $ 245,837 $ 195,833
Land contract, maturing in November
2003, due in monthly installments
of $1,456 including interest at 8%,
collateralized with the related
property deed held in escrow....... 111,123 102,238
Note payable, due in monthly
installments of $2,500 plus
interest at prime plus 1.25% and
secured by accounts receivable,
inventory and equipment, matures
July 31, 1998...................... 107,500 77,500
Capital leases, maturing from 1996 to
2000, interest ranging from 8.94%
to 10%, secured by transportation
equipment.......................... 403,057 420,536
Other................................ 4,709 15,206
---------- ----------
872,226 811,313
Less -- Current maturities........... 262,046 266,830
---------- ----------
$ 610,180 $ 544,483
========== ==========
The Company has a $250,000 bank line of credit expiring July 31, 1996, with
interest payable monthly at prime plus .75 percent. As of December 31, 1995,
there were no borrowings on this agreement. In addition, the Company has a
$100,000 bank lease line of credit expiring January 2, 2000, with interest at
8.94 percent payable monthly. As of December 31, 1995, borrowings on the lease
line were $23,214 and are included in capital leases.
The notes payable contain covenants which require the Company to maintain
specified financial covenants. As of December 31, 1995, the Company was in
compliance with these covenants.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 93,071
1997............................ 94,220
1998............................ 83,015
1999............................ 61,867
2000............................ 13,263
Thereafter...................... 45,341
----------
$ 390,777
==========
F-91
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
The future minimum lease payments under capital leases are as follows:
Year ending December 31 --
1996............................ $ 219,291
1997............................ 159,026
1998............................ 95,352
1999............................ 23,855
2000............................ --
----------
Total minimum lease
payments................ 497,524
Less -- Amounts representing
interest............................. (76,988)
----------
Net minimum lease
payments................ 420,536
Less -- Current portion of
obligations under capital leases... 173,759
----------
Long-term portion of
obligations under
capital leases.......... $ 246,777
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $811,313 at December 31, 1995.
6. LEASES:
The Company leases a facility from its shareholder. The lease was renewed
on January 1, 1995, and expires on December 31, 1999. The lease requires monthly
payments of $7,500. The amount paid under this lease in 1994 and 1995 was
approximately $76,000 and $90,000, respectively.
7. INCOME TAX:
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
----------------------
1994 1995
---------- ----------
Federal --
Current......................... $ -- $ 97,907
Deferred........................ 85,943 39,549
State --
Current......................... 2,062 35,278
Deferred........................ 22,360 5,753
---------- ----------
$ 110,365 $ 178,487
========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
Tax provision at the statutory
rate................................. $ 91,476 $ 152,965
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 16,118 27,080
Nondeductible expenses.......... 3,080 321
Other........................... (309) (1,879)
---------- ----------
$ 110,365 $ 178,487
========== ==========
F-92
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 4,675 $ 13,859
Accruals and reserves not deductible
until paid......................... (50,724) (43,433)
Other................................ (27,652) 1,175
---------- ----------
Total deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ (47,275) $ (41,708)
Long-term....................... (26,426) --
---------- ----------
Total...................... (73,701) (41,708)
Deferred tax liabilities,
long-term.......................... -- 13,309
---------- ----------
Net deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
8. FRANCHISE AGREEMENTS:
In October 1993, the Company renewed a four-year franchise agreement with
DIAL ONE of Central Indiana, Inc. (DIAL ONE), a company wholly owned by the
shareholder of the Company. The Company pays $15,000 annually plus a royalty fee
of 3 percent of gross sales in excess of a predefined base. Total amounts
incurred in 1994 and 1995 under this agreement were approximately $92,000 and
$56,000, respectively.
The Company pays the LINC Corporation for consulting services under a
franchise agreement through its commercial division. Fees are based on a royalty
fee on gross revenues with a minimum payment of $15,000 a year. In 1994 and
1995, the Company incurred approximately $58,000 and $61,000, respectively,
under the terms of the agreement.
9. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company for the first $200 of each participant's
contribution. The Company has the right to make additional discretionary
contributions. Total contributions by the Company under this plan were
approximately $64,000 and $86,000 for 1994 and 1995, respectively.
10. RELATED-PARTY TRANSACTIONS:
The Company is a DIAL ONE franchisee (see Note 8) under an agreement with
DIAL ONE. The Company also shares certain costs with DIAL ONE for personnel and
overhead, which are billed monthly to DIAL ONE, based on that company's pro rata
share of those expenses. In 1995, the Company received $24,000 in rental income
from DIAL ONE for space occupied in the building that the Company owns. At
December 31, 1994 and 1995, the Company had a balance due from DIAL ONE of
approximately $6,000 and $14,000, respectively.
F-93
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
12. SUBSEQUENT EVENT:
Effective January 1, 1996, the Company acquired 100 percent of the
outstanding shares of stock in Sagamore Heating & Cooling, Inc. (Sagamore) for
$281,000. Consideration paid by the Company included $100,000 in cash and a
$181,000 note payable to the former owner. The Company consolidated Sagamore
effective as of the date of acquisition.
13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholder entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company changed its name to Meridian &
Hoosier Heating and Air Conditioning Company and entered into agreements with
the shareholder to lease land and buildings used in the Company's operations for
a negotiated amount and term.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ADCOT, Inc.:
We have audited the accompanying balance sheets of ADCOT, Inc. (a Texas
corporation), as of December 31, 1994 and 1995, and the related statements of
operations, shareholder's deficit and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADCOT, Inc., as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996 (except with respect to
the matter discussed in Note 4, as to
which the date is June 5, 1996)
F-95
<PAGE>
ADCOT, INC.
BALANCE SHEETS
DECEMBER 31
----------------------------
1994 1995
-------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 122,966 $ 256,104
Accounts receivable --
Trade...................... 3,132 --
Shareholder and
affiliates.............. 10,476 11,968
Other receivables.......... -- --
Inventories..................... 416,332 411,892
Prepaid expenses and other
current assets................ -- 23,607
-------------- ------------
Total current
assets............. 552,906 703,571
PROPERTY AND EQUIPMENT, net.......... 294,820 299,757
OTHER NONCURRENT ASSETS.............. -- 999
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 34,065 123,494
-------------- ------------
Total assets.......... $ 881,791 $ 1,127,821
============== ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 15,692 $ 77,263
Accounts payable and accrued
expenses...................... 770,780 754,768
Payable to shareholders and
affiliates.................... 266,297 241,008
Unearned revenue on extended
warranty contracts, current... 375,668 351,514
-------------- ------------
Total current
liabilities........ 1,428,437 1,424,553
LONG-TERM DEBT, net of current
maturities......................... -- 96,277
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 637,614 579,307
OTHER LONG-TERM LIABILITIES.......... 39,014 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIT:
Common stock, $1 par value;
100,000 shares authorized,
10,000 issued and
outstanding................... 10,000 10,000
Deficit......................... (1,233,274) (982,316)
-------------- ------------
Total shareholder's
deficit............ (1,223,274) (972,316)
-------------- ------------
Total liabilities and
shareholder's
deficit............ $ 881,791 $ 1,127,821
============== ============
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
ADCOT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
-------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,899,840 $ 8,675,616 $ 8,707,403 $ 3,982,983 $ 3,445,084
COST OF SERVICES..................... 6,921,371 5,574,296 5,709,114 2,721,218 2,147,264
-------------- ------------ ------------ ------------ ------------
Gross profit.................... 3,978,469 3,101,320 2,998,289 1,261,765 1,297,820
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 2,830,130 2,443,678 2,347,954 1,107,956 835,868
-------------- ------------ ------------ ------------ ------------
Income from operations.......... 1,148,339 657,642 650,335 153,809 461,952
OTHER INCOME (EXPENSE):
Interest expense................ (81,798) (36,224) (83,754) (30,942) (15,370)
Other........................... 3,503 24,430 65,530 27,421 11,163
-------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE STATE INCOME
TAXES.............................. 1,070,044 645,848 632,111 150,288 457,745
PROVISION FOR STATE INCOME TAXES..... -- -- 43,165 6,824 20,598
-------------- ------------ ------------ ------------ ------------
NET INCOME FROM
CONTINUING OPERATIONS.. 1,070,044 645,848 588,946 143,464 437,147
LOSS FROM DISCONTINUED
OPERATIONS, net of applicable state
income taxes....................... (1,452,024) (141,923) (114,900) (91,999) (245,187)
-------------- ------------ ------------ ------------ ------------
NET INCOME (LOSS).................... $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
============== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
ADCOT, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- SHAREHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
--------- ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 10,000 $10,000 $ (1,355,219) $ (1,345,219)
Net loss........................ -- -- (381,980) (381,980)
--------- ------- -------------- -------------
BALANCE, December 31, 1993........... 10,000 10,000 (1,737,199) (1,727,199)
Net income...................... -- -- 503,925 503,925
--------- ------- -------------- -------------
BALANCE, December 31, 1994........... 10,000 10,000 (1,233,274) (1,223,274)
Dividends....................... -- -- (223,088) (223,088)
Net income...................... -- -- 474,046 474,046
--------- ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 $10,000 $ (982,316) $ (972,316)
========= ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
ADCOT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
------------ ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 307,552 271,420 261,704 123,587 184,644
Gain on sale of property and
equipment...................... -- (18,251) (19,519) (19,518) --
Write-off of property and
equipment...................... -- -- 26,118 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ 104,276 (6,318) 1,640 2,459 (110,851)
Inventories.................... 154,349 225,814 4,440 (109,517) (59,220)
Prepaid expenses and other
current assets.............. (114,200) 127,891 (23,607) (23,185) (26,337)
Other noncurrent assets........ (9,068) 10,369 (999) -- 999
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 691,700 (786,089) (16,012) 76,767 570,418
Unearned revenue on extended
warranty contracts.......... 3,661 (8,288) (82,461) (41,229) 3
------------ ---------- ---------- ----------- ------------
Net cash provided by
operating activities...... 756,290 320,473 625,350 60,829 751,616
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ -- 19,503 21,188 21,188 --
Additions to property and
equipment........................ (16,478) (49,403) (294,428) (185,554) (349,988)
Cash provided by (used in)
discontinued operations.......... (1,116,116) 188,714 (89,429) 252,196 (218,054)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) investing
activities................ (1,132,594) 158,814 (362,669) 87,830 (568,042)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholder and
affiliates....................... 580,431 (314,134) (25,289) (155,000) (229,040)
Borrowings of long-term debt....... 63,750 -- 214,553 143,618 249,110
Principal payments of long-term
debt............................. (93,260) (106,035) (56,705) (30,208) (62,288)
Increase (decrease) in other
long-term liabilities............ (173,024) 39,014 (39,014) (29,625) --
Dividends.......................... -- -- (223,088) (178,088) (303,001)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) financing
activities................ 377,897 (381,155) (129,543) (249,303) (345,219)
------------ ---------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,593 98,132 133,138 (100,644) (161,645)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 23,241 24,834 122,966 122,966 256,104
------------ ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 24,834 $ 122,966 $ 256,104 $ 22,322 $ 94,459
============ ========== ========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 109,064 $ 79,658 $ 111,536 $ 32,468 $ 15,370
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
ADCOT, Inc. (a Texas corporation) (the Company) (d.b.a. A-ABC Appliance),
is primarily engaged in the sales of consumer appliances and the service-related
activities of plumbing, air conditioning, appliance and electrical repair and
other home improvement services in Houston and the surrounding areas.
In April 1996, the Company and its shareholder entered into a stock
purchase agreement with Service Enterprises, Inc. (SEI) to sell all of its
outstanding common stock for $2,000,000 to SEI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1995 and
the five months ended May 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of appliances and service-related parts and supplies
held for use in the ordinary course of business and are valued at the lower of
cost or market using the weighted-average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax return.
The Company is subject to Texas franchise tax which is an income-based tax.
Accordingly, the Company has recorded a provision for this tax in the
accompanying statement of operations for 1995. No provision for franchise taxes
was recorded in the 1993 or 1994 statement of operations as the Company's
franchise tax was offset by a business loss carryover.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
F-100
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Leasehold improvements............... 5 - 15 $ 221,120 $ 256,245
Transportation equipment............. 5 815,190 849,183
Computer and telephone equipment..... 5 - 7 351,383 --
Furniture and fixtures............... 5 - 7 1,053,293 1,109,215
------------ ------------
2,440,986 2,214,643
Less -- Accumulated depreciation and
amortization....................... 2,146,166 1,914,886
------------ ------------
Property and equipment,
net..................... $ 294,820 $ 299,757
============ ============
4. DISCONTINUED OPERATIONS:
Subsequent to the purchase of the Company by SEI, the board of directors of
SEI's parent company (Enterprises Holding Company) approved the disposition of
the Company's retail appliance sales division. The allocation of purchase price
to the fair market value of the net assets of the Company acquired by SEI will
be based on preliminary estimates of fair value and may be revised when
additional information concerning asset and liability valuations is obtained.
Accordingly, any gain or loss on the sale of the appliance sales division will
be considered an adjustment of purchase price.
The net losses of these operations prior to April 1, 1996, are included in
the statements of operations under discontinued operations. Revenues, cost of
sales, selling, general and administrative expenses, other income and expense,
and income taxes for fiscal years 1993, 1994 and 1995 exclude amounts associated
with the discontinued division. Revenues from such operations were approximately
$12,185,000, $12,101,000 and $11,915,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Certain expenses have been allocated to
discontinued operations, which were allocated based upon estimated divisional
usage. All assets of the operations are expected to be sold in 1996.
F-101
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net assets of discontinued operations included in the
balance sheets are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Net working capital (deficit)........ $ (64,208) $ 55,667
Property and equipment, net.......... 98,273 99,919
Other liabilities.................... -- (32,092)
---------- ----------
$ 34,065 $ 123,494
========== ==========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 488,819 $ 495,031
Accrued compensation and benefits.... 93,193 87,725
Accrued taxes, other than income..... 147,066 101,383
Other accrued expenses............... 41,702 70,629
---------- ----------
$ 770,780 $ 754,768
========== ==========
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
The Company also has floor plan financing available from three other
companies with similar terms. However, the Company does not utilize these, and
had no balances outstanding at December 31, 1994 and 1995.
The inventory floor plan facilities are personally guaranteed by the sole
shareholder and/or an officer of the Company.
7. LONG-TERM DEBT:
Long-term debt consists of the installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes are 36 months with monthly payments of principal and interest
of approximately $9,000. The notes bear interest at rates ranging from 8.25
percent to 11 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 77,263
1997............................ 67,241
1998............................ 29,036
----------
$ 173,540
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $173,540 at December 31, 1995.
F-102
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES:
OPERATING LEASES
The Company leases certain facilities from its sole shareholder and his
affiliates. The leases expire from 1997 through 2010. The rent paid under these
related-party leases was approximately $316,000, $305,000 and $370,000 in 1993,
1994 and 1995, respectively.
Other nonrelated-party leases for retail facilities expire in 1997. The
rent paid under nonrelated-party leases was approximately $198,000, $183,000 and
$162,000 in 1993, 1994 and 1995, respectively.
The lease terms generally range from five to 15 years. The leases generally
provide for the Company to pay taxes, maintenance, insurance and certain other
operating costs of the leased property. The leases on most of the properties
contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 558,140
1997............................ 430,034
1998............................ 330,288
1999............................ 292,848
2000............................ 240,432
Thereafter...................... 725,820
------------
$ 2,577,562
============
9. RELATED-PARTY TRANSACTIONS:
The Company has payables to its sole shareholder and certain other related
parties in the amounts of $266,297 and $241,008 at December 31, 1994 and 1995,
respectively. Interest accrues on these payables at 8 percent per annum.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On May 28, 1996, Service Enterprises, Inc. ("SEI"), a subsidiary of
Enterprises Holding Company ("EHC") purchased all of the outstanding common
stock of ADCOT for $2,000,000.
The acquisition of the EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro Heating and Air Conditioning, Inc.:
We have audited the accompanying balance sheet of Metro Heating and Air
Conditioning, Inc. (a North Carolina corporation), as of December 31, 1995, and
the related statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metro Heating and Air
Conditioning, Inc., as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Houston, Texas
December 6, 1996
F-104
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $1,338,654 $ 890,726
Accounts receivable --
Trade, net of allowance of
$45,000.......................... 1,781,532 2,564,979
Other receivables.................. 135,686 81,211
Inventories........................... 1,492,548 1,887,274
Prepaid expenses and other current
assets............................. 27,236 --
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 311,901 63,516
------------ -------------
Total current assets.......... 5,087,557 5,487,706
PROPERTY AND EQUIPMENT, net............. 1,828,966 2,512,259
OTHER NONCURRENT ASSETS................. 1,089 2,000
------------ -------------
Total assets.................. $6,917,612 $ 8,001,965
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt....................... $ -- $ 1,000,000
Accounts payable and accrued
expenses........................... 1,623,495 1,589,943
Payable to shareholders............... 652,636 209,465
Unearned revenue on service
contracts.......................... 277,190 316,500
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 225,991 24,708
------------ -------------
Total current liabilities..... 2,779,312 3,140,616
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000
shares authorized, 6,000 shares
issued and outstanding............. 6,000 6,000
Retained earnings..................... 4,132,300 4,855,349
------------ -------------
Total shareholders' equity.... 4,138,300 4,861,349
------------ -------------
Total liabilities and
shareholders' equity....... $6,917,612 $ 8,001,965
============ =============
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, ------------------------------
1995 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $ 20,549,846 $ 14,893,513 $ 19,383,471
COST OF SERVICES........................ 14,367,437 10,524,811 13,894,337
-------------- -------------- --------------
Gross profit....................... 6,182,409 4,368,702 5,489,134
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,084,813 2,896,523 3,888,374
-------------- -------------- --------------
Income from operations............. 2,097,596 1,472,179 1,600,760
OTHER INCOME (EXPENSE):
Interest income.................... 12,486 4,574 8,992
Interest expense................... (34,829) (34,196) (70,256)
Other.............................. 3,849 (1,538) 6,481
-------------- -------------- --------------
NET INCOME.............................. $ 2,079,102 $ 1,441,019 $ 1,545,977
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 6,000 $6,000 $ 3,089,128 $ 3,095,128
Dividends.......................... -- -- (1,035,930) (1,035,930)
Net income......................... -- -- 2,079,102 2,079,102
------ ------ ----------- -------------
BALANCE, December 31, 1995.............. 6,000 6,000 4,132,300 4,138,300
Dividends (unaudited).............. -- -- (822,928) (822,928)
Net income (unaudited)............. -- -- 1,545,977 1,545,977
------ ------ ----------- -------------
BALANCE, September 30, 1996
(unaudited)........................... 6,000 $6,000 $ 4,855,349 $ 4,861,349
====== ====== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, --------------------------
1995 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 2,079,102 $ 1,441,019 $ 1,545,977
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............ 512,107 306,118 470,118
(Gain)/loss on sale of
property and
equipment............... (1,284) 3,790 --
Changes in operating assets
and liabilities --
(Increase) decrease
in --
Accounts receivable... (222,078) (81,910) (728,972)
Inventories........... (42,371) 9,295 (394,726)
Prepaid expenses and
other current
assets............. 1,423 13,063 27,236
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.......... (192,806) 75,695 248,385
Other noncurrent
assets............. 40,640 40,640 (911)
Increase (decrease)
in --
Accounts payable and
accrued expenses... 525,716 47,317 (33,552)
Unearned revenue on
service
contracts.......... 67,275 51,929 39,310
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.......... 14,351 (211,640) (201,283)
------------- ------------ ------------
Net cash provided
by operating
activities...... 2,781,075 1,695,316 971,582
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 5,625 2,775 --
Additions of property and
equipment..................... (850,274) (573,629) (946,530)
Cash paid for acquisition....... -- -- (206,881)
------------- ------------ ------------
Net cash used in
investing
activities...... (844,649) (570,854) (1,153,411)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 350,000 350,000 1,000,000
Repayments of short-term debt... (350,000) (350,000) --
Increase (decrease) in payable
to shareholders............... (276,520) (810,000) (443,171)
Dividends....................... (1,035,930) (541,296) (822,928)
------------- ------------ ------------
Net cash used in
financing
activities...... (1,312,450) (1,351,296) (266,099)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 624,976 (226,834) (447,928)
CASH AND CASH EQUIVALENTS, beginning
of
period............................. 713,678 713,678 1,338,654
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,338,654 $ 486,844 $ 890,726
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 34,822 $ 34,190 $ 26,011
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Metro Heating and Air Conditioning, Inc. (the Company), is primarily
engaged in the installation and maintenance, repair and replacement of air
conditioning and heating systems in new and preexisting residential and
commercial buildings in North Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1996, and for the nine
months ended September 30, 1995 and 1996, are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning and heating
equipment, refrigeration supplies and accessories held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for twelve
months after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
F-109
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1995
------------ ------------
Transportation equipment................ 5 $ 12,198,404
Machinery and equipment................. 5-7 273,555
Computer and telephone equipment........ 5 416,804
Leasehold improvements.................. 7-10 942,468
Furniture and fixtures.................. 5-7 707,987
------------
4,539,218
Less -- Accumulated depreciation and
amortization.......................... (2,710,252)
------------
Property and equipment, net........ $ 1,828,966
============
F-110
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
1995
------------
Balance at beginning of year......... $ 30,000
Additions charged to costs and
expenses........................... 26,350
Deductions for uncollectible
receivables written off............ (11,350)
------------
$ 45,000
============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
1995
------------
Accounts payable, trade................. $ 846,157
Accrued profit-sharing contribution..... 375,437
Accrued compensation and benefits....... 262,901
Accrued warranty expense................ 139,000
------------
$1,623,495
============
Installation contracts in progress are as follows:
DECEMBER 31,
1995
------------
Costs incurred on contracts in
progress.............................. $ 565,148
Estimated earnings, net of losses....... 557,681
------------
1,122,829
Less -- Billings to date................ 896,838
------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. $ 225,991
============
The following are included in the accompanying balance sheet under the
following captions:
DECEMBER 31,
1995
------------
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. $ 311,901
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (225,991)
------------
$ 85,910
============
5. SHORT-TERM DEBT:
The Company has a $1,000,000 line of credit with a bank. The line of credit
bears interest at the prime rate (8.5 percent at December 31, 1995) per annum.
There was no balance outstanding under this line of credit at December 31, 1995.
In January 1996, the line of credit was increased to $1,500,000 and the maturity
was extended from May 1996 to April 30, 1997.
F-111
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases two facilities and a parking lot from the owners of the
Company. The lease for the two facilities expires in 2004, and the lease for the
parking lot expires in 2006 and provides for rents increasing at 2 percent per
year. The rent paid under these related-party leases was approximately $192,000
for the year ended December 31, 1995. The leases provide for the Company to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property. The leases contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................... $ 197,000
1997............................... 201,000
1998............................... 205,000
1999............................... 209,000
2000............................... 214,000
Thereafter......................... 926,000
------------
$ 1,952,000
============
7. RELATED-PARTY TRANSACTIONS:
Two of the shareholders loan funds to the Company as needed. The loans are
payable on demand and bear interest at 5.25 percent. The amount payable to the
shareholders is $652,636 at December 31, 1995. Interest of approximately $27,000
was incurred during the year ended December 31, 1995, related to these loans.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
9. PROFIT-SHARING PLAN:
In January 1982, the Company established a defined contribution 401(k)
profit-sharing plan for employees meeting certain employment requirements. In
January 1983, the plan was amended to include a 401(k) component. Eligible
employees may contribute up to the lesser of 15 percent of their annual
compensation or the maximum amount permitted under IRS regulations to their
401(k) account. The plan provides for an annual contribution made by the
Company, as determined by the board of directors. The Company's contribution was
approximately $375,000 for the year ended December 31, 1995.
F-112
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS:
Effective February 29, 1996, Metro entered into an asset purchase agreement
with Tillman Heating and Air Conditioning Company (THAC) of Durham, North
Carolina for approximately $590,000, consisting of cash and assumption of
certain liabilities. In conjunction with the purchase, the Company entered into
a lease with a related party for the business premises of THAC.
Concurrent with the acquisition, ARS will enter into agreements with the
former shareholders to lease land and buildings used in ARS' operations for a
negotiated amount and term.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On December 11, 1996, ARS acquired the Company.
F-113
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of
II-1
<PAGE>
an undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the corporation as authorized in Section 145. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter and provided further that the Company may,
but is not required to, indemnify such persons who are serving as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise at the written request of the
Company for the expenses incurred in a proceeding if such person is a party to
and is
II-2
<PAGE>
successful, on the merits or otherwise, in such proceeding. The Bylaws further
provide that, in the event of any threatened, or pending action, suit or
proceeding in which any of the persons referred to above is a party or is
involved and that may give rise to a right of indemnification under the Bylaws,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Bylaws and (ii) satisfactory evidence as to the amount of such expenses.
i INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.
INSURANCE
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
*2.1 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Climatic Inc., Climatic Corporation of Vero Beach and the stockholders named therein
(Incorporated by reference to Exhibit 2.1 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*2.2 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS FHAC Inc., Florida Heating and Air Conditioning, Inc. and the stockholders named
therein (Incorporated by reference to Exhibit 2.2 to the Registration Statement of the
Company on Form S-1 (Reg. No. 333-06195)).
*2.3 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Atlas Inc., Atlas Services, Inc. and the stockholders named therein (Incorporated by
reference to Exhibit 2.3 of the Registration Statement of the Company on Form S-1 (Reg.
No. 333-06195)).
*2.4 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS DIAL Inc., DIAL ONE Meridian and Hoosier, Inc. and the stockholders named therein
(Incorporated by reference to Exhibit 2.4 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*2.5 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Bullseye Inc., Bullseye Air Conditioning, Inc. and the stockholders named therein
(Incorporated by reference to Exhibit 2.5 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*2.6 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Duct Inc., Florida Heating and Air Conditioning Duct, Inc. and the stockholders named
therein (Incorporated by reference to Exhibit 2.6 to the Registration Statement of the
Company on Form S-1 (Reg. No. 333-06195)).
*2.7 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Services Inc., Florida Heating and Air Conditioning Service, Inc. and the stockholders
named therein (Incorporated by reference to Exhibit 2.7 to the Registration Statement of
the Company on Form S-1 (Reg. No. 333-06195)).
*2.8 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS General Inc., General Heating Engineering Company, Inc. and the stockholders named
therein (Incorporated by reference to Exhibit 2.8 to the Registration Statement of the
Company on Form S-1 (Reg. No. 333-06195)).
II-3
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
*2.9 -- Agreement and Plan of Reorganization dated as of June 13, 1996 by and among the Company,
ARS Acquisition Inc., Enterprises Holding Company and the stockholders named therein
(Incorporated by reference to Exhibit 2.9 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*2.10 -- Form of Uniform Provisions for the Acquisition of Founding Companies (Incorporated by
reference to Exhibit 2.10 to the Registration Statement of the Company on Form S-1 (Reg.
No. 333-06195)).
2.11 -- Agreement and Plan of Reorganization dated as of December 11, 1996 by and among the
Company, MHAC Acquisition Inc., Metro Heating and Air Conditioning, Inc. and the
stockholders named therein.
*3.1 -- Restated Certificate of Incorporation of the Company (Incorporated by reference to Exhibit
3.1 to the Registration Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*3.2 -- Bylaws of the Company (Incorporated by reference to Exhibit 3.2 to the Registration
Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*3.3 -- Certificate of Designations of Series A Junior Participating Preferred Stock (Incorporated
by reference to Exhibit 3.3 to the Registration Statement of the Company on Form S-1 (Reg.
