AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1996
REGISTRATION NO. 333-06195
================================================================================
SECURITIES AND EXCHANGE COMMISSION
------------------------
AMENDMENT NO. 3
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
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL
INCORPORATION CLASSIFICATION CODE NUMBER)
OR ORGANIZATION)
76-0484996
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
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.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1996
PROSPECTUS
4,200,000 Shares
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.
<TABLE>
<CAPTION>
==================================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $
==================================================================================================================
</TABLE>
(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
<PAGE>
[graphics -- gatefold, showing map of the United States with Company locations,
service vehicles, facilities and personnel of the Founding Companies]
ARS WAS FOUNDED TO CREATE THE LEADING NATIONAL PROVIDER OF RESIDENTIAL
SERVICES CONSISTING PRIMARILY OF MAINTENANCE, REPAIR AND REPLACEMENT OF
HEATING, AIR CONDITIONING, PLUMBING AND ELECTRICAL SYSTEMS IN EXISTING
HOMES AND THE INSTALLATION OF THESE SYSTEMS IN NEW HOMES.
ARS COMPANIES:
o IN 1995, MADE 263,000 SERVICE CALLS
o IN 1995, INSTALLED 15,100 HVAC SYSTEMS
o HAD 1,000 SERVICE AND INSTALLATION TECHNICIANS*
o OPERATED 825 SERVICE VEHICLES*
o HAD 1,400 EMPLOYEES*
o OPERATED OUT OF 16 LOCATIONS*
* At June 30, 1996
------------------------
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.
Based on information provided by the Founding Companies and available
industry data, the Company believes 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 1,445,000 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)........ 1,373 687 687
Operating income................ 6,190 2,379 2,953
Interest income and other
expense, net.................. 613 273 245
Interest expense(4)............. (457) (229) (229)
Income from continuing
operations.................... $ 3,427 $ 1,308 $ 1,603
============ ========= =========
Income per share from continuing
operations.................... $ .41 $ .15 $ .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.................... 91,495 91,061
Total debt, including current
portion........................ 26,848 6,999
Stockholders' equity............ 9,691 64,406
- ------------
(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 a 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:
SIX MONTHS ENDED
FISCAL JUNE 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
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
- ------------
(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 of and other unanticipated problems
arising in the acquired businesses. The success of the Company's acquisition
strategy will depend on the extent to which it is able to acquire, successfully
absorb and profitably manage additional businesses, and no assurance can be
given the Company's strategy will succeed. In this connection, 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 new $55 million bank credit facility (the "New Credit Facility"),
underwritten by NationsBank of Texas, N.A. ("NationsBank"), to be used for
acquisitions, working capital and other corporate purposes. 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 September 30, 1996. 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
generally 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,
11
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.
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." The following are the Founding
Companies:
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. 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 THE 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 Working Capital from the date of
a specified recent balance sheet of such company through September 30, 1996. At
the closing of the Acquisitions, 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 September 30, 1996. 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
14
material adverse change in the results of operations, financial condition or
business of each Founding Company.
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 has entered into the New Credit Facility with NationsBank in
connection with this Offering. 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. The New Credit Facility
prohibits the payment of dividends (except for dividends payable in Common Stock
and certain preferred stock). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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...... 20,478 75,789
Retained deficit................ (10,791) (11,391)
--------- ------------
Total stockholders'
equity.................. 9,691 64,406
--------- ------------
Total
capitalization..... $ 31,442 $ 71,405
========= ============
- ------------
(1) Excludes (i) an aggregate of 1,445,000 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 NationsBank, 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>
<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)......... 1,373 687 687
Operating income................. 6,190 2,379 2,953
Interest income and other
expense, net.................... 613 273 245
Interest expense(4).............. (457) (229) (229)
Income from continuing
operations...................... $ 3,427 $ 1,308 $ 1,603
============ ========= =========
Income per share from continuing
operations...................... $ .41 $ .15 $ .19
============ ========= =========
Shares used in computing pro
forma income per share from
continuing operations(4)........ 8,450 8,450 8,450
============ ========= =========
<TABLE>
<CAPTION>
JUNE 30, 1996
JUNE 30, -----------------
----------------------------------------------------- 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 91,495
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 9,691
</TABLE>
AS ADJUSTED(5)
--------------
ATLAS BALANCE SHEET DATA:
Working capital.................. $ 878
Total assets..................... 91,061
Total debt, including current
portion........................ 6,999
Stockholders' equity............. 64,406
(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 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 other than in connection
with this Offering and the Acquisitions, intends to integrate these businesses
and 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
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 excludes 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 has entered into the New Credit Facility with NationsBank. A
copy of the New Credit Facility has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. It provides the Company 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 from 75 to 175 basis points depending on the same ratio.
Commitment
26
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 contains a sublimit for
standby letters of credit of up to $5.0 million. It will terminate and all
amounts outstanding, if any, thereunder will be due and payable in September
1999. The Company's subsidiaries will guarantee the repayment of all amounts due
under the New Credit Facility.
The New Credit Facility prohibits the payment of dividends by the Company
(except for dividends payable in Common Stock and certain preferred stock), will
not permit the Company to incur or assume other indebtedness in excess of an
amount equal to 5% of its consolidated net worth and will require the Company to
comply with certain financial covenants.
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>
YEAR ENDED DECEMBER 31
------------------------------------------
SIX MONTHS
ENDED
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):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
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)
========= ========= ========= =========
</TABLE>
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):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31 JUNE 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
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
Based on information provided by the Founding Companies and available
industry data, the Company believes 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. 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):
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
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*
</TABLE>
- ------------
* 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 1,445,000 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 13.8% $8.00
Howard S. Hoover, Jr................. January 31, 1996 150,000 10.4% $8.00
William P. McCaughey................. January 31, 1996 120,000 8.3% $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 10.4% $9.60-$10.80
All other employees, outside
directors and officers of Founding
Companies, as a group*............. June-September 1996 800,000 55.4% 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 1,445,000 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
September 15, 1996, $2.4 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 September 30, 1996. Subject to adjustment based on the balance
sheets as of that date, the Company will
56
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 July 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 376,072 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 under the New Credit Facility. 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 a 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 Incentive Plan to
employees, three officers (other than Messrs. Wright, Hoover and McCaughey) and
consultants of ARS and its affiliates and will recognize $600,000 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 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.
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
59
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. The table assumes no
other person intends to acquire shares directly from the Underwriters in
connection with this Offering, other than as set forth in the footnotes to the
table.
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(5)........... 3,666 *
Michael Mamaux(6).................... 3,000 *
Nolan Lehmann(7)..................... 2,000 *
Robert J. Cruikshank(8).............. 2,000 *
Randall B. Hale(9)................... 1,000 *
Thomas N. Amonett(10)................ 1,000 *
Don D. Sykora(11).................... 1,000 *
All executive officers and
directors as a group(3) (14
persons)........................... 1,890,101 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.
61
(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.
(4) Shares shown include 10,000 shares that Mr. Hoover intends to acquire
directly from the Underwriters in connection with this Offering.
_(5) Shares shown include 500 shares that Mr. Walker intends to acquire
directly from the Underwriters in connection with this Offering.
_(6) Shares shown include 500 shares that Mr. Mamaux intends to acquire
directly from the Underwriters in connection with this Offering.
_(7) Shares shown include 2,000 shares that Mr. Lehmann intends to acquire
directly from the Underwriters in connection with this Offering.
_(8) Shares shown include 2,000 shares that Mr. Cruikshank intends to acquire
directly from the Underwriters in connection with this Offering.
_(9) Shares shown include 1,000 shares that Mr. Hale intends to acquire
directly from the Underwriters in connection with this Offering.
(10) Shares shown include 1,000 shares that Mr. Amonett intends to acquire
directly from the Underwriters in connection with this Offering.
(11) Shares shown include 1,000 shares that Mr. Sykora intends to acquire
directly from the Underwriters in connection with this Offering.
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
62
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 generally 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 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
63
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.
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
64
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 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
65
than certain mergers that follow a Permitted Offer) or (ii) 50% or more of the
Company's assets or earning power is sold or transferred, each holder of a Right
(except Rights that previously have been voided as set forth above) shall
thereafter have the right to receive, on exercise of such Right, a number of
shares of common stock of the acquiring company having a Current Market Price
equal to two times the exercise price of the Right. Flip-In Events and Flip-Over
Events are collectively referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
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.
66
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 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
67
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 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
PAGE
----
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 $2.5 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 $0.4 million estimated working capital adjustment) and $0.6 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
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 -- -- -- -- 42,285
--------- -------- --------- --------- ------- --------- --------- -----------
Total assets................... $ 3,625 $12,054 $ 20,898 $ 8,481 $2,892 $ 5,391 $ 1,278 $ 36,876
========= ======== ========= ========= ======= ========= ========= ===========
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 19,620
Retained earnings (deficit)........ (1,014) 8,882 252 1,643 733 1,513 480 (23,280)
Treasury stock..................... -- (1,593 ) -- -- -- -- -- 1,593
--------- -------- --------- --------- ------- --------- --------- -----------
Total shareholders' equity
(deficit).................... (1,012) 8,011 253 1,772 747 1,555 530 (2,165)
--------- -------- --------- --------- ------- --------- --------- -----------
Total liabilities and
shareholders' equity
(deficit).................... $ 3,625 $12,054 $ 20,898 $ 8,481 $2,892 $ 5,391 $ 1,278 $ 36,876
========= ======== ========= ========= ======= ========= ========= ===========
</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............................. 54,921 -- 54,921
--------- ----------- --------
Total assets................... $91,495 $ (434) $91,061
========= =========== ========
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......... 20,478 55,311 75,789
Retained earnings (deficit)........ (10,791) (600) (11,391 )
Treasury stock..................... -- -- --
--------- ----------- --------
Total shareholders' equity
(deficit).................... 9,691 54,715 64,406
--------- ----------- --------
Total liabilities and
shareholders' equity
(deficit).................... $91,495 $ (434) $91,061
========= =========== ========
See accompanying notes to unaudited pro forma combined financial statements.
F-4
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................ 1,373(o) 1,373
----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 1,123 6,190
OTHER INCOME (EXPENSE):
Interest income.................. -- 462
Interest expense................. (83)(p) (457 )
Other............................ -- 151
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 1,040 6,346
PROVISION FOR INCOME TAXES........... 1,619(q) 2,919
----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (579) $ 3,427
=========== =========
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-5
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.............. -- -- -- -- -- -- -- -- 687(o)
--------- ------- ------- ------ ------- --------- ------ -------- -----------
INCOME (LOSS) FROM OPERATIONS...... -- 257 506 640 51 191 154 99 481
--------- ------- ------- ------ ------- --------- ------ -------- -----------
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 43 166 150 106 444
PROVISION FOR INCOME TAXES......... -- -- 189 250 6 65 7 -- 598(q)
--------- ------- ------- ------ ------- --------- ------ -------- -----------
INCOME (LOSS) FROM
CONTINUING OPERATIONS............ $ -- $ 393 $ 280 $ 402 $ 37 $ 101 $ 143 $ 106 $(154)
========= ======= ======= ====== ======= ========= ====== ======== ===========
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................ 687
---------
INCOME (LOSS) FROM OPERATIONS........ 2,379
---------
OTHER INCOME (EXPENSE):
Interest income.................. 165
Interest expense................. (229)
Other............................ 108
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES....................... 2,423
PROVISION FOR INCOME TAXES........... 1,115
---------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.............. $ 1,308
=========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .15
=========
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, 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 -- -- -- -- 600(o)
--------- ------- --------- --------- ------- --------- -------- -----------
INCOME (LOSS) FROM OPERATIONS........ (834) 462 1,359 467 89 517 98 795
--------- ------- --------- --------- ------- --------- -------- -----------
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 1,184
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. -- -- 246 150 6 190 -- 774(q)
--------- ------- --------- --------- ------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (854) $ 588 $ 725 $ 270 $ 81 $ 284 $ 99 $ 410
========= ======= ========= ========= ======= ========= ======== ===========
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................ 687
---------
INCOME (LOSS) FROM OPERATIONS........ 2,953
---------
OTHER INCOME (EXPENSE):
Interest income.................. 156
Interest expense................. (229)
Other............................ 89
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 2,969
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 1,366
---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 1,603
=========
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-7
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-8
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 $ 6,500
Atlas............................. 5,000 1,066,666 10,400
EHC (including Crown and A-ABC)... -- 378,400 4,422
Florida HAC....................... 11,000 333,333 3,250
Meridian & Hoosier................ 3,250 250,000 2,438
Climatic.......................... 550 110,000 1,072
--------- ------------ --------------
Total........................ $ 34,800 2,805,065 $ 28,082
========= ============ ==============
- ------------
(1) Valued at $9.75 per share, a 35% discount to the assumed initial offering
price of $15 per share (the midpoint of the estimated initial public
offering price range).
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 $47.5 million (based on the fair
value of the shares to be issued) of the Acquisitions (excluding Atlas, the
accounting acquiror), $43.1 million has been allocated to
F-9
AMERICAN RESIDENTIAL SERVICES, INC., AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the assets acquired and liabilities assumed. The remaining amount of $4.4
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. Of this amount, $2.1 million relates to the portion of the
excess purchase price paid to the common shareholders of EHC, which will be
recorded as compensation costs. The remaining $2.3 million relates to additional
return on the preferred stock held by Equus II, which will be recorded as a
dividend. 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, $0.4 million of which will be recorded as
compensation costs and $0.8 will be recorded as a preferred stock dividend.
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 $54.9 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 costs, additional preferred stock dividends and the
conversion of $0.5 million of the EHC convertible note held by Equus II
into 844,965 shares of ARS Common Stock.
(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-10
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>
PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
--------- --------- --------- --------- --------- --------- -----------
<S> <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............................. 42,285 42,285
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) (20,870) (7,227) (19,620)
Retained earnings (deficit).......... 5,800 11,608 5,872 23,280
Treasury stock....................... (1,593) (1,593)
--------- --------- --------- --------- --------- --------- -----------
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
========= ========= ========= ========= ========= ========= ===========
<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) (725) (55,311)
Retained earnings (deficit).......... 600 600
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-11
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 1,445,000
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-12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying balance sheets of American Residential
Services, Inc. (a Delaware corporation), as of December 31, 1995 and June 30,
1996, and the related statements of operations, shareholders' deficit and cash
flows from Inception (October 24, 1995) through December 31, 1995 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Residential
Services, Inc. as of December 31, 1995 and June 30, 1996 and the results of its
operations and its cash flows from Inception through December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1996 (except with respect
to the matter discussed in Note 7,
as to which the date is September 9, 1996)
F-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 September 9, 1996, the
Company has granted 10 year options covering an aggregate of 1,445,000 shares of
common stock. Management believes the option price of the options granted is
equal to or in excess of the market value of the stock at the date of grant.
OPTIONS OPTION
DATE OF GRANT GRANTED PRICE
- ------------------------------------- --------- ------
January 31, 1996..................... 495,000 $ 8.00
March 6, 1996........................ 75,000 9.60
March 29, 1996....................... 25,000 10.20
April 30, 1996....................... 50,000 10.80
Offering
June 12, 1996........................ 655,000 Price
Offering
July 15, 1996........................ 85,000 Price
Offering
August 30, 1996...................... 15,000 Price
Offering
September 9, 1996.................... 45,000 Price
---------
1,445,000
=========
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:
<TABLE>
<CAPTION>
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
Mortgage note payable to a bank, with monthly installments of $8,056 principal
plus interest at 7.25%, secured by real estate and life insurance policies,
due December
1998 ....................................................................... $1,401,667 $1,305,000 $1,256,666
Mortgage note payable to a bank, with
monthly installments of $1,000 principal plus interest at prime plus 1.25%
(9.75% at December 31, 1995), secured by real estate, due
May 1997 ................................................................... 103,400 93,400 87,977
Mortgage note payable to a bank, with
monthly installments of $581,
bearing interest at 9.5%, secured
by real estate, due June 2017 .............................................. 56,775 56,173 53,185
Transportation equipment notes payable and capitalized leases, with monthly
installments totaling $48,255, due from July 1994 to January 1998, bearing
interest from 5.9% to 13.3%, secured by
transportation equipment ................................................... 816,486 675,929 574,953
Note payable on equipment, with
monthly installments of $2,083 principal plus interest at prime plus 1.50%
(10% at December 31, 1995), secured by equipment, due
June 1998 .................................................................. 100,000 75,000 62,500
Other ........................................................................ 146,980 116,673 125,969
---------- ---------- ----------
2,625,308 2,322,175 2,161,250
Less -- Current maturities ................................................... 577,545 619,851 596,941
---------- ---------- ----------
$2,047,763 $1,702,324 $1,564,309
========== ========== ==========
</TABLE>
F-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> <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]
TRAINING EMPLOYEES AND FOCUSING ON CUSTOMER SATISFACTION
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
COMMON STOCK
------------
PROSPECTUS
SEPTEMBER , 1996
------------
SMITH BARNEY INC.
MONTGOMERY SECURITIES
PART II
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 American Residential
Services, Inc. (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
*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.
`4.6 -- Revolving Loan Agreement dated
September 17, 1996 among the Company
and NationsBank of Texas, N.A. and
the other parties designated therein.
`4.7-- Convertible Promissory Note dated as
of March 6, 1996 issued by the
Company to Equus II Incorporated.
`4.8-- Promissory Note dated as of July 22,
1996 issued by the Company to Equus
II Incorporated.
The Company and certain of its
subsidiaries are parties to certain
debt instruments under which the
total amount of securities authorized
does not exceed 10% of the total
assets of the Company and its
subsidiaries on a consolidated basis.
Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Regulation S-K, the
Company agrees to furnish a copy of
such instruments to the Commission
upon request.
*5.1 -- Opinion of 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.
II-5
*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.
*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.
`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 SEPTEMBER 18, 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
- --------------------------------------------------- ------------------------------------ -------------------
<S> <C> <C>
/s/C. CLIFFORD WRIGHT, JR. President, Chief Executive September 18, 1996
C. CLIFFORD WRIGHT, JR. Officer, and Director
(Principal Executive Officer and
Principal Financial Officer)
/s/HOWARD S. HOOVER, JR. Chairman of the Board September 18, 1996
HOWARD S. HOOVER, JR.
/s/MICHAEL MAMAUX Controller September 18, 1996
MICHAEL MAMAUX (Principal Accounting Officer)
/s/WILLIAM P. MCCAUGHEY Executive Vice President September 18, 1996
WILLIAM P. MCCAUGHEY and Director
</TABLE>
II-8
EXHIBIT 4.6
REVOLVING LOAN AGREEMENT
DATED
SEPTEMBER 17, 1996
AMONG
AMERICAN RESIDENTIAL SERVICES, INC.
AS BORROWER
AND
NATIONSBANK OF TEXAS, N.A.
AS AGENT AND ISSUING LENDER
AND
NATIONSBANK OF TEXAS, N.A.
AND THE OTHER ENTITIES DESIGNATED HEREIN
AS LENDERS
TABLE OF CONTENTS
ARTICLE I
TERMS DEFINED.......................-1-
Section 1.1 DEFINITIONS..................................................-1-
Section 1.2 SINGULAR AND PLURAL OF DEFINITIONS..........................-27-
Section 1.3 MONEY.......................................................-27-
Section 1.4 CAPTIONS; REFERENCES........................................-27-
Section 1.5 ACCOUNTING TERMS AND DETERMINATIONS.........................-27-
Section 1.6 KNOWLEDGE...................................................-28-
ARTICLE II
TERMS OF CREDIT FACILITY COMMITMENT...................-28-
Section 2.1 CREDIT FACILITY COMMITMENT..................................-28-
Section 2.2 METHOD OF BORROWING.........................................-28-
Section 2.3 METHOD OF ISSUING LETTERS OF CREDIT; PARTICIPATIONS THEREIN;
PAYMENTS THEREUNDER.........................................-29-
Section 2.4 FEES........................................................-30-
Section 2.5 ADDITIONAL ACQUIRED BUSINESSES..............................-31-
Section 2.6 MARGIN AND FEE RATE ADJUSTMENTS.............................-33-
ARTICLE III
TERMS OF CREDIT FACILITY.........................-34-
Section 3.1 NOTES.......................................................-34-
Section 3.2 MATURITY....................................................-34-
Section 3.3 INTEREST RATE...............................................-34-
Section 3.4 INTEREST PAYMENTS...........................................-35-
Section 3.5 LIBOR RATE ADVANCES.........................................-35-
Section 3.6 OPTIONAL AND MANDATORY PREPAYMENTS OF ADVANCES;
OPTIONAL REDUCTIONS OF COMMITMENTS..........................-37-
Section 3.7 SCHEDULES ON NOTES..........................................-38-
Section 3.8 GENERAL PROVISIONS AS TO PAYMENTS...........................-38-
Section 3.9 APPLICATION OF PAYMENTS.....................................-39-
Section 3.10 CAPITAL ADEQUACY............................................-39-
Section 3.11 DEPOSIT OF CASH COLLATERAL..................................-39-
ARTICLE IV
CONDITIONS TO FUNDING..........................-40-
Section 4.1 CONDITIONS TO INITIAL ADVANCE OR LETTER OF CREDIT...........-40-
Section 4.2 CONDITIONS TO ALL ADVANCES..................................-42-
Section 4.3 CONDITIONS TO LETTERS OF CREDIT.............................-43-
-i-
ARTICLE V
REPRESENTATIONS AND WARRANTIES......................-44-
Section 5.1 EXISTENCE AND POWER OF BORROWER.............................-44-
Section 5.2 SUBSIDIARIES................................................-44-
Section 5.3 AUTHORIZATION; CONTRAVENTION................................-44-
Section 5.4 ENFORCEABLE OBLIGATIONS.....................................-45-
Section 5.5 FINANCIAL INFORMATION.......................................-45-
Section 5.6 LITIGATION..................................................-45-
Section 5.7 ERISA.......................................................-45-
Section 5.8 TAXES AND FILING OF TAX RETURNS.............................-46-
Section 5.9 OWNERSHIP OF ASSETS.........................................-46-
Section 5.10 BUSINESS; COMPLIANCE........................................-46-
Section 5.11 LICENSES, PERMITS...........................................-46-
Section 5.12 COMPLIANCE WITH LAW.........................................-46-
Section 5.13 FULL DISCLOSURE.............................................-46-
Section 5.14 ENVIRONMENTAL MATTERS.......................................-47-
Section 5.15 PURPOSE OF CREDIT...........................................-47-
Section 5.16 GOVERNMENTAL REGULATIONS....................................-48-
Section 5.17 INDEBTEDNESS................................................-48-
Section 5.18 INSURANCE...................................................-48-
Section 5.19 SOLVENCY....................................................-48-
ARTICLE VI
AFFIRMATIVE COVENANTS..........................-48-
Section 6.1 INFORMATION FROM BORROWER...................................-49-
Section 6.2 MAINTENANCE OF EXISTENCE, ETC...............................-50-
Section 6.3 BUSINESS....................................................-51-
Section 6.4 RIGHT OF INSPECTION.........................................-51-
Section 6.5 MAINTENANCE OF INSURANCE....................................-52-
Section 6.6 PAYMENT OF TAXES, IMPOSITIONS AND CLAIMS....................-52-
Section 6.7 COMPLIANCE WITH LAWS AND DOCUMENTS..........................-52-
Section 6.8 ENVIRONMENTAL LAW COMPLIANCE AND INDEMNITY..................-52-
Section 6.9 USE OF PROCEEDS.............................................-54-
Section 6.10 ADDITIONAL DOCUMENTS........................................-54-
Section 6.11 COMPLIANCE WITH DUE DILIGENCE STANDARDS; OFFICES AND
FILES.......................................................-54-
ARTICLE VII
NEGATIVE COVENANTS............................-54-
Section 7.1 FINANCIAL COVENANTS.........................................-54-
Section 7.2 LIMITATION ON CAPITAL EXPENDITURES..........................-55-
Section 7.3 LIMITATION ON DEBT..........................................-55-
-ii-
Section 7.4 LIMITATION ON SALE OF ASSETS................................-56-
Section 7.5 LIMITATION ON LIENS.........................................-56-
Section 7.6 CONSOLIDATIONS, MERGERS, SALES OF ASSETS. .................-56-
Section 7.7 INVESTMENTS.................................................-56-
Section 7.8 DISTRIBUTIONS...............................................-56-
Section 7.9 TRANSACTIONS WITH AFFILIATES AND ASSOCIATES.................-56-
Section 7.10 EMPLOYEE PLANS..............................................-57-
Section 7.11 USE VIOLATIONS..............................................-58-
Section 7.12 FISCAL YEAR AND ACCOUNTING METHODS..........................-58-
Section 7.13 GOVERNMENTAL REGULATIONS....................................-58-
ARTICLE VIII
DEFAULTS AND REMEDIES..........................-58-
Section 8.1 EVENTS OF DEFAULT...........................................-58-
Section 8.2 REMEDIES....................................................-60-
Section 8.3 RIGHTS OF SET-OFF...........................................-61-
Section 8.4 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE...........-61-
Section 8.5 NO CONDITIONS PRECEDENT TO EXERCISE REMEDIES................-61-
Section 8.6 ADDITIONAL WAIVERS..........................................-62-
Section 8.7 DISCONTINUANCE OF PROCEEDINGS...............................-62-
ARTICLE IX
AGENT AND THE LENDERS..........................-62-
Section 9.1 APPOINTMENT AND AUTHORIZATION OF AGENT......................-62-
Section 9.2 POSSESSION OF INSTRUMENTS BY AGENT..........................-63-
Section 9.3 EXPENSES....................................................-64-
Section 9.4 DELEGATION OF DUTIES; RELIANCE; CONSULTATION................-64-
Section 9.5 LIMITATION OF AGENT'S LIABILITY.............................-64-
Section 9.6 DEFAULT.....................................................-65-
Section 9.7 LENDERS' DECISION...........................................-66-
Section 9.8 LIMITATION OF LIABILITY OF LENDERS..........................-66-
Section 9.9 RELATIONSHIP OF LENDERS.....................................-66-
Section 9.10 DEBTOR-CREDITOR RELATIONSHIP................................-67-
Section 9.11 CREDIT DECISIONS............................................-67-
Section 9.12 REMOVAL OF AGENT............................................-67-
Section 9.14 SHARING OF PAYMENTS AND SETOFFS.............................-68-
Section 9.15 NON-ADVANCING LENDERS.......................................-69-
Section 9.16 BENEFIT OF LENDERS..........................................-69-
ARTICLE X
MISCELLANEOUS..............................-70-
Section 10.1 CONTINUING AGREEMENT........................................-70-
Section 10.2 NOTICES.....................................................-70-
-iii-
Section 10.3 NO WAIVERS..................................................-70-
Section 10.4 EXPENSES; DOCUMENTARY TAXES; INDEMNIFICATION................-71-
Section 10.5 AMENDMENTS AND WAIVERS: CONSENT TO DEVIATION................-71-
Section 10.6 SURVIVAL....................................................-71-
Section 10.7 PRIOR UNDERSTANDINGS; NO DEFENSES; RELEASE; NO ORAL
AGREEMENTS..................................................-72-
Section 10.8 LIMITATION ON INTEREST......................................-72-
Section 10.9 INVALID PROVISIONS..........................................-73-
Section 10.10 SUCCESSORS AND ASSIGNS......................................-73-
Section 10.11 SENIOR DEBT; BORROWER SUBORDINATION.........................-76-
Section 10.12 REVOLVING LOAN..............................................-76-
Section 10.13 CONSTRUCTION................................................-76-
Section 10.15 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS..............-76-
Section 10.16 JURY TRIAL WAIVER...........................................-77-
Section 10.17 COUNTERPARTS................................................-77-
Section 10.18 INCONSISTENT PROVISIONS.....................................-77-
-iv-
SCHEDULES AND EXHIBITS
SCHEDULE I - NOTICE LIST; LOAN COMMITMENT AMOUNTS
SCHEDULE II - LIBOR MARGIN; BASE RATE MARGIN; COMMITMENT
FEE PERCENTAGE
SCHEDULE III - EXISTING LIENS
SCHEDULE IV - EXISTING DEBT
SCHEDULE 5.7(b) - RETIREE MEDICAL AGREEMENTS
EXHIBIT A - FORM OF NOTE
EXHIBIT B - REQUEST FOR ADVANCE
EXHIBIT C - ASSIGNMENT AND ACCEPTANCE
EXHIBIT D - RATE DESIGNATION NOTICE
EXHIBIT E - FORM OF SUBSIDIARY GUARANTY
-v-
REVOLVING LOAN AGREEMENT
THIS REVOLVING LOAN AGREEMENT is entered into September 17, 1996, by and
among AMERICAN RESIDENTIAL SERVICES, INC., a Delaware corporation, and
NATIONSBANK OF TEXAS, N.A., as Issuing Lender and as Agent, and the lending
institutions designated as "LENDERS" on SCHEDULE I (as such schedule may be
modified and supplemented from time to time).
PRELIMINARY STATEMENT
Borrower has requested that Lenders make available a revolving credit
facility in an aggregate amount not to exceed Fifty-Five Million and No/100
Dollars ($55,000,000.00). Upon and subject to the terms of this Agreement,
Lenders are willing to make such revolving credit facility available to
Borrower. Accordingly, in consideration of the mutual covenants contained
herein, Borrower, Agent, Lenders, and Issuing Lender agree as follows:
ARTICLE I
TERMS DEFINED
Section 1.1 DEFINITIONS. The following terms, as used herein, have the
following meanings:
"ACQUIRED BUSINESS" means any acquisition by Borrower, directly or
indirectly through one of its Subsidiaries, of assets (directly or indirectly
through the acquisition of Capital Stock) which satisfies the Acquisition
Criteria.
"ACQUIRING PERSON" means any Person who or which, together with all
Affiliates and Associates of such Person, is or are the Beneficial Owner of 25%
or more of the shares of Common Stock then outstanding, but does not include any
Exempt Person; provided, however, that a Person shall not be or become an
Acquiring Person if such Person, together with its Affiliates and Associates,
shall become the Beneficial Owner of 25% or more of the shares of Common Stock
then outstanding solely as a result of a reduction in the number of shares of
Common Stock outstanding due to the repurchase of Common Stock by Borrower,
unless and until such time as such Person or any Affiliate or Associate of such
Person shall purchase or otherwise become 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 (or Persons) who is (or collectively are) the
Beneficial Owner of shares of Common Stock constituting 1% or more of the then
outstanding shares of Common Stock shall become an Affiliate
-1-
or Associate of such Person, unless, in either such case, such Person, together
with all Affiliates and Associates of such Person, is not then the Beneficial
Owner of 25% or more of the shares of Common Stock then outstanding.
"ACQUISITION CONSIDERATION" means, with respect to any Acquired
Business, the consideration payable by Borrower, directly or indirectly through
one of its Subsidiaries, to the sellers of that Acquired Business as the
purchase price for that Acquired Business. For purposes of this Agreement, the
amount of Acquisition Consideration applicable to any Acquired Business shall be
determined as of the Acquisition Date of that Acquired Business, in accordance
with GAAP, as the total amount paid (including amounts paid in consideration for
covenants not to compete) for the Acquired Business, including cash,
Consolidated Funded Debt, and redeemable preferred stock which must be redeemed
prior to the first anniversary of the end of the Credit Period, but excluding
the value of any Capital Stock of Borrower (other than such mandatorily
redeemable preferred stock) issued as consideration.
