AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1996
REGISTRATION NO. 333-06195
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
1711 76-0484996
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD
INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION CLASSIFICATION CODE NUMBER)
OR ORGANIZATION)
5850 SAN FELIPE -- SUITE 500
HOUSTON, TEXAS 77057-8003
(713) 706-6177
(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.
5850 SAN FELIPE -- SUITE 500
HOUSTON, TEXAS 77057-8003
(713) 706-6177
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JAMES L. LEADER, ESQ. STEPHEN P. FARRELL, ESQ.
BAKER & BOTTS, L.L.P. MORGAN, LEWIS & BOCKIUS LLP
3000 ONE SHELL PLAZA 101 PARK AVENUE
HOUSTON, TEXAS 77002-4995 NEW YORK, NEW YORK 10178
(713) 229-1234 (212) 309-6000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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.
-------------------------------------------------------------------------------
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 AUGUST 26, 1996
PROSPECTUS
4,200,000 Shares
[LOGO ARS, INC.]
AMERICAN RESIDENTIAL SERVICES, INC.
Common Stock
------------------
All the shares of common stock, $.001 par value per share (the "Common
Stock"), offered hereby are being sold by American Residential Services, Inc.
("ARS"). Prior to this offering, there has not been a public market for the
Common Stock of ARS. It is currently estimated that the initial public offering
price will be between $14.00 and $16.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for listing on the New
York Stock Exchange under the symbol "ARS," subject to official notice of
issuance.
SEE "RISK FACTORS" ON PAGE 9 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF 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
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
- --------------------------------------------------------------------------------
(1) For information regarding indemnification of the several Underwriters,
see "Underwriting."
(2) Before deducting expenses estimated at $ payable by ARS.
(3) ARS has granted the several Underwriters a 30-day option to purchase up
to 630,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
September __, 1996 at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
Smith Barney Inc. Montgomery Securities
September __, 1996
[graphics -- gatefold, showing map of the United States with Company locations,
service vehicles, facilities and personnel of the Founding Companies]
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
PROSPECTUS SUMMARY
CONCURRENTLY WITH THE CLOSING OF THE OFFERING MADE HEREBY (THE
"OFFERING"), ARS PLANS TO ACQUIRE, IN SEPARATE TRANSACTIONS (COLLECTIVELY, THE
"ACQUISITIONS"), IN EXCHANGE FOR CONSIDERATION INCLUDING SHARES OF ITS COMMON
STOCK, SEVEN RESIDENTIAL SERVICES BUSINESSES (COLLECTIVELY, THE "FOUNDING
COMPANIES"), TWO OF WHICH ALREADY HAVE BEEN ACQUIRED BY AN AFFILIATE OF ARS.
SEE "THE COMPANY." THE NUMBER OF SHARES OF COMMON STOCK TO BE ISSUED IN EACH
ACQUISITION AND THE NUMBER OF SHARES ISSUED TO THE FOUNDERS OF ARS WILL DEPEND
ON THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK. ACCORDINGLY, THE
DISCLOSURES HEREIN RELATING TO THE SHARES OF COMMON STOCK ISSUED TO THE FOUNDERS
OF ARS AND TO BE ISSUED IN CONNECTION WITH THE ACQUISITIONS ARE ESTIMATED, BASED
ON AN ASSUMED INITIAL PUBLIC OFFERING PRICE OF $15.00 PER SHARE (THE MIDPOINT OF
THE ESTIMATED INITIAL PUBLIC OFFERING PRICE RANGE). UNLESS OTHERWISE INDICATED
BY THE CONTEXT, REFERENCES HEREIN TO (I) "ARS" MEAN AMERICAN RESIDENTIAL
SERVICES, INC., (II) THE "COMPANY" MEAN ARS AND THE FOUNDING COMPANIES AND
(III) "FISCAL 1993," "FISCAL 1994" AND "FISCAL 1995" MEAN, RESPECTIVELY,
THE YEAR ENDED DECEMBER 31, 1993, 1994 AND 1995 WITH RESPECT TO THE COMPANY AND
FIVE FOUNDING COMPANIES, JUNE 30, 1993 AND 1994 AND DECEMBER 31, 1995 WITH
RESPECT TO ONE FOUNDING COMPANY AND APRIL 30, 1994, 1995 AND 1996 WITH RESPECT
TO ONE OTHER FOUNDING COMPANY.
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, THE INFORMATION AND
SHARE AND PER SHARE DATA IN THIS PROSPECTUS (I) GIVE EFFECT TO THE ACQUISITIONS,
(II) ASSUME THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED AND (III)
GIVE EFFECT TO CERTAIN STOCK SPLITS OF THE OUTSTANDING COMMON STOCK EFFECTED IN
CONNECTION WITH THE OFFERING AND THE CONVERSION OF A CONVERTIBLE NOTE INTO
COMMON STOCK.
THE COMPANY
ARS was founded in October 1995 to create the leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning ("HVAC") systems, including indoor air
quality services, and for 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 (collectively,
"residential services"). To achieve this goal, the Company intends to
implement an aggressive acquisition program and a national operating strategy
designed to increase internal revenue growth and capitalize on cost
efficiencies. During fiscal 1995, the combined revenues of 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%. 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 to 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 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.
ARS has definitive agreements to acquire the seven Founding Companies
simultaneously with the closing of this Offering. The Founding Companies have
been in business an average of 31 years and provide various residential services
in and around the Houston and Washington-Baltimore metropolitan areas, Richmond,
Virginia, throughout South Carolina, southeast Florida and central Indiana
(primarily Indianapolis). The Company is a leading provider of one or more
residential services in each region in which it operates. During fiscal 1995,
the Company's service and installation technicians (totaling
3
approximately 1,000 as of June 30, 1996) responded to approximately 263,000
maintenance, repair and replacement service calls and installed approximately
15,100 HVAC systems in newly built homes, apartments and small commercial
buildings. Three of the largest Founding Companies, representing approximately
63% of the Company's fiscal 1995 combined revenues, have been members of an
industry-sponsored practice-sharing group for the past six years. Through this
arrangement, they have developed common marketing plans, computer systems and
other operational practices in order to develop "best practices" in their
respective markets. The Company believes building upon this arrangement to
include all the Founding Companies will aid in the initial integration of the
Founding Companies following the closing of this Offering.
The Company estimates that 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 implementing a national operating strategy that
enhances internal revenue growth and profitability and achieves cost
efficiencies.
GROWTH THROUGH ACQUISITION. The Company intends to implement 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 will
initially target 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 will be superior operational management
personnel, whom the Company generally will seek 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 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 intends to
implement 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 will review its operations at the local
and regional operating levels (as well as examine other service
industry practices) in order to identify certain "best practices"
that will be implemented throughout its operations. For example, the
Company intends
4
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 intends to utilize a national training program to improve and
keep current the technical, selling and customer relations skills of
its service technicians and will 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 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 the Founding Companies and other
acquired businesses by eliminating duplicative administrative
functions in tuck-in acquisitions and consolidating certain functions
performed separately by each company 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 the individual Founding Companies
and other acquired companies 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.
THIS OFFERING
Common Stock offered by the
Company.............................. 4,200,000
Common Stock to be outstanding after
this Offering(1)................... 8,449,652
Use of Proceeds...................... To pay the cash portion of the purchase
price for the Founding Companies, to
repay indebtedness of ARS, the Founding
Companies and the parent of two Founding
Companies (Enterprises Holding Company
("EHC")) and to redeem preferred stock of
EHC. See "Use of Proceeds."
NYSE symbol.......................... ARS
- ------------
(1) The number of shares estimated to be outstanding on completion of this
Offering consists of (i) 422,483 shares issued to the founders of ARS, (ii)
844,965 shares to be issued on conversion in part of an ARS convertible note
issued in the organizational financing of ARS, (iii) 2,805,065 shares to be
issued as consideration in the Acquisitions, (iv) 137,139 shares to be
issued in exchange for $2.1 million of preferred stock of EHC, (v) 40,000
shares to be awarded to certain employees and consultants of the Company
under the Company's 1996 Incentive Plan on the closing of the EHC
acquisition and (vi) the 4,200,000 shares being offered hereby. Such share
number does not include (i) an aggregate of 1,430,000 shares subject to
options granted under the Company's 1996 Incentive Plan, (ii) a warrant to
purchase up to 100,000 shares of Common Stock, at a purchase price equal to
the initial public offering price per share, issued by the Company to Equus
II Incorporated in connection with the Company's start-up funding and (iii)
a warrant to purchase shares of Common Stock having a value of $125,000 on
the closing date of this Offering, at a purchase price equal to $.01 per
share, to be issued to NationsBank of Texas, N.A. in connection with the EHC
acquisition. See "Certain Transactions -- Organization of the Company" and
"Management -- Option Grants." The number of shares to be outstanding on
completion of this Offering will decrease if the initial public offering
price is higher, and will increase if the initial public offering price is
lower, than $15.00 per share. For example, 8,230,373 shares would be
outstanding if that price is $16.00, while 8,700,258 shares would be
outstanding if that price is $14.00.
------------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
------------------------
5
SUMMARY PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARS will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Atlas Services, Inc., one of the Founding
Companies, has been identified as the accounting acquiror. The following summary
unaudited pro forma financial data presents certain data for the Company, as
adjusted for (i) the effects of the Acquisitions on an historical basis, (ii)
the effects of certain pro forma adjustments to the historical financial
statements and (iii) the consummation of this Offering. See "Selected Financial
Data" and the Unaudited Pro Forma Combined Financial Statements and the notes
thereto included elsewhere in this Prospectus.
PRO FORMA(1)
-----------------------------------
SIX MONTHS
ENDED JUNE 30
--------------------
FISCAL 1995 1995 1996
------------ --------- ---------
STATEMENTS OF OPERATIONS DATA
(UNAUDITED):
Revenues........................ $114,636 $ 52,585 $ 61,536
Gross profit.................... 29,416 13,216 16,042
Selling, general and
administrative expenses(2).... 21,853 10,150 12,402
Goodwill amortization(3)........ 1,296 648 648
Operating income................ 6,267 2,418 2,992
Interest income and other
expense, net.................. 613 273 245
Interest expense(4)............. (457) (229) (229)
Income from continuing
operations.................... $ 3,458 $ 1,329 $ 1,624
============ ========= =========
Income per share from continuing
operations.................... $ .41 $ .16 $ .19
============ ========= =========
Shares used in computing pro
forma income per share from
continuing operations(4)...... 8,450 8,450 8,450
============ ========= =========
JUNE 30, 1996
---------------------------
PRO
FORMA(1) AS ADJUSTED(5)
-------- --------------
BALANCE SHEET DATA (UNAUDITED):
Working capital................. $(39,519) $ 878
Total assets.................... 88,435 88,001
Total debt, including current
portion........................ 26,848 6,999
Stockholders' equity............ 6,631 61,346
- ------------
(1) The pro forma statements of operations data and the pro forma balance sheet
data assume that the Acquisitions were closed on January 1 of each period
presented and June 30, 1996, respectively, and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. The pro forma
combined financial information (i) is based on preliminary estimates,
available information and certain assumptions that management deems
appropriate and (ii) should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statements include the effect of certain reductions
in salary and benefits to the owners of six of the Founding Companies to
which they have agreed prospectively, as follows: fiscal 1995, $1,808; and
six months ended June 30, 1995 and 1996, $943 and $1,272, respectively.
Additionally, the pro forma combined statements include the effect of assets
distributed to and the costs of certain leases assumed by the owners of
certain of the Founding Companies.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period.
(4) Computed on a basis described in Note 5 of Notes to Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom and the use of borrowings under the New Credit
Facility to repay indebtedness of the Founding Companies and ARS and redeem
certain EHC preferred stock. See "Use of Proceeds."
6
SUMMARY INDIVIDUAL FOUNDING COMPANY FINANCIAL DATA
(IN THOUSANDS)
The following table presents summary data for each of the Founding
Companies (see "The Company" for the complete names of each) and EHC for the
three most recent fiscal years as well as the most recent interim period and
comparative period of the prior year, as applicable.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
GENERAL HEATING:
Revenues........................ $ 34,642 $ 36,334 $ 35,159 $ 16,214 $ 17,211
Gross profit.................... 7,249 6,406 6,293 2,883 3,278
Selling, general and
administrative expenses(1).... 5,011 5,245 5,280 2,626 2,816
ATLAS(2):
Revenues........................ $ 10,210 $ 15,625 $ 22,048 $ 10,354 $ 14,092
Gross profit.................... 2,027 2,948 4,237 1,945 2,735
Selling, general and
administrative expenses(1).... 1,761 2,421 3,022 1,439 2,268
CROWN(3):
Revenues........................ $ 16,268 $ 16,844 $ 19,124 $ 8,775 $ 4,152
Gross profit.................... 5,937 6,529 7,791 3,581 1,509
Selling, general and
administrative expenses(1).... 5,698 5,837 6,165 2,941 1,519
FLORIDA HAC(4):
Revenues........................ $ 13,123 $ 15,845 $ 14,510 $ 7,631 $ 7,244
Gross profit.................... 3,217 3,766 3,969 1,934 1,905
Selling, general and
administrative expenses(1).... 2,807 3,321 3,738 1,883 1,816
MERIDIAN & HOOSIER(4):
Revenues........................ $ 5,864 $ 8,066 $ 10,133 $ 4,420 $ 6,992
Gross profit.................... 1,800 2,269 2,852 1,247 2,241
Selling, general and
administrative expenses(1).... 1,454 1,988 2,350 1,056 1,724
A-ABC(5):
Revenues........................ $ 10,900 $ 8,676 $ 8,707 $ 3,983 $ 3,445
Gross profit.................... 3,978 3,101 2,998 1,262 1,298
Selling, general and
administrative expenses(1).... 2,830 2,444 2,348 1,108 836
CLIMATIC(4)(6):
Revenues........................ $ 3,177 $ 4,220 $ 4,955 $ 1,208 $ 1,597
Gross profit.................... 765 841 1,276 364 385
Selling, general and
administrative
expenses...................... 739 847 1,287 265 287
EHC(7):
Revenues........................ $ 6,803
Gross profit.................... 2,691
Selling, general and
administrative
expenses...................... 1,784
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
7
(1) Does not reflect the effects of certain reductions in salaries and benefits
to the owners of six of the Founding Companies, as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
General Heating......................... $ 39 $ 31 $ 41 $ 20 $ 20
Atlas................................... 88 123 210 104 414
Crown................................... 729 402 449 210 115
Florida HAC............................. 58 712 868 494 634
Meridian & Hoosier...................... 8 42 104 47 32
A-ABC................................... 76 110 136 68 57
</TABLE>
- ------------
(2) Results for fiscal years ended June 30, 1993 and 1994 and December 31,
1995.
(3) 1996 interim results for Crown represent results for the three months ended
March 31, 1996. Results for the three months ended June 30, 1996 are
included in the EHC results.
(4) The following summary financial data is unaudited: Florida HAC and Meridian
& Hoosier for fiscal 1993; and Climatic for fiscal 1993, 1994 and 1995.
(5) 1996 interim results for A-ABC represent results for the five months ended
May 31, 1996. Results for A-ABC for the period following its acquisition by
EHC are included in the EHC results.
(6) Interim results for Climatic represent results for the three months ended
July 31, 1995 and 1996.
(7) 1996 interim results for EHC for the six months ended June 30, 1996 include
results of Crown from April 1, 1996 and results of A-ABC from June 1, 1996.
8
RISK FACTORS
PROSPECTIVE INVESTORS 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.
ABSENCE OF COMBINED OPERATING HISTORY
ARS, incorporated in Delaware in October 1995, has conducted no operations
to date other than in connection with this Offering and its pending acquisitions
in separate transactions (the "Acquisitions") of seven businesses (the
"Founding Companies"), two of which already have been acquired by an affiliate
of ARS. See "The Company." The Founding Companies have operated, and will
continue to operate prior to the closing of the Acquisitions, as separate,
independent businesses, and the Company will use the purchase method of
accounting to record the Acquisitions. Consequently, the pro forma financial
information herein may not be indicative of the Company's future operating
results and financial condition. Until the Company establishes centralized
accounting and other administrative systems, it will rely on the separate
systems of the Founding Companies. The success of the Company will depend, in
part, on the extent to which the Company is able to centralize these functions,
eliminate the unnecessary duplication of other functions and otherwise integrate
the Founding Companies and such additional businesses as the Company may acquire
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
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 heating, ventilating and
air conditioning ("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 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, if competition
for acquisition candidates develops, the cost of acquiring businesses could
increase materially. See "Business -- Business Strategy."
NEED FOR ADDITIONAL FINANCING
The Company currently intends to use shares of its Common Stock 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
obtained a commitment from NationsBank of Texas, N.A. ("NationsBank") to
underwrite a new $55 million bank credit facility (the "New Credit Facility")
to be used for acquisitions, working capital and other corporate purposes. In
addition, the Company plans to use a portion of this facility (currently
estimated to be approximately $6.0 million) to refinance indebtedness of the
Founding Companies. No assurance can be given the Company will be able to obtain
the capital it would need to finance a successful acquisition program and its
other cash needs. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
9
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 (including the continued deductibility of mortgage interest in
determining federal income tax), consumer confidence and housing demand. Unless
and until the Company is able through implementation of its growth strategy 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 Founding Companies to expand services will include
the extent to which they are able to attract and retain qualified operational
management and service and installation technicians in new areas of operation
and leverage their relationships with existing customers to provide them
services they currently obtain from others.
PROCEEDS OF OFFERING PAYABLE TO AFFILIATES AND ASSOCIATES
ARS will use the net proceeds of this Offering, the New Credit Facility and
cash available from the Founding Companies to meet its cash requirements
relating to the closing of the Acquisitions, and no portion of the net proceeds
of this Offering should be considered available to meet the Company's cash
requirements following closing of the Acquisitions and this Offering. In
connection with the closing of the Acquisitions, ARS will pay, subject to upward
or downward working capital and other possible adjustments, approximately $30.3
million in cash for stock of the Founding Companies which is beneficially owned
by individuals who will become directors of the Company and/or executive
officers of subsidiaries of the Company. At the closing of the Acquisitions, the
Company will make an aggregate net distribution to certain of these individuals
and Equus II Incorporated ("Equus II") in respect of working capital (defined
in the agreements relating to the Acquisitions generally as current assets less
all liabilities ("Working Capital")) of approximately $4.0 million, which
payment will be subject to a final adjustment based on the balance sheets of the
Founding Companies as of that closing. The Company also will use (i) $19.7
million to pay or refinance debt of or relating to the Founding Companies,
including approximately $13.8 million of debt of Enterprises Holding Company
("EHC"), an affiliate of ARS and the owner of two of the Founding Companies
and (ii) $0.5 million to redeem EHC preferred stock held by Equus II. See "Use
of Proceeds" and "Certain Transactions."
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. 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."
10
SEASONALITY
The Company's installation, maintenance, repair and replacement operations
are subject to seasonal variations in the different lines of service. Except in
southeast Florida and South Carolina, 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 the Founding Companies, 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."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
On closing of the Acquisitions and this Offering, 10 former owners of the
Founding Companies, including the principal venture-capital financing source of
ARS (Equus II) and three executive officers of ARS, will beneficially own in the
aggregate approximately 46% of the outstanding Common Stock. If these persons
were to act in concert, they would, as a practical matter, be able to exercise
control over the Company's affairs, including the election of the entire Board
of Directors and (subject to Section 203 of the Delaware General Corporation Law
(the "DGCL")) any matter submitted to a vote of stockholders. See "Security
Ownership of Certain Beneficial Owners and Management."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
On closing of the Acquisitions and this Offering, 8,449,652 shares of
Common Stock will be outstanding. The 4,200,000 shares sold in this Offering
(other than shares that may be purchased by affiliates of the Company) will be
freely tradable. The remaining shares outstanding may be resold publicly only
following their effective registration under the Securities Act of 1933, as
amended (the "Securities Act"), or pursuant to an available exemption (such as
provided by Rule 144 following a holding period for previously unregistered
shares) from the registration requirements of that Act. The holders of those
remaining 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 they
will not sell, transfer or otherwise dispose of any of their shares, for two
years following the closing of this Offering (or for such shorter period as the
Securities and Exchange Commission (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.
On closing of this Offering, the Company also will have outstanding options
and warrants to purchase up to a total of 1,538,333 shares of Common Stock, of
which only warrants to purchase 108,333 shares will be exercisable immediately
after the Closing. The Company intends to register all the shares subject to
these options and warrants under the Securities Act for public resale.
The Company and its directors and executive officers, Equus II and all
persons who acquire shares of Common Stock in connection with the Acquisitions
have agreed not to offer or sell any shares for a period of 180 days following
the date of this Prospectus (the "Lockup Period") without the prior written
consent of Smith Barney Inc., except that the Company may issue Common Stock in
connection with acquisitions, pursuant to the Company's 1996 Incentive Plan (see
"Management -- 1996 Incentive Plan") and pursuant to the exercise of warrants
outstanding as of the closing of this Offering.
11
The Company intends to register 5,000,000 additional shares of Common Stock
under the Securities Act during the fourth quarter of 1996 for its use in
connection with future acquisitions. These shares generally will be freely
tradable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale.
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 that the effect will not be adverse.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiation
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after this
Offering. See "Underwriting" for the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
listing on the New York Stock Exchange, subject to official notice of issuance,
but no assurance can be given an active trading market for the Common Stock will
develop or, if developed, continue after this Offering. The market price of the
Common Stock after this Offering 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.
IMMEDIATE, SUBSTANTIAL DILUTION
Purchasers of Common Stock in this Offering (i) will experience immediate,
substantial dilution in the net tangible book value of their stock of $13.88 per
share (see "Dilution") and (ii) may experience further dilution in that value
from issuances of Common Stock in connection with future acquisitions.
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the 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
The Company has adopted a stockholder rights plan. This plan and provisions
of the Company's Restated Certificate of Incorporation and Bylaws and the DGCL
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 By-law restriction on the
ability of 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."
12
THE COMPANY
ARS: 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 and as a condition to the closing of this Offering, ARS will acquire the
seven Founding Companies. For a description of the transactions pursuant to
which these businesses will be acquired, see "Certain
Transactions -- Organization of the Company."
GENERAL HEATING: General Heating Engineering Company, Inc., which does
business as "General Heating & Air Conditioning Co." ("General Heating"),
was founded in 1947 and is a leading installer of HVAC systems and equipment and
pre-fabricated gas and wood-burning fireplaces for residential and light
commercial construction markets in the Washington-Baltimore metropolitan area,
including northern Virginia, and Richmond. It also provides comprehensive HVAC
maintenance, repair and replacement services to the residential and light
commercial markets and sells and installs pre-fabricated gas and wood-burning
fireplaces. In recognition of its commitment to customer service, General
Heating has received CONTRACTING BUSINESS magazine's 1996 Residential Contractor
of the Year Award. It maintains its headquarters in Manassas, Virginia and has
branch facilities in Savage, Maryland and Richmond, Virginia. At its Manassas
location, General Heating operates a facility that fabricates and assembles
substantially all the sheet metal, duct work, fiberglass and flexible duct work
items used in its installation operations. During fiscal 1995, General Heating
had revenues of approximately $35.2 million.
ATLAS: Atlas Services, Inc. ("Atlas") was founded in 1976 and is a
leading provider of electric, HVAC and plumbing installation services to
residential and light commercial construction markets throughout South Carolina.
Atlas also provides comprehensive plumbing, HVAC and electrical, maintenance,
repair and replacement services and retails and installs pre-fabricated gas and
wood-burning fireplaces. It maintains its headquarters in Charleston, South
Carolina and has branch facilities in Columbia, Greenville, Hilton Head, Clemson
and Myrtle Beach, South Carolina. During fiscal 1995, Atlas had revenues of
approximately $22.0 million.
CROWN: Services Enterprises, Inc., which does business as "Crown
Services" ("Crown"), began operations in 1956 and 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. Crown does not provide new installation services. It
maintains its headquarters in Houston. In March 1996, Crown was acquired by EHC,
an affiliate of ARS, which will be acquired by the Company in one of the
Acquisitions. See "Certain Transactions -- EHC." During fiscal 1995, Crown had
revenues of approximately $19.1 million.
FLORIDA HAC: Florida Heating and Air Conditioning, Inc. (together with
three affiliated companies having common management, "Florida HAC") began
operations in 1970 and 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. It
maintains its headquarters in Margate, Florida, a suburb of Ft. Lauderdale, and
has a sales office in West Palm Beach. At Margate, Florida HAC operates a
facility that fabricates substantially all fiberglass and flexible duct systems
used in its installation operations. During fiscal 1995, Florida HAC had
revenues of approximately $14.5 million.
MERIDIAN & HOOSIER: DIAL ONE Meridian and Hoosier, Inc. ("Meridian &
Hoosier") is the successor to a business founded in 1973 and 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. It maintains its headquarters in Indianapolis, a branch
facility in Lafayette, Indiana and a sales office in Crawfordsville, Indiana.
During fiscal 1995, Meridian & Hoosier had revenues of approximately $10.1
million.
13
A-ABC: ADCOT, Inc., which does business as "A-ABC Appliance"
("A-ABC"), was founded in 1972 and 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. A-ABC does not provide new installation services. It maintains its
headquarters in Houston. In May 1996, A-ABC was acquired by EHC, which will be
acquired in one of the Acquisitions. In June 1996, EHC determined to discontinue
and hold for sale the retail appliance operations of A-ABC, which included eight
retail stores in the greater Houston area. See "Certain Transactions -- EHC."
During fiscal 1995, A-ABC had revenues of approximately $8.7 million (net of
discontinued appliance store revenues of $11.9 million).
CLIMATIC: Climatic Corporation of Vero Beach ("Climatic") is the
successor to a business founded in 1956 and 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). It also installs HVAC systems and equipment for
the residential and light commercial construction markets. It maintains its
headquarters in Vero Beach, Florida. During fiscal 1995, Climatic had revenues
of approximately $5.0 million.
SUMMARY OF TERMS OF ACQUISITIONS: The aggregate consideration that will be
paid by ARS to acquire the Founding Companies consists of (i) approximately
$34.8 million in cash and (ii) 2,805,065 shares of Common Stock. The Company
will also assume all the indebtedness and preferred stock redemption obligations
of the Founding Companies and EHC (approximately $23.3 million as of June 30,
1996, of which $2.1 million represented EHC preferred stock obligations that
will be converted into 137,139 shares of Common Stock) and then repay or
refinance substantially all such indebtedness and redeem, for $0.5 million, the
EHC preferred stock not converted into shares of Common Stock. In addition, the
purchase price of each of the Founding Companies (other than Crown and A-ABC)
and EHC will be increased by an amount equal to the increase, or decreased by an
amount equal to the decrease, in such company's net Working Capital from the
date of a specified recent balance sheet of such company through the closing of
the Acquisitions. At that closing, the Company will make an aggregate net
distribution in respect of Working Capital of approximately $4.0 million, which
payment will be subject to a final adjustment based on the balance sheets of
such companies as of the Closing. Prior to that closing, General Heating, which
is an S corporation, will distribute cash and other current assets to its
stockholders in an amount equal to the balance of its Accumulated Adjustment
Account ("AAA account") as of the closing of the General Heating Acquisition
(approximately $8.0 million as of June 30, 1996). An AAA account generally
represents undistributed retained earnings of an S corporation, upon which taxes
have been paid by the stockholders. In addition, prior to the closing of the
Acquisitions, certain Founding Companies will make distributions to their
stockholders of certain assets and related liabilities. As of June 30, 1996, the
net amount of these distributions would have been approximately $0.5 million.
See "Certain Transactions."
The consideration being paid by ARS for each Founding Company other than
Crown and A-ABC was determined by arm's-length negotiations between ARS and a
representative of that Founding Company. The consideration being paid by ARS for
EHC (which previously acquired Crown and A-ABC) was determined using generally
the same valuation method ARS used to negotiate the consideration being paid to
the stockholders of the other Founding Companies. The Company valued EHC on a
basis consistent with the other Acquisitions, using the same multiple of cash
flow, as adjusted for owners' compensation and other non-recurring items. In
addition, the purchase price for each Acquisition was increased by the fair
market value of real estate to be acquired in the Acquistion, if any, and
Working Capital. See "Certain Transactions."
The closing of each Acquisition is subject to customary conditions. These
conditions include, among others: the accuracy on the closing date of the
Acquisitions of the representations and warranties made by the Founding
Companies, their principal stockholders and by ARS; the performance of each of
their respective covenants included in the agreements relating to the
Acquisitions; and the nonexistence of a material adverse change in the results
of operations, financial condition or business of each Founding Company.
14
Any Founding Company's Acquisition agreement may be terminated, under
certain circumstances, prior to the closing of this Offering: (i) by the mutual
consent of the boards of directors of ARS and the Founding Company; (ii) if this
Offering and the acquisition of that Founding Company are not closed by December
31, 1996; (iii) by ARS if the schedules to the acquisition agreement are amended
to reflect a material adverse change in that Founding Company; or (iv) if a
material breach or default under the agreement by one party occurs and is not
waived.
No assurance can be given that the conditions to the closing of all the
Acquisitions will be satisfied or waived or that each Acquisition will close.
For information regarding the employment agreements to be entered into by
the chief executive officer of each Founding Company other than A-ABC and Crown
(which include covenants not to compete), see "Management -- Employment
Agreements."
American Residential Services, Inc. is a Delaware corporation. Its
executive offices are located at 5850 San Felipe, Suite 500, Houston, Texas
77057-8003, and its telephone number at that address is
(713) 706-6177.
15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company are estimated to be
approximately $54.6 million (approximately $63.4 million if the Underwriters
exercise their over-allotment option in full), assuming an initial public
offering price of $15.00 per share (the midpoint of the estimated initial public
offering price range). Of those net proceeds, $34.8 million will be used to pay
the cash portion of the purchase prices for the Acquisitions and the remaining
net proceeds will be used, together with available cash balances and up to $6.0
million of borrowings under the Company's New Credit Facility, concurrently for
the following purposes: (i) repayment of outstanding indebtedness of the
Founding Companies, EHC and ARS (approximately $21.8 million); (ii) payment of
net interim working capital adjustments as part of the purchase prices of the
Acquisitions (approximately $4.0 million); and (iii) redemption of certain EHC
preferred stock ($0.5 million). See "Certain Transactions -- Organization of
the Company."
The Company expects to enter into the New Credit Facility effective
concurrently with the closing of this Offering. NationsBank, which provided EHC
with financing to acquire Crown and A-ABC, has underwritten the New Credit
Facility subject to the terms and conditions of a commitment letter dated July
17, 1996. According to these terms, the New Credit Facility provides for up to
$55 million of unsecured revolving credit that may be used for general corporate
purposes, including the refinancing of Founding Company indebtedness,
post-Offering acquisitions and working capital. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Combined
Founding Companies -- Liquidity and Capital Resources -- Combined."
The indebtedness to be repaid from the proceeds of this Offering and the
New Credit Facility (some of which has been guaranteed by stockholders of the
Founding Companies and EHC) bears interest at rates ranging from 5.9% to 13.3%.
Such indebtedness would otherwise mature at various dates through 2017.
16
DIVIDEND POLICY
It is the Company's current intention 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 New Credit Facility and any restrictions that may be
imposed by the Company's future credit facilities. It is currently anticipated
that the New Credit Facility will prohibit the payment of dividends. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the short-term debt and current maturities
of long-term obligations and capitalization as of June 30, 1996 (July 31, 1996
in the case of Climatic) of (i) the Company on a pro forma combined basis to
give effect to the Acquisitions and (ii) the Company, pro forma as adjusted to
give effect to the Acquisitions, this Offering and the application of the
estimated net proceeds therefrom and the use of borrowings under the New Credit
Facility to pay existing indebtedness. See "Use of Proceeds." This table
should be read in conjunction with the Unaudited Pro Forma Financial Statements
of the Company and the related notes thereto included elsewhere in this
Prospectus.
JUNE 30, 1996
-------------------------
PRO FORMA AS ADJUSTED
--------- ------------
(IN THOUSANDS)
Short-term debt and current
maturities of long-term
obligations.......................... $ 5,597 $ --
========= ============
Long-term obligations, less current
maturities......................... 21,251 6,999
Preferred stock of EHC............... 500 --
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;
4,249,652 shares issued and
outstanding, pro forma; and
8,449,652 shares issued and
outstanding, pro forma as
adjusted(1).................... 4 8
Additional paid-in capital...... 15,836 70,847
Retained deficit................ (9,209) (9,509)
--------- ------------
Total stockholders'
equity.................. 6,631 61,346
--------- ------------
Total
capitalization..... $28,382 $ 68,345
========= ============
- ------------
(1) Excludes (i) an aggregate of 1,430,000 shares of Common Stock subject to
options granted pursuant to the Company's 1996 Incentive Plan, (ii) a
warrant to purchase up to 100,000 shares of Common Stock, at a purchase
price equal to the initial public offering price per share, issued by the
Company to Equus II in connection with the Company's start-up funding and
(iii) a warrant to purchase shares of Common Stock having a value of
$125,000 on the closing date of this Offering, at a purchase price equal to
$.01 per share, to be issued to NationsBank in connection with the EHC
Acquisition. See "Management -- 1996 Incentive Plan," "Certain
Transactions -- Organization of the Company" and "-- EHC."
17
DILUTION
The deficit in pro forma net tangible book value of the Company as of June
30, 1996 was approximately $(45,230,000), or approximately $(10.64) per share,
after giving effect to the Acquisitions. The deficit in pro forma net tangible
book value per share represents the amount by which the Company's pro forma
total liabilities exceed the Company's pro forma net tangible assets as of June
30, 1996, divided by the number of shares to be outstanding after giving effect
to (i) the Acquisitions and (ii) the issuance of stock awards to employees of
the Company in connection with the acquisition of EHC, (iii) the conversion in
part of an ARS convertible note and EHC preferred stock held by Equus II and
(iv) the assumed exercise of a warrant held by a bank lender of EHC. After
giving effect to the sale of the 4,200,000 shares offered hereby and deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company, the Company's pro forma net tangible book value as of
June 30, 1996 would have been approximately $9,485,000, or approximately $1.12
per share, based on an assumed initial public offering price of $15.00 per share
(the midpoint of the estimated initial public offering price range). This
represents an immediate increase in pro forma net tangible book value of
approximately $11.76 per share to existing stockholders and an immediate
dilution of approximately $13.88 per share to new investors purchasing shares in
this Offering. The following table illustrates this pro forma dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share................................... $ 15.00
Pro forma deficit in net tangible book value per share before
this Offering................................................................... $ (10.64)
Increase in pro forma net tangible value per share attributable to new
investors......................................................................... 11.76
---------
Pro forma net tangible book value per share after this Offering................... 1.12
---------
Dilution per share to new investors............................................... $ 13.88
=========
</TABLE>
The dilution to new investors purchasing shares in this Offering will
increase if the initial public offering price is higher, and will decrease if
the initial public offering price is lower, than $15.00 per share.
The following table sets forth, on a pro forma basis to give effect to the
Acquisitions as of June 30, 1996, the number of shares of Common Stock purchased
from the Company, the total consideration to the Company and the average price
per share paid to the Company by existing stockholders and the new investors
purchasing shares from the Company in this Offering (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE
---------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 4,249,652 50.3% $ (45,230,000) (254.5)% $(10.64)
New investors........................ 4,200,000 49.7 63,000,000 354.5 15.00
----------- ------- --------------- -------
Total...................... 8,449,652 100.0% $ 17,770,000 100.0%
=========== ======= =============== =======
</TABLE>
- ------------
(1) Total consideration paid by existing stockholders represents the combined
stockholders' equity of the Founding Companies before this Offering,
adjusted to reflect: (i) the payment of $34.8 million in cash as part of the
consideration for the Acquisitions; (ii) the transfer of selected assets to
and the assumption of certain liabilities by certain stockholders of the
Founding Companies in the net amount of $0.5 million in connection with the
Acquisitions; and (iii) the payment of an aggregate interim Working Capital
adjustment of approximately $4.0 million in cash as part of the
consideration for the Acquisitions. See "Use of Proceeds" and
"Capitalization."
18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ARS will acquire the Founding Companies simultaneously with and as a
condition to the consummation of this Offering. For financial statement
presentation purposes, however, Atlas has been identified as the accounting
acquiror. The following selected historical financial data of Atlas as of June
30, 1994 and 1995 and December 31, 1995 and for each of the three years in the
periods ended June 30, 1993, 1994 and 1995 and for the year ended December 31,
1995, have been derived from the audited financial statements of Atlas included
elsewhere in this Prospectus. The following selected historical financial data
for Atlas as of June 30, 1991, 1992 and 1993, and for the years ended June 30,
1991 and 1992, have 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 such data. The
following summary unaudited pro forma financial data presents certain data for
the Company, as adjusted for (i) the effects of the Acquisitions on an
historical basis, (ii) the effects of certain pro forma adjustments to the
historical financial statements and (iii) the consummation of this Offering. See
the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30 YEAR ENDED ENDED JUNE 30
----------------------------------------------------- DECEMBER 31, --------------------
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
ATLAS:
Revenues......................... $ 6,037 $ 7,865 $ 10,210 $ 15,625 $ 21,229 $ 22,048 $ 10,354 $ 14,092
Gross profit..................... 999 1,448 2,027 2,948 3,514 4,237 1,945 2,735
Selling, general and
administrative expenses........ 1,003 1,252 1,761 2,421 2,985 3,022 1,439 2,268
Income (loss) from operations.... (4) 196 266 527 529 1,215 506 467
Interest income and other
expense, net................... 18 (3) (16) 39 179 37 44 49
Interest expense................. (152) (154) (190) (129) (143) (134) (81) (96)
Net income (loss)................ $ (134) $ 35 $ 35 $ 267 $ 342 $ 684 $ 280 $ 270
========= ========= ========= ========= ========= ============ ========= =========
</TABLE>
PRO FORMA(1):
Revenues......................... $114,636 $ 52,585 $ 61,536
Gross profit..................... 29,416 13,216 16,042
Selling, general and
administrative expenses(2)...... 21,853 10,150 12,402
Goodwill amortization(3)......... 1,296 648 648
Operating income................. 6,267 2,418 2,992
Interest income and other
expense, net.................... 613 273 245
Interest expense(4).............. (457) (229) (229)
Income from continuing
operations...................... $ 3,458 $ 1,329 $ 1,624
============ ========= =========
Income per share from continuing
operations...................... $ .41 $ .16 $ .19
============ ========= =========
Shares used in computing pro
forma income per share from
continuing operations(4)........ 8,450 8,450 8,450
============ ========= =========
<TABLE>
<CAPTION>
JUNE 30
JUNE 30, 1996 -----------------
----------------------------------------------------- DECEMBER 31, PRO
1991 1992 1993 1994 1995 1995 ACTUAL FORMA(1)
--------- --------- --------- --------- --------- ------------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ATLAS BALANCE SHEET DATA:
Working capital.................. $ (397) $ (376) $ (575) $ (604) $ (564) $ (288) $(526 ) $(39,519)
Total assets..................... 3,868 3,992 4,328 6,335 7,141 7,092 8,481 88,435
Total debt, including current
portion........................ 2,688 2,423 2,486 2,846 2,530 2,371 2,646 26,848
Stockholders' equity............. 463 500 405 681 1,058 1,503 1,772 6,631
</TABLE>
JUNE 30
AS ADJUSTED(5)
--------------
ATLAS BALANCE SHEET DATA:
Working capital.................. $ 878
Total assets..................... 88,001
Total debt, including current
portion........................ 6,999
Stockholders' equity............. 61,346
(FOOTNOTES ON FOLLOWING PAGE)
19
- ------------
(1) The pro forma statements of operations data and the pro forma balance sheet
data assume that the Acquisitions were closed on January 1 of each period
presented and June 30, 1996, respectively, and are not necessarily
indicative of the results the Company would have obtained had these events
actually then occurred or of the Company's future results. The pro forma
combined financial information (i) is based on preliminary estimates,
available information and certain assumptions that management deems
appropriate and (ii) should be read in conjunction with the other financial
statements and notes thereto included elsewhere in this Prospectus.