No. 333-06195)).
*4.1 -- Form of Certificate representing Common Stock (Incorporated by reference to Exhibit 4.1 to
the Registration Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*4.2 -- Rights Agreement of the Company, including form of Rights Certificate as Exhibit B thereto
(Incorporated by reference to Exhibit 4.4 to the Registration Statement of the Company on
Form S-8 (Reg. No. 333-13299)).
*4.3 -- Registration Rights Agreement among the Company and the stockholders listed on the
signature pages thereto (Incorporated by reference to Exhibit 4.3 to the Registration
Statement of the Company on Form S-1 of the Company (Reg. No. 333-06195)).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996 between American Residential
Services, Inc. and Equus II Incorporated (Incorporated by reference to Exhibit 4.4 to the
Registration Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*4.5 -- Stock Piggyback Registration Agreement dated as of March 19, 1996 between Enterprises
Holding Company and NationsBank of Texas, N.A. (Incorporated by reference to Exhibit 4.5
to the Registration Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*4.6 -- Revolving Loan Agreement dated September 17, 1996 among the Company and NationsBank of
Texas, N.A. and the other parties designated therein (Incorporated by reference to Exhibit
4.6 to the Registration Statement of the Company on Form S-1 (Reg. No. 333-06195)).
The Company and certain of its subsidiaries are parties to certain debt instruments under
which the total amount of securities authorized does not exceed 10% of the total assets of
the Company and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A)
of Item 601(b) of Regulation S-K, the Company agrees to furnish a copy of such instruments
to the Commission upon request.
5.1 -- Opinion of John D. Held, Esq.
*10.1 -- American Residential Services, Inc. 1996 Incentive Plan (Incorporated by reference to
Exhibit 10.1 to the Registration Statement of the Company on Form S-1 (Reg. No.
333-06195)).
*10.2 -- Employment Agreement dated as of November 1, 1995 between the Company and Howard S.
Hoover, Jr., as amended (Incorporated by reference to Exhibit 10.2 to the Registration
Statement of the Company on Form S-1 (Reg. No. 333-06195)).
II-4
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
*10.3 -- Employment Agreement dated as of November 1, 1995 between the Company and C. Clifford
Wright, Jr., as amended (Incorporated by reference to Exhibit 10.3 to the Registration
Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*10.4 -- Employment Agreement dated as of November 1, 1995 between the Company and William P.
McCaughey, as amended (Incorporated by reference to Exhibit 10.4 to the Registration
Statement of the Company on Form S-1 (Reg. No. 333-06195)).
*10.5 -- Employment Agreement dated as of March 6, 1996 between the Company and John D. Held, as
amended (Incorporated by reference to Exhibit 10.5 to the Registration Statement of the
Company on Form S-1 (Reg. No. 333-06195)).
*10.6 -- Employment Agreement dated as of March 6, 1996 between the Company and A. Jefferson
Walker, III (Incorporated by reference to Exhibit 10.6 to the Registration Statement of
the Company on Form S-1 (Reg. No. 333-06195)).
*10.7 -- Employment Agreement dated as of April 15, 1996 between the Company and Michael Mamaux
(Incorporated by reference to Exhibit 10.7 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*10.8 -- Employment Agreement dated as of June 13, 1996 between the Company and Elliot Sokolow
(Incorporated by reference to Exhibit 10.8 to the Registration Statement of the Company on
Form S-1 (Reg. No. 333-06195)).
*10.9 -- Employment Agreement dated as of June 13, 1996 between the Company and Gorden H. Timmons
(Incorporated by reference to Exhibit 10.10 to the Registration Statement of the Company
on Form S-1 (Reg. No. 333-06195)).
*10.10 -- Employment Agreement dated as of June 13, 1996 between the Company and Frank N. Menditch
(Incorporated by reference to Exhibit 10.12 to the Registration Statement of the Company
on Form S-1 (Reg. No. 333-06195)).
*10.11 -- Form of Indemnification Agreement between the Company and each of its directors and
officers (Incorporated by reference to Exhibit 10.15 to the Registration Statement of the
Company on Form S-1 (Reg. No. 333-06195)).
*10.12 -- Executive Supplemental Disability Plan of American Residential Services, Inc.
(Incorporated by reference to Exhibit 10.16 to the Registration Statement of the Company
on Form S-1 (Reg. No. 333-06195)).
*10.13 -- Executive Supplemental Life Insurance Plan of American Residential Services, Inc.
(Incorporated by reference to Exhibit 10.17 to the Registration Statement of the Company
on Form S-1 (Reg. No. 333-06195)).
*10.14 -- American Residential Services, Inc. Deferred Compensation Plan (Incorporated by reference
to Exhibit 10.18 to the Registration Statement of the Company on Form S-1 (Reg. No.
333-06195)).
21.1 -- List of Subsidiaries
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of John D. Held, Esq. (contained in Exhibit 5.1)
24.1 -- Power of Attorney (included in the signature page hereof).
</TABLE>
- ------------
* Incorporated by reference.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment
II-5
<PAGE>
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(7) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein,
II-6
<PAGE>
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON DECEMBER 20, 1996.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Each person whose signature appears below hereby appoints C. Clifford
Wright, Jr. and John D. Held, and both of them, either of whom may act without
the joinder of the other, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and any
registration statement for the same offering filed pursuant to Rule 462 under
the Securities Act of 1933, and to file the same, with all exhibits thereto and
all other documents in connection therewith, with the Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing appropriate or necessary to be done, as fully and
for all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON DECEMBER 20,
1996 IN THE CAPACITIES INDICATED.
/S/C. CLIFFORD WRIGHT, JR. /S/ROBERT J. CRUIKSHANK
C. CLIFFORD WRIGHT, JR. ROBERT J. CRUIKSHANK
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
/S/WILLIAM P. MCCAUGHEY /S/DON D. SYKORA
WILLIAM P. MCCAUGHEY DON D. SYKORA
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
DIRECTOR (CHIEF FINANCIAL OFFICER)
/S/MICHAEL MAMAUX /S/RANDALL B. HALE
MICHAEL MAMAUX RANDALL B. HALE
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) DIRECTOR
II-8
<PAGE>
/S/HOWARD S. HOOVER, JR. /S/NOLAN LEHMANN
HOWARD S. HOOVER, JR. NOLAN LEHMANN
CHAIRMAN OF THE BOARD DIRECTOR
/S/GORDEN H. TIMMONS /S/ELLIOT SOKOLOW
GORDEN H. TIMMONS ELLIOT SOKOLOW
CHIEF OPERATING OFFICER AND DIRECTOR DIRECTOR
/S/THOMAS N. AMONETT /S/FRANK N. MENDITCH
THOMAS N. AMONETT FRANK N. MENDITCH
DIRECTOR DIRECTOR
II-9
EXHIBIT 2.11
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF REORGANIZATION
DATED AS OF DECEMBER 11, 1996
BY AND AMONG
AMERICAN RESIDENTIAL SERVICES, INC.,
MHAC ACQUISITION INC.,
METRO HEATING AND AIR CONDITIONING, INC.
AND
THE STOCKHOLDERS NAMED HEREIN
- --------------------------------------------------------------------------------
Forward Merger; Purchase; Working Capital Adjustment; Restricted Stock
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made
as of December 11, 1996, by and among American Residential Services, Inc., a
Delaware corporation ("ARS"), MHAC Acquisition Inc., a Delaware corporation and
a wholly owned subsidiary of ARS ("ARS Sub"), Metro Heating and Air
Conditioning, Inc., a North Carolina corporation (the "Company"), and the
persons listed on the signature page hereof under the caption "Stockholders"
(collectively, the "Stockholders," and each of those persons, individually, a
"Stockholder").
PRELIMINARY STATEMENT
The parties to this Agreement have determined it is in their best
long-term interests to effect a business combination by means of a Merger
pursuant to which the Company will merge into ARS Sub on the terms and subject
to the conditions set forth herein (that Merger being the "Acquisition").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements, representations and undertakings contained herein, the parties
hereto hereby agree as follows:
Paragraph 1. CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms have the meanings assigned to them below in this Paragraph 1.
Capitalized terms used in this Agreement and not defined below in this Paragraph
1 have the meanings assigned to them in the Preliminary Statement, Article IX of
the Standard Provisions or the Special Provisions, as the case may be.
"ACQUIRED BUSINESS" means the Company.
"ACQUISITION CONSIDERATION" has the meaning specified in Paragraph
2.
"ARS ACQUISITION GUARANTY" means the guaranty in the form thereof
attached hereto as Exhibit 1-A pursuant to which ARS will guarantee the
payment by ARS Sub of the ARS Sub Notes and the performance by ARS Sub of
the ARS Sub Undertaking.
"ARS LEASE GUARANTIES" means the guaranties in the form thereof
attached hereto as Exhibit 1-B, with the blanks appropriately filled,
pursuant to which ARS will guarantee the performance by the Surviving
Corporation of its obligations under the Facility Leases.
"ARS PLEDGE AGREEMENT" means the pledge agreement in the form
thereof attached hereto as Exhibit 1-C pursuant to which ARS will pledge
to Jacob A. Williamson, Jr., as agent for the holders of the ARS Sub
Notes, all the outstanding shares of common stock of
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<PAGE>
ARS Sub to secure the performance by ARS of its guaranty in the ARS
Acquisition Guaranty of the payment by ARS Sub of the ARS Sub Notes.
"ARS SUB NOTES" means the promissory notes of ARS Sub in the form
thereof attached hereto as Exhibit 1-D, with the blanks appropriately
filled, payable on January 3, 1997 to the respective orders of the
Stockholders in the principal amounts specified in Schedule 2(D).
"ARS SUB UNDERTAKING" means the undertaking of ARS Sub in the form
thereof attached hereto as Exhibit 1-E pursuant to which ARS Sub will
undertake to deliver to each Stockholder a certificate evidencing the
number of whole shares of ARS Common Stock specified in Schedule 2(D).
"CALCULATED VALUE" means $19.131.
"CEILING AMOUNT" means $21,180,000; provided, however, that, except
in the case of a Stockholder Indemnified Loss attributable to a Third
Party Claim arising out of or based on a violation of the federal
securities laws by ARS, the Ceiling Amount is $4,314,000 for purposes of
Section 7.06(b).
"CLOSING" has the meaning specified in Paragraph 3.
"CLOSING DATE" means December 11, 1996 or such later date as to
which ARS and the Company shall agree in writing.
"COMPANY" means Metro Heating and Air Conditioning, Inc., a North
Carolina corporation.
"COMPANY CAPITAL STOCK" means the Common Stock, par value $1.00 per
share, of the Company.
"COUNSEL FOR THE COMPANY AND THE STOCKHOLDERS" means Moore & Van
Allen, PLLC.
"CURRENT BALANCE SHEET" means the balance sheet of the Company as of
September 30, 1996.
"CURRENT BALANCE SHEET DATE" means September 30, 1996.
"DGCL" means the Delaware General Corporation Law.
"EFFECTIVE DATE" means the Closing Date.
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<PAGE>
"EXECUTIVE EMPLOYMENT AGREEMENT" means the Employment Agreement
entered into as of the Effective Date between ARS Sub and Jacob A.
Williamson, Jr. in substantially the form attached as Exhibit 5.02-1 to
Schedule 5.02.
"FACILITY LEASES" means the four leases from (a) Jacob A.
Williamson, Sr. and Joyce E. Williamson, (b) Metro Partners, LLC, (c)
Jacob A. Williamson, Jr. and Suzanne Williamson and (d) J&S Williamson,
LLC, respectively, to the Company in the respective forms thereof attached
hereto as Exhibits 1-F, 1-G, 1-H and 1-I.
"INITIAL FINANCIAL STATEMENTS" means (a) the audited balance sheet
of the Company as of December 31, 1995 and the related statements of
operations and retained earnings for the Company's fiscal year ended
December 31, 1995, together with the related audit report of Arthur
Andersen LLP, and (b) the Current Balance Sheet and the related statement
of operations for the nine months ended the Current Balance Sheet Date,
which Arthur Andersen LLP has reviewed and the Company has delivered to
ARS.
"NCBCA" means the North Carolina Business Corporation Act.
"PRO RATA SHARE" of a Stockholder means (a) 80% in the case of Jacob
A. Williamson, Jr., (b) 10% in the case of Jacob A. Williamson, Sr. and
(c) 10% in the case of Joyce E. Williamson; provided, however, that the
Pro Rata Shares of the Ceiling Amount are 100%, 0% and 0%, respectively,
for Jacob A. Williamson, Jr., Jacob A. Williamson, Sr. and Joyce E.
Williamson for purposes of Section 7.06(a).
"RESPONSIBLE OFFICER" means Jacob A. Williamson, Jr.
"SPECIAL PROVISIONS" has the meaning specified in Paragraph 5.
"STANDARD PROVISIONS" has the meaning specified in Paragraph 4.
"SURVIVING CORPORATION" means ARS Sub, which is to be designated in
the Certificates of Merger as the surviving corporation of the Merger.
"THRESHOLD AMOUNT" means $480,000.
"WORKING CAPITAL ADJUSTMENT" means the amount, if any, by which
$2,000,000 exceeds the Final Working Capital, as determined pursuant to
Addendum W.
Paragraph 2. (A) CERTIFICATES OF MERGER. Subject to the terms and
conditions hereof, the Company will cause Certificates of Merger to be duly
executed and delivered on or promptly after the Closing Date and filed with the
Secretary of State of the State of Delaware and the Secretary of State of the
State of North Carolina.
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<PAGE>
(B) THE EFFECTIVE TIME. The effective time of the Merger (the
"Effective Time") will be the time on the Effective Date which the Certificates
of Merger specify or, if the Certificates of Merger do not specify another time,
5:00 p.m., Houston, Texas time, on the Effective Date.
(C) CERTAIN EFFECTS OF THE MERGER. At and as of the Effective Time,
(1) the Company will be merged with and into ARS Sub in accordance with the
provisions of the DGCL and the NCBCA, (2) the Company will cease to exist as a
separate legal entity, (3) the certificate of incorporation of ARS Sub will be
amended (a) to reduce the par value of its Common Stock to $.001 per share and
(b) to change the name of ARS Sub to "Metro Heating and Air Conditioning, Inc.",
(4) ARS Sub will be the Surviving Corporation and, as such, will, all with the
effect provided by the DGCL and the NCBCA, (a) possess all the properties and
rights, and be subject to all the restrictions and duties, of the Company and
ARS Sub and (b) be governed by the laws of the State of Delaware, (5) the
Charter Documents of ARS Sub then in effect (after giving effect to the
amendment of ARS Sub's certificate of incorporation specified in clause (3) of
this sentence) will thereafter remain (until changed in accordance with (a)
applicable law (in the case of the certificate of incorporation) or (b) their
terms (in the case of the bylaws)) the Charter Documents of the Surviving
Corporation, (6) the initial board of directors of the Surviving Corporation
will be the persons named in Schedule 2(C), and those persons will hold the
office of director of the Surviving Corporation, subject to the provisions of
the applicable laws of the State of Delaware and the Charter Documents of the
Surviving Corporation, and (7) the initial officers of the Surviving Corporation
will be as set forth in Schedule 2(C), and each of those persons will serve in
each office specified for that person in Schedule 2(C), subject to the
provisions of the Charter Documents of the Surviving Corporation, until that
person's successor is duly elected to, and, if necessary, qualified for, that
office.
(D) EFFECT OF THE MERGER ON CAPITAL STOCK. As of the Effective Time,
as a result of the Merger and without any action on the part of any holder
thereof:
(1) the shares of Company Capital Stock issued and outstanding
immediately prior to the Effective Time will (a) be converted into the
right to receive, subject to the provisions of Paragraph 2(E), without
interest, on surrender of the certificates evidencing those shares, the
principal amount of ARS Sub Notes and the rights pursuant to the ARS Sub
Undertaking to receive the number of whole shares of ARS Common Stock as
provided in Schedule 2(D) (the "Acquisition Consideration"), (b) cease to
be outstanding and to exist and (c) be canceled and retired;
(2) each share of Company Capital Stock held in the treasury of the
Company or any Company Subsidiary will (a) cease to be outstanding and to
exist and (b) be canceled and retired; and
(3) each share of the Common Stock, par value $.001 per share, of
ARS Sub issued and outstanding immediately prior to the Effective Time
will remain unchanged and
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such shares will constitute all the issued and outstanding shares of
Capital Stock of the Surviving Corporation.
Each holder of a certificate representing shares of Company Capital Stock
immediately prior to the Effective Time will, as of the Effective Time and
thereafter, cease to have any rights respecting those shares other than the
right to receive, subject to the provisions of Paragraph 2(E), the Acquisition
Consideration.
(E) DELIVERY, EXCHANGE AND PAYMENT. (1) At or after the Effective
Time: (a) the Stockholders, as holders of certificates representing shares of
Company Capital Stock, will, on surrender of those certificates to ARS (or any
agent that may be appointed by ARS for purposes of this Paragraph 2(E)),
receive, subject to the provisions of this Paragraph 2(E), the Acquisition
Consideration; and (b) until any certificate representing Company Capital Stock
has been surrendered and replaced pursuant to this Paragraph 2(E), that
certificate will, for all purposes, be deemed to evidence ownership of the right
to receive the number of whole shares of ARS Common Stock to be delivered
pursuant to the ARS Sub Undertaking in respect of that certificate pursuant to
Paragraph 2(D). All shares of ARS Common Stock issuable in the Merger will be
deemed for all purposes to have been issued by ARS at the Effective Time.
(2) Each Stockholder will deliver to ARS (or any agent that may be
appointed by ARS for purposes of this Paragraph 2(E)) on or before the Closing
Date the certificates representing all the Company Capital Stock owned by that
Stockholder, duly endorsed in blank, or accompanied by stock powers in blank
duly executed, by that Person, and with all necessary transfer tax and other
revenue stamps, acquired at that Person's expense, affixed and canceled. Each
Stockholder shall cure any deficiencies in the endorsement of the certificates
or other documents of conveyance respecting, or in the stock powers
accompanying, the certificates representing Company Capital Stock delivered by
that Person.
(3) No dividends (or interest) or other distributions declared or
earned after the Effective Time with respect to ARS Common Stock and payable to
the holders of record thereof after the Effective Time will be paid to the
holder of any unsurrendered certificates representing shares of Company Capital
Stock for which shares of ARS Common Stock have been issued in the Merger until
those certificates are surrendered as provided herein, but (a) on that surrender
ARS will cause to be paid, to the Person in whose name the certificates
representing such shares of ARS Common Stock shall then be issued, the amount of
dividends or other distributions previously paid with respect to such shares of
ARS Common Stock with a record date, or which have accrued, subsequent to the
Effective Time, but prior to surrender, and (b) at the appropriate payment date
or as soon as practicable thereafter, ARS will cause to be paid to that Person
the amount of dividends or other distributions with a record date, or which have
been accrued, subsequent to the Effective Time, but which are not payable until
a date subsequent to surrender, which are payable with respect to such shares of
ARS Common Stock, subject in all cases to any applicable escheat laws. No
interest will be payable with respect to the payment of such dividends or other
distributions on surrender of outstanding certificates.
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<PAGE>
Paragraph 3. THE CLOSING. On or before the Closing Date, the parties
hereto will take all actions necessary to (A) effect the Acquisition (including,
as permitted by the DGCL and the NCBCA, (i) the execution of Certificates of
Merger (a) meeting the requirements of the DGCL and the NCBCA, respectively, and
(b) providing that the Merger will become effective on the Effective Date and
(ii) the filing of those Certificates of Merger with the Secretary of State of
the State of Delaware and the Secretary of State of the State of North
Carolina), (B) verify the existence and ownership of the certificates evidencing
the Company Capital Stock to be exchanged for the Acquisition Consideration
pursuant to Paragraph 2(E) and (C) satisfy the document delivery requirements on
which the obligations of the parties to effect the Acquisition and the other
transactions contemplated hereby are conditioned by the provisions of Article V
(all those actions collectively being the "Closing"). The Closing will take
place at the offices of Baker & Botts, L.L.P., 30th Floor, 910 Louisiana,
Houston, Texas at 10:00 a.m., Houston time, or at such later time on the Closing
Date as ARS shall specify by written notice to the Responsible Officer.
Paragraph 4. INCORPORATION OF STANDARD PROVISIONS. (A) The American
Residential Services, Inc. Standard Provisions for Business Combinations, marked
"Form 96-1 (BC)" and attached hereto as Annex 1 (the "Standard Provisions"),
hereby are incorporated in this Agreement by this reference and constitute a
part of this Agreement with the same force and effect as if set forth at length
herein.
(B) Section 1.03 hereby is amended by adding "applicable to the
Stockholder" immediately after "Requirement" in clause (a) of its first
sentence.
(C) Sections 2.02, 2.06 (each sentence), 2.07 (the first two
sentences), 2.08, 2.09, 2.10, 2.11 (the first sentence), 2.12, 2.14(a) (each
sentence), 2.14(b), 2.15 (the first sentence), 2.16 (each sentence), 2.18(a),
2.18(b) (the first sentence), 2.18(c), 2.18(d), 2.19(a), 2.20 (each sentence),
2.22 (the third sentence), 2.23, 2.24 (the first sentence), 2.25(b), 2.25(c)
(the first and final sentences), 2.25(d), 2.25(e), 2.25(f), 2.25(g) (the first
sentence), 2.25(h) (the first sentence) and 2.29 hereby are amended by deleting
therefrom the word "accurately".
(D) Section 2.11 hereby is further amended by deleting therefrom its
final sentence.
(E) Section 2.13(b) hereby is amended by deleting therefrom its
paragraph (iii).
(F) The representations and warranties in Sections 2.14(a) (clause
(ii) of the first sentence and the final sentence), 2.14(b)(i), 2.15, 2.17, 2.20
(clause (a) of the second sentence), 2.25(g) (the first sentence) and Section
2.29 (as to the matters referred to in clause (k) thereof) are made to the
knowledge of the Company and each of the Stockholders.
(G) Section 2.14(a)(ii) hereby is further amended by deleting
therefrom "ERISA,".
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<PAGE>
(H) Section 2.22 hereby is further amended by (i) deleting from its
first sentence ", accurate" and (ii) adding "other than in the ordinary course
of business" immediately after "aggregate" in clause (f) of its first sentence.
(I) Section 2.24 hereby is further amended by changing "an accurate"
to "a" in clause (a) of its second sentence.
(J) Section 2.25(a) hereby is amended by changing "an accurate," to
"a".
(K) Section 3.02(c) hereby is amended by adding "and the Lien
created by the ARS Pledge Agreement" immediately after "other assets" in its
clause (iii).
(L) The following Sections are added after Section 3.05:
Section 3.06. ORGANIZATION AND POWER OF ARS SUB. ARS Sub is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power
and authority under the laws of that State and its Charter Documents to
own or lease and to operate its properties presently and following the
Effective Time and to carry on its business as now conducted and as
proposed to be conducted following the Effective Time.
Section 3.07. ARS SUB: AUTHORIZATION; ENFORCEABILITY; ABSENCE OF
CONFLICTS; REQUIRED CONSENTS. (a) The execution, delivery and performance by ARS
Sub of this Agreement and each other Transaction Document to which it is a
party, and the effectuation of the Acquisition and the other transactions
contemplated hereby and thereby, are within its corporate power under its
Charter Documents and the applicable Governmental Requirements of the State of
Delaware and have been duly authorized by all proceedings, including actions
permitted to be taken in lieu of proceedings, required under its Charter
Documents and the applicable Governmental Requirements of its Organization
State.
(b) This Agreement has been, and each of the other Transaction
Documents to which ARS Sub is a party, when executed and delivered to the
other parties thereto (or, in the case of the Certificates of Merger, the
applicable Governmental Authorities), will have been, duly executed and
delivered by it and is, or when so executed and delivered will be, its
legal, valid and binding obligation, enforceable against it in accordance
with its terms, except as that enforceability may be (i) limited by any
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and (ii)
subject to general principles of equity (regardless of whether that
enforceability is considered in a proceeding in equity or at law).
(c) The execution, delivery and performance in accordance with their
respective terms by ARS Sub of the Transaction Documents to which it is a
party have not and will not (i) violate, breach or constitute a default
under (A) the Charter Documents of ARS Sub, (B)
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<PAGE>
any Governmental Requirement applicable to ARS Sub or (C) any Material
Agreement of ARS Sub, (ii) result in the acceleration or mandatory
prepayment of any Indebtedness, or any Guaranty not constituting
Indebtedness, of ARS Sub or afford any holder of any of that Indebtedness,
or any beneficiary of any of those Guaranties, the right to require ARS
Sub to redeem, purchase or otherwise acquire, reacquire or repay any of
that Indebtedness, or to perform any of those Guaranties, (iii) cause or
result in the imposition of, or afford any Person the right to obtain, any
Lien upon any property or assets of ARS Sub (or upon any revenues, income
or profits of ARS Sub therefrom), other than negative pledge covenants of
ARS respecting the Capital Stock of its Subsidiaries and its other assets,
or (iv) result in the revocation, cancellation, suspension or material
modification, in any single case or in the aggregate, of any Governmental
Approval possessed by ARS Sub at the date hereof and necessary for the
ownership or lease and the operation of its properties or the carrying on
of its business as now conducted, including any necessary Governmental
Approval under each applicable Environmental Law and Professional Code.
(d) Except for (i) the filing of the Certificates of Merger, if any,
with the applicable Governmental Authorities, and (ii) as may be required
by the HSR Act or the applicable state securities or blue sky laws, no
Governmental Approvals are required to be obtained, and no reports or
notices to or filings with any Governmental Authority are required to be
made, by ARS Sub for the execution, delivery or performance by ARS Sub of
the Transaction Documents to which it is a party, the enforcement against
ARS Sub of its obligations thereunder or the effectuation of the
Acquisition and the other transactions contemplated thereby.
Section 3.08. NO DEFAULTS. No condition or state of facts exists,
or, with the giving of notice or the lapse of time or both, would exist,
which (a) entitles any holder of any outstanding Indebtedness, or any
Guaranty not constituting Indebtedness, of ARS or any of its Subsidiaries,
or a representative of that holder, to accelerate the maturity, or require
a mandatory prepayment, of that Indebtedness or Guaranty, or affords that
holder or its representative, or any beneficiary of that Guaranty, the
right to require ARS or any of its Subsidiaries to redeem, purchase or
otherwise acquire, reacquire or repay any of that Indebtedness, or to
perform that Guaranty in whole or in part, or (b) constitutes a violation
or breach of, or a default under, any Material Agreement of ARS by ARS or
any of its Subsidiaries except, in the case of both clauses (a) and (b)
hereof, for such matters, singly or in the aggregate, as would not have a
material adverse effect on ARS and its Subsidiaries taken as a whole.
Section 3.09. NO MATERIAL ADVERSE CHANGE. Since September 30, 1996,
there has not been, and there exists no condition or state of facts that
reasonably could be expected to result in, a material adverse change in
the business, operations, property or assets, liabilities, financial
condition or results of operations of ARS and its Subsidiaries taken as a
whole.
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<PAGE>
Section 3.10. SEC DOCUMENTS. ARS timely filed its Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 1996 (the
"Recent Form 10-Q") with the SEC. The Recent Form 10-Q is the only
periodic report required to be filed by ARS with the SEC pursuant to the
Exchange Act through the date hereof. The Recent Form 10-Q (a) did not
contain any untrue statement of a material fact or omit to state a
material fact that is necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading and (b)
complied, as of the date it was filed with the SEC, in all material
respects with the applicable requirements of the Exchange Act.