"ACQUISITION CRITERIA" means, with respect to any proposed Acquired
Business, the following criteria:
(a) on the Acquisition Date of that Acquired Business, and after
giving effect thereto , no Default would result therefrom;
(b) that Acquired Business and each of its Subsidiaries consist
primarily of operating assets or rights to use operating assets
(including installation, maintenance, or service contract rights) in one
or more Permitted Lines of Business;
(c) the Acquisition Consideration to be paid by Borrower,
directly or indirectly through one of its Subsidiaries, for that
Acquired Business (and its Subsidiaries) is either (i) $10,000,000.00 or
less in the aggregate, determined without duplication of amounts, or
(ii) Approved Consideration;
(d) if the Acquisition Consideration to be paid is not Approved
Consideration, the sum of (i) the amount of the Acquisition
Consideration to be paid, plus (ii) the total amount of Acquisition
Consideration (other than Approved Consideration) paid by Borrower,
directly or indirectly through its Subsidiaries, for other Acquired
Businesses (and their respective Subsidiaries) during the 12-month
period preceding the Acquisition Date of that Acquired Business does not
exceed $30,000,000.00 (for purposes of clause (ii), Acquisition
Consideration shall be adjusted to reflect amounts actually paid by
Borrower under any contingent earn-out or other contingent obligations);
-2-
(e) if that Acquired Business is an Entity that will remain in
existence after the acquisition, that Entity (and each of its
Subsidiaries which will remain in existence after the acquisition) will
become a Subsidiary of Borrower when the acquisition is completed; and
(f) all requirements of SECTIONS 2.5 and 2.6 shall have been, or
will be, fully and timely satisfied in connection with the acquisition.
"ACQUISITION DATE" means, with respect to any Acquired Business, the
date on which Borrower, directly or indirectly through one of its Subsidiaries,
acquires ownership of that Acquired Business.
"ADJUSTED LIBOR RATE" means, for any day in an Interest Period for any
LIBOR Rate Advance, a rate per annum equal to the quotient of (a)(i) the LIBOR
Rate on the applicable Effective Date, divided by (ii) the remainder of 100%
minus the LIBOR Reserve Requirement, if any, in effect on such day, plus (b) the
LIBOR Margin in effect on such day.
"ADVANCE" means an Advance made by a Lender to Borrower under the Credit
Facility pursuant to SECTION 2.1(A).
"AFFILIATE" means, as to any Person, any Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person. For purposes of this definition, "CONTROL" means the possession of the
power to direct or cause the direction of the management and policies of such
Person, whether through the ownership of voting securities, by contract or
otherwise; provided, however, for purposes of SECTION 7.9, no Subsidiary of
Borrower is an Affiliate of Borrower or any other Subsidiary of Borrower.
"AGENT" means NationsBank, in its capacity as agent for Lenders, and any
successor agent for Lenders appointed pursuant to the terms of this Agreement.
"AGENT'S FEE" means the "Annual Administration Fee" provided for in the
Fee Letter.
"AGREEMENT" means this Revolving Loan Agreement, as renewed, extended,
restated, modified, supplemented, amended and rearranged from time to time.
"AMORTIZATION" means, for any period with respect to a specified Entity,
without duplication of amounts, the amount classified as amortization expense
and deducted in determining Consolidated Net Income of the specified Entity for
that period.
"APPLICABLE ENVIRONMENTAL LAWS" has the meaning set forth in SECTION
6.8(B).
-3-
"APPLICABLE RATE" has the meaning set forth in SECTION 3.3.
"APPROVED CONSIDERATION" means: (a) with respect to each Initial
Acquired Business (and their respective Subsidiaries), the Acquisition
Consideration payable by Borrower pursuant to the Initial Acquisition Agreement
relating to that Initial Acquired Business (and its Subsidiaries); and (b) with
respect to any other Acquired Business, the Acquisition Consideration payable
therefor, the payment of which has been approved in writing by the Required
Lenders prior to the Acquisition Date of such Acquired Business.
"APPROVED SUBORDINATED DEBT" means Debt issued by Borrower which is
unsecured and subordinated to payment of the Obligations and the terms of which
(including, without limitation, the subordination provisions thereof) have been
approved in writing by the Required Lenders.
"ARRANGER" means NationsBanc Capital Markets, Inc.
"ASSIGNMENT AND ACCEPTANCE" has the meaning set forth in
SECTION 10.10(C).
"ASSOCIATE" means, with respect to any Person, (a) any corporation,
firm, partnership, association, unincorporated organization, or other entity
(other than Borrower or a Subsidiary of Borrower) of which that Person is an
officer or general partner (or officer or general partner of a general partner)
or is, directly or indirectly, the Beneficial Owner of 10% or more of any class
of its equity securities, (b) any trust or other estate in which that Person has
a substantial beneficial interest or for or of which that Person serves as
trustee or in a similar fiduciary capacity and (c) any relative or spouse of
that Person, or any relative of that spouse, who has the same home as that
Person; provided, however, for purposes of SECTION 7.9, Borrower is not an
Associate of any of its Subsidiaries, and no Subsidiary of Borrower is an
Associate of any other Subsidiary of Borrower.
"AUTHORIZED OFFICER" means, as to any Person, any officer of such Person
who is duly authorized by the board of directors, or its equivalent, of such
Person to execute the Loan Documents or any other documents or certificates to
be executed by such Person hereunder in connection with any Advance or Letter of
Credit or otherwise.
"AVAILABLE COMMITMENT" means an amount equal to the Committed Sum, minus
(a) the Principal Debt, minus (b) the Letter of Credit Exposure.
"BASE RATE" means, for any day, the greater of (a) the rate of interest
per annum most recently announced by Agent as its prime rate in effect on such
day at its principal office (which, in the case of NationsBank, shall mean its
principal office in
-4-
Dallas, Texas) or (b) the sum of (i) the Federal Funds Rate in effect on such
day, plus (ii) 0.50%. Agent's prime rate will automatically fluctuate upward and
downward until and at the time specified in each such announcement without
special notice to Borrower or any other Person, which prime rate may not
necessarily represent the lowest or best rate actually charged to a customer.
"BASE RATE MARGIN" means: (a) for the period from the beginning of the
Credit Period until the initial Reset Date, 0%; and (b) for any subsequent
period from and including any Reset Date, beginning with the initial Reset Date,
to but not including, the next Reset Date to occur, if the Funded Debt to EBITDA
Ratio calculated as of the last day of Borrower's fiscal quarter immediately
preceding the particular Reset Date is within a range set forth in column A in
Schedule II, the applicable per annum percentage shall be, subject to adjustment
pursuant to SECTION 2.6, as set forth for that range in column C in SCHEDULE II.
A Person is the "BENEFICIAL OWNER" of and is deemed to "beneficially
own," securities:
(a) of which that Person or any of that Person's Affiliates or
Associates, directly or indirectly, is the "beneficial owner" (as
determined pursuant to Exchange Act Rule 13d-3) or otherwise has the
right to vote or dispose of, including pursuant to any agreement,
arrangement or understanding (whether or not in writing); provided,
however, that a Person shall not be deemed the "Beneficial Owner" of, or
to "beneficially own," any security under this subparagraph (a) as a
result of an agreement, arrangement or understanding to vote that
security if that agreement, arrangement or understanding: (i) arises
solely from a revocable proxy or consent given in response to a public
(that is, not including a solicitation exempted by Exchange Act Rule
14a-2(b)(2)) proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange Act; and (ii)
is not then reportable by such Person on Exchange Act Schedule 13D (or
any comparable or successor report);
(b) which that Person or any of that Person's Affiliates or
Associates, directly or indirectly, has the right or obligation to
acquire (whether that right or obligation is exercisable or effective
immediately or only after the passage of time or the occurrence of an
event) pursuant to any agreement, arrangement or understanding (whether
or not in writing) or on the exercise of conversion rights, exchange
rights, other rights, warrants or options, or otherwise; provided,
however, that a Person shall not be deemed the "Beneficial Owner" of, or
to "beneficially own," securities tendered pursuant to a tender or
exchange offer made by that Person or any of that Person's Affiliates or
Associates until those tendered securities are accepted for purchase or
exchange; or
-5-
(c) which are beneficially owned, directly or indirectly, by (i)
any other Person (or any Affiliate or Associate thereof) with which the
specified Person or any of the specified Person's Affiliates or
Associates has any agreement, arrangement or understanding (whether or
not in writing) for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy or consent as described in the proviso to
subparagraph (a) of this definition) or disposing of any voting
securities of the Company or (ii) any group (as that term is used in
Exchange Act Rule 13d-5(b)) of which that specified Person is a member;
provided, however, that nothing in this definition shall cause a Person engaged
in business as an underwriter of securities to be the "Beneficial Owner" of, or
to "beneficially own," any securities acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of 40 days after the date of that acquisition. For purposes of this
Agreement, "voting" a security shall include voting, granting a proxy, acting by
consent, making a request or demand relating to corporate action (including,
without limitation, calling a stockholder meeting) or otherwise giving an
authorization (within the meaning of Section 14(a) of the Exchange Act) in
respect of such security.
"BOARD" means the Board of Directors of Borrower.
"BORROWER DUE DILIGENCE REPORTS" means the various written reports,
information and other materials that Borrower prepared or assembled and has
available at the offices designated pursuant to SECTION 6.11 containing
descriptions and evaluations of the Acquired Businesses it acquires, and
Borrower's assessments and projections regarding same, including, without
limitation, copies of purchase agreements and all summaries of Borrower's due
diligence regarding those Acquired Businesses.
"BORROWER" means American Residential Services, Inc., a Delaware
corporation.
"BUSINESS DAY" means (a) for purposes of ARTICLES II AND III and each
Note, a day of the year Agent, Issuing Lender or any Lender is not required or
authorized by applicable law or executive order to be closed and, with respect
to all requests, notices and determinations in connection with LIBOR Rate
Advances, a day for trading by and between prime banks in Dollar deposits in the
London interbank market and (b) for all other purposes of this Agreement, a day
of the year on which banks are not authorized or required by applicable law or
executive order to be closed in Houston, Texas.
"CAPITAL EXPENDITURES" means as of the last day of each fiscal year of
Borrower, the aggregate amount of expenditures, determined without duplication
of amounts, made by Borrower and its Subsidiaries during that fiscal year for
the acquisition of any fixed assets or any replacements thereof, substitutions
therefor or additions thereto,
-6-
which have a useful life of more than 12 months, including assets acquired by
Borrower and its Subsidiaries during that fiscal year through the incurrence of
Capitalized Lease Obligations; provided, however, that there may be deducted in
determining Capital Expenditures for purposes of SECTION 7.2 as of the end of
each fiscal year of Borrower: (a) the aggregate cash proceeds, net of sales
expense, received by Borrower and its Subsidiaries during that fiscal year in
connection with the sale by any of them of any fixed assets that are
contemporaneously or within 120 days after such sale replaced with fixed assets
serving a similar function; and (b) in case of any damage or casualty to any
fixed assets of Borrower or any of its Subsidiaries, insurance proceeds received
by Borrower and its Subsidiaries during that fiscal year which are used to
finance or refinance (through reimbursement of Borrower's treasury or otherwise)
the cost of repairing or replacing those fixed assets.
"CAPITAL STOCK" means: (a) in the case of a corporation, any equity
security issued by that corporation; and (b) in the case of any other Entity,
any share, membership, partnership or other percentage interest, unit of
participation or other equivalent (however designated) of a corporate equity
security or other equity interest in an Entity.
"CAPITALIZED LEASE OBLIGATIONS" means any indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP, and the amount of such indebtedness
shall be the capitalized amount of such obligations determined in accordance
with GAAP.
"CHANGE IN CONTROL" means the occurrence of any of the following events
that occurs after the IPO Closing Date: (a) any Person becomes an Acquiring
Person; (b) at any time the then Continuing Directors cease to constitute a
majority of the members of the Board; (c) a merger of Borrower with or into, or
a sale by Borrower of its properties and assets substantially as an entirety to,
another Person occurs and, immediately after that occurrence, any Person, other
than an Exempt Person, together with all Affiliates and Associates of such
Person, shall be the Beneficial Owner of 25% or more of the total voting power
of the then outstanding Voting Shares of the Person surviving that transaction
(in the case or a merger or consolidation) or the Person acquiring those
properties and assets substantially as an entirety.
"CHARTER DOCUMENTS" means, with respect to any Person, (a) the articles
or certificate of formation, incorporation, or organization (or the equivalent
organizational documents) of such Person, and (b) the bylaws, limited liability
company agreement or regulations (or the equivalent governing documents) of such
Person.
"CLOSING DATE" means the IPO Closing Date.
"CODE" means the Internal Revenue Code of 1986, as amended.
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"COMMITMENT FEE" has the meaning set forth in SECTION 2.4(A).
"COMMITMENT FEE RATE" means: (a) for the period from the beginning of
the Credit Period until the initial Reset Date, 0.25% per annum; and (b) for any
subsequent period from and including any Reset Date, beginning with the initial
Reset Date, to but not including, the next Reset Date to occur, if the Funded
Debt to EBITDA Ratio calculated as of the last day of Borrower's fiscal quarter
immediately preceding the particular Reset Date is within a range set forth in
column A in Schedule II, the applicable per annum percentage shall be, subject
to adjustment pursuant to SECTION 2.6, as set forth for that range in column D
in SCHEDULE II.
"COMMITTED SUM" means an amount equal to $55,000,000.00, as the same may
be reduced pursuant to SECTION 3.6(C).
"COMMON STOCK" means the Common Stock, par value $.001 per share, of
Borrower.
"COMPENSATION ADJUSTMENT" means, for any period with respect to the
Consolidated Net Income of any Acquired Business, without duplication of
amounts, the amount by which the Owners' Compensation deducted in determining
the Consolidated Net Income of that Acquired Business for that period would be
reduced as a nonrecurring item in a pro forma statement of operations of that
Acquired Business for that period prepared in accordance with GAAP.
"CONSEQUENTIAL LOSS" has the meaning set forth in SECTION 3.5(D).
"CONSOLIDATED CURRENT MATURITIES" means, as of any date, all then
current maturities of long-term Consolidated Funded Debt, determined on a
consolidated basis in accordance with GAAP (including, without limitation,
Capitalized Lease Obligations).
"CONSOLIDATED EBITDA" means, for any period, determined in accordance
with GAAP on a consolidated basis, the sum of (a) (i) Borrower's Consolidated
Net Income for that period before taxes, plus (ii) Borrower's Depreciation, plus
Borrower's Amortization, plus the Borrower's Consolidated Interest Expense, each
as deducted in determining that Consolidated Net Income, plus (iii) all other
non-cash expenses deducted in determining that Consolidated Net Income, and (b)
for each Acquired Business with an Acquisition Date occurring during the 12
months preceding the date of calculation and which Borrower has provided Agent
with a certificate pursuant to Section 2.5(b) (notwithstanding anything herein
to the contrary, such certificate may, at Borrower's option, be provided after
the Acquisition Date of the Acquired Business), with respect to the period
beginning 12 months prior to the date of calculation through the Acquisition
Date, the sum of (A) an amount equal to such Acquired Business' Consolidated Net
Income for that period before taxes, plus (B) the Acquired Business'
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Depreciation, plus the Acquired Business' Amortization, plus the Acquired
Business' Consolidated Interest Expense, each as deducted in determining such
Acquired Business' Consolidated Net Income, plus (C) all other non-cash expenses
deducted in determining the Acquired Business' Consolidated Net Income, plus (D)
the sum of (1) the Compensation Adjustment, if any, applicable to that period,
plus (2) the Rental Adjustment, if any, applicable to that period, plus (3) to
the extent approved by the Required Lenders, the amount of all other add-backs
applicable to that period and proposed by Borrower.
"CONSOLIDATED FUNDED DEBT" means, as of any date, all interest-bearing
Debt of Borrower and its Subsidiaries which is evidenced by promissory notes,
loan agreements, bonds or similar instruments, as such amount is required to be
shown on Borrower's consolidated balance sheet as of that date prepared in
accordance with GAAP (including, without limitation, all Capitalized Lease
Obligations and all Approved Subordinated Debt).
"CONSOLIDATED INTEREST EXPENSE" means, for any period with respect to a
specified Entity, without duplication of amounts, the amount classified as
interest costs and deducted in determining Consolidated Net Income of the
specified Entity for that period.
"CONSOLIDATED NET INCOME" means, for any period with respect to a
specified Entity, the net income (or loss) of the specified Entity and its
Subsidiaries for that period, determined on a consolidated basis in accordance
with GAAP; provided, however, there shall be excluded from that determination
(a) income or loss of any Entity accrued before the date that Entity becomes a
Subsidiary of the specified Entity or is merged into or consolidated with the
specified Entity or a Subsidiary of the specified Entity or the assets
constituting an Acquired Business are acquired by the specified Entity or a
Subsidiary of the specified Entity, (b) any after-tax gains or after-tax losses
attributable to extraordinary items or the discontinuation of operations, and
(c) if the specified Entity is an Acquired Business, there shall be excluded
from that determination the net income (or loss) of each Entity that was a
Subsidiary of the specified Entity at any time during that period, but ceased to
be a Subsidiary of the specified Entity prior to the Acquisition Date of the
specified Entity.
"CONSOLIDATED NET WORTH" means, as of any date, the total stockholders'
equity (including capital stock, additional paid-in capital and retained
earnings after deducting treasury stock, but excluding mandatorily redeemable
preferred stock and other equity instruments the consideration for which is, in
accordance with GAAP, classified otherwise than as a part of that stockholders'
equity) which would appear on a consolidated balance sheet of Borrower and its
Subsidiaries as of such date prepared in accordance with GAAP.
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"CONTINUING DIRECTOR" means at any time any individual who then (a) is a
member of the Board and was a member of the Board as of the IPO Closing Date or
whose nomination for his first election, or that first election, to the Board
following that date was recommended or approved by a majority of the then
Continuing Directors (acting separately or as a part of any action taken by the
Board or any committee thereof) and (ii) is not an Acquiring Person, an
Affiliate or Associate of an Acquiring Person or a nominee or representative of
an Acquiring Person or of any such Affiliate or Associate.
"COVERAGE RATIO" means, as of the end of any fiscal quarter of Borrower,
the ratio of (a) an amount equal to (i) Consolidated EBITDA, minus (ii) Income
Tax Expense of Borrower for such period (but including Income Tax Expense of an
Acquired Business during such period which was incurred prior to the Acquisition
Date of such business), both for the immediately preceding 12 calendar months,
to (b) the sum of (i) Consolidated Interest Expense, plus (ii) Consolidated
Current Maturities, plus (iii) an amount equal to twenty percent (20%) of the
Principal Debt as of the date of determination; clauses (i) and (ii) of clause
(b) shall both be for the immediately preceding 12 calendar months, except that
such calculation shall NOT include any months in such period prior to the
Acquisition Date of any Acquired Business.
"CREDIT FACILITY" means the credit facility for Borrower evidenced by
this Agreement for the purposes identified herein.
"CREDIT PERIOD" means the period commencing on the date of this
Agreement and ending on the earliest to occur of (a) the Termination Date, (b)
the date on which the obligation of Lenders to make Advances and the obligation
of the Issuing Lender to issue Letters of Credit is terminated pursuant to
SECTION 8.2, or (c) September 30, 1996, if the IPO has not occurred prior to
such date. Without limiting the foregoing, the first anniversary of the end of
the Credit Period, for purposes of this Agreement, shall be one year from the
Termination Date.
"CURRENT FINANCIAL STATEMENTS" means, on the date of this Agreement, the
financial statements provided to Agent by Borrower for Borrower and each of the
Initial Acquired Businesses (and their Subsidiaries), and thereafter the
financial statements of Borrower and its Subsidiaries then most recently
delivered to Agent pursuant to SECTION 6.1.
"DEBT" of any Person means at any date, without duplication of amounts,
(a) all indebtedness, obligations and liabilities of such Person for borrowed
money, (b) all indebtedness, obligations and liabilities of such Person
evidenced by bonds, debentures, notes or other similar instruments, whether
recourse or non-recourse and whether secured or unsecured, (c) obligations of
such Person issued or assumed as the deferred purchase of property or services
(excluding trade accounts payable, accrued
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expenses and deferred compensation and other pension, benefit and welfare
expenses arising in the ordinary course of business), (d) all Capitalized Lease
Obligations of such Person, (e) all obligations of such Person in respect of
Interest Hedge Agreements, (f) all obligations of such Person in respect of the
unfunded or unreimbursed portion of all letters of credit issued for the account
of such Person, (g) all mandatory obligations of such Person to redeem or
repurchase its outstanding preferred stock at any time prior to the first
anniversary of the end of the Credit Period , and (h) any liabilities of others
of the type described in the preceding clauses (a) through (f) in respect of
which such Person has incurred, assumed or acquired a liability by means of a
Guaranty.
"DEFAULT" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, constitute an Event of Default.
"DEFAULT RATE" means the rate per annum equal to the lesser of (a) the
rate otherwise applicable with respect to the particular Principal Debt under
SECTION 2.6(A), 3.3(A), plus 2.0%, and (b) the Maximum Lawful Rate; provided,
however, if there is no such applicable rate in respect of the circumstances for
which the Default Rate is used, the Default Rate will be the rate per annum
equal to the lesser of (a) the Variable Rate, plus 2.0%, and (b) the Maximum
Lawful Rate.
"DEPRECIATION" means, for any period with respect to a specified Entity,
without duplication of amounts, the amount classified as depreciation expense
and deducted in determining Consolidated Net Income of the specified Entity for
that period.
"DESIGNATED SUCCESSOR AGENT" means, at the time of any determination
thereof, the Lender other than Agent which has the largest Loan Percentage;
provided, however, if two or more such Lenders have the same Loan Percentage at
such time, then the Designated Successor Agent shall be such of those Lenders
having the same Loan Percentage which has the largest net worth; and provided
further, that if the Required Lenders or Borrower object to the newly named
Designated Successor Agent, or if any Lender determined to be a Designated
Successor Agent declines to serve as successor Agent, in writing delivered to
the outgoing Agent within seven Business Days after such Designated Successor
Agent is determined, then the Lender other than Agent or such rejected or
declining Designated Successor Agent which has the next largest Loan Percentage
shall be the Designated Successor Agent. For each such Lender that is a member
of a bank holding company, its net worth shall be deemed to be the consolidated
net worth of its bank holding company.
"DIDMCA" means the Depositary Institutions Deregulation and Monetary
control Act of 1980, Public Law 96-221, as amended, codified at 12 U.S.C.
ss.1735f-7.
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"DISTRIBUTION" by any Person, means (a) with respect to any Capital
Stock issued by such Person, the retirement, redemption, repurchase, or other
acquisition for value of such Capital Stock, (b) the declaration or payment
(without duplication) of any dividend or other distribution, whether monetary or
in kind, on or with respect to any Capital Stock of such Person, and (c) any
other payment or distribution of assets of a similar nature or in respect of an
equity investment in such Person.
"DOLLARS" and the "$" symbol refer to lawful currency of the United
States of America.
"EFFECTIVE DATE" means the first day of an Interest Period.
"ELIGIBLE ASSIGNEE" means any of: (a) a commercial bank organized under
the laws of the United States, or any state thereof or the District of Columbia;
(b) a savings and loan association or savings bank organized under the laws of
the United States, or any state thereof or the District of Columbia; (c) a
commercial bank organized under the laws of any other country which is a member
of the Organization for Economic Cooperation and Development (the "OECD"), or a
political subdivision of any such country, provided that such bank is acting
through a branch or agency located in the country in which it is organized or
another country which is also a member of the OECD; (d) the central bank of any
country which is a member of the OECD; or (e) an insurance company, pension
fund, credit corporation or other finance company organized under the laws of
any state of the United States; provided, however, that no institution described
in clause (a), (b), (c), (d), or (e) above shall be an Eligible Assignee unless
it has total assets in excess of $5 billion; and provided further, that an
institution described in clause (c) or (d) above must maintain a branch or
agency under the laws of the United States.
"EMPLOYEE PLAN" means at any time an employee benefit plan as defined in
Section 3(3) of ERISA that is now or was previously maintained, sponsored or
contributed to by Borrower or any ERISA Affiliate of Borrower.
"ENTITY" means any corporation, partnership, joint venture, association,
joint stock company, unincorporated organization, government or any agency or
political subdivision thereof, or any other form of entity.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all regulations issued pursuant
thereto.
"ERISA AFFILIATE" of Borrower means any Person that is treated as a
single employer with Borrower under Section 414 of the Code.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 8.1.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXEMPT PERSON" means (a) (i) Borrower, any Subsidiary of Borrower and
any Employee Plan and (ii) any Person organized, appointed or established by
Borrower for or pursuant to the terms of any such plan for the purpose of
funding any such plan or funding other employee benefits for employees of
Borrower or any Subsidiary of Borrower and (b) any of C. Clifford Wright, Jr.
("WRIGHT"), Howard S. Hoover, Jr. ("HOOVER") or William P. McCaughey
("MCCAUGHEY"), any Affiliate or Associate of Wright, Hoover or McCaughey or any
group (as that term is used in Exchange Act Rule 13d-5(b)) of which Wright,
Hoover or McCaughey or any Affiliate of Wright, Hoover or McCaughey is a member.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight federal funds transactions with members of the
Federal Reserve System arranged by federal funds brokers, as published for such
day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York or, if no such rate is so published for
any day that is a Business Day, the Federal Funds Rate for such day shall be the
average of the rate quotations for such day received by Agent from three federal
funds brokers of recognized standing.
"FEE LETTER" means the Fee Letter dated July 17, 1996, from NationsBank
and Arranger to Borrower, providing for certain fees payable by Borrower in
connection with the Credit Facility.
"FDIC PERCENTAGE" shall mean, on any day, the net assessment rate
(expressed as a percentage rounded to the next highest 1/100 of 1%), if any,
which is in effect on such day (under the regulations of the Federal Deposit
Insurance Corporation or any successor) for determining the assessments paid by
Agent to the Federal Deposit Insurance Corporation (or any successor) for
insuring Eurocurrency deposits made in dollars at Agent's principal office
(which for NationsBank shall be its principal office in Dallas, Texas). Each
determination of said percentage made by Agent shall, in the absence of manifest
error, be binding and conclusive.
"FUNDED DEBT TO EBITDA RATIO" means, as of the end of any fiscal quarter
of Borrower, the ratio of (a) Consolidated Funded Debt at that time to (b)
Consolidated EBITDA for the 12-month period then ended.
"FUNDED DEBT TO TOTAL CAPITALIZATION RATIO" means, as of the end of any
fiscal quarter of Borrower, the ratio of (a) Consolidated Funded Debt to (b) the
sum of (i) Consolidated Net Worth, plus (ii) Consolidated Funded Debt, in each
case as of such time.
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"GAAP" means generally accepted accounting principles and practices in
the United States as in effect from time to time and concurred in by the
independent certified public accountants reporting on the financial statements
of Borrower required by SECTION 6.1(A), applied on a basis consistent (except
for changes concurred in by such accountants) with the most recent audited
financial statements of Borrower delivered to Agent pursuant to such Section.
"GOVERNMENTAL AUTHORITY" means any government, any state or other
political subdivision thereof, or any Person exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"GUARANTY" means, for any Person, without duplication, any liability,
contingent or otherwise, of such Person guaranteeing or otherwise becoming
liable for any obligation of any other Person (the "PRIMARY OBLIGOR") in any
manner, whether directly or indirectly, and including, without limitation, any
liability of such Person, direct or indirect, (a) to purchase or pay (or advance
or supply funds for the purchase or payment of) such obligation or to purchase
(or to advance or supply funds for the purchase of) any security for the payment
of such obligation, (b) to purchase property, securities or services for the
purpose of assuring the owner of such obligation of the payment of such
obligation or (c) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such obligation; provided, that the term "Guaranty" does
not include endorsements for.
"IMPOSITIONS" means all real estate and personal property taxes, charges
for any easement, license or agreement maintained for the benefit of any of the
real property of Borrower or any of its Subsidiaries, or any part thereof, and
all other taxes, charges and assessments and any interest, costs or penalties
with respect thereto, general and special, ordinary and extraordinary, foreseen
and unforeseen, of any kind and nature whatsoever, which at any time prior to or
after the date hereof are assessed, levied or imposed upon any of the real
property of Borrower or any of its Subsidiaries, or any part thereof, or the
ownership, use, sale, occupancy or enjoyment thereof, in each case which, if not
timely paid or otherwise discharged, would (individually or collectively) have a
Material Adverse Effect.
"INCOME TAX EXPENSE" means, for any period with respect to a specified
Entity, without duplication of amounts, all cash income taxes paid by the
specified Entity and its Subsidiaries during that period.
"INFORMATION" means written information, including, without limitation,
data, certificates, reports, statements (excluding financial statements) and
documents.
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"INITIAL ACQUIRED BUSINESS" means each of the "Founding Companies" and
EHC" (and their respective Subsidiaries) as the quoted terms are defined in the
IPO Registration Statement.
"INITIAL ACQUISITION AGREEMENT" means, with respect to each Initial
Acquired Business, the Agreement and Plan of Reorganization filed as an exhibit
to the IPO Registration Statement pursuant to which Borrower will acquire that
Acquired Business on the IPO Closing Date.
"INTEREST ADJUSTMENT DATE" means the last day of an Interest Period.
"INTEREST HEDGE AGREEMENTS" means any and all agreements, devises or
arrangements designed to protect at least one of the parties thereto from the
fluctuations of interest rates, including, but not limited to, interest rate cap
or collar protection agreements, interest rate swap agreements or interest rate
options, as the same may be amended or modified and in effect from time to time.
"INTEREST PERIOD" means, with respect to any LIBOR Rate Advance:
(i) initially, the period commencing on the borrowing or
conversion date, as the case may be, with respect to such LIBOR Rate
Advance, and ending one, two, three, or six months thereafter, as
selected by Borrower in its Request for Advance or Rate Designation
Notice pursuant to SECTION 3.5(A), as the case may be, given with
respect thereto; and
(ii) thereafter, with respect to the continuation of such LIBOR
Rate Advance, each period commencing on the last day of the next
preceding Interest Period applicable to such LIBOR Rate Advance and
ending one, two, three, or six months thereafter, as selected by
Borrower in its Rate Designation Note pursuant to SECTION 3.5(A);
provided, that the foregoing provisions are subject to the following:
(1) any Interest Period ending on a date later than the
Termination Date shall be deemed to end on the Termination Date;
(2) any Interest Period that would otherwise end on a day that is
not a Business Day shall be extended to the next succeeding Business
Day, unless the result of such extension would be to extend such
Interest Period into another calendar month, in which event such
Interest Period shall end on the immediately preceding Business Day; and
(3) no more than seven Interest Periods may be in effect at any
time.
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"IPO" means the IPO Registration Statement has been declared effective
under the Securities Act and the shares of Common Stock registered by the IPO
Registration Statement are issued and sold by Borrower (otherwise than pursuant
to the exercise of any over-allotment option).
"IPO CLOSING DATE" means the date on which the IPO occurs.
"IPO REGISTRATION STATEMENT" means at any time the Form S-1 Registration
Statement under the Securities Act, filed by Borrower on June 18, 1996, with the
SEC, as amended at that time.
"ISSUING LENDER" means NationsBank, in its capacity as issuer of the
Letters of Credit.
"LEGAL REQUIREMENTS" means any and all present and future judicial
decisions, statutes, laws, rulings, rules, orders, regulations, permits,
licenses, certificates, or ordinances of any Governmental Authority applicable
to Borrower or any of Borrower's Subsidiaries.