(2) The pro forma combined statements include the effect of certain reductions
in salary and benefits to the owners of six of the Founding Companies to
which they have agreed prospectively, as follows: fiscal 1995, $1,808; and
six months ended June 30, 1995 and 1996, $943 and $1,272, respectively.
Additionally, the pro forma combined statements include the effect of assets
distributed to and the costs of certain leases assumed by the owners of
certain of the Founding Companies.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period.
(4) Computed on a basis described in Note 5 of Notes to Unaudited Pro Forma
Combined Financial Statements.
(5) Reflects the closing of this Offering and the Company's application of the
net proceeds therefrom and the use of borrowings under the New Credit
Facility to repay indebtedness of the Founding Companies and ARS and redeem
certain EHC preferred stock. See "Use of Proceeds."
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements and related notes thereto and "Selected
Financial Data" 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.
The Founding Companies have been managed throughout the periods presented
as independent private companies, and, as such, 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.
These owners and certain key employees have agreed to certain reductions in
their compensation and benefits in connection with the organization of the
Company.
ARS, which has conducted no operations to date, intends to integrate these
businesses, their operations and administrative functions over a period of time.
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 may 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.
Atlas has been identified as the accounting acquiror for financial
statement presentation purposes. See the "Combined Founding
Companies -- Results of Operations -- Combined" elsewhere herein.
ATLAS
Founded in 1976, Atlas is a leading provider of electric, HVAC and plumbing
installation services to the residential and light commercial construction
markets throughout South Carolina. Atlas also provides comprehensive plumbing,
HVAC and electrical maintenance, repair and replacement services and repairs and
installs pre-fabricated gas and wood-burning fireplaces.
21
RESULTS OF OPERATIONS -- ATLAS
The following table sets forth certain selected financial data and data as
a percentage of revenues for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30 YEAR ENDED JUNE 30
------------------------------------------ DECEMBER 31, --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............................. $ 10,210 100.0% $ 15,625 100.0% $ 22,048 100.0% $ 10,354 100.0%
Cost of services..................... 8,183 80.1 12,677 81.1 17,811 80.8 8,409 81.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,027 19.9 2,948 18.9 4,237 19.2 1,945 18.8
Selling, general and administrative
expenses........................... 1,761 17.2 2,421 15.5 3,022 13.7 1,439 13.9
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... 266 2.7 527 3.4 1,215 5.5 506 4.9
Interest income and other expense,
net................................ (16) (0.2) 39 0.2 37 0.2 44 0.4
Interest expense..................... (190) (1.9) (129) (0.8) (134) (0.6) (81) (0.8)
--------- --------- --------- --------- --------- --------- --------- ---------
Pretax income........................ 60 0.6 437 2.8 1,118 5.1 469 4.5
Income taxes......................... 25 0.2 170 1.1 434 2.0 189 1.8
--------- --------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 35 0.4 $ 267 1.7 $ 684 3.1 $ 280 2.7
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 14,092 100.0%
Cost of services..................... 11,357 80.6
--------- ---------
Gross profit......................... 2,735 19.4
Selling, general and administrative
expenses........................... 2,268 16.1
--------- ---------
Income from operations............... 467 3.3
Interest income and other expense,
net................................ 49 0.4
Interest expense..................... (96) (0.7)
--------- ---------
Pretax income........................ 420 3.0
Income taxes......................... 150 1.1
--------- ---------
Net income........................... $ 270 1.9
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $3.7 million, or 35.6%, from $10.4 million
for the six months ended June 30, 1995 to $14.1 million for the six months ended
June 30, 1996. The increase was attributable to several large new installation
projects and the addition of approximately $0.9 million of revenues resulting
from the acquisition of three companies in early 1996.
COST OF SERVICES -- Cost of services increased $3.0 million, or 35.7%, from
$8.4 million for the six months ended June 30, 1995 to $11.4 million for the six
months ended June 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 0.6% from 81.2% to 80.6% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.9 million, or 64.3%, from $1.4 million for
the six months ended June 30, 1995 to $2.3 million for the six months ended June
30, 1996. The increase in selling, general and administrative expenses was
primarily attributable to added administrative staff at several operating
locations, the added administrative staff resulting from the 1996 acquisitions
and approximately $0.3 million of additional owner's compensation in 1996.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net was virtually unchanged for the six months ended June 30, 1995 and
1996.
INTEREST EXPENSE -- Interest expense increased slightly from $0.08 million
for the six months ended June 30, 1995 to $0.1 million for the six months ended
June 30, 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%
22
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 expense of $0.02 million in 1993 to
income of $0.04 million in 1994. The change 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.
LIQUIDITY AND CAPITAL RESOURCES -- ATLAS
The following table sets forth historical selected information from Atlas
statements of cash flows (in millions):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JUNE 30 YEAR ENDED JUNE 30
-------------------- DECEMBER 31, --------------------
1993 1994 1995 1995 1996
--------- --------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.3 $ 0.7 $ 0.8 $ 0.6 $ 0.5
Net cash used in investing
activities......................... (0.3) (1.0) (0.3) (0.1) (0.8)
Net cash provided by (used in)
financing activities............... 0.0 0.4 (0.4) (0.2) 0.3
--------- --------- ------------ --------- ---------
Net increase in cash and cash
equivalents........................ $ 0.0 $ 0.1 $ 0.1 $ 0.3 $ 0.0
========= ========= ============ ========= =========
</TABLE>
From 1993 through the six months ended June 30, 1996, Atlas generated $2.3
million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization, with little change in non-cash
working capital. Net cash used in investing activities was primarily
attributable to purchases of property and equipment. Net cash used in financing
activities was attributable to net borrowings and repayments of short- and
long-term debt obligations.
Atlas had a working capital deficit of $0.5 million and had long-term debt
of $1.6 million as of June 30, 1996. Atlas has historically funded its
operations with cash flows from operations and borrowings from lenders. While
there can be no assurance, management of Atlas believes it has adequate cash
flow and financing alternatives to fund its operations through the third quarter
of 1997 on a stand-alone basis.
23
COMBINED FOUNDING COMPANIES
RESULTS OF OPERATIONS -- COMBINED
The Combined Founding Company Statements of Operations data for fiscal
1993, 1994 and 1995 and for the six months ended June 30, 1995 and 1996 do not
purport to present the combined Founding Companies in accordance with generally
accepted accounting principles, but represent merely a summation of the
revenues, gross profit and selling, general and administrative expenses of the
individual Founding Companies on a historical basis, and exclude the effects of
pro forma adjustments. This data will not be comparable to and may not be
indicative of the Company's post-combination results of operations because (i)
the Founding Comanies were not under common control or management and had
different tax structures (S corporations and C corporations) during the periods
presented and (ii) the Company will use the purchase method to establish a new
basis of accounting to record the Acquisitions.
The following table sets forth certain unaudited combined data of the
Founding Companies on a historical basis and exclude the effects of pro forma
adjustments for the periods indicated (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Combined Founding Companies
Statements of Operations Data
(Unaudited):
Revenues............................ $ 94,184 $ 105,610 $ 114,636 $ 52,585 $ 61,536
Gross profit........................ 24,973 25,860 29,416 13,216 16,042
Selling, general and administrative
expenses.......................... 20,300 22,104 24,190 11,318 13,050
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES. Revenues increased $8.9 million, or 16.9%, from $52.6 million
for the six months ended June 30, 1995 to $61.5 million for the six months ended
June 30, 1996. This increase was primarily due to an increase in Atlas revenues
of $3.7 million, or 35.6%, from $10.4 million for the six months ended June 30,
1995 to $14.1 million for the six months ended June 30, 1996, due to several
large new installation projects and the addition of $0.9 million of revenues
resulting from the acquisition of three companies added during the six months
ended June 30, 1996. The remaining increase in revenues was primarily
attributable to an increase in Crown's residential service revenues of $1.2
million resulting from increased plumbing and renovation services, an increase
in Meridian & Hoosier's revenues of $2.6 million resulting from the acquisition
of Sagamore Heating and Cooling ("Sagamore"), an increase in General Heating's
revenue of $1.0 million resulting from increased new installation activity and
replacement services and increases in repair and replacement services and an
increase in A-ABC's revenues of $0.4 million.
COST OF SERVICES. Cost of services increased $6.1 million, or 15.5%, from
$39.4 million for the six months ended June 30, 1995 to $45.5 million for the
six months ended June 30, 1996, but decreased as a percentage of revenues from
74.9% for the six months ended June 30, 1995 to 74.0% for the six months ended
June 30, 1996. The dollar increase in cost of services was primarily
attributable to a $3.0 million increase at Atlas, from $8.4 million for the six
months ended June 30, 1995 to $11.4 million for the six months ended June 30,
1996, which is consistent with its percentage increase in revenues. The
remaining dollar increase was primarily attributable to a $1.0 million increase
at Crown resulting primarily from an increase in volume of services provided
resulting from a reduction in pricing to increase market share, a $1.6 million
increase at Meridian & Hoosier resulting primarily from the Sagamore acquisition
and a $0.6 million increase at General, which is consistent with its percentage
increase in revenues. The increase was offset by a $0.4 million decrease at
Florida HAC. The decrease in cost of services as a percentage of sales was
primarily attributable to increases in volume purchase discounts and more
effective employee utilization at A-ABC and changes in the mix of services and
increases in volume purchase discounts at Meridian & Hoosier.
24
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1.8 million, or 15.9%, from $11.3 million for
the six months ended June 30, 1995 to $13.1 million for the six months ended
June 30, 1996, and remained relatively constant as a percentage of revenues
between the two periods. The dollar increase in selling, general and
administrative expenses was primarily attributable to slight changes at all the
Founding Companies.
FISCAL 1995 COMPARED TO FISCAL 1994
REVENUES. Revenues increased $9.0 million, or 8.5%, from $105.6 million in
fiscal 1994 to $114.6 million in fiscal 1995. This increase was largely due to:
(i) an increase in Atlas revenues of $6.4 million, or 41.0%, from $15.6 million
in fiscal 1994 to $22.0 million in fiscal 1995, primarily attributable to its
new operating facility in Hilton Head (opened in April 1994) and the addition of
several new large home builder customers; (ii) an increase in Crown's revenues
of $2.3 million, or 13.7%, from $16.8 million in fiscal 1994 to $19.1 million in
fiscal 1995, primarily attributable to an increase in plumbing and HVAC
services; and (iii) an increase in Meridian & Hoosier's revenue of $2.0 million,
or 24.7%, from $8.1 million in fiscal 1994 to $10.1 million in fiscal 1995,
primarily attributable to increased residential replacement sales. This increase
was partially offset by a decrease in General Heating's revenues of $1.1
million, or 3.0%, from $36.3 million in fiscal 1994 to $35.2 million in fiscal
1995 due to a reduction in new home starts in the Washington-Baltimore
metropolitan area, as well as a decrease in revenues of Florida HAC of $1.3
million, or 8.2%, from $15.8 million in fiscal 1994 to $14.5 million in fiscal
1995 due to a decrease in apartment complex installations.
COST OF SERVICES. Cost of services increased by $5.4 million, or 6.8%,
from $79.8 million in fiscal 1994 to $85.2 million in fiscal 1995, but decreased
as a percentage of revenues from 75.5% in fiscal 1994 to 74.3% in fiscal 1995.
The dollar increase in cost of services was primarily attributable to: (i) a
$5.1 million increase in the cost of services of Atlas from $12.7 million in
fiscal 1994 to $17.8 million in fiscal 1995, which was consistent with its
percentage increase in revenues; (ii) a $1.0 million increase in Crown's cost of
service from $10.3 million in fiscal 1994 to $11.3 million in fiscal 1995 as
discussed below; and (iii) a $1.5 million increase in cost of services at
Meridian & Hoosier from $5.8 million in fiscal 1994 to $7.3 million in fiscal
1995, which was consistent with its percentage increase in revenues. The
increases were partially offset by a $1.0 million decrease in cost of services
of General Heating from $29.9 million in fiscal 1994 to $28.9 million in fiscal
1995, which was consistent with its percentage decrease in revenues, and a $1.6
million decrease in Florida HAC's cost of service from $12.1 million in fiscal
1994 to $10.5 million in fiscal 1995. The reduction in cost of services as a
percentage of revenues was primarily attributable to the decrease in apartment
complex installations in fiscal 1995 and improvement in volume rebates at
Florida HAC and a change in the mix of services from lower-margin services to
higher-margin services and increased use of contractors at Crown.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.1 million, or 9.5%, from $22.1 million in
fiscal 1994 to $24.2 million in fiscal 1995 and increased slightly as a
percentage of revenues from 20.9% in fiscal 1994 to 21.1% in fiscal 1995. The
dollar increase was primarily attributable to: (i) a $0.6 million increase at
Atlas resulting primarily from the addition of an administrative infrastructure
for the Hilton Head location and other office expansions; (ii) a $0.4 million
increase at Crown resulting from increased advertising; (iii) a $0.3 million
increase at Meridian & Hoosier resulting from increased marketing efforts; and
(iv) a $0.4 million increase at Florida HAC resulting from a $0.2 million
increase in owner compensation.
FISCAL 1994 COMPARED TO FISCAL 1993
REVENUES. Revenues increased $11.4 million, or 12.1%, from $94.2 million
in fiscal 1993 to $105.6 million in fiscal 1994. This increase was primarily due
to: (i) an increase in Atlas revenues of $5.4 million, or 52.9%, primarily
attributable to the opening of a new location in Greenville, South Carolina and
the addition of several new home building customers; (ii) an increase of $2.7
million, or 20.7%, at Florida HAC, as a result of an increase in the number of
new home starts and the addition of several large apartment complexes; (iii) an
increase at General Heating of $1.7 million, or 4.9%, resulting from an increase
in new
25
home installation volume and replacement services; and (iv) an increase of $2.2
million, or 37.3%, at Meridian & Hoosier primarily attributable to increased
residential replacement services and the start-up of a construction division.
These increases were partially offset by a decrease in revenues of $2.2 million,
or 20.2%, at A-ABC resulting from a $0.7 million decrease in HVAC installations
and a $0.4 million decrease in plumbing services, respectively.
COST OF SERVICES. Cost of services increased $10.6 million, or 15.3%, from
$69.2 million in fiscal 1993 to $79.8 million in fiscal 1994 and increased as a
percentage of revenue for fiscal 1994 to 75.5% from 73.5% for fiscal 1993. The
dollar increase in cost of services was primarily attributable to: (i) a $4.5
million increase at Atlas; (ii) a $2.2 million increase at Florida HAC, which
was consistent with its percentage increase in revenues; (iii) a $2.5 million
increase at General Heating; and (iv) a $1.7 million increase at Meridian &
Hoosier resulting from the start-up of its construction division. The increase
in cost of services as a percentage of revenues was primarily attributable to:
(i) increased turnover and underutilized assets at Atlas; and (ii) increased
truck and delivery costs and payroll and related employee benefits at General
Heating.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Total selling, general and
administrative expenses increased $1.8 million, or 8.9%, from $20.3 million in
fiscal 1993 to $22.1 million in fiscal 1994. The increase was primarily
attributable to: (i) a $0.6 million increase at Atlas resulting from the
addition of an administrative infrastructure in Greenville; and (ii) a $0.5
million increase at Meridian & Hoosier resulting from increased sales commission
and advertising costs.
LIQUIDITY AND CAPITAL RESOURCES -- COMBINED
On a combined basis, the Founding Companies generated $6.8 million and $1.5
million of net cash from operating activities during fiscal 1995 and the six
months ended June 30, 1996, respectively. Net cash used in investing activities
by the Founding Companies on a combined basis was $1.9 million and $0.4 million
during fiscal 1995 and the six months ended June 30, 1996, respectively. Most of
the cash used in investing activities during these periods was used for
purchases of property and equipment. Net cash used in financing activities by
the Founding Companies on a combined basis was $1.8 million and $6.0 million
during fiscal 1995 and the six months ended June 30, 1996, respectively. Most of
the cash used in financing activities during these periods was used for net
payments on long-term debt and distributions to stockholders. The combined cash
and cash equivalents of the Founding Companies decreased by $4.9 million from
$7.9 million at December 31, 1995 to $3.0 million at June 30, 1996. Atlas and
A-ABC each had a working capital deficit of $0.5 million at June 30, 1996.
On the closing of this Offering, the Company intends to repay or refinance
an aggregate of approximately $22.3 million of indebtedness and other
obligations of the Founding Companies, ARS and EHC and to pay approximately $4.0
million of net interim Working Capital adjustments as part of the purchase
prices of the Acquisitions. See "Use of Proceeds."
Prior to the closing of the Acquisitions, General Heating will make
distributions to its stockholders in respect of its estimated S corporation
Accumulated Adjustment Account as of the date of the closing. These
distributions (approximately $8.0 million as of June 30, 1996) are expected to
be funded primarily through working capital, cash provided by General Heating's
operating activities and, to the extent necessary, a borrowing by General
Heating of approximately $1.5 million.
The Company expects to enter into the New Credit Facility effective
concurrently with the closing of this Offering. NationsBank has underwritten the
New Credit Facility, subject to the terms and conditions of a commitment letter
dated July 17, 1996. According to these terms, the Company will have 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, post-Offering acquisitions, capital expenditures and working
capital. Loans under the New Credit Facility will 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
26
from 75 to 175 basis points depending on the same ratio. Commitment fees equal
to from 25 to 50 basis points per annum will be payable on the unused portion of
the line of credit. The New Credit Facility will contain a sublimit for standby
letters of credit of up to $5.0 million. The New Credit Facility will terminate
and all amounts outstanding, if any, thereunder will be due and payable in
August 1999. The Company's subsidiaries will guarantee the repayment of all
amounts due under the New Credit Facility.
The New Credit Facility will prohibit the payment of dividends by the
Company, will not permit the Company to incur or assume other indebtedness in
excess of $2.5 million and will require the Company to comply with certain
financial covenants.
The commitment of the bank to provide the New Credit Agreement is subject
to the satisfaction of certain conditions, including the execution of
appropriate loan documentation. There can be no assurance that the terms of the
New Credit Agreement, if implemented, will not vary from the terms described
above. In the event the New Credit Agreement is not available after this
Offering, the Company believes that sufficient alternative sources of financing
should be available on reasonable terms to the Company.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs, debt service
requirements and planned capital expenditures for property and equipment. On a
combined basis, the Founding Companies made capital expenditures of $2.6 million
and $2.1 million in fiscal 1995 and the six months ended June 30, 1996,
respectively.
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 New Credit Facility, as well as issuances of additional equity.
Due to the relatively low levels of inflation experienced in fiscal 1993,
1994 and 1995, inflation did not have a significant effect on the results of the
combined Founding Companies in those fiscal years.
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 "Summary Individual
Founding Company Financial Data" and the separate company financial statements
and related notes thereto appearing elsewhere in this Prospectus.
GENERAL HEATING
Founded in 1947, General Heating is a leading installer of HVAC systems and
equipment and pre-fabricated gas and wood-burning fireplaces for residential and
light commercial construction markets in the Washington-Baltimore metropolitan
area, including northern Virginia, and Richmond.
27
RESULTS OF OPERATIONS -- GENERAL HEATING
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 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% $ 16,214 100.0%
Cost of services..................... 27,393 79.1 29,928 82.4 28,866 82.1 13,331 82.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 7,249 20.9 6,406 17.6 6,293 17.9 2,883 17.8
Selling, general and administrative
expenses........................... 5,011 14.5 5,245 14.4 5,280 15.0 2,626 16.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 257 1.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 17,211 100.0%
Cost of services..................... 13,933 81.0
--------- ---------
Gross profit......................... 3,278 19.0
Selling, general and administrative
expenses........................... 2,816 16.4
--------- ---------
Income (loss) from operations........ $ 462 2.6
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.0 million, or 6.2%, from $16.2 million
for the six months ended June 30, 1995, to $17.2 million for the six months
ended June 30, 1996. This increase was attributable to a $0.5 million increase
in new installation activity primarily in the Maryland area and a $0.5 million
increase in replacement revenues.
COST OF SERVICES -- Cost of services increased $0.6 million, or 4.5%, from
$13.3 million for the six months ended June 30, 1995 to $13.9 million for the
six months ended June 30, 1996. This increase was consistent with General
Heating's percentage increase in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 7.7%, from $2.6 million for
the six months ended June 30, 1995 to $2.8 million for the six months ended June
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
28
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>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 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 $ 1.2 $ (0.3)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) 1.2 0.8
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.5) (2.7)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ 1.9 $ (2.2)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the six months ended June 30, 1996, General Heating
generated $7.7 million in cash from operating activities and used $2.1 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $5.6 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 Acquisitions, General Heating will make
distributions to its stockholders in respect of its estimated S corporation
Accumulated Adjustment Account as of the date of the closing. These
distributions (approximately $8.0 million as of June 30, 1996) are expected to
be funded primarily through working capital, cash provided by General Heating's
operating activities and, to the extent necessary, additional debt. See
"Certain Transactions -- Organization of the Company."
General Heating had working capital of $5.6 million as of June 30, 1996.
General Heating has historically funded its operations with cash flows from
operations. While there can be no assurance, management of General Heating
believes it has adequate cash flow to fund its operations through the third
quarter of 1997.
CROWN
Founded in 1956, Crown is the largest single provider of residential
plumbing, HVAC, electrical maintenance, repair and replacement services to the
residential and light commercial markets in the Houston metropolitan area.
RESULTS OF OPERATIONS -- CROWN
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 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% $ 8,775 100.0%
Cost of services..................... 10,332 63.5 10,314 61.2 11,333 59.3 5,194 59.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 5,936 36.5 6,530 38.8 7,791 40.7 3,581 40.8
Selling, general and administrative
expenses........................... 5,698 35.0 5,837 34.7 6,165 32.2 2,941 33.5
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 640 7.3
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 10,019 100.0%
Cost of services..................... 6,244 62.3
--------- ---------
Gross profit......................... 3,775 37.7
Selling, general and administrative
expenses........................... 2,980 29.7
--------- ---------
Income from operations............... $ 795 8.0
========= =========
29
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 13.6%, from $8.8 million
for the six months ended June 30, 1995 to $10.0 million for the six months ended
June 30, 1996. This increase was attributable to increases of $0.6 million each
in plumbing and HVAC revenues.
COST OF SERVICES -- Cost of services increased $1.0 million, or 19.2%, from
$5.2 million for the six months ended June 30, 1995 to $6.2 million for the six
months ended June 30, 1996, and increased as a percentage of revenues from 59.2%
in the six months ended June 30, 1995 to 62.3% in the six months ended June 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 increased $0.1 million, or 3.4%, from $2.9 million for
the six months ended June 30, 1995 to $3.0 million for the six months ended June
30, 1996, but declined as a percentage of revenues from 33.5% in the six months
ended June 30, 1995 to 29.7% in the six months ended June 30, 1996. This
percentage reduction was primarily attributable to a $0.1 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 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>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 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 $ 0.8
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (0.5) 1.1
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 (0.5) (3.7)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ -- $ 1.0 $ 1.0 $ (0.3) $ (1.8)
========= ========= ========= ========= =========
</TABLE>
30
From 1993 through the six months ended June 30, 1996, Crown generated $3.3
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.
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 $3.7 million as of June 30, 1996. It
historically has funded its operations with cash flows from operations and
borrowings from lenders and its sole shareholder. While there can be no
assurance, management of Crown believes it has adequate cash flows and financing
alternatives to fund its operations through the third quarter of 1997.
FLORIDA HAC
Founded in 1970, 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.
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 15,845 100.0% $ 14,510 100.0% $ 7,631 100.0% $ 7,244 100.0%
Cost of services..................... 12,079 76.2 10,541 72.6 5,697 74.7 5,339 73.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,766 23.8 3,969 27.4 1,934 25.3 1,905 26.3
Selling, general and administrative
expenses........................... 3,321 21.0 3,738 25.8 1,883 24.7 1,816 25.1
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 445 2.8 $ 231 1.6 $ 51 0.6 $ 89 1.2
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues decreased $0.4 million, or 5.3%, from $7.6 million for
the six months ended June 30, 1995, to $7.2 million for the six months ended
June 30, 1996. The decrease in revenue was attributable to a decrease in
apartment complex installations.
COST OF SERVICES -- Cost of services decreased $0.4 million, or 7.0%, from
$5.7 million for the six months ended June 30, 1995 to $5.3 million for the six
months ended June 30, 1996 and decreased 1.0% as a percentage of revenues from
74.7% for the six months ended June 30, 1995 to 73.7% for the six months ended
June 30, 1996. These decreases were primarily attributable to a decrease in
apartment complex installations and improvements in vendor pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 5.3%, from $1.9 million for
the six months ended June 30, 1995 to $1.8 million for the six months ended June
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.
31
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.
LIQUIDITY AND CAPITAL RESOURCES -- FLORIDA HAC
The following table sets forth selected information from Florida HAC's
statements of cash flows (dollars in millions):
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.6 $ 0.5 $ 0.2 $ 0.0
Net cash used in investing
activities........................ (0.2) (0.2) (0.2)
(0.2)
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 $ (0.5) $
(0.8)
========= ========= ========= =========
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 June 30, 1996.
Florida HAC has historically funded its operations with cash flows from
operations and borrowings from lenders and its stockholders. While there can be
no assurance, management of Florida HAC believes it has adequate cash flows and
financing alternatives to fund its operations through the third quarter of 1997.
MERIDIAN & HOOSIER
Founded in 1973, Meridian & Hoosier is a leading provider of HVAC
maintenance, repair and replacement services to the residential and commercial
markets (including large commercial facilities) in central Indiana, including
Indianapolis, and also installs HVAC systems and equipment for the residential
construction market in those areas. On January 1, 1996, Meridian & Hoosier
acquired Sagamore Heating and Cooling ("Sagamore"), which provides HVAC repair
and replacement services.
RESULTS OF OPERATIONS -- MERIDIAN & HOOSIER
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,066 100.0% $ 10,133 100.0% $ 4,420 100.0% $ 6,992 100.0%
Cost of services..................... 5,797 71.9 7,281 71.9 3,173 71.8 4,751 67.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,269 28.1 2,852 28.1 1,247 28.2 2,241 32.1
Selling, general and administrative
expenses........................... 1,988 24.6 2,350 23.2 1,056 23.9 1,724 24.7
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 281 3.5 $ 502 4.9 $ 191 4.3 $ 517 7.4
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
32
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $2.6 million, or 59.1%, from $4.4 million
for the six months ended June 30, 1995, to $7.0 million for the six months ended
June 30, 1996. Approximately $1.0 million of this increase was attributable to
the acquisition of Sagamore and a majority of the remaining increase was due to
increased sales of residential replacement services.
COST OF SERVICES -- Cost of services increased $1.5 million, or 46.9%, from
$3.2 million for the six months ended June 30, 1995 to $4.7 million for the six
months ended June 30, 1996, but declined 3.9% as a percentage of revenues from
71.8% for the six months ended June 30, 1995 to 67.9% for the six months ended
June 30, 1996. The increase in cost of services was primarily attributable to
the increased sales for the six months ended June 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 $0.6 million, or 54.5%, from $1.1 million for
the six months ended June 30, 1995 to $1.7 million for the six months ended June
30, 1996. This increase was primarily attributable to added administrative staff
resulting from the acquisition of Sagamore and increased marketing and selling
expenses.
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):
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.4 $ 0.7 $ 0.2 $ 0.2
Net cash used in investing
activities.......................... (0.5) (0.2) 0.0
(0.9)
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 $ 0.1
========= ========= ========= =========
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 $1.1 million as of June 30, 1996.
It historically has funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder. While there can be no
assurance, management of Meridian & Hoosier believes it has adequate cash flows
and financing alternatives to fund its operations through the third quarter of
1997.
33
A-ABC
Founded in 1972, A-ABC is among the leading providers of home appliances,
HVAC and plumbing maintenance, repair and replacement services to the
residential and light commercial markets in the Houston metropolitan area.
RESULTS OF OPERATIONS -- A-ABC
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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31 JUNE 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% $ 3,983 100.0%
Cost of services..................... 6,921 63.5 5,574 64.2 5,709 65.6 2,721 68.3
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,979 36.5 3,102 35.8 2,998 34.4 1,262 31.7
Selling, general and administrative
expenses........................... 2,830 26.0 2,444 28.2 2,348 27.0 1,108 27.8
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.... $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 154 3.9
========= ========= ========= ========= ========= ========= ========= =========
Loss from discontinued operations.... $ (1,452) $ (142) $ (115) $ (92)
========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 4,380 100.0%
Cost of services..................... 2,658 60.7
--------- ---------
Gross profit......................... 1,722 39.3
Selling, general and administrative
expenses........................... 1,094 25.0
--------- ---------
Income from continuing operations.... $ 628 14.3
========= =========
Loss from discontinued operations.... $ (244)
=========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.3 million, or 7.5%, from $4.0 million for
the six months ended June 30, 1995 to $4.4 million for the six months ended June
30, 1996. The increase in revenue was attributable to a $0.3 increase in HVAC
installations and a $0.1 million increase in appliance service.
COST OF SERVICES -- Cost of services was $2.7 million for the six months
ended June 30, 1995 and 1996, but decreased as a percentage of revenues from
68.3% to 60.7%. The percentage decrease in cost of services 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 were $1.1 million for the six months ended June 30, 1995
and 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 in revenue was primarily
attributable to a $0.9 million decrease in appliance service, a $0.7 million
decrease in HVAC installations and a $0.4 million decrease in 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.
34
INCOME (LOSS) FROM DISCOUNTED 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 a $0.6 million reduction in salary and benefit cost, a $0.1
million reduction in rent and property tax expense related to certain store
closings and a $0.3 million reduction in advertising expense.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in) by
operating activities............... $ 0.8 $ 0.3 $ 0.6 $ 0.1 $ 0.3
Net cash provided by (used in)
investing activities............... (1.2) 0.2 (0.4) 0.1 (0.4)
Net cash used in financing
activities......................... 0.4 (0.4) (0.1) (0.3) (0.1)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ 0.0 $ 0.1 $ 0.1 $ (0.1) $ (0.2)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the six months ended June 30, 1996, A-ABC generated $2.0
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 consists 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 $0.5 million at June 30, 1996. It
historically has funded its operations with cash flows from operations and
borrowings from lenders and its shareholder. While there can be no assurance,
management of A-ABC believes it has adequate cash flows and financing
alternatives to fund its operations through the third quarter of 1997.
35
BUSINESS
GENERAL
ARS was founded in October 1995 to create the leading national provider of
(i) comprehensive maintenance, repair and replacement services for HVAC systems,
including IAQ, and for 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 (collectively,
"residential services"). To achieve this goal, the Company intends to
implement an aggressive acquisition program and a national operating strategy
designed to increase internal revenue growth, improve profitability and
capitalize on cost efficiencies. During fiscal 1995, the combined revenues of
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%. 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.
ARS has definitive agreements to acquire the seven Founding Companies
simultaneously with the closing of this Offering. The Founding Companies have
been in business an average of 31 years and provide various residential services
in and around the Houston and Washington-Baltimore metropolitan areas, Richmond,
Virginia, throughout South Carolina, southeast Florida and central Indiana
(primarily Indianapolis). The Company is a leading provider of one or more
residential services in each region in which it operates. During fiscal 1995,
the Company's service and installation technicians (totaling approximately 1,000
as of June 30, 1996) responded to approximately 263,000 maintenance, repair and
replacement service calls and installed approximately 15,100 HVAC systems in
newly built homes, apartments and commercial buildings. Three of the largest
Founding Companies, representing approximately 63% of the Company's fiscal 1995
combined revenues, have been members of an industry-sponsored practice-sharing
group for the past six years. Through this arrangement, they have developed
common marketing plans, computer systems and other operational practices in
order to develop "best practices" in their respective markets. The Company
believes building upon this arrangement to include all of the Founding Companies
will aid in the initial integration of the Founding Companies following the
closing of this Offering.
INDUSTRY OVERVIEW
The Company estimates that 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.
36
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 implementing a national operating strategy that
enhances internal revenue growth and profitability and achieves cost
efficiencies.
GROWTH THROUGH ACQUISITION. The Company intends to implement 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 will
initially target 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 will be superior operational management
personnel, whom the Company generally will seek 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 intends to
implement 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 will review its operations at the local
and regional operating levels (as well as examining practices in other
service industries) 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 intends to utilize a national training program
to improve and keep current the technical, selling and customer
relations skills of its service technicians and will 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 the Founding Companies and other
acquired businesses by eliminating duplicative administrative
functions in tuck-in acquisitions and consolidating certain functions
performed separately by each company 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 the individual Founding Companies
and other acquired companies 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 intends to
implement an aggressive acquisition program to expand into these new markets and
to enhance its position in existing markets.
37
In new markets, the Company will target for acquisition one or more leading
local or regional residential services companies. Generally, these companies
will be run by successful entrepreneurs whom the Company will endeavor to retain
and will be of sufficient size to provide the basis for future Company expansion
within a given market. Through implementation of its national operating
strategy, the Company will 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 will seek 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 the
acquisitions within existing markets will be large enough to warrant their own
operating and management structure while other acquisitions will be 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 will 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 will be expected to
demonstrate potential for revenue growth and profitability. The Company will
also evaluate 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 will be regarded by many owners of residential
services businesses as an attractive acquirer 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 promptly following this Offering. Based on
the Company's experience in connection with the acquisitions of the Founding
Companies, the Company believes the senior executives of the Founding Companies
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. Within the past several months, the Company
has contacted the owners of a number of residential services businesses, several
of whom have expressed interest in having their businesses acquired by the
Company. The Company currently has no binding agreements to effect any
acquisition other than in connection with the Founding Companies. 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. The Company
38
intends to register 5,000,000 additional shares of Common Stock under the
Securities Act during the fourth quarter of 1996 for its use in connection with
future acquisitions. 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,
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, including fireplaces, in newly constructed homes and small commercial
buildings.
The following table shows, by region, the approximate percentages of the
combined Founding Companies' revenue for fiscal 1995 represented by maintenance,
repair and replacement services and new installation services, respectively.
<TABLE>
<CAPTION>
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
<S> <C> <C> <C> <C>
MAINTENANCE, REPAIR AND REPLACEMENT SERVICES:
Houston Metropolitan Area....... 8% 10% 1% 6%
Washington-Baltimore
Metropolitan Area and
Richmond, Virginia............ 6 - - -
South Carolina.................. 3 - - -
Southeast Florida............... 6 - - -
Indianapolis and Central
Indiana....................... 8 - - -
---- -------- ---------- --------
31% 10% 1% 6%
==== ======== ========== ========
NEW INSTALLATION SERVICES:
Houston Metropolitan Area....... -% -% -% -%
Washington-Baltimore
Metropolitan Area and
Richmond, Virginia............ 20 - - 5
South Carolina.................. 6 4 5 -
Southeast Florida............... 11 - - -
Indianapolis and Central
Indiana....................... 1 - - -
---- -------- ---------- --------
38% 4% 5% 5%
==== ======== ========== ========
</TABLE>
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 percentages in the foregoing
table are 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."
39
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 intends to operate on a decentralized basis, with the
management of each operating location responsible for its day-to-day operations,
profitability and growth. Local management will be supported by the Company's
marketing and advertising strategies and programs and will be provided
appropriate support in developing optimal pricing strategies. Financial
resources for improved systems and expansion of services, training programs,
financial controls, purchasing information and operating expertise will be
shared among locations to improve productivity, lower operating costs and
improve customer satisfaction to stimulate internal growth. While the local
management will operate with a high degree of autonomy and be empowered to make
the necessary operating decisions, adherence to Company training, safety,
customer satisfaction, accounting and internal control policies will be
required. Frequent communication with the Company's executive management team
will be 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. All of 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.
During fiscal 1995, the Company's service technicians responded to
approximately 263,000 maintenance, repair and replacement service calls, of
which approximately 54,000 were requests for services under the Company's
monitoring service contracts; approximately 22,000 were requests for service
under the Company's warranty service contracts; and approximately 187,000 were
requests for emergency or other services not under contract. These calls covered
a wide variety of services including the replacement of approximately 9,000 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.
40
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. During 1995, the Company was
involved in the installation of approximately 15,100 HVAC systems in new homes
and 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. The Company is not materially dependent on any of these
outside sources. See " -- Sources of Supply."
SALES AND MARKETING
In the Founding Companies, the Company believes it has acquired well known
and established businesses that are leading providers of one or more residential
services in their geographic 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
have traditionally been emphasized by the Founding Companies. 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 Founding 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 the Founding
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 had approximately 31,000 service contracts in effect as of June
30, 1996, which generally have one-year terms. 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."
41
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 will seek 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. In addition, the Company
intends to require certain employees to take a physical exam and pass periodic
drug tests.
The Company intends to have continuous training programs in place 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 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 approximately 825 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 has 25 facilities at its 16 service locations, six of which it
owns and 19 of which are leased under leases with remaining terms ranging from
18 months to 10 years from the date hereof on terms the Company believes to be
commercially reasonable. Some of these leases are with affiliates of the
Founding Companies. 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 currently plans to consolidate a small
number of its leased facilities in the Houston and southeast Florida markets.
The Company does not expect to incur any material costs in connection with these
consolidations.
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 operational base for Crown, (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 62,500 square foot leased facility in Charleston, South
Carolina, which is the headquarters for Atlas and (v) a 29,000 square foot
leased facility in Margate, Florida, which serves as the principal office and
fabrication facility
42
for Florida HAC. The Company believes its facilities are well-maintained and
adequate for the Company's existing and planned operations at each operating
location.
After completion of this Offering, the Company will lease its principal
executive and administrative offices in Houston, Texas, and is currently in the
process of obtaining office space for this purpose.
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. Meridian &
Hoosier currently is using the "DIAL ONE" name and related logos and marks
under a franchise agreement. See "Certain Transactions -- Real Estate and Other
Transactions." 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 June 30, 1996, the Company had approximately 1,400 employees
(excluding sales personnel from A-ABC's discontinued retail appliance
operations), of which approximately 1,000 were service and installation
technicians, approximately 270 were clerical and administrative personnel,
approximately 46 were sales personnel and approximately 75 were management
personnel. The Company does not anticipate any significant reductions in staff
as a result of consolidation of the operations of the Founding Companies.
Rather, 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 Founding Companies 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 package at less cost to the employee than is typical in the industry.
The Company expects to be able to offer such a package in a cost effective
manner because of the large number of persons it will employ on closing of this
Offering.
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
believes that the combined entity will be able to obtain a price savings on 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 seasonal variations in the different lines of service. Except in
southeast Florida and South Carolina, 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.
43
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 expects to offer 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, 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, 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 field.
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 intends to implement 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
44
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. None of the
Founding Companies has 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 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 Acquisitions, the
Company evaluated the properties to be acquired and property leases to be
assumed in the Acquisitions, and engaged an independent environmental consulting
firm to conduct or review assessments of environmental conditions at certain
properties owned or operated by the Founding Companies. 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
Founding Companies that would be material to the Company. The Company intends to
implement 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.
45
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.
46
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's current directors, the eight persons nominated to become directors on
closing of this Offering and the executive officers of the Company (ages are as
of June 30, 1996):
NAME AGE POSITION
- ------------------------------------- --- ----------------------------------
C. Clifford Wright, Jr............... 43 Director, President and Chief
Executive Officer
Howard S. Hoover, Jr................. 57 Director, Chairman of the Board
Gorden H. Timmons.................... 47 Director* and Chief Operating
Officer*; President of Atlas
William P. McCaughey................. 38 Director, Executive Vice President
- Planning and Development
John D. Held......................... 34 Senior Vice President, General
Counsel and Secretary
Frank N. Menditch.................... 44 Director*; President of General
Heating
Elliot Sokolow....................... 53 Director*; President of Florida
HAC
A. Jefferson Walker III.............. 34 Treasurer
Michael Mamaux....................... 30 Controller
Thomas N. Amonett.................... 53 Director*
Robert J. Cruikshank................. 65 Director*
Randall B. Hale...................... 33 Director*
Nolan Lehmann........................ 52 Director*
Don D. Sykora........................ 65 Director*
- ------------
* Appointment will become effective on closing of this Offering.