Section 3.11. NO BROKERS. ARS has not, directly or indirectly, in
connection with this Agreement or the transactions contemplated hereby,
(a) employed any broker, finder or agent or (b) agreed to pay or incurred
any obligation to pay any broker's or finder's fee, any sales commission
or any similar form of compensation.
(M) Notwithstanding Section 5.03(b)(2)(G), the Company and the
Stockholders will not be required to deliver any certificate respecting the
filing of returns relating to or the payment of state franchise and/or income
tax returns in the State of North Carolina.
(N) Section 6.01 hereby is amended by adding the following as its
final two sentences:
Notwithstanding the foregoing, the Stockholders will be responsible for
filing the Company's federal income tax return for, and will pay out of
their own funds all federal income taxes attributable to the Company's
operations during, the Company's final S corporation year, which will be
deemed for purposes of this Agreement to be the period beginning on
January 1, 1996 and ending on the Closing Date; provided however, that if
any income of the Company attributable to the period beginning the day
after the Closing Date and ending on December 31, 1996 is deemed for
purposes of determining the federal income tax liabilities of the
Stockholders for the year ended December 31, 1996 to have been distributed
to the Stockholders, the Surviving Corporation will be liable for and will
indemnify the Stockholders for any additional federal income tax payable
on the amount of that deemed distribution. Each of the Stockholders and
the Surviving Corporation will be solely responsible for the expenses it
incurs in performing its obligations pursuant to the preceding sentence.
(O) Section 6.02 hereby is amended by changing "within 90 days
after" to "contemporaneously with".
(P) The following Sections are added after Section 6.02:
Section 6.03. MANAGEMENT COMPENSATION AGREEMENTS. ARS will cause the
Surviving Corporation to maintain in effect and to perform its obligations
under the 19 management compensation plans attached to Schedule 2.22
during the year ended
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December 31, 1997; provided; however, that (a) any such plan may be
amended or modified by the Surviving Corporation with the prior written
consent of Jacob A. Williamson, Jr.; and (b) no such plan shall alter the
status of any employee named in any such plan as an employee at will whose
employment may be terminated by the Surviving Corporation at any time and
for any reason.
Section 6.04. ENVIRONMENTAL MATTERS. Notwithstanding any other
provision of this Agreement, ARS hereby covenants and agrees that it shall
take such actions as are necessary to maintain the Company's eligibility
to participate in the North Carolina Leaking Petroleum Underground Storage
Tank Trust Fund (the "Trust Fund") for at least two years after the
Closing Date. In the event of a circumstance within two years of the
Closing Date that results in proceeds being paid from the Trust Fund to
the Company, theStockholders shall reimburse the Company, without regard
to the Threshold Amount limitations set forth in Article VII, in the
amount by which (a) the amount of any applicable deductible for which the
Company is responsible under the Trust Fund in connection with that
circumstance exceeds (b) (i) $30,000 minus (ii) the total cost and expense
ARS causes the Company to incur pursuant to Section 6.05; provided,
however, in no event shall any of the Stockholders be liable for any
sampling, testing, audit, investigative or other non-remediation cost.
Section 6.05. UNDERGROUND TANKS. As soon as practicable following
the Closing, ARS shall cause the Company to cease the use of and take out
of service and remove the three underground gasoline tanks currently used
by the Company at its Raleigh, North Carolina facility at the Company's
sole cost and expense and to take such other actions as are required for
the official closure of such tanks in compliance with all applicable
Environmental Laws. The Stockholders jointly and severally represent and
warrant to ARS that the cost and expense ARS has agreed to cause the
Company to incur pursuant to this Section 6.05 will not exceed $30,000 and
agree, without regard to the Threshold Amount limitations set forth in
Article VII, to indemnify ARS against any such costs and expenses in
excess of that amount pursuant to Section 7.04(e).
Section 6.06. PROMISSORY NOTES. ARS hereby acknowledges and agrees
that the promissory notes listed in Schedule 2.11 are the valid, binding
and enforceable obligations of the Company and that such promissory notes
will be paid by the Company as and when they become due.
Section 6.07. 1996 PROFIT-SHARING PLAN CONTRIBUTION BY THE COMPANY.
ARS will cause the Company promptly to pay, to the extent not already paid
on or before the Closing Date, into the Company's qualified profit-sharing
plan for employees all amounts accrued by the Company for such
contributions for the 11-month period ending November 30, 1996.
Section 6.08. CERTAIN TAX MATTERS. (a) ARS and the Stockholders
agree to file their federal income and other Tax returns so as to treat
the Merger of the Company into ARS Sub as a transfer of the assets of the
Company to ARS Sub in exchange for the Acquisition
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<PAGE>
Consideration and the assumption of certain liabilities and the
distribution of the Acquisition Consideration by ARS Sub to the
Stockholders. ARS shall prepare the form or forms which are required by
Section 1060 or other provisions of the Code in respect of such
transaction and, absent manifest error, the Stockholders hereby agree to
execute and file those forms.
(b) In preparing such form or forms, ARS will allocate the amount
deemed to have been paid for the Company's assets for federal income tax
purposes (the "Purchase Price") in accordance with applicable law and, in
doing so, the fair market values of those assets will be determined by ARS
in its sole reasonable judgment, which will be binding absolute manifest
error; provided, however, that the portion of Purchase Price which is
allocated to goodwill shall equal or exceed the portion of the Purchase
Price which is in excess of the adjusted basis of those assets on the
Closing Date. ARS and the Stockholders recognize that the Acquisition
Consideration does not include the Acquisition expenses of ARS and agree
that ARS will allocate those expenses appropriately in its discretion.
Each of the Stockholders and ARS agrees (i) to file its federal income and
other Tax returns reflecting such allocations in accordance with that
determination, (ii) to take no position contrary thereto unless required
to do so pursuant to a "determination" (as defined in Section 1313(a) of
the Code) and (iii) to cooperate in the preparation of any forms or
reports required to be filed in connection with the transactions effected
pursuant to this Agreement.
(Q) Notwithstanding clause (b) of the first sentence of Section
7.01, (i) the representations and warranties of the Stockholders which relate
expressly or by necessary implication to ERISA matters will, in the case of
those relating to the Company's termination of the qualified defined benefit
plan referred to in Paragraph G of Schedule 2.25 (but only in that case),
terminate and expire on the second anniversary of the Effective Date and (ii)
the representations and warranties of the Stockholders which relate expressly or
by necessary implication to employment or labor matters other than ERISA matters
also will terminate and expire on the second anniversary of the Effective Date.
(R) Clause (a) of the proviso in the second sentence of Section 7.01
hereby is amended by adding "and if made known to the Stockholders by a written
notice delivered by ARS prior to the termination and expiration of the
representation and warranty on which that claim is based," immediately before
"shall".
(S) Section 7.04(c) hereby is amended by adding the following
proviso at the end thereof:
; provided, however, that if the Indemnifying Party disputes that advice
of counsel and is advised by other counsel reasonably acceptable to the
Indemnified Party and whose fees and expenses are paid by the Indemnifying
Party that there are no different or additional legal defenses available
to the Indemnified Party, then the Indemnified Party may employ separate
counsel only at its own expense.
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<PAGE>
(T) Section 7.04(d) hereby is amended by adding the following
proviso at the end thereof:
; provided, however, that the Indemnified Party shall pay those costs and
expenses if the Indemnified Party is determined pursuant to Section
7.04(c) not to have been entitled to indemnification hereunder.
(U) Section 7.04(e) hereby is amended by changing "15 days" to "15
Houston, Texas business days".
(V) Section 8.01(a) hereby is amended by adding the following
proviso at the end thereof:
; provided, however, that in the case of any such service facility located
in the State of North Carolina, the "Territory" surrounding that facility
will be: (i) the city in which that service facility is located; (ii) the
county in which that service facility is located; (iii) the counties
contiguous to the county in which that service facility is located; and
(iv) the area located within a radius of 50 miles of that service
facility.
(W) Notwithstanding the provisions of Section 8.01, Jacob A.
Williamson, Sr. and Joyce E. Williamson shall not be restricted by the
provisions of Section 8.01 from organizing or operating a not-for-profit heating
and air conditioning services Entity providing services to poor or elderly
persons without or for nominal charge.
(X) The definition of "Damage" in Section 9.01 hereby is amended by
adding the following proviso at the end thereof:
; provided, that if any Indemnified Party should have a claim against any
Indemnifying Party that does not involve a Third Party Claim and for which
the Indemnified Party seeks indemnification pursuant to Section 7.04(e),
the amount of Damages attributable to that claim will not include any
amount representing consequential, exemplary, punitive or treble damage.
(Y) The definition of "Related Person" in Section 9.01 hereby is
amended to read in its entirety as follows:
"RELATED PERSON" of a Stockholder means: (a) if that Stockholder is
a natural person, (i) any family member of that Stockholder, including
ascendants, descendants and spouses of ascendants and descendants
(collectively "family member"), (ii) any estate of that Stockholder or any
family member of that Stockholder, (iii) the trustee of any trust of which
all the beneficiaries, other than beneficiaries that are charities with
respect to which contributions or transfers thereto are deductible for
federal income, estate or gift tax purposes, are Related Persons of that
Stockholder, including but not limited to charitable
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<PAGE>
remainder trusts or charitable lead trusts created by a Stockholder or
Related Persons of the Stockholder, (iv) any Entity the entire equity
interest in which is owned by any one or more of that Stockholder and
Related Persons of that Stockholder and (v) any private foundation created
by a Stockholder or Related Persons of that Stockholder with respect to
which contributions or transfers thereto are deductible for federal
income, estate or gift tax purposes; and (b) if that Stockholder is an
Entity, estate or trust, (i) any Person who owns an equity interest in
that Stockholder on the date hereof, (ii) any Person who would be a
Related Person under clause (a) of this definition of a natural person who
is an ultimate beneficial owner of that Stockholder or (iii) any other
Entity the entire equity interest in which is owned by any one or more of
that Stockholder and Related Persons of that Stockholder.
(Z) Clause (b) of the first sentence of Section 10.05 hereby is
amended by adding the following proviso at the end thereof:
; provided, however, that the Company will pay the fees, expenses and
disbursements of counsel for the Company and the Stockholders incurred in
connection with the subject matter of this Agreement to the extent that
those fees, expenses and disbursements are recorded as a liability of the
Company for the purpose of determining the Final Working Capital and the
Working Capital Adjustment, if any.
(AA) Section 10.07 hereby is amended by (i) changing "TEXAS" to "NEW
YORK" and (ii) adding the following proviso at the end thereof:
; PROVIDED, HOWEVER, THAT ARTICLE VIII AND THE RIGHTS AND OBLIGATIONS
THEREUNDER OF THE PARTIES THERETO WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NORTH CAROLINA
WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
(BB) Section 10.12 hereby is amended by adding "or release the
claims" immediately after "rights" in its final sentence.
Paragraph 5. INCORPORATION OF SPECIAL PROVISIONS. The following
documents attached hereto as Addenda (the "Special Provisions") hereby are
incorporated in this Agreement by this reference and constitute a part of this
Agreement with the same force and effect as if set forth at length herein:
(A) Addendum U -- "Special Provisions Relating to the Unregistered
ARS Common Stock Included in the Acquisition Consideration";
and
(B) Addendum W -- "Special Provisions Relating to Working Capital".
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<PAGE>
Paragraph 6. COUNTERPARTS. This Agreement may be executed in
multiple counterparts, each of which will be an original, but all of which
together will constitute one and the same instrument.
Paragraph 7. NOTICES. For purposes of Section 10.06, notices shall
be addressed to the Stockholders and the Company, as follows:
(A) if to a Stockholder, addressed to him or her at:
Mr. Jacob A. Williamson, Jr.
3604 Lake Wheeler Road
Raleigh, North Carolina 27603
or
Mr. Jacob A. Williamson, Sr.
9500 Koupela Drive
Raleigh, North Carolina 27615
or
Ms. Joyce E. Williamson
9500 Koupela Drive
Raleigh, North Carolina 27615
with copies (which shall not constitute notice for purposes of this
Agreement) to:
Moore & Van Allen, PLLC
NationsBank Corporate Center
100 North Tryon Street, Floor 47
Charlotte, North Carolina 28202-4003
Attn: Neill G. McBryde
; and
(B) if to the Company, addressed to it at:
Metro Heating and Air Conditioning, Inc.
517 Pylon Drive
Raleigh, North Carolina 27606
Attn: President
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC.
By:
John D. Held
Senior Vice President
MHAC ACQUISITION INC.
By:
John D. Held
Vice President
METRO HEATING AND AIR CONDITIONING, INC.
By:
Jacob A. Williamson, Jr.
President
Stockholders:
Jacob A. Williamson, Jr.
Jacob A. Williamson, Sr.
Joyce E. Williamson
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<PAGE>
SCHEDULE 2(C)
to the
Agreement and Plan of Reorganization
to which
American Residential Services, Inc.
and
Metro Heating and Air Conditioning, Inc.
are parties
A. Words and terms used in this Schedule which are defined in the
captioned Agreement are used herein as therein defined.
B. The directors of the Surviving Corporation immediately after the
Effective Time are as follows: Howard S. Hoover, Jr., William P. McCaughey and
C. Clifford Wright, Jr.
C. The officers of the Surviving Corporation immediately after the
Effective Time are as follows:
President.................................. Jacob A. Williamson, Jr.
Vice President and Assistant Secretary..... William P. McCaughey
Vice President and Secretary............... John D. Held
Controller................................. Michael Mamaux
Treasurer.................................. A. Jefferson Walker III
End of Schedule
<PAGE>
SCHEDULE 2(D)
to the
Agreement and Plan of Reorganization
to which
American Residential Services, Inc.
and
Metro Heating and Air Conditioning, Inc.
are parties
A. Words and terms used in this Schedule which are defined in the
captioned Agreement are used herein as therein defined.
B. Subject to reduction by the application of the Working Capital
Adjustment, if any, the aggregate Acquisition Consideration will be comprised of
(1) ARS Sub Notes in the aggregate principal amount of $16,866,000 and (2) the
ARS Sub Undertaking pursuant to which ARS Sub undertakes to deliver to the
Stockholders 225,500 shares of ARS Common Stock. The Calculated Value may be
higher or lower than the fair market value of a share of ARS Common Stock on the
Closing Date.
C. Each of the Stockholders will be entitled to receive his or her
Pro Rata Share of the Acquisition Consideration pursuant to Paragraph 2(D),
subject to the provisions of Paragraph 2(E) as follows: (1) Jacob A. Williamson,
Jr., the owner of 4,800 shares of Company Capital Stock, will receive an ARS Sub
Note payable to his order in the principal amount of $13,492,800 and, when the
ARS Sub Undertaking is performed by ARS Sub, 180,400 shares of ARS Common Stock;
and (2) each of Jacob A. Williamson, Sr. and Joyce E. Williamson, each the owner
of 600 shares of Company Capital Stock, will receive an ARS Sub Note payable to
his or her order in the principal amount of $1,686,600 and, when the ARS Sub
Undertaking is performed by ARS Sub, 22,550 shares of ARS Common Stock.
End of Schedule
<PAGE>
Annex 1
AMERICAN RESIDENTIAL SERVICES, INC.
STANDARD PROVISIONS
FOR
BUSINESS COMBINATIONS
Form 96-1 (BC)
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I REPRESENTATIONS AND WARRANTIES OF EACH
STOCKHOLDER..............................................1
Section 1.01. Ownership and Status of Company Capital Stock............1
Section 1.02. Power of the Stockholder; Approval of the Acquisition....1
Section 1.03. No Conflicts or Litigation...............................2
Section 1.04. No Brokers...............................................2
Section 1.05. Preemptive and Other Rights; Waiver......................2
Section 1.06. Control of Related Businesses............................2
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE STOCKHOLDERS......................3
Section 2.01. Organization.............................................3
Section 2.02. Qualification............................................3
Section 2.03. Authorization; Enforceability; Absence of Conflicts;
Required Consents........................................3
Section 2.04. Charter Documents and Records; No Violation..............4
Section 2.05. No Defaults..............................................4
Section 2.06. Company Subsidiaries.....................................5
Section 2.07. Capital Stock of the Company and the Company
Subsidiaries.............................................5
Section 2.08. Transactions in Capital Stock............................6
Section 2.09. No Bonus Shares..........................................6
Section 2.10. Predecessor Status; etc..................................6
Section 2.11. Related Party Agreements.................................6
Section 2.12. Litigation...............................................6
Section 2.13. Financial Statements; Disclosure. .......................6
Section 2.14. Compliance With Laws.....................................7
Section 2.15. Certain Environmental Matters............................8
Section 2.16. Liabilities and Obligations..............................9
Section 2.17. Receivables..............................................9
Section 2.18. Real Properties..........................................9
Section 2.19. Other Tangible Assets...................................10
Section 2.20. Proprietary Rights......................................10
Section 2.21. Relations With Governments, etc.........................10
Section 2.22. Commitments.............................................11
Section 2.23. Inventories.............................................12
Section 2.24. Insurance...............................................12
Section 2.25. Employee Matters........................................12
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TABLE OF CONTENTS
PAGE
Section 2.26. Compliance With ERISA, etc..............................14
Section 2.27. Taxes...................................................17
Section 2.28. Government Contracts....................................18
Section 2.29. Absence of Changes......................................18
Section 2.30. Bank Relations; Powers of Attorney......................19
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ARS...................20
Section 3.01. Organization; Power.....................................20
Section 3.02. Authorization; Enforceability; Absence of Conflicts;
Required Consents.......................................20
Section 3.03. Charter Documents.......................................21
Section 3.04. Capital Stock of ARS....................................21
Section 3.05. No Litigation...........................................21
ARTICLE IV COVENANTS EXTENDING TO THE EFFECTIVE TIME...............22
Section 4.01. Access and Cooperation; Due Diligence...................22
Section 4.02. Conduct of Business Pending the Effective Time..........22
Section 4.03. Prohibited Activities...................................23
Section 4.04. No Shop.................................................24
Section 4.05. Notice to Bargaining Agents.............................25
Section 4.06. Notification of Certain Matters.........................25
Section 4.07. Supplemental Information................................25
Section 4.08. Additional Financial Statements.........................26
Section 4.09. Termination of Plans....................................26
Section 4.10. Disposition of Unwanted Assets..........................26
Section 4.11. HSR Act Matters.........................................26
Section 4.12. NYSE Listing............................................27
ARTICLE V CONDITIONS TO CLOSING AND CONSUMMATION..................27
Section 5.01. Conditions to the Obligations of Each Party.............27
Section 5.02. Conditions to the Obligations of the Company and
the Stockholders........................................27
Section 5.03. Conditions to the Obligations of ARS and ARS Sub........27
ARTICLE VI COVENANTS FOLLOWING THE EFFECTIVE TIME..................29
Section 6.01. Preparation and Filing of Tax Returns...................29
Section 6.02. Removal of Guaranties...................................29
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TABLE OF CONTENTS
PAGE
ARTICLE VII INDEMNIFICATION................................................29
Section 7.01. Survival of Representations and Warranties..............29
Section 7.02. Indemnification of ARS Indemnified Parties..............30
Section 7.03. Indemnification of Stockholder Indemnified Parties......30
Section 7.04. Conditions of Indemnification...........................31
Section 7.05. Remedies Not Exclusive..................................33
Section 7.06. Limitations on Indemnification..........................33
ARTICLE VIII LIMITATIONS ON COMPETITION.....................................34
Section 8.01. Prohibited Activities...................................34
Section 8.02. Damages.................................................35
Section 8.03. Reasonable Restraint....................................35
Section 8.04. Severability; Reformation...............................35
Section 8.05. Independent Covenant....................................35
Section 8.06. Materiality.............................................35
ARTICLE IX DEFINITIONS AND DEFINITIONAL PROVISIONS.................35
Section 9.01. Defined Terms...........................................35
Section 9.02. Other Defined Terms.....................................47
Section 9.03. Other Definitional Provisions...........................47
Section 9.04. Captions................................................48
ARTICLE X GENERAL PROVISIONS......................................48
Section 10.01.Treatment of Confidential Information...................48
Section 10.02.Brokers and Agents......................................49
Section 10.03.Assignment; No Third Party Beneficiaries................49
Section 10.04.Entire Agreement; Amendment; Waivers....................49
Section 10.05.Expenses................................................49
Section 10.06.Notices.................................................50
Section 10.07.Governing Law...........................................50
Section 10.08.Exercise of Rights and Remedies.........................50
Section 10.09.Time....................................................51
Section 10.10.Reformation and Severability............................51
Section 10.11.Remedies Cumulative.....................................51
Section 10.12.Release.................................................51
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TABLE OF CONTENTS
PAGE
ARTICLE XI TERMINATION.............................................52
Section 11.01.Termination of This Agreement...........................52
Section 11.02.Liabilities in Event of Termination.....................52
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<PAGE>
ARTICLE I
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Each of the Stockholders represents and warrants to ARS that, as
applied solely to himself, all the following representations and warranties in
this Article I are as of the date of this Agreement, and will be, as amended or
supplemented pursuant to Section 4.07, on the Closing Date and immediately prior
to the Effective Time, true and correct:
Section 1.01. OWNERSHIP AND STATUS OF COMPANY CAPITAL STOCK. The
Stockholder is the record and beneficial owner or, if the Stockholder is a trust
or the estate of a deceased natural person, the legal owner of the number of
shares of the Company Capital Stock set forth, by each class, and by each series
in each class thereof, opposite the Stockholder's name in Schedule 1.01, free
and clear of all Liens, except for the Liens accurately set forth in Schedule
1.01, all of which will be released at or before the Closing Date.
Section 1.02. POWER OF THE STOCKHOLDER; APPROVAL OF THE
ACQUISITION. (a) The Stockholder has the full power, legal capacity and
authority to execute and deliver this Agreement and each other Transaction
Document to which the Stockholder is a party and to perform the Stockholder's
obligations in this Agreement and in all other Transaction Documents to which
the Stockholder is a party. This Agreement constitutes, and each such other
Transaction Document, when executed in the Stockholder's individual capacity and
delivered by the Stockholder, will constitute, the legal, valid and binding
obligation of the Stockholder, enforceable against the Stockholder in accordance
with its terms, except as that enforceability may be (i) limited by any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally and (ii) subject to
general principles of equity (regardless of whether that enforceability is
considered in a proceeding in equity or at law). If the Stockholder is an
Entity, the Stockholder has obtained, in accordance with all applicable
Governmental Requirements and its Charter Documents, all approvals and the
taking of all actions necessary for the authorization, execution, delivery and
performance by the Stockholder of this Agreement and the other Transaction
Documents to which the Stockholder is a party. If the Stockholder is acting
otherwise than in his individual capacity (whether as an executor or a guardian
or in any other fiduciary or representative capacity), all actions on the part
of the Stockholder and all other Persons (including any court) necessary for the
authorization, execution, delivery and performance by the Stockholder of this
Agreement and the other Transaction Documents to which the Stockholder is a
party have been duly taken.
(b) The Stockholder, acting in each capacity in which he is
entitled, by reason of the Company's Charter Documents or the Governmental
Requirements of the Company's Organization State or for any other reason, to
vote to approve or disapprove the consummation of the Acquisition, has voted all
the shares of the Company Capital Stock owned by him and entitled to a vote or
votes on that matter, in any one or more of the manners prescribed or permitted
by the Company's Charter Documents or the Governmental Requirements of the
Company's Organization
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<PAGE>
State, whichever are controlling, to approve this Agreement and the consummation
of the Acquisition and the other transactions contemplated hereby.
Section 1.03. NO CONFLICTS OR LITIGATION. The execution, delivery
and performance in accordance with their respective terms by the Stockholder of
this Agreement and the other Transaction Documents to which the Stockholder is a
party do not and will not (a) violate or conflict with any Governmental
Requirement, (b) breach or constitute a default under any agreement or
instrument to which the Stockholder is a party or by which the Stockholder or
any of the shares of the Company Capital Stock owned by the Stockholder is
bound, (c) result in the creation or imposition of, or afford any Person the
right to obtain, any Lien upon any of the shares of the Company Capital Stock
owned by the Stockholder (or upon any revenues, income or profits of the
Stockholder therefrom) or (d) if the Stockholder is an Entity, violate the
Stockholder's Charter Documents. No Litigation is pending or, to the knowledge
of the Stockholder, threatened to which the Stockholder is or may become a party
which (a) questions or involves the validity or enforceability of any of the
Stockholder's obligations under any Transaction Document or (b) seeks (or
reasonably may be expected to seek) (i) to prevent or delay the consummation by
the Stockholder of the transactions contemplated by this Agreement to be
consummated by the Stockholder or (ii) damages in connection with any
consummation by the Stockholder of the transactions contemplated by this
Agreement.
Section 1.04. NO BROKERS. The Stockholder has not, directly or
indirectly, in connection with this Agreement or the transactions contemplated
hereby (a) employed any broker, finder or agent (other than a Purchaser
Representative) or (b) agreed to pay or incurred any obligation to pay any
broker's or finder's fee, any sales commission or any similar form of
compensation.
Section 1.05. PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the
right of the Stockholder to receive shares of ARS Common Stock as a result of
the Acquisition or to acquire ARS Common Stock pursuant to any written option
granted by ARS to the Stockholder, the Stockholder either (a) does not own or
otherwise have any statutory or contractual preemptive or other right of any
kind (including any right of first offer or refusal) to acquire any shares of
the Company Capital Stock or ARS Common Stock or (b) hereby irrevocably waives
each right of that type the Stockholder does own or otherwise has.
Section 1.06. CONTROL OF RELATED BUSINESSES. Except as accurately
set forth in Schedule 1.06, the Stockholder is not, alone or with one or more
other Persons, the controlling Affiliate of any Entity, business or trade (other
than the Company and the Company Subsidiaries, if the Stockholder is an
Affiliate of the Company) that (a) is engaged in any line of business which is
the same as or similar to any line of business in which the Company or any
Company Subsidiary is engaged or (b) is, or has within the three-year period
ending on the date of this Agreement, engaged in any transaction with the
Company or any Company Subsidiary, except for transactions in the ordinary
course of business of the Company or that Company Subsidiary.
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<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF
THE COMPANY AND THE STOCKHOLDERS
The Company and each Stockholder jointly and severally represent
and warrant to, and agree with, ARS that all the following representations and
warranties in this Article II are as of the date of this Agreement, and will be,
as amended or supplemented pursuant to Section 4.07, on the Closing Date and
immediately prior to the Effective Time, true and correct:
Section 2.01. ORGANIZATION. Schedule 2.01 sets forth the
Organization State of each of the Company and the Company Subsidiaries. Each of
the Company and the Company Subsidiaries (a) is a corporation duly organized,
validly existing and in good standing under the laws of its Organization State,
(b) has all requisite corporate power and authority under those laws and its
Charter Documents to own or lease and to operate its properties and to carry on
its business as now conducted and (c) is duly qualified and in good standing as
a foreign corporation in all jurisdictions in which it owns or leases property
or in which the carrying on of its business as now conducted so requires except
where the failure to be so qualified, singly or in the aggregate, would not have
a Material Adverse Effect.