"LENDERS" means each of the financial institutions listed as a "Lender"
on SCHEDULE I, as the same may be modified or amended from time to time.
"LETTER OF CREDIT" means a standby letter of credit issued by Issuing
Lender under the Credit Facility for the account of Borrower pursuant to SECTION
2.1(B).
"LETTER OF CREDIT EXPOSURE" means, at any time, the aggregate amount
available for drawing under all outstanding Letters of Credit at such time.
"LETTER OF CREDIT FEES" has the meaning set forth in SECTION 2.4(B).
"LIBOR MARGIN" means: (a) for the period from the beginning of the
Credit Period until the initial Reset Date, 0.875%; and (b) for any subsequent
period from and including any Reset Date, beginning with the initial Reset Date,
to but not including, the next Reset Date to occur, if the Funded Debt to EBITDA
Ratio calculated as of the last day of Borrower's fiscal quarter preceding the
particular Reset Date is within a range set forth in Column A in Schedule II,
the applicable per annum percentage shall be, subject to adjustment pursuant to
SECTION 2.6, as set forth for that range, in column B in SCHEDULE II.
"LIBOR RATE" means, with respect to a LIBOR Rate Advance for the
Interest Period applicable thereto, the per annum rate of interest determined by
Agent as the rate per annum (rounded upwards, if necessary, to the nearest 1/100
of 1%) appearing on Telerate Page 3750 (or any successor page) as the London
interbank offered rate
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for deposits in Dollars at approximately 11:00 a.m. (London time) two Business
Days prior to the first day of such Interest Period for a term comparable to
such Interest Period. If for any reason such rate is not available, the term
"LIBOR RATE" shall mean, for any LIBOR Rate Advance for any Interest Period
therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1
/100 of 1%) appearing on Reuters Screen LIBO Page as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period; provided, however, if more than one rate is
specified on Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates.
"LIBOR RATE ADVANCE" means an Advance which bears interest computed with
reference to the LIBOR Rate.
"LIBOR RESERVE REQUIREMENT" means, on any day in any Interest Period,
that percentage which is in effect on such day, as provided by the Federal
Reserve System for determining the maximum reserve requirements applicable to
Agent (including, without limitation, basic, supplemental, marginal and
emergency reserves) under Regulation D of the Board of Governors of the Federal
Reserve System with respect to "Eurocurrency liabilities" having a term equal to
such Interest Period (as such term is currently defined in Regulation D, or
under any similar or successor regulation with respect to Eurocurrency
liabilities or Eurocurrency funding) or, if reserves for Eurocurrency
liabilities are not separately stated in such regulations, the other applicable
category of liabilities which includes deposits by reference to which the
interest rate on a LIBOR Rate Advance is determined. Each determination by Agent
of the LIBOR Reserve Requirement, shall, in the absence of manifest error, be
conclusive and binding.
"LIEN" means with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"LOAN COMMITMENT AMOUNT" means, with respect to any Lender, the amount
of the Committed Sum indicated as such Lender's Loan Commitment Amount opposite
the name of such Lender on SCHEDULE I, as such amount may be increased or
reduced from time to time pursuant to assignments in accordance with SECTION
10.10 or reduced pursuant to SECTION 3.6(C).
"LOAN DOCUMENTS" means this Agreement, the Notes, the Fee Letter, the
LOC Applications, each Subsidiary Guaranty, and all other agreements,
certificates,
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documents or instruments evidencing or securing the Credit Facility or otherwise
executed and delivered to Agent or Lenders on or after the date hereof from time
to time by Borrower or any Subsidiary of Borrower pursuant to this Agreement, as
the same may be modified, amended, renewed, extended, rearranged, restated or
replaced from time to time.
"LOAN PERCENTAGE" means, with respect to any Lender, the percentage
indicated as such Lender's Loan Percentage opposite the name of such Lender on
SCHEDULE I, as such percentage may be adjusted from time to time to account for
any assignment by or to such Lender of all or any portion of its interest under
this Agreement in accordance with SECTION 10.10.
"LOC APPLICATION" has the meaning set forth in SECTION 2.3(A).
"MARGIN REGULATIONS" means Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System, as in effect from time to time.
"MARGIN STOCK" means "margin stock" as defined in Regulation U.
"MATERIAL ADVERSE CHANGE" means a Material Adverse Effect has occurred
and is continuing.
"MATERIAL ADVERSE EFFECT" means any act, circumstance or event which (a)
causes a Default, (b) is material and adverse to the financial condition or
operations of Borrower and its Subsidiaries taken as or whole or (c) materially
and adversely affects the validity or enforceability of any Loan Document.
"MAXIMUM LAWFUL RATE" means, for any Lender, the maximum rate (or, if
the context so requires, an amount calculated at such rate) of interest which,
at the time in question, would not cause the interest charged hereunder or any
other Loan Document to exceed the maximum amount which such Lender would be
allowed to contract for, charge, take, reserve or receive under applicable law,
after taking into account, to the extent required by applicable law, any and all
relevant payments, fees and charges under the Loan Documents. If and to the
extent the laws of the State of Texas are applicable for purposes of determining
the "MAXIMUM LAWFUL RATE," such term shall mean the "indicated rate ceiling"
from time to time in effect under Article 5069-1.04, Title 79, Revised Civil
Statutes of Texas, 1925, as amended, or, if permitted by applicable law and
effective upon the giving of the notices required by such Article 5069-1.04 (or
effective upon any other date otherwise specified by applicable law), the
"quarterly ceiling" or "annualized ceiling" from time to time in effect under
such Article 5069-1.04, whichever Agent shall elect to substitute for the
"indicated rate ceiling," and vice versa, each such substitution to have the
effect provided in such Article 5069-1.04, and Agent shall be entitled to make
such election
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from time to time and one or more times and, without notice to Borrower, to
leave any such substitute rate in effect for subsequent periods in accordance
with subsection (h)(1) of such Article 5069-1.04. If under all applicable laws,
there is no legal limitation on the amount or rate of interest that may be
charged on amounts outstanding under the Credit Facility, there shall be no
Maximum Lawful Rate, notwithstanding any reference thereto herein or in any
other Loan Document.
"NATIONSBANK" means NationsBank of Texas, N.A., a national banking
association, and its successors.
"NOTE" means a promissory note in the form of EXHIBIT A issued by
Borrower to a Lender pursuant to SECTION 3.1, as such promissory note may be
amended, restated, replaced, substituted, modified, increased and rearranged
from time to time.
"OBLIGATIONS" means all indebtedness, obligations and liabilities, or
any part thereof, of Borrower to Agent, Issuing Lender, or any Lender now or
hereafter existing or arising under or in connection with this Agreement, the
Notes or any other Loan Document, including, without limitation, (a) all
Advances outstanding, and all accrued interest owing, under the Notes, (b) all
reasonable costs, expenses and attorneys' fees of counsel to Agent and Lenders
(as a group) incurred in the documentation of any amendments, waivers or
extensions of the Loan Documents, (c) the reimbursement and payment of all sums
which are advanced by Agent or any Lender to pay or satisfy amounts required to
be paid by Borrower under this Agreement or under any other Loan Document, (d)
all amounts owed by Borrower to any Lender under Interest Hedge Agreements
between Borrower and such Lender entered into in connection with this Agreement
and (e) to the extent permitted by SECTION 10.4, the reasonable costs and
expenses of Agent and Lenders (including reasonable fees and expenses of counsel
to Agent or any Lender) incurred in connection with the preservation of their
respective Rights under the Loan Documents, in the enforcement of the Loan
Documents or in the collection of any amounts owing to Agent or Lenders
thereunder (specifically including, without limitation, any of the foregoing
incurred in connection with any bankruptcy or other insolvency proceedings of
Borrower), regardless of whether such obligations and liabilities are direct,
indirect, fixed, contingent, liquidated, unliquidated, joint, several or joint
and several. The Obligations shall include all renewals, extensions,
modifications, rearrangements and replacements of any of the above described
obligations and liabilities.
"OWNER'S COMPENSATION" means, for any period, with respect to any
Acquired Business that is an Entity, the amount equal to the sum of all salaries
and bonuses paid by that Entity and its Subsidiaries to the owners of that
Entity and their spouses during that period.
"PBGC" means the Pension Benefit Guaranty Corporation and its
successors.
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"PENSION PLAN" means any Employee Plan that is now or was previously
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code.
"PERMITTED DEBT" of Borrower or any Subsidiary of Borrower means:
(a) the Debt included in the Obligations;
(b) the Subsidiary Guaranties;
(c) Debt of any Subsidiary of Borrower owing to Borrower or any other
Subsidiary of Borrower or Debt of Borrower to any of its Subsidiaries;
(d) any Interest Hedge Agreements;
(e) through and including March 31, 1997, only, Debt owing to Victor
Davidson and Wanda Davidson, as of the date hereof (which in any event shall not
exceed an aggregate amount of $1,000,000.00);
(f) prior to the Closing Date, the Debt to be listed prior to the
Closing Date on Schedule IV (which Schedule IV shall be provided to Agent prior
to the Closing Date);
(g) for a period of 10 Business Days following the Acquisition Date of
an Acquired Business only, Debt owing by such Acquired Business and its
Subsidiaries;
(h) Approved Subordinated Debt; and
(i) additional Debt (including Secured Debt) not to exceed outstanding
during any fiscal year of Borrower the amount equal to 5% of Borrower's
Consolidated Net Worth, calculated as of the end of any fiscal quarter of
Borrower (including the Debt existing one day after the Closing Date as set
forth in Schedule IV); provided, that Secured Debt at any time outstanding
during any fiscal year of Borrower, determined without duplication of amounts,
shall not exceed the amount equal to 2.5% of Borrower's Consolidated Net Worth
as of the end of any fiscal quarter of Borrower.
"PERMITTED ENCUMBRANCES" means, as applied to the property or assets of
any specified Person:
(a) Liens created pursuant to any Loan Document;
(b) Liens for Taxes and Impositions if the same are not at the time due
and delinquent or are being contested in good faith and by appropriate
proceedings, and
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if the specified Person has set aside on its books such reserves as may be
required by GAAP;
(c) Liens of carriers, warehousemen, mechanics, laborers, materialmen
and landlords and other similar Liens arising by operation of law for sums not
yet due or being contested in good faith and by appropriate proceedings, if the
specified Person has set aside on its books such reserves as may be required by
GAAP;
(d) Liens incurred in the ordinary course of the specified Person's
business in connection with workmen's compensation, unemployment insurance and
other social security legislation (other than pursuant to ERISA or Section
412(n) of the Code) or to secure liabilities to insurance carriers under
insurance or self-insurance arrangements and other obligations of a like nature,
so long as, in each case with respect to this clause (d), such Liens do not
secure obligations constituting Debt;
(e) easements, rights-of-way, reservations, restrictions and other
similar encumbrances incurred in the ordinary course of the specified Person's
business or existing on property and not materially interfering with the
ordinary conduct of the specified Person's business or the use of that property;
(f) defects or irregularities in the specified Person's title to its
real properties which do not materially (i) diminish the value of the surface
estate or (ii) interfere with the ordinary conduct of the specified Person's
business or the use of any of such properties;
(g) any interest or title of any consignor or similar Person in assets
being held by the specified Person pursuant to any consignment arrangement
entered into in the ordinary course of the specified Person's business;
(h) rights of a common owner of any interest in property held by the
specified Person and such common owner as tenants in common or through other
common ownership;
(i) Liens incurred in the ordinary course of the specified Person's
business to secure the performance of bids, tenders, trade contracts, statutory
obligations, surety and appeal bonds, performance and return of money bonds and
other obligations of like nature;
(j) any interest or title of any vendor or consignor or similar Person
(including Maytag and GECC) in assets being held by Adcot, Inc. pursuant to any
floor plan financing arrangement, consignment arrangement, or other similar
financing arrangement entered into in the ordinary course of business (but only
to the extent
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such floor plan financing arrangement, consignment arrangement, or other
financing arrangement relates to discontinued operations of Adcot, Inc.);
(k) pre-judgment Liens and Liens arising from any judgment, decree or
other order in existence, provided, that no Event of Default has occurred with
respect thereto pursuant to Section 8.1(j);
(l) Liens securing Secured Debt as permitted by SECTION 7.3 and other
Liens to be listed prior to the Closing Date on Schedule III, which shall be
provided to and approved by Agent prior to the Closing Date;
(m) rights reserved to or vested in any Governmental Authority by the
terms of any right, power, franchise, grant, license or permit, or by any
provision of law, to terminate such right, power, franchise, grant, license or
permit or to purchase, condemn, expropriate or recapture or to designate a
purchaser of any of the property of the specified Person;
(n) rights reserved to or vested in any Governmental Authority to
control, regulate or use any property of the specified Person;
(o) any obligations or duties affecting the property of the specified
Person to any Governmental Authority with respect to any franchise, grant,
license or permit;
(p) zoning, planning and environmental laws and ordinances and municipal
regulations;
(q) legal or equitable encumbrances deemed to exist by reason of
fraudulent conveyance or transfer laws; and
(r) legal or equitable encumbrances deemed to exist by reason of
negative pledge clauses such as SECTION 7.5.
"PERMITTED INVESTMENTS" means:
(a) securities with maturities of one year or less from the date of
acquisition issued or fully guaranteed or insured by the United States
Government or any agency thereof;
(b) certificates of deposit and Eurodollar time deposits with maturities
of one year or less from the date of acquisition and overnight bank deposits of
any commercial bank (i) having capital and surplus in excess of $500,000,000.00
or (ii) which has a short-term commercial paper rating which satisfies the
requirements set forth in clause (d) of this definition;
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(c) repurchase obligations of any commercial bank satisfying the
requirements of clause (b) of this definition, having a term of not more than 30
days with respect to securities issued, fully guaranteed or insured by the
United States Government or any agency thereof;
(d) commercial paper rated P-1 by Moody's Investors Service, Inc. or A-1
by Standard & Poor's Ratings Group on the date of acquisition;
(e) securities with maturities of one year or less from the date of
acquisition insured or fully guaranteed by any state, commonwealth or territory
of the United States or by any political subdivision or taxing authority of such
state, commonwealth or territory;
(f) securities with maturities of one year or less from the date of
acquisition backed by standby letters of credit issued by any commercial bank
satisfying the requirements of clause (b) of this definition;
(g) shares of money market mutual or similar funds which invest
primarily in assets satisfying the requirements of clauses (a) through (f) of
this definition;
(h) time deposits and certificates of deposit in any Lender and other
investments, securities and products offered by any Lender (including Eurodollar
deposits);
(i) loans, advances, extensions of credit and capital contributions to,
and purchases of the Capital Stock of or other interests in, (A) Subsidiaries of
Borrower, and (B) corporations formed directly or indirectly by Borrower to
become Subsidiaries of Borrower; and
(j) Acquired Businesses.
"PERMITTED LINE OF BUSINESS" means any of the following: (a)
maintenance, repair, and replacement (collectively, "MAINTENANCE") services for
heating, ventilating, and air conditioning systems in homes and commercial
buildings, including indoor air quality services; (b) maintenance services for
plumbing systems in homes and commercial buildings; (c) maintenance services for
electrical and other systems and appliances (including prefabricated fireplaces)
in homes and commercial buildings; (d) installing any one of the foregoing
systems in homes and commercial buildings; and (e) any reasonable or logical
extension of any of the foregoing.
"PERSON" means any individual, Entity, estate, trust or any other
organization, including a government or political subdivision or any agency or
instrumentality thereof.
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"PRINCIPAL DEBT" means, at the time of any determination thereof, the
then aggregate unpaid principal amount of all Advances.
"QUALIFIED PREFERRED STOCK" means any class of Capital Stock of Borrower
which is preferred in respect of the right to receive dividends or in
liquidation and which, by its terms, (i) is not subject to any mandatory
redemption or other mandatory purchase obligation on the part of Borrower or any
Subsidiary of Borrower prior to the first anniversary of the end of the Credit
Period and (ii) is not entitled to any dividend or other Distribution thereto
prior to the first anniversary of the end of the Credit Period other than (A)
dividends or other Distributions made in the same or any other class or series
of Qualified Preferred Stock or Common Stock and (B) distributions in
liquidation of Borrower after claims of creditors of Borrower have been paid in
full.
"RATE DESIGNATION NOTICE" means a notice of interest rate selection in
the form of EXHIBIT E, including, without limitation, as applicable, Borrower's
selection of (a) the Interest Periods during which the Adjusted LIBOR Rate will
apply, (b) the Effective Date of each such Interest Period, (c) the aggregate
amount of LIBOR Rate Advances subject to each such Interest Period and (d) the
aggregate amount of any LIBOR Rate Advances to be converted to Variable Rate
Advances.
"REGISTER" has the meaning set forth in SECTION 10.10.
"REGULATION U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time, and any successor or
other regulation or official interpretation of the Board of Governors relating
to the extension of credit by banks for the purpose of purchasing or carrying
Margin Stock that is applicable to member banks of the Federal Reserve System.
"REGULATORY CHANGE" means the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any Governmental
Authority charged with the administration thereof, in each case, after the date
hereof.
"RENTAL ADJUSTMENT" means, for any period with respect to the
Consolidated Net Income of any Acquired Business, without duplication of
amounts, the amount by which the Rental Expense deducted in determining the
Consolidated Net Income of that Acquired Business for that period would be
reduced as a nonrecurring item in a pro forma statement of operations of that
Acquired Business for such period prepared in accordance with GAAP.
"RENTAL EXPENSE" means, for any period, with respect to any Acquired
Business that is an Entity, the amount classified as rental expense and deducted
in determining the Consolidated Net Income of that Entity for that period.
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"REQUEST FOR ADVANCE" means a written request for Advances or a Letter
of Credit, substantially in the form of EXHIBIT B, which (a) specifies (i) the
date of such borrowing or issuance of such Letter of Credit, which shall be a
Business Day, (ii) the aggregate amount of such borrowing or the face amount of
such Letter of Credit and (iii) the aggregate amount of LIBOR Rate Advances (and
the related Interest Periods therefor) and Variable Rate Advances constituting
such borrowing, (b) contains a certification of an Authorized Officer of
Borrower as of the date of such borrowing or issuance of such Letter of Credit
certifying (i) that the intended use of the proceeds of such borrowing or the
intended use of such Letter of Credit does not violate the provisions of this
Agreement (including, without limitation, SECTIONS 2.1, 5.15, and 6.9)) and (ii)
as to the matters set forth in SECTION 4.2(C) and 4.2(D), in the case of a
borrowing, or the matters set forth in SECTION 4.3(D) and 4.3(E), in the case of
a Letter of Credit, and (c) with respect to a borrowing, the proceeds of which
will be used to acquire an Acquired Business, is accompanied by all documents
and instruments necessary to satisfy in all material respects all applicable
requirements of this Agreement to enable such acquisition to constitute an
Acquired Business.
"REQUIRED LENDERS" means:
(a) Except as provided in clause (b) or (c) below or as expressly stated
otherwise in this Agreement or in any other Loan Document, at any time and with
respect to any matter hereunder or relating to the Credit Facility, Lenders
holding at the time in question a portion of the Credit Facility (including
participations in Letters of Credit) equal to or greater than sixty-six and
two-thirds percent (66 2/3%) of the sum of (A) the aggregate unpaid principal
amount of the Notes, plus (B) the Letter of Credit Exposure (or, if no Advances
or Letters of Credit are outstanding, then Lenders holding at the time in
question sixty-six and two-thirds percent (66 2/3%) of the aggregate Loan
Commitment Amounts of all Lenders); or
(b) With respect to (i) any alteration of the interest rate applicable
to the Credit Facility, (ii) any alteration of the amount of any fees payable to
the Lenders (excluding the Agent in such capacity or the Arranger) under this
Agreement, (iii) any extension of the maturity date of the Credit Facility or
the due date of any installment of principal or interest or any fees on the
Credit Facility, or (iv) forgiveness of any principal or interest under any
Note, (v) any increase in the amount of the Credit Facility, (vi) the
reinstatement of the Notes and other indebtedness pursuant to the provisions in
SECTION 8.2(A) hereof, (vii) any consent of Lenders required by SECTION
10.10(A)(I), or (viii) any alteration of the provisions of this definition of
Required Lenders, one hundred percent (100%) of the Lenders.
"RESET DATE" means any of (a) the Acquisition Date of an Acquired
Business in which the cash consideration for the Acquired Business is in excess
of $5,000,000.00, (b) the 45th day after the end of each of the first three
fiscal quarters
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of each fiscal year of Borrower, (c) the earlier to occur of (i) the 90th day
after the end of each of Borrower's fiscal years or (ii) the date Borrower
publicly releases a report of its results of operations for that fiscal year,
and (d) the date of any single principal payment on the Credit Facility in
excess of $5,000,000.00.
"RESPONSIBLE OFFICER" means, with respect to Borrower, the Chairman of
the Board, the President, the Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer, the Controller, the Treasurer or any Vice
President of Borrower.
"RIGHTS" means rights, remedies, powers, privileges and benefits.
"SEC" means the federal Securities and Exchange Commission and its
successors.
"SECURED DEBT" means the portion of the Permitted Debt described in the
first clause of subparagraph (i) of the definition of Permitted Debt, which
constitutes Capitalized Lease Obligations or secured purchase money
indebtedness.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STRUCTURING FEE" means the "Structuring Fee" provided for in the Fee
Letter.
"SUBSIDIARY" means, (a) with respect to any specified Person, other than
Borrower, any corporation or other Entity of which securities or other ownership
interests having ordinary voting power to elect a majority of the board of
directors or other Persons performing similar functions (including that of a
general partner) are at the time directly or indirectly owned collectively, by
such Person and any Subsidiaries of such Person, and (b) for Borrower, any
corporation wholly-owned by Borrower or any other Entity of which 100% of the
securities or other ownership interests are at the time directly or indirectly
owned, collectively, by Borrower and any Subsidiaries of Borrower. The term
Subsidiary shall include Subsidiaries of Subsidiaries (and so on).
"SUBSIDIARY GUARANTY" means each Guaranty Agreement executed and
delivered by a Subsidiary of Borrower, substantially in the form of Exhibit F,
guaranteeing the payment and performance of the Obligations.
"TAXES" means all taxes, assessments, filing or other fees, levies,
imposts, duties, deductions, withholdings, stamp taxes, interest equalization
taxes, capital transaction taxes, foreign exchange taxes or other charges of any
nature whatsoever, from time to time or at any time imposed by law or any
federal, state or local governmental agency; provided, however, with respect to
Agent, any Lender, and Issuing Lender, the term "Taxes" shall not include any
income taxes, franchise taxes
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based on income taxes, doing business taxes, or bank share taxes of any such
Person or any Affiliate thereof.
"TELERATE PAGE" means the British Bankers Association LIBOR Rates
(determined at 11:00 a.m. London time) that are published by Dow Jones Telerate,
Inc.
"TERMINATION DATE" means September 30, 1999.
"UCC" means the Uniform Commercial Code in effect in the State of Texas,
as amended, or, if stated with reference to another jurisdiction, the Uniform
Commercial Code as adopted in the relevant jurisdiction, as amended.
"UNDERWRITING FEE" means the "Underwriting Fee" provided for in the Fee
Letter, minus $37,500.00.
"VARIABLE RATE" means, for any day, a fluctuating rate of interest equal
to (a) the Base Rate in effect on such day, plus (b) the Base Rate Margin in
effect on such day.
"VARIABLE RATE ADVANCE" means an Advance which bears interest computed
with reference to the Variable Rate.
"VOTING SHARES" means: (a) in the case of any corporation, Capital Stock
of that corporation of the class or classes having general voting power under
ordinary circumstances to elect a majority of that corporation's board of
directors; and (b) in the case of any other Entity, Capital Stock of the class
or classes having general voting power under ordinary circumstances equivalent
to the Voting Shares of a corporation.
Section 1.2 SINGULAR AND PLURAL OF DEFINITIONS. Each term defined in the
singular form in SECTION 1.1 shall mean the plural thereof when the plural form
of such term is used in this Agreement, and each term defined in the plural form
in SECTION 1.1 shall mean the singular thereof when the singular form of such
term is used in this Agreement.
Section 1.3 MONEY. Unless stipulated otherwise, all references herein or
in any of the Loan Documents to "DOLLARS," "$," "MONEY," "PAYMENTS" or other
similar financial or monetary terms are references to lawful money of the United
States of America.
Section 1.4 CAPTIONS; REFERENCES. The captions in this Agreement and in
the table of contents hereof are for convenience of reference only and shall not
define, affect or limit any of the terms or provisions hereof. All references
herein to "ARTICLES" and "SECTIONS" are, unless specified otherwise, references
to articles and sections of this Agreement. Unless specifically indicated
otherwise, all references herein to an
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"EXHIBIT," "ANNEX" or "SCHEDULE" are references to exhibits, annexes or
schedules attached hereto, all of which are incorporated herein and made a part
hereof for all purposes, the same as if set forth fully herein, it being
understood that if any exhibit, annex or schedule attached hereto which is to be
executed and delivered contains blanks, the same shall be completed correctly
and in accordance with this Agreement prior to or at the time of the execution
and delivery thereof. The words "HEREIN," "HEREOF," "HEREUNDER" and other
similar compounds of the word "HERE" when used in this Agreement shall refer to
this entire Agreement and not to any particular provision or Section unless
specifically indicated otherwise.
Section 1.5 ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made and all financial statements
required to be delivered hereunder shall be prepared in accordance with GAAP.
Section 1.6 KNOWLEDGE. References in this Agreement or any other Loan
Document to knowledge of Borrower or any Subsidiary of Borrower of events or
circumstances shall be deemed to refer to events or circumstances of which a
Responsible Officer has knowledge.
ARTICLE II
TERMS OF CREDIT FACILITY COMMITMENT
Section 2.1 CREDIT FACILITY COMMITMENT. (a) ADVANCES. Subject to and
upon the terms, covenants and conditions of this Agreement, each Lender
severally agrees to make Advances to Borrower in the manner set forth in SECTION
2.2. The proceeds of the Advances shall be used by Borrower for general
corporate purposes, including, without limitation, the refinancing on the
Closing Date of certain obligations of Borrower and its Subsidiaries, working
capital and the acquisition of Acquired Businesses. Subject to and upon the
terms, covenants and conditions of this Agreement, Borrower may borrow, repay
and reborrow under this Agreement; provided, that (i) each Advance must be made
on a Business Day and no later than the Business Day immediately preceding the
Termination Date, (ii) each borrowing must be in an amount not less than the
respective amounts provided for in SECTION 2.2, as applicable, and (iii) the
Principal Debt shall never exceed an amount equal to the Committed Sum, less the
Letter of Credit Exposure.
(b) LETTERS OF CREDIT. Subject to and upon the terms, covenants, and
conditions of this Agreement, the Issuing Lender shall issue Letters of Credit
for the account of Borrower from time to time for any of the purposes for which
Borrower can obtain an Advance; provided, that (i) each Letter of Credit shall
be issued on a Business Day, (ii) after the issuance of any Letter of Credit,
(A) the Letter of Credit Exposure, plus the Principal Debt, must be less than or
equal to the Committed Sum,
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and (B) the Letter of Credit Exposure shall not exceed Five Million and No/100
Dollars ($5,000,000.00), and (iii) when issued, such Letter of Credit must have
an expiration date no later than one Business Day prior to the Termination Date.
(c) In no event shall any Lender be required to make any Advances in
excess of such Lender's Loan Percentage of any borrowing requested by Borrower
under this SECTION 2.1 or which, after giving effect to such Advance would cause
the aggregate amount of Advances owing to such Lender to exceed such Lender's
Loan Commitment Amount.
Section 2.2 METHOD OF BORROWING. Borrower shall be entitled to
obtain Advances pursuant to SECTION 2.1 in the following manner:
(a) VARIABLE RATE ADVANCES. In the case of Variable Rate Advances,
Borrower, through one of its Authorized Officers, shall give Agent, prior to
11:00 a.m. (Houston time) on the date of any such proposed borrowing, an
irrevocable Request for Advance, accompanied by any documents required by
ARTICLE IV. The aggregate amount of Variable Rate Advances to be made on any
funding date shall not be less than $200,000.00 or an integral multiple of
$100,000.00 in excess thereof.
(b) LIBOR RATE ADVANCES. In the case of LIBOR Rate Advances, Borrower,
through one of its Authorized Officers, shall give Agent, prior to 12:00 noon
(Houston time) at least three Business Days prior to the proposed borrowing
date, an irrevocable Request for Advance, accompanied by any documents required
by ARTICLE IV. LIBOR Rate Advances shall in all cases be subject to availability
and to SECTION 3.5. The aggregate amount of LIBOR Rate Advances to be made on
any funding date shall not be less than $1,000,000.00 or an integral multiple of
$100,000.00 in excess thereof.
(c) NOTICE TO LENDERS. Agent shall promptly notify Lenders of each
notice received from Borrower pursuant to this SECTION 2.2. Each Lender shall,
not later than 1:00 p.m. (Houston time) with respect to Variable Rate Advances
and 12:00 noon (Houston time) with respect to LIBOR Rate Advances, on the date
of any borrowing, deliver to Agent, at its address set forth on SCHEDULE I, an
amount equal to such Lender's Loan Percentage of such borrowing in immediately
available funds in accordance with Agent's instructions. Prior to 2:00 p.m.
(Houston time) on the date of any borrowing, Agent shall, subject to
satisfaction of the conditions set forth in ARTICLE IV, disburse the amounts
made available to Agent by Lenders by (i) transferring such amounts by wire
transfer pursuant to Borrower's instructions or (ii) in the absence of such
instructions, crediting such amounts to the account of Borrower maintained with
Agent.
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Section 2.3 METHOD OF ISSUING LETTERS OF CREDIT; PARTICIPATIONS THEREIN;
PAYMENTS THEREUNDER.
(a) ISSUANCE OF LETTERS OF CREDIT. Borrower shall be entitled to have a
Letter of Credit issued by Issuing Lender pursuant to SECTION 2.1 upon delivery
of a Request for Advance by an Authorized Officer of Borrower to Agent and
Issuing Lender prior to 12:00 noon (Houston time) at least three Business Days
prior to the proposed issuance date selected by Borrower in such request,
together with a completed and executed letter of credit application and
agreement on the customary form of Issuing Lender then in effect (the "LOC
APPLICATION"). In the event of a conflict between the provisions of the LOC
Application and this Agreement, the provisions of this Agreement shall govern.
The requested terms of such Letter of Credit shall be reasonably acceptable to
Issuing Lender. Upon satisfaction of the applicable conditions precedent set
forth in ARTICLE IV and subject to the other terms and conditions of this
Agreement, Issuing Lender shall issue such Letter of Credit within three
Business Days after receipt by Issuing Lender of the LOC Application therefor.
(b) LENDERS' PARTICIPATION IN LETTERS OF CREDIT. Immediately upon the
issuance of each Letter of Credit, Issuing Lender shall be deemed to have sold
and transferred to each Lender, and each Lender shall be deemed to have
purchased and received from Issuing Lender, in each case irrevocably and without
any further action by any party, an undivided interest and participation in such
Letter of Credit, each drawing thereunder and the obligations of Borrower under
this Agreement in respect thereof in an amount equal to such Lender's Loan
Percentage of the maximum amount available to be drawn under such Letter of
Credit (assuming compliance with all conditions to drawing).