C. CLIFFORD WRIGHT, JR. has been President and Chief Executive Officer and
a director of the Company since November 1995. Since February 1996, Mr. Wright
has also served as President and Chief Executive Officer of EHC. 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 of the Company since
November 1995. Since February 1996, Mr. Hoover has also served as Chairman of
EHC. 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 founded Atlas in 1976 and has served as its President
since that time. 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 - Planning and
Development and a director of the Company since November 1995. Since February
1996, Mr. McCaughey has also served as Executive Vice President of EHC. 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.
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
of the Company since March 1996. Mr. Held also has served as Vice President and
Secretary of EHC 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.
47
FRANK N. MENDITCH 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. Mr. Menditch
holds Master Air Conditioning licenses in various jurisdictions.
ELLIOT SOKOLOW 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. Mr. Walker has
also served as Treasurer of EHC since 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 and EHC 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 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 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 Vice President of Equus Capital Management
Corporation ("ECMC") and 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, where he served in an accounting and financial advisory
capacity to a number of publicly traded and private companies. Mr. Hale is a
Certified Public Accountant. Mr. Hale is being appointed to the Company's Board
of Directors pursuant to the provisions of a funding agreement between ARS and
Equus II, which will terminate pursuant to its terms upon completion of this
Offering. See "Certain Transactions -- Organization of the Company."
NOLAN LEHMANN 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 is being
appointed to the Company's Board of Directors pursuant to the provisions of a
funding agreement between ARS and Equus II, which will terminate pursuant to its
terms upon completion of this Offering. See "Certain
Transactions -- Organization of the Company."
DON D. SYKORA is currently a consultant to Houston Industries Incorporated.
Prior to his retirement in 1995, he served as President and Chief Operating
Officer of Houston Industries Incorporated since 1993.
48
From 1990 to 1993, Mr. Sykora was President and Chief Operating Officer of
Houston Industries Incorporated's principal operating subsidiary, Houston
Lighting & Power Company. Mr. Sykora is currently serving as a director of each
of Powell Industries, Inc., Pool Oilfield Services, Inc. and TransTexas Gas
Corp.
On closing of this Offering, the Board of Directors will be divided into
three classes with staggered terms of office. The term of the Class I directors,
consisting of Messrs. Wright, Sokolow and Amonett, will expire at the annual
stockholders' meeting in 1997. The term of the Class II directors, consisting of
Messrs. Hoover, Menditch, Cruikshank and Hale, will expire at the annual
stockholders' meeting in 1998. The term of the Class III directors, consisting
of Messrs. Timmons, McCaughey, Lehmann and Sykora, will expire at the annual
stockholders' meeting in 1999. After 1997 for the Class I directors, after 1998
for the Class II directors and after 1999 for the Class III directors, each
class will hold office until the third annual stockholders' meeting following
the most recent election of such class. Classification of the Board could have
the effect of increasing the length of time necessary to change the composition
of a majority of the Board. In general, at least two annual meetings of
stockholders will be necessary for stockholders to effect a change in a majority
of the members of the Board. Executive officers serve at the discretion of the
Board.
On closing of this Offering, there will be five committees of the Board:
Audit, Compensation, Executive, Nominating and Industry Relations. The initial
members of the Audit Committee will be Messrs. Cruikshank (chairman), Amonett
and Hale. The initial members of the Compensation Committee will be Messrs.
Amonett (chairman), Sykora and Lehmann. The initial members of the Executive
Committee will be Messrs. Wright (chairman), Hoover, Sykora and Timmons. The
initial members of the Nominating Committee will be Messrs. Hoover (chairman),
Wright, Cruikshank and McCaughey. The initial members of the Industry Relations
Committee will be Messrs. Sokolow (chairman), Hoover and Menditch. The members
of the Audit and Compensation Committees will not be employees of the Company.
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") initially will receive 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 periodically
be granted options to purchase Common Stock pursuant to the Company's 1996
Incentive Plan (the "Incentive Plan"). See "-- 1996 Incentive
Plan -- Nonemployee Director Awards." All directors will be 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
The Company was incorporated in October 1995 and, prior to this Offering,
has not conducted any operations other than activities related to the
Acquisitions and this Offering. The Company did not pay any compensation to its
senior executive officers in 1995. In 1996, the Company paid Mr. Wright 75% of
his annual base salary accrued from November 1, 1995 to August 1, 1996 at an
annual rate of $175,000. The Company anticipates that during 1996 its most
highly compensated executive officers and their annualized base salaries will
be: Mr. Wright -- $175,000; Mr. Hoover -- $160,000; Mr. Timmons -- $150,000; Mr.
Menditch -- $150,000; and Mr. Sokolow -- $150,000. On the closing of this
Offering, Mr. Wright will be paid the balance of his accrued 1995 and 1996
compensation, while Mr. Hoover will be paid his accrued 1995 and 1996
compensation through a series of payments beginning on October 1, 1996. Pursuant
to the terms of their employment agreements with ARS, the annual base salaries
of each of the executive officers named above are subject to upward adjustment
effective one year from the effective date of his employment agreement. The
effective date of the employment agreements of Messrs. Wright and Hoover is
November 1, 1995 and of Messrs. Timmons, Menditch and Sokolow is the date this
Offering closes. See "-- Employment Agreements." Each of the executive
officers named above is eligible to earn additional performance-based incentive
compensation for 1996. See "-- 1996 Incentive Plan."
49
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Wright,
Hoover, McCaughey, Held and the current chief executive officer of each of the
Founding Companies other than Crown and A-ABC, which generally will continue
their existing employment arrangements with operational management. The
following summary of these agreements, which will be effective on the closing of
the Acquisitions and this Offering, does not purport to be complete and is
qualified by reference to them, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part. Each of these
agreements provides for an annual base salary in an amount not less than the
initial specified amount and entitles the employee to participate in all the
Company's compensation plans (as defined) in which other executive officers of
the Company participate. Each of these agreements also has a continuous
three-year term subject to the right of the Company and the employee 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 will be entitled to terminate his employment at any time during the
365-day period following that change of control 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 excise or other similar purpose tax relating to
"parachute payments" under the Internal Revenue Code of 1986, as amended (the
"Code"). Each employment agreement contains or will contain a covenant
limiting competition with the Company for a period of one year following
termination of employment.
The Company also has entered into employment agreements with Messrs. Walker
and Mamaux.
50
OPTION GRANTS
Pursuant to the Company's 1996 Stock Option Plan (the "Option Plan") and
the Incentive Plan, the Company has granted to its directors, officers and
certain employees (including officers of the Founding Companies) 10-year options
to purchase 1,430,000 shares of Common Stock. The Incentive Plan amended and
restated the Option Plan and all options granted under the Option Plan will be
governed by the Incentive Plan. The following table sets forth certain
information concerning the options granted under the Option Plan and the
Incentive Plan:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SHARES UNDERLYING OPTIONS
OPTIONS GRANTED OUTSTANDING OR
NAME DATE OF GRANT OR TO BE GRANTED TO BE GRANTED EXERCISE PRICE
- ------------------------------------- ---------------- ----------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
C. Clifford Wright, Jr............... January 31, 1996 200,000 14.0% $8.00
Howard S. Hoover, Jr................. January 31, 1996 150,000 10.5% $8.00
William P. McCaughey................. January 31, 1996 120,000 8.4% $8.00
A. Jefferson Walker III.............. January 31, 1996 25,000 1.7% $8.00
Certain other officers and
employees.......................... March-April 1996 150,000 10.5% $9.60-$10.80
All other employees, outside
directors and officers of Founding
Companies, as a group*............. June-July 1996 785,000 54.9% Initial public offering
price per share
- ------------
</TABLE>
* Conditioned on the closing of the Acquisitions and this Offering.
The options granted to Messrs. Wright, Hoover, McCaughey, Walker and one
other executive officer are exercisable in 50% increments six and 18 months,
respectively after the closing of this Offering. Other than the options for
outside directors which are exercisable as set forth in "-- Director
Compensation," the other outstanding options generally are exercisable in 20%
increments six months after the date this Offering closes and thereafter on each
of the first four anniversaries of that date.
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
between the closing of this Offering and 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 the
closing of this Offering through December 31. The officers granted these 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
51
any, will be based upon performance standards established by the Compensation
Committee 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. The Company expects the Compensation
Committee to establish such performance standards for the remainder of the 1996
year following the closing of this Offering.
1996 INCENTIVE PLAN
The description set forth below summarizes the principal terms and
conditions of the Incentive Plan, does not purport to be complete and is
qualified in its entirety by reference to the Incentive Plan, a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
GENERAL. The objectives of the Incentive Plan, which was approved by the
Company's Board of Directors and stockholders, 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 Plan (which includes 1,430,000 shares subject to options
previously granted and 40,000 shares to be awarded to certain employees of the
Company on the closing of the EHC Acquisition). Beginning with the Company's
first fiscal quarter after the closing of this Offering 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 eligible 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 ("Employees"), (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 ("Independent
Contractors"). Awards to Employees ("Employee Awards") and Awards to
Independent Contractors ("Independent Contractor Awards") generally are
treated alike under the Incentive Plan, and the following discussion of Employee
Awards applies, except as noted, equally to Independent Contractor Awards. For
purposes of Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), which could impose so-called short-swing trading
liabilities on the directors and executive officers of the Company in connection
with their purchases and sales of Common Stock within any six-month period, the
Incentive Plan is intended to qualify for the exemptions from that Section which
are provided by Rule 16b-3 under the Exchange Act ("Rule 16b-3").
The Compensation Committee of the Company's Board of Directors (the
"Committee") will administer the Incentive Plan, except as it applies to
Nonemployee Directors, and, to the extent required for the Rule 16b-3
exemptions, the Committee will at all times consist of at least two Nonemployee
Directors. The Committee has the exclusive power to administer the Incentive
Plan and take all actions specifically contemplated thereby or necessary or
appropriate in connection with the administration thereof. Except insofar as the
Incentive Plan relates to Nonemployee Directors, the Committee also has the
exclusive power to interpret the Incentive Plan and to adopt such rules,
regulations and guidelines for carrying out its purposes as the Committee may
deem necessary or proper in keeping with the objectives thereof. The Committee
may, in its discretion, extend or accelerate the exercisability of, accelerate
the vesting of or eliminate or make less restrictive any restrictions contained
in any Employee Award, waive any restriction or other provision of the Incentive
Plan or in any Employee Award or otherwise amend or modify any Employee Award in
any manner that is either (i) not adverse to that Employee holding the Employee
Award or (ii) consented to by that Employee. The Committee also may delegate to
the chief executive officer and
52
other senior officers of the Company its duties under the Incentive Plan, except
that no such delegation may be made in the case of actions respecting
participants subject to Section 16 of the Exchange Act.
EMPLOYEE AWARDS. Employee Awards may be in the form of (i) rights to
purchase a specified number of shares of Common Stock at a specified price
("Options") 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 strike price
("SARs"), (iii) restricted or unrestricted grants of Common Stock or units
denominated in Common Stock ("Stock Awards"), (iv) grants denominated in cash
("Cash Awards") 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 ("Performance Awards"). Subject to
the limitations described below, the Committee will determine the recipients of
Employee Awards and the terms, conditions and limitations applicable to each
Employee Award, which conditions may, but need not, include continuous service
with the Company, achievement of specific business objectives or goals,
increases in specified indices or other comparable measures of performance. The
Committee may grant Employee Awards (i) singly, (ii) in combination or tandem
with other Employee Awards, (iii) in replacement of or as alternatives to prior
Employee Awards or (iv) in combination or tandem with, in replacement of or as
alternatives to rights under any other employee plan of the Company or any
acquired entity. The exercise price of an Option may be paid with cash or,
according to methods determined by the Committee, with Common Stock or any other
Employee Award the exerciser has owned for at least six months. Performance
Awards may include more than one performance goal, and a performance goal may be
based on one or more business criteria applicable to the grantee, the Company as
a whole or one or more of the Company's business units and may include any of
the following: increased revenue, net income, stock price, market share,
earnings per share, return on equity or assets or decreased costs or other
liabilities.
The Incentive Plan contains limitations respecting Employee Awards,
including the following:
(i) an Option may be either an incentive stock option ("ISO") that
qualifies, or a nonqualified stock option ("NSO") that does not qualify,
with the requirements of Section 422 of the Code, and must have an exercise
price of not less than the fair market value of a Common Stock share on the
date of grant;
(ii) the Committee must establish the performance goal or goals for
each Performance Award prior to the earlier to occur of (a) 90 days after
the commencement of the performance measurement period for that Award and
(b) the lapse of 25% of that period, and in any event while it is
substantially uncertain whether the goal or goals will be met;
(iii) no employee may be granted, during any one-year period, (a)
Options or SARs covering more than 150,000 shares of Common Stock or (b)
Stock Awards covering or relating to more than 10,000 shares of Common
Stock (the limitations referred to in this clause (iii) being the
"Stock-based Awards Limitations"); and
(iv) no Employee may be granted Cash Awards (including Performance
Awards denominated in cash) having a value determined on the date of grant
in excess of $1 million.
Only the limitations described in clause (i) above apply to Independent
Contractor Awards.
NONEMPLOYEE DIRECTOR AWARDS. Nonemployee Director Awards will be granted
either automatically or at the option of Nonemployee Directors in lieu of
director's fees, as described below.
On the date this Offering closes, each Nonemployee Director automatically
will be granted NSOs to purchase 10,000 shares of Common Stock. In addition, on
the first business day of the month following the date on which each annual
meeting of the Company's stockholders is held (each an "Annual Director Award
Date"), each Nonemployee Director automatically will be granted NSOs to
purchase 5,000 shares of Common Stock. The Board may increase subsequent annual
Director Awards to not more than 15,000 shares. Any person who first becomes a
Nonemployee Director after the date this Offering closes otherwise than by
election at an annual meeting of stockholders automatically will be granted, on
the date of his or her election, NSOs to purchase the number of shares of Common
Stock equal to the product of (i) 10,000 and
53
(ii) a fraction, the numerator of which is the number of days between the
election of that Nonemployee Director and the next scheduled Annual Director
Award Date (or, if that date then has not been scheduled, the date that is the
first anniversary of the then immediately preceding Annual Director Award Date,
if any) and the denominator of which is 365. For purposes of any Director Awards
granted prior to the scheduling of the 1997 annual meeting of stockholders, June
1, 1997 will be deemed the initial Annual Director Award Date. Each NSO granted
to Nonemployee Directors will (i) have a 10-year term, (ii) have an exercise
price per share equal to the fair market value of a Common Stock share on the
date of grant (the initial public offering price in the case of NSOs granted on
the closing of this Offering) which must be paid in full in cash at the time of
exercise to the extent exercised and (iii) become exercisable in increments of
one-third of the total number of shares of Common Stock subject thereto on the
first, second and third anniversaries of the date of grant. If a Nonemployee
Director resigns from the Board without the consent of a majority of the other
directors, his or her NSOs may be exercised only to the extent they were
exercisable on the resignation date.
A Nonemployee Director may make an annual election to receive, in lieu of
all or any portion of the director's fees he or she would otherwise receive in
the next year (including both annual retainer fees, if any, and meeting fees), a
restricted Stock Award covering a number of shares of Common Stock having a fair
market value equal to the quotient obtained by dividing (i) the dollar amount of
fees the Nonemployee Director elects to forego in the next year in exchange for
restricted Stock Awards by (ii) the fair market value of a Common Stock share on
the date of the election.
OTHER PROVISIONS. With the approval of the Committee, payments in respect
of Employee Awards may be deferred, either in the form of installments or a
future lump sum payment, by any Employee. At the discretion of the Committee, an
Employee may be offered an election to substitute an Award for another Award or
Awards of the same or different type.
The Company will have the right to deduct applicable taxes from any
Employee Award payment and withhold, at the time of delivery or vesting of cash
or shares of Common Stock under the Incentive Plan, an appropriate amount of
cash or number of shares of Common Stock, or combination thereof, for the
payment of taxes. The Committee may (i) permit withholding to be satisfied by
the transfer to the Company of shares of Common Stock previously owned by the
holder of the Employee Award for which withholding is required and (ii) cause
the Company to make a short-term or demand loan to any Employee or Independent
Contractor to permit the payment of taxes required by law.
The Board of Directors may amend, modify, suspend or terminate the
Incentive Plan for the purpose of addressing any changes in legal requirements
or for any other lawful purpose, except that (i) no change that would impair the
rights of any holder of an Award with respect to that Award may be made without
the consent of that holder and (ii) no change requiring stockholder approval to
maintain the Rule l6b-3 exemptions will be effective until that approval has
been obtained.
If any subdivision, split or consolidation of outstanding shares of Common
Stock, or any declaration of a stock dividend payable in shares of Common Stock,
occurs, the Board will make appropriate adjustments to (i) the number of shares
of Common Stock reserved under the Incentive Plan, (ii) the number of shares of
Common Stock covered by outstanding Awards in the form of Common Stock or units
denominated in Common Stock, (iii) the exercise or other price in respect of
such Awards, (iv) the appropriate fair market value and other price
determinations for Awards in order to reflect such transactions, (v) the number
of shares of Common Stock covered by Options automatically granted to
Nonemployee Directors, (vi) the number of shares covered by restricted Stock
Awards automatically granted to Nonemployee Directors and (vii) the Stock Based
Awards Limitations. If any recapitalization or capital reorganization of the
Company, any consolidation or merger of the Company with another corporation or
entity, any adoption by the Company of any plan of exchange affecting the Common
Stock or any distribution to holders of Common Stock of securities or property
(other than normal cash dividends) occurs, the Board will make appropriate
adjustments to the amounts or other items referred to in clauses (ii), (iii),
(iv), (v), (vi) and (vii) above to give effect to such transactions, but only to
the extent necessary to maintain the proportionate interest of the holders of
the Awards and to preserve, without exceeding, the value thereof.
54
TAX IMPLICATIONS OF AWARDS. The following summarizes the United States
federal income tax consequences to Employees, Nonemployee Directors and the
Company as a result of the grant and exercise of Awards under the Incentive
Plan. It does not address the consequences of the Incentive Plan under any other
tax laws.
No grant of any Option or SAR will constitute realized taxable income to
the grantee. Each exerciser of an SAR or NSO will (i) recognize ordinary income
in an amount equal to the excess of (a) the amount of cash and the fair market
value of the Common Stock received over (b) the exercise price (if any) paid
therefor and (ii) generally have a tax basis in any shares of Common Stock
received pursuant to the exercise of an SAR or the cash exercise of an NSO which
equals the fair market value of those shares on the date of exercise.
An Employee will not have taxable income as a result of exercising an ISO,
but the excess of the fair market value of the shares of Common Stock received
on that exercise ("ISO Stock") over the exercise price may cause the Employee
to incur alternative minimum tax ("AMT"). The payment of AMT by an Employee
attributable to an ISO exercise would be allowed as a credit against his regular
tax liability in a later year to the extent his regular tax liability exceeds
his AMT for that year.
On the disposition of ISO Stock that has been held for the requisite
holding period (generally, at least two years from the date of grant and one
year from the date of exercise of the ISO), the Employee generally will
recognize capital gain (or loss) equal to the difference between the amount
received in the disposition and the exercise price paid by the Employee for the
ISO Stock. If an Employee disposes of ISO Stock he has not held for the
requisite holding period (a "disqualifying disposition"), he will (i)
recognize ordinary income to the extent that the fair market value of the ISO
Stock at the time of exercise of the ISO (or, if less, the amount realized in
the case of an arm's-length disqualifying disposition to an unrelated party)
exceeds the exercise price paid by the Employee for such ISO Stock and (ii)
recognize capital gain to the extent the amount realized in the disqualifying
disposition exceeds the fair market value of the ISO Stock on the exercise date.
If the exercise price paid for the ISO Stock exceeds the amount realized in the
disqualifying disposition (in the case of an arm's-length disposition to an
unrelated party), that excess generally would constitute a capital loss.
Under current rulings, if a holder of an Option uses shares of Common Stock
he already owns (other than ISO Stock that has not been held for the requisite
holding period) to pay all or any part of the exercise price of that Option, (i)
he will recognize income respecting the Common Stock received in the manner
described above, (ii) no additional gain will be recognized as a result of the
transfer of shares used as payment and (iii) shares so received, up to the
number of shares so used, will have a tax basis that equals, and a holding
period that includes, the tax basis and holding period of the shares of Common
Stock surrendered in satisfaction of that exercise price. Any additional shares
of Common Stock received on exercise will have a tax basis that equals the
amount of cash (if any) paid by the exerciser.
When cash is paid or first made available to the recipient of a Cash Award
or Performance Award, that cash will constitute ordinary compensation income to
the recipient which is taxable at that time. When Common Stock is delivered
pursuant to a Stock Award or a Performance Award, or when Common Stock or cash
is delivered pursuant to a Stock Award denominated in units of Common Stock, the
recipient generally will recognize ordinary compensation income at that time
which is equal to the amount received (that amount being, in the case of Common
Stock, its fair market value when received), except that: if an Incentive Plan
participant receives Common Stock pursuant to a Stock Award or Performance Award
and that stock then is both nontransferable and subject to a substantial risk of
forfeiture, the participant may elect to recognize ordinary compensation income
equal to the then fair market value of the stock received or to defer such
recognition until such time, if ever, as the stock received first becomes both
transferable and no longer subject to a substantial risk of forfeiture, at which
time the participant would recognize ordinary compensation income equal to the
fair market value at that time of the stock previously received. If dividends
are paid or accrued on Common Stock included in a Stock Award or Performance
Award prior to the time the recipient of that Award recognizes ordinary
compensation income in respect of that stock, those dividends will be taxable as
compensation income rather than as dividend income. The tax basis of Common
Stock received by an Incentive Plan participant pursuant to a Stock Award or
Performance Award
55
will be the amount the participant recognizes as compensation income in respect
of that stock, and the holding period of that stock will begin on the date of
that recognition.
When an Employee recognizes compensation income from the exercise of an SAR
or NSO or in respect of Common Stock, cash or other property received pursuant
to a Cash Award, Performance Award or Stock Award, he will be subject to
withholding by the Company for federal (and generally for state and local)
income tax at that time.
Subject to the Code limitations described below, the Company (or a
subsidiary) generally will be entitled to a deduction for federal income tax
purposes which corresponds as to amount and timing with the compensation income
realized by Incentive Plan participants in respect of Awards made to them. The
Code limits deductions to amounts constituting both reasonable compensation for
services rendered or to be rendered and ordinary, necessary business expenses.
Code Sections 280G, which disallows deductions of amounts constituting excess
parachute payments made or deemed made in connection with a change in control of
an employer, and 162(m), which generally limits to $1 million the deductibility
of compensation paid to certain employees of the Company in any one taxable
year, could limit the ability of the Company (or a subsidiary) to deduct amounts
taxable as compensation income to Incentive Plan participants. In the case of
performance-based compensation, exceptions to Code Section 162(m) currently
apply if certain requirements are met. The Company intends generally to satisfy
these requirements in connection with the grant and payment of performance-based
Awards (including certain Options and SARs), but no assurance can be given the
Company will be able to satisfy these requirements in all cases and the Company
may, in its sole discretion, determine in one or more cases that it is in its
best interests not to satisfy these requirements even if it is able to do so.
OTHER PLANS
The Company has adopted or intends to adopt deferred compensation,
supplemental disability, supplemental life and retirement or other benefit or
welfare plans in which executive officers of the Company will be eligible to
participate. Copies of the plans that have been adopted as of the date of this
Prospectus are filed as exhibits to the Registration Statement of which this
Prospectus is a part.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
START-UP FUNDING. 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 will total
422,483 shares on the closing of this Offering. Since early 1996, Equus II has
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 this Offering. The Equus II advances are evidenced by an ARS
convertible note for $1.6 million and an ARS note for $1.0 million. As of August
23, 1996, $1.9 million was outstanding under such notes. Depending on the amount
of further ARS advances, the entire $2.6 million may be outstanding prior to the
closing of this Offering. On the closing of this Offering, $0.5 million of this
note will be converted into 844,965 shares of Common Stock, and ARS will pay the
balance of the note with proceeds from this Offering. As a part of its funding
arrangements with Equus II, ARS issued a warrant to Equus II in March 1996 that
will become exercisable in whole on the closing of this Offering to purchase up
to 100,000 shares of Common Stock at the initial public offering price per
share. This warrant will expire in 2001 to the extent not exercised.
Simultaneously with the closing of this Offering, ARS will acquire by
merger all the issued and outstanding capital stock of the Founding Companies,
at which time each Founding Company will become a wholly owned subsidiary of the
Company. The aggregate consideration that will be paid by ARS to acquire the
Founding Companies consists of (i) approximately $34.8 million in cash and (ii)
2,805,065 shares of Common Stock. In addition, the purchase price of certain of
the Founding Companies and EHC will be increased by an amount equal to the
increase, or decreased by an amount equal to the decrease, in such company's
Working Capital from the date of a specified recent balance sheet of such
company through the closing of the Acquisitions. Subject to adjustment based on
the balance sheets as of that closing, the
56
Company will make an aggregate net distribution estimated to be approximately
$4.0 million at that closing in respect of Working Capital. The Company will
also assume all the indebtedness of the Founding Companies and EHC
(approximately $20.7 million as of June 30, 1996) and then repay substantially
all such indebtedness. A portion of the foregoing indebtedness has been
guaranteed by the following stockholders of the Founding Companies and EHC:
Equus II (EHC), Gorden Timmons (Atlas), Elliot Sokolow and Robert Rogoff
(Florida HAC), Gary Daymon (Meridian & Hoosier) and Howard and Patricia Hauser
(Climatic). The Company has agreed to have such guarantees released within 60
days after the closing of the Offering. In addition, the Company consented to
the distribution of cash and certain receivables to stockholders of General
Heating, which is an S corporation, in an amount equal to the balance of its AAA
account as of the closing of the General Heating Acquisition (approximately $8.0
million as of June 30, 1996). An AAA account generally represents undistributed
retained earnings of an S corporation, upon which taxes have been paid by the
stockholders. In addition, prior to the closing of the Acquisitions, certain
Founding Companies will make distributions to their stockholders of certain
assets and related liabilities. As of June 30, 1996, the aggregate amount of
these distributions would have been approximately $0.5 million.
The following table sets forth for each Founding Company the consideration
to be paid the holders of its common stock (and, in the case of EHC, the holder
of its preferred stock) (i) in cash and (ii) in shares of Common Stock.
SHARES OF
CASH(1) COMMON STOCK
------- ------------
(DOLLARS IN THOUSANDS)
General Heating(2)................... $15,000 666,666
Atlas(3)............................. 5,000 1,066,666
EHC (including Crown and A-ABC)(4)... -- 378,400
Florida HAC(5)....................... 11,000 333,333
Meridian & Hoosier(6)................ 3,250 250,000
Climatic(7).......................... 550 110,000
------- ------------
Total........................... $34,800 2,805,065
======= ============
- ------------
(1) Excluding possible increases or decreases for changes in Working Capital.
(2) Bruce L. Menditch, Frank N. Menditch and Howard C. Menditch, the sole
stockholders of General Heating, each will receive 33 1/3% of the cash and
Common Stock being paid for General Heating.
(3) Gorden H. Timmons and a trust established for the benefit of his family,
respectively, will receive 80% and 19.6% of the cash and 39.8% and 37.1% of
the Common Stock being paid for Atlas. Nineteen other Atlas stockholders
will receive in the aggregate 0.4% and 23.1%, respectively, of the cash and
Common Stock being paid for Atlas.
(4) Howard S. Hoover, Jr., two trusts established for the benefit of Mr.
Hoover's family members, William P. McCaughey and C. Clifford Wright, Jr.
are the owners of EHC's common stock and will receive, respectively, 25,104,
9,763, 52,300 and 52,300 of the shares of Common Stock being paid for EHC,
representing 139,467 of the shares shown above in the table. The remaining
238,933 shares shown above in the table are being paid as partial
consideration for the outstanding EHC preferred stock, all of which is owned
by Equus II. The Company's additional payments for the EHC preferred stock
will consist of 137,139 shares of Common Stock, $0.5 million in cash and
cash in an amount equal to cash dividends accrued on the preferred stock
since April 1, 1996 at the rate of $50,000 per calendar quarter.
(5) Florida HAC consists of four separate companies, two of which are wholly
owned by Elliot Sokolow and two of which are owned 50% by Mr. Sokolow and
50% by Robert Rogoff. Messrs. Sokolow and Rogoff, respectively, will receive
59.1% and 40.9% of the cash and 80% and 20% of the Common Stock being paid
for Florida HAC.
(6) Gary Daymon is the sole stockholder of and will receive the entire
consideration being paid for Meridian & Hoosier.
(7) Howard Hauser and his wife, Patricia Hauser, each owns 50% of the
outstanding stock of and will receive 50% of the consideration being paid
for Climatic.
57
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy on the closing date of the
Acquisitions of the representations and warranties by the Founding Companies,
their principal stockholders and by ARS; the performance of each of their
respective covenants included in the agreements relating to the Acquisitions;
and the nonexistence of a material adverse change in the results of operations,
financial condition or business of each Founding Company.
The agreements relating to the Acquisitions may be terminated, under
certain circumstances, prior to the consummation of this Offering. Specifically,
the agreements may be terminated (i) by the mutual consent of the board of
directors of the Company and each Founding Company; (ii) if this Offering and
the Acquisitions are not consummated by December 31, 1996; (iii) if the
schedules to any acquisition agreement are amended to reflect a material adverse
change in a Founding Company; or (iv) if a material breach or default under the
agreements shall exist and is not waived.
There can be no assurance that the conditions to the closing of the
Acquisitions will be satisfied or waived or that the agreements relating to the
Acquisitions will not be terminated prior to closing.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies (other than Equus II and the minority interest
owners in Atlas) have agreed not to compete with the Company for a period of
three years commencing on the date of closing of the Acquisitions.
ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Individuals who are or will become directors of the Company will receive
the following consideration in the Acquisitions for their interests in the
Founding Companies, subject to upward or downward adjustment for changes in
working capital.
SHARES OF
CASH COMMON STOCK
--------- ------------
(DOLLARS IN THOUSANDS)
General Heating:
Frank N. Menditch..................... $ 5,000 222,222
Atlas:
Gorden H. Timmons(1).................. 4,000 424,605
EHC:
C. Clifford Wright, Jr................ -- 52,300
Howard S. Hoover, Jr.(2).............. -- 25,104
William P. McCaughey.................. -- 52,300
Florida HAC:
Elliot Sokolow........................ 6,500 266,666
- ------------
(1) In addition, a Timmons family trust will receive approximately $981,000 in
cash and 395,422 shares of Common Stock.
(2) In addition, two trusts established for the benefit of certain members of
Mr. Hoover's family will receive an aggregate of 9,763 shares of Common
Stock.
Equus will receive 137,139 shares of Common Stock, $500,000 in cash and
accrued cash dividends in exchange for its EHC preferred stock.
EHC
EHC was organized in February 1996 to acquire, for a total purchase price
of $17.5 million, all the capital stock of Crown and certain real estate used in
its business. The purchase price was funded by a loan from NationsBank secured
by the capital stock and certain assets of Crown, by a loan from Equus II,
credit enhancements provided to NationsBank by Equus II secured by all of the
capital stock of ARS and through the purchase by Equus II of $2.5 million of EHC
8% preferred stock. In May 1996, EHC acquired all the capital stock of A-ABC for
a total purchase price of $2.0 million, which was provided by borrowings from
58
NationsBank, which are secured by the capital stock of A-ABC and credit
enhancements provided by Equus II, and the assumption of certain liabilities.
See "The Company." EHC is being acquired by the Company for consideration 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 in cash), approximately $14.3 million of which
will be repaid either out of a portion of the net proceeds of this Offering or
through bank borrowings. In addition, the Company will issue to NationsBank a
warrant to purchase shares of Common Stock having a value of $125,000 on the
closing of this Offering at a purchase price equal to $.01 per share in exchange
for the warrant previously issued by EHC to NationsBank. The Company valued EHC
on a basis consistent with the other Acquisitions, using the same multiple of
cash flow, as adjusted for owners' compensation and other non-recurring items.
In addition, the purchase price for each Acquisition was increased by the fair
market value of real estate to be acquired in the Acquisition, if any, and
Working Capital. Messrs. Wright, Hoover and McCaughey, who, prior to the
completion of this Offering are the sole stockholders of ARS, and Equus II are
the sole stockholders of EHC.
Simultaneously with the closing of the Acquisitions, the Company will issue
40,000 shares of Common Stock pursuant to the Company's 1996 Incentive Plan to
employees, three officers (other than Messrs. Wright, Hoover and McCaughey) and
consultants of ARS and its affiliates and will recognize $300,000 of
compensation expense.
REAL ESTATE AND OTHER TRANSACTIONS
Atlas leases office and warehouse space in Hilton Head and Greenville,
South Carolina from a company in which Gorden H. Timmons has a 50% ownership
interest. One lease extends to May 2005 and currently provides for total annual
rentals of $105,000. The other lease has a 10-year term when Atlas takes
possession of the leased property in mid-1996 and provides for initial total
annual rentals of $73,800. Rentals under both leases will increase if a
specified prime interest rate increases to 11% or above. Atlas also leases
office and warehouse space in Clemson, South Carolina 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. A realtor of which Mr. Timmons is a 75% owner and the broker-in-charge
acts as leasing agent of a portion of Atlas's office and warehouse space in
North Charleston, South Carolina. During the five years ended December 31, 1995,
Atlas paid this company an average annual amount of approximately $2,000.
In November 1995, Mr. Timmons purchased the capital stock of Golden
Triangle Mechanical, Inc. from a third party for approximately $85,000. In
January 1996, Mr. Timmons conveyed that stock to Atlas for the same purchase
price.
Atlas has a receivable from Mr. Timmons, its majority shareholder, in the
amount of approximately $195,000 as of December 31, 1995. See Note 9 to "Notes
to Consolidated Financial Statements" of Atlas.
General Heating leases office and warehouse space in Manassas, Virginia and
Laurel, Maryland under four leases from a limited partnership owned by Frank N.
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 has receivables from Frank Menditch in the aggregate amount
of approximately $308,139 as of December 31, 1995. See Note 7 to "Notes to
Financial Statements" of General Heating.
Florida HAC leases its principal office and warehouse space in Margate,
Florida from a limited partnership 80% owned by Elliot Sokolow. ARS and Mr.
Sokolow have agreed to extend the lease term by five years to May 31, 2005. The
annual rental currently is $224,856 and will increase 5% each year.
Florida HAC has borrowings outstanding from Mr. Sokolow in the aggregate
amount of approximately $641,804 as of December 31, 1995. See Note 8 to "Notes
to Combined Financial Statements" of Florida HAC.
59
Meridian & Hoosier leases its principal office and warehouse space in
Indianapolis from Gary Daymon and his wife. The annual rental currently is
$90,000 and will increase 5% annually. The lease expires in 2001, and the
Company has obtained an option to purchase the building at its appraised fair
market value. Meridian & Hoosier leases office space in Indianapolis to DIAL ONE
of Central Indiana, Inc., a corporation wholly owned by Mr. Daymon ("DOCI").
This lease extends to June 30, 1997 and provides for total annual rentals of
$24,000.
In October 1993, Meridian & Hoosier renewed a four-year franchise agreement
with DOCI under which Meridian & Hoosier uses the "DIAL ONE" name, logo and
various materials in its business within a designated franchise territory it
shares with other DOCI franchisees that also provide various residential
services under the "DIAL ONE" name. DOCI provides its franchisees a common
telephone number for customer calls, as well as promotional and training
materials and training seminars. Meridian & Hoosier's current annual payment
obligation under its franchise agreement is $60,000, and Meridian & Hoosier may
terminate the agreement at any time. If it does so, it will owe DOCI the balance
of the payments due to the end of the agreement's stated term and must cease
using the "DIAL ONE" name and materials.
Meridian & Hoosier shares certain costs with DOCI for personnel and
overhead, for which it bills DOCI monthly based on DOCI's pro rata share of
those expenses.
The Company believes the rentals provided under the leases described above
are fair market rentals. It also believes the other agreements described above
are fair to the Company.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved in advance by a majority of the Board of Directors, including a
majority of disinterested members of the Board of Directors.
60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table shows, as of June 30, 1996, information respecting the
then "beneficial owners" (as defined by the SEC) of more than 5% of the Common
Stock:
SHARES BENEFICIALLY
OWNED
----------------------
NAME NUMBER PERCENT
- ------------------------------------- --------- --------
C. Clifford Wright, Jr............... 158,431 37.5%
Howard S. Hoover, Jr................. 105,621 25.0%
William P. McCaughey................. 158,431 37.5%
The following table shows, immediately after giving effect to the closing
of the Acquisitions and this Offering, the then "beneficial ownership" of the
Common Stock of (i) Equus II, (ii) each director and person nominated to become
a director on closing of this Offering; (iii) each executive officer; (iv)
certain executive officers of each of the Founding Companies; and (v) all
executive officers and directors of the Company as a group.
SHARES BENEFICIALLY
OWNED
AFTER OFFERING(1)
----------------------
NAME NUMBER PERCENT
- ------------------------------------- --------- -------
Equus II Incorporated(2)............. 1,321,037 15.6%
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Gorden H. Timmons(3)................. 820,027 9.7%
Gorden H. Timmons, as Trustee under
Gorden H. Timmons
Retained Annuity Trust............. 395,422 4.7%
Elliot Sokolow....................... 266,666 3.2%
Gary Daymon.......................... 250,000 3.0%
Frank N. Menditch.................... 222,222 2.6%
Howard C. Menditch................... 222,222 2.6%
Bruce L. Menditch.................... 222,222 2.6%
C. Clifford Wright, Jr............... 210,731 2.5%
William P. McCaughey................. 210,731 2.5%
Howard S. Hoover, Jr.(4)............. 140,725 1.7%
Howard W. Hauser.................... 110,000 1.3%
John D. Held......................... 5,333 *
A. Jefferson Walker III.............. 3,166 *
Michael Mamaux....................... 2,500 *
All executive officers and
directors as a group(3) (14
persons)........................... 1,882,101 22.3%
- ------------
* 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 the IPO price per share. See "Certain
Transactions -- Organization of the Company." Nolan Lehmann, who will
become a director of the Company on closing of this Offering, 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 the Gorden H. Timmons Retained Annuity Trust, of
which Mr. Timmons is the trustee. Mr. Timmons may be deemed the beneficial
owner of the shares held by that trust.
61
(4) Shares shown include 10,000 shares that Mr. Hoover intends to acquire
directly from the Underwriters in connection with this Offering. The table
assumes no other person listed intends to acquire shares from the
Underwriters.
Except as otherwise indicated, the address of each person listed in the
above tables is c/o American Residential Services, Inc., 5850 San Felipe, Suite
500, Houston, Texas 77057. All persons listed have sole voting and investment
power with respect to their shares unless otherwise indicated.
SHARES ELIGIBLE FOR FUTURE SALE
On closing of the Acquisitions and this Offering, 8,449,652 shares of
Common Stock will be outstanding. The shares sold in this Offering (other than
to affiliates of the Company) will be 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 Company intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved or to be
available for issuance pursuant to the Incentive Plan. Shares of Common Stock
issued pursuant to the Incentive Plan after the effective date of that
registration statement generally will be available for sale 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 (I.E., 84,496
shares immediately on closing of this Offering) 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 for
a period of 180 days (the "Lockup Period") following the date of this
Prospectus 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 the closing of this Offering.