Section 2.02. QUALIFICATION. Schedule 2.02 accurately lists all
the jurisdictions in which each of the Company and the Company Subsidiaries is
authorized or qualified to own or lease and to operate its properties or to
carry on its business as now conducted, and neither the Company nor any Company
Subsidiary owns, leases or operates any properties, or carries on its business,
in any jurisdiction not listed in Schedule 2.02 which is Material to the
Acquired Business.
Section 2.03. AUTHORIZATION; ENFORCEABILITY; ABSENCE OF
CONFLICTS; REQUIRED CONSENTS. (a) The execution, delivery and performance by the
Company of this Agreement and each other Transaction Document to which it is a
party, and the effectuation of the Acquisition and the other transactions
contemplated hereby and thereby, are within its corporate or other power under
its Charter Documents and the applicable Governmental Requirements of its
Organization State and have been duly authorized by all proceedings, including
actions permitted to be taken in lieu of proceedings, required under its Charter
Documents and those Governmental Requirements.
(b) This Agreement has been, and each of the other Transaction
Documents to which the Company is a party, when executed and delivered to ARS
(or, in the case of the Certificates of Merger, if any, the applicable
Governmental Authorities) will have been, duly executed and delivered by the
Company and is, or when so executed and delivered will be, the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as that enforceability may be (i) limited by any
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the enforcement of creditors' rights generally
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<PAGE>
and (ii) subject to general principles of equity (regardless of whether that
enforceability is considered in a proceeding in equity or at law).
(c) The execution, delivery and performance in accordance with
their respective terms by the Company of the Transaction Documents to which it
is a party have not and will not (i) violate, breach or constitute a default
under (A) the Charter Documents of any of the Company and the Company
Subsidiaries, (B) any Governmental Requirement applicable to any of the Company
and the Company Subsidiaries or (C) any Material Agreement of the Company, (ii)
result in the acceleration or mandatory prepayment of any Indebtedness, or any
Guaranty not constituting Indebtedness, of any of the Company and the Company
Subsidiaries or afford any holder of any of that Indebtedness, or any
beneficiary of any of those Guaranties, the right to require any of the Company
and the Company Subsidiaries to redeem, purchase or otherwise acquire, reacquire
or repay any of that Indebtedness, or to perform any of those Guaranties, (iii)
cause or result in the imposition of, or afford any Person the right to obtain,
any Lien upon any property or assets of any of the Company and the Company
Subsidiaries (or upon any revenues, income or profits of any of the Company and
the Company Subsidiaries therefrom) or (iv) result in the revocation,
cancellation, suspension or material modification, in any single case or in the
aggregate, of any Governmental Approval possessed by any of the Company and the
Company Subsidiaries at the date hereof and necessary for the ownership or lease
or the operation of its properties or the carrying on of its business as now
conducted, including any necessary Governmental Approval under each applicable
Environmental Law and Professional Code.
(d) Except for (i) the filing of the Certificates of Merger, if
any, with the applicable Governmental Authorities, (ii) as may be required by
the HSR Act or the applicable state securities or blue sky laws, no Governmental
Approvals are required to be obtained, and no reports or notices to or filings
with any Governmental Authority are required to be made, by any of the Company
and the Company Subsidiaries for the execution, delivery or performance by the
Company of the Transaction Documents to which it is a party, the enforcement
against the Company of its obligations thereunder or the effectuation of the
Acquisition and the other transactions contemplated thereby.
Section 2.04. CHARTER DOCUMENTS AND RECORDS; NO VIOLATION. The
Company has caused true, complete and correct copies of the Charter Documents,
each as in effect on the date hereof, and the minute books and similar corporate
or other Entity records of each of the Company and the Company Subsidiaries to
be delivered or otherwise made available to ARS. No breach or violation of any
Charter Document of any of the Company and the Company Subsidiaries has occurred
and is continuing.
Section 2.05. NO DEFAULTS. No condition or state of facts exists,
or, with the giving of notice or the lapse of time or both, would exist, which
(a) entitles any holder of any outstanding Indebtedness, or any Guaranty not
constituting Indebtedness, of any of the Company and the Company Subsidiaries,
or a representative of that holder, to accelerate the maturity, or require a
mandatory prepayment, of that Indebtedness or Guaranty, or affords that holder
or its representative,
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<PAGE>
or any beneficiary of that Guaranty, the right to require any of the Company and
the Company Subsidiaries to redeem, purchase or otherwise acquire, reacquire or
repay any of that Indebtedness, or to perform that Guaranty in whole or in part,
(b) entitles any Person to obtain any Lien (other than a Permitted Lien) upon
any properties or assets constituting any part of the Acquired Business (or upon
any revenues, income or profits of any of the Company and the Company
Subsidiaries therefrom) or (c) constitutes a violation or breach of, or a
default under, any Material Agreement of the Company by any of the Company and
the Company Subsidiaries.
Section 2.06. COMPANY SUBSIDIARIES. Schedule 2.01 either (a)
accurately sets forth the form of organization, legal name, and Organization
State of each Company Subsidiary or (b) correctly states no Entity is a Company
Subsidiary. Except as accurately disclosed in Schedule 2.06, each Company
Subsidiary is a wholly owned Subsidiary of the Company. In the case of any
Company Subsidiary that is not a wholly owned Subsidiary of the Company,
Schedule 2.06 accurately sets forth, by each class and each series within each
class, the number of outstanding shares (or other percentage ownership
interests) of Capital Stock of the Company Subsidiary, (a) the Company's
aggregate direct and indirect ownership of those shares (or interests) and (b)
the name and address of record and percentage ownership of those shares (or
interests) of each holder of record thereof other than the Company or a Company
Subsidiary. No Lien exists on any outstanding Capital Stock of any Company
Subsidiary which is owned directly or indirectly by the Company other than (a)
the Liens, if any, described in Schedule 2.06, all of which will be released at
or before the Effective Time, and (b) Permitted Liens. Except as accurately set
forth in Schedule 2.06, the Company does not own, of record or beneficially,
directly or indirectly through any Person, and does not control, directly or
indirectly through any Person or otherwise, any Capital Stock or any option,
warrant or right to acquire Capital Stock of any Entity other than a Company
Subsidiary.
Section 2.07. CAPITAL STOCK OF THE COMPANY AND THE COMPANY
SUBSIDIARIES. Schedule 2.07 accurately sets forth, by each class and by each
series within each class, the total number of shares of authorized Company
Capital Stock and the total number of such shares that have been issued and are
now outstanding. Except as accurately set forth in Schedule 2.07: (a) no shares
of Company Capital Stock are held by the Company or any Company Subsidiary as
treasury shares; and (b) no outstanding options, warrants or rights to acquire
Capital Stock of the Company or any Company Subsidiary exist. All the issued and
outstanding Capital Stock of each of the Company and the Company Subsidiaries
(a) have been duly authorized and validly issued in accordance with the
applicable Governmental Requirements of their issuer's Organization State and
Charter Documents and (b) are fully paid and nonassessable. Neither the Company
nor any Company Subsidiary has issued or sold any of its outstanding Capital
Stock in breach or violation of (a) any applicable statutory or contractual
preemptive rights, or any other rights of any kind (including any rights of
first offer or refusal), of any Person or (b) the terms of any options, warrants
or rights to acquire its Capital Stock which then were outstanding. No Person
has, otherwise than solely by reason of that Person's right, if any, to vote
shares of the Capital Stock of the Company or any Company Subsidiary it holds,
any right to vote on any matter with the holders of Capital Stock of the Company
or any Company Subsidiary.
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Section 2.08. TRANSACTIONS IN CAPITAL STOCK. Except as accurately
set forth in Schedule 2.08: (a) the Company has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire or reacquire any of its
equity securities or any interests therein or to pay any dividend or make any
distribution in respect thereof; and (b) no transaction has been effected, and
no action in contemplation of the transactions described in this Agreement has
been taken, respecting the equity ownership of either the Company or any Company
Subsidiary.
Section 2.09. NO BONUS SHARES. Except as accurately set forth in
Schedule 2.09, no outstanding Company Capital Stock was issued for less than the
fair market value thereof at the time of issuance or was issued in exchange for
any consideration other than cash.
Section 2.10. PREDECESSOR STATUS; ETC. Schedule 2.10 accurately
lists all the legal and assumed names of all predecessor companies for the past
five years of the Company, including the names of any Entities from which the
Company previously acquired material assets. Except as accurately disclosed in
Schedule 2.10, the Company has not been a Subsidiary or division of another
corporation or a part of an acquisition that later was rescinded.
Section 2.11. RELATED PARTY AGREEMENTS. Schedule 2.11 accurately
sets forth all Related Party Agreements in effect on the date hereof. Except for
those Related Party Agreements specifically referred to in Schedule 2.11 as
"Retained Related Party Agreements" (the "Retained Related Party Agreements"),
each Related Party Agreement in effect on the date hereof will have been
terminated, and all Indebtedness of each Related Person and its Affiliates owed
to any of the Company and the Company Subsidiaries will have been paid in full,
prior to the Effective Time, and no Related Party Agreement then will exist. The
terms and conditions of each of the Retained Related Party Agreements are no
less favorable to the Company than the Company reasonably could have expected to
obtain in an arm's-length transaction with a Person other than an Affiliate of
the Company, the rentals provided for in the Retained Related Party Agreements
constituting leases of property to the Acquired Business do not and will not
exceed fair market rentals of the properties being rented or leased under those
Retained Related Party Agreements and the payments provided to be made by the
Company or any Company Subsidiary in the other Retained Related Party Agreements
do not exceed the fair market value of the goods or other property provided to
or the services performed for the Acquired Business.
Section 2.12. LITIGATION. Except as accurately disclosed in
Schedule 2.12, no Litigation is pending or, to the knowledge of the Company or
any Stockholder, threatened to which the Company or any Company Subsidiary is or
may become a party.
Section 2.13. FINANCIAL STATEMENTS; DISCLOSURE. (a) FINANCIAL
STATEMENTS. (i) The Financial Statements (including in each case the related
schedules and notes, if any) delivered to ARS present fairly, in all material
respects, the financial position of the Acquired Business at the respective
dates of the balance sheets included therein and the results of operations and
cash flows of the Acquired Business for the respective periods set forth therein
and have been prepared in accordance with GAAP. As of the date of any balance
sheet included in the Financial Statements
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delivered to ARS, neither the Company nor any Company Subsidiary then had any
outstanding Indebtedness to any Person or any liabilities of any kind (including
contingent obligations, tax assessments or unusual forward or long-term
commitments), or any unrealized or anticipated loss, which in the aggregate then
were Material to the Company and required to be reflected in those Financial
Statements or in the notes related thereto in accordance with GAAP which were
not so reflected.
(ii) Since the Current Balance Sheet Date, no change has occurred
in the business, operations, properties or assets, liabilities, condition
(financial or other) or results of operations of the Company or any Company
Subsidiary that could reasonably be expected, either alone or together with all
other such changes, to have a Material Adverse Effect.
(b) DISCLOSURE. (i) As of the date hereof, all Information that
has been made available to ARS by or on behalf of the Company prior to the date
of this Agreement in connection with the transactions contemplated hereby is,
taken together, true and correct in all material respects (other than financial
budgets and projections) and does not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained therein not materially misleading in light of the circumstances under
which those statements were made.
(ii) All Information that is made available after the date hereof
from time to time prior to the Effective Time to ARS by or on behalf of the
Company in connection with or pursuant to this Agreement, any other Transaction
Document or the transactions contemplated hereby or thereby will be, when made
available and taken together, true and correct in all material respects (other
than financial budgets and projections) and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements contained therein not materially misleading in light of
the circumstances under which those statements are made.
(iii) All financial budgets and projections that have been or are
hereafter from time to time prepared by the Company or any of its
Representatives and made available prior to the Effective Time to ARS pursuant
to or in connection with this Agreement, any other Transaction Document or the
transactions contemplated hereby or thereby have been and will be prepared and
furnished to ARS in good faith and were and will be based on facts and
assumptions that are believed by the management of the Company to be reasonable
in light of the then current and foreseeable business conditions of the Company
and the Company Subsidiaries and represented and will represent management's
good faith estimate of the projected financial performance of the Acquired
Business based on the information available to the Responsible Officers at the
time so furnished.
Section 2.14. COMPLIANCE WITH LAWS. (a) Except as accurately
disclosed in Schedule 2.14: (i) each of the Company and the Company Subsidiaries
possesses, or, if required by the applicable Environmental Laws (including those
relating to the maintenance, repair or servicing of appliances, equipment or
other products containing chlorofluorocarbons or hydrochloro- fluorocarbons) and
Professional Codes, one or more of its employees as required by those
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Environmental Laws and Professional Codes possesses, all necessary master
licenses and similar Governmental Approvals required for the conduct of its
business; and (ii) each of the Company and the Company Subsidiaries and such one
or more of its employees are in compliance in all material respects with the
terms and conditions of all Governmental Approvals necessary for the ownership
or lease and the operation of its properties (including all the facilities and
sites it owns or holds under any lease) and the carrying on of its business as
now conducted. Schedule 2.14 accurately discloses all the Governmental Approvals
so possessed (other than permits for particular jobs for customers as may be
required under the applicable Professional Codes). All the Governmental
Approvals so listed are valid and in full force and effect and, except as
accurately disclosed in Schedule 2.14, neither the Company nor any Company
Subsidiary has received, nor to the knowledge of any Stockholder, has any
employee of either received, any notice from any Governmental Authority of its
intention to cancel, terminate or not renew any of those Governmental Approvals.
(b) Except as accurately disclosed in Schedule 2.14, each of the
Company and the Company Subsidiaries: (i) has been and continues to be in
compliance with all Governmental Requirements applicable to it or any of its
presently or previously owned or operated properties (including all the
facilities and sites now or previously owned or held by it under any lease),
businesses or operations, including all applicable Governmental Requirements
under ERISA, Environmental Laws and Professional Codes; and (ii)(A) neither the
Company nor any Company Subsidiary has received, nor to the knowledge of the
Company has any employee of either received, any notice from any Governmental
Authority which asserts, or raises the possibility of assertion of, any
noncompliance with any of those Governmental Requirements and (B) to the
knowledge of each of the Company, the Company Subsidiaries and the Stockholders,
no condition or state of facts exists which would provide a valid basis for any
such assertion.
Section 2.15. CERTAIN ENVIRONMENTAL MATTERS. Except as accurately
disclosed in Schedule 2.15: (a) the Company and each Company Subsidiary have
complied, and remain in compliance, with the provisions of all Environmental
Laws applicable to any of them or any of their respective presently owned or
operated facilities, sites or other properties, businesses and operations and
which relate to the reporting by the Company and each Company Subsidiary of all
sites presently owned or operated by any of them where Solid Wastes, Hazardous
Wastes or Hazardous Substances have been treated, stored, disposed of or
otherwise handled; (b) no release (as defined in those Environmental Laws) at,
from, in or on any site owned or operated by the Company or any Company
Subsidiary has occurred which, if all relevant facts were known to the relevant
Governmental Authorities, reasonably could be expected to require remediation to
avoid deed record notices, restrictions, liabilities or other consequences that
would not be applicable if that release had not occurred; (c) neither the
Company nor any Company Subsidiary (or any agent or contractor of either) has
transported or arranged for the transportation of any Solid Wastes, Hazardous
Wastes or Hazardous Substances to, or disposed or arranged for the disposition
of any Solid Wastes, Hazardous Wastes or Hazardous Substances at, any off-site
location that could lead to any claim against the Company, any Company
Subsidiary, ARS or any Subsidiary of ARS, as a potentially responsible party or
otherwise, for any clean-up costs, remedial work, damage to natural resources,
personal injury or property damage, including any claim under CERCLA; and (d) no
storage tanks exist on
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or under any of the properties owned or operated by the Company or any Company
Subsidiary from which any Solid Wastes, Hazardous Wastes or Hazardous Substances
have been released into the surrounding environment. The Company has provided
ARS with copies (or if not available, accurate written summaries) of all
environmental investigations, studies, audits, reviews and other analyses
conducted by or on behalf, or which otherwise are in the possession, of the
Company or any Company Subsidiary respecting any facility, site or other
property presently owned or operated by the Company and each Company Subsidiary.
Section 2.16. LIABILITIES AND OBLIGATIONS. Schedule 2.16
accurately lists all present liabilities, of every kind, character and
description and whether accrued, absolute, fixed, contingent or otherwise, of
each of the Company and the Company Subsidiaries which (a) (i) exceed or
reasonably could be expected to exceed $10,000 and (ii) (A) had been incurred
prior to the Current Balance Sheet Date, but are not reflected on the Current
Balance Sheet, or (B) were incurred after the Current Balance Sheet Date
otherwise than in the ordinary course of business and consistent with past
practice. Schedule 2.16 also accurately lists and describes, for each of the
Company and the Company Subsidiaries, each of its outstanding secured and
unsecured Guaranties not constituting its Indebtedness and, for each of those
Guaranties, whether any Stockholder or Related Person or Affiliate of any
Stockholder is a Person whose obligation is covered by that Guaranty, and if
that item is secured by any property or asset of the Company or any Company
Subsidiary, the nature of that security.
Section 2.17. RECEIVABLES. Except as accurately set forth in
Schedule 2.17, all the accounts and notes or other advances receivable of the
Company and the Company Subsidiaries reflected on the Current Balance Sheet were
collected, or are collectible, in the respective amounts so reflected, net of
the reserves, if any, reflected in the Current Balance Sheet.
Section 2.18. REAL PROPERTIES. (a) Schedule 2.18 accurately lists
and correctly describes in all material respects: (i) all real properties owned
by any of the Company and the Company Subsidiaries and, for each of those
properties, the address thereof and the use thereof in the business of the
Company and the Company Subsidiaries, and (ii) all real properties of which any
of the Company and the Company Subsidiaries is the lessee and, for each of those
properties, the address thereof and the lease (including its expiration date and
any renewal options) relating thereto.
(b) The Company has provided ARS with true, complete and correct
copies of all title reports and insurance policies owned or in the possession of
any of the Company and the Company Subsidiaries and relating to any of the real
properties listed as being owned in Schedule 2.18. Except as accurately set
forth in Schedule 2.18 or those reports and policies, and except for Permitted
Liens, the Company or a Company Subsidiary owns in fee, and has good, valid and
marketable title to, free and clear of all Liens, each property listed in
Schedule 2.18 as being owned.
(c) The Company has provided ARS with true, correct and complete
copies of all leases under which the Company or a Company Subsidiary is leasing
each of the properties listed in Schedule 2.18 as being leased and, except as
accurately set forth in Schedule 2.18, (i) each of
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those leases is, to the knowledge of the Company, valid and binding on the
lessor party thereto, and (ii) the lessee party thereto has not sublet any of
the leased space to any Person other than the Company or a Company Subsidiary.
(d) The fixed assets of each of the Company and the Company
Subsidiaries are affixed only to one or more of the real properties listed in
Schedule 2.18 and, except as accurately set forth in Schedule 2.18, are
maintained in accordance with reasonable commercial operating practices and
adequate for the purposes for which they presently are being used or held for
use, ordinary wear and tear excepted.
Section 2.19. OTHER TANGIBLE ASSETS. (a) Schedule 2.19 accurately
discloses all leases, including capital leases, that are Material to the Company
under which the Company or a Company Subsidiary is leasing its property, plant
and equipment and other tangible assets other than real properties. Except as
accurately set forth in Schedule 2.19, (i) each of those leases is, to the
knowledge of the Company, valid and binding on the lessor party thereto and (ii)
the lessee party thereto has not sublet any of the leased property to any Person
other than the Company or a Company Subsidiary.
(b) Except as accurately set forth in Schedule 2.19, all the
property, plant and equipment of the Company and its Subsidiaries are in good
working order and condition, ordinary wear and tear excepted, and adequate for
the purposes for which they presently are being used or held for use.
Section 2.20. PROPRIETARY RIGHTS. Except as accurately set forth
in Schedule 2.20, each of the Company and the Company Subsidiaries owns, free
and clean of all Liens other than Permitted Liens, or has the legal right to use
all Proprietary Rights that are necessary to the conduct of its business as now
conducted, in each case free, to their knowledge, of any claims or
infringements. Schedule 2.20 accurately (a) lists these Proprietary Rights and
(b) indicates those owned by the Company or any Company Subsidiary and, for
those not listed as so owned, the agreement or other arrangement pursuant to
which they are possessed. Except as accurately set forth in Schedule 2.20, (a)
no consent of any Person will be required for the use of any of these
Proprietary Rights by ARS or any Subsidiary of ARS following the Effective Time
and (b) no governmental registration of any of these Proprietary Rights has
lapsed or expired or been canceled, abandoned, opposed or the subject of any
reexamination request.
Section 2.21. RELATIONS WITH GOVERNMENTS, ETC. Neither the
Company nor any Company Subsidiary has made, offered or agreed to offer anything
of value to any governmental official, political party or candidate for
government office which would cause the Company or any Company Subsidiary to be
in violation of the Foreign Corrupt Practices Act of 1977 or any Governmental
Requirement to a similar effect.
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Section 2.22. COMMITMENTS. Schedule 2.22 sets forth a complete,
accurate list of each of the following to which any of the Company and the
Company Subsidiaries is a party or by which any of its properties is bound and
which presently remains executory in whole or in any part:
(a) each partnership, joint venture or cost-sharing agreement;
(b) each guaranty or suretyship, indemnification or contribution
agreement or performance bond;
(c) each instrument, agreement or other obligation evidencing or
relating to Indebtedness of any of the Company and the Company
Subsidiaries or to money lent or to be lent to another Person involving
more than $25,000;
(d) each contract to purchase or sell real property;
(e) each agreement with dealers or sales or commission agents,
public relations or advertising agencies, accountants or attorneys
(other than in connection with this Agreement and the transactions
contemplated hereby) involving total payments within any 12-month period
in excess of $25,000 and which is not terminable without penalty and on
no more than 30 days' prior notice;
(f) each agreement for the acquisition or provision of services,
supplies, equipment, inventory, fixtures or other property involving
more than $25,000 in the aggregate;
(g) each contract containing any noncompetition covenant;
(h) each agreement providing for the purchase from a supplier of
all or substantially all the requirements of the Company or any Company
Subsidiary of a particular product or service; and
(i) each other agreement or commitment not made in the ordinary
course of business that is Material to the Acquired Business.
True, correct and complete copies of all written items listed above, and true,
correct and complete written descriptions of all oral items listed above, have
heretofore been delivered or made available to ARS. Except as accurately set
forth in Schedule 2.22: (a) there are no existing or asserted defaults, events
of default or events, occurrences, acts or omissions that, with the giving of
notice or lapse of time or both, would constitute defaults or events of default
under any of the items listed above which are Material to the Acquired Business
by any of the Company and the Company Subsidiaries or, to the knowledge of the
Company, any other party thereto; and (b) no penalties have been incurred, nor
are amendments pending, with respect to the items listed above which are
Material to the Acquired Business. The items listed above are in full force and
effect and are valid
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and enforceable obligations of the Company or the Company Subsidiaries parties
thereto and, to the knowledge of the Company, the other parties thereto in
accordance with their respective terms, and no defenses, off-sets or
counterclaims have been asserted or, to the knowledge of the Company, may be
made by any party thereto (other than by the Company or a Company Subsidiary),
nor has the Company or a Company Subsidiary, as the case may be, waived any
rights thereunder.
Section 2.23. INVENTORIES. Except as accurately set forth in
Schedule 2.23, all inventories, net of reserves determined in accordance with
GAAP, of each of the Company and the Company Subsidiaries which are classified
as such on the Current Balance Sheet are, to the knowledge of the Company,
merchantable and salable or usable in the ordinary course of business of the
Acquired Business. The Acquired Business does not depend on any single vendor
for its inventories the loss of which could have a Material Adverse Effect.
Section 2.24. INSURANCE. Schedule 2.24 accurately sets forth a
list of all insurance policies carried by each of the Company and the Company
Subsidiaries. The Company has previously provided ARS with: (a) an accurate list
of all insurance loss runs and worker's compensation claims received for the
most recently ended three policy years; and (b) true, complete and correct
copies of all insurance policies carried by each of the Company and the Company
Subsidiaries which are in effect, all of which (i) have been issued by insurers
of recognized responsibility and (ii) currently are, and will remain without
interruption through the Effective Date, in full force and effect. Except as set
forth in Schedule 2.24: (a) no insurance carried by the Company or any Company
Subsidiary has been canceled by the insurer during the past five years, and
neither the Company nor any Company Subsidiary has ever been denied coverage;
and (b) neither the Company nor any Company Subsidiary or Stockholder has
received any notice or other communication from any issuer of any such insurance
policy of any material increase in any deductibles, retained amounts or the
premiums payable thereunder, and, to the knowledge of the Company and the
Stockholders, no such increase in deductibles, retainages or premiums is
threatened.
Section 2.25. EMPLOYEE MATTERS. (a) CASH COMPENSATION. Schedule
2.25 sets forth an accurate, complete written list of the names, titles and
rates of annual cash compensation, at the Current Balance Sheet Date and at the
date hereof (and the portions thereof attributable to salary or the equivalent,
fixed bonuses, discretionary bonuses and other cash compensation, respectively)
of all key employees, nonemployee officers, nonemployee directors and key
consultants and independent contractors of each of the Company and the Company
Subsidiaries who receive annualized cash compensation of greater than $100,000.
(b) EMPLOYMENT AGREEMENTS. Schedule 2.25 accurately lists all
Employment Agreements remaining executory in whole or in part on the date
hereof, and the Company has provided ARS with true, complete and correct copies
of all those Employment Agreements. Neither the Company nor any Company
Subsidiary is a party to any oral Employment Agreement.
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(c) OTHER COMPENSATION PLANS. Schedule 2.25 accurately lists all
Other Compensation Plans either remaining executory on the date hereof or to
become effective after the date hereof. The Company has provided ARS with a
true, correct and complete copy of each of those Other Compensation Plans that
is in writing and an accurate written description of each of those Other
Compensation Plans that is not written. Except as accurately set forth in
Schedule 2.25, each of the Other Compensation Plans, including each that is a
Welfare Plan, may be unilaterally amended or terminated by the Company or any
Company Subsidiary without liability to any of them, except as to benefits
accrued thereunder prior to that amendment or termination.
(d) ERISA BENEFIT PLANS. Schedule 2.25 accurately (i) lists each
ERISA Pension Benefit Plan (A)(1) the funding requirements of which (under
Section 301 of ERISA or Section 412 of the Code) are, or at any time during the
six-year period ending on the date hereof were, in whole or in part, the
responsibility of the Company or any Company Subsidiary or (2) respecting which
the Company or any Company Subsidiary is, or at any time during that period was,
a "contributing sponsor" or an "employer" as defined in Sections 4001(a)(13) and
3(5), respectively, of ERISA (each plan described in this clause (A) being a
"Company ERISA Pension Plan"), (B) each other ERISA Pension Benefit Plan
respecting which an ERISA Affiliate is, or at any time during that period was,
such a "contributing sponsor" or "employer" (each plan described in this clause
(B) being an "ERISA Affiliate Pension Plan") and (C) each other ERISA Employee
Benefit Plan that is being, or at any time during that period was, sponsored,
maintained or contributed to by the Company or any Company Subsidiary (each plan
described in this clause (C) and each Company ERISA Pension Plan being a
"Company ERISA Benefit Plan"), (ii) states the termination date of each Company
ERISA Benefit Plan and ERISA Affiliate Pension Plan that has been terminated and
(iii) identifies for each ERISA Affiliate Pension Plan the relevant ERISA
Affiliates. The Company has provided ARS with (i) true, complete and correct
copies of (A) each Company ERISA Benefit Plan and ERISA Affiliate Pension Plan,
(B) each trust agreement related thereto and (C) all amendments to those plans
and trust agreements. Except as accurately set forth in Schedule 2.25, (i)
neither the Company nor any Company Subsidiary is, or at any time during the
six-year period ended on the date hereof was, a member of any ERISA Group that
currently includes, or included when the Company or a Company Subsidiary was a
member, among its members any Person other than the Company and the Company
Subsidiaries and (ii) no Person is an ERISA Affiliate of the Company or any
Company Subsidiary (other than the Company or any Company Subsidiary in the case
of any other Company Subsidiary or any Company Subsidiary in the case of the
Company, if the Company and the Company Subsidiaries comprise an ERISA Group).