(c) PAYMENT OF LETTER OF CREDIT DRAWINGS. The payment by Issuing Lender
of a draft drawn under any Letter of Credit shall constitute for all purposes of
this Agreement the making by Issuing Lender of a Variable Rate Advance in the
amount of such draft. In the event that an Advance by Issuing Lender in respect
of a drawing under any Letter of Credit is not reimbursed by Borrower by 12:00
noon (Houston time) on the first Business Day after such Advance is made,
Issuing Lender shall promptly so notify each other Lender, whereupon each such
Lender shall, on the first Business Day following such notification, make a
Variable Rate Advance by depositing at Agent's office for the account of Issuing
Lender, in same day funds, an amount equal to such Lender's participation in
such drawing. In the event that any Lender fails to make such amount available
to Agent for the account of Issuing Lender, Issuing Lender shall be entitled to
recover such amount on demand from such Lender, together with interest thereon
at a rate per annum equal to the lesser of (i) the Maximum Lawful Rate or (ii)
the Federal Funds Rate. Each Advance made pursuant to this SECTION 2.3(C) shall
be made irrespective of the conditions precedent otherwise applicable to
Advances hereunder.
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Section 2.4 FEES. (a) COMMITMENT FEE. Borrower agrees to pay to Agent
for the account of each Lender a non-refundable commitment fee (the "COMMITMENT
FEE") on such Lender's Loan Percentage of the average daily Available Commitment
during the Credit Period at the Commitment Fee Rate in effect from time to time,
calculated on the basis of a 360-day year for the actual number of days elapsed,
payable in arrears on the first day of each calendar quarter, commencing January
1, 1997, with a final payment of such Commitment Fee being due and payable on
the last day of the Credit Period.
(b) LETTER OF CREDIT FEES. On the date each Letter of Credit is issued,
Borrower shall pay to Agent for the account of each Lender and the Issuing
Lender a non-refundable letter of credit fee (the "LETTER OF CREDIT FEE") equal
to the greater of (i) $750 or (ii) the amount equal to the product of (x) the
face amount of such Letter of Credit multiplied by the sum of (A) the LIBOR
Margin in effect on such date, plus (B) 0.25%, times (y) the fraction the
numerator of which is the number of days in the stated term of the Letter of
Credit and the denominator of which is 360. One-eighth (1/8th) of the Letter of
Credit Fee shall be paid by Agent to Issuing Lender, and the remaining amount
shall be paid to Lenders (including Issuing Lender, in its capacity as a
"Lender") ratably in accordance with their respective Loan Percentages.
(c) UNDERWRITING FEE. Notwithstanding any contrary provision of the Fee
Letter, in consideration of Arranger arranging for and underwriting the Credit
Facility, Borrower shall pay to Arranger on the IPO Closing Date the
Underwriting Fee.
(d) STRUCTURING FEE. Notwithstanding any contrary provision of the Fee
Letter, in consideration of Arranger analyzing and structuring the Credit
Facility, Borrower shall pay to Arranger on the IPO Closing Date the Structuring
Fee.
(e) AGENT'S FEE. Notwithstanding any contrary provision of the Fee
Letter, on the IPO Closing Date and on October 1 of each year, beginning on
October 1, 1997, during the Credit Period, Borrower shall pay to Agent the
Agent's Fee.
Section 2.5 ADDITIONAL ACQUIRED BUSINESSES. (a) Borrower shall deliver
to Agent, prior to the Acquisition Date of any Acquired Business (other than the
Initial Acquired Businesses) by Borrower or any of its Subsidiaries, each of the
following:
(i) a copy of the agreement pursuant to which the Acquired
Business and its Subsidiaries will be acquired;
(ii) a certificate setting forth in reasonable detail (in a
manner and on a form satisfactory to Agent) (x) the nature and amount of
the Acquisition Consideration to be paid for the Acquired Business and
its Subsidiaries, which shall include a statement that when all earn-out
and other contingent obligations
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are added to the amount of such Acquisition Consideration, Borrower has
reasonably determined that the aggregate amount of cash consideration
for the acquisition of such Acquired Business will not exceed
$5,000,000.00, and (y) the Acquisition Consideration for each Acquired
Business which has an Acquisition Date within 12 months prior to the
Acquisition Date of the Acquired Business which is being acquired, and
all adjustments made thereto in order to reflect amounts actually paid
under any contingent earn-out or other contingent obligation;
(iii) a certificate setting forth in reasonable detail (prepared
in a manner and on a form satisfactory to Agent) the Consolidated Funded
Debt to be outstanding on the Acquisition Date of the Acquired Business
after giving effect to the payment of the Acquisition Consideration
therefor and the incurrence, if any, of Debt in connection therewith;
(iv) If and to the extent the Acquired Business and any of its
Subsidiaries will be Subsidiaries of Borrower, the Charter Documents of
the Acquired Business and each such Subsidiary, all assumed name
certificates used by the Acquired Business and each such Subsidiary, and
evidence that the Acquired Business and each such Subsidiary have not
dissolved and are in good standing and have authority to transact
business in all applicable jurisdictions, and are insured in the manner
required by this Agreement;
(v) a search from a reporting service acceptable to Agent, of all
applicable jurisdictions, detailing all liens and security interests
against the assets of the Acquired Business and its Subsidiaries being
acquired; and
(vi) all other items to be delivered in order to satisfy all of
the Acquisition Criteria.
(b) Borrower shall be entitled, but shall not be obligated, with respect
to any Acquired Business, to include (as contemplated by clause (b) of the
definition herein of Consolidated EBITDA) the operating results of that Acquired
Business prior to its Acquisition Date in the calculation of Consolidated EBITDA
for the period in which that Acquisition Date occurs by delivering to Agent
prior to the first calculation hereunder of Consolidated EBITDA in which it
elects to effect such inclusion a certificate setting forth in reasonable detail
(prepared on a form and in a manner acceptable to Agent) the pro forma effects
of such inclusion. Except as provided in SECTION 2.6 for its purposes only, the
inclusion of the operating results of any Acquired Business during any period
for which Consolidated EBITDA is being calculated shall extend from and
including the beginning of that period through, but not including, the
Acquisition Date of that Acquired Business.
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(c) Within five Business Days following the acquisition of any Acquired
Business (including, without limitation, the Initial Acquired Businesses) by
Borrower or one of its Subsidiaries, Borrower shall deliver to Agent: (i) copies
of all closing documents delivered by the Acquired Business and its sellers in
satisfaction of the conditions to closing of the acquisition by Borrower or one
of its Subsidiaries, as the case may be; and (ii) if the Acquired Business is a
new Subsidiary of Borrower, a Subsidiary Guaranty executed and delivered by that
Entity (and all Subsidiaries of such Entity which remain in existence after the
acquisition), together with all opinions, resolutions, and certificates required
by Agent to evidence that the delivery of all Subsidiary Guarantys are duly
authorized.
(d) Within 60 days following the acquisition of any Acquired Business
(including, without limitation, the Initial Acquired Businesses), Borrower shall
deliver to Agent evidence that, except for Permitted Encumbrances, all liens on
the assets of the Acquired Business and its Subsidiaries (and, if the Acquired
Business or its Subsidiaries is an Entity whose outstanding Capital Stock was
acquired, on that Capital Stock) have been released or otherwise terminated.
(e) Within 180 days following the acquisition of any Acquired Business
(including, without limitation, the Initial Acquired Businesses), Borrower shall
provide to Agent any of the items listed in subsection (a) that Agent has agreed
in writing may be delivered after the acquisition of the Acquired Business.
Section 2.6 MARGIN AND FEE RATE ADJUSTMENTS. (a) If a Reset Date of the
type described in clause (a) of the definition herein of Reset Date occurs,
Borrower shall on or within five Business Days after such Reset Date, deliver to
Agent a certificate setting forth in reasonable detail (prepared in a manner and
on a form acceptable to Agent) the Funded Debt to EBITDA Ratio then most
recently determined (as such ratio may then have been most recently adjusted
during the quarter pursuant to this SECTION 2.6, but only to the extent any such
adjustment did not occur prior to a Reset Date of the type described in clause
(b) or clause (c) of the definition of Reset Date), as adjusted by (i)
substituting the Consolidated Funded Debt at such Reset Date for the
Consolidated Funded Debt used in that determination (or then most recent such
adjustment, as the case may be, but only to the extent such adjustment did not
occur prior to a Reset Date of the type described in clause (b) or clause (c) of
the definition of Reset Date), and (ii) adding to the Consolidated EBITDA used
in that determination (or then most recent such adjustment, as the case may be,
but only to the extent such adjustment did not occur prior to a Reset Date of
the type described in clause (b) or clause (c) of the definition of Reset Date),
for each Acquired Business whose Acquisition Date is such Reset Date, the sum
determined pursuant to clause (b) of the definition herein of Consolidated
EBITDA shall be calculated for the most recently available 12-month period
ending within 12 months prior to such Reset Date as Borrower shall specify. If
the Funded Debt to EBITDA Ratio, as so adjusted in that
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certificate, changes from one range to another in column A in SCHEDULE II, then,
from and including such Resets Date to the next Reset Date to occur, the Base
Rate Margin, the LIBOR Margin and the Commitment Fee Rate shall be the
applicable per annum percentages set forth for the new range in columns C, B,
and D, respectively, in SCHEDULE II.
(b) If a Reset Date of the type described in clause (d) of the
definition herein of Reset Date occurs, Borrower shall, on or within five
Business Days after such Reset Date, deliver to Agent a certificate setting
forth in reasonable detail (prepared in a manner and on a form acceptable to
Agent) the Funded Debt to EBITDA Ratio then most recently determined (as such
ratio may then have been most recently adjusted pursuant to this SECTION 2.6),
as adjusted by substituting the Consolidated Funded Debt at such Reset Date for
the Consolidated Funded Debt used in that determination (or then most recent
such adjustment, as the case may be). If the Funded Debt to EBITDA Ratio, as so
adjusted in that certificate, changes from one range to another in column A in
SCHEDULE II, then, from and including such Reset Date to the next Reset Date to
occur, the Base Rate Margin, the LIBOR Margin and the Commitment Fee Rate shall
be the applicable per annum percentages set forth for the new range in columns
C, B, and D, respectively, in SCHEDULE II.
(c) Upon the occurrence of a Reset Date of the type described in clauses
(b) and (c) of the definition herein of Reset Date (provided that if such a
Reset Date is also a Reset Date under subsection (a), subsection (a) shall
govern and control the manner of calculating Consolidated Funded Debt and
Consolidated EBITDA for purposes of this SECTION 2.6), any and all adjustments
made prior to such Reset Date to the calculation of Consolidated Funded Debt and
Consolidated EBITDA in accordance with the terms of subsections (a) and (b)
hereof shall be replaced with the calculations thereof set forth in the
applicable compliance certificate delivered pursuant to SECTION 6.1(C), with
respect to such Reset Date (which calculations shall in any event be calculated
only for the 12 month period ending the date of calculation). If the Funded Debt
to EBITDA Ratio, as reflected in such compliance certificate, changes from one
range to another in column A of SCHEDULE II, then from and including such Reset
Date to but not including the next Reset Date to occur, the Base Rate Margin,
the LIBOR Rate Margin, and Commitment Fee Rate shall be the applicable per annum
percentages set forth in columns C, B, and D, respectively, of SCHEDULE II.
(d) Notwithstanding anything in this SECTION 2.6 to the contrary, the
adjustments to Consolidated Funded Debt and Consolidated EBITDA described in
subsection (a) shall only be calculated, when applicable, for purposes of
determining the applicable margin and fee rate adjustments for the Base Rate
Margin, LIBOR Rate Margin, and the Commitment Fee Rate, and the calculation of
Consolidated Funded Debt and Consolidated EBITDA, for all other purposes set
forth in this Agreement
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(including calculations determining compliance with the covenants set forth in
SECTION 7.1 and 7.2) shall be based solely on the 12 month period ending on the
date of calculation.
ARTICLE III
TERMS OF CREDIT FACILITY
Section 3.1 NOTES. The Advances shall be evidenced by the Notes. Each
Lender shall receive an original executed Note in a principal face amount equal
to such Lender's Loan Commitment Amount.
Section 3.2 MATURITY. All outstanding principal of the Notes, together
with all accrued but unpaid interest thereon and other amounts owed with respect
thereto, shall be due and payable in full on the earlier of (a) the Termination
Date or (b) the date on which the Advances become due and payable pursuant to
SECTION 8.2.
Section 3.3 INTEREST RATE. (a) PRIOR TO DEFAULT. Subject in all events
to SECTIONS 3.5 and 10.8, interest on the Advances of each Lender shall accrue,
subject to SECTION 2.6(B), 2.6(C), 2.6(D), 3.3(B), at a rate per annum equal to
the lesser of (a) at Borrower's option, the Variable Rate or the Adjusted LIBOR
Rate (the "APPLICABLE RATE") or (b) the Maximum Lawful Rate; provided, however,
if at any time the Applicable Rate exceeds the Maximum Lawful Rate, resulting in
the charging of interest hereunder to be limited to the Maximum Lawful Rate,
then any subsequent reduction in the Applicable Rate shall not reduce the rate
of interest below the Maximum Lawful Rate until the total amount of interest
accrued on such Advances equals the amount of interest which would have accrued
thereon if the Applicable Rate had at all times been in effect.
(b) POST-DEFAULT. Subject in all events to SECTION 10.8, after the
occurrence and during the continuation of an Event of Default, the outstanding
Advances under the Notes shall, at the option of the Required Lenders, bear
interest at the Default Rate. Any past due principal of and, to the extent
permitted by law, past due interest on the Notes shall bear interest, payable as
it accrues on demand, at the Default Rate, until the Notes are paid in full or
the Event of Default has been cured or waived by the Required Lenders. Without
limiting the foregoing, the interest on such past due amounts shall continue to
accrue at the Default Rate after the entry of a judgment with respect to any of
the Advances, except as otherwise provided by applicable law.
(c) COMPUTATION. Interest on Variable Rate Advances shall be computed on
the basis of a 365/366-day year and interest on LIBOR Rate Advances shall be
computed based on the basis of a 360-day year, for the actual days elapsed,
subject in all events to the provisions hereof limiting interest to the Maximum
Lawful Rate.
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Section 3.4 INTEREST PAYMENTS. Except as otherwise provided in SECTION
2.6(B), 2.6(C), 2.6(D), 3.3(B), interest on the Notes shall be due and payable
as it accrues (a) on the first day of each calendar quarter, commencing on
January 1, 1997, and on the first day of each April, July, October and January
thereafter and (b) on the Interest Adjustment Date of each LIBOR Rate Advance.
Section 3.5 LIBOR RATE ADVANCES.
(a) CONVERSIONS AND CONTINUATIONS. Subject to the other terms of this
Agreement, upon delivery of a Rate Designation Notice by Borrower to Agent prior
to 12:00 noon (Houston time) at least three Business Days prior to the Effective
Date selected by Borrower in such notice, Borrower may convert Variable Rate
Advances into LIBOR Rate Advances for the Interest Periods selected in such
notice. Subject to the other terms of this Agreement, upon delivery of a Rate
Designation Notice by Borrower to Agent prior to 12:00 noon (Houston time) at
least three Business Days prior to the applicable Interest Adjustment Date,
Borrower may, on such Interest Adjustment Date, (i) convert all or any portion
of the LIBOR Rate Advances subject to such Interest Adjustment Date into
Variable Rate Advances or (ii) continue the applicable LIBOR Rate Advances as
LIBOR Rate Advances for the Interest Periods selected in such notice. If
Borrower fails to make timely any such election prior to any Interest Adjustment
Date, the LIBOR Rate Advances subject to such Interest Adjustment Date shall
automatically convert to Variable Rate Advances on such Interest Adjustment
Date.
(b) CONDITIONS TO CONVERSIONS; CONTINUATIONS. Borrower's election to
convert to or continue LIBOR Rate Advances as LIBOR Rate Advances is subject to
the following additional conditions: (i) the aggregate amount of LIBOR Rate
Advances subject to any Interest Period shall be not less than $1,000,000.00 or
an integral multiple of $100,000.00 in excess thereof; (ii) no LIBOR Rate
election shall be effected if (x) Agent determines by reason of circumstances
affecting the interbank Eurodollar market that either adequate or reasonable
means do not exist for ascertaining the LIBOR Rate for the applicable Interest
Period, (y) it becomes impracticable for Agent to obtain funds by purchasing
Dollars in the interbank Eurodollar market, or (z) the Required Lenders notify
Agent that the Adjusted LIBOR Rate will not adequately or fairly reflect the
costs to such Lenders of maintaining the applicable LIBOR Rate Advances at such
rate; and (iii) at the option of Required Lenders, no LIBOR Rate election shall
be effected after the occurrence and during the continuation of an Event of
Default.
(c) ILLEGALITY. If any Regulatory Change shall make it unlawful or
impossible for any Lender (or its Eurodollar lending office) to make, maintain
or fund LIBOR Rate Advances and such Lender shall so notify Agent, Agent shall
forthwith give notice thereof to the other Lenders and Borrower, whereupon the
obligation of such Lender
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to make LIBOR Rate Advances shall be suspended until such Lender notifies
Borrower and Agent that the circumstances giving rise to such suspension no
longer exist. If such Lender shall determine that it may not lawfully continue
to maintain and fund any of its outstanding LIBOR Rate Advances to maturity and
shall so specify in such notice, the LIBOR Rate Advances of such Lender affected
thereby shall be converted to Variable Rate Advances on the applicable Interest
Adjustment Date or such earlier date as may be required by law. If a Lender
shall be unable to make, maintain, or fund LIBOR Rate Advances, and other
Lenders are not similarly restricted, Borrower shall be entitled to designate an
Eligible Assignee (which Eligible Assignee, if not already a Lender, shall be
reasonably acceptable to Agent) to purchase the interest of such Lender
hereunder, and such Lender shall sell such interest to such Eligible Assignee in
accordance with SECTION 10.10 within five Business Days after Agent's approval
in writing of the designated assignee.
(d) CONSEQUENTIAL LOSSES. SUBJECT TO SECTION 10.8, BORROWER SHALL
INDEMNIFY LENDERS AGAINST ANY CONSEQUENTIAL LOSS OR EXPENSE (OTHER THAN IN
RESPECT OF THE LIBOR MARGIN) WHICH LENDERS SUSTAIN OR INCUR IN LIQUIDATING OR
EMPLOYING DEPOSITS FROM THIRD PARTIES ACQUIRED TO EFFECT, FUND OR MAINTAIN ANY
LIBOR RATE ADVANCES OR ANY PART THEREOF AS A CONSEQUENCE OF BORROWER'S PAYMENT,
PREPAYMENT OR CONVERSION OF ANY LIBOR RATE ADVANCE ON A DATE OTHER THAN AN
INTEREST ADJUSTMENT DATE, WHETHER SUCH PAYMENT, PREPAYMENT OR CONVERSION IS
BEING MADE VOLUNTARILY OR INVOLUNTARILY, INCLUDING, WITHOUT, LIMITATION, AS A
RESULT OF AN ACCELERATION OF LIBOR RATE ADVANCES, OR ANY PART THEREOF, DUE TO AN
EVENT OF DEFAULT (SUCH COSTS AND EXPENSES BEING HEREINAFTER REFERRED TO AS A
"CONSEQUENTIAL LOSS"). Each request by any Lender for payment by Borrower of a
Consequential Loss shall be made within 15 Business Days after the date on which
the event occurs giving rise to such claim, accompanied by a certificate of such
Lender setting forth in reasonable detail the basis therefor, and Borrower will
pay such claim within 10 Business Days after such Lender's request.
(e) INCREASED COSTS. SUBJECT TO SECTION 10.8, BORROWER SHALL INDEMNIFY
EACH LENDER AGAINST AND REIMBURSE EACH LENDER FOR INCREASED COSTS TO SUCH
LENDER, AS A RESULT OF ANY REGULATORY CHANGE, OF MAINTAINING ANY OR ALL OF ITS
LIBOR RATE ADVANCES, INCLUDING, WITHOUT LIMITATION, AS A RESULT OF ANY INCREASE
IN SUCH LENDER'S FDIC PERCENTAGE, AND ANY ADDITIONAL IMPOSITIONS, ASSESSMENTS,
FEES, OR SURCHARGES THAT MAY BE IMPOSED ON SUCH LENDER, TO THE EXTENT NOT
REFLECTED IN SUCH LENDER'S FDIC PERCENTAGE OR ITS LIBOR RESERVE REQUIREMENTS
(BUT EXCLUDING CHANGES AFFECTING THE LIBOR RESERVE REQUIREMENT OR INCOME TAXES,
FRANCHISE TAXES BASED ON INCOME, DOING BUSINESS TAXES, AND BANK SHARE TAXES OF
ANY LENDER
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OR ANY AFFILIATE OR ASSOCIATE THEREOF). SUCH LENDER SHALL GIVE BORROWER WRITTEN
NOTICE OF SUCH COSTS WITHIN 90 DAYS AFTER ITS IMPLEMENTATION AND/OR COMPLIANCE
WITH ANY SUCH REGULATORY CHANGE AND SUCH COSTS SHALL BE REIMBURSED TO SUCH
LENDER ON OR PRIOR TO THE EARLIER TO OCCUR OF (I) THE TERMINATION DATE OR (II)
10 BUSINESS DAYS, IN EACH CASE, FOLLOWING WRITTEN NOTICE THEREOF FROM LENDER TO
BORROWER. ALL PAYMENTS MADE PURSUANT TO THIS PARAGRAPH SHALL BE MADE FREE AND
CLEAR OF, AND WITHOUT REDUCTION FOR, ANY PRESENT OR FUTURE TAXES. Each request
by any Lender for payment by Borrower of any
increased costs of Lender shall be accompanied by a certificate of such Lender
setting forth in reasonable detail the basis for such claim. Unless such
Regulatory Change has the effect of increasing the costs to all Lenders
generally of maintaining LIBOR Rate Advances, Borrower shall be entitled to
designate an Eligible Assignee (which Eligible Assignee, if not already a
Lender, shall be reasonably acceptable to Agent) to purchase the interest of any
such Lender requesting reimbursement pursuant to this SECTION 3.5(E), and such
Lender shall sell such interest to such Eligible Assignee in accordance with
SECTION 10.10 within five Business Days after Agent's approval of the designated
assignee.
Section 3.6 OPTIONAL AND MANDATORY PREPAYMENTS OF ADVANCES; OPTIONAL
REDUCTIONS OF COMMITMENTS. (a) OPTIONAL PREPAYMENTS. Subject to SECTIONS 3.5(D)
and 3.8 at any time and from time to time, Borrower may (i) upon notice from
Borrower to Agent prior to 11:00 a.m. (Houston time) on the date any prepayment
under this SECTION 3.6 is to be made on Variable Rate Advances, and (ii) upon
notice from Borrower to Agent prior to 12:00 noon (Houston time), at least one
Business Day prior to the date on which prepayment under this SECTION 3.6 is to
be made on LIBOR Rate Advances, voluntarily prepay outstanding Advances, in
whole or in part, without premium or penalty; provided, that each such partial
payment made in accordance with clause (i) or clause (ii), must be in a minimum
amount of at least $200,000.00; provided further that if the prepayment causes
the balance of a particular tranche related to a LIBOR Rate Advance to be less
than $1,000,000.00, Borrower shall, on demand by Agent, pay the entire amount of
that tranche. Each such optional prepayment of Advances shall be applied in
accordance with SECTION 3.9.
(b) MANDATORY PREPAYMENTS. If the Principal Debt, plus the Letter of
Credit Exposure, ever exceeds the Committed Sum, upon demand therefor by Agent,
Borrower shall make a mandatory prepayment of the Advances in at least the
amount of such excess and shall pay any Consequential Loss arising as a result
of such prepayment required by SECTION 3.5(D).
(c) OPTIONAL REDUCTIONS OF AVAILABLE COMMITMENT. Subject to SECTION
3.6(B), Borrower shall have the right on at least one Business Day's notice to
Agent to terminate in whole or, from time to time, reduce ratably in part the
Available
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Commitment; provided, that each partial reduction of the Available Commitment
shall be in an aggregate amount equal to the lesser of (i) $5,000,000.00 or an
integral multiple of $1,000,000.00 in excess thereof or (ii) the entire
Available Commitment. Once the Available Commitment has been reduced pursuant to
this SECTION 3.6(C), it may not be reinstated. Upon receipt of any such notice,
Agent shall promptly notify each Lender of the contents thereof and the amount
to which such Lender's Loan Commitment Amount is to be reduced.
Section 3.7 SCHEDULES ON NOTES. Each Lender is hereby authorized to
record the date and amount of each Advance made under its Note and the date and
amount of each payment of principal thereon and to attach any such recording as
a schedule to such Note, whereupon such schedule shall constitute a part of such
Note for all purposes. Any such recording shall constitute PRIMA FACIE evidence
of the accuracy of the information so recorded; provided, that the absence or
inaccuracy of any such schedule or notation thereon shall not limit or otherwise
affect the liability of Borrower for the repayment of all amounts outstanding
under such Note, together with accrued interest thereon.
Section 3.8 GENERAL PROVISIONS AS TO PAYMENTS. Borrower shall make each
payment of principal and interest on the Notes and all fees payable hereunder or
under any other Loan Document not later than 12:00 noon (Houston time) on the
date when due, in federal or other funds immediately available in Houston,
Texas, to Agent at Agent's address for payments set forth on SCHEDULE I. Agent
will promptly (and if such payment is received by Agent by 12:00 noon (Houston
time) and otherwise if reasonably possible, on the same Business Day, and in any
event not later than the next Business Day after receipt of such payment)
distribute to each Lender such Lender's pro rata share of each such payment
received by Agent for the account of such Lender. For purposes of calculating
accrued interest on the Notes, any payment received by Agent as aforesaid by
12:00 noon (Houston time) on any Business Day shall be deemed made on such day;
otherwise, such payment shall be deemed made on the next succeeding Business Day
after receipt by Agent. Whenever any payment of principal or interest on the
Notes, or any fees under the Loan Documents, shall be due on a day which is not
a Business Day, the date for payment thereof shall be extended to the next
succeeding Business Day, and such extension of time shall be included in the
computation of the amount of interest then due and payable.
Section 3.9 APPLICATION OF PAYMENTS. Subject to ARTICLE IX and any other
provisions of the Loan Documents or other agreements among the Lenders providing
for the application of payments made hereunder in another manner, all payments
made by Borrower to Lenders hereunder shall be ratably paid to Lenders in
accordance with their respective Loan Percentages. Except as to principal
payments made pursuant to SECTION 3.6(A) or 3.6(B) and as otherwise specifically
provided in this Agreement or in any other Loan Document, all payments and
prepayments on the Notes shall be applied
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first against accrued but unpaid interest and then against the principal
outstanding thereunder; provided, however, unless otherwise designated by
Borrower or required by law, all payments and prepayments applied to principal
of the Notes shall be applied first to the payment of Variable Rate Advances and
then to the payment of LIBOR Rate Advances.
Section 3.10 CAPITAL ADEQUACY. Subject to SECTION 10.8, if any
Regulatory Change has the effect of increasing the amount of capital required or
expected to be maintained by any Lender or any corporation controlling such
Lender and such Lender reasonably determines that the amount of capital so
required or expected to be maintained is increased by or based upon the
existence of the Credit Facility, then such Lender may notify Borrower of such
fact, and commencing 90 days following such notice, Borrower shall pay to such
Lender or Agent (for such Lender) from time to time within 10 Business Days
after a demand therefor accompanied by a certificate of such Lender as
hereinafter provided, as an additional fee payable hereunder, such amount as
such Lender shall determine in good faith and certify thereto to Borrower in
reasonable detail to be an amount that will adequately compensate such Lender in
light of such circumstances for its increased costs of maintaining such capital.
Each Lender shall allocate such cost increases among its customers in good faith
and on an equitable basis. Borrower shall be entitled to designate an Eligible
Assignee (which Eligible Assignee, if not already a Lender, shall be reasonably
acceptable to Agent) to purchase the interest of any such Lender requesting
reimbursement pursuant to this SECTION 3.10, and such Lender shall sell such
interest to such Eligible Assignee in accordance with SECTION 10.10 within five
Business Days after Agent's written approval of the designated assignee.
Section 3.11 DEPOSIT OF CASH COLLATERAL. Upon the occurrence and during
the continuation of any Event of Default, without limiting any other right or
remedy of Lenders hereunder, Borrower shall, on the next succeeding Business Day
after request therefor, deposit in a segregated, interest bearing account with
Agent such funds as Agent may request, up to a maximum amount equal to the
Letter of Credit Exposure. Any funds so deposited shall be held by Agent as
security for the Credit Facility (including the Letters of Credit) and Borrower
shall, in connection therewith, execute and deliver such assignments and
security agreements in form and substance reasonably satisfactory to Agent which
Agent may, in its discretion, require. As drafts or demands for payment are
presented under any Letter of Credit, Borrower hereby irrevocably directs Agent
to apply such funds to satisfy such drafts or demands. When either (a) all
Letters of Credit have expired and the Notes have been repaid in full (and
Lenders have no obligation to make further Advances and Issuing Lender has no
obligation to issue Letters of Credit hereunder), or (b) such Event of Default
has been cured to the satisfaction of Agent or waived by the Required Lenders,
Agent shall release to Borrower any remaining funds deposited with it pursuant
to this SECTION 3.11. Whenever Borrower is required to make deposits under this
SECTION 3.11 and
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fails to do so on the day such deposit is due, Lenders may make such deposit
using any funds of Borrower then available to any Lender.
ARTICLE IV
CONDITIONS TO FUNDING
Section 4.1 CONDITIONS TO INITIAL ADVANCE OR LETTER OF CREDIT. The
obligation of each Lender to fund its initial Advance or the Issuing Lender to
issue the initial Letter of Credit is subject to the satisfaction of the
following conditions and requirements:
(a) on or prior to the Closing Date, receipt and approval by Agent of
each of the following:
(i) this Agreement and the Notes, each properly executed by
Borrower;
(ii) evidence acceptable to Agent that Borrower has paid or
will pay on the Closing Date all fees and other amounts
required to be paid by Borrower on the Closing Date
pursuant to the Fee Letter and this Agreement;
(iii) evidence that the IPO shall have occurred, yielded net
proceeds to Borrower of at least $45,000,000.00 and
constituted a sale of not more than 60% of the Common
Stock outstanding immediately after giving effect
thereto;
(iv) a pro forma organizational chart of Borrower and its
Subsidiaries after giving effect to Borrower's
acquisition of the Initial Acquired Businesses;
(v) copies of all Initial Acquisition Agreements and other
material agreements of Borrower requested by Agent
relating to Borrower's agreement to purchase each of the
Initial Acquired Businesses;
(vi) one or more opinions of counsel for Borrower and each
Initial Acquired Business (which may include opinions of
Borrower's general counsel), opining as to the due
incorporation and existence of Borrower, each Subsidiary
of Borrower, and each Initial Acquired Business, the
enforceability of each of the Loan Documents
constituting an executory contract and such other
matters as Agent may reasonably request, in form and
substance reasonably satisfactory to Agent;
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(vii) all resolutions, certificates or documents Agent may
reasonably request relating to the formation, existence
and good standing of Borrower, each Subsidiary of
Borrower, and each Initial Acquired Business, corporate
authority for the execution and validity of this
Agreement and the other Loan Documents and any other
matters relevant to this Agreement, all in form and
substance reasonably satisfactory to Agent, which
resolutions, certificates and documents shall include,
without limitation, (A) the Charter Documents of
Borrower, each Subsidiary of Borrower, and each Initial
Acquired Business and all assumed name and doing
business certificates of each such Entity, (B)
resolutions of the Board and the board of directors of
each Subsidiary of Borrower authorizing the execution of
the Loan Documents to which such Person is a party on
behalf of such Person, (C) certificates of incumbency
for the Authorized Officers of Borrower and each
Subsidiary of Borrower, and (D) certificates of
corporate existence and good standing issued by the
state of incorporation of Borrower, each Subsidiary of
Borrower, and each Initial Acquired Business and from
the appropriate governmental authority of each state in
which Borrower, each Subsidiary of Borrower, and each
Initial Acquired Business is qualified or registered to
do business as a foreign corporation;
(viii) evidence reasonably satisfactory to Agent that, after
consummation of the transactions contemplated on the
Closing Date, no Liens will encumber any assets of
Borrower or any Subsidiary of Borrower, except Permitted
Encumbrances, which evidence may include, without
limitation, filing officer certificates (or commercial
reports similar thereto) under Section 9-407(2) of the
UCC, releases or partial releases of liens or financing
statements;
(ix) satisfaction of all conditions contained in SECTION 4.2
if an Advance is being made, or satisfaction of all
conditions contained in SECTION 4.3 if a Letter of
Credit is being issues;
(x) copies of certificates of insurance for each policy
maintained by Borrower and each of its Subsidiaries,
together with evidence of payment of all premiums
thereon;
(xi) a schedule of all Debt of Borrower and its Subsidiaries
(inclusive of the Initial Acquired Businesses)
outstanding on the Closing Date
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after giving effect to the consummation of the
transactions contemplated on the Closing Date;
(xii) a copy of the IPO Registration Statement as in effect on
the Closing Date;
(xiii) evidence reflecting (x) the sources and uses of all
proceeds from the IPO and the Advances made on the IPO
Closing Date, (y) wiring instructions relating thereto,
and (z) all other matters reasonably required by Agent
in connection with the IPO; and
(xiv) such other documents, instruments, certificates and
information as may be reasonably requested by Agent.