Further, all the current stockholders of ARS, including the former owners of the
Founding Companies and Equus II, will be contractually prohibited from selling
the shares they own for a period of 180 days following the consummation of the
Acquisitions. The Company has agreed that it will not waive such prohibition
during the Lock-up Period without the prior written consent of Smith Barney Inc.
of the Underwriters. In addition, the holders of the shares of Common Stock
acquired in connection with the Acquisitions have agreed with the Company that
they will not sell, transfer or otherwise dispose of any of their shares for two
years following the closing of this Offering (or for such shorter period as the
SEC may prescribe as the holding period for restricted securities under Rule
144).
In connection with the Acquisitions, the Company will enter into a
registration rights agreement with former stockholders of the Founding Companies
(the "Registration Rights Agreement"), which will
62
provide certain registration rights with respect to the Common Stock issued to
such stockholders in the Acquisitions. The Registration Rights Agreement will
provide 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 the date of this Prospectus (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
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 (or, in the case of NationsBank, issuable to it pursuant to a
warrant that was originally issued by EHC) 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
attritubable 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.
The Company intends to register 5,000,000 shares of Common Stock under the
Securities Act during the fourth quarter of 1996 for its use in connection with
future acquisitions. These shares generally will be freely tradable after their
issuance by persons not affiliated with the Company unless the Company
contractually restricts their sale, and sales of these shares during the Lockup
Period would require the prior written consent of Smith Barney Inc.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock 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 June 30, 1996,
422,483 shares of Common Stock were issued and outstanding. On closing of the
Acquisitions and this Offering, the Company will have outstanding 8,449,652
shares of Common Stock (9,079,652 if the Underwriters' over-allotment option is
exercised in full) and no shares of Preferred Stock. The following summary is
qualified in its entirety by reference to the Company's Restated Certificate of
Incorporation (the "Certificate of Incorporation"), which is filed 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 therefor. See "Dividend Policy" for information
regarding dividend policy.
63
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), 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 the Company 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 the Company, 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 Company's securities are traded.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from the Company 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 the Company and a Rights Agent (the "Rights
Agreement"), the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part and is incorporated herein by
reference.
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
64
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.
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.
65
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
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 antitakeover 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 acquirers.
STATUTORY BUSINESS COMBINATION PROVISION
The Company 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
66
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
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 the Company to the Company or
its stockholders to the fullest extent permitted by Delaware law. Specifically,
directors of the Company 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 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) 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 the Company and its
stockholders. The Company's Bylaws provide indemnification to the Company's
officers and directors and certain other persons with respect to certain
matters, and the Company 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 the Company from obtaining control of the Board of Directors until the
second annual stockholders meeting following the date the acquirer 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 Company's Bylaws contain provisions (i) requiring that advance notice
be delivered to the Company 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 the Company 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
67
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 such stockholder and such business or director nominee, as described
in the Company's Bylaws. The foregoing summary is qualified in its entirety by
reference to the Company's Bylaws, which are filed 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.
68
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below has severally agreed to purchase from the Company,
and the Company has agreed to sell to such Underwriter, the respective number of
shares of Common Stock set forth opposite the name of such Underwriter.
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------- -------------
Smith Barney Inc.............................
Montgomery Securities........................
-------------
Total........................................ 4,200,000
=============
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all shares
of Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Montgomery Securities are
acting as representatives (the "Representatives"), propose to offer part of
the shares of Common Stock directly to the public at the offering price set
forth on the cover page of this Prospectus and part of the shares to certain
dealers at a price which represents a concession not in excess of $ per share
under the public offering price. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to certain other
dealers. The Representatives of the Underwriters have advised the Company that
the Underwriters do not intend to confirm any shares to any accounts over which
they exercise discretionary authority. After the initial public offering, the
offering price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to an additional 630,000
shares of Common Stock at the price to the public set forth on the cover page of
this Prospectus, minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this Offering. To the extent such
option is exercised, each Underwriter will be obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares as the number of shares set forth opposite each Underwriter's name in the
preceding table bears to the total number of shares listed in such table.
The Company, its officers and directors, and certain stockholders of the
Company designated by the Representatives have agreed that, for a period of 180
days from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose
of any shares of Common Stock of the Company or any securities convertible into,
or exercisable or exchangeable for, Common Stock of the Company, except that the
Company may issue shares of Common Stock (i) in connection with acquisitions,
(ii) pursuant to exercise of options granted under the Incentive Plan and (iii)
pursuant to the exercise of warrants outstanding as of the closing of this
Offering.
69
Prior to this Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in this Offering will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in determining such price are the history of and prospects for the
Company's business and the industry in which it competes, an assessment of the
Company's management and the present state of the Company's development, the
past and present revenues and earnings of the Company, the prospects for the
growth of the Company's revenues and earnings, the current state of the economy
in the United States and the current level of economic activity in the industry
in which the Company competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies that are comparable to the
Company.
The Company has agreed to indemnify the Underwriters and certain related
persons against certain liabilities, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
LEGAL MATTERS
Certain legal matters in connection with the sale of the Common Stock
offered hereby are being passed upon for the Company by Baker & Botts, L.L.P.,
3000 One Shell Plaza, Houston, Texas 77002, and for the Underwriters by Morgan,
Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178.
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.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed a
Registration Statement on Form S-1 (the "Registration Statement") 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 of 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 is hereby made to such omitted information. The statements made in
this Prospectus concerning documents filed as exhibits to the Registration
Statement accurately describe the material provisions of such documents and are
qualified in their entirety by reference to such exhibits for complete
statements of their provisions. The Registration Statement and the exhibits and
schedules thereto 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 the Registration Statement 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 reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC. The address of that site is http://www.sec.gov.
70
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation........... F-3
Pro Forma Combined Balance Sheet
as of June 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 Six Months
Ended June 30, 1995
(unaudited).................... F-6
Pro Forma Combined Statement of
Operations for the Six Months
Ended June 30, 1996
(unaudited).................... F-7
Enterprises Holding Company's
Pro Forma Consolidated
Statement of Operations for the
Six Months Ended June 30, 1996
(unaudited).................... F-8
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-9
Historical Financial Statements
American Residential Services,
Inc.
Report of Independent
Public Accountants......... F-13
Balance Sheets............. F-14
Statements of Operations... F-15
Statements of Shareholders'
Deficit.................... F-16
Statements of Cash Flows... F-17
Notes to Financial
Statements................. F-18
General Heating Engineering
Company, Inc.
Report of Independent
Public Accountants......... F-22
Balance Sheets............. F-23
Statements of Operations... F-24
Statements of Shareholders'
Equity..................... F-25
Statements of Cash Flows... F-26
Notes to Financial
Statements................. F-27
Atlas Services, Inc., and
Subsidary
Report of Independent
Public Accountants......... F-32
Consolidated Balance
Sheets..................... F-33
Consolidated Statements of
Operations................. F-34
Consolidated Statements of
Shareholders' Equity....... F-35
Consolidated Statements of
Cash Flows................. F-36
Notes to Consolidated
Financial Statements....... F-37
Enterprises Holding Company
and Subsidiaries
Consolidated Balance
Sheet...................... F-44
Consolidated Statement of
Operations................. F-45
Consolidated Statement of
Shareholders' Equity....... F-46
Consolidated Statement of
Cash Flows................. F-47
Notes to Consolidated
Financial Statements....... F-48
F-1
Service Enterprises, Inc., and
Subsidiaries
Report of Independent
Public Accountants......... F-56
Consolidated Balance
Sheets..................... F-57
Consolidated Statements of
Operations................. F-58
Consolidated Statements of
Shareholder's Equity....... F-59
Consolidated Statements of
Cash Flows................. F-60
Notes to Consolidated
Financial Statements....... F-61
Florida Heating and Air
Conditioning, Inc. and Related
Companies
Report of Independent
Public Accountants......... F-67
Combined Balance Sheets.... F-68
Combined Statements of
Operations................. F-69
Combined Statements of
Shareholders' Equity....... F-70
Combined Statements of Cash
Flows...................... F-71
Notes to Combined Financial
Statements................. F-72
DIAL ONE Meridian and Hoosier,
Inc.
Report of Independent
Public Accountants......... F-78
Balance Sheets............. F-79
Statements of Operations... F-80
Statements of Shareholder's
Equity..................... F-81
Statements of Cash Flows... F-82
Notes to Financial
Statements................. F-83
ADCOT, Inc.
Report of Independent
Public Accountants......... F-90
Balance Sheets............. F-91
Statements of Operations... F-92
Statements of Shareholder's
Deficit.................... F-93
Statements of Cash Flows... F-94
Notes to Financial
Statements................. F-95
F-2
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
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 of the net assets of (a) General Heating Engineering Company,
Inc. (General Heating), (b) Atlas Services, Inc. and subsidiary (Atlas), (c)
Service Enterprises, Inc. and subsidiaries (Crown), (d) Florida Heating and Air
Conditioning, Inc. and Related Companies (Florida HAC), (e) DIAL ONE Meridian
and Hoosier, Inc. (Meridian & Hoosier), (f) ADCOT, Inc. (A-ABC), and (g)
Climatic Corporation of Vero Beach (Climatic), (together, the Founding
Companies). ARS and the Founding Companies are hereinafter referred to as the
Company. In addition, ARS will acquire EHC. These acquisitions (the
Acquisitions) will occur simultaneously with the closing of ARS's initial public
offering (the Offering) and will be accounted for using the purchase method of
accounting. Atlas, one of the Founding Companies, has been identified as the
acquiror for financial statement presentation purposes. The unaudited pro forma
combined financial statements also give effect to the issuance of Common Stock,
which will be issued by ARS to the sellers of the Founding Companies upon the
effectiveness of the Offering. These statements are based on the historical
financial statements of the Founding Companies included elsewhere in this
Prospectus (except Climatic) and the estimates and assumptions set forth below
and in the notes to the unaudited pro forma combined financial statements.
The unaudited pro forma combined balance sheet gives effect to these
transactions (the Acquisitions and the Offering) as if they had occurred on June
30, 1996. The unaudited pro forma combined statements of operations give effect
to these transactions as if they had occurred at the beginning of each period
presented.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The pro
forma adjustments do not reflect amounts related to the working capital
adjustments, which may affect goodwill and debt. In addition, the pro forma
combined statement of operations does not include adjustments for non-recurring,
non-cash charges of $4.0 million related to shares of Common Stock to be issued
to the shareholders of EHC in connection with the acquisition of EHC by Atlas
(including a $1.2 million estimated working capital adjustment) and $0.3 million
for the issuance of 40,000 shares of Common Stock to employees, three officers
and consultants of ARS and its affiliates which will be recorded subsequent to
the completion of the Offering. The unaudited pro forma combined financial data
presented herein do 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 Founding Companies. 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
F-4
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
GENERAL FLORIDA MERIDIAN PRO FORMA
ARS HEATING EHC ATLAS HAC & HOOSIER CLIMATIC ADJUSTMENTS
--------- -------- --------- --------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 235 $ 1,183 $ 324 $ 200 $ 261 $ 986 $ 26 $ 217
Investments........................ -- 1,000 -- -- -- -- -- (1,000)
Accounts receivable --
Trade, net of allowance.......... -- 4,339 501 2,946 1,284 2,135 948 (4,339)
Shareholder and affiliates....... -- -- -- 15 -- 19 --
Other receivables................ -- 66 322 -- 311 26 -- --
Notes receivable --
Shareholders..................... -- 484 -- -- -- -- -- --
Other............................ -- -- -- -- -- -- -- --
Inventories........................ -- 2,430 1,473 753 276 448 50 --
Prepaid expenses and other current
assets........................... 47 129 264 256 182 59 64 251
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ -- -- -- 309 -- 14 -- --
--------- -------- --------- --------- ------- --------- --------- -----------
Total current assets........... 282 9,631 2,884 4,479 2,314 3,687 1,088 (4,871)
--------- -------- --------- --------- ------- --------- --------- -----------
PROPERTY AND EQUIPMENT, net.......... 45 2,015 5,056 3,557 566 1,589 167 (70)
OTHER NONCURRENT ASSETS.............. 3,298 408 322 445 12 115 23 (468)
GOODWILL............................. -- -- 12,636 -- -- -- -- 39,225
--------- -------- --------- --------- ------- --------- --------- -----------
Total assets................... $ 3,625 $12,054 $ 20,898 $ 8,481 $2,892 $ 5,391 $ 1,278 $ 33,816
========= ======== ========= ========= ======= ========= ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current maturities of long-term
debt............................. $ -- $ -- $ 1,832 $ 746 $ 143 $ 431 $ 45 $ --
Short-term debt.................... 1,200 -- -- 300 -- -- -- 900
Accounts payable and accrued
expenses......................... 3,437 3,088 2,184 3,211 1,412 1,145 584 --
Unearned revenue on service and
warranty contracts, current...... -- 810 305 62 -- 439 -- --
Billings in excess of cost and
estimated earnings on uncompleted
contracts........................ -- 145 -- 686 219 566 36 --
Deferred income taxes.............. -- -- -- -- 287 -- -- --
Pro forma cash consideration due to
Founding Companies............... -- -- -- -- -- -- -- 34,800
--------- -------- --------- --------- ------- --------- --------- -----------
Total current liabilities...... 4,637 4,043 4,321 5,005 2,061 2,581 665 35,700
--------- -------- --------- --------- ------- --------- --------- -----------
LONG-TERM DEBT, net of current
maturities......................... -- -- 12,948 1,600 42 1,223 40 5,398
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS NONCURRENT............... -- -- 613 -- -- -- -- --
DEFERRED INCOME TAXES................ -- -- 114 104 42 32 43 --
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... -- -- 92 -- -- -- -- --
PREFERRED STOCK...................... -- -- 2,557 -- -- -- -- (2,057)
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock....................... 1 55 1 24 10 7 4 (98)
Additional paid-in capital......... 1 667 -- 105 4 35 46 14,978
Retained earnings (deficit)........ (1,014) 8,882 252 1,643 733 1,513 480 (21,698)
Treasury stock..................... -- (1,593 ) -- -- -- -- -- 1,593
--------- -------- --------- --------- ------- --------- --------- -----------
Total shareholders' equity
(deficit).................... (1,012) 8,011 253 1,772 747 1,555 530 (5,225)
--------- -------- --------- --------- ------- --------- --------- -----------
Total liabilities and
shareholders' equity
(deficit).................... $ 3,625 $12,054 $ 20,898 $ 8,481 $2,892 $ 5,391 $ 1,278 $ 33,816
========= ======== ========= ========= ======= ========= ========= ===========
</TABLE>
POST
MERGER AS
PRO FORMA ADJUSTMENTS ADJUSTED
--------- ----------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 3,432 $ -- $ 3,432
Investments........................ -- -- --
Accounts receivable --
Trade, net of allowance.......... 7,814 -- 7,814
Shareholder and affiliates....... 34 -- 34
Other receivables................ 725 -- 725
Notes receivable --
Shareholders..................... 484 -- 484
Other............................ -- -- --
Inventories........................ 5,430 -- 5,430
Prepaid expenses and other current
assets........................... 1,252 -- 1,252
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ 323 -- 323
--------- ----------- --------
Total current assets........... 19,494 -- 19,494
--------- ----------- --------
PROPERTY AND EQUIPMENT, net.......... 12,925 -- 12,925
OTHER NONCURRENT ASSETS.............. 4,155 (434) 3,721
GOODWILL............................. 51,861 -- 51,861
--------- ----------- --------
Total assets................... $88,435 $ (434) $88,001
========= =========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current maturities of long-term
debt............................. $ 3,197 $ (3,197) $ --
Short-term debt.................... 2,400 (2,400) --
Accounts payable and accrued
expenses......................... 15,061 -- 15,061
Unearned revenue on service and
warranty contracts, current...... 1,616 -- 1,616
Billings in excess of cost and
estimated earnings on uncompleted
contracts........................ 1,652 -- 1,652
Deferred income taxes.............. 287 -- 287
Pro forma cash consideration due to
Founding Companies............... 34,800 (34,800) --
--------- ----------- --------
Total current liabilities...... 59,013 (40,397) 18,616
--------- ----------- --------
LONG-TERM DEBT, net of current
maturities......................... 21,251 (14,252) 6,999
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS NONCURRENT............... 613 -- 613
DEFERRED INCOME TAXES................ 335 -- 335
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... 92 -- 92
PREFERRED STOCK...................... 500 (500) --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock....................... 4 4 8
Additional paid-in capital......... 15,836 55,011 70,847
Retained earnings (deficit)........ (9,209) (300) (9,509 )
Treasury stock..................... -- -- --
--------- ----------- --------
Total shareholders' equity
(deficit).................... 6,631 54,715 61,346
--------- ----------- --------
Total liabilities and
shareholders' equity
(deficit).................... $88,435 $ (434) $88,001
========= =========== ========
See accompanying notes to unaudited pro forma combined financial statements.
F-5
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GENERAL FLORIDA MERIDIAN
ARS HEATING ATLAS CROWN HAC & HOOSIER A-ABC CLIMATIC
--------- ------- ------- ------- ------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ -- $35,159 $22,048 $19,124 $14,510 $10,133 $8,707 $4,955
COST OF SERVICES..................... -- 28,866 17,811 11,333 10,541 7,281 5,709 3,679
--------- ------- ------- ------- ------- --------- ------ --------
Gross profit..................... -- 6,293 4,237 7,791 3,969 2,852 2,998 1,276
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 159 5,280 3,022 6,165 3,738 2,350 2,348 1,287
GOODWILL AMORTIZATION................ -- -- -- -- -- -- -- --
--------- ------- ------- ------- ------- --------- ------ --------
INCOME (LOSS) FROM OPERATIONS........ (159) 1,013 1,215 1,626 231 502 650 (11)
OTHER INCOME (EXPENSE):
Interest income.................. -- 299 17 119 -- 24 -- 3
Interest expense................. -- -- (134) (58) (12) (86) (84 ) --
Other............................ -- 58 20 (10) (8) 10 66 15
--------- ------- ------- ------- ------- --------- ------ --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (159) 1,370 1,118 1,677 211 450 632 7
PROVISION FOR INCOME TAXES........... -- -- 434 630 14 179 43 --
--------- ------- ------- ------- ------- --------- ------ --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (159) $1,370 $ 684 $ 1,047 $ 197 $ 271 $ 589 $ 7
========= ======= ======= ======= ======= ========= ====== ========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS..............
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS.........................
</TABLE>
PRO FORMA
ADJUSTMENTS PRO FORMA
----------- ---------
REVENUES............................. $-- $114,636
COST OF SERVICES..................... -- 85,220
----------- ---------
Gross profit..................... -- 29,416
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... (204)(l) 21,853
(1,808)(m)
(484)(n)
GOODWILL AMORTIZATION................ 1,296(o) 1,296
----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 1,200 6,267
OTHER INCOME (EXPENSE):
Interest income.................. -- 462
Interest expense................. (83)(p) (457 )
Other............................ -- 151
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 1,117 6,423
PROVISION FOR INCOME TAXES........... 1,665(q) 2,965
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (548) $ 3,458
=========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .41
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 8,450 (r)
=========
See accompanying notes to unaudited pro forma combined financial statements.
F-6
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GENERAL FLORIDA MERIDIAN PRO FORMA
ARS HEATING ATLAS CROWN HAC & HOOSIER A-ABC CLIMATIC ADJUSTMENTS
--------- ------- ------- ------ ------- --------- ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ -- $16,214 $10,354 $8,775 $7,631 $ 4,420 $3,983 $1,208 $--
COST OF SERVICES..................... -- 13,331 8,409 5,194 5,697 3,173 2,721 844
--------- ------- ------- ------ ------- --------- ------ -------- -----------
Gross profit..................... -- 2,883 1,945 3,581 1,934 1,247 1,262 364
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... -- 2,626 1,439 2,941 1,883 1,056 1,108 265 (102)(l)
(943)(m)
(123)(n)
GOODWILL AMORTIZATION................ -- -- -- -- -- -- -- -- 648(o)
--------- ------- ------- ------ ------- --------- ------ -------- -----------
INCOME (LOSS) FROM OPERATIONS........ -- 257 506 640 51 191 154 99 520
--------- ------- ------- ------ ------- --------- ------ -------- -----------
OTHER INCOME (EXPENSE):
Interest income.................. -- 103 6 49 -- 5 -- 2 --
Interest expense................. -- -- (81) (27) (8) (43) (31 ) (2) (37)(p)
Other............................ -- 33 38 (10) -- 13 27 7 --
--------- ------- ------- ------ ------- --------- ------ -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES....................... -- 393 469 652 43 166 150 106 483
PROVISION FOR INCOME TAXES........... -- -- 189 250 6 65 7 -- 616(q)
--------- ------- ------- ------ ------- --------- ------ -------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.............. $ -- $ 393 $ 280 $ 402 $ 37 $ 101 $ 143 $ 106 $(133)
========= ======= ======= ====== ======= ========= ====== ======== ===========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS..............
SHARES USED IN COMPUTING PRO FORMA
INCOME PER
SHARE FROM CONTINUING OPERATIONS...
</TABLE>
PRO FORMA
---------
REVENUES............................. $52,585
COST OF SERVICES..................... 39,369
---------
Gross profit..................... 13,216
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 10,150
GOODWILL AMORTIZATION................ 648
---------
INCOME (LOSS) FROM OPERATIONS........ 2,418
---------
OTHER INCOME (EXPENSE):
Interest income.................. 165
Interest expense................. (229)
Other............................ 108
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES....................... 2,462
PROVISION FOR INCOME TAXES........... 1,133
---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.............. $ 1,329
=========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .16
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER
SHARE FROM CONTINUING OPERATIONS... 8,450(r)
=========
See accompanying notes to unaudited pro forma combined financial statements.
F-7
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
GENERAL PRO FORMA FLORIDA MERIDIAN PRO FORMA
ARS HEATING EHC(1) ATLAS HAC & HOOSIER CLIMATIC ADJUSTMENTS
--------- ------- --------- --------- ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ -- $17,211 $ 14,400 $ 14,092 $7,244 $ 6,992 $1,597 $
COST OF SERVICES..................... -- 13,933 8,902 11,357 5,339 4,751 1,212 --
--------- ------- --------- --------- ------- --------- -------- -----------
Gross profit..................... -- 3,278 5,498 2,735 1,905 2,241 385 --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 834 2,816 4,052 2,268 1,816 1,724 287 (1,272)(m)
(123)(n)
GOODWILL AMORTIZATION................ -- -- 87 -- -- -- -- 561(o)
--------- ------- --------- --------- ------- --------- -------- -----------
INCOME (LOSS) FROM OPERATIONS........ (834) 462 1,359 467 89 517 98 834
--------- ------- --------- --------- ------- --------- -------- -----------
OTHER INCOME (EXPENSE):
Interest income.................. -- 109 22 4 -- 17 4 --
Interest expense................. (20) -- (415 ) (96) (13) (72) (2) 389(p)
Other............................ -- 17 5 45 11 12 (1) --
--------- ------- --------- --------- ------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (854) 588 971 420 87 474 99 1,223
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. -- -- 246 150 6 190 -- 792(q)
--------- ------- --------- --------- ------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (854) $ 588 $ 725 $ 270 $ 81 $ 284 $ 99 $ 431
========= ======= ========= ========= ======= ========= ======== ===========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS..............
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS.........................
</TABLE>
PRO FORMA
---------
REVENUES............................. $61,536
COST OF SERVICES..................... 45,494
---------
Gross profit..................... 16,042
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 12,402
GOODWILL AMORTIZATION................ 648
---------
INCOME (LOSS) FROM OPERATIONS........ 2,992
---------
OTHER INCOME (EXPENSE):
Interest income.................. 156
Interest expense................. (229)
Other............................ 89
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 3,008
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 1,384
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 1,624
=========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .19
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 8,450(r)
=========
- ------------
(1) EHC is presented on a pro forma basis to include Crown and A-ABC from
January 1, 1996 through their dates of acquisition by EHC as set forth on
F-8.
See accompanying notes to unaudited pro forma combined financial statements.
F-8
AMERICAN RESIDENTIAL SERVICES, INC.
ENTERPRISES HOLDING COMPANY'S PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CROWN A-ABC
JANUARY 1, 1996 JANUARY 1, 1996
THROUGH THROUGH PRO FORMA
EHC MARCH 31, 1996 MAY 31, 1996 EHC
------ --------------- --------------- ---------
<S> <C> <C> <C> <C>
REVENUES............................. $6,803 $ 4,152 $ 3,445 $14,400
COST OF SERVICES..................... 4,112 2,643 2,147 8,902
------ --------------- --------------- ---------
Gross Profit.................... 2,691 1,509 1,298 5,498
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,697 1,519 836 4,052
GOODWILL AMORTIZATION................ 87 -- -- 87
------ --------------- --------------- ---------
INCOME (LOSS) FROM OPERATIONS........ 907 (10) 462 1,359
OTHER INCOME (EXPENSE):
Interest income................. 6 16 -- 22
Interest expense................ (384) (16) (15) (415)
Other........................... 3 (9) 11 5
------ --------------- --------------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 532 (19) 458 971
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 229 (4) 21 246
------ --------------- --------------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 303 $ (15) $ 437 $ 725
====== =============== =============== =========
</TABLE>
F-9
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. AMERICAN RESIDENTIAL SERVICES, INC. BACKGROUND:
American Residential Services, Inc. (ARS) 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.
ARS has conducted no operations to date and will acquire the Founding Companies
simultaneously with the consummation of the Offering.
2. HISTORICAL FINANCIAL STATEMENTS:
The historical financial statements represent the financial position and
results of operations of the Founding Companies and were derived from the
respective financial statements where indicated. All Founding Companies have a
December 31 year-end or they have been converted to a December 31 year-end,
except for Climatic which has an April 30 year-end. Quarterly statements of
operations for Climatic for the three months ended July 31, 1996 have been
included in the pro forma statements of operations for the six months ended June
30, 1995 and 1996. The audited historical financial statements included
elsewhere in this Prospectus have been included in accordance with Securities
and Exchange Commission (SEC) Staff Accounting Bulletin No. 80.
3. ACQUISITION OF FOUNDING COMPANIES:
Concurrent with the closing of the Offering, ARS will acquire substantially
all of the net assets of the Founding Companies. The Acquisitions will be
accounted for using the purchase method of accounting, with Atlas being treated
as the acquirer.
The following table sets forth for each Founding Company the consideration
to be paid its common stockholders (i) in cash and (ii) in shares of Common
Stock.
COMMON STOCK
-------------------------------
FAIR VALUE OF
CASH SHARES SHARES(1)
--------- ------------ --------------
(DOLLARS IN THOUSANDS)
General Heating..................... $ 15,000 666,666 $ 5,000
Atlas............................... 5,000 1,066,666 8,000
EHC (including Crown and A-ABC)..... -- 378,400 2,838
Florida HAC......................... 11,000 333,333 2,500
Meridian & Hoosier.................. 3,250 250,000 1,875
Climatic............................ 550 110,000 825
--------- ------------ --------------
Total.......................... $ 34,800 2,805,065 $ 21,038
========= ============ ==============
- ------------
(1) Based on the estimated fair market value.
The estimated purchase price for the Acquisitions is subject to certain
purchase price adjustments at and following closing. See "Certain
Transactions -- Organization of the Company."
The holders of 2.8 million shares of Common Stock issued in partial payment
of the Acquisitions have agreed not to offer, sell or otherwise dispose of any
of those shares for a period of two years after the Offering (or for such
shorter period as the SEC may prescribe as the holding period for registered
securities under Rule 144). The fair value of these shares reflects this
restriction.
Of the estimated total purchase price of $55.8 million (based on the fair
value of the shares to be issued) of the Acquisitions, $53 million has been
allocated to the assets acquired and liabilities assumed.
F-10
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The remaining amount of $2.8 million, the value of shares of Common Stock to be
issued to acquire the outstanding common stock of Enterprises Holding Company
(EHC) represents the purchase price paid to EHC in excess of its cost of Crown
and A-ABC. The Company valued EHC on a basis consistent with the other
Acquisitions using the same multiple of cash flow, as adjusted for owners'
compensation and other nonrecurring items. This amount will be recorded as
compensation and finance costs. In addition, the stockholders of each Founding
Company and EHC will be entitled to receive, or obligated to pay, an amount
equal to the increase or decrease in such company's net working capital from the
date of a specified recent balance sheet date for such company through the
closing of the Acquisitions. Subject to adjustments, the Company estimates, and
the pro forma financial statements reflect, a $4.0 million distribution for such
Working Capital adjustments. Included in this amount is an estimated $1.2
million payment to the shareholders of EHC, which will be recorded as
compensation and financing costs.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the Founding Companies' assets and liabilities will
approximate fair value. The amount allocated to goodwill is $51.9 million.
Management of ARS has not identified any other material tangible or identifiable
intangible assets of the Founding Companies to which a portion of the purchased
price could reasonably be allocated.
4. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the additional cash to be borrowed.
(b) Records distribution of a Founding Company's S Corporation
Accumulated Adjustment Account.
(c) Records the distribution of General's and Atlas' cash surrender
value of life insurance policies in the amounts of $387,000 and $124,000,
respectively to shareholders and the distribution of certain equipment and
the related obligations to certain shareholders of the Founding Companies.
(d) Records the purchase of ARS by Atlas and records a capital
distribution to Atlas shareholders.
(e) Records the purchase of the Founding Companies (excluding EHC
and ARS), including the cash consideration due to the Founding Companies
and Common Stock portions and the related deferred income tax assets.
(f) Records the purchase of EHC by Atlas including the recognition
of compensation and finance costs.
(g) Records the proceeds from the issuance of 4,200,000 shares of
ARS Common Stock, net of estimated offering costs of $8,410,000 (based on
an assumed initial public offering price of $15 per share, the midpoint of
the estimated price range). Offering costs primarily consist of
underwriting discounts and commissions, accounting fees, legal fees and
printing expenses.
(h) Records the repayment of certain debt obligations with proceeds
from the Offering.
(i) Records the cash portion to be paid to the Founding Companies in
connection with the Acquisitions.
(j) Records the retirement of EHC's preferred stock.
(k) Records the exercise of a warrant held by a bank lender of EHC
and the issuance of shares to employees, three officers and certain
consultants of ARS and its affiliates.
F-11
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize unaudited pro forma combined balance sheet
adjustments:
<TABLE>
<CAPTION>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ 2,854 $ (2,637) $ $ $ $ $ 217
Investments.......................... (1,000) (1,000)
Accounts receivable - trade.......... (4,339) (4,339)
Prepaid expenses and other current
assets............................. 251 251
Property and equipment, net.......... (70) (70)
Other noncurrent assets.............. (511) 43 (468)
Goodwill............................. 39,225 39,225
Short-term debt...................... (1,400) 500 (900)
Pro forma cash consideration due to
Founding Companies................. (5,000) (29,800) (34,800)
Long-term debt, net of current
maturities......................... (1,454) 56 (800) (2,000) (1,200) (5,398)
Preferred
stock...................... 2,057 2,057
Common stock......................... 24 76 (2) 98
Additional paid-in capital........... 7,976 525 (24) (17,810) (5,645) (14,978)
Retained earnings (deficit).......... 5,800 11,608 4,290 21,698
Treasury
stock....................... (1,593) (1,593)
--------- --------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
POST
MERGER
(G) (H) (I) (J) (K) ADJUSTMENTS
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............ $ 55,149 $ (19,849) $ (34,800) $ (500) $ $ 0
Other noncurrent assets.............. (559) 125 (434)
Current maturities of long-term
debt............................... 3,197 3,197
Short-term debt...................... 2,400 2,400
Pro forma cash consideration due to
Founding Companies................. 34,800 34,800
Long-term debt, net of current
maturities......................... 14,252 14,252
Preferred stock...................... 500 500
Common stock......................... (4) (4)
Additional paid-in capital........... (54,586) (425) (55,011)
Retained earnings
(deficit).......... 300 300
Treasury
stock....................... 0
--------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ===========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS ADJUSTMENTS:
(l) Adjusts rent expense incurred due to the purchase of the
facility used by Crown, net of pro forma depreciation expense.
(m) Adjusts compensation to the level the owners of certain of the
Founding Companies have agreed to receive subsequent to the Acquisitions.
(n) Adjusts for the effect of assets distributed to and the costs of
certain leases assumed by the owners of certain Founding Companies.
(o) Records the pro forma goodwill amortization expense using a 40
year estimated life.
(p) Records change in interest expense for pro forma adjustments to
debt.
F-12
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(q) Records the incremental provision for federal and state income
taxes relating to the compensation differential, S corporation income and
other pro forma adjustments.
(r) The number of shares estimated to be outstanding on completion
of the Offering includes the following, but excludes warrants to purchase
108,333 shares immediately after the Offering and an aggregate 1,430,000
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 (to be adjusted for a
planned stock split).............. 422,483
Issued in Initial Public
Offering.......................... 4,200,000
Issued to acquire Founding
Companies......................... 2,805,065
Conversion of a portion of the
Equus Note Payable................ 844,965
Conversion of a portion of the EHC
Preferred Stock................... 137,139
Shares awarded under Company's 1996
Incentive Plan.................... 40,000
-----------
Shares estimated to be
outstanding....................... 8,449,652
===========
F-13
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
F-13
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-14
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-15
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-16
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-17
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-18
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 upon completion of the Offering.
F-19
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.
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 July 15, 1996, the Company
has granted 10 year options covering an aggregate of 1,430,000 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
Offering
June 12, 1996........................ 700,000 Price
Offering
July 15, 1996........................ 85,000 Price
---------
1,430,000
=========
F-20
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. SUBSEQUENT EVENT (UNAUDITED):
The Company obtained a commitment letter dated July 17, 1996 from
NationsBank of Texas, N.A. to underwrite a new $55 million bank credit facility
to be used for acquisitions, working capital and other corporate purposes. This
commitment will be unsecured, will bear interest at a variable rate and will be
due and payable in August 1999.
F-21
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-22
GENERAL HEATING ENGINEERING COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------ JUNE 30,
1994 1995 1996
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,258,467 $ 3,369,929 $ 1,183,429
Investments..................... 2,475,000 2,000,000 1,000,000
Accounts receivable --
Trade, net of allowance of
$159,910, $126,650 and
$138,911................ 4,129,536 3,740,406 4,339,344
Other receivables.......... 129,308 47,588 65,602
Notes receivable --
Shareholders............... 92,500 308,139 483,742
Other...................... -- 39,870 --
Inventories..................... 2,375,590 2,215,659 2,429,880
Prepaid expenses and other
current assets................ 17,331 13,871 129,481
-------------- -------------- -----------
Total current
assets............. 11,477,732 11,735,462 9,631,478
PROPERTY AND EQUIPMENT, net.......... 1,941,076 2,100,638 2,015,058
OTHER NONCURRENT ASSETS.............. 376,017 483,014 407,625
-------------- -------------- -----------
Total assets.......... $ 13,794,825 $ 14,319,114 $12,054,161
============== ============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses...................... $ 2,736,479 $ 3,248,968 $ 3,087,815
Unearned revenue on service and
warranty contracts............ 797,820 894,766 809,599
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 319,323 139,764 145,088
-------------- -------------- -----------
Total current
liabilities........ 3,853,622 4,283,498 4,042,502
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 55,040
Additional paid-in capital...... 666,913 666,913 666,913
Retained earnings............... 10,811,994 10,906,407 8,882,450
Treasury stock, 2,290 shares at
cost.......................... (1,592,744) (1,592,744) (1,592,744)
-------------- -------------- -----------
Total shareholders'
equity............. 9,941,203 10,035,616 8,011,659
-------------- -------------- -----------
Total liabilities and
shareholders'
equity............. $ 13,794,825 $ 14,319,114 $12,054,161
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 34,642,267 $ 36,333,827 $ 35,159,389 $ 16,213,702 $ 17,210,646
COST OF SERVICES..................... 27,393,298 29,927,352 28,866,207 13,330,955 13,932,504
--------------- --------------- --------------- -------------- --------------
Gross profit.................... 7,248,969 6,406,475 6,293,182 2,882,747 3,278,142
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,011,270 5,244,776 5,280,402 2,626,353 2,815,572
--------------- --------------- --------------- -------------- --------------
Income from operations.......... 2,237,699 1,161,699 1,012,780 256,394 462,570
OTHER INCOME:
Interest income................. 189,223 177,149 299,116 102,593 107,742
Other........................... 7,891 66,724 58,517 33,336 17,731
--------------- --------------- --------------- -------------- --------------
NET INCOME........................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 392,323 $ 588,043
=============== =============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK TOTAL
----------------- PAID-IN RETAINED ----------------------- SHAREHOLDERS'
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
Dividends....................... -- -- -- (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
Dividends (unaudited)........... -- -- -- (2,612,000) -- -- (2,612,000)
Net income (unaudited).......... -- -- -- 588,043 -- -- 588,043
------ ------- ---------- -------------- ------ -------------- ------------
BALANCE, June 30, 1996 (unaudited)... 2,752 $55,040 $ 666,913 $ 8,882,450 (2,290) $ (1,592,744) $ 8,011,659
====== ======= ========== ============== ====== ============== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 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 $ 392,323 $ 588,043
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 465,076 495,396 508,497 268,396 263,500
Loss on sale of investments...... -- -- 13,626 -- --
(Gain) loss on sale of property
and equipment.................. 4,811 (38,978) 56,152 -- (17,731)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (1,427,017) 210,329 470,850 755,082 (616,952)
Inventories................. (416,216) 49,258 159,931 (535,480) (214,221)
Prepaid expenses and other
current assets............ (37,843) (1,907) 3,460 (190,525) (115,610)
Other noncurrent assets..... (83,112) (22,741) (106,997) 9,865 75,389
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 631,061 143,263 512,489 482,472 (161,153)
Unearned revenue on service
and warranty contracts.... 17,782 31,739 96,946 55,337 (85,167)
Billings in excess of costs
and estimated earnings on
uncompleted contracts..... (732,654) (152,605) (179,559) -- 5,324
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities.............. 856,701 2,119,326 2,905,808 1,237,470 (278,578)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 5,000 112,530 42,533 10,682 20,925
Additions of property and
equipment........................ (941,748) (786,863) (766,744) (324,177) (181,114)
Purchase of investments............ -- (2,475,000) (4,193,948) (1,725,000) (1,000,000)
Proceeds from sale of
investments...................... -- -- 4,655,322 3,225,000 2,000,000
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) investing
activities.............. (936,748) (3,149,333) (262,837) 1,186,505 839,811
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in notes
receivable......................... -- 882,500 (255,509) 3,996 (135,733)
Dividends.......................... (1,744,798) (1,095,044) (1,276,000) (532,000) (2,612,000)
Capital contributions.............. -- 18,001 -- -- --
------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities.............. (1,744,798) (194,543) (1,531,509) (528,004) (2,747,733)
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,824,845) (1,224,550) 1,111,462 1,895,971 (2,186,500)
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 $ 4,154,438 $ 1,183,429
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
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 as of June 30, 1996, and for the six
months ended June 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 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-27
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-28
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 make
additional discretionary contributions. Total contributions by the Company under
this plan to provide
F-29
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-30
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In connection with the acquisition, the Company will distribute certain
assets to the shareholders, consisting of the cash surrender value of life
insurance, with a total carrying value of approximately $387,000, as of June 30,
1996. In addition, prior to the closing of the acquisition, the Company will
make distributions in respect of the Company's estimated S Corporation
accumulated adjustment account at the time of closing. Had these transactions
been recorded at June 30, 1996, the effect on the accompanying balance sheet
would be a decrease in assets of approximately $6,909,000, an increase in
liabilities of $1,454,000 and a decrease in shareholders' equity of $8,363,000.