(e) EMPLOYEE POLICIES AND PROCEDURES. Schedule 2.25 accurately
lists all Employee Policies and Procedures. The Company has provided ARS with a
copy of all written Employee Policies and Procedures and a written description
of all material unwritten Employee Policies and Procedures.
(f) UNWRITTEN AMENDMENTS. Except as accurately described in
Schedule 2.25, no material unwritten amendments have been made, whether by oral
communication, pattern of
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conduct or otherwise, with respect to any of the Employment Agreements, Other
Compensation Plans or Employee Policies and Procedures.
(g) LABOR COMPLIANCE. Each of the Company and the Company
Subsidiaries has been and is in compliance with all applicable Governmental
Requirements respecting employment and employment practices, terms and
conditions of employment and wages and hours, and neither the Company nor any
Company Subsidiary is liable for any arrears of wages or penalties for failure
to comply with any of the foregoing. Neither the Company nor any Company
Subsidiary has engaged in any unfair labor practice or discriminated on the
basis of race, color, religion, sex, national origin, age, disability or
handicap in its employment conditions or practices. Except as accurately set
forth in Schedule 2.25, there are no (i) unfair labor practice charges or
complaints or racial, color, religious, sex, national origin, age, disability or
handicap discrimination charges or complaints pending or, to the knowledge of
the Company, threatened against the Company or any of the Company Subsidiaries
before any Governmental Authority (nor, to the knowledge of the Company, does
any valid basis therefor exist) or (ii) existing or, to the knowledge of the
Company, threatened labor strikes, disputes, grievances, controversies or other
labor troubles affecting the Company or any of the Company Subsidiaries (nor, to
the knowledge of the Company, does any valid basis therefor exist).
(h) UNIONS. Except as set forth on Schedule 2.25, (i) neither the
Company nor any Company Subsidiary or ERISA Affiliate has ever been a party to
any agreement with any union, labor organization or collective bargaining unit.
No employees of the Company and the Company Subsidiaries are represented by any
union, labor organization or collective bargaining unit and, to the knowledge of
the Company, (ii) none of the employees of the Company and the Company
Subsidiaries has threatened to organize or join a union, labor organization or
collective bargaining unit.
(i) CHANGE OF CONTROL BENEFITS. Except as accurately set forth in
Schedule 2.25, neither the Company nor any of the Company Subsidiaries is a
party to any agreement, or has established any policy, practice or program,
requiring it to make a payment or provide any other form of compensation or
benefit or vesting rights to any person performing services for the Company or
any of the Company Subsidiaries which would not be payable or provided in the
absence of this Agreement or the consummation of the transactions contemplated
by this Agreement, including any parachute payment under Section 280G of the
Code.
(j) RETIREES. Neither the Company nor any of the Company
Subsidiaries has any obligation or commitment to provide medical, dental or life
insurance benefits to or on behalf of any of its employees who may retire or any
of its former employees who have retired except as may be required pursuant to
the continuation of coverage provisions of Section 4980B of the Code and the
applicable parallel provisions of ERISA.
Section 2.26. COMPLIANCE WITH ERISA, ETC. (a) COMPLIANCE. Each of
the Company ERISA Benefit Plans and Other Compensation Plans (each, a "Plan")
(i) is in substantial compliance
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with all applicable provisions of ERISA, as well as with all other applicable
Governmental Requirements, and (ii) has been administered, operated and managed
in accordance with its governing documents.
(b) QUALIFICATION. All Plans that are intended to qualify under
Section 401(a) of the Code (the "Qualified Plans") are so qualified and have
been determined by the IRS to be so qualified (or application for determination
letters have been timely submitted to the IRS). The Company has provided ARS
with true, complete and correct copies of the current plan determination
letters, most recent actuarial valuation reports, if any, most recent Form 5500,
or, as applicable, Form 5500-C/R, filed with respect to each such Qualified Plan
and most recent trustee or custodian report. To the extent that any Qualified
Plans have not been amended to comply with applicable Governmental Requirements,
the remedial amendment period permitting retroactive amendment of these
Qualified Plans has not expired and will not expire within 120 days after the
Effective Time. All reports and other documents required to be filed with any
governmental agency or distributed to plan participants or beneficiaries have
been timely filed or distributed.
(c) NO PROHIBITED TRANSACTIONS, ETC. None of the Stockholders,
any Plan or the Company or any Company Subsidiary has engaged in any Prohibited
Transaction. No Plan has incurred an accumulated funding deficiency, as defined
in Section 412(a) of the Code and Section 302(a) of ERISA, and no circumstances
exist pursuant to which the Company or any Company Subsidiary could have any
direct or indirect liability whatsoever (including being subject to any
statutory Lien to secure payment of any such liability), to the Pension Benefit
Guaranty Corporation under Title IV of ERISA or to the IRS for any excise tax or
penalty with respect to any Plan now or hereafter maintained or contributed to
by the Company or any of its ERISA Affiliates. Further:
(i) there have been no terminations, partial terminations or
discontinuances of contributions to any Qualified Plan without a
determination by the IRS that such action does not adversely affect the
tax-qualified status of that plan;
(ii) no Termination Event has occurred;
(iii) no Reportable Event has occurred with respect to any Plan
which was not properly reported;
(iv) the valuation of assets of any Qualified Plan, as of the
Effective Time, shall equal or exceed the actuarial present value of all
"benefit liabilities" (within the meaning of Section 4001(a)(16) of
ERISA) under that plan in accordance with the assumptions contained in
the regulations of the Pension Benefit Guaranty Corporation governing
the funding of terminated defined benefit plans;
(v) with respect to Plans qualifying as "group health plans"
under Section 4980B of the Code or Section 607(l) or 609 of ERISA and
related regulations (relating to the benefit continuation rights imposed
by "COBRA" or qualified medical child support orders), the
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Company, each Company Subsidiary and the Stockholders have complied (and
at the Effective Time will have complied) in all material respects with
all reporting, disclosure, notice, election and other benefit
continuation and coverage requirements imposed thereunder as and when
applicable to those plans, and neither the Company nor any Company
Subsidiary has incurred (or will incur) any direct or indirect liability
or is (or will be) subject to any loss, assessment, excise tax penalty,
loss of federal income tax deduction or other sanction, arising on
account of or in respect of any direct or indirect failure by the
Company, any Company Subsidiary or any Stockholder, at any time prior to
the Effective Time, to comply with any such federal or state benefit
continuation or coverage requirement, which is capable of being assessed
or asserted before or after the Effective Time directly or indirectly
against the Company, any Company Subsidiary, any Stockholder, ARS or any
Subsidiary of ARS with respect to any of those group health plans;
(vi) the Financial Statements as of the Current Balance Sheet
Date reflect the approximate total pension, medical and other benefit
liability for all Plans, and no material funding changes or
irregularities are reflected thereon which would cause those Financial
Statements to be not representative of prior periods; and
(vii) neither the Company nor any Company Subsidiary has incurred
liability under Section 4062 of ERISA.
(d) MULTIEMPLOYER PLANS. Except as set forth in Schedule 2.26,
neither the Company nor any Company Subsidiary, and no ERISA Affiliate of any of
them, is, or at any time during the six-year period ended on the date hereof
was, obligated to contribute to a Multiemployer Plan. Neither the Company nor
any Company Subsidiary, and no ERISA Affiliate of any of them, has made a
complete or partial withdrawal from a Multiemployer Plan so as to incur
withdrawal liability as defined in Section 4201 of ERISA. Schedule 2.26 lists
for each Multiemployer Plan on such Schedule the Company's best estimate of the
amount of withdrawal liability that would be incurred if the Company and each of
its ERISA Affiliates were to make a complete withdrawal from such Multiemployer
Plan as of the Closing Date. Except as set forth in Schedule 2.26, the aggregate
amount of such withdrawal liability if the Company and each of its ERISA
Affiliates were to make a complete withdrawal from each such Multiemployer Plan
would not exceed $25,000.
(e) CLAIMS AND LITIGATION. Except as accurately set forth in
Schedule 2.26, no Litigation or claims (other than routine claims for benefits)
are pending or, to the knowledge of the Company, threatened against, or with
respect to, any of the Plans or with respect to any fiduciary, administrator or
sponsor thereof (in their capacities as such), or any party-in-interest thereof.
(f) EXCISE TAXES, DAMAGES AND PENALTIES. No act, omission or
transaction has occurred which would result in the imposition on the Company or
any Company Subsidiary of (i) breach of fiduciary duty liability damages under
Section 409 of ERISA, (ii) a civil penalty assessed pursuant to subsection (c),
(i) or (l) of Section 502 of ERISA or (iii) any excise tax under applicable
provisions of the Code with respect to any Plan.
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(g) WELFARE TRUSTS. Any trust funding a Plan, which is intended
to be exempt from federal income taxation pursuant to Section 501(c)(9) of the
Code, satisfies the requirements of that section and has received a favorable
determination letter from the IRS regarding that exempt status and has not,
since receipt of the most recent favorable determination letter, been amended or
operated in a way that would adversely affect that exempt status.
Section 2.27. TAXES. (a) Each of the following representations
and warranties in this Section 2.27 is qualified to the extent set forth in
Schedule 2.27.
(b) All Returns required to be filed with respect to any Tax for
which any of the Company and the Company Subsidiaries is liable have been duly
and timely filed with the appropriate Taxing Authority, each Tax shown to be
payable on each such Return has been paid, each Tax payable by the Company or a
Company Subsidiary by assessment has been timely paid in the amount assessed and
adequate reserves have been established on the consolidated books of the Company
and the Company Subsidiaries for all Taxes for which any of the Company and the
Company Subsidiaries is liable, but the payment of which is not yet due. Neither
the Company nor any Company Subsidiary is, or ever has been, liable for any Tax
payable by reason of the income or property of a Person other than the Company
or a Company Subsidiary. Each of the Company and the Company Subsidiaries has
timely filed true, correct and complete declarations of estimated Tax in each
jurisdiction in which any such declaration is required to be filed by it. No
Liens for Taxes exist upon the assets of the Company or any Company Subsidiary
except Liens for Taxes which are not yet due. Neither the Company nor any
Company Subsidiary is, or ever has been, subject to Tax in any jurisdiction
outside of the United States. No Litigation with respect to any Tax for which
the Company or any Company Subsidiary is asserted to be liable is pending or, to
the knowledge of the Company or any Stockholder, threatened and no basis which
the Company or any Stockholder believes to be valid exists on which any claim
for any such Tax can be asserted against the Company or any Company Subsidiary.
There are no requests for rulings or determinations in respect of any Taxes
pending between the Company or any Company Subsidiary and any Taxing Authority.
No extension of any period during which any Tax may be assessed or collected and
for which the Company or any Company Subsidiary is or may be liable has been
granted to any Taxing Authority. Neither the Company nor any Company Subsidiary
is or has been a party to any tax allocation or sharing agreement. All amounts
required to be withheld by any of the Company and the Company Subsidiaries and
paid to governmental agencies for income, social security, unemployment
insurance, sales, excise, use and other Taxes have been collected or withheld
and paid to the proper Taxing Authority. The Company and each Company Subsidiary
have made all deposits required by law to be made with respect to employees'
withholding and other employment taxes.
(c) Neither the Company or any Company Subsidiary nor any
Stockholder is a "foreign person," as that term is referred to in Section
1445(f)(3) of the Code.
(d) The Company has not filed a consent pursuant to Section
341(f) of the Code or any comparable provision of any other tax statute and has
not agreed to have Section 341(f)(2)
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of the Code or any comparable provision of any other tax statute apply to any
disposition of an asset. The Company has not made, is not obligated to make and
is not a party to any agreement that could require it to make any payment that
is not deductible under Section 280G of the Code. No asset of the Company or of
any Company Subsidiary is subject to any provision of applicable law which
eliminates or reduces the allowance for depreciation or amortization in respect
of that asset below the allowance generally available to an asset of its type.
No accounting method changes of the Company or of any Company Subsidiary exist
or are proposed or threatened which could give rise to an adjustment under
Section 481 of the Code.
Section 2.28. GOVERNMENT CONTRACTS. Neither the Company nor any
Company Subsidiary is a party to any governmental contract subject to price
redetermination or renegotiation.
Section 2.29. ABSENCE OF CHANGES. Since the Current Balance Sheet
Date, except as accurately set forth in Schedule 2.29, none of the following has
occurred with respect to the Company or any Company Subsidiary:
(a) any circumstance, condition, event or state of facts (either
singly or in the aggregate), other than conditions generally affecting
the Air Conditioning and Refrigeration Contracting or Plumbing
businesses, which has caused, is causing or will cause a Material
Adverse Effect;
(b) any change in its authorized Capital Stock or in any of its
outstanding Capital Stock or options, warrants or rights to acquire its
Capital Stock;
(c) any Restricted Payment, except any declaration or payment of
dividends by any Company Subsidiary solely to the Company;
(d) any increase in, or any commitment or promise to increase,
the rates of cash compensation as of the date hereof, or the amounts or
other benefits paid or payable under any Company ERISA Pension Plan or
Other Compensation Plan, except for ordinary and customary bonuses and
salary increases for employees (other than the Stockholders or their
family members) at the times and in the amounts consistent with its past
practice;
(e) any work interruptions, labor grievances or claims filed, or
any similar event or condition of any character, that will have a
Material Adverse Effect following the Effective Time;
(f) any distribution, sale or transfer of, or any commitment to
distribute, sell or transfer, any of its assets or properties of any
kind which singly is or in the aggregate are Material to the Acquired
Business, other than distributions, sales or transfers in the ordinary
course of its business and consistent with its past practices to Persons
other than the Stockholders and their family members and Affiliates;
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(g) any cancellation, or agreement to cancel, any Indebtedness,
obligation or other liability owing to it, including any Indebtedness,
obligation or other liability of any Stockholder or any Related Person
or Affiliate thereof, provided that it may negotiate and adjust bills in
the course of good faith disputes with customers in a manner consistent
with past practice;
(h) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets,
property or rights or requiring consent of any Person to the transfer
and assignment of any such assets, property or rights;
(i) any purchase or acquisition of, or agreement, plan or
arrangement to purchase or acquire, any property, rights or assets
outside of the ordinary course of its business consistent with its past
practices;
(j) any waiver of any of its rights or claims that singly is or
in the aggregate are Material to the Acquired Business;
(k) any transaction by it outside the ordinary course of its
business or not consistent with its past practices;
(l) any incurrence by it of any Indebtedness or any Guaranty not
constituting its Indebtedness, or any commitment to incur any
Indebtedness or any such Guaranty;
(m) any investment in the Capital Stock, options, warrants,
rights to acquire the Capital Stock or the Indebtedness of any Person
other than short-term United States Treasury obligations or short-term
certificates of deposit of a commercial bank or trust company;
(n) except in accordance with the Company's consolidated capital
expenditure budget for the Company's current fiscal year, any capital
expenditure or series of related capital expenditures by the Company and
the Company Subsidiaries collectively in excess of $50,000, or
commitments by the Company and the Company Subsidiaries to make capital
expenditures totaling in excess of $50,000; or
(o) any cancellation or termination of a Material Agreement of
the Acquired Business.
Section 2.30. BANK RELATIONS; POWERS OF ATTORNEY. Schedule 2.30
accurately sets forth:
(a) the name of each financial institution in which the Company
or any Company Subsidiary has borrowing or investment arrangements,
deposit or checking accounts or safe deposit boxes;
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(b) the types of those arrangements and accounts, including, as
applicable, names in which accounts or boxes are held, the account or
box numbers and the name of each Person authorized to draw thereon or
have access thereto; and
(c) the name of each Person holding a general or special power of
attorney from the Company or any Company Subsidiary and a description of
the terms of each such power.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ARS
ARS represents and warrants to the Company and each Stockholder
that all the following representations and warranties in this Article III are as
of the date of this Agreement, and will be on the Closing Date and immediately
prior to the Effective Time, true and correct:
Section 3.01. ORGANIZATION; POWER. ARS is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority under the laws of
that State and its Charter Documents to own or lease and to operate its
properties presently and following the Effective Time and to carry on its
business as now conducted and as proposed to be conducted following the
Effective Time.
Section 3.02. AUTHORIZATION; ENFORCEABILITY; ABSENCE OF
CONFLICTS; REQUIRED CONSENTS. (a) The execution, delivery and performance by ARS
of this Agreement and each other Transaction Document to which it is a party,
and the effectuation of the Acquisition and the other transactions contemplated
hereby and thereby, are within its corporate power under its Charter Documents
and the applicable Governmental Requirements of the State of Delaware and have
been duly authorized by all proceedings, including actions permitted to be taken
in lieu of proceedings, required under its Charter Documents and the applicable
Governmental Requirements of its Organization State.
(b) This Agreement has been, and each of the other Transaction
Documents to which ARS is a party, when executed and delivered to the other
parties thereto (or, in the case of the Certificates of Merger, if any, the
applicable Governmental Authorities), will have been, duly executed and
delivered by it and is, or when so executed and delivered will be, its legal,
valid and binding obligation, enforceable against it in accordance with its
terms, except as that enforceability may be (i) limited by any applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and (ii) subject to general
principles of equity (regardless of whether that enforceability is considered in
a proceeding in equity or at law).
(c) The execution, delivery and performance in accordance with
their respective terms by ARS of the Transaction Documents to which it is a
party have not and will not (i) violate, breach or constitute a default under
(A) the Charter Documents of ARS, (B) any Governmental Requirement applicable to
ARS or (C) any Material Agreement of ARS, (ii) result in the acceleration
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or mandatory prepayment of any Indebtedness, or any Guaranty not constituting
Indebtedness, of ARS or afford any holder of any of that Indebtedness, or any
beneficiary of any of those Guaranties, the right to require ARS to redeem,
purchase or otherwise acquire, reacquire or repay any of that Indebtedness, or
to perform any of those Guaranties, (iii) cause or result in the imposition of,
or afford any Person the right to obtain, any Lien upon any property or assets
of ARS(or upon any revenues, income or profits of ARS therefrom), other than
negative pledge covenants of ARS respecting the Capital Stock of its
Subsidiaries and its other assets, or (iv) result in the revocation,
cancellation, suspension or material modification, in any single case or in the
aggregate, of any Governmental Approval possessed by ARS at the date hereof and
necessary for the ownership or lease and the operation of its properties or the
carrying on of its business as now conducted, including any necessary
Governmental Approval under each applicable Environmental Law and Professional
Code.
(d) Except for (i) the filing of the Certificates of Merger, if
any, with the applicable Governmental Authorities, and (ii) as may be required
by the HSR Act or the applicable state securities or blue sky laws, no
Governmental Approvals are required to be obtained, and no reports or notices to
or filings with any Governmental Authority are required to be made, by ARS for
the execution, delivery or performance by ARS of the Transaction Documents to
which it is a party, the enforcement against ARS of its obligations thereunder
or the effectuation of the Acquisition and the other transactions contemplated
thereby.
Section 3.03. CHARTER DOCUMENTS. No breach or violation of any
Charter Document of ARS has occurred and is continuing.
Section 3.04. CAPITAL STOCK OF ARS. As of the date hereof, the
authorized capital stock of ARS is comprised of (A) 50,000,000 shares of ARS
Common Stock and (B) 10,000,000 shares of preferred stock, $.001 par value per
share. All shares of ARS Common Stock, if any, to be issued pursuant to
Paragraph 2, when issued, (a) will have been duly authorized and validly issued
in accordance with the Delaware General Corporation Law and the Charter
Documents of ARS and (b) will be fully paid and nonassessable. None of the
shares of ARS Common Stock, if any, to be issued pursuant to Paragraph 2 will,
when issued, have been issued in breach or violation of (a) any applicable
statutory or contractual preemptive rights, or any other rights of any kind
(including any rights of first offer or refusal), of any Person or (b) the terms
of any then outstanding options, warrants or other rights it has issued to
acquire ARS Common Stock.
Section 3.05. NO LITIGATION. No Litigation is pending or, to the
knowledge of ARS, threatened to which ARS is or may become a party which (a)
questions or involves the validity or enforceability of any obligation of ARS
under any Transaction Document, (b) seeks (or reasonably may be expected to
seek) (i) to prevent or delay consummation by ARS of the transactions
contemplated by this Agreement to be consummated by ARS or (ii) damages from ARS
in connection with any such consummation.
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ARTICLE IV
COVENANTS EXTENDING TO THE EFFECTIVE TIME
Section 4.01. ACCESS AND COOPERATION; DUE DILIGENCE. (a) From the
date hereof and until the Effective Time, the Company will (i) afford to the
Representatives of ARS reasonable access to all the key employees, sites,
properties, books and records of each of the Company and the Company
Subsidiaries, (ii) provide ARS with such additional financial and operating data
and other information relating to the business and properties of each of the
Company and the Company Subsidiaries as ARS may from time to time reasonably
request and (iii) cooperate with ARS and its Representatives in the preparation
of any documents or other material that may be required in connection with any
Transaction Document. Each Stockholder and the Company will treat all
Confidential Information obtained by them in connection with the negotiation and
performance of this Agreement as confidential in accordance with the provisions
of Section 10.01.
(b) Each of the Company and the Stockholders will use its best
efforts to secure, as soon as practicable after the date hereof, all approvals
or consents of third Persons as may be necessary to consummate the transactions
contemplated hereby.
(c) From the date hereof and until the Effective Time, ARS will
(i) afford to the Representatives of the Company and the Stockholders access to
all sites, properties, books and records of ARS, (ii) provide the Company with
such additional financial and operating data and other information relating to
the business and properties of ARS as the Company or any Stockholder may from
time to time reasonably request and (iii) cooperate with the Company and the
Stockholders and their respective Representatives in the preparation of any
documents or other material which may be required in connection with any
Transaction Documents.
(d) If this Agreement is terminated pursuant to Article XI, ARS
promptly will return all written Confidential Information of the Company it then
possesses to the Company.
Section 4.02. CONDUCT OF BUSINESS PENDING THE EFFECTIVE TIME.
From the date hereof and until the Effective Time, the Company will, and will
cause each Company Subsidiary to:
(a) carry on its businesses in substantially the same manner as
it has heretofore and not introduce any material new method of
management, operation or accounting;
(b) maintain its properties and facilities, including those held
under leases, in as good working order and condition as at present,
ordinary wear and tear excepted;
(c) perform all its obligations under agreements relating to or
affecting its assets, properties and other rights;
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(d) keep in full force and effect without interruption all its
present insurance policies or other comparable insurance coverage;
(e) use reasonable commercial efforts to (i) maintain and
preserve its business organization intact, (ii) retain its present
employees and (iii) maintain its relationships with suppliers, customers
and others having business relations with it;
(f) comply with all applicable Governmental Requirements; and
(g) except as required or expressly permitted by this Agreement,
maintain the instruments and agreements governing its outstanding
Indebtedness and leases on their present terms and not enter into new or
amended Indebtedness or lease instruments or agreements involving
amounts over $10,000 in any case or $100,000 in the aggregate, without
the prior written consent of ARS (which consent will not be unreasonably
withheld).
Section 4.03. PROHIBITED ACTIVITIES. From the date hereof and
until the Effective Time, without the prior written consent of ARS or unless as
required or expressly permitted by this Agreement, the Company will not, and
will not permit any Company Subsidiary to:
(a) make any change in its Charter Documents;
(b) issue any of its Capital Stock or issue or otherwise create
any options, warrants or rights to acquire any of its Capital Stock;
(c) make any Restricted Payment (other than as provided in
Schedule 4.03);
(d) make any investments (other than short-term United States
Treasury obligations or short-term certificates of deposit of a
commercial bank or trust company) in the Capital Stock (or options,
warrants or rights to acquire the Capital Stock) or Indebtedness of any
Person;
(e) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures in a single
transaction or a series of related transactions involving an aggregate
amount of more than $50,000 otherwise than in the ordinary course of its
business and consistent with its past practice;
(f) increase or commit or promise to increase the cash
compensation payable or to become payable to any officer, director,
stockholder, employee or agent, consultant or independent contractor of
any of the Company and the Company Subsidiaries or make any
discretionary bonus or management fee payment to any such Person, except
bonuses or salary increases to employees (other than the Stockholders or
their family members) at the times and in the amounts consistent with
its past practice;
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(g) create, assume or permit to be created or imposed any Liens
(other than Permitted Liens) upon any of its assets or properties,
whether now owned or hereafter acquired, except for purchase money Liens
incurred in connection with the acquisition of equipment with an
aggregate cost not in excess of $25,000 and necessary or desirable for
the conduct of the business of any of the Company and the Company
Subsidiaries;
(h) (i) adopt, establish, amend or terminate any ERISA Employee
Benefit Plan, or any Other Compensation Plan or Employee Policies and
Procedures or (ii) take any discretionary action, or omit to take any
contractually required action, if that action or omission could either
(A) deplete the assets of any ERISA Employee Benefit Plan or any Other
Compensation Plan or (B) increase the liabilities or obligations under
any such plan;
(i) sell, assign, lease or otherwise transfer or dispose of any
of its owned or leased property or equipment otherwise than in the
ordinary course of its business and consistent with its past practice;
(j) negotiate for the acquisition of any business or the start-up
of any new business;
(k) merge, consolidate or effect a share exchange with, or agree
to merge, consolidate or effect a share exchange with, any other Entity;
(l) waive any of its material rights or claims, provided that it
may negotiate and adjust bills in the course of good faith disputes with
customers in a manner consistent with past practice;
(m) commit a material breach of or amend or terminate any
Material Agreement of the Company or the Acquired Business or any
Governmental Approvals Material to the Acquired Business; or
(n) enter into any other transaction that is not in the ordinary
course of its business and consistent with its past practice or that is
prohibited hereby.
Section 4.04. NO SHOP. Each of the Company and the Stockholders
agrees that, from the date hereof and until the first to occur of the Effective
Time or the termination of this Agreement in accordance with Article XI, neither
the Company nor any Stockholder, nor any of their respective officers and
directors shall, and the Company and each Stockholder will direct and use their
best efforts to cause each of their respective Representatives not to, initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including any proposal or offer to the
Stockholders) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, the Company or engage in any activities,
discussions or negotiations concerning, or provide any Confidential Information
respecting, the Acquired Business
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or ARS to, or have any discussions with, any Person relating to such an offer or
proposal or otherwise facilitate any effort or attempt to make or implement such
an offer or proposal. The Company and each Stockholder will: (a) immediately
cease and cause to be terminated any existing activities, discussions or
negotiations with any Persons conducted heretofore with respect to any of the
foregoing, and each will take the steps necessary to inform the Persons referred
to in the first sentence of this Section 4.04 of the obligations undertaken in
this Section 4.04; and (b) notify ARS immediately if any such inquiries or
proposals are received by, any such information is requested from or any such
discussions or negotiations are sought to be initiated or continued with the
Company or any Stockholder.