(b) the occurrence of the IPO Closing Date on or before September 30,
1996.
Section 4.2 CONDITIONS TO ALL ADVANCES. The obligation of each Lender to
fund any Advance (including, without limitation, its initial Advance) is subject
to the satisfaction of the following conditions and requirements:
(a) timely receipt by Agent of a Request For Advance;
(b) no Material Adverse Change shall have occurred and be continuing;
(c) immediately before and after giving effect to such Advance and the
application of the proceeds thereof, no Default shall exist;
(d) the representations and warranties contained in this Agreement and
in the other Loan Documents shall be true and correct in all material respects
on and as of the date of such Advance, except that all representations and
warranties that speak as of a particular date shall only be required on the date
of each such Advance to be true and correct in all material respects as of the
date to which such representation or warranty speaks and not as of any
subsequent date; and
(e) if such Advance is to be made to enable Borrower to acquire an
Acquired Business, such other information and documentation as is required
pursuant to SECTIONS 2.5 and 2.6.
Section 4.3 CONDITIONS TO LETTERS OF CREDIT. The obligation of Issuing
Lender to issue any Letter of Credit (including, without limitation, the
issuance of the initial Letter of Credit) is subject to the satisfaction by
Borrower of the following conditions and requirements:
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(a) timely receipt by Issuing Lender of a fully completed LOC
Application and such other information relating to the requested Letter of
Credit as Issuing Lender may reasonably request;
(b) timely receipt by Agent of a Request For Advance;
(c) no Material Adverse Change shall have occurred and be continuing;
(d) immediately before and after the issuance of such Letter of Credit,
no Default shall exist;
(e) the representations and warranties contained in this Agreement and
in the other Loan Documents shall be true in all material respects on and as of
the date of issuance of such Letter of Credit, except that all representations
and warranties that speak as of a particular date shall only be required on the
date of issuance of each such Letter of Credit to be true and correct in all
material respects as of the date to which such representation or warranty speaks
and not as of any subsequent date; and
(f) timely receipt by Agent (for the account of Issuing Lender and the
other Lenders) of the Letter of Credit Fee payable on the issuance date pursuant
to SECTION 2.4(B).
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Lenders that:
Section 5.1 EXISTENCE AND POWER OF BORROWER. Each of Borrower and its
Subsidiaries: (a) is a corporation duly created, validly existing, and in good
standing under the laws of the state, province or country of its incorporation
and is or will be qualified and in good standing as a foreign corporation under
the laws of each state where such qualification is necessary for it to conduct
its business, except where the failure to so qualify (individually or
collectively) would not have a Material Adverse Effect; and (b) has all
corporate powers and all governmental licenses, authorizations, consents and
approvals required to carry on its business as now conducted and as contemplated
to be conducted, except where the failure to have any such item (either
individually or collectively) would not have a Material Adverse Effect. Except
as permitted by Section 7.7, Borrower owns no Capital Stock, directly or
indirectly, in any Entity which is not a Subsidiary of Borrower.
Section 5.2 SUBSIDIARIES. All direct and indirect Subsidiaries of
Borrower have or will execute a Subsidiary Guaranty in accordance with the terms
of this Agreement,
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and with respect to such Subsidiary, Borrower has or will otherwise fully
satisfy the other terms and requirements of SECTION 2.5.
Section 5.3 AUTHORIZATION; CONTRAVENTION. The execution, delivery and
performance by Borrower of this Agreement, the Notes, the LOC Applications and
the other Loan Documents to which Borrower is a party are within Borrower's
corporate powers, have been duly authorized by all necessary corporate action,
require no action by or in respect of, or filing with, any governmental body,
agency or official and do not contravene, or constitute a default under, any
provision of applicable law or regulation or of the Charter Documents of
Borrower or of any material agreement, judgment, injunction, order, decree or
other instrument binding upon Borrower or (other than pursuant to the Loan
Documents) result in the creation or imposition of any Lien on any asset of
Borrower. The execution, delivery, and performance by each Subsidiary of
Borrower of the Subsidiary Guaranty and the other Loan Documents to which that
Subsidiary is a party are within that Subsidiary's corporate powers, have been
duly authorized by all necessary corporate action, require no action by or in
respect of, or filing with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the Charter Documents of that Subsidiary or of any material
agreement, judgment, injunction, order, decree or other instrument binding upon
that Subsidiary or (other than pursuant to the Loan Documents) result in the
creation or imposition of any Lien on any asset of that Subsidiary.
Section 5.4 ENFORCEABLE OBLIGATIONS. This Agreement, the Notes, the LOC
Applications and the other Loan Documents constituting executory contracts to
which Borrower is a party each constitutes a valid and binding agreement of
Borrower, enforceable against Borrower in accordance with its terms except as
the enforceability thereof may be limited by (a) bankruptcy, insolvency,
fraudulent transfer or similar laws affecting creditors' rights generally and
(b) the application of general equitable principles. The Subsidiary Guaranty and
each other Loan Document constituting an executory contract to which any
Subsidiary of Borrower is a party each constitutes a valid and binding agreement
of that Subsidiary, enforceable against that Subsidiary in accordance with its
terms except as the enforceability thereof may be limited by (i) bankruptcy,
insolvency, fraudulent transfer, or similar laws affecting creditors' rights
generally and (ii) the application of general equitable principles.
Section 5.5 FINANCIAL INFORMATION. (a) The Current Financial Statements
present fairly, in all material respects, the consolidated financial position of
Borrower and its Subsidiaries at the respective dates of the balance sheets
included therein and the consolidated results of their operations and their
consolidated cash flows for the respective periods set forth therein.
(b) No Default exists under SECTION 7.10.
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(c) Except as disclosed in writing to Agent prior to the
execution and delivery of this Agreement, since June 18, 1996, there has been no
Material Adverse Change that is continuing; and, there exists no condition,
event or occurrence that (either individually or collectively) could reasonably
be expected to result in a Material Adverse Change.
Section 5.6 LITIGATION. There is no action, suit, or proceeding pending
against or, to the knowledge of Borrower, threatened against or affecting
Borrower or any of its Subsidiaries before any court or arbitrator or any
governmental body or agency in which there is a reasonable possibility of an
adverse decision that would have a Material Adverse Effect or which draws into
question the validity of the Loan Documents.
Section 5.7 ERISA. (a) Each Employee Plan has been maintained and
administered in substantial compliance with the applicable requirements of the
Code and ERISA. No circumstances exist with respect to any Employee Plan that
reasonably could be expected to have a Material Adverse Effect.
(b) Except as set forth in SCHEDULE 5.7(B), as of the date hereof,
neither Borrower nor any of its Subsidiaries has any obligation under any
Employee Plan to provide post-employment health care benefits to any of its
current or former employees, except as may be required by Section 4980B of the
Code.
Section 5.8 TAXES AND FILING OF TAX RETURNS. Borrower and each of its
Subsidiaries have filed all material tax returns required to have been filed and
have paid all Taxes shown to be due and payable on such returns, including
interest and penalties, and all other Taxes which are payable by such party, to
the extent the same have become due and payable, other than Taxes with respect
to which a failure to pay would not have a Material Adverse Effect or except as
otherwise permitted by SECTION 6.6. Borrower does not know of any proposed tax
assessment against Borrower or any of its Subsidiaries other than customary ad
valorem taxes or other Taxes to become due in the normal course of business, and
all material Tax liabilities of Borrower and each of its Subsidiaries are
adequately provided for. No income tax liability of Borrower or any of its
Subsidiaries has been asserted by the Internal Revenue Service for Taxes in
excess of those already paid, the payment of which would have a Material Adverse
Effect.
Section 5.9 OWNERSHIP OF ASSETS. Borrower or one of its Subsidiaries has
good title to all material assets reflected on the latest balance sheet included
in the Current Financial Statements. Except for Permitted Encumbrances, there is
no Lien on any property of Borrower or any of its Subsidiaries.
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Section 5.10 BUSINESS; COMPLIANCE. Each of Borrower its Subsidiaries
have performed and abided by all obligations required to be performed by it
under any license, permit, order, authorization, grant, contract, agreement or
regulation to which it is a party or by which it or any its assets are bound and
which, if Borrower and each of its Subsidiaries were to fail to perform or abide
by, such failure would have a Material Adverse Effect.
Section 5.11 LICENSES, PERMITS. Borrower and each of its Subsidiaries
possess, directly or through its employees, such valid franchises, licenses,
permits, consents, authorizations, exemptions and orders of Governmental
Authorities, as are necessary to carry on their respective business as now being
conducted, other than those the failure to possess which would not (either
individually or collectively) have a Material Adverse Effect.
Section 5.12 COMPLIANCE WITH LAW. The business and operations of
Borrower and each of its Subsidiaries have been and are being conducted in
substantial compliance with all applicable laws, rules and regulations of all
Governmental Authorities, other than violations which would not (either
individually or collectively) have a Material Adverse Effect.
Section 5.13 FULL DISCLOSURE. (a) As of the date hereof, all Information
that has been made available to Agent or any Lender by or on behalf of Borrower
prior to the date of this Agreement in connection with the transactions
contemplated by this Agreement is, taken together, true and correct in all
material respects (other than financial budgets and projections) and does not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not materially
misleading in light of the circumstances under which such statements were made.
(b) All Information that is made available after the date of this
Agreement from time to time to Agent or any Lender by or on behalf of Borrower
in connection with or pursuant to this Agreement, any other Loan Document or the
transactions contemplated hereby or thereby will be, when made available and
taken together, true and correct in all material respects (other than financial
budgets and projections) and will not contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the statements
contained therein not materially misleading in light of the circumstances under
which such statements are made.
(c) All financial budgets and projections that have been or are
hereafter from time to time prepared by or on behalf of Borrower and made
available to Agent or any Lender pursuant to or in connection with this
Agreement, any other Loan Document or the transactions contemplated hereby or
thereby have been and will be prepared and furnished to Agent and that Lender in
good faith and were and will be based on facts
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and assumptions that are believed by the management of Borrower to be reasonable
in light of the then current and foreseeable business conditions of Borrower and
its Subsidiaries and represented and will represent Borrower's management's good
faith estimate of the consolidated projected financial performance of Borrower
and its Subsidiaries based on the information available to the Responsible
Officers at the time so furnished.
Section 5.14 ENVIRONMENTAL MATTERS. Except for conditions,
circumstances, or violations that would not (either individually or
collectively) have a Material Adverse Effect, Borrower (i) does not know of any
environmental condition or circumstance, such as the presence of any hazardous
substance (as defined in SECTION 6.8), adversely affecting the properties or
operations of Borrower or any of its Subsidiaries, (ii) has not received any
report of a violation by Borrower or any of its Subsidiaries of any Applicable
Environmental Law and (iii) does not know that Borrower or any of its
Subsidiaries is under any obligation to remedy any violation of any Applicable
Environmental Laws.
Section 5.15 PURPOSE OF CREDIT. Borrower shall use the proceeds of the
Credit Facility solely for the purposes stated in SECTION 2.1. No part of the
proceeds of the Credit Facility will be used, directly or indirectly, for a
purpose which violates any law, rule or regulation. Borrower shall not, directly
or indirectly, use any of the proceeds of the Credit Facility for the purpose of
purchasing or carrying, or retiring any Debt which was originally incurred to
purchase or carry, any Margin Stock, or to purchase or carry any "SECURITY THAT
IS PUBLICLY-HELD" within the meaning of Regulation T of the Board of Governors
of the Federal Reserve System, or otherwise take or permit any action which
would involve a violation of the Margin Regulations or any other regulation of
such Board of Governors. The Credit Facility is not secured, directly or
indirectly, in whole or in part, by collateral that includes any Margin Stock
within the meaning of the Margin Regulations. Borrower shall not engage
principally, or as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying any Margin Stock within the
meaning of the Margin Regulations.
Section 5.16 GOVERNMENTAL REGULATIONS. Neither Borrower nor any of its
Subsidiaries is subject to regulation under the Investment Advisers Act of 1940,
as amended, the Investment Company Act of 1940, as amended, the Public Utility
Holding Company Act of 1935, as amended, or any other law, rule or regulation
(other than the Securities Act, the Trust Indenture Act of 1939, as amended, the
Margin Regulations and state "blue sky" and securities laws, none of which are
violated by the loan transactions contemplated by this Agreement) which
regulates the ability of Borrower or any of its Subsidiaries to issue promissory
notes or debt securities.
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Section 5.17 INDEBTEDNESS. Neither Borrower nor any of its Subsidiaries
is an obligor on any Debt other than Permitted Debt.
Section 5.18 INSURANCE. Borrower and each of its Subsidiaries maintains
with financially sound and reputable insurance companies or associations (or, as
to workers' compensation or similar insurance, with an insurance fund or by
self-insurance authorized by the jurisdictions in which it operates) insurance
concerning its properties and business against such casualties and contingencies
and of such types and in such amounts (and with co-insurance and deductibles) as
is customary for the same or similar businesses.
Section 5.19 SOLVENCY. On a consolidated basis as of the Closing Date,
(a) the aggregate fair market value of Borrower's assets exceeds its liabilities
(whether contingent, subordinated, unmatured, unliquidated or otherwise), (b)
Borrower has sufficient cash flow to enable it to pay its Debts as they mature
and (c) Borrower has a reasonable amount of capital to conduct its business as
presently contemplated.
ARTICLE VI
AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as Lenders' commitment to
make Advances under the Credit Facility remains in effect, any Letters of Credit
remain outstanding, or any of the Obligations that have matured and become due
and payable remain unpaid:
Section 6.1 INFORMATION FROM BORROWER. Borrower shall deliver, or cause
to be delivered, to Agent on behalf of Lenders:
(a) As soon as available and in any event within 90 days after the end
of each fiscal year of Borrower, a consolidated and consolidating balance sheet
of Borrower and its Subsidiaries as of the end of such fiscal year and the
related consolidated and consolidating statements of income and cash flow for
such fiscal year, setting forth in each case in comparative form the figures for
the previous fiscal year, all reported by Borrower in accordance with GAAP and,
with respect to such consolidated financial statements, audited by Arthur
Andersen LLP (or its successors) or other independent public accountants
reasonably acceptable to Agent.
(b) As soon as available and in any event within (i) 45 days after the
end of each of the first three fiscal quarters of each fiscal year of Borrower
and (ii) the earlier to occur of (A) the 90th day after the end of the fourth
fiscal quarter of each fiscal year of Borrower or (B) the date Borrower publicly
releases a report of its results of operations for that fiscal year, a
consolidating and consolidated balance sheet and related consolidated and
consolidating statements of income of Borrower and its
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Subsidiaries as of the end of such quarter and year-to-date, all certified by
the chief financial officer or the chief accounting officer of Borrower as to
fairness of presentation and as to whether such financial statements present
fairly, in all material respects, the consolidated financial condition of
Borrower and its Subsidiaries as of the date of the latest balance sheet
included therein, subject to year-end adjustments. Such financial statements
shall be prepared in conformity with GAAP, except that certain recurring
adjustments and certain information and note disclosures normally included in
annual financial statements prepared in accordance with GAAP may be condensed or
omitted, provided that the disclosures made are adequate to make the information
presented not misleading, and GAAP shall be applied on a basis consistent with
the financial statements most recently furnished pursuant to SECTION 6.1(A).
(c) Simultaneously with the delivery of each set of financial statements
referred to in SECTIONS 6.1(A) AND 6.1(B), a compliance certificate of a
Responsible Officer, (i) setting forth in reasonable detail the calculations
required to establish whether Borrower was in compliance with the requirements
of SECTIONS 7.1 and SECTION 7.2 on the date of the latest balance sheet included
in such financial statements, and detailing all add-backs and adjustments
thereto, and (ii) with respect only to the consolidated financial statements
delivered pursuant to SECTIONS 6.1(A) AND 6.1(B), stating, to the best of such
Responsible Officer's knowledge and belief, whether or not such financial
statements present fairly, in all material respects, the consolidated financial
condition of Borrower and its Subsidiaries as of the date of the latest balance
sheet included therein and the consolidated results of operations of Borrower
and its Subsidiaries for the portion of Borrower's fiscal year ended on the date
of that balance sheet.
(d) Promptly after the filing thereof with the SEC, a true, correct and
complete copy of each Form 10-K and Form 10-Q and each other report filed by or
on behalf of Borrower pursuant to the Exchange Act.
(e) Promptly after a Responsible Officer has knowledge that a Default
has occurred and is continuing, a certificate of a Responsible Officer setting
forth the details thereof and the action which Borrower or any applicable
Subsidiary of Borrower is taking or proposes to take with respect thereto.
(f) Promptly after a Responsible Officer of Borrower or any Subsidiary
has knowledge of (i) the occurrence of any Material Adverse Change, (ii) the
commencement of any litigation against Borrower or any of its Subsidiaries which
involves an uninsured claim in excess of $250,000.00, (iii) the occurrence of
any acceleration (other than by the obligor) of the maturity of any Debt in
excess of $500,000.00 owing by Borrower or any Subsidiary of Borrower, or any
default under any indenture, mortgage, agreement, contract or other instrument
to which Borrower or any Subsidiary of Borrower is a party or by which Borrower
or any Subsidiary of
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Borrower or any properties of Borrower or any Subsidiary of Borrower are bound,
if such acceleration or default could reasonably be expected to have a Material
Adverse Effect, or (iv) any labor dispute to which Borrower or any of its
Subsidiaries becomes a party, any strikes, or walkouts relating to any of its
plants or other facilities or the expiration of any collective bargaining
agreement to which any of them is a party or by which any of them is bound, in
each case if such dispute, strike, walkout or expiration could reasonably be
expected to have a Material Adverse Effect, a certificate from such Responsible
Officer setting forth the details thereof.
(g) From time to time such additional information regarding the
financial position or business of Borrower and its Subsidiaries, as any Lender
(acting through Agent) may reasonably request, including, without limitation,
financial projections of Borrower and its Subsidiaries and information
concerning the insurance being maintained by Borrower and its Subsidiaries.
Section 6.2 MAINTENANCE OF EXISTENCE, ETC. Borrower shall maintain its
existence as a corporation and, except as permitted by SECTION 7.6, shall cause
each of its Subsidiaries to maintain its existence, except where the failure of
its Subsidiaries to do so would not (either individually or collectively) have a
Material Adverse Effect. Borrower shall, and shall cause each of its
Subsidiaries to, be in good standing in each jurisdiction in which its ownership
or lease of properties or its transaction of business requires it to be
registered, qualified, or licensed, except to the extent that failures to be so
registered, qualified or licensed (either individually or collectively) could
not reasonably be expected to have a Material Adverse Effect.
Section 6.3 BUSINESS. Borrower shall cause the primary business of
Borrower and its Subsidiaries taken as a whole to remain one or more of the
Permitted Lines of Business.
Section 6.4 RIGHT OF INSPECTION. Borrower shall permit, and shall cause
each of its Subsidiaries to permit, Agent or any Lender, or any officer,
employee or agent of any such party, during normal daytime business hours and
following reasonable notice, to (a) visit and inspect any of the assets of
Borrower and each of its Subsidiaries, examine the books of record and accounts
of Borrower and each Subsidiary of Borrower, (b) take copies and extracts
therefrom and (c) discuss the affairs, finances and accounts of Borrower and
each Subsidiary of Borrower with the respective officers, accountants and
auditors of Borrower and each Subsidiary of Borrower, all as often as Agent or
any Lender may reasonably require; provided that, in the case of any discussions
pursuant to clause (c) of this sentence, a representative of Borrower designated
by a Responsible Officer must be present, it being understood and agreed by
Borrower that it will cooperate to cause this condition to be satisfied. Each
Lender covenants and agrees to preserve the confidentiality of any financial
data concerning Borrower and its Subsidiaries, or related to the businesses or
operations of
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Borrower and its Subsidiaries or any information with respect to which Borrower
or any Subsidiary of Borrower has (a) an obligation of confidentiality to a
third party (to the extent such obligation has been disclosed to such Lender) or
(b) informed such Lender of the confidential nature of the specific information,
except to the extent such Lender is required to disclose such information
pursuant to any applicable law, rule, regulation or order of any Governmental
Authority; provided that (i) any information contained in any Form 10-K, Form
10-Q or Form 8-K reports (if any) which have been filed with the SEC, or any
other annual or quarterly reports to the stockholders of Borrower and each
Subsidiary of Borrower subject to the reporting requirements of the Exchange
Act, proxy material delivered to the stockholders of Borrower or any publicly
available report filed with the SEC, or any other information that is in the
public domain or has become publicly known, shall not in any event be deemed
confidential, and (ii) each Lender may make any information received by it
available (A) to any participant in any interest in the Credit Facility or the
Notes, provided that such participant agrees in writing to be bound by the
provisions of this SECTION 6.4, (B) to any accountants or other professionals
engaged by such Lender, provided that each such accountant or professional
agrees to be bound by the provisions of this SECTION 6.4, or (C) in connection
with the enforcement of any of the Loan Documents or any litigation in
connection therewith. Each Lender will pay the costs incurred by it in
exercising its rights under this SECTION 6.4; provided, however, that if a
Lender exercises its rights under this SECTION 6.4 after the occurrence and
during the continuation of an Event of Default, then, subject to SECTION 10.4,
Borrower will reimburse that Lender for the reasonable out-of-pocket expenses
incurred by that Lender in connection therewith promptly after that Lender's
request therefor.
Section 6.5 MAINTENANCE OF INSURANCE. Borrower shall at all times
maintain, and shall cause each of its Subsidiaries to maintain, insurance
covering each of their respective risks as are customarily carried by businesses
similarly situated, including, without limitation, the following: (a) workmen's
compensation insurance; (b) comprehensive general public liability and property
damage insurance in respect of all activities in which Borrower and each of its
Subsidiaries might incur personal liability for the death or injury of an
employee or third person, or damage to or destruction of another's property; (c)
insurance against loss or damage by fire, lightning, hail, tornado, explosion
and other similar risk; and (d) comprehensive automobile liability insurance.
Borrower shall maintain, and shall cause each of its Subsidiaries to maintain,
coverage with respect to the foregoing risks in such coverage amounts as are
customarily carried by businesses similarly situated.
Section 6.6 PAYMENT OF TAXES, IMPOSITIONS AND CLAIMS. Borrower shall
pay, and shall cause each of its Subsidiaries to pay, (a) all Taxes imposed upon
it or any of its assets or with respect to any of its franchises, business,
income or profits and all Impositions, in each case before any material penalty
or interest may accrue thereon, and (b) all material claims (including, without
limitation, claims for labor, services,
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materials and supplies) for sums which have become due and payable and which by
law have or might become a Lien on any of its assets; provided, however, payment
of Taxes, Impositions or claims shall not be required if and for so long as (i)
the amount, applicability or validity thereof is being contested in good faith
by appropriate action diligently conducted in accordance with good business
practices and no material part of the property or assets of Borrower or any of
its Subsidiaries is subject to levy or execution, (ii) Borrower or the
applicable Subsidiary of Borrower, as required in accordance with GAAP, shall
have set aside on its books such reserves as may be required (and segregated to
the extent) required by GAAP deemed by it to be adequate with respect thereto,
and (iii) Borrower has notified Agent of such circumstances, in detail
satisfactory to Agent, and, provided further, that Borrower or the applicable
Subsidiary of Borrower shall pay any such Tax, Imposition, or claim if such
contest is not successful.
Section 6.7 COMPLIANCE WITH LAWS AND DOCUMENTS. Borrower shall at all
times comply, and shall cause each of its Subsidiaries to comply, with all Legal
Requirements and any other agreement to which Borrower or any of its
Subsidiaries is a party, unless their failure to so comply (either individually
or collectively) would not have a Material Adverse Effect.
Section 6.8 ENVIRONMENTAL LAW COMPLIANCE AND INDEMNITY. (A) SUBJECT TO
SECTION 10.4 AND WITHOUT DUPLICATION OF AMOUNTS PAYABLE BY BORROWER THEREUNDER
OR PURSUANT TO ANY OTHER PROVISION OF THIS AGREEMENT, BORROWER HEREBY
INDEMNIFIES AND AGREES TO DEFEND AND HOLD AGENT AND EACH LENDER AND THEIR
SUCCESSORS AND ASSIGNS HARMLESS FROM AND AGAINST ANY AND ALL CLAIMS, DEMANDS,
CAUSES OF ACTION, LOSS, DAMAGE, LIABILITIES, COSTS AND EXPENSES (INCLUDING
REASONABLE ATTORNEYS' FEES AND COURT COSTS) OF ANY AND EVERY KIND OR CHARACTER,
KNOWN OR UNKNOWN, FIXED OR CONTINGENT, ASSERTED AGAINST OR INCURRED BY AGENT OR
ANY LENDER AT ANY TIME AND FROM TIME TO TIME, INCLUDING, WITHOUT LIMITATION,
THOSE ASSERTED OR ARISING SUBSEQUENT TO THE PAYMENT OR OTHER SATISFACTION OF THE
NOTES AND EXPIRATION OF THE LETTERS OF CREDIT, BY REASON OF, ARISING OUT OF OR
RELATED IN ANY WAY TO (A) ANY LOAN DOCUMENT, INCLUDING, WITHOUT LIMITATION, THE
USE OF PROCEEDS OF THE ADVANCES OR THE RELATIONSHIP CREATED BY ANY LOAN DOCUMENT
BETWEEN OR AMONG BORROWER, AGENT, ISSUING LENDER AND THE LENDERS AND (B)
BORROWER'S FAILURE TO COMPLY WITH APPLICABLE ENVIRONMENTAL LAWS, INCLUDING
MATTERS ARISING OUT OF THE ORDINARY NEGLIGENCE OF AGENT OR ANY LENDER, BUT
EXCLUDING MATTERS ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
AGENT OR ANY LENDER.
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(b) Borrower agrees to promptly pay and discharge, or cause to be
promptly paid and discharged, when due all debts, claims, liabilities and
obligations with respect to any clean-up measures necessary for Borrower or any
of its Subsidiaries to comply with Applicable Environmental Laws affecting
Borrower or any of its Subsidiaries, provided that, with respect to any single
tract or parcel of real property, Borrower shall not be required to take such
action if failure to take such action would not have a Material Adverse Effect.
It shall not be a defense to the covenant of Borrower to indemnify provided for
in SECTION 6.8(A) that the act, omission, event or circumstance did not
constitute a violation of any Applicable Environmental Law at the time of its
existence or occurrence. The term "HAZARDOUS SUBSTANCE" shall have the meaning
specified in the Superfund Amendments and Reauthorization Act of 1986 ("SARA");
provided, to the extent that any other applicable laws of the United States of
America or any political subdivision thereof establish a meaning for "HAZARDOUS
SUBSTANCE" which is broader than that specified in SARA, such broader meaning
shall apply. As used in this Agreement, "APPLICABLE ENVIRONMENTAL LAW" shall
mean and include the singular, and "APPLICABLE ENVIRONMENTAL LAWS" shall mean
and include the collective aggregate of the following: any law, statute,
ordinance, rule, regulation, order or determination of any governmental
authority or any board of fire underwriters (or other body exercising similar
functions), or any restrictive covenant or deed restriction (recorded or
otherwise) affecting Borrower pertaining to health, safety or the environment,
including, without limitation, all applicable flood disaster laws and health,
safety and environmental laws and regulations pertaining to health, safety or
the environment, including, without limitation, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Resource Conservation and
Recover Health Act, the Texas Water Code, the Texas Solid Waste Disposal Act,
the Texas Workers' Compensation Laws, and any federal, state or municipal laws,
ordinances, regulations or law which may now or hereafter require removal of
asbestos or other hazardous substance from any property of Borrower or any of
its Subsidiaries or impose any liability on Agent or any Lender related to
asbestos or other hazardous wastes in any property of Borrower or any of its
Subsidiaries.
(c) The provisions of this SECTION 6.8 shall survive the repayment of
the Notes and expiration of the Letters of Credit. In the event of the
assignment of any Note or any portion thereof by any Lender in accordance with
the terms of this Agreement, such Lender shall continue to be benefitted by this
indemnity and agreement.
Section 6.9 USE OF PROCEEDS. Borrower shall use the proceeds of the
Credit Facility solely for the purposes represented in this Agreement and shall
not use such proceeds, directly or indirectly, for the purpose, whether
immediate, incidental or ultimate, of purchasing or carrying any Margin Stock
and none of such proceeds will be used in violation of applicable law
(including, without limitation, the Margin
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Regulations). Further, the proceeds of the IPO shall be paid and applied as
evidenced by the information provided to Agent pursuant to SECTION 4.1(A)(XIII).
Section 6.10 ADDITIONAL DOCUMENTS. Consistent with the terms of this
Agreement, Borrower shall execute and deliver or cause to be executed and
delivered to Agent upon Agent's request such other and further instruments or
documents (or amendments and modifications to existing instruments or documents,
as the case may be) as in the reasonable judgment of Agent may be required to
better effectuate the transactions contemplated herein and do all such
additional acts, give such assurances and execute such instruments as Agent may
reasonably require to vest more completely in and assure to the Lenders their
rights under this Agreement.
Section 6.11 COMPLIANCE WITH DUE DILIGENCE STANDARDS; OFFICES AND FILES.
Borrower shall comply with Borrower's past procedures related to due diligence
with respect to all Acquired Businesses it acquires. Borrower's principal office
shall at all times be maintained at Borrower's principal office in Houston,
Texas (as disclosed to Agent), and Borrower's books, records and files related
to the Acquired Businesses it acquires (including, without limitation, the
Borrower Due Diligence Reports) shall at all times be maintained at such
principal office.