F-31
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
present 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-32
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30
-------------------------- DECEMBER 31, JUNE 30,
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 204,883 $ 383,190 $ 241,263 $ 199,515
Accounts receivable --
Trade, net of allowance of
$29,989, $39,866, $39,866 and
$59,448....................... 1,634,219 2,098,213 2,163,990 2,946,258
Affiliates...................... 188,829 178,554 211,939 15,106
Inventories........................ 478,447 474,093 531,819 753,016
Prepaid expenses and other current
assets.......................... 20,763 112,207 146,283 255,576
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 323,901 382,653 254,039 309,319
------------ ------------ ------------ ------------
Total current assets....... 2,851,042 3,628,910 3,549,333 4,478,790
PROPERTY AND EQUIPMENT, net.......... 3,203,143 3,169,128 3,136,363 3,556,608
OTHER NONCURRENT ASSETS.............. 280,321 342,776 406,316 445,042
------------ ------------ ------------ ------------
Total assets............... $ 6,334,506 $ 7,140,814 $7,092,012 $ 8,480,440
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 577,545 $ 619,851 $ 596,941 $ 746,415
Short-term debt.................... 220,807 207,335 209,948 300,000
Accounts payable and accrued
expenses........................ 2,328,709 2,859,998 2,391,955 3,209,851
Unearned revenue on service and
warranty contracts.............. 135,487 150,628 162,755 62,418
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 192,408 355,186 475,731 685,753
------------ ------------ ------------ ------------
Total current
liabilities............. 3,454,956 4,192,998 3,837,330 5,004,437
LONG-TERM DEBT, net of current
maturities......................... 2,047,763 1,702,324 1,564,309 1,599,601
DEFERRED INCOME TAXES................ 150,506 187,806 187,237 103,936
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000
shares authorized, 2,254, 2,345,
24,303 and 24,303 shares issued
and outstanding................. 2,254 2,345 24,303 24,303
Additional paid-in capital......... 48,011 81,877 105,040 105,040
Retained earnings.................. 631,016 973,464 1,373,793 1,643,123
------------ ------------ ------------ ------------
Total shareholders'
equity.................. 681,281 1,057,686 1,503,136 1,772,466
------------ ------------ ------------ ------------
Total liabilities and
shareholders'
equity.................. $ 6,334,506 $ 7,140,814 $7,092,012 $ 8,480,440
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED JUNE 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 $ 10,354,146 $ 14,092,372
COST OF SERVICES..................... 8,182,867 12,676,789 17,714,515 17,810,928 8,409,272 11,356,977
------------ ------------ ------------ ------------ ------------ ------------
Gross profit..................... 2,027,018 2,948,422 3,514,241 4,237,175 1,944,874 2,735,395
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,760,805 2,421,016 2,985,258 3,021,692 1,439,226 2,267,973
------------ ------------ ------------ ------------ ------------ ------------
Income from operations........... 266,213 527,406 528,983 1,215,483 505,648 467,422
OTHER INCOME (EXPENSE):
Interest income.................. 12,086 12,742 13,004 16,671 6,022 4,318
Interest expense................. (189,927) (129,303) (143,123) (134,236) (80,656) (96,450)
Other............................ (27,690) 26,814 165,821 20,327 38,251 44,240
------------ ------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 60,682 437,659 564,685 1,118,245 469,265 419,530
PROVISION FOR INCOME TAXES........... 24,914 170,478 222,237 434,258 189,222 150,200
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 280,043 $ 269,330
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
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
Net income (unaudited).......... -- -- -- 269,330 269,330
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1996 (unaudited)... 24,303 $24,303 $ 105,040 $1,643,123 $1,772,466
====== ======= ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED JUNE 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 $ 280,043 $ 269,330
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 271,683 375,186 501,796 490,554 239,432 352,874
Deferred income taxes
(benefit)....................... (1,144) 20,022 (22,265) (50,894) 52,152 42,345
Loss on sale of property and
equipment....................... 54,786 -- -- -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (13,227) (822,197) (453,719) (505,195) (406,030) (571,524)
Inventories................. (175,733) (134,837) 4,354 (139,118) (81,392) (141,856)
Prepaid expenses and other
current assets............. 13,350 (1,800) (31,878) 7,150 (84,238) (234,939)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (27,506) (276,261) (58,752) 539,181 410,567 (55,280)
Other noncurrent assets..... (62,020) (63,362) (101,110) (66,703) 16,242 (8,368)
Increase (decrease) in --
Accounts payable and accrued
expenses................... 211,091 1,233,347 531,289 (219,215) 271,815 778,896
Unearned revenue on service
and warranty contracts..... 49,963 53,271 15,141 (10,274) (22,401) (110,905)
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... (10,909) 51,603 162,778 52,327 (68,218) 183,801
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
operating activities... 346,102 702,153 890,082 781,800 607,972 504,374
---------- ---------- ---------- ------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 173,037 -- -- -- -- 12,567
Additions to property and
equipment......................... (439,920) (980,761) (429,127) (258,257) (55,693) (707,442)
Cash paid for acquisitions, net
of cash acquired.................. -- -- -- -- -- (126,065)
---------- ---------- ---------- ------------ ---------- ----------
Net cash used in
investing activities... (266,883) (980,761) (429,127) (258,257) (55,693) (820,940)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long- and short-term
debt.............................. 478,187 887,990 347,001 442,394 118,578 728,010
Principal payments of long- and
short-term debt................... (513,870) (529,624) (663,606) (843,201) (361,073) (453,192)
Proceeds from stock issuance....... 6,880 8,583 33,957 45,121 -- --
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
(used in) financing
activities............. (28,803) 366,949 (282,648) (355,686) (242,495) 274,818
---------- ---------- ---------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 50,416 88,341 178,307 167,857 309,784 (41,748)
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 $ 383,190 $ 199,515
========== ========== ========== ============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 286,112 $ 210,549 $ 225,374 $ 177,031 $ 81,316 $ 96,450
Income taxes..................... $ -- $ 56,477 $ 271,924 $ 251,750 $ 133,750 $ 473,234
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
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 as of June 30, 1996, and for
the six months ended June 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 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-37
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-38
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:
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
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)
============ ============ ============
F-39
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:
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
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
============ ============ ============
F-40
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
=============
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:
F-41
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
=========== ============= ============
F-42
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
In connection with the acquisition, the Company will distribute 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 $124,000 and $14,000 as of June 30, 1996. Had these transactions
been recorded at June 30, 1996, the effect on the accompanying balance sheet
would be a decrease in assets of appproximately $194,000, liabilities of $56,000
and shareholders' equity of $138,000.
F-43
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-44
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
(UNAUDITED)
REVENUES............................. $ 6,802,655
COST OF SERVICES..................... 4,111,714
-------------------
Gross profit.................... 2,690,941
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,783,798
-------------------
Income from operations.......... 907,143
OTHER INCOME (EXPENSE):
Interest income................. 6,362
Interest expense................ (384,224)
Other........................... 3,472
-------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 532,753
PROVISION FOR INCOME TAXES........... 229,335
-------------------
NET INCOME FROM CONTINUING
OPERATIONS......................... 303,418
INCOME FROM DISCONTINUED OPERATIONS,
net of tax......................... 5,663
-------------------
NET INCOME........................... $ 309,081
===================
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ----------------- -------------
<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-46
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 309,081
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and amortization... 244,780
Gain on sale of property and
equipment...................... (5,172)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ (275,541)
Inventories................ (169,385)
Prepaid expenses and other
current assets........... 35,839
Other noncurrent assets.... 306,569
Increase (decrease) in --
Accounts payable and
accrued expenses......... 38,360
Unearned revenue on
extended warranty
contracts................ (13,137)
-------------------
Net cash provided by
operating activities... 471,394
-------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 5,172
Additions of property and
equipment....................... (64,419)
Cash paid for acquisitions, net of
cash acquired................... (17,008,364)
-------------------
Net cash used in
investing activities... (17,067,611)
-------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... 16,047,000
Principal payments of long-term
debt............................ (1,627,500)
Proceeds from stock issuance....... 2,501,000
-------------------
Net cash provided by
financing activities... 16,920,500
-------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 324,283
CASH AND CASH EQUIVALENTS, beginning
of period.......................... --
-------------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 324,283
===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 197,326
Income taxes.................... $ 99,735
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
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 as of June 30, 1996, and for
the period from inception, February 16, 1996, through June 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-48
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-49
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
============
F-50
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
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
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-51
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 are 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 are 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-52
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
SIX MONTHS
ENDED JUNE 30,
1995
--------------
Federal--
Current............................ $210,740
Deferred........................... --
State--
Current............................ 18,595
Deferred........................... --
--------------
$229,335
==============
F-53
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-54
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.
F-55
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-56
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-57
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-58
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-59
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-60
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-61
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
============ ============
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
F-62
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
========== ==========
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
========== ==========
F-63
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
==========
F-64
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
============ ========== ==========
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
========== ==========
F-65
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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):
In June 1996, the Company's shareholder entered into a definitive agreement
with ARS, providing for the acquisition of the Company by ARS. Additionally, on
May 28, 1996, the Company completed its acquisition of ADCOT.
F-66
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-67
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 735,749 $ 1,022,154 $ 261,340
Accounts receivable --
Trade, net of allowance of
$41,305, $41,305 and
$41,305................. 1,418,022 1,394,895 1,283,541
Other receivables.......... 376,211 444,680 311,402
Inventories..................... 269,295 306,523 275,717
Prepaid expenses and other
current assets................ 61,056 52,992 182,421
------------ ------------ -----------
Total current
assets............. 2,860,333 3,221,244 2,314,421
PROPERTY AND EQUIPMENT, net.......... 458,964 495,110 566,009
OTHER NONCURRENT ASSETS.............. 27,896 38,509 11,485
------------ ------------ -----------
Total assets.......... $ 3,347,193 $ 3,754,863 $ 2,891,915
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 52,477 $ 100,166 $ 142,894
Accounts payable and accrued
expenses...................... 1,296,472 1,626,569 1,411,771
Payable to shareholder.......... 640,447 641,804 --
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 508,209 367,519 218,784
Deferred income taxes........... 256,022 287,454 287,454
------------ ------------ -----------
Total current
liabilities........ 2,753,627 3,023,512 2,060,903
LONG-TERM DEBT, net of current
maturities......................... 45,689 18,017 42,097
DEFERRED INCOME TAXES................ 68,015 42,339 42,339
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.................... 9,800 9,800 9,800
Additional paid-in capital...... 4,000 4,000 4,000
Retained earnings............... 466,062 657,195 732,776
------------ ------------ -----------
Total shareholders'
equity............. 479,862 670,995 746,576
------------ ------------ -----------
Total liabilities and
shareholders'
equity............. $ 3,347,193 $ 3,754,863 $ 2,891,915
============ ============ ===========
The accompanying notes are an integral part of these combined financial
statements.
F-68
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30
------------------------------ --------------------------
1994 1995 1995 1996
-------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 15,845,183 $ 14,510,455 $ 7,630,963 $ 7,244,160
COST OF SERVICES..................... 12,079,290 10,541,122 5,696,572 5,339,002
-------------- -------------- ------------ ------------
Gross profit.................... 3,765,893 3,969,333 1,934,391 1,905,158
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,321,394 3,738,253 1,883,296 1,815,927
-------------- -------------- ------------ ------------
Income from operations.......... 444,499 231,080 51,095 89,231
OTHER INCOME (EXPENSE):
Interest expense................ (23,338) (11,743) (8,863) (13,331)
Other........................... 12,833 (8,238) 258 11,446
-------------- -------------- ------------ ------------
INCOME BEFORE INCOME TAXES........... 433,994 211,099 42,490 87,346
PROVISION FOR INCOME TAXES........... 3,832 13,966 6,139 5,765
-------------- -------------- ------------ ------------
NET INCOME........................... $ 430,162 $ 197,133 $ 36,351 $ 81,581
============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-69
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>
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
Dividend (unaudited)............ -- -- -- (6,000) (6,000)
Net income (unaudited).......... -- -- -- 81,581 81,581
------ ------ ---------- --------- --------------
BALANCE, June 30, 1996 (unaudited)... 2,600 $9,800 $4,000 $ 732,776 $746,576
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-70
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31 JUNE 30,
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 430,162 $ 197,133 $ 36,351 $ 81,581
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 183,860 195,662 93,908 79,772
Deferred income taxes........... 1,274 5,756 (383) --
Gain on sale of property and
equipment..................... 25,241 (12,303) (12,303) --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........... (331,298) (45,342) 146,003 274,021
Inventories................... (33,374) (37,228) (138,143) 30,806
Prepaid expenses and other
current assets............. 112,642 8,064 (24,859) (129,429)
Other noncurrent assets....... (4,915) (10,613) (1,661) 27,024
Increase (decrease) in --
Accounts payable and accrued
expenses................... (15,654) 330,097 (28,484) (214,798)
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... 269,917 (140,690) 76,837 (148,735)
------------ ------------ ------------ ------------
Net cash provided by operating
activities.................... 637,855 490,536 147,266 242
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 38,190 16,704 16,704 --
Additions of property and
equipment....................... (199,281) (236,209) (211,907) (150,671)
------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (161,091) (219,505) (195,203) (150,671)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... -- 1,357 (539,643) (671,193)
Borrowings of long-term debt....... 276,291 185,511 185,511 161,352
Principal payments of long-term
debt............................ (346,573) (165,494) (97,355) (94,544)
Dividends.......................... (55,060) (6,000) (6,000) (6,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (125,342) 15,374 (457,487) (610,385)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 351,422 286,405 (505,424) (760,814)
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 $ 230,325 $ 261,340
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 25,931 $ 11,743 $ 6,185 $ 13,331
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-71
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 as of June 30, 1996, and for the
six months ended June 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-72
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-73
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-74
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-75
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-76
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 percent 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.
Concurrent with the acquisition, the Company will enter into agreements
with the shareholders to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-77
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-78
DIAL ONE MERIDIAN AND HOOSIER, INC.
BALANCE SHEETS
DECEMBER 31
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 427,005 $ 856,754 $ 986,399
Investments........................ 150,000 -- --
Accounts receivable --
Trade, net of allowance of
$41,595, $54,050 and
$66,183....................... 869,316 989,963 2,134,683
Shareholder and affiliates...... 6,316 14,261 19,023
Other receivables............... 19,098 26,459 26,029
Inventories........................ 345,934 249,773 448,158
Prepaid expenses and other current
assets.......................... 72,239 96,545 58,692
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 42,717 16,825 14,239
------------ ------------ -----------
Total current assets....... 1,932,625 2,250,580 3,687,223
PROPERTY AND EQUIPMENT, net.......... 829,316 919,238 1,589,431
OTHER NONCURRENT ASSETS.............. 28,567 18,819 115,215
------------ ------------ -----------
Total assets............... $ 2,790,508 $ 3,188,637 $ 5,391,869
============ ============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 262,046 $ 266,830 $ 430,631
Accounts payable and accrued
expenses........................ 488,197 638,224 1,146,247
Unearned revenue on service
contracts....................... 353,045 423,259 439,750
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 78,049 32,131 565,508
------------ ------------ -----------
Total current
liabilities............. 1,181,337 1,360,444 2,582,136
LONG-TERM DEBT, net of current
maturities......................... 610,180 544,483 1,222,838
DEFERRED INCOME TAXES................ -- 13,309 31,826
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 7,201
Additional paid-in capital......... 35,000 35,000 35,000
Retained earnings.................. 956,890 1,228,300 1,512,968
Treasury stock, 10 shares at
cost............................ (100) (100) (100)
------------ ------------ -----------
Total shareholder's
equity.................. 998,991 1,270,401 1,555,069
------------ ------------ -----------
Total liabilities and
shareholder's equity.... $ 2,790,508 $ 3,188,637 $ 5,391,869
============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-79
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
---------------------------- --------------------------
1994 1995 1995 1996
------------ -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,066,155 $ 10,132,706 $ 4,419,534 $ 6,992,286
COST OF SERVICES..................... 5,797,066 7,280,888 3,172,601 4,750,533
------------ -------------- ------------ ------------
Gross profit............... 2,269,089 2,851,818 1,246,933 2,241,753
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,988,791 2,349,482 1,056,317 1,724,128
------------ -------------- ------------ ------------
Income from operations..... 280,298 502,336 190,616 517,625
OTHER INCOME (EXPENSE):
Interest income................. 8,517 23,399 4,699 16,894
Interest expense................ (56,585) (86,097) (43,373) (71,651)
Other........................... 36,817 10,259 13,246 12,000
------------ -------------- ------------ ------------
INCOME BEFORE INCOME TAXES........... 269,047 449,897 165,188 474,868
PROVISION FOR INCOME TAXES........... 110,365 178,487 65,090 190,200
------------ -------------- ------------ ------------
NET INCOME........................... $ 158,682 $ 271,410 $ 100,098 $ 284,668
============ ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-80
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
Net income (unaudited).......... -- -- -- 284,668 -- 284,668
------ ------ ---------- ---------- -------- --------------
BALANCE, June 30, 1996 (unaudited)... 588 $7,201 $ 35,000 $1,512,968 $ (100) $1,555,069
====== ====== ========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-81
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31 ENDED JUNE 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 158,682 $ 271,410 $ 100,098 $ 284,668
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and amortization... 205,310 245,028 124,264 153,189
Deferred income taxes........... 108,303 45,302 6,654 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivables....... (183,259) (128,008) (328,519) (993,806)
Inventories................ (129,922) 96,161 35,406 (91,097)
Prepaid expenses and other
current assets.......... (14,768) (29,873) (16,636) 40,562
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 29,530 25,892 31,743 22,260
Other noncurrent assets.... 2,606 (16,678) (2,832) (44,912)
Increase (decrease) in --
Accounts payable and
accrued expenses........ 86,294 150,027 164,902 369,448
Unearned revenue on service
contracts............... 60,469 70,214 11,777 7,884
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 27,852 (45,918) 101,085 471,109
Other noncurrent
liabilities............. -- -- -- --
------------ ------------ ------------ ------------
Net cash provided by operating
activities................. 351,097 683,557 227,942 219,305
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... (318,444) (334,950) (114,386) (642,885)
Purchase of investment.......... (150,000) -- -- --
Proceeds from sale of
investment.................... -- 150,000 150,000 --
Cash paid for acquisition, net
of cash acquired.............. -- -- -- (259,533)
------------ ------------ ------------ ------------
Net cash used in investing
activities................. (468,444) (184,950) 35,614 (902,418)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 451,815 200,639 51,813 1,027,570
Principal payments of long-term
debt.......................... (183,134) (261,552) (130,822) (210,050)
(Advances) payments of
receivable from shareholder
and affiliates................ 17,940 (7,945) (32,225) (4,762)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities....... 286,621 (68,858) (111,234) 812,758
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 169,274 429,749 152,322 129,645
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 $ 579,327 $ 986,399
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 56,585 $ 86,097 $ 22,484 $ 71,651
Income taxes............... $ 20,000 $ 126,137 $ 2,490 $ 57,232
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
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 as of June 30, 1996, and for the six
months ended June 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 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-83
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-84
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-85
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-86
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-87
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-88
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.
Concurrent with the acquisition, the Company will enter into agreements
with the shareholder to lease land and buildings used in the Company's
operations for a negotiated amount and term.
F-89
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-90
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-91
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-92
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-93
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-94
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-95
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
F-96
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
==========
F-97
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management estimates that the fair value of its debt obligations
approximates the historical value of $173,540 at December 31, 1995.
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):
In June 1996, the Company's shareholder entered into a definitive agreement
with ARS, providing for the acquisition of the Company by ARS.
F-98
[INSIDE BACK COVER OF PROSPECTUS]
[GRAPHICS -- SHOWING EMPLOYEES PERFORMING
SERVICE, DISPATCH AND TRAINING TASKS]
PASTE-UP -- COPPERPLATE LINE -- PASTE-UP
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER 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 OR BY ANY OF THE UNDERWRITERS. 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.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 9
The Company.......................... 13
Use of Proceeds...................... 16
Dividend Policy...................... 17
Capitalization....................... 17
Dilution............................. 18
Selected Financial Data.............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 36
Management........................... 47
Certain Transactions................. 56
Security Ownership of Certain
Beneficial Owners and Management... 61
Shares Eligible for Future Sale...... 62
Description of Capital Stock......... 63
Underwriting......................... 69
Legal Matters........................ 70
Experts.............................. 70
Additional Information............... 70
Index to Financial Statements........ F-1
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
4,200,000 SHARES
[LOGO ARS, INC]
AMERICAN RESIDENTIAL SERVICES, INC.
COMMON STOCK
------------
PROSPECTUS
SEPTEMBER __, 1996
------------
SMITH BARNEY INC.
MONTGOMERY SECURITIES
================================================================================
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions) in connection with the offering described in this
Registration Statement, all of which shall be paid by the Company. All of such
amounts (except the SEC Registration Fee, the NASD Filing Fee and the New York
Stock Exchange Listing Fee) are estimated.
SEC Registration Fee................. $ 21,652
NASD Filing Fee...................... 6,779
NYSE Filing Fee...................... 100,790
Blue Sky Fees and Expenses........... 15,000
Printing and Engraving Costs......... 150,000
Legal Fees and Expenses.............. 1,090,000
Accounting Fees and Expenses......... 2,500,000
Transfer Agent and Registrar Fees and
Expenses........................... 4,500
Miscellaneous........................ 111,279
------------
Total...................... $ 4,000,000
============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the General Corporation Law of the State of Delaware (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
II-1
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 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
II-2
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 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.
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.
UNDERWRITING AGREEMENT
The Underwriting Agreement provides for the indemnification of the
directors and officers of the Company in certain circumstances.
INSURANCE
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities of the Company issued or
sold within the past three years which were not registered under the Securities
Act:
On November 8, 1995, the Company issued 375, 375 and 250 shares of Common
Stock to C. Clifford Wright, William P. McCaughey and Howard S. Hoover, Jr.,
respectively, the founders of the Company, for $1.00 per share. Such issuances
were exempt from the registration requirements of the Securities Act by virtue
of Section 4(2) thereof as transactions not involving any public offering. As a
result of subsequent stock splits, the 1,000 shares originally issued will total
422,483 shares as of the closing of this Offering. These splits were exempt from
the registration requirements of the Securities Act because they did not involve
a "sale," as defined in Section 2(3) of the Securities Act.
II-3
On March 19, 1996, the Company issued to Equus II Incorporated ("Equus
II") a convertible note, a portion of which will convert into 844,965 shares of
Common Stock on the closing of the Offering being made by this Registration
Statement (this "Offering") and a warrant to purchase 100,000 shares of Common
Stock at the initial public offering price in this Offering. The issuance of the
note was exempt from the registration requirements of the Securities Act under
Section 4(2) thereof as not involving a public offering and the conversion
thereof will be exempt from those requirements pursuant to Section 3(a)(9)
thereof. The issuance of the warrant was exempt from the registration
requirements of the Securities Act under Section 4(2) thereof as not involving a
public offering.
On July 22, 1996, the Company issued a $1.0 million principal amount
promissory note to Equus II to evidence additional borrowings by the Company
from Equus II of up to that amount prior to the closing of the Offering. The
issuance of the note was exempt from the registration requirements of the
Securities Act under Section 4(2) thereof as not involving a public offering.
In connection with the acquisition of Enterprises Holding Company
("EHC"), the Company will issue to NationsBank of Texas, N.A.
("NationsBank") a warrant to purchase shares of Common Stock having a value of
$125,000 on the closing date of this Offering at a purchase price of $.01 per
share. This warrant will be issued in exchange for a warrant issued on March 19,
1996 by EHC, and its issuance will be exempt from the registration requirements
of the Securities Act under Section 4(2) thereof as not involving a public
offering.
Simultaneously with the completion of this Offering, the Company will issue
2,982,204 shares of Common Stock in connection with the acquisition of the
Founding Companies (based on an assumed initial public offering price of $15 per
share, the midpoint of the estimated public offering price range). Such
issuances will be exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof as transactions not involving any public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
`1.1 -- Form of Underwriting Agreement.
*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.
*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.
*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.
*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.
*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.
*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.
*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.
II-4
EXHIBIT
NUMBER DESCRIPTION
*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.
*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.
*2.10 -- Form of Uniform Provisions for the
Acquisition of Founding Companies.
'3.1 -- Restated Certificate of Incorporation
of the Company.
'3.2 -- Bylaws of the Company.
'3.3 -- Certificate of Designations of Series
A Junior Participating Preferred
Stock.
*4.1 -- Form of Certificate representing
Common Stock.
*4.2 -- Form of Rights Agreement of the
Company, including form of Rights
Certificate as Exhibit B thereto.
*4.3 -- Form of Registration Rights Agreement
among the Company and the
stockholders listed on the signature
pages thereto.
*4.4 -- Stock Registration Agreement dated as
of March 6, 1996 between American
Residential Services, Inc. and Equus
II Incorporated.
*4.5 -- Stock Piggyback Registration
Agreement dated as of March 19, 1996
between Enterprises Holding Company
and NationsBank of Texas, N.A.
'5.1 -- Opinion of Baker & Botts, L.L.P.
*10.1 -- American Residential Services, Inc.
1996 Incentive Plan.
*10.2 -- Employment Agreement dated as of
November 1, 1995 between the Company
and Howard S. Hoover, Jr., as
amended.
*10.3 -- Employment Agreement dated as of
November 1, 1995 between the Company
and C. Clifford Wright, Jr., as
amended.
*10.4 -- Employment Agreement dated as of
November 1, 1995 between the Company
and William P. McCaughey, as amended.
*10.5 -- Employment Agreement dated as of
March 6, 1996 between the Company and
John D. Held, as amended.
*10.6 -- Employment Agreement dated as of
March 6, 1996 between the Company and
A. Jefferson Walker, III.
*10.7 -- Employment Agreement dated as of
April 15, 1996 between the Company
and Michael Mamaux.
*10.8 -- Employment Agreement dated as of June
13, 1996 between the Company and
Elliot Sokolow.
*10.9 -- Employment Agreement dated as of June
13, 1996 between the Company and
Howard W. Hauser.
*10.10 -- Employment Agreement dated as of June
13, 1996 between the Company and
Gorden H. Timmons.
*10.11 -- Employment Agreement dated as of June
13, 1996 between the Company and Gary
Daymon.
*10.12 -- Employment Agreement dated as of June
13, 1996 between the Company and
Frank N. Menditch.
*10.13 -- Employment Agreement dated as of June
13, 1996 between the Company and
Howard C. Menditch.
*10.14 -- Employment Agreement dated as of June
13, 1996 between the Company and
Bruce L. Menditch.
II-5
EXHIBIT
NUMBER DESCRIPTION
*10.15 -- Form of Indemnification Agreement
between the Company and each of its
directors and officers.
*10.16 -- Executive Supplemental Disability
Plan of American Residential
Services, Inc.
*10.17 -- Executive Supplemental Life
Insurance Plan of American
Residential Services, Inc.
*10.18 -- American Residential Services, Inc.
Deferred Compensation Plan.
'10.19 -- Commitment Letter dated July 17,
1996 between the Company and
NationsBank of Texas, N.A.
'23.1 -- Consent of Arthur Andersen LLP.
'23.2 -- Consent of Baker & Botts, L.L.P.
(contained in Exhibit 5.1)
*23.3 -- Consent of Gorden H. Timmons, as a
nominee for directorship.
*23.4 -- Consent of Elliot Sokolow, as a
nominee for directorship.
*23.5 -- Consent of Nolan Lehmann, as a
nominee for directorship.
*23.6 -- Consent of Randall B. Hale, as a
nominee for directorship.
*23.7 -- Consent of Robert J. Cruikshank, as
a nominee for directorship.
*23.8 -- Consent of Don D. Sykora, as a
nominee for directorship.
*23.9 -- Consent of Frank N. Menditch, as a
nominee for directorship.
*23.10 -- Consent of Thomas Amonett, as a
nominee for directorship.
*24.1 -- Power of Attorney.
*27.1 -- Financial Data Schedule.
- ------------
* Previously filed.
` Filed herewith.
(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 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Purchase Agreement, certificates
representing the shares of Common Stock offered hereby in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
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 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.
II-6
The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as a part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each 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.
II-7
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON AUGUST 26, 1996.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
CAPACITY IN
SIGNATURES WHICH SIGNED DATE
- ------------------------------------------------------- ------------------------------------ ----------------
<C> <S> <C>
/s/C. CLIFFORD WRIGHT, JR. President, Chief Executive August 26, 1996
C. CLIFFORD WRIGHT, JR. Officer, and Director
(Principal Executive Officer and
Principal Financial Officer)
/s/HOWARD S. HOOVER, JR.* Chairman of the Board August 26, 1996
HOWARD S. HOOVER, JR.
/s/MICHAEL MAMAUX Controller August 26, 1996
MICHAEL MAMAUX (Principal Accounting Officer)
/s/WILLIAM P. MCCAUGHEY Executive Vice President August 26, 1996
WILLIAM P. MCCAUGHEY and Director
*By: C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
ATTORNEY-IN-FACT
</TABLE>
II-8
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
`1.1 -- Form of Underwriting Agreement.
*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.
*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.
*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.
*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.
*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.
*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.
*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.
II-9
EXHIBIT
NUMBER DESCRIPTION
*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.
*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.
*2.10 -- Form of Uniform Provisions for the
Acquisition of Founding Companies.
'3.1 -- Restated Certificate of Incorporation
of the Company.
'3.2 -- Bylaws of the Company.
'3.3 -- Certificate of Designations of Series
A Junior Participating Preferred
Stock.
*4.1 -- Form of Certificate representing
Common Stock.
*4.2 -- Form of Rights Agreement of the
Company, including form of Rights
Certificate as Exhibit B thereto.
*4.3 -- Form of Registration Rights Agreement
among the Company and the
stockholders listed on the signature
pages thereto.
*4.4 -- Stock Registration Agreement dated as
of March 6, 1996 between American
Residential Services, Inc. and Equus
II Incorporated.
*4.5 -- Stock Piggyback Registration
Agreement dated as of March 19, 1996
between Enterprises Holding Company
and NationsBank of Texas, N.A.
'5.1 -- Opinion of Baker & Botts, L.L.P.
*10.1 -- American Residential Services, Inc.
1996 Incentive Plan.
*10.2 -- Employment Agreement dated as of
November 1, 1995 between the Company
and Howard S. Hoover, Jr., as
amended.
*10.3 -- Employment Agreement dated as of
November 1, 1995 between the Company
and C. Clifford Wright, Jr., as
amended.
*10.4 -- Employment Agreement dated as of
November 1, 1995 between the Company
and William P. McCaughey, as amended.
*10.5 -- Employment Agreement dated as of
March 6, 1996 between the Company and
John D. Held, as amended.
*10.6 -- Employment Agreement dated as of
March 6, 1996 between the Company and
A. Jefferson Walker, III.
*10.7 -- Employment Agreement dated as of
April 15, 1996 between the Company
and Michael Mamaux.
*10.8 -- Employment Agreement dated as of June
13, 1996 between the Company and
Elliot Sokolow.
*10.9 -- Employment Agreement dated as of June
13, 1996 between the Company and
Howard W. Hauser.
*10.10 -- Employment Agreement dated as of June
13, 1996 between the Company and
Gorden H. Timmons.
*10.11 -- Employment Agreement dated as of June
13, 1996 between the Company and Gary
Daymon.
*10.12 -- Employment Agreement dated as of June
13, 1996 between the Company and
Frank N. Menditch.
*10.13 -- Employment Agreement dated as of June
13, 1996 between the Company and
Howard C. Menditch.
*10.14 -- Employment Agreement dated as of June
13, 1996 between the Company and
Bruce L. Menditch.
II-10
EXHIBIT
NUMBER DESCRIPTION
*10.15 -- Form of Indemnification Agreement
between the Company and each of its
directors and officers.
*10.16 -- Executive Supplemental Disability
Plan of American Residential
Services, Inc.
*10.17 -- Executive Supplemental Life
Insurance Plan of American
Residential Services, Inc.
*10.18 -- American Residential Services, Inc.
Deferred Compensation Plan.
'10.19 -- Commitment Letter dated July 17,
1996 between the Company and
NationsBank of Texas, N.A.
'23.1 -- Consent of Arthur Andersen LLP.
'23.2 -- Consent of Baker & Botts, L.L.P.
(contained in Exhibit 5.1)
*23.3 -- Consent of Gorden H. Timmons, as a
nominee for directorship.
*23.4 -- Consent of Elliot Sokolow, as a
nominee for directorship.
*23.5 -- Consent of Nolan Lehmann, as a
nominee for directorship.
*23.6 -- Consent of Randall B. Hale, as a
nominee for directorship.
*23.7 -- Consent of Robert J. Cruikshank, as
a nominee for directorship.
*23.8 -- Consent of Don D. Sykora, as a
nominee for directorship.
*23.9 -- Consent of Frank N. Menditch, as a
nominee for directorship.
*23.10 -- Consent of Thomas Amonett, as a
nominee for directorship.
*24.1 -- Power of Attorney.
*27.1 -- Financial Data Schedule.
- ------------
* Previously filed.
` Filed herewith.
Proof of August 23, 1996
4,200,000 Shares
AMERICAN RESIDENTIAL SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
September , 1996
SMITH BARNEY INC.
MONTGOMERY SECURITIES
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
American Residential Services, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 4,200,000 shares (the
"Firm Shares") of its common stock, $0.001 par value per share (the "Common
Stock"), to the several Underwriters named in Schedule I hereto (the
"Underwriters"). The Company also proposes to sell to the Underwriters, upon the
terms and conditions set forth in Section 2 hereof, up to an additional 630,000
shares (the "Additional Shares") of Common Stock. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "Shares".
The Company wishes to confirm as follows its agreement with you (the
"Representatives") and the other several Underwriters on whose behalf you are
acting, in connection with the several purchases of the Shares by the
Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has
prepared and filed with the Securities and Exchange Commission
-1-
(the "Commission") in accordance with the provisions of the Securities Act of
1933, as amended, and the rules and regulations of the Commission thereunder
(collectively, the "Act"), a registration statement on Form S-1 under the Act
(Registration No. 333-6195) [and a registration statement on Form S-1 under the
Act filed pursuant to Rule 462(b)], including a prospectus subject to completion
relating to the Shares. The term "Registration Statement" as used in this
Agreement means [each] such registration statement (including all financial
schedules and exhibits), as amended at the time it becomes effective, or, if
such registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
[If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment.] The term "Prospectus" as
used in this Agreement means the prospectus in the form included in the
Registration Statement, or, if the prospectus included in the Registration
Statement omits information in reliance on Rule 430A under the Act and such
information is included in a prospectus filed with the Commission pursuant to
Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, and as
such prospectus shall have been amended from time to time prior to the date of
the Prospectus.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees, subject
to all the terms and conditions set forth herein, to issue and sell to each
Underwriter and, upon the basis of the representations, warranties and
agreements of the Company herein contained and subject to all the terms and
conditions set forth herein, each Underwriter agrees, severally and not jointly,
to purchase from the Company, at a purchase price of $ per Share (the "purchase
price per share"), the number of Firm Shares
-2-
set forth opposite the name of such Underwriter in Schedule I hereto (or such
number of Firm Shares increased as set forth in Section 10 hereof).
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time and from time to time prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 630,000
Additional Shares. Additional Shares may be purchased only for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. Upon any exercise of the over-allotment option, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments as you may determine in order to
avoid fractional shares) which bears the same proportion to the number of
Additional Shares to be purchased by the Underwriters as the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto (or
such number of Firm Shares increased as set forth in Section 10 hereof) bears to
the aggregate number of Firm Shares.
3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on September , 1996 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement between you
and the Company.
-3-
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a written
notice from you on behalf of the Underwriters to the Company of the
Underwriters' determination to purchase a number, specified in such notice, of
Additional Shares. The place of closing for any Additional Shares and the Option
Closing Date for such Shares may be varied by agreement between you and the
Company.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request in writing prior to 9:30 A.M., New York City time, on the
second business day preceding the Closing Date or any Option Closing Date, as
the case may be. Such certificates shall be made available to you in New York
City for inspection and packaging not later than 9:30 A.M., New York City time,
on the business day next preceding the Closing Date or the Option Closing Date,
as the case may be. The certificates evidencing the Firm Shares and any
Additional Shares to be purchased hereunder shall be delivered to you on the
Closing Date or the Option Closing Date, as the case may be, against payment of
the purchase price therefor in immediately available funds.
5. AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing, when
the Registration Statement or such post-effective amendment has become
effective.
-4-
(b) The Company will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement made in the Registration Statement or
the Prospectus (as then amended or supplemented) an untrue statement of a
material fact or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein not
misleading, or of the necessity to amend or supplement the Prospectus (as then
amended or supplemented) to comply with the Act or any other applicable law. If
at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company will furnish to you, without charge, three
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
copies of all exhibits thereto, and will also furnish to you, without charge,
such number of conformed copies of the registration statement as originally
filed and of each amendment thereto, but without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall object
after being so advised or (ii) so long as, in the opinion of counsel for the
Underwriters, a Prospectus is required to be delivered in connection with sales
by any
-5-
Underwriter or dealer, file any information, documents or reports pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
requested, copies of each form of the Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Shares are offered
by the several Underwriters and by dealers, prior to the date of the Prospectus,
of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement
as possible and thereafter from time to time for such period as in the opinion
of counsel for the Underwriters a prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom Shares
may be sold, both in connection with the offering and sale of the Shares and for
such period of time thereafter as the Prospectus is required by the Act to be
delivered in connection with sales by any Underwriter or dealer. If during such
period of time any event shall occur that in the judgment of the Company or in
the opinion of counsel for the Underwriters is required to be set forth in the
Prospectus (as then amended or supplemented) or should be set forth therein in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with the Act or any other law, the Company will
forthwith prepare and, subject to the provisions of paragraph (d) above, file
with the Commission an appropriate supplement or amendment thereto, and will
expeditiously furnish to the Underwriters and dealers a
-6-
reasonable number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should be
amended or supplemented, the Company, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such domestic and foreign jurisdictions as
you may designate and will file such consents to service of process or other
documents necessary or appropriate in order to effect such registration or
qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action which would subject it to any income taxing authority to
which it is not now subject or to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction where it
is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company
will furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission, and (ii) from time
to time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than pursuant to
the second paragraph of Section 10 hereof or by notice given by you terminating
this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company to comply with the terms or
-7-
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the Representatives for all out-of-pocket expenses (including fees and expenses
of counsel for the Underwriters) incurred by you in connection herewith upon
receipt of appropriate invoices therefor.
(k) The Company will apply the net proceeds from the
sale of the Shares substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not
sell, contract to sell or otherwise dispose of any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
grant any options or warrants to purchase Common Stock, for a period of 180 days
after the date of the Prospectus (the "180-Day Lock-up Period"), without the
prior written consent of Smith Barney Inc., except that the Company may (i)
issue on the Closing Date the shares of Common Stock to be issued in connection
with the acquisitions to be consummated on the Closing Date, as described in the
Registration Statement (the "Acquisitions"), (ii) issue up to 5,000,000 shares
of Common Stock ("Acquisition Shares") during the 180-Day Lock-up Period in
connection with additional acquisitions so long as the purchaser of such
Acquisition Shares agrees to be bound by a lock-up letter in the form previously
delivered to you (a "Lockup Letter") pursuant to which such purchaser agrees
with the Company not to sell, offer to sell, solicit an offer to buy, contract
to sell, grant any option to purchase, or otherwise transfer or dispose of, any
such Acquisition Shares at any time before the expiration of the 180-Day Lock-up
Period and the certificates evidencing such Acquisition Shares bear a legend to
such effect, (iii) issue shares of Common Stock during the 180- Day Lock-up
Period pursuant to the exercise of options or warrants granted or issued by the
Company prior to the date hereof, pursuant to the convertible note issued by the
Company prior to the date hereof and described in the Registration Statement
(the "Convertible Note"), and pursuant to the warrant to be issued to
NationsBank of Texas, N.A. on the Closing Date, as described in the Registration
Statement, and (iv) grant awards
-8-
(which may include awards of restricted stock and stock options) during the
180-Day Lock-up Period pursuant to the American Residential Services, Inc. 1996
Incentive Plan. The Company further agrees for the express benefit of the
Underwriters that, during the 180-Day Lock-up Period, it will not, without the
prior written consent of Smith Barney Inc., waive any provision of any
registration rights agreement, stockholders agreement or any reorganization
agreement (as defined herein), in each case relating to any restriction imposed
on the subsequent transfer or other disposition of shares of Common Stock and
will take reasonable steps to cause its transfer agent to enforce any such
provision so as to limit the transfer or other disposition of shares of the
Common Stock during the 180-Day Lock-up Period.