Section 4.05. NOTICE TO BARGAINING AGENTS. Prior to the Closing
Date, the Company will (a) satisfy any requirement for notice of the
transactions contemplated by this Agreement under applicable collective
bargaining agreements and (b) provide ARS with proof that any required notice
has been sent.
Section 4.06. NOTIFICATION OF CERTAIN MATTERS. The Stockholders
and the Company shall give prompt notice to ARS of (a) the existence or
occurrence of each condition or state of facts which will or reasonably could be
expected to cause any representation or warranty of the Company or any
Stockholder contained herein to be untrue or incorrect in any material respect
at or prior to the Closing Date and (b) any material failure of any Stockholder
or the Company to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by that Person hereunder. ARS shall give prompt
notice to the Company of (a) the existence or occurrence of each condition or
state of facts which will or reasonably could be expected to cause any
representation or warranty of ARS contained herein to be untrue or inaccurate at
or prior to the Closing Date and (b) any material failure of ARS to comply with
or satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder. The delivery of any notice pursuant to this Section 4.06 shall
not be deemed to (a) modify the representations or warranties herein of the
party delivering that notice, or any other party, which modification may be made
only pursuant to Section 4.07, (b) modify the conditions set forth or referred
to in Article V or (c) limit or otherwise affect the remedies available
hereunder to the party receiving that notice.
Section 4.07. SUPPLEMENTAL INFORMATION. Each of the Company and
the Stockholders agrees that, with respect to the representations and warranties
of that party contained in this Agreement, that party will have the continuing
obligation until the Closing Date to provide ARS promptly with such additional
supplemental information (collectively, the "Supplemental Information"), in the
form of (a) amendments to then existing Schedules or (b) additional Schedules as
would be necessary, in the light of the circumstances, conditions, events and
states of facts then known to the Company or any Stockholder, to make each of
those representations and warranties true and correct as of the Closing Date.
For purposes only of determining whether the conditions to the obligations of
ARS which are specified in Section 5.03 have been satisfied, and not for any
purpose under Article VII, the Schedules as of the Closing Date shall be deemed
to be the Schedules as of the date hereof as amended or supplemented by the
Supplemental Information provided to ARS prior to the Closing pursuant to this
Section 4.07; provided, however, that if the Supplemental
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Information so provided discloses the existence of circumstances, conditions,
events or states of facts which, in any combination thereof, (a) have had a
Material Adverse Effect which was not reflected in the determination of the
Ceiling Amount or, in the sole judgment of ARS (which shall be conclusive for
purposes of this Section 4.07 and Article XI, but not for any purpose of Article
VII), (b) are having or will have a Material Adverse Effect, ARS will be
entitled either (i) to terminate this Agreement pursuant to Section 11.01(d) or
(ii) to treat as ARS Indemnified Losses for all purposes of Article VII (which
treatment will not prejudice the right of any Stockholders under Article VII to
contest Damage Claims made by ARS in respect of those ARS Indemnified Losses)
all Damages to the Acquired Business which are attributable to the
circumstances, conditions, events and states of facts first disclosed herein
after the date hereof in the Supplemental Information.
Section 4.08. ADDITIONAL FINANCIAL STATEMENTS. The Company will
furnish to ARS:
(a) as soon as available and in any event within 30 days after
the end of each of the Company's fiscal quarters which ends prior to the
Effective Time, an unaudited balance sheet of the Acquired Business as
of the end of that fiscal quarter and the related statements of income
or operations, cash flows and stockholders' or other owners' equity for
that fiscal quarter and for the period of the Company's fiscal year
ended with that quarter, in each case (i) setting forth in comparative
form the figures for the corresponding portion of the Company's previous
fiscal year and (ii) prepared in accordance with GAAP applied on basis
consistent (A) throughout the periods indicated (excepting footnotes)
and (B) with the basis on which the Initial Financial Statements
including the Current Balance Sheet were prepared; and
(b) if requested by ARS and promptly following any such request,
such summary operating or other financial information of the Acquired
Business as of the end of either the first or second fiscal month in any
of the Company's fiscal quarters as ARS may request.
Section 4.09. TERMINATION OF PLANS. If requested by ARS, the
Company will, or will cause the applicable Company Subsidiary to, if permitted
by all applicable Governmental Requirements to do so, terminate each Plan
identified in Schedule 2.25 as a "Plan To Be Terminated Prior to the Effective
Time" prior to the Effective Time.
Section 4.10. DISPOSITION OF UNWANTED ASSETS. The Company will
make all arrangements and take all such actions as are necessary and
satisfactory to ARS to dispose, prior to the Effective Time, of those assets of
the Company or the Company Subsidiaries which are listed in Schedule 4.10.
Section 4.11. HSR ACT MATTERS. If ARS shall determine that
filings pursuant to and under the HSR Act are necessary or appropriate in
connection with the effectuation of the Acquisition, and advises the Company in
writing of that determination, the Company promptly will compile and file (or
will cause its "ultimate parent entity" (as determined for purposes of the HSR
Act) to file) under the HSR Act such information respecting it as the HSR Act
requires of an Entity
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to be acquired, and the expiration or termination of the applicable waiting
period and any extension thereof under the HSR Act shall be deemed a condition
precedent set forth in Section 5.01.
Section 4.12. NYSE LISTING. ARS shall use its reasonable business
efforts to have the shares of ARS Common Stock issuable in the Acquisition, if
any, approved for listing on the New York Stock Exchange, subject to official
notice of issuance, at or prior to the Effective Time.
ARTICLE V
CONDITIONS TO CLOSING AND CONSUMMATION
Section 5.01. CONDITIONS TO THE OBLIGATIONS OF EACH PARTY7.01.
THE CLOSING AND CERTAIN CONDITIONS. The obligation of each party hereto to take
the actions contemplated to be taken by that party at the Closing is subject to
the satisfaction on or before the Closing Date of each of the following
conditions or waiver pursuant to Section 10.04:
(a) NO LITIGATION. No Litigation shall be pending on the Closing
Date to restrain, prohibit or otherwise interfere with, or to obtain
material damages or other relief from ARS or any Subsidiary of ARS in
connection with, the consummation of the Acquisition;
(b) GOVERNMENTAL APPROVALS. All Governmental Approvals (other
than the acceptance for filing of the Certificates of Merger, if any)
required to be obtained by any of the Company, ARS and ARS Sub in
connection with the consummation of the Acquisition shall have been
obtained; and
(c) NYSE LISTING. All shares of ARS Common Stock issuable in the
Acquisition, if any, shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
Section 5.02. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY AND
THE STOCKHOLDERS. The obligations of the Company and each Stockholder with
respect to actions to be taken by them at or before the Closing Date and the
actions to be taken on the Closing Date are subject to the satisfaction, or the
waiver by the Company on behalf of itself and each Stockholder pursuant to
Section 10.04 on or before the Closing Date, of (a) all the conditions set forth
in Schedule 5.02, if any, and (b) the condition that all the representations and
warranties of ARS in Article III shall be true and correct as of the Closing
Date as though made at that time.
Section 5.03. CONDITIONS TO THE OBLIGATIONS OF ARS AND ARS SUB.
The obligations of ARS and ARS Sub with respect to actions to be taken by them
at or before the Closing Date are subject to the satisfaction, or the waiver by
ARS pursuant to Section 10.04, on or before the Closing Date of (a) all the
conditions set forth in Schedule 5.03, if any, and (b) all the following
conditions:
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(1) REPRESENTATIONS AND WARRANTIES. All the representations and
warranties of the Stockholders and the Company in Articles I and II and
in the Special Provisions, if any, shall be true and correct as of the
Closing as though made at that time;
(2) DELIVERY OF DOCUMENTS. The Stockholders and the Company shall
have delivered to ARS:
(A) a Company officer's certificate, in the form of
Exhibit 5.03-1 signed by the Company's President, respecting the
representations and warranties of the Stockholders and the
Company in Articles I and II and in the Special Provisions, if
any, and compliance with the covenants of the Stockholders and
the Company in Article IV and in the Special Provisions, if any;
(B) a Company secretary's certificate, in substantially
the form of Exhibit 5.03-2 signed by the Company's Secretary,
respecting the Charter Documents of the Company, resolutions of
the Board of Directors and stockholders of the Company and the
incumbency and signatures of certain officers of the Company;
(C) from each Stockholder, a certificate to the effect
that no withholding is required under Section 1445 of the Code
and in the form of Exhibit 5.03-3, with the blanks appropriately
filled, duly executed and delivered by that Stockholder;
(D) an opinion dated the Effective Date and addressed to
ARS from Counsel for the Company and the Stockholders
substantially in the form of Exhibit 5.03-4;
(E) from each officer and director of the Company and each
Company Subsidiary, if any, a notice of resignation substantially
in the form of Exhibit 5.03-5;
(F) from each Stockholder receiving ARS Common Stock as
Acquisition Consideration, if any, a lockup agreement
substantially in the form of Exhibit 5.03-6; and
(G) for each of the Company and the Company Subsidiaries,
a certificate, dated within 15 days prior to the Closing Date,
duly issued by the appropriate Governmental Authorities in its
Organization State and in each other jurisdiction listed for it
in Schedule 2.02, showing it to be in good standing and
authorized to do business in its Organization State and those
other jurisdictions and that all state franchise and/or income
tax returns and taxes due by it in its Organization State and
those other jurisdictions for all periods prior to the Closing
Date have been filed and paid.
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ARTICLE VI
COVENANTS FOLLOWING THE EFFECTIVE TIME
Section 6.01. PREPARATION AND FILING OF TAX RETURNS. Each party
hereto will, and will cause its Affiliates to, provide to each of the other
parties hereto such cooperation and information as any of them reasonably may
request in filing any Return, amended Return or claim for refund, determining a
liability for Taxes or a right to refund of Taxes or in conducting any audit or
other proceeding in respect of Taxes. This cooperation and information shall
include providing copies of all relevant portions of the relevant Returns,
together with such accompanying schedules and work papers, documents relating to
rulings or other determinations by Taxing Authorities and records concerning the
ownership and Tax bases of property as are relevant which a party possesses.
Each party will make its employees, if any, reasonably available on a mutually
convenient basis at its cost to provide an explanation of any documents or
information so provided. Subject to the preceding sentence, each party required
to file Returns pursuant to this Agreement shall bear all costs attributable to
the preparation and filing of those Returns.
Section 6.02. REMOVAL OF GUARANTIES. ARS will use its reasonable
best efforts to ensure that, within 90 days after the Effective Time, either (a)
the Stockholder Guaranties, if any, listed in Schedule 6.02 are terminated or
(b) the Indebtedness to which those Guaranties relate is retired; provided,
however, that if ARS is unable to effect the termination of any of those
Guaranties or the retirement of any of that Indebtedness, ARS will indemnify and
holds harmless each Stockholder from and against any liabilities, claims,
demands, judgments, losses, costs, damages or expenses whatsoever (including
reasonable attorneys' fees) that such Stockholder may sustain, suffer or incur
and that result from or arise out of or relate to that Guaranty or that
Indebtedness, as the case may be.
ARTICLE VII
INDEMNIFICATION
Section 7.01. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All the
provisions of this Agreement will survive the Closing and Effective Time
indefinitely notwithstanding any investigation at any time made by or on behalf
of any party hereto or the provision of any Supplemental Information pursuant to
Section 4.07, provided that the representations and warranties set forth in (or
deemed by any of the Special Provisions to be set forth in) Articles I, II and
III and in any certificate delivered in connection herewith with respect to any
of those representations and warranties will terminate and expire on the second
anniversary of the Effective Date, except as follows: (a) the representations
and warranties of the Stockholders which relate expressly or by necessary
implication to Taxes, ERISA or other employment or labor matters will survive
until the expiration of the applicable statutes of limitations (including all
periods of extension and tolling); (b) the representations and warranties of the
Stockholders which relate expressly or by necessary
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implication to the environment or Environmental Laws will survive for a period
of five years from the Effective Date; (c) the representatives and warranties of
the Stockholders set forth in Sections 1.01 and 1.02 will survive forever; (d)
if the Company is not included in the Acquired Business, the representations and
warranties of the Company specified in Schedule 7.01, if any, will survive
forever and the representations and warranties of the Company in Article II will
expire as when the representations and warranties of the Stockholders to the
same effect expire; and (e) if the Company is included in the Acquired Business,
the representations and warranties of the Company will terminate and expire at
the Effective Time. After a representation and warranty has terminated and
expired, no indemnification will or may be sought pursuant to this Article VII
on the basis of that representation and warranty by any Person who would have
been entitled pursuant to this Article VII to indemnification on the basis of
that representation and warranty prior to its termination and expiration,
provided that: (a) the amount of that claim, if against the Company or any
Stockholder, shall be taken into account in determining whether the aggregate
amount of all claims against the Company or that Stockholder has exceeded the
Threshold Amount or that Stockholder's Pro Rata Share of the Threshold Amount
for purposes of Section 7.06; and (b) in the case of each representation and
warranty that will terminate and expire as provided in this Section 7.01, no
claim presented in writing for indemnification pursuant to this Article VII on
the basis of that representation and warranty prior to its termination and
expiration will be affected in any way by that termination and expiration.
Section 7.02. INDEMNIFICATION OF ARS INDEMNIFIED PARTIES. (a)
Subject to the applicable provisions of Sections 7.01 and 7.06, the Stockholders
covenant and agree that they, jointly and severally, will indemnify each ARS
Indemnified Party against, and hold each ARS Indemnified Party harmless from and
in respect of, all Damage Claims that arise from, are based on or relate or
otherwise are attributable to (i) any breach of the representations and
warranties of the Stockholders or the Company set forth herein (other than in
Article I) or in certificates delivered in connection herewith (other than in
respect of certificates relating only to the representations and warranties in
Article I), or (ii) any nonfulfillment of any covenant or agreement on the part
of the Stockholders or the Company under this Agreement (each such Damage Claim
and each Damage Claim described in Section 7.02(b) being an "ARS Indemnified
Loss").
(b) Each Stockholder, severally and not jointly with any other
Person, covenants and agrees that he will indemnify each ARS Indemnified Party
against, and hold each ARS Indemnified Party harmless from and in respect of,
all Damage Claims that arise from, are based on or relate or otherwise are
attributable to (i) any breach of the representations and warranties of that
Stockholder solely as to that Stockholder set forth in Article I or in
certificates delivered by that Stockholder and relating to those representations
and warranties or (ii) any nonfulfillment of any several agreement on the part
of that Stockholder in this Agreement.
Section 7.03. INDEMNIFICATION OF STOCKHOLDER INDEMNIFIED PARTIES.
ARS covenants and agrees that it will indemnify each Stockholder Indemnified
Party against, and hold each Stockholder Indemnified Party harmless from and in
respect of, all Damage Claims that arise from, are based on or relate or
otherwise are attributable to (a) any breach by ARS of its representations
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and warranties set forth herein or in its certificates, if any, delivered to the
Company or the Stockholders in connection herewith or (b) any nonfulfillment of
any covenant or agreement on the part of ARS or ARS Sub in this Agreement (each
such Damage Claim being a "Stockholder Indemnified Loss").
Section 7.04. CONDITIONS OF INDEMNIFICATION. (a) All claims for
indemnification under this Agreement shall be asserted and resolved as follows
in this Section 7.04.
(b) A party claiming indemnification under this Agreement (an
"Indemnified Party") shall promptly (i) notify the party from whom
indemnification is sought (the "Indemnifying Party") of any third-party claim or
claims asserted against the Indemnified Party ("Third Party Claim") that could
give rise to a right of indemnification under this Agreement and (ii) transmit
to the Indemnifying Party a written notice ("Claim Notice") describing in
reasonable detail the nature of the Third Party Claim, a copy of all papers
served with respect to that claim (if any), an estimate of the amount of damages
attributable to the Third Party Claim to the extent feasible (which estimate
shall not be conclusive of the final amount of that claim) and the basis for the
Indemnified Party's request for indemnification under this Agreement. Except as
set forth in Section 7.01, the failure to promptly deliver a Claim Notice shall
not relieve the Indemnifying Party of its obligations to the Indemnified Party
with respect to the related Third Party Claim except to the extent that the
resulting delay is materially prejudicial to the defense of that claim. Within
15 days after receipt of any Claim Notice (the "Election Period"), the
Indemnifying Party shall notify the Indemnified Party (i) whether the
Indemnifying Party disputes its potential liability to the Indemnified Party
under this Article VII with respect to that Third Party Claim and (ii) if the
Indemnifying Party does not dispute its potential liability to the Indemnified
Party with respect to that Third Party Claim, whether the Indemnifying Party
desires, at the sole cost and expense of the Indemnifying Party, to defend the
Indemnified Party against that Third Party Claim.
(c) If the Indemnifying Party does not dispute its potential
liability to the Indemnified Party and notifies the Indemnified Party within the
Election Period that the Indemnifying Party elects to assume the defense of the
Third Party Claim, then the Indemnifying Party shall have the right to defend,
at its sole cost and expense, that Third Party Claim by all appropriate
proceedings, which proceedings shall be prosecuted diligently by the
Indemnifying Party to a final conclusion or settled at the discretion of the
Indemnifying Party in accordance with this Section 7.04(c), and the Indemnified
Party will furnish the Indemnifying Party with all information in its possession
with respect to that Third Party Claim and otherwise cooperate with the
Indemnifying Party in the defense of that Third Party Claim; provided, however,
that the Indemnifying Party shall not enter into any settlement with respect to
any Third Party Claim that purports to limit the activities of, or otherwise
restrict in any way, any Indemnified Party or any Affiliate of any Indemnified
Party without the prior consent of that Indemnified Party (which consent may be
withheld in the sole discretion of that Indemnified Party). The Indemnified
Party is hereby authorized, at the sole cost and expense of the Indemnifying
Party, to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party shall deem necessary or appropriate to
protect its interests or those of the Indemnifying Party. The Indemnified
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Party may participate in, but not control, any defense or settlement of any
Third Party Claim controlled by the Indemnifying Party pursuant to this Section
7.04(c) and will bear its own costs and expenses with respect to that
participation; provided, however, that if the named parties to any such action
(including any impleaded parties) include both the Indemnifying Party and the
Indemnified Party, and the Indemnified Party has been advised by counsel that
there may be one or more legal defenses available to it which are different from
or additional to those available to the Indemnifying Party, then the Indemnified
Party may employ separate counsel at the expense of the Indemnifying Party, and,
on its written notification of that employment, the Indemnifying Party shall not
have the right to assume or continue the defense of such action on behalf of the
Indemnified Party.
(d) If the Indemnifying Party (i) within the Election Period (A)
disputes its potential liability to the Indemnified Party under this Article
VII, (B) elects not to defend the Indemnified Party pursuant to Section 7.04(c)
or (C) fails to notify the Indemnified Party that the Indemnifying Party elects
to defend the Indemnified Party pursuant to Section 7.04(c) or (ii) elects to
defend the Indemnified Party pursuant to Section 7.04(c) but fails diligently
and promptly to prosecute or settle the Third Party Claim, then the Indemnified
Party shall have the right to defend, at the sole cost and expense of the
Indemnifying Party (if the Indemnified Party is entitled to indemnification
hereunder), the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified Party
to a final conclusion or settled. The Indemnified Party shall have full control
of such defense and proceedings. Notwithstanding the foregoing, if the
Indemnifying Party has delivered a written notice to the Indemnified Party to
the effect that the Indemnifying Party disputes its potential liability to the
Indemnified Party under this Article VII and if that dispute is resolved in
favor of the Indemnifying Party, the Indemnifying Party shall not be required to
bear the costs and expenses of the Indemnified Party's defense pursuant to this
Section 7.04 or of the Indemnifying Party's participation therein at the
Indemnified Party's request, and the Indemnified Party shall reimburse the
Indemnifying Party in full for all reasonable costs and expenses of such
litigation. The Indemnifying Party may participate in, but not control, any
defense or settlement controlled by the Indemnified Party pursuant to this
Section 7.04(d), and the Indemnifying Party shall bear its own costs and
expenses with respect to that participation.
(e) In the event any Indemnified Party should have a claim
against any Indemnifying Party hereunder that does not involve a Third Party
Claim, the Indemnified Party shall transmit to the Indemnifying Party a written
notice (the "Indemnity Notice") describing in reasonable detail the nature of
the claim, an estimate of the amount of Damages attributable to that claim to
the extent feasible (which estimate shall not be conclusive of the final amount
of that claim) and the basis of the Indemnified Party's request for
indemnification under this Agreement. If the Indemnifying Party does not notify
the Indemnified Party within 15 days from its receipt of the Indemnity Notice
that the Indemnifying Party disputes the claim specified by the Indemnified
Party in the Indemnity Notice, that claim shall be deemed a liability of the
Indemnifying Party hereunder. If the Indemnifying Party has timely disputed that
claim, as provided above, that dispute shall be resolved by proceedings in an
appropriate court of competent jurisdiction if the parties do not reach a
settlement of that dispute within 30 days after notice of that dispute is given.
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(f) Payments of all amounts owing by an Indemnifying Party
pursuant to this Article VII relating to a Third Party Claim shall be made
within 30 days after the latest of (i) the settlement of that Third Party Claim,
(ii) the expiration of the period for appeal of a final adjudication of that
Third Party Claim or (iii) the expiration of the period for appeal of a final
adjudication of the Indemnifying Party's liability to the Indemnified Party
under this Agreement in respect of that Third Party Claim. Payments of all
amounts owing by an Indemnifying Party pursuant to Section 7.04(e) shall be made
within 30 days after the later of (i) the expiration of the 30-day Indemnity
Notice period or (ii) the expiration of the period for appeal of a final
adjudication of the Indemnifying Party's liability to the Indemnified Party
under this Agreement.
Section 7.05. REMEDIES NOT EXCLUSIVE. The remedies provided in
this Agreement shall not be exclusive of any other rights or remedies available
to any other party, either at law or in equity.
Section 7.06. LIMITATIONS ON INDEMNIFICATION. (a) Notwithstanding
the provisions of Section 7.02(a), neither the Company nor any of the
Stockholders shall be required to indemnify or hold harmless any of the ARS
Indemnified Parties on account of any ARS Indemnified Loss under Section 7.02(a)
unless the liability of the Company and the Stockholders in respect of that ARS
Indemnified Loss, when aggregated with the liability of the Company and the
Stockholders in respect of all ARS Indemnified Losses under Section 7.02(a),
exceeds, and only to the extent the aggregate amount of all those ARS
Indemnified Losses does exceed, the Threshold Amount. In no event shall (i) the
aggregate joint and several liability of the Company and the Stockholders under
this Agreement, including Section 7.02(a), exceed the Ceiling Amount or (ii) the
aggregate liability of each Stockholder under this Agreement, including Sections
7.02(a) and 7.02(b), exceed that Stockholder's Pro Rata Share of the Ceiling
Amount. For purposes of determining the amount of ARS Indemnified Losses, no
effect will be given to any resulting Tax benefit to any ARS Indemnified Party.
(b) Notwithstanding the provisions of Section 7.03, ARS shall not
be required to indemnify or hold harmless any of the Stockholder Indemnified
Parties on account of any Stockholder Indemnified Loss unless the liability of
ARS in respect of that Stockholder Indemnified Loss, when aggregated with the
liability of ARS in respect of all Stockholder Indemnified Losses, exceeds, and
only to the extent the aggregate amount of all those Stockholder Indemnified
Losses does exceed, the Threshold Amount. In no event shall ARS be liable under
this Agreement, including Section 7.04, for any amount in excess of the Ceiling
Amount. For purposes of determining the amount of Stockholder Indemnified
Losses, no effect will be given to any resulting Tax benefit to any Stockholder
Indemnified Party.
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ARTICLE VIII
LIMITATIONS ON COMPETITION
Section 8.01. PROHIBITED ACTIVITIES. Each Stockholder agrees,
severally and not jointly with any other Person, that he will not, during the
period beginning on the date hereof and ending on the third anniversary of the
Closing Date, directly or indirectly, for any reason, for his own account or on
behalf of or together with any other Person:
(a) engage as an officer, director or in any other managerial
capacity or as an owner, co-owner or other investor of or in, whether as
an employee, independent contractor, consultant or advisor, or as a
sales representative or distributor of any kind, in any business selling
any products or providing any services in competition with the Acquired
Business or ARS or any Subsidiary of ARS (ARS and its Subsidiaries
collectively being "ARS" for purposes of this Article VIII) in any area
within a radius of 100 miles of each service facility in which the
Acquired Business was engaged in business on the date hereof or
immediately prior to the Effective Date (each such area being a
"Territory");
(b) call on any natural person who is at that time employed by
the Acquired Business or ARS in any managerial capacity with the purpose
or intent of attracting that person from the employ of the Acquired
Business or ARS, provided that the Stockholder may call on and hire any
of his family members;
(c) call on any Person that at that time is, or at any time
within one year prior to that time was, a customer of the Acquired
Business or ARS within any Territory (i) for the purpose of soliciting
or selling any product or service in competition with the Acquired
Business or ARS in that Territory and (ii) with the knowledge of that
customer relationship; or
(d) call on any Entity which has been called on by ARS in
connection with a possible acquisition by ARS, with the knowledge of
that Entity's status as such an acquisition candidate, for the purpose
of acquiring that Entity or arranging the acquisition of that Entity by
any Person other than ARS.
Notwithstanding the foregoing, any Stockholder may own and hold as a passive
investment up to 5% of the outstanding capital stock of a competing Entity if
that class of capital stock is listed on a national stock exchange or included
in the Nasdaq National Market. For purposes hereof and the respective tax
reporting positions of the parties hereto, each party hereto agrees that the
percentage of the cash portion of the Acquisition Consideration to be received
by each Stockholder pursuant to Paragraph 2 which equals 1% of that
Stockholder's Pro Rata Share of the Ceiling Amount will represent, and be
received as, consideration for that Stockholder's agreement to observe the
covenants in this Section 8.01.
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Section 8.02. DAMAGES. Because of the difficulty of measuring
economic losses to ARS as a result of any breach by a Stockholder of his
covenants in Section 8.01, and because of the immediate and irreparable damage
that could be caused to ARS for which it would have no other adequate remedy,
each Stockholder agrees that ARS may enforce the provisions of Section 8.01 by
injunctions and restraining orders against that Stockholder if he breaches any
of those provisions.
Section 8.03. REASONABLE RESTRAINT. The parties hereto each agree
that Sections 8.01 and 8.02 impose a reasonable restraint on the Stockholders in
light of the activities and business of ARS on the date hereof, the current
business plans of ARS and the investment, if any, by each Stockholder in ARS as
a result of the Acquisition.
Section 8.04. SEVERABILITY; REFORMATION. The covenants in this
Article VIII are severable and separate, and the unenforceability of any
specific covenant in this Article VIII is not intended by any party hereto to,
and shall not, affect the provisions of any other covenant in this Article VIII.
If any court of competent jurisdiction shall determine that the scope, time or
territorial restrictions set forth in Section 8.01 are unreasonable as applied
to any Stockholder, the parties hereto, including that Stockholder, acknowledge
their mutual intention and agreement that those restrictions be enforced to the
fullest extent the court deems reasonable, and thereby shall be reformed to that
extent as applied to that Stockholder and any other Stockholder similarly
situated.