ARTICLE VII
NEGATIVE COVENANTS
Borrower covenants and agrees that without the prior written consent of
the Required Lenders, so long as Lenders' commitment to make Advances under the
Credit Facility remains in effect, any Letters of Credit remain outstanding or
any of the Obligations that have matured and become due and payable remain
unpaid:
Section 7.1 FINANCIAL COVENANTS. (a) CONSOLIDATED NET WORTH. Borrower
shall not permit Consolidated Net Worth to be less than the Required Minimum at
the end of any fiscal quarter of Borrower, beginning with its fiscal quarter
ended September 30, 1996. For purposes of this subsection, "REQUIRED MINIMUM"
shall initially mean an amount equal to the greater of (a) $52,500,000.00, or
(b) ninety percent (90%) of the Consolidated Net Worth of Borrower on the first
Business Day after the IPO Closing Date. Thereafter, at the end of each fiscal
quarter (beginning with the fiscal quarter ending on December 31, 1996), the
Required Minimum shall be adjusted by adding to the Required Minimum calculated
as of the end of the immediately preceding fiscal quarter, an amount equal to
(i) the greater of (x) ninety percent (90%) of the Consolidated Net Income for
the calendar quarter ending on the date as of which compliance with this
covenant is being measured, or (y) 0, plus (ii) the aggregate amount of any cash
proceeds (less reasonable and customary transaction costs) received by Borrower
during such fiscal quarter from its sale of any additional shares of stock or
other equity instruments (other than mandatorily redeemable preferred
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stock and other equity instruments the consideration for which is classified
otherwise than as a part of Borrower's Consolidated Net Worth determined in
accordance with GAAP).
(b) FUNDED DEBT TO TOTAL CAPITALIZATION RATIO. Borrower shall not permit
the Funded Debt to Total Capitalization Ratio at the end of any fiscal quarter
of Borrower, beginning with its fiscal quarter ended September 30, 1996, to be
greater than 0.45 to 1.00.
(c) COVERAGE RATIO. Borrower shall not permit the Coverage Ratio at the
end of any fiscal quarter of Borrower, beginning with its fiscal quarter ended
December 31, 1996, to be less than 1.20 to 1.00.
(d) FUNDED DEBT TO EBITDA RATIO. Borrower shall not permit the Funded
Debt to EBITDA Ratio at the end of any fiscal quarter of Borrower, beginning
with its fiscal quarter ended December 31, 1996, to be greater than 2.75 to
1.00.
Section 7.2 LIMITATION ON CAPITAL EXPENDITURES. Borrower shall not
permit Capital Expenditures (excluding Capital Expenditures related to
acquisitions of Acquired Businesses) to be made in any of its fiscal years in an
amount in excess of 10% of Consolidated Net Worth at the end of that fiscal
year.
Section 7.3 LIMITATION ON DEBT. (a) Borrower shall not, and shall not
permit any of its Subsidiaries to, incur any Debt, except Permitted Debt.
(b) Borrower shall not, and shall not permit any of its Subsidiaries to,
make payments on Approved Subordinated Debt after the occurrence and during the
continuation of a Default or, prior to the occurrence of a Default, which would
exceed the scheduled payments due under the documents evidencing the Approved
Subordinated Debt as approved by the Required Lenders.
Section 7.4 LIMITATION ON SALE OF ASSETS. Borrower shall not, and shall
not permit any of its Subsidiaries to, sell, assign, convey, exchange, lease or
otherwise dispose of any of its properties, rights, assets or business, whether
now owned or hereafter acquired, except in (a) the ordinary course of its
business and (b) transactions permitted by any one or more of SECTIONS 6.3, 7.5,
and 7.6.
Section 7.5 LIMITATION ON LIENS. Borrower shall not, and shall not
permit any of its Subsidiaries to, create, incur, assume or suffer to exist any
Lien upon any of its respective assets, except for Permitted Encumbrances.
Section 7.6 CONSOLIDATIONS, MERGERS, SALES OF ASSETS. Borrower shall
not, and Borrower shall not permit any of its Subsidiaries to, (a) consolidate
or merge with or
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into any other Person or (b) sell, lease, abandon or otherwise transfer all or
any material part of its assets to any Person, in one or a series of related
transactions, other than the sale of assets singly or in bulk in the ordinary
course of its business; provided, that: (i) in connection with Borrower's direct
or indirect acquisition of any Acquired Business, (A) any Subsidiary of Borrower
may merge with or into or consolidate with the Entity owning that Acquired
Business and (B) that Entity may merge into Borrower; (ii) any Subsidiary of
Borrower may merge with or into, consolidate with or transfer all or any part of
its assets to Borrower or any other Subsidiary of Borrower; and (iii) ADCOT,
Inc. may dispose of its discontinued retail appliance store operations and
properties.
Section 7.7 INVESTMENTS. Borrower shall not, and shall not permit any of
its Subsidiaries to, directly or indirectly, make any loans, advances,
extensions of credit or capital contributions to, make any investment in or
purchase any stock or securities of, or interest in, any Person except for (a)
Permitted Investments, (b) temporary loans or advances by Borrower or any
Subsidiary of Borrower to any of its directors, officers, employees and
independent contractors which are made in the ordinary course of its business
(including, without limitation, advances of expenses pursuant to indemnification
arrangements), (c) loans to any Pension Plan that is an employee stock ownership
plan or contributions to any trust relating to any Employee Plan, (d) accounts
receivable of Borrower or any Subsidiary of Borrower which arise in the ordinary
course of its business and adjustments offered to account debtors with respect
thereto in the ordinary course of its business, (e) extensions of credit in
connection with cooperative marketing or advertising arrangements entered into
by Borrower or any Subsidiary of Borrower in the ordinary course of its
business, and (f) memberships in professional or trade associations or other
organizations.
Section 7.8 DISTRIBUTIONS. Borrower shall not make or declare any
Distributions other than Distributions made in Qualified Preferred Stock or
Common Stock.
Section 7.9 TRANSACTIONS WITH AFFILIATES AND ASSOCIATES. Borrower shall
not enter into, or permit any of its Subsidiaries to enter into, any transaction
with an Affiliate or Associate of Borrower unless such transaction is (a)
generally as favorable to Borrower or its Subsidiaries as could be obtained in
an arm's length transaction with an unaffiliated Person or (b) on terms that are
fair from a financial point of view to Borrower or such Subsidiary, as the case
may be, in the event no comparable transaction with an unaffiliated Person is
available; provided, however, that this SECTION 7.9 shall not restrict or be
applicable to (i) any transaction between Borrower or any Subsidiary of Borrower
and any Employee Plan, (ii) the payment in accordance with sound business
practice to officers and directors of Borrower and its Subsidiaries and
divisions of compensation, including salaries, bonuses, awards, participation in
Borrower's 1996 Incentive Plan or in any other retirement, health, welfare or
other executive or employee plan, policy, practice or program, for the
performance of their
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services or (iii) any indemnification or similar payment or advancement of
expenses by Borrower or any Subsidiary of Borrower to any director, officer or
employee of Borrower or any subsidiary of Borrower in accordance with its
Charter Documents or under applicable law.
Section 7.10 EMPLOYEE PLANS. (a) Borrower shall, and shall cause each
member of its Controlled Group (as that term is defined in the Code) to,
maintain and administer any Employee Plan it is required to maintain and
administer in material compliance with the applicable requirements of the Code
and ERISA except for such noncompliances as (either individually and
collectively) do not and could not reasonably be expected to have a Material
Adverse Effect.
(b) With respect to any Pension Plan, Borrower shall not, and shall not
permit any of its Subsidiaries to, do any of the following if a Material Adverse
Effect would result from such actions or any of them: (i) permit any accumulated
funding deficiency (within the meaning of Section 412(a) of the Code), whether
waived or unwaived, to exist; (ii) permit the present value of accrued benefits
(based on the most recent actuarial valuation prepared for each such plan, if
any, in accordance with ongoing actuarial assumptions) to exceed the current
value of plan assets allocable to such benefits; (iii) permit any reportable
event (within the meaning of Section 4043 of ERISA) to occur, other than
purchases and sales of securities from a plan trustee as reported in the audited
financial statements of such plan; (iv) permit a prohibited transaction (within
the meaning of Section 4975 of the Code) to occur; (v) incur any material
liability to the PBGC; or (vi) incur any material withdrawal liability (within
the meaning of Section 4201(a) of ERISA).
(c) Borrower shall not, and shall not permit any of its Subsidiaries to,
incur a material obligation to provide post-employment health care benefits to
any of its current or former employees, except (i) as may be required by Section
4980B of the Code or otherwise required by law, (ii) pursuant to employment
agreements in effect on the date hereof, or like employment agreements entered
into in the future, and (iii) pursuant to the plans listed in SCHEDULE 5.7(B).
Section 7.11 USE VIOLATIONS. Borrower shall not, and shall not permit
any of its Subsidiaries to, use, maintain, operate or occupy, or allow the use,
maintenance, operation or occupancy of, any of its properties in any manner
which violates any Legal Requirement then in effect unless such violation would
not have a Material Adverse Effect.
Section 7.12 FISCAL YEAR AND ACCOUNTING METHODS. Borrower shall not
change its fiscal year from the calendar year or its method of accounting (other
than changes in such method as are concurred with by Borrower's independent
public accountants as being in accordance with GAAP).
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Section 7.13 GOVERNMENTAL REGULATIONS. Borrower shall not conduct its
business in such a way that it will become subject to regulation under the
Investment Advisers Act of 1940, as amended, the Investment Company Act of 1940,
as amended, the Public Utility Holding Company Act of 1935, as amended, or any
other laws, rules or regulations (other than the Securities Act, the Trust
Indenture Act of 1939, as amended, the Margin Regulations and state "blue sky"
and securities laws) which regulate Borrower's ability to issue promissory notes
or debt securities.
ARTICLE VIII
DEFAULTS AND REMEDIES
Section 8.1 EVENTS OF DEFAULT. The term "EVENT OF DEFAULT" as used in
this Agreement, shall mean any one of the following:
(a) Borrower fails to pay any principal of the Notes when the same
becomes due and payable;
(b) Borrower fails to pay any interest on the Notes or any fee required
by SECTION 2.4 when the same becomes due and payable and such failure continues
for a period of five consecutive days;
(c) Borrower fails to observe or perform any covenant or agreement to be
performed by it contained in ARTICLE VII;
(d) Borrower or any Subsidiary of Borrower fails to observe or perform
any other covenant or agreement contained in any Loan Document to be performed
by it (other than any of those described in subparagraphs (a), (b), and (c)
above or listed in any other subparagraph of this SECTION 8.1), and such failure
continues unremedied for a period of 30 days after the earlier to occur of (i)
notice of such failure being given to Borrower or such Subsidiary by Agent and
(ii) Borrower or such Subsidiary otherwise obtaining knowledge of such failure;
(e) Any representation, warranty or certification made by Borrower or
any Subsidiary of Borrower in this Agreement or any other Loan Document to which
it is a party shall prove to have been untrue in any material respect when made
or deemed to have been made;
(f) The occurrence of any event or condition which results in the
acceleration of the maturity of any Debt of Borrower or any Subsidiary of
Borrower having a then principal amount in excess of $500,000.00;
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(g) The filing or commencement by Borrower or any Subsidiary of Borrower
of a voluntary case or other proceeding seeking liquidation, reorganization or
other similar relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or Borrower or any
Subsidiary of Borrower shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing;
(h) The filing or commencement of an involuntary case or other
proceeding against Borrower or any Subsidiary of Borrower seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of 60 days; or an order for relief shall be entered against Borrower or
any Subsidiary of Borrower under the federal bankruptcy laws as now or hereafter
in effect;
(i) Except as otherwise permitted by the terms of this Agreement, the
liquidation or dissolution of Borrower or any Subsidiary of Borrower;
(j) One or a series of related judgments or orders are entered against
Borrower or any Subsidiary of Borrower by one or more courts of competent
jurisdiction, the cost of which to Borrower and its Subsidiaries (without
duplication of amounts and without including attorney's fees and other expenses
incurred for defending against or litigating in connection with any such
judgments or orders) aggregates in excess of $250,000.00 and such judgments or
orders are, in each instance, not undismissed, unbonded, undischarged, or
unstayed for a period of 30 days; or
(k) There shall occur a Change in Control of Borrower.
It is understood and agreed by Borrower that the EVENTS OF DEFAULT are
cumulative of and in addition to any default or event of default contained in
any of the other Loan Documents.
Section 8.2 REMEDIES. Upon the occurrence and during the continuation of
an Event of Default, all obligations of Lenders and Issuing Lender hereunder to
make Advances and issue Letters of Credit, as applicable, shall terminate at the
option of the Required Lenders, upon notice thereof to Borrower (except that
such notice shall not
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be necessary with respect to the Events of Default described in SECTION 8.1(G)
and SECTION 8.1(H)), and Agent, at the direction and election of the Required
Lenders, acting by or through any of its agents, trustees or other Persons, and
in addition to any other provision of this Agreement or any other Loan Document,
to exercise any or all of the following rights, remedies and recourses:
(a) Declare the principal balance of each Note, the accrued and unpaid
interest thereon and any other accrued but unpaid Obligations to be immediately
due and payable, without notice or grace (expressly including, but not limited
to, notice of default, notice of intent to accelerate or notice of
acceleration), except any notice or grace that is expressly required by the
terms of the Loan Documents, presentment, protest, notice of protest, demand or
action of any nature whatsoever, each of which hereby is expressly waived by
Borrower, whereupon such Obligations shall become immediately due and payable.
Notwithstanding the foregoing or anything to the contrary contained herein or in
any other Loan Document, upon the occurrence of an Event of Default described in
SECTION 8.1(G) or SECTION 8.1(H), the entire principal balance of the Notes, and
all accrued and unpaid interest thereon, shall automatically be accelerated and
become immediately due and payable in full, without notice or grace (expressly
including, but not limited to, notice of default, notice of intent to accelerate
or notice of acceleration, presentment, protest, notice of protest, demand or
action of any nature whatsoever, each of which hereby is expressly waived by
Borrower); provided, however, that if accelerated automatically pursuant to the
foregoing, the Notes, the Advances evidenced thereby and such other Obligations
may be reinstated at the option of the Required Lenders.
(b) Exercise any and all other rights, remedies and recourses granted
hereunder or under the other Loan Documents or otherwise now or hereafter
existing in equity, at law, by virtue of statute or otherwise, without notice or
grace (expressly including, but not limited to, notice of default, notice of
intent to accelerate or notice of acceleration), except any notice or grace that
is expressly required by the terms of any Loan Document, presentment, protest,
notice of protest, demand or action of any nature whatsoever, each of which
hereby is expressly waived by Borrower.
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Section 8.3 RIGHTS OF SET-OFF.
(a) Borrower hereby expressly grants to Lenders the right of setoff
against all deposits and other sums at any time held or credited by or due from
any Lender to Borrower, in accordance with this SECTION 8.3. The rights of each
Lender under this SECTION 8.3 are in addition to other rights and remedies
(including, without limitation, other rights of setoff) which such Lender may
have at law, in equity, or by agreement.
(b) Upon the occurrence and during the continuation of any Event of
Default, each Lender is hereby authorized at any time and from time to time, to
the fullest extent permitted by applicable law, at its option, without notice,
demand or liability to Borrower, to set off and apply any and all deposits
(general or special, time or demand, provisional or final, excepting, however,
any fiduciary or escrow accounts established by Borrower into which only funds
of unrelated third-parties are deposited, provided that Borrower has informed
such Lender and Agent of the nature of such accounts) at any time held, and
other indebtedness at any time owing, by any Lender to or for the credit or the
account of Borrower against any and all of the Obligations now or hereafter
existing under this Agreement, the Notes and the other Loan Documents, in such
order and manner as such Lender may determine, subject, however, to SECTION
9.13, regardless of whether such Lender (acting through Agent) shall have made
any demand under this Agreement or its Note and although such Obligations may be
unmatured.
Section 8.4 REMEDIES CUMULATIVE, CONCURRENT AND NON-EXCLUSIVE. Lenders
shall have all rights, remedies and recourses granted in the Loan Documents, and
available at law or in equity, and the same (a) shall be cumulative and
concurrent, (b) may be pursued separately, successively, or concurrently against
Borrower, any Subsidiary of Borrower, or any other Person obligated under any
Note, or against any one or more of them, at the sole discretion of Lenders, (c)
may be exercised as often as the occasion therefor shall arise, it being agreed
by Borrower that the exercise or failure to exercise any of same shall in no
event be construed as a waiver or release thereof or of any other right, remedy
or recourse and (d) are intended to be, and shall be, non-exclusive.
Section 8.5 NO CONDITIONS PRECEDENT TO EXERCISE REMEDIES. Borrower, any
Subsidiary of Borrower, and any other Person hereafter obligated for payment or
fulfillment of all or any part of the Obligations shall not, except as otherwise
provided by applicable law, be relieved of such obligation by reason of any
other act or occurrence, save and except the complete payment and performance of
the Obligations. Borrower waives any right to require Lenders to proceed against
any other Person or to pursue any other available remedy. All dealings between
Borrower and any Lender with respect to the Credit Facility, whether or not
resulting in the
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creation of the Obligations, shall conclusively be presumed to have been had or
consummated in reliance upon this Agreement.
Section 8.6 ADDITIONAL WAIVERS. To the full extent permitted by
applicable law, Borrower hereby irrevocably and unconditionally waives and
releases, except as specifically provided for in any Loan Document, (a) all
notices of any Default or Event of Default, (b) any right to a marshalling of
assets with respect to the Notes or the Letters of Credit or any other Debt of
Borrower or to a sale in inverse order of alienation and (c) except as
specifically provided for in any Loan Document, any and all right to receive
demand, grace, notice, presentment for payment, protest, notice of protest,
notice of intention to accelerate the Obligations or notice of acceleration of
the Obligations.
Section 8.7 DISCONTINUANCE OF PROCEEDINGS. In case Agent shall have
proceeded to invoke any right, remedy, or recourse permitted under the Loan
Documents and shall thereafter elect to discontinue or abandon same for any
reason, Agent shall have the unqualified right to do so and, in such event,
Borrower and Lenders shall be restored to their former positions with respect to
the Obligations, the Loan Documents and otherwise, and the rights, remedies,
recourses, powers and obligations of Agent, Lenders and Borrower shall continue
as if same had never been invoked.
ARTICLE IX
AGENT AND THE LENDERS
Section 9.1 APPOINTMENT AND AUTHORIZATION OF AGENT. (a) Each Lender
hereby irrevocably appoints and authorizes Agent as its nominee and agent, in
its name and on its behalf: (i) to act as nominee for and on behalf of such
Lender in and under all Loan Documents; (ii) to arrange the means whereby the
funds of the Lenders are to be made available to Borrower under the Loan
Documents; (iii) to take such action as may be requested by any Lender under the
Loan Documents (when such Lender is entitled to make such request under the Loan
Documents and after such requesting Lender has obtained the concurrence of such
other Lenders as may be required under the Loan Documents); (iv) to receive all
documents and items to be furnished to the Lenders under the Loan Documents; (v)
to promptly distribute to each Lender the material information, requests,
documents and items received from Borrower under the Loan Documents; (vi) to
promptly distribute to each Lender such Lender's share of each payment or
prepayment in accordance with the terms of the Loan Documents; and (vii) to
deliver to the appropriate Persons requests, demands, approvals and consents
received from the Lenders.
(b) The obligations of Agent hereunder are only those expressly set
forth herein. Each Lender and Borrower agree that: (i) Agent is not a fiduciary
for Lenders
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or Borrower, but simply is acting in the capacity described herein to alleviate
administrative burdens for both Borrower and Lenders; and (ii) Agent has no
duties or responsibilities to the Lenders or Borrower except those expressly set
forth herein. Without limiting the generality of the foregoing, Agent shall not
be required to take any action or exercise any right or remedy with respect to
any Default or Event of Default, unless requested by the Required Lenders.
Notwithstanding the administrative authority delegated to Agent, Agent shall not
cause or permit any modification of the Loan Documents or take other action
relating to the Credit Facility specifically requiring the consent or approval
of the Required Lenders without such consent or approval. Action taken by Agent,
including, without limitation, any exercise of remedies or initiation of suit or
other legal proceedings made in accordance with the instructions of the Required
Lenders or as otherwise permitted by this ARTICLE IX, shall be binding upon each
of the Lenders.
(c) Agent, in its capacity as a Lender, shall have the same Rights under
the Loan Documents as any other Lender and may exercise the same as though it
were not acting as Agent, and any resignation by Agent hereunder shall not
impair or otherwise affect any Rights which it has or may have in its capacity
as an individual Lender.
(d) Agent may now or hereafter be engaged in one or more loan, letter of
credit, leasing or other financing transactions with Borrower, act as trustee or
depositary for Borrower or otherwise be engaged in other transactions with
Borrower, any Subsidiary of Borrower, and any of their respective Affiliates and
Associates (collectively, the "OTHER ACTIVITIES") not the subject of the Loan
Documents. Without limiting the Rights of the Lenders specifically set forth in
the Loan Documents, Agent shall not be responsible to account to the Lenders for
such other activities, and no Lender shall have any interest in any other
activities, any present or future guaranties by or for the account of Borrower
which are not contemplated or included in the Loan Documents (or any present or
future offset exercised by Agent in respect of such other activities), any
present or future property taken as security for any such other activities, [or
any property now or hereafter in the possession or control of Agent which may be
or become security for the Obligations by reason of the general description of
indebtedness secured or of property contained in any other agreements, documents
or instruments related to any such other activities; provided that, if any
payments in respect of such guaranties, such property or the proceeds thereof or
any offset shall be applied to reduction of the Obligations, then each Lender
shall be entitled to share in such application in accordance with the terms of
this Agreement.
Section 9.2 POSSESSION OF INSTRUMENTS BY AGENT. Agent shall exercise all
rights and remedies under the Loan Documents and take all actions with respect
thereto in accordance with the request or direction of the Required Lenders, or
otherwise as and to the extent provided herein or in the other Loan Documents;
provided, however, that Agent may take such actions in its name without the
joinder of the Lenders, and
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Borrower and all third parties shall be entitled to rely on the actions taken by
Agent with respect to the execution by Agent of any and all agreements,
financing statements, affidavits, notices or any other type of document or
instrument pertaining thereto, including, without limitation, in connection with
the exercise of any rights or remedies of the Lenders under the Loan Documents,
and the same shall be binding upon all the Lenders as to any third party relying
on such actions of Agent.
Section 9.3 EXPENSES. Each Lender shall pay an amount equal to its Loan
Percentage of any reasonable expenses (including, without limitation, court
costs, reasonable attorneys' fees and other costs of collection) incurred by
Agent in connection with any of the Loan Documents if Agent does not receive
reimbursement therefor from other sources within 30 days after the incurrence
thereof; provided, subject to the terms and conditions of SECTION 10.4, each
Lender shall be entitled to receive an amount equal to its Loan Percentage of
any reimbursement for such expenses, or any part thereof, which Agent
subsequently receives from such other sources Agent has been fully reimbursed
for all such expenses.
Section 9.4 DELEGATION OF DUTIES; RELIANCE; CONSULTATION. Lenders may
perform any of their duties or exercise any of their Rights under the Loan
Documents by or through Agent, and Lenders and Agent may perform any of their
duties or exercise any of their Rights under the Loan Documents by or through
their respective officers, directors, employees, attorneys, agents, or other
representatives (collectively, "REPRESENTATIVES"). Agent and Lenders and their
respective Representatives shall (a) be entitled to rely upon (and shall be
protected in relying upon) any writing, resolution, notice, consent,
certificate, affidavit, letter, cablegram, telecopy, telegram, telex or teletype
message, statement, order or other documents or conversation believed by any of
them to be genuine and correct and to have been signed or made by the proper
Person and, with respect to legal matters, upon opinion of counsel selected by
Agent or such Lender, (b) be entitled to deem and treat each Lender as the owner
and holder of its Loan Percentage for all purposes until, subject to SECTION
10.10, the effective date of any Assignment and Acceptance relating thereto (and
any request, authorization, consent or approval made or given by any Lender
prior to such effective date shall be conclusive and binding on the applicable
assignee of such Lender's Loan Percentage), and (c) not be deemed to have notice
of the occurrence of a Default unless notified thereof by Agent, another Lender
or Borrower. Agent may consult with legal counsel, independent public
accountants, consultants, appraisers and other experts selected by Agent, and
shall not be liable for any action taken or omitted to be taken by Agent in good
faith in accordance with the advice of such Persons and any such Persons shall
be engaged to represent and render services to all Lenders as a group unless
otherwise specified by Agent.
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Section 9.5 LIMITATION OF AGENT'S LIABILITY.
(a) Neither Agent nor any of its Representatives shall be liable for any
action taken or omitted to be taken by it under the Loan Documents in good faith
and believed by it to be within the discretion or power conferred upon it by the
Loan Documents or be responsible for the consequences of any error of judgment
or negligence, except for gross negligence or willful misconduct, and neither
Agent nor any of its Representatives has a fiduciary relationship with any
Lender by virtue of the Loan Documents; provided, that nothing herein shall
negate the obligation of Agent to account for funds received by it for the
account of any Lender, Issuing Lender or Borrower.
(b) Notwithstanding anything to the contrary contained in this ARTICLE
IX, unless indemnified to its satisfaction against loss, cost, liability and
expense, Agent shall not be compelled to act under the Loan Documents or to take
any action toward the execution or enforcement of the powers thereby created or
to prosecute or defend any suit in respect of the Loan Documents. If Agent
requests instructions from the Lenders with respect to any action or forbearance
by it in connection with any Loan Document, Agent shall be entitled, but shall
not be required, to refrain (without incurring any liability to any Person by so
refraining) from such action or forbearance unless and until it has received
such instructions. In no event, however, shall Agent or any of its
Representatives be required to take any action which it reasonably determines
could incur for it criminal or civil liability.
(c) Agent shall not be responsible in any manner to any Lender or any
participant of a Lender for, and each Lender represents and warrants that it has
not relied upon Agent in respect of, (i) the creditworthiness of Borrower and
the risks involved to such Lender, (ii) the effectiveness, enforceability,
genuineness, validity or due execution of any Loan Document, (iii) any
representation, warranty, document, certificate, report or statement made
therein or furnished thereunder or in connection therewith, (iv) the existence,
priority or perfection of any Lien granted or purported to be granted under any
Loan Document or (v) the observation of or compliance with any of the terms,
covenants or conditions of any Loan Document on the part of Borrower or any
Subsidiary of Borrower. EACH LENDER JOINTLY AND SEVERALLY AGREES TO INDEMNIFY
AGENT AND HOLD IT HARMLESS FROM AND AGAINST (BUT LIMITED TO SUCH LENDER'S LOAN
PERCENTAGE OF) ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES,
ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE EXPENSES AND REASONABLE
DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION,
COUNSEL FEES AND DISBURSEMENTS) WHICH MAY BE IMPOSED ON, ASSERTED AGAINST, OR
INCURRED BY AGENT IN ANY WAY RELATING TO OR ARISING OUT OF THE LOAN DOCUMENTS OR
ANY ACTION TAKEN OR OMITTED BY AGENT UNDER THE LOAN DOCUMENTS; PROVIDED, THAT
ALTHOUGH AGENT SHALL HAVE THE RIGHT
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TO BE INDEMNIFIED FOR ITS ORDINARY NEGLIGENCE, AGENT SHALL NOT HAVE
THE RIGHT TO BE INDEMNIFIED HEREUNDER FOR ITS OWN FRAUD, GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
Section 9.6 DEFAULT. Upon the occurrence of a Default, Agent shall make
a recommendation to Lenders of any actions to be taken, and Lenders agree to
promptly confer in order to consider such course of action or any other actions
to be taken for the enforcement of their respective Rights with respect hereto;
provided, that Agent shall be entitled (but not obligated) to proceed to take
any actions necessary in its reasonable judgment to preserve such Rights pending
agreement by Lenders on the course of action to be taken. If the Required
Lenders cannot agree on a course of action to be taken within 60 days following
Agent's initial recommendation, Agent may (but shall not be obligated to)
thereafter take such action as Agent deems advisable to enforce such Rights. Any
action directed or approved by the Required Lenders, including, without
limitation, any exercise of remedies or initiation of suit or other legal
proceedings, shall be binding upon each Lender. In actions with respect to any
property of Borrower, Agent is acting for the account of each Lender to the
extent of each Lender's Rights therein. Any and all agreements to subordinate
(whether made heretofore or hereafter) other indebtedness or obligations of
Borrower to the Obligations shall be construed as being for the benefit of each
Lender in proportion to its Loan Percentage. If Agent acquires any security for
the Obligations or any guaranty of the Obligations, the same shall be held for
the benefit of each Lender in proportion to such Lender's respective Loan
Percentage.
Section 9.7 LENDERS' DECISION. Lenders agree as among themselves that
any decisions or elections to be made by Lenders (and not Agent) under this
Agreement and the other Loan Documents shall be made by the Required Lenders,
except in the case, if any, where a specific different number or percentage of
Lenders is expressly required under this Agreement or any other Loan Documents.
Use of the term "LENDERS" in any Loan Document, without an express provision for
different voting rights other than as set forth in the definition of "REQUIRED
LENDERS," does not imply that unanimous consent is thereby required. Agent may,
at its election, request any determination, vote, consent or approval by Lenders
in writing or orally (by telephone or in person). In addition, if any request by
Agent for Lenders' determination or approval hereunder is made in writing and
such writing contains written notice to Lenders requesting a response within
five Business Days, or longer, from the date Lenders are deemed to have received
notice as herein provided and setting forth the actual date of the last day of
the Lender reply period, then Lenders shall use reasonable efforts to reply
within the applicable reply period; provided, that if any Lender does not reply
within the applicable reply period, such Lender shall be deemed to have approved
of or consented to or concurred with such recommendation or determination.
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Section 9.8 LIMITATION OF LIABILITY OF LENDERS. To the extent permitted
by law, (a) neither Agent nor any Lender or participant of a Lender shall incur
any liability to any other Lender or participant of a Lender or to Agent except
for acts or omissions in bad faith, and (b) neither Agent nor any Lender or
participant of a Lender shall incur any liability to Borrower or any other
Person for any act or omission of any other Lender or participant.
Section 9.9 RELATIONSHIP OF LENDERS. Nothing herein shall be construed
as creating a partnership or venture among Agent and Lenders or among Lenders.
Section 9.10 DEBTOR-CREDITOR RELATIONSHIP. Each Lender has and shall
maintain a direct creditor-debtor relationship with Borrower and will have
direct recourse, singly or in the aggregate, against Borrower, subject to the
terms and conditions of the Loan Documents. Notwithstanding the foregoing, any
right, remedy, action, omission or waiver respecting this Agreement, the Notes
and the other Loan Documents shall only be exercised, made, taken or permitted
by Agent, acting upon the direction of the Required Lenders, as the agent for
all Lenders.
Section 9.11 CREDIT DECISIONS. Each Lender acknowledges that it has,
independently and without reliance upon Agent or any other Lender, and based on
such documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement (or a supplement hereof) and
each of the other Loan Documents to which it is a party or to which Agent is a
party for its benefit. Each Lender also acknowledges that it will, independently
and without reliance upon Agent or any other Lender, and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking any action under this Agreement or
with respect to the Credit Facility.