(n) The Company has furnished or will furnish to you Lock-up
Letters signed by each of its current officers and directors and each of its
stockholders who holds or will, immediately after the closing of the
Acquisitions, hold 5,000 or more shares of Common Stock, restricting such
officers, directors and stockholders for the 180-Day Lock-up Period from
selling, offering for sale or otherwise transferring or disposing of any shares
of Common Stock.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common
Stock listed, subject to notice of issuance, on the New York Stock Exchange
prior to or concurrently with the effectiveness of the registration statement.
(q) The Company will furnish to you as early as practicable
prior to the time of purchase on the Closing Date and the time of purchase on
the Option Closing Date, as the case may be, but not later than two business
days prior thereto, a copy of the latest available unaudited interim financial
statements, if any, of the Company which have been read by Arthur Andersen LLP,
as stated in their letter to be furnished pursuant to Section 8(f).
-9-
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The registration statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective, and the Prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, except that this
representation and warranty does not apply to statements in or omissions from
the Registration Statement or the Prospectus or any amendment or supplement
thereto made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by or on behalf of any
Underwriter through you expressly for use therein.
(c) As of the date of this Agreement, the Company has
authorized capital stock consisting 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"); prior to the closing of the transactions
contemplated by each of the agreements identified on Schedule II hereto (the
"Reorganization Agreements") and the issuance of shares of Common Stock as
contemplated thereby and hereby, and prior to giving effect to the partial
conversion of the Convertible Note into Common Stock, which is to occur on the
Closing Date, the Company has issued and outstanding ____________ shares of
Common Stock and no shares of Preferred Stock; upon consummation of the
Acquisitions and the issuance of ____________ shares of Common Stock as
contemplated by the Reorganization Agreements, upon the issuance of _________
shares of Common Stock in connection with
-10-
the partial conversion of the Convertible Note, the issuance of ________ shares
of Common Stock in exchange for the preferred stock of Enterprises Holding
Company and upon the grant of ________ shares of restricted Common Stock to be
awarded under the American Residential Services, Inc. 1996 Incentive Plan upon
the closing of one of the Acquisitions (which, together with all of the shares
described in the previous clause of this sentence, are all the shares of Common
Stock to be issued prior to the issuance and sale of the Shares and the
Additional Shares), but without giving effect to the issuance of shares of
Common Stock pursuant to the terms of this Agreement, the Company will have
issued and outstanding ____________ shares of Common Stock and no shares of
Preferred Stock. All of such outstanding shares of Common Stock (other than the
Shares) have been or, as of the Closing Date, will be duly authorized and
validly issued, fully paid and nonassessable, and none will have been issued in
violation of any preemptive right or similar right. Except as described in the
Prospectus, (a) there are no outstanding options, warrants or other rights
calling for the issuance of, and there are no commitments to issue any shares
of, capital stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company, and (b) there is
no holder of any securities of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or otherwise issue
to him or her, or permit him or her to underwrite the sale of, any of the
Shares.
(d) The Shares have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive or similar rights; and the capital stock of the Company conforms
to the description thereof in the Registration Statement and the Prospectus.
(e) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such
-11-
registration or qualification, except where the failure so to register or
qualify does not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the Company
and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material
Adverse Effect").
(f) Each of the Company's subsidiaries, including each of the
Founding Companies as identified in the Registration Statement which will become
a subsidiary of the Company upon the Closing Date (collectively, before and upon
giving effect to the Acquisitions (unless otherwise specifically qualified
herein), the "Subsidiaries") is a corporation duly organized, validly existing
and in good standing in the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a Material Adverse Effect; all the outstanding shares of capital stock of each
of the Subsidiaries (upon giving effect to the Acquisitions) have been duly
authorized and validly issued, are fully paid and nonassessable, and on the
closing of the Acquisitions will be owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity, or other encumbrance. Other than with respect
to the Subsidiaries (upon giving effect to the Acquisitions), the Company does
not have, directly or indirectly, any ownership interest which is material to
the Company in consideration of its consolidated assets, in any corporation,
partnership, joint venture, association or other business organization.
(g) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties, is subject that are required to be described
in the Registration Statement or the Prospectus but are not described as
required, and there are no agreements, contracts, indentures,
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leases or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required by the Act.
(h) Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any of the
Subsidiaries or of any decree of any court or governmental agency or body having
jurisdiction over the Company or any of the Subsidiaries, or in default in any
material respect in the performance of any obligation, agreement or condition
contained in any bond, debenture, note or any other evidence of indebtedness or
in any material agreement, indenture, lease or other instrument to which the
Company or any of the Subsidiaries is a party or by which any of them or any of
their respective properties may be bound, except for such violations or defaults
as would not, individually or in the aggregate, have a Material Adverse Effect.
(i) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company, the
execution, delivery or performance of the Reorganization Agreements by the
Company or by any Subsidiary, nor the consummation by the Company or any
Subsidiary of any of the transactions contemplated hereby or thereby (A)
requires any consent, approval, authorization or other order of or registration
or filing with, any court, regulatory body, administrative agency or other
governmental body, agency or official (except such as may be required under the
Act and the Exchange Act and compliance with the securities or Blue Sky laws of
various jurisdictions, all of which have been or will be effected in accordance
with this Agreement) or conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational documents, of the Company or
any of the Subsidiaries or (B) conflicts or will conflict with or constitutes or
will constitute a breach of, or a default under, any agreement, indenture, lease
or other instrument to which the Company or any of the Subsidiaries is a party
or by which any of them or any of their respective properties may be bound, or
violates or will violate any statute, law, regulation or
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judgment, injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, or will result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument to which any of them is a party or by which any of them
may be bound or to which any of the property or assets of any of them is
subject, except for such conflicts, breaches, defaults, violations, liens,
charges or encumbrances as would not, individually or in the aggregate, have a
Material Adverse Effect.
(j) The accountants, Arthur Andersen LLP, who have certified
or shall certify the financial statements included in the Registration Statement
and the Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(k) The historical financial statements, together with the
related notes, included in the Registration Statement and the Prospectus (and
any amendment or supplement thereto), present fairly in all material respects
the separate financial position, results of operations, shareholders' equity
(and deficit) and cash flows of each of General Heating Engineering Company,
Inc., Atlas Services, Inc., Service Enterprises, Inc., Florida Heating and Air
Conditioning, Inc., Dial One Meridian and Hoosier, Inc. and Adcot, Inc., on the
basis stated in the Registration Statement at the respective dates or for the
respective periods to which they apply; such statements and related notes have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the summary financial and statistical data included in the Registration
Statement present fairly the information shown therein and such data have been
compiled on a basis consistent with the financial statements presented therein
and the books and records of the Company and the Founding Companies, as
applicable; the pro forma combined financial statements of the Company and the
Founding Companies (including the supplemental pro forma information shown
therein), together with the related notes, as set forth in the Registration
Statement, present fairly the information shown therein, have been prepared in
accordance with the applicable provisions of Article 11 of Regulation S-X
promulgated by the Commission with
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respect to pro forma financial statements and have been properly compiled on the
pro forma bases described therein, and in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions or circumstances
referred to therein; and the other financial and statistical information and
data included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented and prepared on a
basis consistent with such financial statements and the books and records of the
Company and the Subsidiaries.
(l) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as that enforceability may be subject to the effect of (i) any applicable
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally, (ii) general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law) and (iii) any implied covenant of good faith or fair
dealing, and except to the extent that rights to indemnity and contribution
hereunder may be limited by federal or state securities laws. The execution and
delivery of, and the performance by the Company and each Subsidiary, as
applicable, of its respective obligations under, each Reorganization Agreement
have been duly and validly authorized by the Company and such Subsidiary and
each Reorganization Agreement has been duly authorized, executed and delivered
by the Company and the Subsidiary which is a party to such agreement, and
constitutes the legal, valid and binding agreement of the Company and such
Subsidiary, as the case may be, except as that enforceability may be subject to
the effect of (i) any applicable bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium or other laws affecting creditors' rights generally,
(ii) general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and (iii) any implied covenant
of good faith or fair dealing.
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(m) Except as disclosed in or contemplated by the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
subsequent to the respective dates as of which such information is given in the
Registration Statement and the Prospectus (or any amendment or supplement
thereto), neither the Company nor any of the Subsidiaries has incurred any
liability or obligation, direct or contingent, or entered into any transaction,
not in the ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any of the Subsidiaries, or any material adverse change, or any
development involving, or which may reasonably be expected to involve, a
prospective Material Adverse Effect.
(n) Each of the Company and the Subsidiaries has good and
marketable title to all material property (real and personal) described in the
Registration Statement and the Prospectus or in a document filed as an exhibit
to the Registration Statement as being owned by it, free and clear of all liens,
claims, security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus or in a document filed as an
exhibit to the Registration Statement and all the property described in the
Prospectus as being held under lease by each of the Company and the Subsidiaries
is held by it under valid, subsisting and enforceable leases.
(o) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) the completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(p) The Company and each of the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus, except for any such
permits the absence or lapse of which would not have, individually or in the
aggregate, a Material Adverse Effect; the Company and each of the Subsidiaries
has fulfilled and performed all its material
-16-
obligations with respect to such permits and no event has occurred which allows,
or after notice or lapse of time would allow, revocation or termination thereof
or results in any other material impairment of the rights of the holder of any
such permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, none of such permits
contains any restriction that is materially burdensome to the Company or any of
the Subsidiaries.
(q) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of
the Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(s) The Company and each of the Subsidiaries have conducted
their respective businesses in substantial compliance with all applicable
Federal, state and local laws and regulations including, without limitation,
those applicable to emissions into the environment, waste management and waste
disposal (collectively, the "Environmental Laws") and, to the Company's
knowledge, under current law, there are no existing circumstances that would
prevent, interfere with, or materially increase the cost of compliance with such
Environmental Laws in the future, except for any lack of compliance or the
existence of any such circumstance as would not have, individually or in the
aggregate, a Material Adverse Effect.
-17-
(t) Except as set forth in the Registration Statement and the
Prospectus, there is no material claim under any Environmental Law, including
common law, pending or, threatened against the Company or any of the
Subsidiaries ("Environmental Claim") and, to the Company's best knowledge, under
applicable law, there are no past or present actions, activities, circumstances,
events or incidents, including, without limitation, releases of any material
into the environment that would reasonably be expected to form the basis of any
material claim against the Company or any of the Subsidiaries.
(u) The Company and each of the Subsidiaries have filed all
tax returns required to be filed, which returns are complete and correct, and
neither the Company nor any Subsidiary is in default in the payment of any taxes
which were payable pursuant to said returns or any assessments with respect
thereto, except for any failures to file or any such defaults as would not have,
individually or in the aggregate, a Material Adverse Effect.
(v) Except as disclosed in the Prospectus, no holder of any
security of the Company has any right to require registration of shares of
Common Stock or any other security of the Company because of the filing of the
Registration Statement or consummation of the transactions contemplated by this
Agreement or the Reorganization Agreements.
(w) The Company and the Subsidiaries own or possess valid and
enforceable rights to use all patents, trademarks, trademark registrations,
service marks, service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the Prospectus or the
Reorganization Agreements as being owned by them or any of them or material to
the conduct of their respective businesses, and the Company is not aware of any
claim to the contrary or any challenge by any other person to the rights of the
Company and the Subsidiaries with respect to the foregoing.
(x) The Company is not now, and after sale of the Shares to be
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company"
-18-
within the meaning of the Investment Company Act of 1940, as amended.
(y) The Company has complied with all provisions of Florida
Statutes ss.517.075, relating to issuers doing business with Cuba.
(z) The Shares have been approved for listing, upon notice of
issuance, on the New York Stock Exchange.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or expenses arise out of or are based upon any untrue statement or
omission or alleged untrue statement or omission which has been made therein or
omitted therefrom in reliance upon and in conformity with the information
relating to such Underwriter furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use in connection therewith;
provided, however, that the indemnification contained in this paragraph (a) with
respect to any Prepricing Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of Shares by such Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person within the time required by
the Act and the regulations thereunder, and the untrue statement or alleged
untrue statement or omission or alleged omission of a material fact contained in
such Prepricing Prospectus was corrected in the Prospectus, provided that the
Company has delivered the Prospectus to the several Underwriters in requisite
quantity on a timely basis to permit such delivery
-19-
or sending. The foregoing indemnity agreement shall be in addition to any
liability which the Company may otherwise have.
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the Company, and the Company shall
assume the defense thereof, including the employment of counsel and payment of
all fees and expenses. Such Underwriter or any such controlling person shall
have the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such controlling person
unless (i) the Company has agreed in writing to pay such fees and expenses, (ii)
the Company has failed to assume the defense and employ counsel, or (iii) the
named parties to any such action, suit or proceeding (including any impleaded
parties) include both such Underwriter or such controlling person and the
Company and such Underwriter or such controlling person shall have been advised
by its counsel that representation of such indemnified party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between them (in
which case the Company shall not have the right to assume the defense of such
action, suit or proceeding on behalf of such Underwriter or such controlling
person). It is understood, however, that the Company shall, in connection with
any one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons, which
firm shall be designated in writing by Smith Barney Inc., and that all such fees
and expenses shall be reimbursed as they are incurred. The Company shall not be
liable for any settlement of any such action, suit or proceeding effected
without its written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the Company agrees to indemnify and hold harmless any Underwriter,
to the extent provided in the preceding paragraph,
-20-
and any such controlling person from and against any loss, claim, damage,
liability or expense by reason of such settlement or judgment.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with respect
to information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against the Company,
any of its directors, any such officer, or any such controlling person based on
the Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto, and in respect of which indemnity may be sought
against any Underwriter pursuant to this paragraph (c), such Underwriter shall
have the rights and duties given to the Company by paragraph (b) above (except
that if the Company shall have assumed the defense thereof such Underwriter
shall not be required to do so, but may employ separate counsel therein and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at such Underwriter's expense), and the Company, its directors, any
such officer, and any such controlling person shall have the rights and duties
given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Underwriters may
otherwise have.
(d) If the indemnification provided for in this Section 7 is unavailable
to an indemnified party under paragraphs (a) or (c) hereof in respect of any
losses, claims, damages, liabilities or expenses referred to therein, then an
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of the
Shares, or (ii) if the allocation provided by clause (i) above is not
-21-
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault of the Company on the
one hand and the Underwriters on the other hand shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(e) The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by a pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in paragraph (d) above. The amount paid or
payable by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price of the Shares
underwritten by it and distributed to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution. The Underwriters'
-22-
obligations to contribute pursuant to this Section 7 are several in proportion
to the respective numbers of Firm Shares set forth opposite their names in
Schedule I hereto (or such numbers of Firm Shares increased as set forth in
Section 10 hereof) and not joint.
(f) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such action, suit or proceeding.
(g) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 7 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers, or any person
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter or any person controlling any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be entitled
to the benefits of the indemnity, contribution, and reimbursement agreements
contained in this Section 7.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Firm Shares
hereunder are subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the registration statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the registration statement or such post-effective amendment shall have become
-23-
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially, adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any Subsidiary or any officer or director of the
Company or any Subsidiary which makes any statement in the Prospectus an untrue
statement of a material fact or which, in the opinion of the Company and its
counsel or the Underwriters and their counsel, requires the making of any
addition to or change in the Prospectus in order to state a material fact
required by the Act or any other applicable law to be stated therein or
necessary in order to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development would, in your
opinion, as Representatives of the several Underwriters, materially adversely
affect the market for the Shares.
(c) You shall have received on the Closing Date,
an opinion of Baker & Botts, L.L.P., counsel for the Company, dated the Closing
Date and addressed to you, as Representatives of the several Underwriters, to
the effect that:
(i) The Company is a corporation duly
incorporated and validly existing in good standing under the laws of the State
of Delaware with full corporate power and authority to own, lease and operate
its properties and to conduct its
-24-
business as described in the Registration Statement and the Prospectus (and any
amendment or supplement thereto);
(ii) The authorized capital stock of the Company
is comprised of 50,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock. No shares of Preferred Stock have been issued. After giving
effect to the issuance of shares of Common Stock pursuant to the conversion of
the Convertible Note, the issuance of shares of Common Stock pursuant to the
Reorganization Agreements and the grant of Common Stock awards as described in
the Prospectus, ____________ shares of Common Stock (the "Presently Outstanding
Shares") have been issued and are outstanding;
(iii) All the Presently Outstanding Shares have
been duly authorized and validly issued and are fully paid and
nonassessable;
(iv) The Shares have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and will not have been issued in violation of the preemptive or
other similar rights of any holder of Common Stock existing under the restated
certificate of incorporation of the Company, under the corporate law of the
State of Delaware or, to the knowledge of such counsel, otherwise;
(v) The form of certificates for the Shares
conforms to the applicable requirements of the Delaware General
Corporation Law;
(vi) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act and, to
the knowledge of such counsel after making telephone inquiries to staff members
of the Securities and Exchange Commission on the Closing Date, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose are pending before or contemplated by the
Commission; and any required filing of the Prospectus pursuant to Rule 424(b)
has been made in accordance with Rule 424(b);
-25-
(vii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver the Shares
to the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company. The Company has the corporate
power and authority to enter into the Reorganization Agreements to which it is a
party and to perform its obligations thereunder, and each Reorganization
Agreement has been duly authorized, executed and delivered by the Company;
(viii) To the knowledge of such counsel, except as
disclosed in the Prospectus, no default exists in the performance or observance
by the Company of any material agreement, lease or other instrument that is
filed as an exhibit to the Registration Statement;
(ix) The execution and delivery of this Agreement
by the Company, the consummation by the Company of the transactions contemplated
in this Agreement, the Reorganization Agreements and in the Prospectus
(including the issuance, delivery and sale of the Shares pursuant to this
Agreement) and compliance by the Company with the terms of this Agreement (A) do
not and will not result in any violation of the restated certificate of
incorporation or by-laws of the Company or (B) do not and will not conflict
with, or result in a breach of any of the terms of, or constitute a default
under, or result in the creation of any lien, charge or encumbrance upon any
property or assets of the Company under, (i) any agreement, indenture, lease or
other instrument (a) to which the Company is a party or by which the Company or
any of its properties is bound and (b) which has been described in or filed as
an exhibit to the Registration Statement, (ii) any existing applicable law, rule
or regulation (other than securities or Blue Sky laws of the various states or
other jurisdictions, as to which such counsel need express no opinion) or (iii)
any judgement, injunction, order or decree known to such counsel of any
government, governmental instrumentality or court having jurisdiction over the
Company or any of its properties, except, in each case referred to in this
clause (B), for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect;
-26-
(x) No consent, approval, authorization or other order of,
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the part
of the Company (except as have been obtained under the Act and the Exchange Act
or such as may be required under state or foreign securities or Blue Sky laws
governing the purchase and distribution of the Shares) for the valid issuance
and sale of the Shares to the Underwriters as contemplated by this Agreement;
(xi) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and the
notes thereto and the auditor's reports, exhibits, schedules and other financial
and statistical data included therein, as to which such counsel need express no
opinion), as of their respective effective or issue dates, appear on their face
to have been appropriately responsive in all material respects to the
requirements of the Act;
(xii) Such counsel does not know of (A) any pending or
threatened legal or governmental proceedings that are required to be described
in the Prospectus and are not described as required or (B) any agreement,
contract, indenture, lease or other instrument of a character required to be
described or referred to in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement which has not been
described or referred to or filed as required;
(xiii) Except as described in or contemplated by the
Prospectus, such counsel knows of no outstanding option, warrant or other right
calling for the issuance of, and such counsel knows of no commitment, plan or
arrangement to issue, any share of capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of the
Company; and except as described in the Prospectus, such counsel does not know
of any holder of any securities of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, any of the Shares; and
(xiv) The Shares, subject to official notice of issuance,
have been approved for listing on the New York Stock Exchange.
-27-
In addition, such counsel shall state that such counsel
has participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants of the Company
and representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed and
that, although such counsel has not undertaken to determine independently, and
does not assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the Prospectus,
such counsel advises you that, on the basis of the foregoing (relying as to
materiality to a large extent on statements and other representations of
officers and other representatives of the Company), no facts have come to such
counsel's attention that lead such counsel to believe that the Registration
Statement (other than (i) the financial statements and schedules (including the
notes thereto and the auditors' reports thereon) included therein or omitted
therefrom and (ii) the other accounting, financial and statistical information
contained therein or omitted therefrom, and it being understood that such
counsel is making no statement herein as to the accuracy of any statement or
representation in any exhibit to the Registration Statement), as of its
effective date, contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein not misleading,
or that the Prospectus (other than (i) the financial statements and schedules
(including the notes thereto and the auditors' reports thereon) included therein
or omitted therefrom and (ii) the other accounting, financial and statistical
information contained therein or omitted therefrom, as to which such counsel
need not comment), as of its issue date or the Closing Date or the Option
Closing Date, as the case may be, contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
In rendering their opinion as aforesaid, counsel may limit their
opinion to the laws of the State of Texas, the corporate laws of the State of
Delaware and applicable federal law.
-28-
(d) You shall have received on the Closing Date,
an opinion of John D. Held, Esq., Senior Vice President, General Counsel and
Secretary of the Company, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters (provided that, in lieu of any or
all of the following opinions with respect to any single Subsidiary, the Company
may cause you to be provided with an opinion of counsel to any such Subsidiary
(provided that such counsel is acceptable to you, such opinion is addressed to
you, as Representatives of the several Underwriters, and Mr. Held shall state in
his opinion that he believes the Underwriters are justified in relying on such
opinion), and provided further that any such opinion with respect to any
Subsidiary shall, (x) with respect to issues of materiality, speak to
materiality as to that Subsidiary alone, and (y) with respect to issues of
required disclosure, speak to disclosure required under the applicable
Reorganization Agreement as well as in the Prospectus), to the effect that:
(i) The Company is duly registered and qualified
to conduct its business and is in good standing in each jurisdiction or place
where the nature of its business or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not have a Material Adverse Effect;
(ii) Each of the Subsidiaries is a corporation
duly incorporated and validly existing in good standing under the laws of the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease, and operate its properties and to conduct its business as described
in the Prospectus; and (after giving effect to the Acquisitions) all the
outstanding shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and are owned by
the Company directly, or indirectly through one of the other Subsidiaries, free
and clear (except as set forth in the Prospectus)of any perfected security
interest or adverse claim;
(iii) The Company and each of the Subsidiaries
has full corporate power and authority, and all necessary governmental
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from all governmental regulatory officials and bodies (except
where the failure so to
-29-
have any such authorizations, approvals, orders, licenses, certificates,
franchises or permits, individually or in the aggregate, would not have a
Material Adverse Effect), to own their respective properties and to conduct
their respective businesses as now being conducted, as described in the
Prospectus;
(iv) Such counsel is not aware, after reasonable
inquiry, of (A) any pending or threatened legal or governmental proceedings that
are required to be described in the Prospectus and are not described as required
or (B) any claim or challenge by any other person to the rights of the Company
or any of the Subsidiaries with respect to any patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus or the Reorganization Agreements as being owned by the Company or any
such Subsidiary or material to the conduct of their respective businesses;
(v) Except as described in or contemplated by
the Prospectus, such counsel knows of no outstanding option, warrant or other
right calling for the issuance of, and such counsel knows of no commitment, plan
or arrangement to issue, any share of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital stock of
the Company, and except as described in the Prospectus, such counsel does not
know of any holder of any securities of the Company or any other person who has
the right, contractual or otherwise, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of any of the Shares;
(vi) Each of the Acquisitions has been consummated
pursuant to the terms of the Reorganization Agreement related
thereto;
(vii) To the knowledge of such counsel, except as
disclosed in the Prospectus, no default exists in the performance or observance
by the Company of any material obligation, agreement, covenant or condition in
any agreement, contract, indenture, lease or other instrument that is described
or referred to in the Registration Statement or the Prospectus or filed as an
exhibit to the Registration Statement;
-30-
(viii) The statements in the Registration
Statement and Prospectus, insofar as they are descriptions of contracts,
agreements or other legal documents, or refer to statements of law or legal
conclusions, are accurate in all material respects and fairly summarize in all
material respects the information required to be shown.
In addition, such counsel shall state that such
counsel has participated in conferences with officers and other representatives
of the Company, representatives of the independent public accountants of the
Company and representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed and
that, although such counsel has not undertaken to determine independently, and
does not assume any responsibility for, the accuracy, completeness or fairness
of the statements contained in the Registration Statement and the Prospectus,
such counsel advises you that, on the basis of the foregoing (relying as to
materiality to a large extent on statements and other representations of
officers and other representatives of the Company), no facts have come to such
counsel's attention that lead such counsel to believe that the Registration
Statement (other than (i) the financial statements and schedules (including the
notes thereto and the auditors' reports thereon) included therein or omitted
therefrom and (ii) the other accounting, financial and statistical information
contained therein or omitted therefrom as to which such counsel need not
comment, and it being understood that such counsel is making no statement herein
as to the accuracy of any statement or representation in any exhibit to the
Registration Statement), as of its effective date, contained an untrue statement
of a material fact or omitted to state a material fact necessary to make the
statements therein not misleading, or that the Prospectus (other than (i) the
financial statements and schedules (including the notes thereto and the
auditors' reports thereon) included therein or omitted therefrom and (ii) the
other accounting, financial and statistical information contained therein or
omitted therefrom, as to which such counsel need not comment), as of its issue
date or the Closing Date or the Option Closing Date, as the case may be,
contained or contains an untrue statement of a material fact or omitted or omits
to state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
-31-
In rendering his opinion as aforesaid, such counsel may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by the Company as to laws of any jurisdiction other than the United States or
the State of Texas, provided that (1) each such local counsel is acceptable to
the Representatives, (2) such reliance is expressly authorized by each opinion
so relied upon and a copy of each such opinion is addressed and delivered to the
Representatives and is, in form and substance satisfactory to them and their
counsel, and (3) such counsel shall state in his opinion that he believes that
he and the Underwriters are justified in relying thereon.
(e) You shall have received a copy of the opinions
to be delivered by counsel for each of the Founding Companies identified in the
Prospectus, dated the Closing Date, substantially in the forms previously
delivered to you and with each such opinion specifically to authorize your
reliance thereon.
(f) You shall have received on the Closing Date an
opinion of Morgan, Lewis & Bockius LLP, counsel for the Underwriters, dated the
Closing Date and addressed to you, as Representatives of the several
Underwriters, with respect to the matters referred to in clauses (iv), (vi) and
(xi)and a statement to the same effect as is set forth in the second to last
paragraph of the foregoing paragraph (c) and such other related matters as you
may request.
(g) You shall have received letters addressed to
you, as Representatives of the several Underwriters, and dated the date hereof
and the Closing Date from Arthur Andersen, LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(h) No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set
-32-
forth or contemplated in the Registration Statement or the Prospectus (or any
amendment or supplement thereto); (iii) there shall not have been, since the
respective dates as of which information is given in the Registration Statement
and the Prospectus (or any amendment or supplement thereto), except as may
otherwise be stated in the Registration Statement and Prospectus (or any
amendment or supplement thereto), any Material Adverse Effect; (iv) the Company
and the Subsidiaries shall not have any liabilities or obligations, direct or
contingent (whether or not in the ordinary course of business), that are
material to the Company and the Subsidiaries, taken as a whole, other than those
reflected in the Registration Statement or the Prospectus (or any amendment or
supplement thereto); and (v) all the representations and warranties of the
Company contained in this Agreement shall be true and correct on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer of the Company (or such other officer
as is acceptable to you), to the effect set forth in this Section 8(g) and in
Section 8(h) hereof.
(i) The Acquisitions shall have been consummated
as of the Closing Date on the terms set forth in the Registration Statement and
the Reorganization Agreements, without waiver or modification of any material
terms or provisions of the Reorganization Agreements, except as may be approved
by you.
(j) The Company shall not have failed at or prior
to the Closing Date to have performed or complied with any of its agreements
herein contained and required to be performed or complied with by it hereunder
at or prior to the Closing Date.
(k) The Shares shall have been approved for
listing, subject to notice of issuance, on the New York Stock
Exchange.
(l) The Company shall have furnished or caused to
be furnished to you such further certificates and documents as
you shall have reasonably requested.
All such opinions, certificates, letters and other documents will
be in compliance with the provisions hereof only
-33-
if they are satisfactory in form and substance to you and counsel for the
Underwriters.
Any certificate or document signed by any officer of the Company
and delivered to you, as Representatives of the Underwriters, or to counsel for
the Underwriters, shall be deemed a representation and warranty by the Company
to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of any
Option Closing Date of the conditions set forth in this Section 8, except that,
if any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in paragraphs (c) through (g) shall be dated
the Option Closing Date in question and the opinions called for by paragraphs
(c), (d) and (e) shall be revised to reflect the sale of Additional Shares.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the original issuance and sale of the Shares; (iv) the
printing (or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares; (v)
the registration of the Common Stock under the Exchange Act and the listing of
the Shares on the New York Stock Exchange; (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states as provided in
-34-
Section 5(g) hereof (including the reasonable fees, expenses and disbursements
of counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the preliminary and supplemental Blue Sky
Memoranda and such registration and qualification); (vii) the filing fees for
any filings required to be made with the National Association of Securities
Dealers, Inc.; (viii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Shares; (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company; and (x) the expenses incurred by the Company
incident to the negotiation, execution, delivery and performance of the
Reorganization Agreements.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company.
If any one or more of the Underwriters shall fail or
refuse to purchase Shares which it or they are obligated to purchase hereunder
on the Closing Date, and the aggregate number of Shares which such defaulting
Underwriter or Underwriters are obligated but fail or refuse to purchase is not
more than one-tenth of the aggregate number of Shares which the Underwriters are
obligated to purchase on the Closing Date, each non-defaulting Underwriter shall
be obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but
-35-
fail or refuse, to purchase. If any one or more of the Underwriters shall fail
or refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date and the aggregate number of Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Shares which
the Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any such default of any such Underwriter under this Agreement. The term
"Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval and
the approval of the Company, purchases Shares which a defaulting Underwriter is
obligated, but fails or refuses, to purchase.
Any notice under this Section 10 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company, by notice to the Company, if prior to the Closing
Date or any Option Closing Date (if different from the Closing Date and then
only as to the Additional Shares), as the case may be, (i) trading in securities
generally on the New York Stock Exchange, the American Stock Exchange or the
Nasdaq National Market shall have been suspended or materially limited, (ii) a
general moratorium on commercial banking activities in New York shall have been
declared by either federal or state authorities, or (iii) there shall have
occurred any outbreak or escalation of hostilities or other international or
domestic calamity, crisis or change in
-36-
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first (including the table) and
third paragraphs under the caption "Underwriting" in any Prepricing Prospectus
and in the Prospectus, constitute the only information furnished by or on behalf
of the Underwriters through you as such information is referred to in Sections
6(b) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10
and 11 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at 5850 San Felipe, Suite 500, Houston, Texas, 77057-8003, Attention:
John D. Held, Esq.; or (ii) if to you, as Representatives of the several
Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement
shall be governed by and construed in accordance with the laws of
the State of New York applicable to contracts made and to be
performed within the State of New York.
-37-
This Agreement may be signed in various counterparts which
together constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
-38-
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
AMERICAN RESIDENTIAL SERVICES, INC.
By _______________________________
President and Chief
Executive Officer
Confirmed as of the date first above mentioned on behalf of themselves and the
other several Underwriters named in Schedule I hereto.
SMITH BARNEY INC.
MONTGOMERY SECURITIES
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By ____________________________
Managing Director
-39-
SCHEDULE I
AMERICAN RESIDENTIAL SERVICES, INC.
UNDERWRITER NUMBER OF FIRM SHARES
Smith Barney Inc. ....
Montgomery Securities ....
---------
Total.....4,200,000
=========
-40-
SCHEDULE II
REORGANIZATION AGREEMENTS
-41-
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
AMERICAN RESIDENTIAL SERVICES, INC.
American Residential Services, Inc. (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware (the "DGCL"), hereby adopts this
Restated Certificate of Incorporation, which accurately restates and integrates
the provisions of the existing Certificate of Incorporation of the Corporation
and all amendments thereto that are in effect on the date hereof (the
"Certificate of Incorporation") and further amends the provisions of the
Certificate of Incorporation as described below, and does hereby further certify
that:
1. The name of the Corporation is American Residential Services,
Inc. The original certificate of incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on October 24, 1995.
2. The Board of Directors of the Corporation duly adopted a
resolution proposing and declaring advisable the amendments to the Certificate
of Incorporation as described herein, and the Corporation's stockholders duly
adopted such amendments, all in accordance with the provisions of Sections 228,
242 and 245 of the DGCL.
3. The Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
RESTATED CERTIFICATE OF INCORPORATION
FIRST: The name of the Corporation is American Residential
Services, Inc.
SECOND: The address of the registered office of the Corporation
in the State of Delaware is 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful
business, act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware or any successor statute (the
"DGCL").
-1-
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is Sixty Million (60,000,000), divided
into Fifty Million (50,000,000) shares of common stock, par value $0.001 per
share ("Common Stock"), and Ten Million (10,000,000) shares of preferred stock,
par value $0.001 per share ("Preferred Stock"). Shares of any class of capital
stock of the Corporation may be issued for such consideration and for such
corporate purposes as the Board of Directors of the Corporation (the "Board of
Directors") may from time to time determine. Each share of Common Stock shall be
entitled to one vote.
The Preferred Stock may be divided into and issued from time to
time in one or more series as may be fixed and determined by the Board of
Directors. The relative rights and preferences of the Preferred Stock of each
series shall be such as shall be stated in any resolution or resolutions adopted
by the Board of Directors setting forth the designation of the series and fixing
and determining the relative rights and preferences thereof, any such resolution
or resolutions being herein called a "Directors' Resolution." The Board of
Directors is hereby authorized to fix and determine the powers, designations,
preferences, and relative, participating, optional or other rights (including,
without limitation, voting powers, full or limited, preferential rights to
receive dividends or assets upon liquidation, rights of conversion or exchange
into Common Stock, Preferred Stock of any series or other securities, any right
of the Corporation to exchange or convert shares into Common Stock, Preferred
Stock of any series or other securities, or redemption provisions or sinking
fund provisions) as between series and as between the Preferred Stock or any
series thereof and the Common Stock, and the qualifications, limitations or
restrictions thereof, if any, all as shall be stated in a Directors' Resolution,
and the shares of Preferred Stock or any series thereof may have full or limited
voting powers, or be without voting powers, all as shall be stated in a
Directors' Resolution.
No stockholder shall, by reason of the holding of shares of any
class or series of capital stock of the Corporation, have a preemptive or
preferential right to acquire or subscribe for any shares or securities of any
class, whether now or hereafter authorized, which may at any time be issued,
sold or offered for sale by the Corporation, unless specifically provided for in
a Directors' Resolution with respect to a series of Preferred Stock.
Cumulative voting of shares of any class or series of capital
stock having voting rights is prohibited unless specifically provided for in a
Directors' Resolution with respect to a series of Preferred Stock.
FIFTH: (a) DIRECTORS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. In
addition to the authority and powers conferred upon the Board of Directors by
the DGCL or by the other provisions of this Restated Certificate of
Incorporation (this "Certificate of Incorporation"), the Board of Directors is
hereby authorized and empowered to exercise all such powers and do all such acts
and things as may be exercised or done by the Corporation, subject to the
provisions of the DGCL, this Certificate of Incorporation and any Bylaws adopted
by the stockholders of the Corporation; PROVIDED, HOWEVER, that no Bylaws
hereafter adopted by the stockholders of the Corporation, or any amendments
thereto, shall invalidate any prior act of the Board of Directors that would
have been valid if such Bylaws or amendment had not been adopted.
-2-
(b) NUMBER, ELECTION AND TERMS OF DIRECTORS. The number of
directors which shall constitute the whole Board of Directors shall be fixed
from time to time by a majority of the directors then in office, subject to an
increase in the number of directors by reason of any provisions contained in or
established pursuant to Article FOURTH, but in any event shall not be less than
three. The directors, other than those who may be elected by the holders of any
series of Preferred Stock, shall be divided into three classes, Class I, Class
II and Class III. Each director shall serve for a term ending on the third
annual meeting following the annual meeting at which such director was elected;
PROVIDED, HOWEVER, that the directors first elected to Class I shall serve for a
term expiring at the annual meeting next following the end of the calendar year
1996, the directors first elected to Class II shall serve for a term expiring at
the annual meeting next following the end of the calendar year 1997, and the
directors first elected to Class III shall serve for a term expiring at the
annual meeting next following the end of the calendar year 1998. Each director
shall hold office until the annual meeting at which such director's term expires
and, the foregoing notwithstanding, shall serve until his successor shall have
been duly elected and qualified or until his earlier death, resignation or
removal.
At each annual election, the directors chosen to succeed those
whose terms then expire shall be of the same class as the directors they
succeed, unless, by reason of any intervening changes in the authorized number
of directors, the Board of Directors shall have designated one or more
directorships whose term then expires as directorships of another class in order
more nearly to achieve equality of number of directors among the classes.
In the event of any change in the authorized number of directors,
each director then continuing to serve as such shall nevertheless continue as a
director of the class of which he is a member until the expiration of his
current term, or his prior death, resignation or removal. The Board of Directors
shall specify the class to which a newly created directorship shall be
allocated.
Election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
(c) REMOVAL OF DIRECTORS. No director of the Corporation shall be
removed from office as a director by vote or other action of the stockholders or
otherwise except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of capital
stock of the Corporation generally entitled to vote in the election of
directors, voting together as a single class. Except as may otherwise be
provided by law, cause for removal of a director shall be deemed to exist only
if: (i) the director whose removal is proposed has been convicted, or where a
director is granted immunity to testify where another has been convicted, of a
felony by a court of competent jurisdiction and such conviction is no longer
subject to direct appeal; (ii) such director has been found by the affirmative
vote of a majority of the entire Board of Directors at any regular or special
meeting of the Board of Directors called for that purpose or by a court of
competent jurisdiction to have been grossly negligent or guilty of misconduct in
the performance of his duties to the Corporation in a matter of substantial
importance to the Corporation; or (iii) such director has been adjudicated by a
court of competent
-3-
jurisdiction to be mentally incompetent, which mental incompetency directly
affects his ability as a director of the Corporation.
(d) VACANCIES. Except as provided in Article FOURTH hereof, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the Board of Directors resulting from death, resignation,
removal or other cause shall be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of the
Board of Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified or until
his earlier death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
SIXTH: From and after the first date as of which the Corporation
has a class or series of capital stock registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), any action required or permitted
to be taken by the stockholders of the Corporation must be effected at an annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. Except as otherwise required by
law, or as may be prescribed in a Directors' Resolution, special meetings of
stockholders of the Corporation may be called only by the Chairman of the Board
of Directors or by the President of the Corporation or by the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
entire Board of Directors.
SEVENTH: No director of the Corporation shall be personally
liable to the Corporation or any of its stockholders for monetary damages for
breach of fiduciary duty as a director; PROVIDED, HOWEVER, that the foregoing
provisions shall not eliminate or limit the liability of a director (i) for any
breach of such director's duty of loyalty to the Corporation 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, as the same exists or as such provision may hereafter be amended,
supplemented or replaced, or (iv) for any transactions from which such director
derived an improper personal benefit. If the DGCL is amended after the filing of
this Certificate of Incorporation to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation, in addition to the limitation on personal
liability provided herein, shall be limited to the fullest extent permitted by
such law, as so amended. Any repeal or modification of this Article SEVENTH by
the stockholders of the Corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
Corporation existing at the time of such repeal or modification.