Section 8.05. INDEPENDENT COVENANT. All the covenants in this
Article VIII are intended by each party hereto to, and shall, be construed as an
agreement independent of any other provision in this Agreement, and the
existence of any claim or cause of action of any Stockholder against ARS,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by ARS of any covenant in this Article VIII. It is
specifically agreed that the period specified in Section 8.01 shall be computed
in the case of each Stockholder by excluding from that computation any time
during which that Stockholder is in violation of any provision of Section 8.01.
The covenants contained in this Article VIII shall not be affected by any breach
of any other provision hereof by any party hereto.
Section 8.06. MATERIALITY. The Company and each Stockholder,
severally and not jointly with any other Person, hereby agree that this Article
VIII is a material and substantial part of the transactions contemplated hereby.
ARTICLE IX
DEFINITIONS AND DEFINITIONAL PROVISIONS
Section 9.01. DEFINED TERMS. As used in this Agreement, the
following terms have the meanings assigned to them below:
"ACQUIRED BUSINESS" has the meaning specified in Paragraph 1.
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"ACQUISITION" has the meaning specified in the Preliminary
Statement.
"ACQUISITION CONSIDERATION" has the meaning specified in
Paragraph 2.
"AGREEMENT" means this Agreement, including all attached
Schedules, Annexes, Addenda and Exhibits, as each of the same may be
amended, modified or supplemented from time to time pursuant to the
provisions hereof or thereof.
"AFFILIATE" means, as to any specified Person, any other Person
that, directly or indirectly through one or more intermediaries or
otherwise, controls, is controlled by or is under common control with
the specified Person. As used in this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person (whether through
ownership of Capital Stock of that Person, by contract or otherwise).
"AIR CONDITIONING AND REFRIGERATION CONTRACTING" means the
design, installation, construction, maintenance, service, repair,
alteration or modification of any appliance, equipment or other product
used in environmental air conditioning or filtering, commercial
refrigeration or process cooling or heating systems.
"ARS" means American Residential Services, Inc., a Delaware
corporation.
"ARS COMMON STOCK" means the common stock, par value $.001 per
share, of ARS.
"ARS INDEMNIFIED LOSS" has the meaning specified in Section 7.02.
"ARS INDEMNIFIED PARTY" means ARS and its Affiliates and each of
their respective officers, directors, employees, agents and counsel;
provided, however, that no Person who indemnifies ARS Indemnified
Parties in this Agreement in his capacity as a Stockholder will be an
ARS Indemnified Party for purposes of this Agreement.
"ARS SUB" means the Subsidiary of ARS, if any, which is a party
to this Agreement.
"CAPITAL STOCK" means, with respect to: (a) any corporation, any
share, or any depositary receipt or other certificate representing any
share, of an equity ownership interest in that corporation; and (b) any
other Entity, any share, membership or other percentage interest, unit
of participation or other equivalent (however designated) of an equity
interest in that Entity.
"CEILING AMOUNT" has the meaning specified in Paragraph 1.
"CERTIFICATE OF MERGER" means, if the Acquisition is effected by
means of a Merger, (a) the articles or certificate of merger respecting
that Merger which contains the information
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required by the laws of Surviving Corporation's Organization State to
effect that Merger and, if the Organization State of any Entity merged
into the Surviving Corporation in that Merger is not the Organization
State of the Surviving Corporation, (b) the articles or certificate of
merger respecting that Merger which contains the information required by
the laws of that merged Entity's Organization State to effect that
Merger.
"CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980.
"CHARTER DOCUMENTS" means, with respect to any Entity at any
time, in each case as amended, modified and supplemented at that time,
the articles or certificate of formation, incorporation or organization
(or the equivalent organizational documents) of that Entity, (b) the
bylaws or limited liability company agreement or regulations (or the
equivalent governing documents) of that Entity and (c) each document
setting forth the designation, amount and relative rights, limitations
and preferences of any class or series of that Entity's Capital Stock or
of any rights in respect of that Entity's Capital Stock.
"CLAIM NOTICE" has the meaning specified in Section 7.04.
"CLOSING" has the meaning specified in Paragraph 3.
"CLOSING DATE" has the meaning specified in Paragraph 1.
"CODE" means the Internal Revenue Code of 1986.
"COMPANY" has the meaning specified in Paragraph 1.
"COMPANY CAPITAL STOCK" has the meaning specified in the
Paragraph 1.
"COMPANY ERISA BENEFIT PLAN" has the meaning specified in Section
2.25.
"COMPANY ERISA PENSION PLAN" has the meaning specified in Section
2.25.
"COMPANY SUBSIDIARY" means at any time any Entity that is a
Subsidiary of the Company at that time.
"CONFIDENTIAL INFORMATION" means, with respect to any Person, all
trade secrets and other confidential, nonpublic and/or proprietary
information of that Person, including information derived from reports,
investigations, research, work in progress, codes, marketing and sales
programs, capital expenditure projects, cost summaries, pricing
formulae, contract analyses, financial information, projections,
confidential filings with any Governmental Authority and all other
confidential, nonpublic concepts, methods of doing
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business, ideas, materials or information prepared or performed for, by
or on behalf of that Person.
"COUNSEL FOR ARS" means John D. Held, Esq., in his capacity as
General Counsel and an officer of ARS.
"CURRENT BALANCE SHEET" has the meaning specified in Paragraph 1.
"CURRENT BALANCE SHEET DATE" has the meaning specified in
Paragraph 1.
"DAMAGE" to any specified Person means any cost, damage
(including any consequential, exemplary, punitive or treble damage) or
expense (including reasonable fees and actual disbursements by
attorneys, consultants, experts or other Representatives and Litigation
costs) to, any fine of or penalty on or any liability (including loss of
earnings or profits) of any other nature of that Person.
"DAMAGE CLAIM" means, as asserted (a) against any specified
Person, any claim, demand or Litigation made or pending against the
specified Person for Damages to any other Person, or (b) by the
specified Person, any claim or demand of the specified Person against
any other Person for Damages to the specified Person.
"EFFECTIVE DATE" has the meaning specified in Paragraph 1.
"EFFECTIVE TIME" has the meaning specified in Paragraph 2.
"ELECTION PERIOD" has the meaning specified in Section 7.04.
"EMPLOYEE POLICIES AND PROCEDURES" means at any time all employee
manuals and all material policies, procedures and work-related rules
that apply at that time to any employee, nonemployee director or officer
of, or any other natural person performing consulting or other
independent contractor services for, the Company or any Company
Subsidiary.
"EMPLOYMENT AGREEMENT" means at any time any (a) agreement to
which the Company or any Company Subsidiary is a party which then
relates to the direct or indirect employment or engagement, or arises
from the past employment or engagement, of any natural person by the
Company or any Company Subsidiary, whether as an employee, a nonemployee
officer or director, a consultant or other independent contractor, a
sales representative or a distributor of any kind, including any
employee leasing or service agreement and any noncompetition agreement,
and (b) agreement between the Company or any Company Subsidiary and any
Person which arises from the sale of a business by that Person to the
Company or any Company Subsidiary and limits that Person's competition
with the Company or any Company Subsidiary.
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"ENTITY" means any sole proprietorship, corporation, partnership
of any kind having a separate legal status, limited liability company,
business trust, unincorporated organization or association, mutual
company, joint stock company or joint venture.
"ENVIRONMENTAL LAWS" means any and all Governmental Requirements
relating to the environment or worker health or safety, including
ambient air, surface water, land surface or subsurface strata, or to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or
wastes (including Solid Wastes, Hazardous Wastes or Hazardous
Substances) or noxious noise or odor into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, recycling, removal, transport or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or wastes (including petroleum, petroleum distillates,
asbestos or asbestos-containing material, polychlorinated biphenyl's,
chlorofluorocarbons (including chlorofluorocarbon-12) or hydrochloro-
fluorocarbons).
"ERISA" means the Employee Retirement Income Security Act of
1974.
"ERISA AFFILIATE" means, with respect to any specified Person at
any time, any other Person, including an Affiliate of the specified
Person, that is, or at any time within six years of that time was, a
member of any ERISA Group of which the specified Person is or was a
member at the same time.
"ERISA AFFILIATE PENSION PLAN" has the meaning specified in
Section 2.25.
"ERISA EMPLOYEE BENEFIT PLAN" means any "employee benefit plan"
as defined in Section 3(3) of ERISA and includes any ERISA Pension
Benefit Plan.
"ERISA GROUP" means any "group of organizations" within the
meaning of Section 414(b), (c), (m) or (o) of the Code or any
"controlled group" as defined in Section 4001(a)(14) of ERISA.
"ERISA PENSION BENEFIT PLAN" means any "employee pension benefit
plan", as defined in Section 3(2) of ERISA, including any plan that is
covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code (excluding any Multiemployer Plan).
"EXCHANGE ACT" means the Securities Exchange Act of 1934.
"FINANCIAL STATEMENTS" means the Initial Financial Statements and
the other financial statements of the Company and the Company
Subsidiaries, if any, delivered to ARS pursuant to Section 4.08 prior to
the Effective Time.
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"GAAP" means generally accepted accounting principles and
practices in the United States as in effect from time to time which have
been concurred in by Arthur Andersen LLP and have been or are applied on
a basis consistent (except for changes concurred in by Arthur Andersen
LLP) with the most recent Financial Statements delivered to ARS prior to
the Effective Time.
"GOVERNMENTAL APPROVAL" means at any time any authorization,
consent, approval, permit, franchise, certificate, license, implementing
order or exemption of, or registration or filing with, any Governmental
Authority, including any certification or licensing of a natural person
to engage in a profession or trade or a specific regulated activity, at
that time.
"GOVERNMENTAL AUTHORITY" means (a) any national, state, county,
municipal or other government, domestic or foreign, or any agency,
board, bureau, commission, court, department or other instrumentality of
any such government, or (b) any Person having the authority under any
applicable Governmental Requirement to assess and collect Taxes for its
own account.
"GOVERNMENTAL REQUIREMENT" means at any time (a) any law,
statute, code, ordinance, order, rule, regulation, judgment, decree,
injunction, writ, edict, award, authorization or other requirement of
any Governmental Authority in effect at that time or (b) any obligation
included in any certificate, certification, franchise, permit or license
issued by any Governmental Authority or resulting from binding
arbitration, including any requirement under common law, at that time.
"GUARANTY" means, for any specified Person, without duplication,
any liability, contingent or otherwise, of that Person guaranteeing or
otherwise becoming liable for any obligation of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and
including any liability of the specified Person, direct or indirect, (a)
to purchase or pay (or advance or supply funds for the purchase or
payment of) that obligation or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of that
obligation, (b) to purchase property, securities or services for the
purpose of assuring the owner of that obligation of its payment or (c)
to maintain working capital, equity capital or other financial statement
condition or liquidity of the primary obligor so as to enable the
primary obligor to pay that obligation; provided, that the term
"Guaranty" does not include endorsements for collection or deposit in
the ordinary course of the endorser's business.
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act
of 1976.
"INDEBTEDNESS" of any Person means, without duplication, (a) any
liability of that Person (i) for borrowed money or arising out of any
extension of credit to or for the account of that Person (including
reimbursement or payment obligations with respect to surety bonds,
letters of credit, banker's acceptances and similar instruments), for
the deferred purchase
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price of property or services or arising under conditional sale or other
title retention agreements, other than trade payables arising in the
ordinary course of business, (ii) evidenced by notes, bonds, debentures
or similar instruments, (iii) in respect of capital leases or (iv) in
respect of interest rate protection agreements, (b) any liability
secured by any Lien upon any property or assets of that Person (or upon
any revenues, income or profits of that Person therefrom), whether or
not that Person has assumed that liability or otherwise become liable
for the payment thereof or (c) any liability of others of the type
described in the preceding clause (a) or (b) in respect of which that
Person has incurred, assumed or acquired a liability by means of a
Guaranty.
"INDEMNITY NOTICE" has the meaning specified in Section 7.04.
"INDEMNIFIED PARTY" has the meaning specified in Section 7.04.
"INDEMNIFYING PARTY" has the meaning specified in Section 7.04.
"INFORMATION" means written information, including (a) data,
certificates, reports and statements (excluding Financial Statements)
and (b) summaries of unwritten agreements, arrangements, contracts,
plans, policies, programs or practices or of unwritten amendments or
modifications of, supplements to or waivers under any of the foregoing
documents.
"INITIAL FINANCIAL STATEMENTS" has the meaning specified in
Paragraph 1.
"IRS" means the Internal Revenue Service.
"LIEN" means, with respect to any property or asset of any Person
(or any revenues, income or profits of that Person therefrom) (in each
case whether the same is consensual or nonconsensual or arises by
contract, operation of law, legal process or otherwise), (a) any
mortgage, lien, security interest, pledge, attachment, levy or other
charge or encumbrance of any kind thereupon or in respect thereof or (b)
any other arrangement under which the same is transferred, sequestered
or otherwise identified with the intention of subjecting the same to, or
making the same available for, the payment or performance of any
liability in priority to the payment of the ordinary, unsecured
creditors of that Person, including any "adverse claim" (as defined in
the applicable Uniform Commercial Code) in the case of any Capital
Stock. For purposes of this Agreement, a Person shall be deemed to own
subject to a Lien any asset that it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement relating to that asset.
"LITIGATION" means any action, case, proceeding, claim,
grievance, suit or investigation or other proceeding conducted by or
pending before any Governmental Authority or any arbitration proceeding.
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"MATERIAL" means, as applied to any Entity or the Acquired
Business, material to the business, operations, property or assets,
liabilities, financial condition or results of operations of that Entity
and its Subsidiaries considered as a whole or the Acquired Business, as
the case may be.
"MATERIAL ADVERSE EFFECT" means, with respect to the consequences
of any fact or circumstance (including the occurrence or non-occurrence
of any event) to the Acquired Business, that such fact or circumstance
has caused, is causing or will cause, directly, indirectly or
consequentially, singly or in the aggregate with other facts and
circumstances, any Damages in excess of the Threshold Amount.
"MATERIAL AGREEMENT" of any Entity means any contract or
agreement (a) to which that Entity or any of its Subsidiaries is a
party, or by which that Entity or any of its Subsidiaries is bound or to
which any property or assets of that Entity or any of its Subsidiaries
is subject and (b) which is Material to that Entity.
"MERGER" means a transaction as a result of which the Acquisition
is effected and in which either (a) ARS Sub is merged with or into the
Company or (b) the Company is merged with or into ARS or ARS Sub, as the
case may be.
"MULTIEMPLOYER PLAN" means a "multiemployer" plan as defined in
Section 4001(a)(3) of ERISA, Section 414 of the Code or Section 3(37) of
ERISA.
"ORGANIZATION STATE" means, as applied to (a) any corporation,
its state or other jurisdiction of incorporation, (b) any limited
liability company or limited partnership, the state or other
jurisdiction under whose laws it is organized and existing in that legal
form, and (c) any other Entity, the state or other jurisdiction whose
laws govern that Entity's internal affairs.
"OTHER COMPENSATION PLAN" means any compensation arrangement,
plan, policy, practice or program established, maintained or sponsored
by the Company or any Company Subsidiary, or to which the Company or any
Company Subsidiary contributes, on behalf of any of its employees,
nonemployee directors or officers or other natural persons performing
consulting or other independent contractor services for the Company or
any Company Subsidiary, (a) including all such arrangements, plans,
policies, practices or programs providing for severance pay, deferred
compensation, incentive, bonus or performance awards or the actual or
phantom ownership of any Capital Stock or options, warrants or rights to
acquire Capital Stock of the Company or any Company Subsidiary, but (b)
excluding all Company ERISA Pension Plans and Employment Agreements.
"PERMITTED LIENS" means, as applied to the property or assets of
any Person (or any revenues, income or profits of that Person
therefrom): (a) Liens for Taxes if the same are not at the time due and
delinquent; (b) Liens of carriers, warehousemen, mechanics, laborers and
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materialmen for sums not yet due; (c) Liens incurred in the ordinary
course of that Person's business in connection with workmen's
compensation, unemployment insurance and other social security
legislation (other than pursuant to ERISA or Section 412(n) of the
Code); (d) Liens incurred in the ordinary course of that Person's
business in connection with deposit accounts or to secure the
performance of bids, tenders, trade contracts, statutory obligations,
surety and appeal bonds, performance and return-of-money bonds and other
obligations of like nature; (e) easements, rights-of-way, reservations,
restrictions and other similar encumbrances incurred in the ordinary
course of that Person's business or existing on property and not
materially interfering with the ordinary conduct of that Person's
business or the use of that property; (f) defects or irregularities in
that Person's title to its real properties which do not materially (i)
diminish the value of the surface estate or (ii) interfere with the
ordinary conduct of that Person's business or the use of any of such
properties; (g) any interest or title of a lessor of assets being leased
by any Person pursuant to any capital lease disclosed in Schedule 2.19
or any lease that, pursuant to GAAP, would be accounted for as an
operating lease; and (h) Liens securing purchase money Indebtedness
disclosed in Schedule 2.18 or 2.19 so long as such Liens do not attach
to any property or assets other than the properties or assets purchased
with the proceeds of such Indebtedness.
"PERSON" means any natural person, Entity, estate, trust, union
or employee organization or Governmental Authority or, for the purpose
of the definition of "ERISA Affiliate" any trade or business.
"PLAN" has the meaning specified in Section 2.26.
"PLUMBING" means the installation, repair, service or maintenance
of any piping, fixtures, appurtenances or appliances in and about
buildings where any natural person or persons live, work or assemble for
a supply of gas, water or liquids, or any combination thereof, or for
the disposal of waste water or sewage.
"PLUMBING LAWS" means any and all Governmental Requirements
related to Plumbing, such as Governmental Requirements relating to the
planning, superintending, installation, alteration, repair, service and
renovation of any pipeline, fixtures, appurtenances, appliances or drain
or waste pipes, and including Governmental Requirements relating to the
licensing of natural persons as plumbers of any classification.
"PROFESSIONAL CODES" means any and all Governmental Requirements
relating to the licensing or other regulation of the business of Air
Conditioning and Refrigeration Contracting, the installation, repair or
replacement of electrical appliances, equipment and systems, Plumbing or
other residential or commercial on-site services, including building,
electric and mechanical codes, Plumbing Laws and Governmental
Requirements relating to any Person who issues and performs, or arranges
to perform, services pursuant to any agreement or contract whereby, for
a fee, a Person undertakes, for a specified period of time, to maintain,
repair or replace all or any part of the structural components, the
appliances or
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the electrical, plumbing, heating, cooling or air-conditioning systems
on any residential or commercial property.
"PROHIBITED TRANSACTION" means any transaction that is prohibited
under Section 4975 of the Code or Section 406 of ERISA and not exempt
under Section 4975 of the Code or Section 408 of ERISA.
"PROPRIETARY RIGHTS" means (a) patents, applications for patents
and patent rights, (b) in each case, whether registered, unregistered or
under pending registration, trademark rights, trade names, trade name
rights, corporate names, business names, trade styles or dress, service
marks and logos and other trade designations and copyrights and (c), in
the case of the Company or any Company Subsidiary, all agreements
relating to the technology, know-how or processes used in any business
of the Company or any Company Subsidiary.
"PRO RATA SHARE" means for each Stockholder the fraction
expressed as a percentage and set forth either in Paragraph 1 or in a
Schedule to Paragraph 2, (a) the numerator of which is the number of
shares of outstanding Company Capital Stock owned by that Person, as set
forth in a Schedule to Paragraph 2, and (b) the denominator of which is
the total number of shares of outstanding Company Capital Stock owned by
all Stockholders as set forth in a Schedule to Paragraph 2.
"PURCHASER REPRESENTATIVE" means a "purchaser representative" as
defined in Securities Act Rule 501(h).
"QUALIFIED PLANS" has the meaning specified in Section 2.26.
"RELATED PARTY AGREEMENT" means any contract or other agreement,
written or oral, (a) to which the Company or any Company Subsidiary is a
party or is bound or by which any property of the Company or any Company
Subsidiary is bound or may be subject and (b) (i) to which any
Stockholder or any of that Stockholder's Related Persons or Affiliates
also is a party, or (ii) of which any Stockholder or any of that
Stockholder's Related Persons or Affiliates is a beneficiary.
"RELATED PERSON" of a Stockholder means: (a) if that Stockholder
is a natural person, (i) any family member of that Stockholder, (ii) any
estate of that Stockholder or any family member of that Stockholder,
(iii) the trustee of any trust of which all the beneficiaries are
Related Persons of that Stockholder and (iv) any Entity the entire
equity interest in which is owned by any one or more of that Stockholder
and Related Persons of that Stockholder; and (b) if that Stockholder is
an Entity, estate or trust, (i) any Person who owns an equity interest
in that Stockholder on the date hereof, (ii) any Person who would be a
Related Person under clause (a) of this definition of a natural person
who is an ultimate beneficial owner of that Stockholder or (iii) any
other Entity the entire equity interest in which is owned by any one or
more of that Stockholder and Related Persons of that Stockholder.
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"REPORTABLE EVENT" means, with respect to any Company ERISA
Pension Plan, (a) the occurrence of any of the events set forth in
Section 4043(b) or (c) (other than a Reportable Event as to which the
provision of 30 days' notice to the Pension Benefit Guaranty Corporation
is waived under applicable regulations), 4062(e) or 4063(a) of ERISA
with respect to that plan, (b) any event requiring the Company or any
ERISA Affiliate to provide security to that plan under Section
401(a)(29) of the Code or (c) any failure to make a payment required by
Section 412(m) of the Code with respect to that plan.
"REPRESENTATIVES" means, with respect to any Person, the
directors, officers, employees, Affiliates, accountants (including
independent certified public accountants), advisors, attorneys,
consultants or other agents of that Person, or any other representatives
of that Person or of any of those directors, officers, employees,
Affiliates, accountants (including independent certified public
accountants), advisors, attorneys, consultants or other agents.
"RCRA" means the Resource Conservation and Recovery Act of 1976.
"RESTRICTED PAYMENT" means, with respect to any Entity at any
time, any of the following effected by that Entity: (a) any declaration
or payment of any dividend or other distribution, direct or indirect, on
account of any Capital Stock of that Entity or any Affiliate of that
Entity or (b) any direct or indirect redemption, retirement, purchase or
other acquisition for value of, or any direct or indirect purchase,
payment or sinking fund or similar deposit for the redemption,
retirement, purchase or other acquisition for value of, or to obtain the
surrender of, any then outstanding Capital Stock of that Entity or any
Affiliate of that Entity or any then outstanding warrants, options or
other rights to acquire or subscribe for or purchase unissued or
treasury Capital Stock of that Entity or any Affiliate of that Entity.
"RETAINED RELATED PARTY AGREEMENT" has the meaning specified in
Section 2.11.
"RETURNS" of any Person means the returns, reports or statements
(including any Information returns) any Governmental Requirement
requires to be filed by that Person for purposes of any Tax.
"SECTION 338(H)(10) PURCHASE" means a transaction as a result of
which the Acquisition is effected by means of a Stock Purchase and in
connection with which ARS or ARS Sub makes an election under Section
338(h)(10) of the Code with respect to its purchase of the Company
Capital Stock.
"SECTION 351 TRANSACTION" means, if the Acquisition is structured
as a transaction qualifying for the deferral of federal income tax under
Section 351 of the Code, that transaction.
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"SECTION 368 REORGANIZATION" means, if the Acquisition is
structured as a transaction qualifying as a reorganization under Section
368 of the Code, that transaction.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933.
"SOLID WASTES, HAZARDOUS WASTES OR HAZARDOUS SUBSTANCES" have the
meanings ascribed to those terms in CERCLA, RCRA or any other
Environmental Law applicable to the business or operations of the
Company or any Company Subsidiary which imparts a broader meaning to any
of those terms than does CERCLA or RCRA.
"SPECIAL PROVISIONS" means the Special Provisions of ARS, if any,
referred to in Paragraph 5 and incorporated by reference in this
Agreement.
"STOCKHOLDER INDEMNIFIED LOSS" has the meaning specified in
Section 7.03.
"STOCKHOLDER INDEMNIFIED PARTY" means (a) each Stockholder and
each of that Stockholder's Affiliates (other than the Company or,
following the Effective Time, ARS or any of its Subsidiaries, if the
Stockholder is an Affiliate of ARS), agents and counsel and (b) prior to
the Effective Time, the Company and each of its officers, directors,
employees, agents and counsel who are not Stockholder Indemnified
Parties within the meaning of clause (a) of this definition.
"STOCK PURCHASE" means a transaction as a result of which the
Acquisition is effected by means of the purchase by ARS or ARS Sub from
the Stockholders of all the outstanding Company Capital Stock.
"SUBSIDIARY" of any specified Person at any time, means any
Entity a majority of the Capital Stock of which is at that time owned or
controlled, directly or indirectly, by the specified Person.
"SUPPLEMENTAL INFORMATION" has the meaning specified in Section
4.07.
"SURVIVING CORPORATION" means, if the Acquisition is effected by
means of Merger, the Company or the Person to be designated in the
Certificate of Merger as the surviving corporation of that merger.
"TAX" or "TAXES" means all net or gross income, gross receipts,
net proceeds, sales, use, ad valorem, value added, franchise, bank
shares, withholding, payroll, employment, excise, property, deed, stamp,
alternative or add-on minimum, environmental or other taxes,
assessments, duties, fees, levies or other governmental charges or
assessments of any nature
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whatever imposed by any Governmental Requirement, whether disputed or
not, together with any interest, penalties, additions to tax or
additional amounts with respect thereto.
"TAXING AUTHORITY" means any Governmental Authority having or
purporting to exercise jurisdiction with respect to any Tax.
"TERMINATION EVENT" means, with respect to any Company ERISA
Pension Plan, (a) any Reportable Event with respect to that plan which
is likely to result in the termination of that plan, (b) the termination
of, or the filing of a notice of intent to terminate, that plan or the
treatment of any amendment to that plan as a termination under Section
4041(c) of ERISA or (c) the institution of proceedings to terminate, or
the appointment of a trustee to administer, that plan under Section 4042
of ERISA.
"THIRD PARTY CLAIM" has the meaning specified in Section 7.04.
"THRESHOLD AMOUNT" has the meaning specified in Paragraph 1.
"TRANSACTION DOCUMENT" means this Agreement and the other written
agreements, documents, instruments and certificates executed pursuant to
or in connection with this Agreement including those specified or
referred to in Article V to be delivered at or before the Closing, all
as amended, modified or supplemented from time to time.
"WELFARE PLAN" means an "employee welfare benefit plan" as
defined in Section 3(1) of ERISA.
Section 9.02. OTHER DEFINED TERMS. Words and terms used in these
Standard Provisions which are defined elsewhere in this Agreement are used
herein as therein defined.
Section 9.03. OTHER DEFINITIONAL PROVISIONS. (a) Except as
otherwise specified herein, all references herein to any Governmental
Requirement defined or referred to herein, including the Code, CERCLA, ERISA,
the Exchange Act, RCRA and the Securities Act, shall be deemed references to
that Governmental Requirement or any successor Governmental Requirement, as the
same may have been amended or supplemented from time to time, and any rules or
regulations promulgated thereunder.
(b) When used in this Agreement, the words "herein," "hereof" and
"hereunder" and words of similar import shall refer to this Agreement as a whole
and not to any provision of this Agreement, and the words "Article,"
"Paragraph," "Section," "Annex," "Addendum," "Schedule" and "Exhibit" refer to
Articles, Paragraphs and Sections of, and Annexes, Addenda, Schedules and
Exhibits to, this Agreement unless otherwise specified.