Section 9.12 REMOVAL OF AGENT. Lenders, acting by written notice to
Agent from and agreed to by all of the Lenders other than Agent, may remove for
cause the then current Agent, as Agent, and appoint (with the prior approval of
Borrower, except as otherwise provided herein) one of the other Lenders as the
successor Agent. If the Required Lenders and Borrower cannot agree upon the
choice of the successor Agent within 10 days after the removal of Agent, then
the Designated Successor Agent shall become the successor Agent. Borrower shall
be entitled to participate in the selection of the replacement Agent only if a
Default or Event of Default is not then continuing. Upon the appointment of a
successor Agent, the removed Agent and the successor Agent shall execute such
documents as any Lender may reasonably request to reflect such appointment of a
successor Agent and shall notify Borrower of such change in the Agent. The
successor Agent shall be vested with all rights, powers, and privileges and be
bound to all duties, obligations, and responsibilities of Agent in and under
this Agreement and the other Loan
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Documents; provided, however, that until such time as Borrower is notified in
writing signed by both the removed and successor Agents as to the appointment of
the successor Agent, Borrower shall be entitled to rely on any decision,
approval or other act by the removed Agent as binding on Lenders, and may pay to
Agent any amounts due or owing by Borrower under the Loan Documents.
Section 9.13 RESIGNATION BY AGENT. An Agent's status as Agent under this
Agreement shall automatically terminate 15 days after the closing or liquidation
of such Agent or 15 days after such Agent is adjudicated insolvent.
Additionally, Agent may resign its position as Agent at any time by giving at
least 30 days written notice thereof to Borrower and the other Lenders. Upon any
such occurrence causing a termination of Agent or the delivery by Agent of such
notice of resignation, the Required Lenders and Borrower shall select a
successor Agent. If the Required Lenders and Borrower cannot agree upon the
choice of the successor Agent within 10 days after the occurrence causing a
termination in the case of a termination of Agent, or 10 days prior to the
effective resignation date set forth in Agent's resignation notice in the case
of a resignation by Agent, then the Designated Successor Agent shall become the
successor Agent. Borrower shall be entitled to participate in the selection of
the replacement Agent only if a Default or Event of Default is not then
continuing. Upon any such termination or resignation, (a) the successor Agent
shall automatically be vested with all rights, powers and privileges and be
bound to all duties, obligations and responsibilities of Agent in and under this
Agreement and the other Loan Documents and shall thereafter be deemed the
"AGENT" for all purposes under the Loan Documents and (b) such terminating or
resigning Agent shall act only in a custodial capacity for the holding by it of
any funds theretofore received from Borrower for the account of the Lenders or
Borrower, as the case may be. Additionally, upon the successor Agent becoming
the "AGENT" as provided in this SECTION 9.13, the terminating or resigning Agent
and the new Agent shall execute such documents as any Lender may reasonably
request to reflect such succession. All costs incurred in connection with the
execution of such documents shall be paid by Lenders in proportion to each
Lender's Loan Percentage.
Section 9.14 SHARING OF PAYMENTS AND SETOFFS. Each Lender agrees that if
it should receive any amount (whether by voluntary payment, by the exercise of
the right of setoff or banker's lien, by counterclaim or cross action, by the
enforcement of any right under the Loan Documents or otherwise) which is
applicable to the payment of the principal of or interest on the Notes, which
with respect to the related sum or sums received by the other Lenders exceeds
the amount such Lender would receive based upon its Loan Percentage, then such
Lender receiving such excess payment shall purchase without recourse or warranty
from the other Lenders a participation in the Notes of such Lenders in such
amount as shall result in a proportional participation by all of the Lenders in
such amount; provided, that if all or any portion of such excess amount is
thereafter recovered from such Lender, such
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purchase shall be rescinded and the purchase price restored to the extent of
such recovery, but without interest. This SECTION 9.14 shall not impair the
right of any Lender to exercise any right of setoff or counterclaim it may have
with respect to any funds in an account pledged to such Lender to secure only
indebtedness other than the Obligations, and to apply the amount received or
subject to such exercise to the payment of such other indebtedness; it being
expressly agreed by all Lenders, however, that until the Obligations are paid
and satisfied in full, any and all amounts received by any Lender from offset of
any account of Borrower or any Subsidiary of Borrower shall be applied to the
Obligations, and not to any other indebtedness of Borrower or any Subsidiary of
Borrower to such Lender, except in the case of a certificate of deposit or other
designated account (but in no event any operating account of Borrower or any
Subsidiary of Borrower) that is specifically pledged or assigned to a Lender as
security for indebtedness other than the Obligations.
Section 9.15 NON-ADVANCING LENDERS. In the event that any Lender shall
fail or refuse to advance its Loan Percentage of any payment or reimbursement by
the Lenders as required hereunder, or of any amount to be funded pursuant to
SECTION 9.3, when it is obligated to do so, Agent shall notify the other Lenders
of such failure, and such remaining Lenders, or any of them, may elect, at their
sole option and discretion (without any obligation whatsoever to do so), to
advance such non-advancing Lender's portion, pro rata in accordance with the
proportion that the Loan Percentage of each Lender electing to make such advance
bears to the Loan Percentages of all Lenders electing to make such advance. Upon
making any such advance, and notwithstanding anything to the contrary expressed
or implied herein or in the Notes or any other Loan Document, all subsequent
payments made on the Obligations or from the exercise of rights of setoff or
other remedies under this Agreement or the other Loan Documents shall be
applied, in the manner described below, only to Lenders other than the
non-advancing Lenders (and the non-advancing Lenders shall not be entitled to
receive the same) until the amounts advanced by such advancing Lenders on behalf
of the non-advancing Lenders (together with the interest earned thereon pursuant
to this Agreement and the Notes) have been repaid in full. As among Lenders
other than the non-advancing Lenders, Lenders that advanced funds on behalf of
the non-advancing Lenders shall receive the portion the non-advancing Lenders
would have been entitled to receive had they advanced (together with the
interest earned thereon pursuant to this Agreement and the Notes), to be applied
pro rata in accordance with the amounts advanced by each such advancing Lender,
until the amounts advanced by such Lenders on behalf of the non-advancing
Lenders (together with the interest earned thereon pursuant to this Agreement
and the Notes), have been repaid in full; any Lender that advanced only on its
own behalf based on its Loan Percentage shall be repaid based on such Loan
Percentage. In addition, any Lenders that advance funds on behalf of a
non-advancing Lender pursuant to this SECTION 9.15 shall have a claim against
such non-advancing Lenders for the amounts so advanced and shall be entitled to
all rights and remedies at law or in equity to recover any unpaid amounts. A
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non-advancing Lender shall not be entitled to vote on any matters hereunder or
related to the Credit Facility (and its interest shall be excluded for purposes
of determining the requisite percentage or number of Lenders for a vote) so long
as such Lender remains a non-advancing Lender. If, with respect to any Request
for Advance, the remaining Lenders do not fund a non-advancing Lender's Loan
Percentage, Borrower's sole recourse shall be against such non-advancing Lender.
Section 9.16 BENEFIT OF LENDERS. All terms, conditions and agreements
set forth in this ARTICLE IX, specifically including, without limitation, the
provisions of SECTION 9.14, are for the sole and exclusive benefit of Lenders,
except as otherwise provided, and neither Borrower nor any other Person shall be
entitled to rely on or seek the benefit of such provisions; provided, however,
that Borrower shall be entitled to rely on any decision, approval or other act
by Agent as binding Lenders.
ARTICLE X
MISCELLANEOUS
Section 10.1 CONTINUING AGREEMENT. This is a continuing agreement and
all the rights, powers and remedies of Lenders hereunder and all agreements and
obligations of Borrower and Lenders hereunder shall continue to exist until all
Advances, have been paid in full, the commitments of Lenders to make Advances
and of the Issuing Lender to issue Letters of Credit hereunder has terminated,
all Letters of Credit have been terminated and all other Obligations that have
matured and become due and payable have been paid in full.
Section 10.2 NOTICES. All notices, requests and other communications to
any party hereunder shall be in writing (including bank wire, telecopy or
similar writing), except for any telephone notices as specifically provided for
herein, may be personally served or sent by telecopier, mail or the express mail
service of the United States Postal Service, FedEx or other equivalent overnight
or expedited delivery service and: (a) if given by personal service or
telecopier (confirmed by telephone), it shall be deemed to have been given upon
receipt; (b) if sent by telecopier without telephone confirmation, it shall be
deemed to have been given 24 hours after being sent; (c) if sent by mail, it
shall be deemed to have been given upon the earlier of (i) actual receipt, or
(ii) three Business Days after deposit in a depository of the United States
Postal Service, first class mail, postage prepaid; (d) if sent by FedEx, the
express mail service of the United States Postal Service or other equivalent
overnight or expedited delivery service, it shall be deemed given upon the
earlier of (i) actual receipt or (ii) 24 hours after delivery to such overnight
or expedited delivery service, delivery charges prepaid, and properly addressed
to Borrower or Lender. For purposes hereof, the address of the parties to this
Agreement shall be as set forth on SCHEDULE I. Any party may, by proper written
notice hereunder to the other parties, change the address to which notices shall
thereafter be sent to it. Notwithstanding anything to the contrary
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implied or expressed herein, the notice requirements herein (including the
method, timing or deemed giving of any notice) are not intended to and shall not
be deemed to increase the number of days or to modify the method of notice or to
otherwise supplement or affect the requirements for any notice required or sent
pursuant to any Legal Requirement then in effect, or otherwise given hereunder,
that is not required under this Agreement or the other Loan Documents. The
provisions of this SECTION 10.2 shall control over any conflicting contractual
notice provisions contained in any other Loan Document.
Section 10.3 NO WAIVERS. No failure or delay by Agent or any Lender in
exercising any right, power or privilege hereunder or under the Notes or any
other Loan Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
Section 10.4 EXPENSES; DOCUMENTARY TAXES; INDEMNIFICATION. Borrower
agrees to pay: (a) all out-of-pocket expenses of Agent and the reasonable fees
and disbursements of legal counsel for Agent in connection with the negotiation,
documentation, and closing of the Credit Facility (including due diligence
therefor) or any waiver, amendment, supplement or replacement of any Loan
Document or any provision thereof; (b) if an Event of Default occurs and while
it is continuing, all out-of-pocket expenses incurred by Agent or Lenders for
(i) fees and disbursements of legal counsel for Agent or any Lender in
connection with the preservation of any Rights of Lenders hereunder or any other
Loan Document or for the collection or other enforcement proceedings resulting
therefrom (including, without limitation, any bankruptcy or other insolvency
proceedings) and (ii) investigation expenses incurred, and fees of auditors and
consultants retained, by Agent in connection therewith and (c) all out-of-pocket
expenses of Arranger and NationsBank in connection with the syndication of the
Credit Facility, other than the transfer fee provided for in SECTION
10.10(C)(III). BORROWER SHALL PAY AND INDEMNIFY AGENT AND EACH LENDER AGAINST
ANY TAXES IMPOSED BY REASON OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR
THE NOTES. BORROWER FURTHER SHALL INDEMNIFY AGENT AND EACH LENDER AND HOLD AGENT
AND EACH LENDER HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, LOSSES,
DAMAGES, COSTS AND EXPENSES OF ANY KIND (INCLUDING, WITHOUT LIMITATION, THE
REASONABLE FEES AND DISBURSEMENTS OF COUNSEL FOR AGENT AND LENDERS IN CONNECTION
WITH ANY INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT
AGENT OR LENDERS SHALL BE DESIGNATED A PARTY THERETO) WHICH MAY BE INCURRED BY
AGENT OR ANY LENDER RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTUAL
OR PROPOSED USE OF PROCEEDS OF THE NOTES OR THE LETTERS OF CREDIT; PROVIDED,
THAT NEITHER AGENT NOR ANY LENDER SHALL HAVE THE RIGHT TO BE INDEMNIFIED
HEREUNDER FOR ITS OWN GROSS NEGLIGENCE OR WILLFUL
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MISCONDUCT, IT BEING THE INTENTION HEREBY THAT AGENT BE INDEMNIFIED FOR THE
CONSEQUENCES OF ITS ORDINARY NEGLIGENCE.
Section 10.5 AMENDMENTS AND WAIVERS: CONSENT TO DEVIATION. Any provision
of this Agreement, the Notes, or any other Loan Document may be amended or
waived if, but only if, such amendment or waiver is in writing and is signed by
Borrower and Required Lenders.
Section 10.6 SURVIVAL. All representations, warranties and covenants
made by Borrower herein or in any other Loan Document shall be considered to
have been relied upon by Lenders and shall survive the delivery to Agent or
Lenders of such Loan Documents or the extension of any credit under the Credit
Facility, including the issuance of any of the Letters of Credit, regardless of
any investigation made by or on behalf of Agent or any Lender.
Section 10.7 PRIOR UNDERSTANDINGS; NO DEFENSES; RELEASE; NO ORAL
AGREEMENTS. This Agreement and the other Loan Documents supersedes all other
prior understandings and agreements, whether written or not, between the parties
hereto relating specifically to the transactions provided for herein. Borrower
confirms that there are no existing defenses, claims, counterclaims or rights of
offset against any Lender in connection with the negotiation, preparation,
execution or performance of or any other matters related to this Agreement or
any other Loan Document executed as of the date hereof and any of the
transactions contemplated thereby. Borrower further confirms that none of the
Lenders has made any agreements with, or commitments or representations to,
Borrower (either in writing or orally) other than as expressly stated herein or
in the other Loan Documents executed as of the date hereof.
THIS WRITTEN LOAN AGREEMENT, TOGETHER WITH THE OTHER WRITTEN LOAN
DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENT OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.
To the fullest extent applicable, Borrower and Lenders acknowledge and agree
that this Agreement and each of the other Loan Documents shall be subject to
Section 26.02 of the Texas Business and Commerce Code, as in effect on the date
hereof.
Section 10.8 LIMITATION ON INTEREST. It is expressly stipulated and
agreed to be the intent of Borrower, Agent, Issuing Lender, and Lenders at all
times to comply with the applicable law governing the maximum rate or amount of
interest payable on or in connection with the Notes, the Advances, the Letters
of Credit, and the other Loan Documents. If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under the
Notes or under any other Loan Document,
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or contracted for, charged, taken, reserved, collected or received with respect
to any of the Notes, the Advances, the Letters of Credit or the other Loan
Documents, or if acceleration of the maturity of the Notes or any of the other
Obligations, any prepayment by Borrower, or any other circumstance whatsoever,
results in Agent or any Lender having been paid any interest in excess of that
permitted by applicable law, then it is the express intent of Borrower, Agent,
Issuing Lender and Lenders that all excess amounts theretofore taken, collected
or received by Agent, Issuing Lender or Lenders be credited on the principal
balance of the Notes (or, if the Notes have been or would thereby be paid in
full, refunded to Borrower), and that the provisions of the Notes and the other
applicable Loan Documents immediately be deemed reformed and the amounts
thereafter collectible hereunder and thereunder reduced, without the necessity
of the execution of any new document, so as to comply with the applicable law,
but so as to permit the recovery of the fullest amount otherwise called for
hereunder and thereunder. The right to accelerate the maturity of the Notes and
the other Obligations does not include the right to accelerate any interest
which has not otherwise accrued on the date of such acceleration, and Lenders do
not intend to collect any unearned interest in the event of acceleration or
otherwise. All sums paid or agreed to be paid to Lenders for the use,
forbearance or detention of the indebtedness evidenced hereby, the Notes or any
other Loan Do the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full term of such indebtedness until payment
in full so that the rate or amount of interest on account of such indebtedness
does not exceed the Maximum Lawful Rate or maximum amount of interest permitted
under applicable law. The term "APPLICABLE LAW" as used herein means the laws of
the State of Texas and applicable United States federal law (including, without
limitation, DIDMCA). The provisions of this SECTION 10.8 shall control all
agreements among Borrower, Agent, Issuing Lender, and Lenders respecting the
matters and transactions contemplated by the Loan Documents.
Section 10.9 INVALID PROVISIONS. If any provision of the Loan Documents
is held to be illegal, invalid or unenforceable under present or future laws
effective during the term thereof, such provision shall be fully severable, the
Loan Documents shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part thereof, and the remaining
provisions thereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
therefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision there shall be added automatically as a part of the Loan Documents a
provision as similar in terms to such illegal, invalid or unenforceable
provision as may be possible and be legal, valid and enforceable.
Section 10.10 SUCCESSORS AND ASSIGNS. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided, that (i) Borrower shall
not, directly or indirectly, assign or transfer, or attempt to assign or
transfer, any of its rights, duties
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or obligations under this Agreement without the express prior written consent of
the Required Lenders and (ii) the Lenders may not assign or transfer any of
their rights or interests in this Agreement, the Notes, the other Loan Documents
or the Advances, other than to an Affiliate of such Lender, except in accordance
with this SECTION 10.10. Prior to entering into any discussions with any
potential participant or assignee of its interest in the Credit Facility, the
applicable Lender shall obtain the prior written consent of Agent and
Borrower(if Borrower's consent is required in connection with any assignment or
participation) and shall cause such proposed participant or assignee to execute
a confidentiality agreement to the same effect as that contained in SECTION 6.4.
(b) Each Lender shall have the right, at any time and from time to time,
to assign all or any part of its rights, interests and obligations under this
Agreement and to sell or transfer to any Person a participation interest in such
Lender's portion of the Credit Facility, subject to and in accordance with the
following provisions:
(i) in the case of a participation, such Lender shall remain the
"LENDER" for all purposes under the Loan Documents (including, without
limitation, any votes, elections or other decisions of the Lenders hereunder)
and shall remain fully liable for its obligations hereunder, and Agent shall
continue to deal directly and solely with such Lender under the Loan Documents
and shall have no duty or obligation to deal with any participant in any manner
(including, without limitation, delivery of information or distribution of any
funds to any participant);
(ii) Borrower and Agent shall have given their prior written
consent for such assignment or participation; provided, that Borrower's consent
shall not be unreasonably withheld or delayed and shall not be required during
the continuance of an Event of Default; and
(iii) any such assignment or participation must be to an Eligible
Assignee and in a principal amount of not less than $5,000,000.00.
(c) In addition to the conditions and requirements set forth in SECTION
10.10(B), any assignment by any Lender shall be subject to the following
conditions:
(i) each assignment shall be of a constant, and not a varying,
percentage of all of the assigning Lender's rights and obligations under this
Agreement;
(ii) the parties to any assignment shall execute and deliver to
Agent, for recording in the Register, with a copy thereof to Borrower, an
Assignment and Acceptance, substantially in the form of EXHIBIT D (an
"ASSIGNMENT AND ACCEPTANCE"), together with any Note subject to such assignment;
and
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(iii) the assigning Lender or its assignee shall pay to Agent a
registration fee in the amount of $3,000.00 in connection with each such
assignment.
Upon obtaining the consent of Agent and Borrower (when required) to an
assignment, the execution of an Assignment and Acceptance with respect thereto,
delivery by the transferor Lender of an executed copy thereof to Borrower and
Agent (together with notice that payment of the purchase price, as hereinafter
provided, has been made), payment of the registration fee referred to in clause
(iii) above and payment by the purchaser of such assignment to such transferor
Lender of an amount equal to the purchase price agreed between such transferor
Lender and such purchaser, and the recording by Agent in the Register of such
assignment and the effective date thereof, from and after the effective date
specified in such Assignment and Acceptance (which effective date shall be at
least five Business Days after the execution thereof), (A) the assignee
thereunder shall be a party to this Agreement as a "LENDER" hereunder and, to
the extent provided in such Assignment and Acceptance, shall have the rights and
obligations of a Lender hereunder, and (B) the assigning Lender shall, to the
extent provided in such assignment, be released from its obligations under this
Agreement, except for the confidentiality agreements contained in SECTION 6.4,
which shall survive any such assignment, and any such other obligations which by
their nature should survive any such assignment.
(d) Agent shall maintain a copy of each Assignment and Acceptance
delivered to it and a register or similar list (the "REGISTER") for the
recordation of the names and addresses of the Lenders and the Loan Percentages
of, and principal amount of the Advances owing to, the Lenders from time to
time. The entries in the Register shall be conclusive, in the absence of
manifest error, and Borrower, Agent and Lenders may treat each Person whose name
is recorded in the Register as a Lender hereunder for all purposes of this
Agreement. The Register shall be available for inspection by Borrower and
Lenders at any reasonable time and from time to time upon reasonable prior
notice to Agent.
(e) Upon its receipt of an Assignment and Acceptance executed by the
parties to such assignment, together with the Note subject to such assignment,
and satisfaction of the matters required by SECTION 10.10(B) AND 10.10(C), Agent
shall (i) record the information contained therein in the Register and (ii) give
prompt notice thereof to Borrower and Lenders (other than the assigning Lender),
and SCHEDULE I shall automatically be deemed revised to reflect the name,
address, Loan Commitment Amount and Loan Percentage of the new Lender and the
deletion of or changed information for the assigning Lender, and Agent shall
deliver to Borrower and any Lender, upon request by Borrower or such Lender, an
amended SCHEDULE I reflecting such changes. Within five Business Days after
receipt of such notice, Borrower, at the assigning Lender's expense, shall
execute and deliver to Agent, in exchange for each surrendered Note, a new Note
payable to the order of such new Lender in an amount
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equal to the amount assigned to such new Lender pursuant to such Assignment and
Acceptance and, if the assigning Lender has retained some portion of its
obligations hereunder, a new Note payable to the order of the assigning Lender
in an amount equal to the amount retained by it hereunder. Such new Notes shall
provide that they are replacements for the surrendered Notes, shall be in face
principal amounts equal to the Loan Commitment Amounts of the respective payees
thereunder, shall be dated the effective date of such Assignment and Acceptance
and shall otherwise be in substantially the form of the surrendered Notes. The
surrendered Notes shall be canceled and returned to Borrower.
(f) Any Lender may at any time pledge all or any portion of its interest
and rights under this Agreement (including all or any portion of its Note) to
any of the 12 Federal Reserve Banks organized under ss.4 of the Federal Reserve
Act, 12 U.S.C. ss.1341. No such pledge or the enforcement thereof shall release
the pledgor Lender from its obligations hereunder or under any of the other Loan
Documents.
(g) Notwithstanding anything to the contrary contained herein, a Lender
may not assign or participate any of its interests for a purchase price which,
directly or indirectly, reflects a discount from face value (i.e., the aggregate
outstanding Advances to be assigned or participated, plus accrued and unpaid
interest thereon), without first offering such assignment or participation at
such discounted price to the other Lenders on a pro rata basis, in which event
such other Lenders shall have 30 days in which to elect whether to purchase the
interest to be transferred.
(h) Any participant or new Lender hereunder shall agree in writing to
keep in confidence any financial information regarding Borrower that such
participant or new Lender may receive as provided in SECTION 6.4.
Section 10.11 SENIOR DEBT; BORROWER SUBORDINATION. The Obligations are
intended to be and shall be senior to all subordinated indebtedness of Borrower.
The Obligations shall never be contractually subordinated to any Debt of
Borrower owing to any other Person, except with the prior written consent of
Agent, Issuing Lender, and each of the Lenders.
Section 10.12 REVOLVING LOAN. Borrower and Lenders hereby agree that,
except for Section 15.10(b) thereof, the provisions of Art. 5069-1 5.01 et seq.
of the Revised Civil Statues of Texas, 1925, as amended (regulating certain
revolving credit loans and revolving triparty accounts) shall not govern or in
any manner apply to the Notes, the Letters of Credit or the Loan Documents.
Section 10.13 CONSTRUCTION. The parties hereto acknowledge and agree
that neither this Agreement nor any other Loan Document shall be construed more
favorably in favor of one than the other based upon which party drafted the
same, it
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being acknowledged that all parties hereto contributed substantially to the
negotiations and preparation of this Agreement and the other Loan Documents.
Section 10.14 APPLICABLE LAW. THIS AGREEMENT, THE NOTES AND ALL THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS OR, TO THE EXTENT THAT UNITED
STATES FEDERAL LAW APPLIES PURSUANT TO SECTION 10.8 OR OTHERWISE, UNITED STATES
FEDERAL LAW.
Section 10.15 SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. (a)
SUBMISSION TO JURISDICTION; VENUE. To the extent permitted by applicable law,
any legal action or proceeding with respect to this Agreement or the Notes or
any other Loan Document may be brought in the courts of the State of Texas or of
the United States of America for the Southern District of Texas, and, by
execution and delivery of this Agreement, Borrower, Agent, Issuing Lender, and
each Lender hereby accepts for itself and in respect of its property, generally
and unconditionally, the nonexclusive jurisdiction of the aforesaid courts. To
the extent permitted by applicable law, the parties hereto hereby irrevocably
waive any objection, including, without limitation, any objection to the laying
of venue or based on the grounds of FORUM NON CONVENIENS, which any of them may
now or hereafter have to the bringing of any such action or proceeding in such
respective jurisdictions.
(b) SERVICE OF PROCESS. To the extent permitted by applicable law,
Borrower, Agent, Issuing Lender, and each Lender irrevocably consents to the
service of process of any of the aforesaid courts in any such action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to it at its address provided herein. Nothing contained in this
SECTION 10.15(B) shall affect the right of Borrower, Agent, Issuing Lender, or
any Lender to serve process in any other manner permitted by law or commence
legal proceedings or otherwise proceed against any party hereto in any other
jurisdiction.
Section 10.16 JURY TRIAL WAIVER. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, BORROWER, AGENT, ISSUING LENDER AND LENDERS EACH HEREBY WAIVE ANY RIGHT TO
A JURY TRIAL WITH RESPECT TO ANY MATTER ARISING OR RELATING TO THIS AGREEMENT,
THE NOTES OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY.
Section 10.17 COUNTERPARTS. (a) This Agreement and all amendments hereto
may be executed in any number of original counterparts, each of which when so
executed and delivered shall be an original, and all of which, collectively,
shall constitute one and the same agreement, it being understood and agreed that
the signature pages may be detached from one or more counterparts and combined
with
-78-
the signature pages from any other counterpart in order that one or more fully
executed originals may be assembled.
(b) All certificates, opinions, reports, and documents to be
delivered from time to time hereunder shall be in such number of counterparts as
Agent may reasonably request, and in form reasonably acceptable to Agent, and
counterpart signature pages to any such documents may be attached to and shall,
together with all counterparts, constitute one and the same document.
Section 10.18 INCONSISTENT PROVISIONS. In the event of any conflict or
inconsistency between the terms of this Agreement and any terms of any other
Loan Document, the terms of this Agreement shall control.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered by their respective authorized officers effective as
of the date first set forth above.
BORROWER:
AMERICAN RESIDENTIAL SERVICES,
INC., a Delaware corporation
By: /s/ JOHN D. HELD
John D. Held,
Senior Vice President
AGENT:
NATIONSBANK OF TEXAS, N.A., a
national banking association,
as Agent for Lenders
By: /s/ ALBERT WELCH
Albert Welch
Vice President
ISSUING LENDER:
NATIONSBANK OF TEXAS, N.A.,
a national banking association
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By: /s/ ALBERT WELCH
Albert Welch
Vice President
LENDERS:
NATIONSBANK OF TEXAS, N.A.,
a national banking association
By: /s/ ALBERT WELCH
Albert Welch
Vice President
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SCHEDULE I
I. ADDRESS FOR NOTICES
A. AGENT OR ISSUING LENDER:
NationsBank of Texas, N.A.
Commercial Banking Division
700 Louisiana, 7th Floor
Houston, Texas 77002
Attn: Albert Welch
Fax No.: (713) 247-7175
Telephone No.: (713) 247-6631
B. LENDERS:
NationsBank of Texas, N.A.
Commercial Banking Division
700 Louisiana, 7th Floor
Houston, Texas 77002
Attn: Albert Welch
Fax No.: (713) 247-7175
Telephone No.: (713) 247-6631
C. BORROWER:
AMERICAN RESIDENTIAL SERVICES, INC.
5850 San Felipe, Suite 500
Houston, Texas 77057
Attention: A. Jefferson Walker III, Treasurer
Fax No.: (713) 706-6178
Telephone No.: (713) 706-6184
I-1
II. LOAN COMMITMENT AMOUNTS
Loan Commitment LOAN PERCENTAGE
AMOUNT
NationsBank of Texas, N.A. $55,000,000
100%
TOTAL $55,000,000 100%
I-2
SCHEDULE II
<TABLE>
<CAPTION>
A B C D
Funded Debt to Applicable LIBOR Applicable Base Unused Commitment
EBITDA Ratio Margin Rate Margin Fee Percentage
<S> <C> <C> <C>
Less than 1.00x 0.75% 0% 0.25%
Greater than or equal 0.875% 0% 0.25%
to 1.00x, but less
than 1.50x
Greater than or equal 1.125% 0% 0.30%
to 1.50x, but less
than 2.00x
Greater than or equal 1.375% 0.125% 0.375%
to 2.00x, but less
than 2.50x
Greater than or equal
to 2.5x 1.75% 0.25% 0.50%
- --------------------------- --------------------- --------------------- ---------------------------
</TABLE>
II-1
SCHEDULE III
EXISTING LIENS
[TO BE ADDED]
III-1
SCHEDULE IV
EXISTING DEBT
[TO BE ADDED]
IV-1
SCHEDULE 5.7(b)
RETIREE MEDICAL AGREEMENTS
1. Executive Supplemental Life Insurance Plan of American Residential
Services, Inc. dated effective September 1, 1996.
2. Executive Supplemental Disability Plan of American Residential Services,
Inc. dated effective September 1, 1996.
EMPLOYMENT AGREEMENTS
- - Howard S. Hoover, Jr. - Frank Menditch
- - C. Clifford Wright, Jr. - Bruce Menditch
- - William P. McCaughey - Howard Menditch
- - John D. Held - Howard Hauser
- - Gorden Timmons - Gary Daymon
- - Elliot Sokolow
5.7(b)-1
EXHIBIT A
PROMISSORY NOTE
$ Houston, Texas ______________ ____, 1996
FOR VALUE RECEIVED, AMERICAN RESIDENTIAL SERVICES, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of ____________________
("LENDER") at the office of Agent located at Houston, Harris County, Texas, or
at such other address in Houston, Harris County, Texas, given to Maker by Agent,
the principal sum of _______________________ Dollars ($_________), or so much
thereof as may be advanced and outstanding hereunder, together with accrued
interest thereon, as hereinafter provided.
This Note has been executed and delivered pursuant to, and is entitled
to the benefits of, the terms of that certain Revolving Loan Agreement dated
September 17, 1996 (as the same may be renewed, extended, restated, modified,
supplemented, amended and rearranged from time to time, the "LOAN AGREEMENT"),
executed by and among Maker, Agent, Issuing Lender, Lender, and the other
Lenders parties thereto from time to time and is one of the notes defined
therein as a "NOTE." Each capitalized term not expressly defined herein shall
have the meaning given to such term in the Loan Agreement. The terms of the Loan
Agreement shall govern in the case of any inconsistency between such terms and
the terms hereof.
1. INTEREST AND PAYMENT.
(a) MATURITY. The principal of this Note, and all accrued but
unpaid interest thereon, shall be due and payable in full on the earlier of (i)
the Termination Date or (ii) the date on which such amounts become due and
payable pursuant to SECTION 8.2 of the Loan Agreement.
(b) ACCRUAL OF INTEREST. Reference is hereby made to the
provisions of ARTICLES II AND III of the Loan Agreement relating to the interest
rate elections available to Maker under the Loan Agreement. Subject to SECTION
10.8 of the Loan Agreement and the terms hereof, interest on this Note shall
accrue at the rate or rates provided for in SECTION 3.3 of the Loan Agreement,
including, without limitation, at the Default Rate under the circumstances
provided for in SECTION 2.6(B), 2.6(C), 2.6(D), 3.3(B) of the Loan Agreement
(both before and after the entry of a judgment with respect to any of Lender's
Advances, except as otherwise provided by applicable law).