-4-
EIGHTH: In furtherance of, and not in limitation of, the powers
conferred by statute, the Board of Directors is expressly authorized to adopt,
amend or repeal the Bylaws of the Corporation, or adopt new Bylaws, without any
action on the part of the stockholders, except as may be otherwise provided by
applicable law or the Bylaws of the Corporation.
NINTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for the Corporation under
Section 291 of Title 8 of the Delaware Code, or on the application of trustees
in dissolution or of any receiver or receivers appointed for the Corporation
under Section 279 of Title 8 of the Delaware Code, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in such
manner as the said court directs. If the majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused this certificate
to be executed this 23rd day of August, 1996.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /S/ JOHN D. HELD
John D. Held
Senior Vice President
-5-
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
AMERICAN RESIDENTIAL SERVICES, INC.
ADOPTED JULY 23, 1996, TO BE EFFECTIVE AS OF THE CLOSING DATE OF THE
INITIAL PUBLIC OFFERING OF THE COMMON STOCK OF AMERICAN RESIDENTIAL
SERVICES, INC.
<PAGE>
AMENDED & RESTATED BYLAWS
OF
AMERICAN RESIDENTIAL SERVICES, INC.
TABLE OF CONTENTS
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE..........................................-1-
1.2 OTHER OFFICES..............................................-1-
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS..........................................-1-
2.2 ANNUAL MEETING.............................................-1-
2.3 SPECIAL MEETINGS...........................................-2-
2.4 NOTICE OF MEETING..........................................-2-
2.5 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE
TRANSFER RECORDS; AND RECORD DATE..........................-2-
2.6 QUORUM OF STOCKHOLDERS; ADJOURNMENT........................-3-
2.7 VOTING BY STOCKHOLDERS.....................................-3-
2.8 BUSINESS TO BE CONDUCTED...................................-4-
2.9 PROXIES....................................................-5-
2.10 APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS
BY STOCKHOLDERS............................................-5-
ARTICLE III
DIRECTORS
3.1 POWERS, NUMBER, CLASSIFICATION AND TENURE..................-6-
3.2 QUALIFICATIONS.............................................-6-
3.3 NOMINATION OF DIRECTORS....................................-6-
3.4 PLACE OF MEETING; ORDER OF BUSINESS........................-8-
3.5 REGULAR MEETINGS...........................................-8-
3.6 SPECIAL MEETINGS...........................................-8-
3.7 ATTENDANCE AT AND NOTICE OF MEETINGS.......................-8-
3.8 QUORUM OF AND ACTION BY DIRECTORS..........................-8-
3.9 BOARD AND COMMITTEE ACTION WITHOUT A MEETING...............-8-
3.10 BOARD AND COMMITTEE TELEPHONE MEETINGS.....................-9-
3.11 COMPENSATION...............................................-9-
-i-
3.12 REMOVAL....................................................-9-
3.13 COMMITTEES OF THE BOARD OF DIRECTORS.......................-9-
ARTICLE IV
OFFICERS
4.1 DESIGNATION...............................................-12-
4.2 CHAIRMAN OF THE BOARD OF DIRECTORS........................-13-
4.3 PRESIDENT.................................................-13-
4.4 CHIEF OPERATING OFFICER...................................-13-
4.5 VICE PRESIDENT............................................-13-
4.6 SECRETARY.................................................-14-
4.7 TREASURER.................................................-14-
4.8 CONTROLLER................................................-14-
4.9 ASSISTANT SECRETARIES.....................................-15-
4.10 ASSISTANT TREASURERS......................................-15-
4.11 ASSISTANT CONTROLLERS.....................................-15-
4.12 OTHER OFFICERS............................................-15-
4.13 VACANCIES.................................................-15-
4.14 REMOVAL...................................................-15-
4.15 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS...-16-
ARTICLE V
CAPITAL STOCK
5.1 CERTIFICATES FOR SHARES...................................-16-
5.2 TRANSFER OF SHARES........................................-16-
5.3 OWNERSHIP OF SHARES.......................................-16-
5.4 REGULATIONS REGARDING CERTIFICATES........................-17-
5.5 LOST OR DESTROYED CERTIFICATES............................-17-
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL...................................................-17-
6.2 EXPENSES..................................................-17-
6.3 ADVANCES..................................................-18-
6.4 REQUEST FOR INDEMNIFICATION...............................-18-
6.5 NONEXCLUSIVITY OF RIGHTS..................................-18-
6.6 INSURANCE AND SUBROGATION.................................-18-
6.7 SEVERABILITY..............................................-19-
6.8 CERTAIN ACTIONS WHERE INDEMNIFICATION IS NOT PROVIDED.....-19-
-ii-
6.9 DEFINITIONS...............................................-19-
6.10 NOTICES...................................................-20-
6.11 CONTRACTUAL RIGHTS........................................-20-
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 BYLAW AMENDMENTS..........................................-20-
7.2 BOOKS AND RECORDS.........................................-21-
7.3 NOTICES; WAIVER OF NOTICE.................................-21-
7.4 RESIGNATIONS..............................................-21-
7.5 SEAL......................................................-21-
7.6 FISCAL YEAR...............................................-21-
7.7 FACSIMILE SIGNATURES......................................-21-
7.8 RELIANCE UPON BOOKS, REPORTS AND RECORDS..................-22-
-iii-
AMENDED AND RESTATED BYLAWS
OF
AMERICAN RESIDENTIAL SERVICES, INC.
ARTICLE I
OFFICES
1.1 REGISTERED OFFICE. The registered office of American Residential
Services, Inc. (the "Corporation") required by the General Corporation
Law of the State of Delaware or any successor statute (the "DGCL"), to
be maintained in the State of Delaware, shall be the registered office
named in the Certificate of Incorporation of the Corporation, as it may
be amended or restated in accordance with the DGCL from time to time
(the "Certificate of Incorporation"), or such other office as may be
designated from time to time by the Board of Directors of the
Corporation (the "Board of Directors" or the "Board") in the manner
provided by applicable law. Should the Corporation maintain a principal
office within the State of Delaware such registered office need not be
identical to such principal office of the Corporation.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of
Directors may determine from time to time or as the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS. Meetings of stockholders shall be held at such place
within or without the State of Delaware as may be designated by the
Board of Directors or the officer calling the meeting, or, in the
absence of such designation, at the registered office of the Corporation
in the State of Delaware.
2.2 ANNUAL MEETING. An annual meeting of the stockholders, for the election
of directors to succeed those whose terms expire or to fill vacancies
and for the transaction of such other business as may properly come
before the meeting, shall be held on such date and at such time as the
Board of Directors shall fix and set forth in the notice of the meeting,
which date shall be within thirteen months subsequent to the last annual
meeting of stockholders. At the annual meeting of the stockholders, only
such business shall be conducted as shall have been properly brought
before the annual meeting as set forth in Section 2.8 hereof. Failure to
hold the annual meeting at the designated time shall not work a
dissolution of the Corporation.
-1-
2.3 SPECIAL MEETINGS. Special meetings of the stockholders may be called at
any time by the Chairman of the Board, the President or a majority of
the Board of Directors. Upon written request of any person or persons
who have duly called a special meeting, it shall be the duty of the
Secretary of the Corporation to fix the date of the meeting to be held
not less than ten nor more than 60 days after the receipt of the request
and to give due notice thereof. If the Secretary shall neglect or refuse
to fix the date of the meeting and give notice thereof, the person or
persons calling the meeting may do so.
2.4 NOTICE OF MEETING. Written or printed notice of all meetings stating the
place, day and hour of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall
be delivered not less than ten nor more than 60 days before the date of
the meeting, either personally or by mail, by or at the direction of the
Chairman of the Board, President or Secretary of the Corporation, to
each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered to a stockholder when deposited
in the United States mail addressed to such stockholder at such
stockholder's address as it appears on the stock transfer records of the
Corporation, with postage thereon prepaid.
2.5 REGISTERED HOLDERS OF SHARES; CLOSING OF SHARE TRANSFER RECORDS; AND
RECORD DATE.
(a) REGISTERED HOLDERS AS OWNERS. Unless otherwise provided under
Delaware law, the Corporation may regard the person in whose
name any shares issued by the Corporation are registered in the
stock transfer records of the Corporation at any particular time
(including, without limitation, as of a record date fixed
pursuant to paragraph (b) of this Section 2.5) as the owner of
those shares at that time for purposes of voting those shares,
receiving distributions thereon or notices in respect thereof,
transferring those shares, exercising rights of dissent with
respect to those shares, entering into agreements with respect
to those shares, or giving proxies with respect to those shares;
and neither the Corporation nor any of its officers, directors,
employees or agents shall be liable for regarding that person as
the owner of those shares at that time for those purposes,
regardless of whether that person possesses a certificate for
those shares.
(b) RECORD DATE. For the purpose of determining stockholders
entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to receive a
distribution by the Corporation (other than a distribution
involving a purchase or redemption by the Corporation of any of
its own shares) or a share dividend, or in order to make a
determination of stockholders for any other proper purpose, the
Board of Directors may fix in advance a date as the record date
for any such determination of stockholders, such date in any
case to be not more than 60 days and, in the case of a meeting
of stockholders, not less than ten days, prior to the date on
which the particular action requiring such determination of
-2-
stockholders is to be taken. The Board of Directors shall not
close the books of the Corporation against transfers of shares
during the whole or any part of such period.
If the Board of Directors does not fix a record date for any meeting of
the stockholders, the record date for determining stockholders entitled
to notice of or to vote at such meeting shall be at the close of
business on the day next preceding the day on which notice is given, or,
if in accordance with Section 7.3 of these Amended and Restated Bylaws
(these "Bylaws") notice is waived, at the close of business on the day
next preceding the day on which the meeting is held.
2.6 QUORUM OF STOCKHOLDERS; ADJOURNMENT. Unless otherwise provided in the
Certificate of Incorporation, a majority of the outstanding shares of
capital stock of the Corporation entitled to vote, present in person or
represented by proxy, shall constitute a quorum at any meeting of the
stockholders, and the stockholders present at any duly convened meeting
may continue to do business until adjournment notwithstanding any
withdrawal from the meeting of holders of shares counted in determining
the existence of a quorum. Unless otherwise provided in the Certificate
of Incorporation or these Bylaws, any meeting of the stockholders may be
adjourned from time to time by the chairman of the meeting or the
holders of a majority of the issued and outstanding stock, present in
person or represented by proxy, whether or not a quorum is present,
without notice other than by announcement at the meeting at which such
adjournment is taken, and at any such adjourned meeting at which a
quorum shall be present any action may be taken that could have been
taken at the meeting originally called; PROVIDED that if the adjournment
is for more than 30 days, or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the
adjourned meeting.
2.7 VOTING BY STOCKHOLDERS.
(a) VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With
respect to any matters as to which no other voting requirement
is specified by the DGCL, the Certificate of Incorporation or
these Bylaws, the affirmative vote required for stockholder
action shall be that of a majority of the shares present in
person or represented by proxy at the meeting (as counted for
purposes of determining the existence of a quorum at the
meeting). In the case of a matter submitted for a vote of the
stockholders as to which a stockholder approval requirement is
applicable under the stockholder approval policy of any stock
exchange or quotation system on which the capital stock of the
Corporation is traded or quoted, the requirements under the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or any provision of the Internal Revenue Code, in each
case for which no higher voting requirement is specified by the
DGCL, the Certificate of Incorporation or these Bylaws, the vote
required for approval shall be the requisite vote specified in
such stockholder approval policy, the Exchange Act or Internal
Revenue Code
HOU03A:362998.7
-3-
<PAGE>
provision, as the case may be (or the highest such requirement
if more than one is applicable). For the approval of the
appointment of independent public accountants (if submitted for
a vote of the stockholders), the vote required for approval
shall be a majority of the votes cast on the matter.
(b) VOTING IN THE ELECTION OF DIRECTORS. Unless otherwise provided
in the Certificate of Incorporation or these Bylaws in
accordance with the DGCL, directors shall be elected by a
plurality of the votes cast by the holders of outstanding shares
of capital stock of the Corporation entitled to vote in the
election of directors at a meeting of stockholders at which a
quorum is present.
(c) OTHER. The Board of Directors, in its discretion, or the officer
of the Corporation presiding at a meeting of stockholders of the
Corporation, in his discretion, may require that any votes cast
at such meeting shall be cast by written ballot.
2.8 BUSINESS TO BE CONDUCTED.
(a) At an annual meeting of stockholders, only such business shall
be conducted, and only such proposals shall be acted upon, as
shall have been brought before the annual meeting (i) by or at
the direction of the Board of Directors or (ii) by any
stockholder of the Corporation who is a stockholder of record at
the time of the giving of such stockholder's notice provided for
in this Section 2.8, who shall be entitled to vote at such
meeting and who complies with the requirements of this Section
2.8 and as shall otherwise be proper subjects for stockholder
action and shall be properly introduced at the meeting. For a
proposal to be properly brought before an annual meeting by a
stockholder, in addition to any other applicable requirements,
the stockholder must have given timely advance notice thereof in
writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and
received at, the principal executive offices of the Corporation
not later than the 90th day prior to the first anniversary of
the preceding year's annual meeting; PROVIDED, HOWEVER, that
with respect to the annual meeting of stockholders to be held in
1997 or in the event that the date of the annual meeting is more
than 30 days before or more than 60 days after such anniversary
date, notice by the stockholder to be timely must be so
delivered not later than the close of business on the later of
the 90th day prior to such annual meeting or the 10th day
following the day on which public announcement of the date of
such meeting is first made by the Corporation. Any such
stockholder's notice to the Secretary of the Corporation shall
set forth as to each matter the stockholder proposes to bring
before the annual meeting (i) a description of the proposal
desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the
name and address, as they appear on the Corporation's books, of
the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such
proposal,
-4-
(iii) the class and number of shares of the Corporation's stock
which are beneficially owned by the stockholder on the date of
such notice, (iv) any financial interest of the stockholder in
such proposal and (v) a representation that the stockholder
intends to appear in person or by proxy at the meeting to bring
the proposed business before the annual meeting. The presiding
officer of the annual meeting shall determine whether the
requirements of this paragraph (a) have been met with respect to
any stockholder proposal. If the presiding officer determines
that a stockholder proposal was not made in accordance with the
terms of this paragraph (a), he shall so declare at the meeting
and any such proposal shall not be acted upon at the meeting. At
a special meeting of stockholders, only such business shall be
acted upon as shall have been set forth in the notice relating
to the meeting required by Section 2.4 hereof or as shall
constitute matters incident to the conduct of the meeting as the
presiding officer of the meeting shall determine to be
appropriate.
(b) Notwithstanding the foregoing provisions of this Section 2.8, a
stockholder shall also comply with all applicable requirements
of the Exchange Act and the rules and regulations thereunder
with respect to the matters set forth in this Section 2.8.
2.9 PROXIES. Each stockholder entitled to vote at a meeting of stockholders
may authorize another person or persons to act for him by proxy. Proxies
for use at any meeting of stockholders shall be filed with the
Secretary, or such other officer as the Board of Directors may from time
to time determine by resolution, before or at the time of the meeting.
All proxies shall be received and taken charge of and all ballots shall
be received and canvassed by the secretary of the meeting who shall
decide all questions relating to the qualification of voters, the
validity of the proxies, and the acceptance or rejection of votes,
unless an inspector or inspectors shall have been appointed by the
chairman of the meeting, in which event such inspector or inspectors
shall decide all such questions.
2.10 APPROVAL OR RATIFICATION OF ACTS OR CONTRACTS BY STOCKHOLDERS. The Board
of Directors in its discretion may submit any act or contract for
approval or ratification at any annual meeting of the stockholders, or
at any special meeting of the stockholders called for the purpose of
considering any such act or contract, and any act or contract that shall
be approved or be ratified by the vote of the stockholders holding a
majority of the issued and outstanding shares of stock of the
Corporation entitled to vote and present in person or by proxy at such
meeting (provided that a quorum is present), shall be as valid and as
binding upon the Corporation and upon all the stockholders as if it has
been approved or ratified by every stockholder of the Corporation.
-5-
ARTICLE III
DIRECTORS
3.1 POWERS, NUMBER, CLASSIFICATION AND TENURE.
(a) The powers of the Corporation shall be exercised by or under the
authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors.
The Board of Directors shall be divided into three classes as
provided in the Certificate of Incorporation. Each director
shall hold office for the full term for which such director is
elected and until such director's successor shall have been duly
elected and qualified or until his earlier death or resignation
or removal in accordance with the Certificate of Incorporation
or these Bylaws.
(b) Within the limits specified in the Certificate of Incorporation,
the number of directors that shall constitute the whole Board of
Directors shall be fixed by, and may be increased or decreased
from time to time by, the affirmative vote of a majority of the
members at any time constituting the Board of Directors. Except
as provided in the Certificate of Incorporation of the
Corporation, newly created directorships resulting from any
increase in the number of directors and any vacancies on the
Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then
in office, even though less than a quorum of the Board of
Directors. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of
the class of directors in which the new directorship was created
or the vacancy occurred and until such director's successor
shall have been elected and qualified or until his earlier
death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the
term of any incumbent director.
3.2 QUALIFICATIONS. Directors need not be residents of the State of Delaware
or stockholders of the Corporation.
3.3 NOMINATION OF DIRECTORS. Subject to such rights of the holders of one or
more outstanding series of Preferred Stock of the Corporation to elect
one or more directors in case of arrearages in the payment of dividends
or other defaults as shall be prescribed in the Certificate of
Incorporation or in the resolutions of the Board of Directors providing
for the establishment of any such series, only persons who are nominated
in accordance with the procedures set forth in this Section 3.3 shall be
eligible for election as, and to serve as, directors. Nominations of
persons for election to the Board of Directors may be made at a meeting
of the stockholders at which Directors are to be elected (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of
the Corporation who is
-6-
a stockholder of record at the time of the giving of such stockholder's
notice provided for in this Section 3.3, who shall be entitled to vote
at such meeting in the election of directors and who complies with the
requirements of this Section 3.3. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be preceded
by timely advance notice in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice shall be delivered to, or mailed
and received at, the principal executive offices of the Corporation (i)
with respect to an election to be held at the annual meeting of the
stockholders of the Corporation, not later than the close of business on
the 90th day prior to the first anniversary of the preceding year's
annual meeting; PROVIDED, HOWEVER, that with respect to the annual
meeting of stockholders to be held in 1997 or in the event that the date
of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the stockholder to be timely must
be so delivered not later than the close of business on the later of the
90th day prior to such annual meeting or the 10th day following the day
on which public announcement of the date of such meeting is first made
by the Corporation; and (ii) with respect to an election to be held at a
special meeting of stockholders of the Corporation for the election of
directors not later than the close of business on the tenth day
following the day on which notice of the date of the special meeting was
mailed to stockholders of the Corporation as provided in Section 2.4
hereof or public disclosure of the date of the special meeting was made,
whichever first occurs. Any such stockholder's notice to the Secretary
of the Corporation shall set forth (x) as to each person whom the
stockholder proposes to nominate for election or re-election as a
director, (i) the name, age, business address and residence address of
such person, (ii) the principal occupation or employment of such person,
(iii) the number of shares of each class of capital stock of the
Corporation beneficially owned by such person, (iv) the written consent
of such person to having such person's name placed in nomination at the
meeting and to serve as a director if elected and (v) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise
required, pursuant to Regulation 14A under the Exchange Act, and (y) as
to the stockholder giving the notice, (i) the name and address, as they
appear on the Corporation's books, of such stockholder and (ii) the
number of shares of each class of voting stock of the Corporation which
are then beneficially owned by such stockholder. The presiding officer
of the meeting of stockholders shall determine whether the requirements
of this Section 3.3 have been met with respect to any nomination or
intended nomination. If the presiding officer determines that any
nomination was not made in accordance with the requirements of this
Section 3.3, he shall so declare at the meeting and the defective
nomination shall be disregarded. Notwithstanding the foregoing
provisions of this Section 3.3, a stockholder shall also comply with all
applicable requirements of the Exchange Act and the rules and
regulations thereunder with respect to the matters set forth in this
Section 3.3.
3.4 PLACE OF MEETING; ORDER OF BUSINESS. Except as otherwise provided by
law, meetings of the Board of Directors, regular or special, may be held
either within or without the State
-7-
of Delaware, at whatever place is specified by the person or persons
calling the meeting. In the absence of specific designation, the
meetings shall be held at the principal office of the Corporation. At
all meetings of the Board of Directors, business shall be transacted in
such order as shall from time to time be determined by the Chairman of
the Board (if any), or in his absence by the President, or by resolution
of the Board of Directors.
3.5 REGULAR MEETINGS. Regular meetings of the Board of Directors shall be
held, in each case, at such hour and on such day as may be fixed by
resolution of the Board of Directors, without further notice of such
meetings. The time or place of holding regular meetings of the Board of
Directors may be changed by the Chairman of the Board or the President
by giving written notice thereof as provided in Section 3.7 hereof.
3.6 SPECIAL MEETINGS. Special meetings of the Board of Directors shall be
held, whenever called by the Chairman of the Board, the President or by
resolution adopted by the Board of Directors, in each case, at such hour
and on such day as may be stated in the notice of the meeting.
3.7 ATTENDANCE AT AND NOTICE OF MEETINGS. Written notice of the time and
place of, and general nature of the business to be transacted at, all
special meetings of the Board of Directors, and written notice of any
change in the time or place of holding the regular meetings of the Board
of Directors, shall be given to each director personally or by mail or
by telegraph, telecopier or similar communication at least one day
before the day of the meeting; PROVIDED, HOWEVER, that notice of any
meeting need not be given to any director if waived by him in writing,
or if he shall be present at such meeting. Participation in a meeting of
the Board of Directors shall constitute presence in person at such
meeting, except where a person participates in the meeting for the
express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
3.8 QUORUM OF AND ACTION BY DIRECTORS. A majority of the directors in office
shall constitute a quorum of the Board of Directors for the transaction
of business; but a lesser number may adjourn from day to day until a
quorum is present. Except as otherwise provided by law or in these
Bylaws, all questions shall be decided by the vote of a majority of the
directors present.
3.9 BOARD AND COMMITTEE ACTION WITHOUT A MEETING. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any
action required or permitted to be taken at a meeting of the Board of
Directors or any committee thereof may be taken without a meeting if a
consent in writing, setting forth the action so taken, is signed by all
the members of the Board of Directors or such committee, as the case may
be, and shall be filed with the Secretary of the Corporation.
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3.10 BOARD AND COMMITTEE TELEPHONE MEETINGS. Subject to the provisions
required or permitted by the DGCL for notice of meetings, unless
otherwise restricted by the Certificate of Incorporation or these
Bylaws, members of the Board of Directors, or members of any committee
designated by the Board of Directors, may participate in and hold a
meeting of such Board of Directors or committee by means of conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this Section 3.10 shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not
lawfully called or convened.
3.11 COMPENSATION. Directors shall receive such compensation for their
services as shall be determined by the Board of Directors.
3.12 REMOVAL. No director of the Corporation shall be removed from office as
a director by vote or other action of the stockholders or otherwise
except for cause, and then only by the affirmative vote of the holders
of at least a majority of the voting power of all outstanding shares of
capital stock of the Corporation generally entitled to vote in the
election of directors, voting together as a single class. Cause for
removal of a director shall be as provided by law or in the Certificate
of Incorporation. Any proposal by a stockholder to remove a director of
the Corporation, in order to be validly acted upon at any meeting, shall
comply with paragraph (a) of Section 2.8 hereof.
Notwithstanding the first paragraph of this Section 3.12,
whenever holders of outstanding shares of one or more series of
Preferred Stock are entitled to elect members of the Board of Directors
pursuant to the provisions applicable in the case of arrearages in the
payment of dividends or other defaults contained in the resolution or
resolutions of the Board of Directors providing for the establishment of
any series of Preferred Stock, any such director of the Corporation so
elected may be removed in accordance with the provision of such
resolution or resolutions.
3.13 COMMITTEES OF THE BOARD OF DIRECTORS.
(a) The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its
members one or more committees (in addition to those listed
below), each of which shall be comprised of one or more of its
members, and may designate one or more of its members as
alternate members of any committee, who may, subject to any
limitations by the Board of Directors, replace absent or
disqualified members at any meeting of that committee. Any such
committee, to the extent provided in such resolution or in the
Certificate of Incorporation or these Bylaws, shall have and may
exercise all of the authority of the Board of Directors to the
extent permitted by the DGCL, including, without limitation, the
power and authority to declare a dividend, to
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authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the DGCL. Any
such committee may authorize the seal of the Corporation to be
affixed to all papers which may require it. In addition to the
above, such committee or committees shall have such other powers
and limitations of authority as may be determined from time to
time by resolution adopted by the Board of Directors.
(b) The Board of Directors shall have the power at any time to
change the membership of any such committee and to fill
vacancies in it. A majority of the number of members of any such
committee shall constitute a quorum for the transaction of
business unless a greater number is required by a resolution
adopted by the Board of Directors. The act of the majority of
the members of a committee present at any meeting at which a
quorum is present shall be the act of such committee, unless the
act of a greater number is required by a resolution adopted by
the Board of Directors. Each such committee may elect a chairman
and appoint such subcommittees and assistants as it may deem
necessary. Except as otherwise provided by the Board of
Directors, meetings of any committee shall be conducted in
accordance with Sections 3.5, 3.6, 3.7, 3.8, 3.9, 3.10 and 7.3
hereof. In the absence or disqualification of a member of a
committee, the member or members present at any meeting and not
disqualified from voting, whether or not constituting a quorum,
may unanimously appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified
member. Any member of any such committee elected or appointed by
the Board of Directors may be removed by the Board of Directors
whenever in its judgment the best interests of the Corporation
will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so
removed. Election or appointment of a member of a committee
shall not of itself create contract rights.
(c) Any action taken by any committee of the Board of Directors
shall promptly be recorded in the minutes and filed with the
Secretary of the Corporation.
(d) EXECUTIVE COMMITTEE. There shall be an Executive Committee of
the Board of Directors, which committee shall have and may
exercise all the powers and authority of the Board of Directors
between regular or special meetings of the Board in the
management of the business and affairs of the Corporation,
except to the extent limited by Delaware law. Without limiting
the generality of the foregoing, the Executive Committee shall
have the power and authority to (i) declare dividends on any
class of capital stock of the Corporation, (ii) authorize the
issuance of capital stock of the Corporation, (iii) adopt
certificates of ownership and merger pursuant to Section 253 of
the DGCL and (iv) in reference to amending the Certificate of
Incorporation, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock
adopted by the Board of
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Directors as provided in Section 151(a) of the DGCL, fix the
designations and any of the preferences or rights of such shares
relating to dividends, redemptions, dissolution, any
distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other
class or classes of stock of the Corporation or fix the number
of shares of any series of stock or authorize the increase or
decrease of the shares of any series.
(e) AUDIT COMMITTEE. There shall be an Audit Committee of the Board
of Directors whose members shall consist solely of directors who
are not employees or affiliates of the Corporation and have no
relationship with the Corporation that would, in the judgment of
the Board of Directors, interfere with their exercise of
independent judgment as a member of such Committee. The Audit
Committee shall have and may exercise the power and authority to
recommend to the Board of Directors the accounting firm to be
selected by the Board or to be recommended by it for stockholder
approval, as independent auditor of the financial statements of
the Corporation and its subsidiaries, and to act on behalf of
the Board in meeting and reviewing with the independent
auditors, the chief accounting officer, the chief internal
auditor, if any, and the appropriate corporate officers, matters
relating to corporate financial reporting and accounting
procedures and policies, adequacy of financial, accounting and
operating controls and the scope of the respective audits of the
independent auditors and the internal auditor, if any. The Audit
Committee shall also review the results of such audits with the
respective auditors and shall report the results of those
reviews to the Board of Directors. The Audit Committee shall
submit to the Board of Directors any recommendations it may have
from time to time with respect to financial reporting and
accounting practices and policies and financial, accounting and
operational controls and safeguards. The Audit Committee may
submit to the Compensation Committee any recommendations it may
have with respect to the compensation of the chief accounting
officer and the chief internal auditor, if any. The Board of
Directors shall, by resolution adopted by a majority of the
Board of Directors, designate not less than two of its
qualifying members from time to time to constitute members of
the Audit Committee.
(f) NOMINATING COMMITTEE. There shall be a Nominating Committee of
the Board of Directors, which committee shall have and may
exercise the power and authority to recommend to the Board of
Directors prior to each annual meeting of the stockholders of
the Corporation: (a) the appropriate size and composition of the
Board of Directors; and (b) nominees: (i) for election to the
Board of Directors for whom the Corporation should solicit
proxies; (ii) to serve as proxies in connection with the annual
stockholders' meeting; and (iii) for election to all committees
of the Board of Directors other than the Nominating Committee.
The Board of Directors shall, by resolution adopted by a
majority of the Board, designate one or
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more of its members from time to time to constitute members of
the Nominating Committee.
(g) COMPENSATION COMMITTEE. There shall be a Compensation Committee
of the Board of Directors, whose members shall consist solely of
directors who are not employees or affiliates of the Corporation
and have no relationship with the Corporation that would, in the
judgment of the Board of Directors, interfere with their
exercise of independent judgment as a member of such committee.
The Compensation Committee shall have and may exercise all the
power and authority to (i) establish a general compensation
policy for officers and employees of the Corporation, including
to establish and at least annually review officers' salaries and
levels of officers' participation in the benefit plans of the
Corporation, (ii) prepare any reports that may be required by
the regulations of the Securities and Exchange Commission or
otherwise relating to officer compensation, (iii) approve any
increases in directors' fees and (iv) exercise all other powers
of the Board of Directors with respect to matters involving the
compensation of employees and the employee benefits of the
Corporation as shall be delegated by the Board of Directors to
the Compensation Committee from time to time. Without limiting
the generality of the foregoing, the Compensation Committee
shall have the power and authority to authorize the issuance of
capital stock of the Corporation pursuant to any compensation or
benefit plan or arrangement adopted or entered into by the
Corporation. The Board of Directors shall, by resolution adopted
by a majority of the Board, designate two or more of its
qualifying members from time to time to constitute members of
the Compensation Committee.
(h) INDUSTRY RELATIONS COMMITTEE. There shall be an Industry
Relations Committee of the Board of Directors, which Committee
shall monitor events in the residential services industry and
report to the Board of Directors any significant industry
developments that may, in the judgment of the members of such
Committee, affect the business of the Corporation. The Board of
Directors shall, by resolution adopted by a majority of the
Board, designate one or more of its members from time to time to
constitute members of the Industry Relations Committee.
ARTICLE IV
OFFICERS
4.1 DESIGNATION. The officers of the Corporation shall consist of a Chairman
of the Board, President, Chief Operating Officer, Secretary, Treasurer,
Controller and such Executive, Senior or other Vice Presidents,
Assistant Secretaries, Assistant Treasurers, Assistant Controllers and
other officers as may be elected or appointed by the Board of Directors
from time to time. Any number of offices may be held by the same person.
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4.2 CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of
Directors shall preside at all meetings of the stockholders and of the
Board of Directors. Except where by law the signature of the President
is required, the Chairman of the Board of Directors shall possess the
same power as the President to sign all contracts, certificates and
other instruments of the Corporation which may be authorized by the
Board of Directors. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from
time to time may be assigned to him by these Bylaws or by the Board of
Directors. In the absence or incapacity to act of the President, the
Chairman of the Board shall serve as acting President, and when so
acting, shall have all the powers of and be subject to the restrictions
of such office.
4.3 PRESIDENT. The President shall be the Chief Executive Officer of the
Corporation and shall have general supervision and control of the
business, affairs and properties of the Corporation and its general
officers, and shall see that all orders and resolutions of the Board of
Directors are carried into effect. He shall have the power to appoint
and remove all subordinate officers, agents and employees, except those
elected or appointed by the Board of Directors, and shall execute all
bonds, mortgages, contracts and other instruments of the Corporation
requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and
except that the other officers of the Corporation may sign and execute
documents when so authorized by these Bylaws, the Board of Directors or
the President. The President shall also perform such other duties and
may exercise such other powers as from time to time may be assigned to
him by these Bylaws or by the Board of Directors. In the absence or
incapacity to act of the Chairman of the Board, the President shall
serve as acting Chairman of the Board, and when so acting, shall have
all the powers of and be subject to the restrictions of such office.
4.4 CHIEF OPERATING OFFICER. The Chief Operating Officer, if there is one,
shall have general charge and supervision of the day to day operations
of the Corporation (subject to the direction of the President and the
Board of Directors), and, in general, shall perform such other duties as
are incident to the office of a chief operating officer of a
corporation, including those duties customarily performed by persons
occupying such office, and shall perform such other duties as, from time
to time, may be assigned to him by the Board of Directors or the
President.
4.5 VICE PRESIDENT. The Board of Directors may appoint such Vice Presidents
as may be recommended by the President or as they deem necessary or
appropriate. Vice Presidents may be designated as Senior Vice
Presidents, Executive Vice Presidents or some other designation as the
Board of Directors deems appropriate (each a "Vice President"). Each
Vice President shall perform such duties as the Board of Directors may
from time to time prescribe and have such other powers as the President
may from time to time prescribe.
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4.6 SECRETARY. The Secretary shall attend the meetings of the Board of
Directors and all meetings of stockholders and record the proceeding
thereat in a book or books to be kept for that purpose; the Secretary
shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by
the Board of Directors or President, under whose supervision he shall
be. If the Secretary shall be unable or shall refuse to cause to be
given notice of all meetings of the stockholders and special meetings of
the Board of Directors, and if there be no Assistant Secretary, then
either the Chairman of the Board or the President may choose another
officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any
Assistant Secretary, if there be one, shall have authority to affix the
same to any instrument requiring it and when so affixed, it may be
attested by the signature of the Secretary or by the signature of any
such Assistant Secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that
all books, reports, statements, certificates and other documents and
records required by law to be kept or filed are properly kept or filed,
as the case may be.
4.7 TREASURER. The Treasurer, if there is one, shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts
of receipt and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to
the credit of the Corporation in such depositories as may be designated
by the Board of Directors. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and
the Board of Directors, at its regular meeting, or when the Board of
Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the Corporation. If required by the
Board of Directors, the Treasurer shall give the Corporation a bond in
such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books papers,
vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
4.8 CONTROLLER. The Controller, if there is one, shall be the chief
accounting officer of the Corporation, shall maintain records of all
assets, liabilities, and transactions of the Corporation and shall be
responsible for the design, installation and maintenance of accounting
and cost control systems and procedures for the Corporation and shall
perform such other duties and have such other powers as from time to
time may be assigned to him by the Board of Directors, the Audit
Committee or the President.
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4.9 ASSISTANT SECRETARIES. Except as may be otherwise provided in these
Bylaws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them
by the Board of Directors, the President, any Vice- President, or the
Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary,
and when so acting, shall have all the powers of and be subject to all
the restrictions upon the Secretary.
4.10 ASSISTANT TREASURERS. Assistant Treasurers, if there by any, shall
perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President or the
Treasurer, and in the absence of the Treasurer or in the event of his
disability or refusal to act, shall perform the duties of the Treasurer,
and when so acting, shall have all the powers of and be subject to all
the restrictions upon the Treasurer. If required by the Board of
Directors, an Assistant Treasurer shall give the Corporation a bond in
such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or
under his control belonging to the Corporation.
4.11 ASSISTANT CONTROLLERS. Except as may be otherwise provided in these
Bylaws, Assistant Controllers, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them
by the Board of Directors, the President, any Vice- President, or the
Controller, and in the absence of the Controller or in the event of his
disability or refusal to act, shall perform the duties of the
Controller, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Controller.
4.12 OTHER OFFICERS. Such other officers as to the Board of Directors may
choose shall perform such duties and have such powers, subordinate to
those powers specifically delegated to certain officer in these Bylaws,
as from time to time may be assigned to them by the Board of Directors.
The President of the Corporation shall have the power to choose such
other officers and to prescribe their respective duties and powers,
subject to control by the Board of Directors.
4.13 VACANCIES. Whenever any vacancies shall occur in any office by death,
resignation, increase in the number of offices of the Corporation, or
otherwise, the same shall be filled by the Board of Directors (or the
President, in accordance with Section 4.3 of these Bylaws, subject to
control by the Board of Directors), and the officer so appointed shall
hold office until such officer's successor is elected or appointed in
accordance with these Bylaws or until his earlier death, resignation or
removal.
4.14 REMOVAL. Any officer or agent of the Corporation may be removed by the
Board of Directors whenever in its judgment the best interests of the
Corporation will be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the
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person so removed. Election or appointment of an officer or agent shall
not of itself create contract rights.
4.15 ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless
otherwise directed by the Board of Directors, the Chairman of the Board,
the President, any Vice President and the Treasurer of the Corporation
shall each have power to vote and otherwise act on behalf of the
Corporation, in person or by proxy, at any meeting of security holders
of or with respect to any action of security holders of any other
corporation in which this Corporation may hold securities and otherwise
to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other
corporation.
ARTICLE V
CAPITAL STOCK
5.1 CERTIFICATES FOR SHARES. The certificates for shares of the capital
stock of the Corporation shall be in such form as may be approved by the
Board of Directors or may be uncertificated shares. In the case of
certificated shares, the Corporation shall deliver certificates
representing shares to which stockholders are entitled. Certificates
representing such certificated shares shall be signed by the Chairman of
the Board, the President or a Vice President and either the Secretary or
an Assistant Secretary of the Corporation, and may bear the seal of the
Corporation or a facsimile thereof. The signatures of such officers upon
a certificate may be facsimiles. The stock record books and the blank
stock certificate books shall be kept by the Secretary of the
Corporation, or at the office of such transfer agent or transfer agents
as the Board of Directors may from time to time by resolution determine.
In case any officer who has signed or whose facsimile signature has been
placed upon such certificate shall have ceased to be such officer before
such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer at the date of its
issuance.
5.2 TRANSFER OF SHARES. The shares of stock of the Corporation shall be
transferable only on the books of the Corporation by the holders thereof
in person or by their duly authorized attorneys or legal representatives
upon surrender and cancellation of certificates for a like number of
shares.
5.3 OWNERSHIP OF SHARES. The Corporation shall be entitled to treat the
holder of record of any share or shares of capital stock of the
Corporation as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by
the laws of the State of Delaware.
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5.4 REGULATIONS REGARDING CERTIFICATES. The Board of Directors shall have
the power and authority to make all such rules and regulations as they
may deem expedient concerning the issue, transfer and registration or
the replacement of certificates for shares of capital stock of the
Corporation.
5.5 LOST OR DESTROYED CERTIFICATES. The Board of Directors may determine the
conditions upon which a new certificate of stock may be issued in place
of a certificate which is alleged to have been lost, stolen or
destroyed; and may, in its discretion, require the owner of such
certificate or his legal representative to give bond, with sufficient
surety, to indemnify the Corporation and each transfer agent and
registrar against any and all losses or claims that may arise by reason
of the issue of a new certificate in the place of the one so lost,
stolen or destroyed.
ARTICLE VI
INDEMNIFICATION
6.1 GENERAL. The Corporation shall, to the fullest extent permitted by
applicable law in effect on the date of effectiveness of these Bylaws,
and to such greater extent as applicable law may thereafter permit,
indemnify and hold harmless an Indemnitee (as this and all other
capitalized words used in this Article VI not previously defined in
these Bylaws are defined in Section 6.9 hereof) from and against any and
all judgments, penalties, fines (including excise taxes), amounts paid
in settlement and, subject to Section 6.2, Expenses whatsoever arising
out of any event or occurrence related to the fact that Indemnitee is or
was a director or officer of the Corporation. The Corporation may, but
shall not be required to, indemnify and hold harmless an Indemnitee from
and against any and all judgments, penalties, fines (including excise
taxes), amounts paid in settlement and, subject to Section 6.2, Expenses
whatsoever arising out of any event or occurrence related to the fact
that Indemnitee is or was an employee or agent of the Corporation or is
or was serving in another Corporate Status (other than as an officer or
director of the Corporation).