(c) Whenever the context so requires, the singular number
includes the plural and vice versa, and a reference to one gender includes the
other gender and the neuter.
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(d) The word "including" (and, with correlative meaning, the word
"include") means including, without limiting the generality of any description
preceding such word, and the words "shall" and "will" are used interchangeably
and have the same meaning.
Section 9.04. CAPTIONS. Captions to Articles, Paragraphs,
Sections and subsections of, and Annexes, Addenda, Schedules and Exhibits to,
this Agreement or any other Transaction Document are included for convenience of
reference only, and such captions shall not constitute a part of this Agreement
or any other Transaction Document for any other purpose or in any way affect the
meaning or construction of any provision of this Agreement or any other
Transaction Document.
ARTICLE X
GENERAL PROVISIONS
Section 10.01. TREATMENT OF CONFIDENTIAL INFORMATION. (a) Each of
the Company and the Stockholders, severally and not jointly with any other
Person, acknowledges that it has or may have had in the past, currently has and
in the future may have access to Confidential Information of the Company and the
Company Subsidiaries and ARS and its Subsidiaries. Each of the Company and the
Stockholders, severally and not jointly with any other Person, agrees that it
will keep confidential all such Confidential Information furnished to it and,
except with the specific prior written consent of ARS, will not disclose such
Confidential Information to any Person except (a) Representatives of ARS and (b)
its own Representatives, provided that these Representatives (other than
counsel) agree to the confidentiality provisions of this Section 10.01;
provided, however, that Confidential Information shall not include such
information as (i) becomes known to the public generally through no fault of any
Stockholder, (ii) is required to be disclosed by law or the order of any
Governmental Authority under color of law, provided, that prior to disclosing
any information pursuant to this clause (ii), each Stockholder shall, if
possible, give prior written notice thereof to ARS and provide ARS with the
opportunity to contest such disclosure, or (iii) the disclosing party reasonably
believes is required to be disclosed in connection with the defense of a lawsuit
against the disclosing party. In the event of a breach or threatened breach by
any Stockholder of the provisions of this Section 10.01 with respect to any
Confidential Information, ARS shall be entitled to an injunction restraining
such Stockholder from disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting ARS from pursuing
any other available remedy for such breach or threatened breach, including the
recovery of damages.
(b) Because of the difficulty of measuring economic losses as a
result of the breach of the foregoing covenants in Section 10.01(a), and because
of the immediate and irreparable damage that would be caused to ARS for which it
would have no other adequate remedy, each of the Company and the Stockholders
agrees that ARS may enforce the provisions of Section 10.01(a) by injunctions
and restraining orders against each of them who breaches any of those
provisions.
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(c) The obligations of the parties under this Section 10.01 shall
survive the termination of this Agreement.
Section 10.02. BROKERS AND AGENTS. The Stockholders jointly and
severally represent and warrant to ARS that the Company has not directly or
indirectly employed or become obligated to pay any broker or similar agent in
connection with the transactions contemplated hereby and agree, without regard
to the Threshold Amount limitations set forth in Article VII, to indemnify ARS
against all Damage Claims arising out of claims for any and all fees and
commissions of brokers or similar agents employed or promised payment by the
Company.
Section 10.03. ASSIGNMENT; NO THIRD PARTY BENEFICIARIES. This
Agreement and the rights of the parties hereunder may not be assigned (except by
operation of law) and shall be binding on and inure to the benefit of the
parties hereto, the successors of ARS, and the heirs and legal representatives
of the Stockholders (and, in the case of any trust, the successor trustees of
that trust). Neither this Agreement nor any other Transaction Document is
intended, or shall be construed, deemed or interpreted, to confer on any Person
not a party hereto or thereto any rights or remedies hereunder or thereunder,
except as provided in Section 10.12 or Article VII or as otherwise provided
expressly herein or therein.
Section 10.04. ENTIRE AGREEMENT; AMENDMENT; WAIVERS. This
Agreement and the documents delivered pursuant hereto constitute the entire
agreement and understanding among the Stockholders, the Company, ARS Sub and ARS
and supersede all prior agreements and understandings, both written and oral,
relating to the subject matter of this Agreement. This Agreement may be amended,
modified or supplemented, and any right hereunder may be waived, if, but only
if, that amendment, modification, supplement or waiver is in writing and signed
by the Stockholders entitled to receive at least 80% of the total Acquisition
Consideration, the Company and ARS; provided, however, that no such amendment,
modification, supplement or waiver will be effective unless it is signed by each
Stockholder affected thereby to the extent that it (a) changes the several
nature of that Stockholder's representations and warranties (to the extent they
are not already joint and several as provided in Article II and Section 10.02),
(b) reduces the amount, or changes the components, of the Acquisition
Consideration that Stockholder is entitled to receive pursuant to Section 1.4,
or (c) amends or waives this sentence. The waiver of any of the terms and
conditions hereof shall not be construed or interpreted as, or deemed to be, a
waiver of any other term or condition hereof.
Section 10.05. EXPENSES. Whether or not the transactions
contemplated hereby are consummated, (a) ARS will pay the fees, expenses and
disbursements of ARS and its Subsidiaries and their Representatives which are
incurred in connection with the subject matter of this Agreement and any
amendments thereto, including all costs and expenses incurred in the performance
of and compliance with all conditions to be performed by ARS under this
Agreement, and (b) the Stockholders will pay from personal funds, and not from
funds of the Company or any Company Subsidiary, all sales, use, transfer and
other similar taxes and fees incurred in connection with the transactions
contemplated hereby including the fees, expenses and disbursements of counsel
for the
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Company and the Stockholders incurred in connection with the subject matter of
this Agreement. The Stockholders will file all necessary documentation and
Returns with respect to all sales, use, transfer and other similar taxes and
fees they are required by this Section 10.05 to pay. In addition, each
Stockholder acknowledges that he, and not the Company or ARS or the Surviving
Corporation, will pay all Taxes due upon receipt of the consideration payable to
that Stockholder pursuant to the transactions contemplated by this Agreement.
Section 10.06. NOTICES. All notices required or permitted
hereunder shall be in writing, and shall be deemed to be delivered and received
(a) if personally delivered or if delivered by telex, telegram, facsimile or
courier service, when actually received by the party to whom notice is sent or
(b) if delivered by mail (whether actually received or not), at the close of
business on the third Houston, Texas business day next following the day when
placed in the mail, postage prepaid, certified or registered, addressed to the
appropriate party or parties, at the address of such party set forth below (or
at such other address as such party may designate by written notice to all other
parties in accordance herewith):
(i) if to ARS or any of its Subsidiaries, addressed to it at:
American Residential Services, Inc.
Post Oak Tower
5051 Westheimer Rd., Suite 725
Houston, Texas 77056-5604
Attn.: John D. Held, Esq.
Senior Vice President, General Counsel and Secretary
Fax No.: 713-599-0200
; and
(ii) if to the Company or any of the Stockholders, addressed to
such Person as set forth in Paragraph 7.
Section 10.07. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF TEXAS WITHOUT
REGARD TO THE CONFLICTS OF LAW PROVISIONS THEREOF.
Section 10.08. EXERCISE OF RIGHTS AND REMEDIES. Except as
otherwise provided herein, no delay or omission in the exercise of any right,
power or remedy accruing to any party hereto as a result of any breach or
default hereunder by any other party hereto shall impair any such right, power
or remedy, nor shall it be construed, deemed or interpreted as a waiver of or
acquiescence in any such breach or default, or of any similar breach or default
occurring later; nor shall any waiver of any single breach or default be
construed, deemed or interpreted as a waiver of any other breach or default
hereunder occurring before or after that waiver.
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Section 10.09. TIME. Time is of the essence in the performance of
this Agreement in all respects.
Section 10.10. REFORMATION AND SEVERABILITY. If any provision of
this Agreement is invalid, illegal or unenforceable, that provision shall, to
the extent possible, be modified in such manner as to be valid, legal and
enforceable but so as to most nearly retain the intent of the parties hereto as
expressed herein, and if such a modification is not possible, that provision
shall be severed from this Agreement, and in either case the validity, legality
and enforceability of the remaining provisions of this Agreement shall not in
any way be affected or impaired thereby.
Section 10.11. REMEDIES CUMULATIVE. No right, remedy or election
given by any term of this Agreement shall be deemed exclusive, but each shall be
cumulative with all other rights, remedies and elections available at law or in
equity.
Section 10.12. RELEASE. Subject to the limitations set forth in
the last sentence in this Section 10.12, each Stockholder hereby unconditionally
and irrevocably releases and forever discharges, effective as of and forever
after the Effective Time, to the fullest extent permitted by applicable law, all
past, present and future ARS Indemnified Parties (including, after the Effective
Time, each of the Company and the Company Subsidiaries which is a Subsidiary of
ARS immediately after the Effective Time) (collectively, the "Released Parties")
from any and all debts, liabilities, obligations, claims, demands, actions or
causes of action, suits, judgments or controversies of any kind whatsoever
(collectively, "Pre-Acquisition Claims") against the Company and the Company
Subsidiaries, if any, or any of them that arises out of or is based on any
agreement or understanding or act or failure to act (INCLUDING ANY ACT OR
FAILURE TO ACT THAT CONSTITUTES ORDINARY OR GROSS NEGLIGENCE OR RECKLESS OR
WILLFUL, WANTON MISCONDUCT), misrepresentation, omission, transaction, fact,
event or other matter occurring prior to the Effective Time (whether based at
law or in equity or otherwise, foreseen or unforeseen, matured or unmatured,
known or unknown, accrued or not accrued) (collectively, "Pre-Acquisition
Matters"), including: (a) claims by the Stockholder with respect to repayment of
loans or indebtedness; (b) any rights, titles and interests in, to or under any
agreements, arrangements or understandings to which the Stockholder is a party;
and (c) claims by the Stockholder with respect to dividends, violation of
preemptive rights, or payment of salaries or other compensation or in any way
arising out of or in connection with the Stockholder's employment with the
Company or any Company Subsidiary, the cessation of that employment, the
Stockholder's status as an officer, director or stockholder of the Company or
otherwise (but excluding any and all claims in respect of (i) accrued and unpaid
amounts owing to the Stockholder pursuant to each Employment Agreement disclosed
in Schedule 2.25 to which the Stockholder is a party, (ii) accrued and unpaid
cash compensation owing to the Stockholder in the normal and ordinary course of
business and consistent with past practices, (iii) benefits accrued under each
Company ERISA Benefit Plan or Other Compensation Plan, the existence of which
has been disclosed in Schedule 2.25, and (iv) amounts or other obligations owing
to the Stockholder, directly or indirectly, pursuant to each Retained Related
Party Agreement, if any, which is disclosed in Schedule 2.11 and to which the
Stockholder, directly or indirectly, is a party). The Stockholder further agrees
not to file or bring any Litigation before any Governmental Authority on the
basis of
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or respecting any Pre-Acquisition Claim concerning any Pre-Acquisition Matter
against any Related Party. Each Stockholder (a) acknowledges that he or she
fully comprehends and understands all the terms of this Section 10.12 and their
legal effects and (b) expressly represents and warrants that (i) he or she is
competent to effect the release made in this Section 10.12 knowingly and
voluntarily and without reliance on any statement or representation of any
Released Party or its Representatives and (ii) he or she had the opportunity to
consult with an attorney of his or her choice regarding this Section 10.12. This
Section 10.12 shall not affect the rights of the Stockholders under this
Agreement or any other Transaction Document.
ARTICLE XI
TERMINATION
Section 11.01. TERMINATION OF THIS AGREEMENT. This Agreement may
be terminated at any time prior to the Effective Time solely:
(a) by the mutual written consent of ARS and the Company;
(b) by the Stockholders or the Company, on the one hand, or by
ARS, on the other hand, if the transactions contemplated by this Agreement to
take place at the Closing shall not have been consummated by the close of
business on the 90th day after the date of this Agreement, unless the failure of
such transactions to be consummated results from the willful failure of the
party (or in the case of the Stockholders and the Company, any of them) seeking
to terminate this Agreement to perform or adhere to any agreement required
hereby to be performed or adhered to by it prior to or on the Closing Date;
(c) by the Stockholders or the Company, on the one hand, or by
ARS, on the other hand, if a material breach or default shall be made by the
other party (or in the case of the Stockholders and the Company, any of them) in
the observance or in the due and timely performance of any of the covenants,
agreements or conditions contained herein; or
(d) by ARS if it is entitled to do so as provided in Section
4.07.
Section 11.02. LIABILITIES IN EVENT OF TERMINATION. If this
Agreement is terminated pursuant to Section 11.01, there shall be no liability
or obligation on the part of any party hereto except (a) as provided in Section
10.05 and (b) to the extent that such liability is based on the breach by that
party of any of its representations, warranties or covenants set forth in this
Agreement.
-52-
<PAGE>
Addendum U
AMERICAN RESIDENTIAL SERVICES, INC.
SPECIAL PROVISIONS RELATING TO
THE UNREGISTERED ARS COMMON STOCK
INCLUDED IN THE ACQUISITION CONSIDERATION
A. DEFINED TERMS. Words and terms used in this Addendum which are
defined elsewhere in the Agreement in which this Addendum is incorporated by
reference are used herein as defined therein.
B. REPRESENTATION AND WARRANTY BY EACH STOCKHOLDER. Each
Stockholder represents and warrants to ARS that, as applied solely to himself,
as of the date of this Agreement, the Closing Date and immediately prior to the
Effective Time: (1) the Stockholder will be acquiring the shares of ARS Common
Stock to be issued pursuant to Paragraph 2 to him solely for his account, for
investment purposes only and with no current intention or plan to distribute,
sell or otherwise dispose of any of those shares in connection with any
distribution; (2) the Stockholder is not a party to any agreement or other
arrangement for the disposition of any shares of ARS Common Stock other than
this Agreement and the Joinder to the Registration Rights Agreement; (3)
Schedule B to this Addendum correctly states (a) whether the Stockholder is, or
is not, an "accredited investor" as defined in Securities Act Rule 501(a) and,
if the Stockholder is not such an investor, (b) the name and address of his
Purchaser Representative; and (4) the Stockholder (a) is able to bear the
economic risk of an investment in the ARS Common Stock acquired pursuant to this
Agreement, (b) can afford to sustain a total loss of that investment, (c) has
such knowledge and experience in financial and business matters that he is
capable of evaluating the merits and risks of the proposed investment in the ARS
Common Stock, (d) or his Purchaser Representative, if any, has had an adequate
opportunity to ask questions and receive answers from the officers of ARS
concerning any and all matters relating to the transactions contemplated hereby,
including the background and experience of the current and proposed officers and
directors of ARS, the business, operations and financial condition of ARS and
any plans of ARS for additional acquisitions, and (e) or his Purchaser
Representative, if any, has asked all questions of the nature described in
preceding clause (d), and all those questions have been answered to his
satisfaction and the satisfaction of his Purchaser Representative, if any. For
purposes of Section 7.01, the representation and warranty made in this Section B
shall be deemed to be included in Article I.
C. RESTRICTIONS ON TRANSFER OF ARS COMMON STOCK. (1) Each
Stockholder agrees with ARS that, during the two-year period ending on the
second anniversary of the Effective Date (the "Restricted Period"), the
Stockholder will not voluntarily, except pursuant to and in accordance with the
applicable provisions of the Joinder to the Registration Rights Agreement: (a)
sell, assign,
1
<PAGE>
exchange, transfer, encumber, pledge, distribute, appoint or otherwise dispose
of (1) any shares of ARS Common Stock received by any Stockholder in the
Acquisition or (2) any interest in (including any option to buy or sell) any of
those shares of ARS Common Stock, in whole or in part, and ARS will have no
obligation to, and shall not, treat any such attempted transfer as effective for
any purpose; or (b) engage in any transaction, whether or not with respect to
any shares of ARS Common Stock or any interest therein, the intent or effect of
which is to reduce the risk of owning the shares of ARS Common Stock acquired
pursuant to Paragraph 2 (including, for example, engaging in put, call,
short-sale, straddle or similar market transactions); provided, however, that
this Section C shall not restrict any transfer of ARS Common Stock acquired by a
Stockholder pursuant to Paragraph 2 to any of that Stockholder's Related Persons
who agree in writing to be bound by the provisions of Section 10.01 and this
Section C. Each Stockholder agrees with ARS that the certificates evidencing the
ARS Common Stock delivered to that Stockholder pursuant to Paragraph 2 will bear
a legend substantially in the form set forth below and containing such other
information as ARS may deem necessary or appropriate:
EXCEPT PURSUANT TO THE TERMS OF THE [TITLE OF ACQUISITION AGREEMENT]
AMONG THE ISSUER, THE HOLDER OF THIS CERTIFICATE AND THE OTHER PARTIES
THERETO, THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
VOLUNTARILY SOLD, ASSIGNED, EXCHANGED, TRANSFERRED, ENCUMBERED, PLEDGED,
DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF, AND THE ISSUER SHALL
NOT BE REQUIRED TO GIVE EFFECT TO ANY ATTEMPTED VOLUNTARY SALE,
ASSIGNMENT, EXCHANGE, TRANSFER, ENCUMBRANCE, PLEDGE, DISTRIBUTION,
APPOINTMENT OR OTHER DISPOSITION OF ANY OF THOSE SHARES, DURING THE
TWO-YEAR PERIOD ENDING ON __________ [DATE THAT IS THE SECOND
ANNIVERSARY OF THE EFFECTIVE DATE.] ON THE WRITTEN REQUEST OF THE HOLDER
OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND
(AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE
SPECIFIED ABOVE.
(2) Each Stockholder, severally and not jointly with any other
Person: (a) acknowledges that the shares of ARS Common Stock to be delivered to
that Stockholder pursuant to Paragraph 2 (i) have not been and, except pursuant
to the Joinder to the Registration Rights Agreement, if applicable, will not be
registered under the Securities Act and therefore may not be resold by that
Stockholder without compliance with the Securities Act and (ii) will, as a
result of the restrictions on their transferability which are imposed by this
Agreement during the Restricted Period, have a value materially less on the
Effective Date than the value of then freely tradable shares of ARS Common
Stock; (b) covenants that none of the shares of ARS Common Stock issued to that
Stockholder pursuant to Paragraph 2 will be offered, sold, assigned, pledged,
hypothecated, transferred or otherwise disposed of except after full compliance
with all the applicable provisions of the Securities Act and the rules and
regulations of the SEC and applicable state securities laws and regulations; and
(c) agrees with ARS that all certificates evidencing shares of ARS Common Stock
issued pursuant to Paragraph 2 will bear the following legend in addition to the
legend prescribed by Section C(1) of this Addendum:
2
<PAGE>
THE SHARES REPRESENTED HEREBY HAVE BEEN ISSUED PURSUANT TO A CLAIM OF
EXEMPTION UNDER THE SECURITIES ACT OF 1933 AND THE APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED WITHOUT
COMPLIANCE WITH THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF
1933 AND APPLICABLE SECURITIES LAWS OR APPLICABLE EXEMPTIONS THEREFROM.
In addition, each Stockholder agrees with ARS that the certificates evidencing
shares of ARS Common Stock issued pursuant to Paragraph 2 to that Stockholder
will bear any legend required by the securities or blue sky laws of the state in
which that Stockholder resides.
End of Addendum
3
<PAGE>
SCHEDULE B
to
Addendum U
to the
Agreement and Plan of Reorganization
to which
American Residential Services, Inc.
and
Metro Heating and Air Conditioning, Inc.
are parties
A. Words and terms used in this Schedule which are defined in the
captioned Agreement are used herein as therein defined.
B. Each Stockholder is an "accredited investor" as defined in
Securities Act Rule 501(a) because each Stockholder, alone or together with his
or her spouse, has a net worth that exceeds $1,000,000.
End of Schedule
4
<PAGE>
Addendum W
AMERICAN RESIDENTIAL SERVICES, INC.
SPECIAL PROVISIONS RELATING TO WORKING CAPITAL
A. DEFINED TERMS. Words and terms used in this Addendum which are
defined elsewhere in the Agreement in which this Addendum is incorporated by
reference are used herein as defined therein. As used in this Addendum the
following terms have the meanings assigned to them below in this Section A:
"ADJUSTMENT DETERMINATION DATE" means the date that is 30 days
following delivery by ARS of the Post-closing Statement to the Sellers,
unless the Final Working Capital and the Working Capital Adjustment, if
any, are determined pursuant to Section B of this Addendum by Arthur
Andersen LLP, in which event the Adjustment Determination Date is the
date Arthur Andersen LLP delivers those determinations in writing to
ARS.
"FINAL BALANCE SHEET" means a balance sheet of the Acquired
Business as of November 30, 1996 which is prepared in accordance with
GAAP on the same basis on which the Current Balance Sheet was prepared.
"FINAL WORKING CAPITAL" means, as of November 30, 1996 and as
determined from the Final Balance Sheet, the amount by which (a) the
sum, without duplication of amounts, of all amounts that are included
and classified as current assets on that balance sheet exceeds, or is
exceeded by, (b) the sum, without duplication of amounts, of all amounts
that are included and classified as liabilities or as mandatorily
redeemable Capital Stock on that balance sheet; provided, that if that
determination is made pursuant to Section B of this Addendum by Arthur
Andersen LLP, the amount equal to 50% of the fees and expenses of Arthur
Andersen LLP which are attributable to its audit of the Final Balance
Sheet and its making of that determination will be deemed a liability of
the Acquired Business for the purpose of determining its Final Working
Capital and resulting Working Capital Adjustment, if any; and provided,
further, that if at any time those current assets are exceeded by those
liabilities, Final Working Capital will be expressed as a negative
amount.
"POST-CLOSING STATEMENT" has the meaning specified in Section B
of this Addendum.
"SELLER" means (1) the Company, if the Acquisition is effected by
means of an Asset Purchase, or (2) any Stockholder, if the Acquisition
is effected by any other means.
1
<PAGE>
B. WORKING CAPITAL ADJUSTMENT. (1) As soon as practicable, and in
any event within 75 days after the Effective Date, ARS will cause to be prepared
and delivered to the Sellers (a) the Final Balance Sheet and (b) a statement
(the "Post-closing Statement") of the Final Working Capital and the Working
Capital Adjustment, if any. The Post-closing Statement will be final and binding
on ARS and the Sellers unless, within 30 days following the delivery of the
Post-closing Statement, any Seller notifies ARS in writing that that Seller does
not accept as correct the amount of the Final Working Capital or the amount of
the Working Capital Adjustment, if any, as set forth in the Post-closing
Statement. If any Seller timely delivers that notice respecting the Post-closing
Statement, the Final Balance Sheet will be audited, and the Final Working
Capital and the Working Capital Adjustment, if any, will be determined within 30
days after the delivery to ARS of that notice, by Arthur Andersen LLP, and these
determinations will be final and binding on ARS and each Seller.
(2) If a Working Capital Adjustment is determined with finality
pursuant to Section B(1) of this Addendum, each Seller will, no later than 10
Houston, Texas business days after ARS makes a written request therefor, pay in
cash that Seller's Pro Rata Share (which, if the Company is the Seller, will be
100%) of the Working Capital Adjustment, together with interest on that sum at
8% per annum from (and including) the Effective Date to (but excluding) the
Adjustment Determination Date.
End of Addendum
2
EXHIBIT 5.1
December 23, 1996
American Residential Services, Inc.
5051 Westheimer
Suite 725
Houston, Texas 77056
Gentlemen:
As set forth in the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission (the "Commission") on December 23, 1996 (the
"Registration Statement") by American Residential Services, Inc., a Delaware
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Act"), relating to shares of common stock, par value $0.001 per share, of the
Company, including the rights associated therewith ("Common Stock"), to be
issued and sold by the Company from time to time pursuant to Rule 415 under the
Act, certain legal matters in connection with the Common Stock are being passed
upon for the Company by me.
In my capacity as General Counsel of the Company, I have examined the
Restated Certificate of Incorporation and By-Laws of the Company, each as
amended to date, and the originals, or copies certified or otherwise identified,
of corporate records of the Company, certificates of public officials and of
representatives of the Company, statutes and other instruments and documents as
a basis for the opinions hereafter expressed.
In connection with this opinion, I have assumed that (i) the Registration
Statement, and any amendments thereto (including post-effective amendments),
will have become effective; (ii) all Common Stock will be issued and sold in
compliance with applicable federal and state securities laws and in the manner
stated in the Registration Statement and any appropriate prospectus supplement.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of Delaware.
<PAGE>
2. With respect to shares of Common Stock, when (i) the Board of
Directors of the Company or, to the extent permitted by Section 141(c) of
the General Corporation Law of the State of Delaware, a duly constituted
and acting committee thereof (such Board of Directors or committee being
hereinafter referred to as the "Board"), has taken all necessary corporate
action to approve the issuance of and the terms of the offering shares of
Common Stock and related matters; and (ii) certificates representing the
shares of Common Stock have been duly executed, countersigned, registered
and delivered in accordance with the applicable definitive purchase or
similar agreement approved by the Board upon payment of the consideration
therefor (not less than the par value of the Common Stock) provided for
therein, the shares of Common Stock will be duly authorized, validly
issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion of counsel as Exhibit 5 to
the Registration Statement. I also consent to the reference to my name under the
heading "Legal Matters" in the prospectus forming a part of the Registration
Statement.
Very truly yours,
/s/ JOHN D. HELD
John D. Held
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF DECEMBER 18, 1996)
<TABLE>
<CAPTION>
State of
Subsidiary Name Incorporation
- --------------- -------------
<S> <C>
American Mechanical Services, Inc. Delaware
Annandale & Fairfax Air Conditioning & Heating, Inc. (d/b/a Keenan Heating & Cooling) Virginia
ARS Energy Services Company Delaware
ARS Residential Services, Inc. Delaware
ARS Residential Services, Inc. Texas
ARSSOS, Inc. Delaware
McCannics, Inc. Texas
Service Enterprise Holdings, LLC Texas
Service Enterprises, Inc. Texas
Adcot, Inc. (d/b/a A-ABC Appliances) Texas
Service Enterprises - Houston, Inc. (d/b/a Crown Services) Delaware
Trademark Enterprises, Inc. Delaware
Atlas Services, Inc. South Carolina
Golden Triangle Mechanical, Inc. South Carolina
Florida Heating & Air Conditioning, Inc. Florida
Bullseye Air Conditioning, Inc. Florida
Climatic Corporation of Vero Beach Florida
Florida Heating & Air Duct, Inc. Florida
General Heating & Air Conditioning Company, Inc. Delaware
Hession Plumbing Company, Inc. Indiana
Illinois Heating & Air Conditioning, Inc. (d/b/a Kranz Heating & Cooling, Inc.) Illinois
Keenan Mechanical Services, Inc. Virginia
Kirby Heating & Air, Inc. South Carolina
Korte Electric, Inc. Delaware
Meridian & Hoosier Heating and Air Conditioning Company (d/b/a Dial One Meridian and Hoosier, Inc.) Indiana
Sagamore Heating & Cooling, Inc. Indiana
Metro Heating and Air Conditioning, Inc. Delaware
Pricemasters Heating & Air Conditioning Co. (d/b/a Ross Heating & Cooling Inc.; Kranz Mechanical Corporation) Illinois
Sasso Air Conditioning, Inc. Delaware
Ted's Plumbing, Inc. Florida
USA Heating & Air Conditioning, Inc. Delaware
West Houston Services, Inc. Delaware
</TABLE>
[ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
Houston, Texas
December 20, 1996