6.2 EXPENSES. If Indemnitee is, by reason of his serving as a director,
officer, employee or agent of the Corporation, a party to and is
successful, on the merits or otherwise, in any Proceeding, the
Corporation shall indemnify him against all Expenses actually and
reasonably incurred by him or on his behalf in connection therewith. If
any such Indemnitee is not wholly successful in such Proceeding but is
successful, on the merits or otherwise, as to any Matter in such
Proceeding, the Corporation shall indemnify such Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf
relating to such Matter. The termination of any Matter in such a
Proceeding by dismissal, with or without prejudice, shall be deemed to
be a successful result as to such Matter. If Indemnitee is, by reason of
any Corporate Status other than his serving as a director, officer,
employee or agent of the Corporation, a party to and is successful, on
the merits
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or otherwise, in any Proceeding, the Corporation may, but shall not be
required to, indemnify him against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith. To the extent
that the Indemnitee is, by reason of his Corporate Status, a witness in
any Proceeding, the Corporation may, but shall not be required to,
indemnify him against all Expenses actually and reasonably incurred by
him or on his behalf in connection therewith.
6.3 ADVANCES. In the event of any threatened or pending action, suit or
proceeding in which Indemnitee is a party or is involved and that may
give rise to a right of indemnification under this Article VI, following
written request to the Corporation by Indemnitee, the Corporation shall
promptly pay to Indemnitee amounts to cover expenses reasonably incurred
by Indemnitee in such proceeding in advance of its final disposition
upon the receipt by the Corporation of (i) a written undertaking
executed by or on behalf of Indemnitee providing that Indemnitee will
repay the advance if it shall ultimately be determined pursuant to the
provisions of this Article VI or by final judgment or other final
adjudication under the provisions of any applicable law that Indemnitee
is not entitled to be indemnified by the Corporation as provided in
these Bylaws and (ii) satisfactory evidence as to the amount of such
expenses.
6.4 REQUEST FOR INDEMNIFICATION. To request indemnification, Indemnitee
shall submit to the Secretary of the Corporation a written claim or
request. Such written claim or request shall contain sufficient
information to reasonably inform the Corporation about the nature and
extent of the indemnification or advance sought by Indemnitee. The
Secretary of the Corporation shall promptly advise the Board of
Directors of such request.
6.5 NONEXCLUSIVITY OF RIGHTS. The rights of indemnification and advancement
of Expenses as provided by this Article VI shall not be deemed exclusive
of any other rights to which Indemnitee may at any time be entitled to
under applicable law, the Certificate of Incorporation, these Bylaws,
any agreement, a vote of stockholders or a resolution of directors of
the Corporation, or otherwise. No amendment, alteration or repeal of
this Article VI or any provision hereof shall be effective as to any
Indemnitee for acts, events and circumstances that occurred, in whole or
in part, before such amendment, alteration or repeal. The provisions of
this Article VI shall continue as to an Indemnitee whose Corporate
Status has ceased for any reason and shall inure to the benefit of his
heirs, executors and administrators. Neither the provisions of this
Article VI nor those of any agreement to which the Corporation is a
party shall be deemed to preclude the indemnification of any person who
is not specified in this Article VI as having the right to receive
indemnification or is not a party to any such agreement, but whom the
Corporation has the power or obligation to indemnify under the
provisions of the DGCL.
6.6 INSURANCE AND SUBROGATION. The Corporation shall not be liable under
this Article VI to make any payment of amounts otherwise indemnifiable
hereunder if, but only to the extent that, Indemnitee has otherwise
actually received such payment under any insurance policy,
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contract, agreement or otherwise. In the event of any payment hereunder,
the Corporation shall be subrogated to the extent of such payment to all
the rights of recovery of Indemnitee, who shall execute all papers
required and take all action reasonably requested by the Corporation to
secure such rights, including execution of such documents as are
necessary to enable the Corporation to bring suit to enforce such
rights.
6.7 SEVERABILITY. If any provision or provisions of this Article VI shall be
held to be invalid, illegal or unenforceable for any reason whatsoever,
the validity, legality and enforceability of the remaining provisions
shall not in any way be affected or impaired thereby; and, to the
fullest extent possible, the provisions of this Article VI shall be
construed so as to give effect to the intent manifested by the provision
held invalid, illegal or unenforceable.
6.8 CERTAIN ACTIONS WHERE INDEMNIFICATION IS NOT PROVIDED. Notwithstanding
any other provision of this Article VI, no person shall be entitled to
indemnification or advancement of Expenses under this Article VI with
respect to any Proceeding, or any Matter therein, brought or made by
such person against the Corporation.
6.9 DEFINITIONS. For purposes of this Article VI:
(a) "CORPORATE STATUS" describes the status of a person who is or
was a director, officer, employee or agent of the Corporation or
of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such person is
or was serving at the written request of the Corporation. For
purposes of this Agreement, "serving at the written request of
the Corporation" includes any service by Indemnitee which
imposes duties on, or involves services by, Indemnitee with
respect to any employee benefit plan or its participants or
beneficiaries.
(b) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and
binding costs, telephone charges, postage, delivery service
fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, or being or
preparing to be a witness in a Proceeding.
(c) "INDEMNITEE" includes any person who is, or is threatened to be
made, a witness in or a party to any Proceeding as described in
Section 6.1 or 6.2 hereof by reason of his Corporate Status.
(d) "MATTER" is a claim, a material issue or a substantial request
for relief.
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(e) "PROCEEDING" includes any action, suit, alternate dispute
resolution mechanism, hearing or any other proceeding, whether
civil, criminal, administrative, arbitrative, investigative or
mediative, any appeal in any such action, suit, alternate
dispute resolution mechanism, hearing or other proceeding and
any inquiry or investigation that could lead to any such action,
suit, alternate dispute resolution mechanism, hearing or other
proceeding, except one (i) initiated by an Indemnitee to enforce
his rights under this Article VI or (ii) pending on or before
the date of this Agreement.
6.10 NOTICES. Promptly after receipt by Indemnitee of notice of the
commencement of any action, suit or proceeding, Indemnitee shall, if he
anticipates or contemplates making a claim for expenses or an advance
pursuant to the terms of this Article VI, notify the Corporation of the
commencement of such action, suit or proceeding; PROVIDED, HOWEVER, that
any delay in so notifying the Corporation shall not constitute a waiver
or release by Indemnitee of rights hereunder and that any omission by
Indemnitee to so notify the Corporation shall not relieve the
Corporation from any liability that it may have to Indemnitee otherwise
than under this Article VI. Any communication required or permitted to
the Corporation shall be addressed to the Secretary of the Corporation
and any such communication to Indemnitee shall be addressed to
Indemnitee's address as shown on the Corporation's records unless he
specifies otherwise and shall be personally delivered or delivered by
overnight mail delivery. Any such notice shall be effective upon
receipt.
6.11 CONTRACTUAL RIGHTS. The right to be indemnified or to the advancement or
reimbursement of Expenses (i) is a contract right based upon good and
valuable consideration, pursuant to which Indemnitee may sue as if these
provisions were set forth in a separate written contract between
Indemnitee and the Corporation, (ii) is and is intended to be
retroactive and shall be available as to events occurring prior to the
adoption of these provisions and (iii) shall continue after any
rescission or restrictive modification of such provisions as to events
occurring prior thereto.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 BYLAW AMENDMENTS. The Board of Directors shall have the power to adopt,
amend and repeal from time to time the Bylaws of the Corporation,
subject to the right of stockholders entitled to vote with respect
thereto to amend or repeal such Bylaws as adopted or amended by the
Board of Directors. Bylaws of the Corporation may be adopted, amended or
repealed by the affirmative vote of the holders of at least two-thirds
of the combined voting power of the outstanding shares of all classes of
stock of the Corporation entitled to vote generally in the election of
directors, voting together as a single class, at any annual meeting, or
at any special meeting if notice of the proposed amendment be
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contained in the notice of said special meeting, or by the Board of
Directors as specified in the preceding sentence.
7.2 BOOKS AND RECORDS. The Corporation shall keep books and records of
account and shall keep minutes of the proceedings of its stockholders,
its Board of Directors and each committee of its Board of Directors.
7.3 NOTICES; WAIVER OF NOTICE. Whenever any notice is required to be given
to any stockholder, director or committee member under the provisions of
the DGCL or under the Certificate of Incorporation, as amended, or these
Bylaws, said notice shall be deemed to be sufficient if given (i) by
telegraphic, facsimile, cable or wireless transmission or (ii) by
deposit of the same in the United States mail, with postage paid
thereon, addressed to the person entitled thereto at his address as it
appears on the records of the Corporation, and such notice shall be
deemed to have been given on the day of such transmission or mailing, as
the case may be.
Whenever any notice is required to be given to any stockholder,
director or committee member under the provisions of the DGCL or under
the Certificate of Incorporation, as amended, or these Bylaws, a waiver
thereof in writing signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be
equivalent to the giving of such notice. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because
the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of
the stockholders, directors, or members of a committee of directors need
be specified in any written waiver of notice unless so required by the
Certificate of Incorporation or these Bylaws.
7.4 RESIGNATIONS. Any director or officer may resign at any time. Such
resignations shall be made in writing and shall take effect at the time
specified therein, or, if no time be specified, at the time of its
receipt by the President or the Secretary of the Corporation. The
acceptance of a resignation shall not be necessary to make it effective,
unless expressly so provided in the resignation.
7.5 SEAL. The seal of the Corporation shall be in such form as the Board of
Directors may adopt.
7.6 FISCAL YEAR. The fiscal year of the Corporation shall end on the 31st
day of December of each year or as otherwise provided by a resolution
adopted by the Board of Directors.
7.7 FACSIMILE SIGNATURES. In addition to the provisions for the use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any officer or
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officers of the Corporation may be used whenever and as authorized by
the Board of Directors.
7.8 RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director and each member
of any committee designated by the Board of Directors shall, in the
performance of his duties, be fully protected in relying in good faith
upon the books of account or reports made to the Corporation by any of
its officers, or by an independent certified public accountant, or by an
appraiser selected with reasonable care by the Board of Directors or by
any such committee, or in relying in good faith upon other records of
the Corporation.
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CERTIFICATE OF DESIGNATIONS
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
AMERICAN RESIDENTIAL SERVICES, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
AMERICAN RESIDENTIAL SERVICES, INC., a corporation organized and
existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, DOES HEREBY CERTIFY:
That pursuant to the authority vested in the Board of Directors in
accordance with the provisions of the Restated Certificate of Incorporation of
the said Corporation, the said Board of Directors on July 23, 1996 adopted the
following resolution creating a series of 500,000 shares of Preferred Stock
designated as "Series A Junior Participating Preferred Stock":
RESOLVED, that pursuant to the authority vested in the Board of
Directors of American Residential Services, Inc. (the "Corporation") in
accordance with the provisions of the Restated Certificate of
Incorporation, a series of Preferred Stock, par value $.001 per share, of
the Corporation ("Preferred Stock") be and hereby is created, and that the
designation and number of shares thereof and the voting and other powers,
preferences and relative, participating, optional or other rights of the
shares of such series and the qualifications, limitations and restrictions
thereof are as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
1. DESIGNATION AND AMOUNT. There shall be a series of Preferred
Stock that shall be designated as "Series A Junior Participating Preferred
Stock," and the number of shares constituting such series shall be 500,000. Such
number of shares may be increased or decreased by resolution of the Board of
Directors of the Corporation (the "Board of Directors"); provided, however, that
no decrease shall reduce the number of shares of Series A Junior Participating
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Preferred Stock to less than the number of shares then issued and outstanding
plus the number of shares issuable upon exercise of outstanding rights, options
or warrants or upon conversion of outstanding securities issued by the
Corporation.
2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Junior Participating Preferred Stock with respect to dividends, the
holders of shares of Series A Junior Participating Preferred Stock, in
preference to the holders of shares of any class or series of stock of the
Corporation ranking junior to the Series A Junior Participating Preferred Stock,
shall be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends payable in
cash on the last day of March, June, September and December in each year (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Junior Participating Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the greater
of (a) $10 or (b) the Adjustment Number (as defined below) times the aggregate
per share amount of all cash dividends, and the Adjustment Number times the
aggregate per share amount (payable in kind) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on shares of Common Stock, par value $.001 per share, of
the Corporation ("Common Stock") since the immediately preceding Quarterly
Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment
Date, since the first issuance of any share or fraction of a share of Series A
Junior Participating Preferred Stock. The "Adjustment Number" shall initially be
100. In the event the Corporation shall at any time after July 23, 1996 (the
"Rights Declaration Date") (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number in effect immediately prior to such event
shall be adjusted by multiplying such Adjustment Number by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Junior Participating Preferred Stock as provided in paragraph (A) above
immediately after it declares a dividend or distribution on shares of Common
Stock (other than a dividend payable in shares of Common Stock); provided that,
in the event no dividend or distribution shall have been declared on shares of
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share
on the Series A Junior Participating Preferred Stock shall nevertheless be
payable on such subsequent Quarterly Dividend Payment Date.
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(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Junior Participating Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares of Series
A Junior Participating Preferred Stock, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from the date of issue
of such shares, or unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive a quarterly
dividend and before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the shares of Series A Junior Participating
Preferred Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Junior Participating Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be no more
than 30 days prior to the date fixed for the payment thereof.
3. VOTING RIGHTS. The holders of shares of Series A Junior
Participating Preferred Stock shall have the following voting rights:
(A) Each share of Series A Junior Participating Preferred Stock
shall entitle the holder thereof to a number of votes equal to the Adjustment
Number on all matters submitted to a vote of the stockholders of the
Corporation.
(B) Except as otherwise provided herein, in the Restated Certificate
of Incorporation or by law, the holders of shares of Series A Junior
Participating Preferred Stock, the holders of shares of any other class or
series entitled to vote with the Common Stock and the holders of shares of
Common Stock shall vote together as one class on all matters submitted to a vote
of stockholders of the Corporation.
(C)(i)If at any time dividends on any Series A Junior Participating
Preferred Stock shall be in arrears in an amount equal to six quarterly
dividends thereon, the occurrence of such contingency shall mark the beginning
of a period (herein called a "default period") that shall extend until such time
when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Junior Participating Preferred Stock then outstanding shall have been declared
and paid or set apart for payment. During each default period, (1) the number of
Directors shall be increased by two, effective as of the time of election of
such Directors as herein provided, and (2) the holders of Preferred Stock
(including holders of the Series A Junior Participating Preferred Stock) upon
which these or like voting rights have been conferred and are exercisable (the
"Voting Preferred Stock") with dividends in arrears in an amount equal to six
quarterly dividends thereon, voting as a class, irrespective of series, shall
have the right to elect such two Directors.
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(ii) During any default period, such voting right of the holders of
Series A Junior Participating Preferred Stock may be exercised initially at a
special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at
any annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that such voting right shall not be exercised unless the
holders of at least one-third in number of the shares of Voting Preferred Stock
outstanding shall be present in person or by proxy. The absence of a quorum of
the holders of Common Stock shall not affect the exercise by the holders of
Voting Preferred Stock of such voting right.
(iii) Unless the holders of Voting Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or stockholders
owning in the aggregate not less than ten percent of the total number of shares
of Voting Preferred Stock outstanding, irrespective of series, may request, the
calling of a special meeting of the holders of Voting Preferred Stock, which
meeting shall thereupon be called by the Chairman of the Board, the President, a
Vice President or the Secretary of the Corporation. Notice of such meeting and
of any annual meeting at which holders of Voting Preferred Stock are entitled to
vote pursuant to this paragraph (C)(iii) shall be given to each holder of record
of Voting Preferred Stock by mailing a copy of such notice to him at his last
address as the same appears on the books of the Corporation. Such meeting shall
be called for a time not earlier than 20 days and not later than 60 days after
such order or request or, in default of the calling of such meeting within 60
days after such order or request, such meeting may be called on similar notice
by any stockholder or stockholders owning in the aggregate not less than ten
percent of the total number of shares of Voting Preferred Stock outstanding.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the period within 60 days immediately preceding
the date fixed for the next annual meeting of the stockholders.
(iv) In any default period, after the holders of Voting Preferred
Stock shall have exercised their right to elect Directors voting as a class, (x)
the Directors so elected by the holders of Voting Preferred Stock shall continue
in office until their successors shall have been elected by such holders or
until the expiration of the default period and (y) any vacancy in the Board of
Directors may be filled by vote of a majority of the remaining Directors
theretofore elected by the holders of the class or classes of stock which
elected the Director whose office shall have become vacant. References in this
paragraph (C) to Directors elected by the holders of a particular class or
classes of stock shall include Directors elected by such Directors to fill
vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Voting Preferred Stock as a class to elect Directors
shall cease, (y) the term of any Directors elected by the holders of Voting
Preferred Stock as a class shall terminate and (z) the number of Directors shall
be such number as may be provided for in the Restated Certificate of
Incorporation or Bylaws irrespective of any increase made pursuant to the
provisions of paragraph (C) of this Section 3 (such number being subject,
however, to change thereafter in any manner provided by law or in the Restated
Certificate of Incorporation or Bylaws). Any vacancies in the
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Board of Directors effected by the provisions of clauses (y) and (z) in the
preceding sentence may be filled by a majority of the remaining Directors.
(D) Except as set forth herein, holders of Series A Junior
Participating Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for taking any corporate
action.
4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Junior Participating Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A Junior
Participating Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Junior
Participating Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series
A Junior Participating Preferred Stock, except dividends paid ratably on
the Series A Junior Participating Preferred Stock and all such parity
stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
or
(iii) redeem or purchase or otherwise acquire for
consideration any shares of Series A Junior Participating Preferred Stock,
or any shares of stock ranking on a parity with the Series A Junior
Participating Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of Series A Junior Participating Preferred
Stock, or to all such holders and the holders of any such shares ranking
on a parity therewith, upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative
rights and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable treatment among
the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
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5. REACQUIRED SHARES. Any shares of Series A Junior Participating
Preferred Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock to be created by resolution or resolutions of the Board of
Directors, subject to any conditions and restrictions on issuance set forth
herein.
6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Junior Participating Preferred Stock unless, prior thereto, the holders
of shares of Series A Junior Participating Preferred Stock shall have received
$100 per share, plus an amount equal to accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment (the
"Series A Liquidation Preference"). Following the payment of the full amount of
the Series A Liquidation Preference, no additional distributions shall be made
to the holders of shares of Series A Junior Participating Preferred Stock
unless, prior thereto, the holders of shares of Common Stock shall have received
an amount per share (the "Common Adjustment") equal to the quotient obtained by
dividing (i) the Series A Liquidation Preference by (ii) the Adjustment Number.
Following the payment of the full amount of the Series A Liquidation Preference
and the Common Adjustment in respect of all outstanding shares of Series A
Junior Participating Preferred Stock and Common Stock, respectively, holders of
Series A Junior Participating Preferred Stock and holders of shares of Common
Stock shall, subject to the prior rights of all other series of Preferred Stock,
if any, ranking prior thereto, receive their ratable and proportionate share of
the remaining assets to be distributed in the ratio of the Adjustment Number to
1 with respect to such Series A Junior Participating Preferred Stock and Common
Stock, on a per share basis, respectively.
(B) In the event, however, that there are not sufficient assets
available to permit payment in full of the Series A Liquidation Preference and
the liquidation preferences of all other series of Preferred Stock, if any, that
rank on a parity with the Series A Junior Participating Preferred Stock, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(C) Neither the merger or consolidation of the Corporation into or
with another corporation nor the merger or consolidation of any other
corporation into or with the Corporation shall be deemed to be a liquidation,
dissolution or winding up of the Corporation within the meaning of this Section
6, but the sale, lease or conveyance of all or substantially all the
Corporation's assets shall be deemed to be a liquidation, dissolution or winding
up of the Corporation within the meaning of this Section 6.
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7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each share of
Series A Junior Participating Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to the Adjustment
Number times the aggregate amount of stock, securities, cash and/or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
8. REDEMPTION. (A) The Corporation, at its option, may redeem shares
of the Series A Junior Participating Preferred Stock in whole at any time and in
part from time to time, at a redemption price equal to the Adjustment Number
times the current per share market price (as such term is hereinafter defined)
of the Common Stock on the date of the mailing of the notice of redemption,
together with unpaid accumulated dividends to the date of such redemption. The
"current per share market price" on any date shall be deemed to be the average
of the closing price per share of such Common Stock for the ten consecutive
Trading Days (as such term is hereinafter defined) immediately prior to such
date; PROVIDED, however, that in the event that the current per share market
price of the Common Stock is determined during a period following the
announcement of (A) a dividend or distribution on the Common Stock other than a
regular quarterly cash dividend or (B) any subdivision, combination or
reclassification of such Common Stock and the ex-dividend date for such dividend
or distribution, or the record date for such subdivision, combination or
reclassification, shall not have occurred prior to the commencement of such ten
Trading Day period, then, and in each such case, the current per share market
price shall be properly adjusted to take into account ex-dividend trading. The
closing price for each day shall be the last sales price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange, or, if the Common Stock is not listed or
admitted to trading on the New York Stock Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
or, if the Common Stock is not listed or admitted to trading on any national
securities exchange but sales price information is reported for such security,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or such other self-regulatory organization or
registered securities information processor (as such terms are used under the
Securities Exchange Act of 1934, as amended) that then reports information
concerning the Common Stock, or, if sales price information is not so reported,
the average of the high bid and low asked prices in the over-the-counter market
on such day, as reported by NASDAQ or such other entity, or, if on any such date
the Common Stock is not quoted by any such entity, the average of the closing
bid and asked prices as furnished by a professional market maker making a market
in the Common Stock selected by the Board of Directors. If on any such date no
such market maker is making a market in the Common Stock, the fair value of the
Common Stock on such date as determined in good faith by the Board of Directors
shall be used. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the Common Stock is listed or admitted to
trading is open for the transaction of business, or, if the Common Stock is not
listed or admitted to trading on any national securities exchange but is quoted
by NASDAQ, a day
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on which NASDAQ reports trades, or, if the Common Stock is not so quoted, a
Monday, Tuesday, Wednesday, Thursday or Friday on which banking institutions in
the State of New York are not authorized or obligated by law or executive order
to close.
(B) In the event that fewer than all the outstanding shares of the
Series A Junior Participating Preferred Stock are to be redeemed, the number of
shares to be redeemed shall be determined by the Board of Directors and the
shares to be redeemed shall be determined by lot or pro rata as may be
determined by the Board of Directors or by any other method that may be
determined by the Board of Directors in its sole discretion to be equitable.
(C) Notice of any such redemption shall be given by mailing to the
holders of the shares of Series A Junior Participating Preferred Stock to be
redeemed a notice of such redemption, first class postage prepaid, not later
than the fifteenth day and not earlier than the sixtieth day before the date
fixed for redemption, at their last address as the same shall appear upon the
books of the Corporation. Each such notice shall state: (i) the redemption date;
(ii) the number of shares to be redeemed and, if fewer than all the shares held
by such holder are to be redeemed, the number of such shares to be redeemed from
such holder; (iii) the redemption price; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price; and (v) that dividends on the shares to be redeemed will cease to accrue
on the close of business on such redemption date. Any notice that is mailed in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not the stockholder received such notice, and failure duly to
give such notice by mail, or any defect in such notice, to any holder of Series
A Junior Participating Preferred Stock shall not affect the validity of the
proceedings for the redemption of any other shares of Series A Junior
Participating Preferred Stock that are to be redeemed. On or after the date
fixed for redemption as stated in such notice, each holder of the shares called
for redemption shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice and shall thereupon be
entitled to receive payment of the redemption price. If fewer than all the
shares represented by any such surrendered certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(D) The shares of Series A Junior Participating Preferred Stock
shall not be subject to the operation of any purchase, retirement or sinking
fund.
9. RANKING. The Series A Junior Participating Preferred Stock shall
rank junior to all other series of the Corporation's Preferred Stock as to the
payment of dividends and the distribution of assets, unless the terms of any
such series shall provide otherwise, and shall rank senior to the Common Stock
as to such matters.
10. AMENDMENT. At any time that any shares of Series A Junior
Participating Preferred Stock are outstanding, the Restated Certificate of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series A Junior Participating Preferred Stock so as to affect them adversely
-8-
without the affirmative vote of the holders of two-thirds or more of the
outstanding shares of Series A Junior Participating Preferred Stock, voting
separately as a class.
11. FRACTIONAL SHARES. Series A Junior Participating Preferred Stock
may be issued in fractions of a share that shall entitle the holder, in
proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series A Junior Participating Preferred Stock.
IN WITNESS WHEREOF, the undersigned has executed this Certificate
and does affirm the foregoing as true this 26th day of August, 1996.
/s/ JOHN D. HELD
---------------------
John D. Held
Senior Vice President
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EXHIBIT 5.1
[BAKER & BOTTS L.L.P.]
August 26, 1996
American Residential Services, Inc.
5850 San Felipe, Suite 500
Houston, Texas 77057-8003
Gentlemen:
As set forth in the Registration Statement (the "Registration
Statement") on Form S-1 (Registration No. 333-06195) filed by American
Residential Services, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended, relating to the Company's Common Stock, par value $.001 per
share ("Common Stock"), certain legal matters in connection with the Common
Stock are being passed upon for the Company by us. The Registration Statement
relates to the offering of an aggregate of 4,830,000 shares of Common Stock (the
"Shares"), consisting of 4,200,000 shares to be issued and sold by the Company
to the underwriters referred to in the Registration Statement in a firm
commitment underwriting, together with up to 630,000 shares (the "Additional
Shares") that may be issued and sold by the Company pursuant to the
underwriters' over-allotment option as described in the Registration Statement.
At your request, this opinion is being furnished to you for filing as Exhibit
5.1 to the Registration Statement.
In our capacity as your counsel in the connection referred to above, we
have examined the Restated Certificate of Incorporation and Bylaws of the
Company and the originals, or copies certified or otherwise identified, of
corporate records of the Company, including minute books of the Company as
furnished to us by the Company, certificates of public officials and of
representatives of the Company, statutes and other instruments and documents
pertaining to the Company as a basis for the opinions hereinafter expressed. In
giving such opinions, we have relied upon certificates of officers of the
Company with respect to the accuracy of the material factual matters contained
in such certificates.
Based on our examination as aforesaid, we are of the opinion that:
1. The Company is a corporation duly incorporated and validly existing
in good standing under the laws of the State of Delaware; and
- 1 -
2. When the pricing committee of the Board of Directors of the Company
has determined the price at which the Shares and the Additional Shares are
to be sold to the underwriters by the Company and has authorized the
issuance of such Shares and the Additional Shares, upon the issuance and
sale by the Company of the Shares and any Additional Shares that may be
purchased pursuant to the underwriting agreement referred to in the
Registration Statement for the consideration so determined, such Shares and
any such Additional Shares will be duly authorized, validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion with the
Commission as an exhibit to the Registration Statement
Very truly yours,
BAKER & BOTTS, L.L.P.
- 2 -
NationsBank
Commercial Banking Group
P. O. Box 2518
700 Louisiana Street, 7th Floor
Houston, TX 77252-2518
NATIONSBANK
July 17, 1996
Mr. C. Clifford Wright
Chief Executive Officer
American Residential Services, Inc.
5850 San Felipe, Suite 500
Houston, Texas 77057
Dear Cliff:
NationsBank of Texas, N.A. ("Bank") is pleased to advise you that the
undersigned is prepared, subject to the terms and conditions hereof, to make
credit available to American Residential Services, Inc. ("Borrower")
substantially in accordance with the terms and conditions set forth in the
attached Term Sheet dated July 17, 1996 ("Term Sheet").
This commitment is conditioned upon (i) the absence of a material adverse
change in the Borrower's financial condition or operations, (ii) the
preparation, execution and delivery of legal documentation in form and substance
satisfactory to the Bank and to its counsel incorporating substantially the
terms and conditions referred to in the attached Term Sheet and such
clarifications thereof and modifications and additions thereto as the Bank may
require, and (iii) receipt of a legal opinion from the Borrower's counsel in
form and substance satisfactory to the Bank and its counsel (including but not
limited to opinions as to the existence and good standing of all obligors and
the validity and enforceability of all agreements).
Terms and conditions of the credit are not limited to those set forth in
the Term Sheet. The credit agreement will also include other covenants,
representations and warranties that the Bank and its counsel deems standard and
customary for such credit. Any clarification or modification of the matters
which are set forth in the Term Sheet or any addition thereto are subject to
mutual agreements of the parties.
Please evidence your acceptance of this commitment letter by signing and
returning to the Bank the enclosed copy of this letter on or before July 24,
1996, the date this commitment letter (if not accepted prior thereto) will
expire. If accepted, this commitment letter will terminate on August 31, 1996,
if final documentation has not been executed by that date.
Whether or not final documentation is executed, you agree by signing below
to pay the reasonable charges and disbursements for legal counsel to the Bank in
connection with this commitment letter, the proposed credit and preparation of
documentation.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES.
We appreciate the opportunity to provide American Residential Services with
this commitment for credit and look forward to establishing a mutually
beneficial relationship. If I can be of any assistance, please do not hesitate
to call.
Sincerely,
NATIONSBANK OF TEXAS, N.A.
Albert L. Welch
Vice President
(713) 247-6631
Agreed to and accepted this 22nd day of
July, 1996.
American Residential Services, Inc.
By: C. CLIFFORD WRIGHT________________
C. Clifford Wright
Chief Executive Officer
- --------------------------------------------------------------------------------
NATIONSBANK TERM SHEET
- --------------------------------------------------------------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
FOR DISCUSSION PURPOSES ONLY
SUMMARY OF PROPOSED TERMS
JULY 17, 1996
BORROWER: American Residential Services, Inc.
("Borrower").
GUARANTORS: All existing and future, direct and
indirect subsidiaries of the Borrower
ADMINISTRATIVE AGENT: NationsBank of Texas, N.A.
("NationsBank" or the "Agent").
ARRANGER: NationsBanc Capital Markets, Inc.
("NCMI").
LENDERS: NationsBank of Texas, N.A. and a
syndicate of financial institutions
arranged by NCMI which are reasonably
acceptable to the Borrower and the Agent.
FACILITY: $55,000,000 Revolving Line of Credit.
USE OF PROCEEDS: General corporate purposes including the
refinancing of remaining post-IPO
indebtedness, acquisition financings and
working capital. Sublimit for Standby
Letters of Credit of $5,000.000.
BORROWING OPTIONS: LIBOR and Base Rate options will be
available under the Facility.
LIBOR: means the London Interbank Offered Rate
for offshore deposits as quoted by
NationsBank.
BASE RATE: means the higher of (i) the rate of
interest publicly announced from
time-to-time by NationsBank as its prime
rate, or (ii) 0.5% per annum above the
Effective Federal Funds rate.
REPAYMENT: Interest only payable quarterly;
principal due at Maturity.
MATURITY: Three years from the Closing Date.
CLOSING DATE: No later than September 30, 1996.
SECURITY: Unsecured.
PERFORMANCE PRICING: Pricing for the Facility will be at the
interest rate margins indicated in the
accompanying Performance Pricing Grid.
The Applicable Margin for loans will be
calculated quarterly based on the
Borrower's Funded Debt to EBITDA Ratio.
INTEREST PAYMENTS: For committed LIBOR Advances, one, two,
three, or six months, but at least
quarterly. Interest on Base Rate loans
shall be payable quarterly in arrears.
FEES: See attached Fee Schedule.
UNUSED COMMITMENT FEE: Commencing on the Closing Date, a
non-refundable fee (in the percentage per
annum specified in the accompanying
Performance Pricing Grid) will accrue on
the daily average unused portion of the
Facility, payable quarterly in arrears
and at Maturity.
YIELD PROTECTION: Protective provisions for such matters as
increased costs, capital adequacy,
funding losses, illegality and LIBOR
reserve requirements. All payments shall
be made free of taxes.
VOLUNTARY PREPAYMENTS: Outstanding loans are voluntarily
prepayable without penalty; provided,
however, that LIBOR breakage costs, if
any, shall be for the account of the
Borrower.
- --------------------------------------------------------------------------------
NATIONSBANK TERM SHEET
- --------------------------------------------------------------------------------
DRAWDOWNS: Drawdowns are at the Borrower's
discretion with same business day notice
for the Base Rate option and three
business days notice for LIBOR advances.
CONDITIONS PRECEDENT: Usual and customary for transactions of
this nature including, without
limitation, the following:
o Successful Initial Public Offering
yielding net proceeds to the
Borrower of at least $55,000,000
(of which said offering shall
constitute no more than 60% of
Borrower's capital stock issued).
o Execution and delivery of
satisfactory credit, guarantee and
other related documentation
embodying the structure, terms and
conditions contained herein.
o No material adverse change.
o Receipt of closing certificates,
opinions of counsel, etc., usual
and customary for transactions of
this nature.
o Agent's satisfaction with
background checks on Borrower's
executive management.
REPRESENTATIONS & WARRANTIES: Usual and customary for transactions of
this nature.
AFFIRMATIVE COVENANTS: Usual and customary for transactions of
this nature.
NEGATIVE COVENANTS: Usual and customary for the type of
transaction proposed and others to be
reasonably specified by the Agent,
including, without limitation, as follows
(which covenants shall include such
exclusions as the Agent and X Borrower
shall agree):
Indebtedness: o Restricting the incurrence or
assumption of additional debt,
capital leases and contingent
liabilities, including without
limitation, negative pledges on
assets and sale-leaseback
transactions to $2,500,000.
Dividends: o Restricting the making of dividends
or similar distributions.
Liens: o The incurrence or assumption of
liens limited to $1,000,000.
Sale of Assets: o Restricting the sale of assets or
similar transfers, other than in
the ordinary course of business or
in connection with permitted
dispositions.
Acquisitions: o Restricting the making of
investments or acquisitions other
than permitted acquisitions without
prior written approval of the
Lenders. The Borrower will not, and
will not permit any of its
subsidiaries to make an Acquisition
in a transaction or related series
of transactions unless:
o The Acquisition would not, after
giving effect thereto, result in
a Default;
o The Acquisition is substantially
related to the business of the
Borrower and its subsidiaries;
o The amount of consideration paid
for the Acquisition (INCLUDING
cash, liabilities assumed, seller
debt and amounts payable under
non-compete covenants or similar
agreements, but EXCLUDINGthe value
of any stock of the Borrower issued
as consideration) does not exceed
$10,000,000 for any individual
acquisition and $30,000,000 in
aggregate for the preceding four
quarters, excluding previously
approved acquisitions.
Mergers: o Restricting mergers, consolidations
and similar combinations.
- --------------------------------------------------------------------------------
NATIONSBANK TERM SHEET
- --------------------------------------------------------------------------------
FINANCIAL COVENANTS: Usual and customary for transactions of
this nature and others to be reasonably
specified by the Agent including, without
limitation, the financial covenants set
forth below (which financial covenants
shall also include quarterly tests to be
negotiated).
Consolidated Net Worth Covenant: Maintenance of minimum CONSOLIDATED NET
WORTH (to be defined as the Borrower's
book equity) equal to 90% of the post-IPO
closing Net Worth which shall be
increased quarterly by an amount equal to
90% of net income for such quarter
(without adjustment for any quarter in
which there is a loss) and by 100% of the
net proceeds of any equity offering X by
the Borrower (initial minimum of
$60,000,000).
EBITDA Definition: For purposes of the covenants below,
EBITDA shall be defined as the Borrower's
earnings before interest, taxes,
depreciation and amortization calculated
as follows:
Most recent rolling four quarters,
giving pro forma effect to the
historical EBITDA of acquired
companies.
Fixed Charge Coverage Ratio: Maintenance of a minimum FIXED CHARGE
COVERAGE RATIO to be defined as the ratio
of the borrower's EBITDA (as such term is
defined above) minus cash taxes paid to
the sum or interest expense plus current
maturities paid plus 20% of the funded
balance under the Facility. All such
components of this ratio shall be based
on an actual rolling four quarter basis.
Closing Date - Maturity 1.20:1.00
Funded Debt to EBITDA Ratio: Maintenance of a maximum FUNDED DEBT TO
EBITDA RATIO where Funded Debt is defined
as all interest bearing debt and EBITDA
is defined as above.
Closing Date - Maturity 2.75:1.00
Debt to Capitalization Ratio: Maintenance of maximum DEBT TO
CAPITALIZATION RATIO (to be defined as
the ratio of (x) Total Funded Debt to (y)
Total Funded Debt plus Net Worth.
Closing Date - Maturity 45%
Capital Expenditures Covenant: Limitation on CAPITAL EXPENDITURES
(excluding capital expenditures related
to acquisitions) of 10% of Borrower's Net
Worth.
EVENTS OF DEFAULT: Usual and customary for similar
transactions and appropriate others for
this particular transaction, including,
but not limited to, nonpayment of fees,
interest, or principal when due; breach
of representations, warranties, or
covenants; breach of other material
agreements or contracts; cross default to
other indebtedness; bankruptcy or
insolvency; material judgments; certain
ERISA events; and a change in control of
Borrower.
INDEMNITY: The Borrower will indemnify, pay, and
hold harmless the Agent and the Lenders
(and their respective directors,
officers, employees and agents) against
any loss and any liability in respect to
the financing contemplated hereby, or the
use (or proposed use) of the proceeds
thereof, other than any loss or liability
arising out of the gross negligence or
willful misconduct.
- --------------------------------------------------------------------------------
NATIONSBANK TERM SHEET
- --------------------------------------------------------------------------------
ASSIGNMENTS and
PARTICIPATIONS: Each Lender will have the right to assign
its loan or commitments, with the prior
written consent of the Borrower and the
Agent, which consent shall not be
unreasonably withheld. Assignments must
be in minimum amounts of at least
$5,000,000. A $3,000 assignment fee will
be payable to the Agent by the assignee
prior to the assignment becoming
effective.p Voting rights of participants
are limited to changes in amounts, rates
and fees (in each case as applicable to
each participant), as well as maturity,
and participants have the same benefits
as Lenders with respect to yield
protection, capital adequacy and
increased cost provisions.
GOVERNING LAW: State of Texas.
EXPENSES: The reasonable fees and expenses of
Agent, Arranger and Agent's Counsel
associated with the negotiation,
documentation and syndication of this
Facility under a limitation to be agreed
to in conjunction with the Agent's
counsel plus out of pocket expenses will
be paid by Borrower.
AMERICAN RESIDENTIAL SERVICES, INC.
PERFORMANCE PRICING
INTEREST RATES AND UNUSED COMMITMENT
FEE: Principal shall bear interest, at
Borrower's option, at EITHER the Base
Rate OR LIBOR plus an Applicable Margin
and Borrower shall pay a quarterly Unused
Commitment Fee in each case based on the
Borrower's Funded Debt to EBITDA Ratio.
<TABLE>
<CAPTION>
FUNDED DEBT TO APPLICABLE LIBOR APPLICABLE UNUSED
EBITDA RATIO MARGIN BASE RATE MARGIN COMMITMENT FEE
- ------------------------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C>
Less than 1.00x...................... 75 b.p. 0 b.p. 25.0 b.p.
---------------- ---------------- ---------------
Greater than or equal to 1.00x, but
less than 1.50x.................... 87.5 b.p. 0 b.p. 25.0 b.p.
---------------- ---------------- ---------------
Greater than or equal to 1.50x, but
less than 2.00x.................... 112.5 b.p. 0 b.p. 30.0 b.p.
---------------- ---------------- ---------------
Greater than or equal to 2.00x, but
less than 2.50x.................... 137.5 b.p. 12.5 b.p. 37.5 b.p.
---------------- ---------------- ---------------
Greater than or equal to 2.5x........ 175 b.p. 25 b.p. 50.0 b.p.
================ ================ ===============
</TABLE>
EXHIBIT 23.1
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.
ARTHUR ANDERSEN LLP
Houston, Texas
August 26, 1996