(c) INTEREST PAYMENTS. Interest hereon shall be due and
payable on the dates provided for in SECTIONS 3.4 and 8.2 of the Loan Agreement.
A-1
(d) OTHER AMOUNTS PAYABLE TO LENDER. Reference is hereby made to
SECTIONS 3.5(D) AND 3.5(E) and SECTION 3.10 of the Loan Agreement for other
amounts that may become due and payable by Maker to Lender in respect of its
Advances hereunder. All payments made pursuant to SECTION 3.5(E) of the Loan
Agreement shall be made free and clear of, and without reduction for, any
present or future Taxes.
2. DEFAULT. The occurrence of an Event of Default under the Loan
Agreement shall constitute an Event of Default under this Note.
3. REMEDIES.
(a) ALL REMEDIES AVAILABLE. Upon the occurrence and during the
continuation of an Event of Default, the holder hereof, acting by and through
Agent in accordance with and subject to the terms of ARTICLE VIII of the Loan
Agreement, shall have all of its Rights as provided for in the Loan Agreement.
(b) NO WAIVER. Neither the failure by the holder hereof to
exercise, nor delay by the holder hereof in exercising, any right to direct
Agent to accelerate the maturity of this Note or any other right, power or
remedy available to it under the Loan Documents upon the occurrence and during
the continuation of any Event of Default shall be construed as a waiver of such
Event of Default or as a waiver of the right to exercise any such right, power
or remedy at any time. No single or partial exercise by the holder hereof of any
such right, power or remedy shall exhaust the same or shall preclude any other
or further exercise thereof, and every such right, power or remedy may be
exercised at any time and from time to time. All rights and remedies provided
for in this Note and in any other Loan Document are cumulative of each other and
the holder hereof shall be entitled to avail itself of all such rights and
remedies for the collection of the indebtedness owing hereunder, and the resort
to any right or remedy provided for hereunder or under any such other Loan
Document shall not prevent the concurrent or subsequent employment of any other
appropriate rights or remedies provided for herein or therein. Without limiting
the generality of the foregoing provisions, the acceptance by the holder hereof
from time to time of any payment under this Note which is past due or which is
less than the payment in full of all amounts due and payable at the time of such
payment shall not (i) constitute a waiver of or impair or extinguish the rights
of the holder hereof to direct (in accordance with the Loan Agreement) Agent to
accelerate the maturity of this Note or to direct Agent (in accordance with the
Loan Agreement) to exercise any other right, power or remedy available to it at
the time or at any subsequent time, or nullify any prior exercise of any such
right, power or remedy, or (ii) constitute a waiver of the requirement of
punctual payment and performance or a novation in any respect.
4. USURY SAVINGS PROVISIONS.
A-2
(a) GENERAL LIMITATION. Notwithstanding anything herein or in any
other Loan Document, expressed or implied, to the contrary, in no event shall
any interest rate charged hereunder or under any other Loan Document, or any
interest contracted for, taken, reserved, collected or received by Lender, or
any other holder hereof, exceed the Maximum Lawful Rate. This Note, the amounts
payable hereunder and the rights of Lender, or any other holder hereof, with
respect hereto, are in all events subject to the terms of the Loan Agreement,
including, without limitation, SECTION 10.8 thereof.
(b) INTENT OF PARTIES. It is expressly stipulated and agreed to
be the intent of Maker and Lender at all times to comply with the applicable law
governing the maximum rate or amount of interest payable to Lender on or in
connection with this Note and the other Loan Documents in accordance with the
terms of SECTION 10.8 of the Loan Agreement.
5. GENERAL PROVISIONS.
(a) BUSINESS DAYS. Whenever any payment of principal or interest
under this Note shall be due on a day which is not a Business Day, the date for
payment thereof shall be extended to the next succeeding Business Day, and such
extension of time shall be included in the computation of the amount of interest
then due and payable.
(b) APPLICATION OF PAYMENTS. All payments in respect of this Note
shall be applied in such order and manner as is provided for in SECTION 3.9 of
the Loan Agreement. Nothing herein shall limit or impair any rights of any
holder hereof to apply as provided in the Loan Documents any past due payments,
any proceeds from the disposition of any collateral by foreclosure or other
collections after the occurrence of a Default.
(c) PREPAYMENTS. This Note may be prepaid pursuant to SECTION
3.6 of the Loan Agreement.
(d) COSTS OF COLLECTION. If any holder of this Note retains an
attorney at maturity or to collect, enforce or defend this Note or any other
Loan Document in any lawsuit or in any probate, reorganization, bankruptcy or
other proceeding, then Maker agrees to pay to each such holder, in addition to
the principal and interest owing hereunder, all costs and expenses incurred by
such holder in trying to collect this Note or in any such suit or proceeding,
including the reasonable fees of such attorneys.
(e) WAIVERS AND ACKNOWLEDGMENTS. Maker and all sureties,
endorsers, guarantors, and any other party now or hereafter liable for the
payment of this Note in whole or in part, hereby severally: (i) waive demand,
presentment for payment, notice of dishonor and of nonpayment, protest, notice
of protest, notice of intent to
A-3
accelerate, notice of acceleration and all other notice (except only for any
notice that is specifically required by the terms of the Loan Agreement or any
other Loan Document), filing of suit and diligence in collecting this Note or
enforcing any of the security herefor; (ii) agree to any substitution,
subordination, exchange or release of any such security or the release of any
party primarily or secondarily liable hereon; (iii) agree that the holder hereof
shall not be required first to institute suit or exhaust its remedies against
Maker or others liable or to become liable hereon or to enforce its rights
against them or any security herefor; (iv) consent to any extension or
postponement of time of payment of this Note for any period or periods of time
and to any partial payments, before or after maturity, and to any other
indulgences with respect hereto, without notice thereof to any of them; and (v)
to the extent permitted by applicable law, submit (and waive all rights to
object) to personal jurisdiction in the State of Texas, and venue in Harris
County, Texas, for the enforcement of any and all obligations of such Persons
under the Loan Documents.
(g) AMENDMENTS IN WRITING. This Note may not be changed, amended
or modified except in a writing expressly intended for such purpose and executed
by the party against whom enforcement of the change, amendment or modification
is sought.
(h) PURPOSE OF PROCEEDS. The proceeds of this Note will be used
solely for business purposes and not for personal, family, household or
agricultural purposes.
(i) NOTICES. Any notice required or which any party desires to
give under this Note shall be given and effective as provided in SECTION 10.2 of
the Loan Agreement.
(j) ASSIGNMENTS/PARTICIPATIONS. Maker acknowledges and agrees
that the holder of this Note may, at any time and from time to time, assign all
or a portion of its interest in this Note or transfer to any Person a
participation interest in this Note, subject to and in accordance with the terms
and conditions of the Loan Agreement, including SECTION 10.10 thereof.
(k) SUCCESSORS AND ASSIGNS. All of the covenants, stipulations,
promises and agreements contained in this Note by or on behalf of Maker shall
bind its successors and assigns and shall be for the benefit of Lender and its
successors and assigns, whether so expressed or not, subject, however, to the
provisions of SECTION 10.10 of the Loan Agreement.
(l) GOVERNING LAW. THIS NOTE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, OR TO
THE EXTENT THAT UNITED STATES FEDERAL LAW APPLIES PURSUANT TO
SECTION 10.8 OF THE LOAN AGREEMENT OR OTHERWISE, UNITED STATES
FEDERAL LAW.
A-4
(m) INTEGRATION. THIS NOTE AND THE OTHER LOAN DOCUMENTS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
A-5
IN WITNESS WHEREOF, Maker has duly executed this Note as of the
date first above written.
MAKER:
AMERICAN RESIDENTIAL
SERVICES, INC., a Delaware
corporation
By:
Name:
Title:
A-6
EXHIBIT B
REQUEST FOR ADVANCE
This Request for Advance is being delivered by AMERICAN RESIDENTIAL
SERVICES, INC., as Borrower under the Revolving Loan Agreement, dated September
17, 1996, among Borrower, NationsBank of Texas, N.A., as Agent and Issuing
Lender, and the Lenders parties thereto from time to time, (as amended, modified
and supplemented from time to time, the "LOAN AGREEMENT"). Unless otherwise
defined herein, each capitalized term used herein shall have the meaning given
to such term in the Loan Agreement.
1 . [Borrower hereby requests Advances be made to it on in an aggregate
principal amount equal to $ . Borrower represents and warrants to Lenders that
the Advances herein requested do not exceed the amount which Borrower is
entitled to receive pursuant to SECTION 2.1 of the Loan Agreement.] [Borrower
hereby requests that a Letter of Credit be issued for its account on
in the face amount of $ and expiring on and requests that the
original of such Letter of Credit be delivered to _____________ located at
__________________. Borrower represents and warrants to Lender that the Letter
of Credit herein requested does not exceed the amount which Borrower is entitled
to receive pursuant to SECTION 2.1 of the Loan Agreement.]
2. The requested [Advances][Letter of Credit] shall be used for the
following purpose or purposes: . (Indicate specifically if any purpose includes
the acquisition of an Acquired Business.)
[3. Borrower requests that of the Advances requested hereby, $
bear interest based on the Variable Rate and $ bear
interest based on the Adjusted LIBOR Rate. With respect to the LIBOR Rate
Advances, the Interest Period shall be and the Effective Date
shall be .]
[3][4]. Borrower hereby certifies, represents, and warrants to Lenders
that:
(a) This Request for Advance has been duly authorized by
all necessary action on the part of Borrower.
(b) The representations and warranties of Borrower and its
Subsidiaries contained in the Loan Agreement and the other Loan
Documents are true in all material respects on and as of the date hereof
with the same force
B-1
and effect as though made on the date hereof, except for such
representations and warranties that speak as of a particular date.
(c) No Default or Event of Default has occurred and is
continuing, and no Default or Event of Default shall exist after giving
effect to the extension of credit requested hereby.
(d) Each of the conditions precedent contained in the Loan
Agreement applicable to the extensions of credit requested hereby has
been satisfied in all material respects.
(e) The [proceeds of the Advances] [Letter of Credit]
herein requested will not be used in violation of any provision of the
Loan Agreement.
EXECUTED as of ________________, 19__.
BORROWER:
AMERICAN RESIDENTIAL SERVICES,
INC.
By:
Name:
Title:
B-2
EXHIBIT C
ASSIGNMENT AND ACCEPTANCE
This ASSIGNMENT AND ACCEPTANCE (this "ASSIGNMENT AND ACCEPTANCE") is
entered into as of the _____ day of ____________, 19__, by and between a
______________("ASSIGNOR") and _________________ ("ASSIGNEE").
RECITALS:
I. Reference is made to the Revolving Loan Agreement, dated September
17, 1996, between AMERICAN RESIDENTIAL SERVICES, INC., as Borrower, NationsBank
of Texas, N.A., as Agent and Issuing Lender, and the Lenders from time to time
parties thereto (as amended, supplemented and otherwise modified from time to
time, the "LOAN AGREEMENT"). Each capitalized term defined in the Loan Agreement
and used herein and not otherwise defined shall have the same meaning assigned
to such term in the Loan Agreement.
II. As a Lender party to the Loan Agreement, Assignor owns and holds a %
undivided interest in the Credit Facility, as set forth in Schedule I to the
Loan Agreement.
III. Assignor desires to assign to Assignee [all of its] [a ____%
interest in all of Assignor's] right, title and interest in, to and under the
Credit Facility and Assignee desires to purchase the same from Assignor.
NOW, THEREFORE, for and in consideration of Ten and No/100 Dollars
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged and confessed, Assignor and Assignee hereby
covenant and agree as follows:
1. Assignor has SOLD, ASSIGNED, TRANSFERRED and CONVEYED, and by
these presents does hereby SELL, ASSIGN, TRANSFER and CONVEY,
unto Assignee [all of] [a___% interest in all of] Assignor's
right, title and interest under the Credit Facility, the Loan
Agreement, Assignor's Note and the other Loan Documents, and all
obligations as Assignor arising thereunder, as of the Assignment
Date (hereinafter defined) (the "ASSIGNED INTEREST").
2. Assignee hereby assumes all obligations of Assignor with respect
to the Assigned Interest.
C-1
3. Assignor hereby represents and warrants to Assignee that Assignor
is the legal and beneficial owner of the Assigned Interest and
that Assignor is legally authorized to enter into this Assignment
and Acceptance.
4. Assignee hereby confirms and acknowledges that, except as
specifically set forth herein, Assignor: (i) makes no
representation or warranty and assumes no responsibility with
respect to any statements, warranties or representations made in
or in connection with any Loan Document, or the execution,
legality, validity, enforceability, genuineness, sufficiency or
value of any Loan Document or any other instrument or document
furnished pursuant thereto, other than that it is the legal and
beneficial owner of the Assigned Interest and that such interest
is free and clear of any adverse claim; (ii) makes no
representation or warranty and assumes no responsibility with
respect to the value or condition of, or title to, the Assigned
Interest or the financial condition of Borrower; and (iii) makes
no representation or warranty and assumes no responsibility with
respect to the performance or observance by Borrower of any of
its obligations under any Loan Document or any other instrument
or document furnished pursuant thereto.
5. Assignor requests that Agent exchange Assignor's Note, as
follows:
Note Payable to the Order of: Amount of Note
[Assignor] $
[Assignee] $
6. Assignee represents and warrants that (a) it is legally
authorized to enter into this Assignment and Acceptance, and (b)
it is an Eligible Assignee.
7. Assignee hereby: (a) appoints Agent as its "Agent" under the
Loan Agreement and other Loan Documents and authorizes Agent to
take such action as agent on its behalf and to exercise such
powers under the Loan Agreement and the other Loan Documents as
are delegated to Agent by the terms thereof; (b) confirms that
it has received a copy of the Loan Documents, together with
copies of such financial statements of Borrower and such other
documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into this
Assignment and Acceptance; (c) agrees that it will,
independently and without reliance upon Assignor, any other
Lender or Agent, and based on such documents and information as
it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Loan
Documents, subject to and in accordance with the Loan
C-2
Agreement; (d) agrees with Assignor for the benefit of Agent,
Issuing Lender, each other Lender and Borrower that it will
perform all of the obligations which by the terms of the Loan
Documents are required to be performed by it as a Lender
thereunder, and that it shall be liable directly to Assignor,
Agent, Borrower, Issuing Lender and each other Lender for the
performance of such obligations; and (e) agrees not to disclose
any financial information of Borrower or other confidential
information regarding the Credit Facility as and to the extent
provided in SECTION 6.4 of the Loan Agreement.
8. The effective date of the sale, assignment, transfer, and
conveyance evidenced by this Assignment and Acceptance shall be
________, 19___ (the "ASSIGNMENT DATE"), determined in accordance
with SECTION 10.10(C) of the Loan Agreement. Following the
execution of this Assignment and Acceptance, each party hereto
and each Person consenting hereto shall deliver its duly executed
counterpart hereof to Agent for acceptance and recording in the
Register by Agent.
9. As of the Assignment Date, (i) Assignee shall be a "Lender"
under the Loan Documents and, to the extent provided in this
Assignment and Acceptance and subject to the terms of the Loan
Documents, shall have all the rights and obligations of a Lender
thereunder, (ii) Assignor shall, to the extent of the Assigned
Interest, relinquish its rights and be released from its
obligations, under the Loan Documents, (iii) the Loan Commitment
Amount and Loan Percentage of Assignor will be $__________ and
_______%, respectively, and (iv) the Loan Commitment Amount and
Loan Percentage of Assignee will be $ and %, respectively.
10. Upon acceptance and recording of the Assignment and Acceptance,
from and after the Assignment Date, Agent shall make all payments
in respect of the Assigned Interest (including payments of
principal, interest, fees and other amounts) to Assignee.
11. If Assignee is organized under the laws of a jurisdiction outside
the United States, it hereby represents that it has delivered to
Assignor and Agent completed and signed copies of any forms that
may be required by the United States Internal Revenue Service in
order to certify Assignee's exemption from United States
withholding taxes with respect to any payment or distributions
made or to be made to Assignee with respect to the Credit
Facility or under the Loan Documents.
12. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
C-3
TEXAS, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF.
13. This Assignment and Acceptance may be executed in any number of
counterparts which shall together constitute but one and the same
agreement.
IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment
and Acceptance as of the date first above written.
ASSIGNOR:
By:
Name:
Title:
ASSIGNEE:
Address of Assignee:
By:
Name:
Title:
ACKNOWLEDGED and ACCEPTED as of the _____ day of _________________, 199__.
AGENT:
NATIONSBANK OF TEXAS, N.A., a
national banking association, as Agent
By:
Name:
Title:
C-4
ACKNOWLEDGED and ACCEPTED as of
the day of , 199 .
---------- ---------------------------------- -----
BORROWER:
C-5
AMERICAN RESIDENTIAL RESOURCES, INC.
By:
Name:
Title:
C-6
EXHIBIT D
Date Submitted:
RATE DESIGNATION NOTICE
NationsBank of Texas, N.A.
700 Louisiana, 7th Floor
Houston, Texas 77002
Attention: Albert Welch
Re: American Residential Services, Inc.
Gentlemen:
Pursuant to and in accordance with SECTION 3.5(A) AND 3.5(B) of the
Revolving Loan Agreement, dated September 17, 1996, among AMERICAN RESIDENTIAL
SERVICES, INC., as Borrower, NationsBank of Texas, N.A., as Agent and Issuing
Lender, and the Lenders parties thereto from time to time (as amended,
supplemented and otherwise modified from time to time, the "LOAN AGREEMENT"),
Borrower hereby makes the following election:
A. CONVERSION INTO OR CONTINUATION OF LIBOR RATE ADVANCEs
1 . Effective Date of Conversion and/or Continuation:
2. (a) Amount of Variable Rate Advances to be Converted
into LIBOR Rate Advances: $ .
(b) Amount of LIBOR Rate Advances to be Continued as
LIBOR Rate Advances and the existing Interest
Adjustment Date for such Advances: $
Interest Adjustment Date
3. Interest Period Selections for Above:
Period AMOUNT Period Amount
[ ] 1 month $ [ ] 4 months $
-------------
[ ] 2 months $ [ ] 6 months $
-------------
D-1
[ ] 3 months $
B. CONVERSION OF LIBOR RATE ADVANCES INTO VARIABLE RATE ADVANCES
1. Amount of LIBOR Rate Advances to be Converted and the existing
Interest Adjustment Date for such LIBOR Rate Advances:
$
Interest Adjustment Date
$
Interest Adjustment Date
Borrower represents and warrants as of the date first set forth above
that the foregoing interest rate selection is in compliance with the terms and
conditions of the Loan Agreement and that there exists no Event of Default.
AMERICAN RESIDENTIAL SERVICES, INC.,
a Delaware corporation
By:
Name:
Title:
D-2
EXHIBIT E
[FORM]
GUARANTY
The undersigned ("GUARANTOR"), for and in consideration of the
sum of Ten Dollars ($10.00) and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, and to induce
NATIONSBANK OF TEXAS, N.A., in its capacity as Agent and Issuing Lender, and
each Lender (as such term is defined in the hereafter defined Loan Agreement),
at any time or from time to time to loan monies or to otherwise extend credit,
with or without security, to or for the account of AMERICAN RESIDENTIAL
SERVICES, INC., a Delaware corporation ("BORROWER"), in accordance with the
terms of the hereinafter defined Loan Agreement, hereby agrees with Agent,
Issuing Lender, and each Lender as follows:
1. Guarantor unconditionally guarantees the prompt payment to
Agent and each Lender of the following (the "GUARANTEED INDEBTEDNESS"):
Any and all indebtedness, obligations, and liabilities of Borrower to
Lenders (individually and collectively) of any kind, type, or nature,
whether now existing or hereafter arising under and in connection with
the Revolving Loan Agreement dated September 17, 1996, among Borrower,
Agent, Issuing Lender, and Lenders (as the same may be amended,
modified, supplemented, rearranged, and restated from time to time, the
"LOAN AGREEMENT"), including all principal, accrued interest, and other
amounts owing by Borrower under the Notes (as such term is defined in
the Loan Agreement), and each of the other Obligations (as such term is
defined in the Loan Agreement).
2. All capitalized terms used in this Guaranty, which are not
otherwise defined herein, shall have the meanings assigned to such terms in the
Loan Agreement.
3. If the Guaranteed Indebtedness is not paid by Guarantor when
due, as required herein, and this Guaranty is placed in the hands of an attorney
for collection, or if this Guaranty is enforced by suit or through the
Bankruptcy Court or through any other judicial proceedings, Guarantor shall pay
to Agent (or any Lender, as the case may be) an amount equal to the reasonable
attorneys' fees and collection costs incurred by Agent (or any Lender, as the
case may be) in the collection of the Guaranteed Indebtedness.
E-i
4. (a) Guarantor hereby expressly grants to each Lender a right of
setoff against all deposits and other sums at any time held or credited by or
due from such Lender to Guarantor. The rights of each Lender under this
paragraph 4 are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which such Lender may have at law, in
equity, or by agreement.
(b) Upon the occurrence and during the continuation of any
Event of Default, each Lender is hereby authorized at any time and from time to
time, to the fullest extent permitted by applicable law, at its option, without
notice, demand or liability to Guarantor, to set off and apply any and all
deposits (general or special, time or demand, provisional or final, excepting,
however, any fiduciary or escrow accounts established by Guarantor into which
only funds of unrelated third parties are deposited, provided that Guarantor has
informed such Lender and Agent in writing of the nature of such accounts) at any
time held, and other indebtedness at any time owing, by such Lender to or for
the credit or the account of Guarantor against any and all of the Guaranteed
Indebtedness, in such order and manner as such Lender may determine, subject,
however, to SECTION 9.14 of the Loan Agreement, regardless of whether Agent or
such Lender (acting through Agent in accordance with the Loan Agreement) shall
have made any demand under this Guaranty, and although such Guaranteed
Indebtedness may be unmatured.
5. This is an absolute, complete, and continuing Guaranty, and no
notice of the Guaranteed Indebtedness or any extension of credit heretofore or
hereafter contracted by or extended to Borrower pursuant to the Loan Agreement
need be given to Guarantor. Borrower and Lenders (through Agent or otherwise)
may rear range, extend, and/or renew the Guaranteed Indebtedness without notice
to Guarantor and in such event Guarantor will remain fully bound hereunder on
the Guaranteed Indebtedness. Further, any Lender may assign all or any portion
of its respective interest in the Credit Facility and its obligations
thereunder, subject to and in accordance with the terms of the Loan Agreement,
without giving notice thereof to Guarantor, or obtaining the consent thereto of
Guarantor, and, on the effective date of any such assignment pursuant to an
Assignment and Acceptance contemplated by SECTION 10.10 of the Loan Agreement,
the assignee thereunder shall be a Lender for purposes of this Guaranty.
Guarantor expressly waives all notices of any kind, presentment for payment,
demand for payment, protest, notice of protest, notice of intent to accelerate,
notice of acceleration, dishonor, diligence, notice of any adverse change in the
financial condition of Borrower, notice of any adjustment, indulgence,
forbearance or compromise that might be granted or given by any Lender (through
Agent or otherwise) to Borrower, and also notice of acceptance of this Guaranty,
acceptance on the part of each Lender (through Agent or otherwise) being
conclusively presumed by Guarantor's execution and delivery of this Guaranty.
The liability and obligations of Guarantor hereunder shall not be affected or
impaired by any action or inaction by Lenders (through Agent or otherwise) in
regard to any matter waived or
E-ii
notice of which is waived by Guarantor in this paragraph or in any other
paragraph of this Guaranty.
6. Guarantor authorizes Lenders (through Agent or otherwise),
without notice or demand and without affecting Guarantor's liability hereunder,
(a) to take and hold security for the payment of this Guaranty and/or the
Guaranteed Indebtedness, and to exchange, enforce, waive and/or release any such
security; (b) to apply such security and direct the order or manner of sale
thereof as Lenders (through Agent or otherwise) in their discretion may
determine (but subject to the requirements of the Loan Agreement); (c) to obtain
a guaranty of the Guaranteed Indebtedness from any one or more other Persons
whomsoever and to enforce, waive, rearrange, modify, limit or release at any
time or times such other Persons from their respective obligations under such
guaranties; and (d) to fully or partially release at any time any guarantor
which executes any other guaranty of the Guaranteed Indebtedness, whether with
or without consideration.
7. Guarantor waives any right to require Lenders (through Agent or
otherwise) to: (a) proceed against, or make any effort at the collection of the
Guar anteed Indebtedness from Borrower or any other guarantor or Person liable
for the Guaranteed Indebtedness; (b) proceed against or exhaust any collateral
held by Lenders (through Agent or otherwise) as security for the Guaranteed
Indebtedness (or any part thereof); or (c) pursue, through Agent or otherwise as
permitted thereby, any other remedy available to Lenders under any other Loan
Document. Guarantor further waives any and all rights and remedies which
Guarantor may have or be able to assert by reason of the provisions of Chapter
34 of the Texas Business and Commerce Code or Section 3.605 of the Texas Uniform
Commercial Code. Guarantor waives any defense arising by reason of any lack of
corporate authority or power, or other defense of Borrower or any other
guarantor of the Guaranteed Indebtedness, and Guarantor shall remain liable
under this Guaranty regardless of whether Borrower or any other guarantor be
found not liable on the Guaranteed Indebtedness for any reason, including,
without limitation, the bankruptcy, insolvency, or corporate dissolution of
Borrower or any such other guarantor, even though rendering the Guaranteed
Indebtedness void or unenforceable or uncollectible as against Borrower or any
such other guarantor. This Guaranty shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the
Guaranteed Indebtedness is rescinded or must otherwise be returned by any Lender
(or Agent) upon the insolvency, bankruptcy or reorganization of Borrower or
otherwise, all as though such payment had not been made and Guarantor will,
thereupon, guarantee pursuant hereto payment of such amount as to which a refund
or restitution has been made, together with interest accruing thereon subsequent
to the date of such refund or restitution at the Default Rate and the collection
costs and fees (including, without limitation, reasonable attorneys' fees)
applicable thereto.
E-iii
8. Guarantor hereby represents and warrants to Lenders and Agent
that the Credit Facility made available to Borrower in accordance with the terms
of the Loan Agreement has benefited, and does benefit, Guarantor, directly or
indirectly.
9. Upon the occurrence of an Event of Default, subject to the
terms and provisions of the Loan Agreement, the Required Lender's may, at their
option, direct the Agent to declare the unpaid balance of the Guaranteed
Indebtedness to be immediately due and payable, and thereupon such Guaranteed
Indebtedness shall immediately be due and payable without presentation, notice,
protest, notice of protest, notice of dishonor, notice of intent to accelerate,
or notice of acceleration, all of which are hereby expressly waived by Guarantor
(except as specifically provided for in the Loan Agreement).
10. To the extent permitted by applicable law, the liability and
obligations of Guarantor hereunder shall not be affected or impaired by, to the
extent applicable, (a) the failure of Agent, on behalf of Lenders, or any other
party to exercise diligence or reasonable care in the preservation, protection
or other handling or treatment of all or any part of any collateral securing
payment of all or any part of the Guaranteed Indebtedness, (b) the failure of
any Lien intended to be granted or created pursuant to any Loan Document to
secure the Guaranteed Indebtedness to be properly perfected or created or the
unenforceability of any such Lien for any other reason, or (c) the subordination
of any such Lien to any Lien of any other Person.
11. To the maximum extent permitted by applicable law, Agent, on
behalf of Lenders, may pursue any remedy available to it pursuant to and in
accordance with the requirements of the Loan Agreement, without altering the
obligations of Guarantor hereunder and without liability to Guarantor, even
though the pursuit of such remedy may result in Guarantor's loss of rights of
subrogation, including, without limitation, pursuing others liable for the
Guaranteed Indebtedness. Guarantor hereby agrees that in no event shall any such
payment by Guarantor in respect of the Guaranteed Indebtedness entitle it, by
subrogation or otherwise, to exercise any rights against Borrower or to
participate in any security now or hereafter held by any Lender, or Agent on
behalf of Lenders, for payment of the Guaranteed Indebtedness prior to 90 days
(or the applicable preference period if such period is longer than 90 days)
after the making of any such payment by Guarantor in respect of the Guaranteed
Indebtedness.
12. Notwithstanding any change in Borrower's status, including,
without limitation, as a result of any dissolution of Borrower, any sale, lease,
or transfer of any assets of Borrower, any changes in the stockholders, partners
or members of Borrower, or any reorganization of Borrower, this Guaranty shall
continue, and Guarantor shall remain liable for the Guaranteed Indebtedness.
E-iv
13. The liability of Guarantor for the payment of the Guaranteed
Indebtedness is primary and not secondary.
14. Guarantor is familiar with and has independently reviewed the
books and records relating to the financial condition of Borrower; Guarantor is
not, however, relying on such financial condition as an inducement to entering
into this Guaranty. As of the date hereof, and after giving effect to this
Guaranty and the contingent obligations evidenced hereby, (a) the aggregate fair
market value of Guarantor's assets exceeds its liabilities (whether contingent,
subordinated, unmatured, unliquidated or otherwise), (b) Guarantor has
sufficient cash flow to enable it to pay its Debt as it matures, and (c)
Guarantor has a reasonable amount of capital to conduct its business as
presently contemplated.
15. If Borrower shall at any time or times be or become obligated
to any Lender for payment of any indebtedness other than the Guaranteed
Indebtedness (such other indebtedness being hereinafter referred to as the
"Other Indebtedness"), such Lender (without in anywise impairing its rights
hereunder or diminishing Guarantor's liability hereunder, but subject to the
terms and requirements of the Loan Agreement) shall have the right at any time
or times to apply to the Other Indebtedness any amounts paid to or received by
or coming into the possession of such Lender from or attributable to Borrower or
any other Person liable for any of the Other Indebtedness or from or
attributable to or representing proceeds of any property or security held by
such Lender securing payment of the Other Indebtedness or any credits, deposits
or offsets due Borrower or such other Person liable for any of the Other
Indebtedness (whether or not the Guaranteed Indebtedness or the Other
Indebtedness is then due), it being intended hereby that such Lender shall have
the right to apply all such amounts, credits, deposits and offsets so becoming
available first against the Other Indebtedness before making application thereof
on or against the Guaranteed Indebtedness.
16. Guarantor acknowledges that Guarantor is not relying on any
representations (oral or otherwise) of Agent, any Lender, or any other Person
(other than as expressly described in this Guaranty) as an inducement to enter
into this Guaranty.
17. This Guaranty was reviewed by Guarantor, and Guarantor
acknowledges and agrees that Guarantor (a) understands fully all the terms of
this Guaranty and the consequences and implications of Guarantor's execution of
this Guaranty, and (b) has been afforded an opportunity to have this Guaranty
reviewed by, and to discuss the terms, consequences and implications of this
Guaranty with, an attorney or such other Persons as Guarantor may have desired.
18. This Guaranty is and shall be in every particular available to
the successors of Agent and each Lender and is and shall be fully binding upon
the
E-v
successors and assigns of Guarantor. This Guaranty is intended for and shall
inure to the benefit of Agent and each Lender. This Guaranty shall be
transferable with the same force and effect and to the same extent that the
Guaranteed Indebtedness is transferable pursuant to an Assignment and Acceptance
provided for in the Loan Agreement.
19. All amounts becoming payable by Guarantor to any Lender (or
Agent on such Lender's behalf) under this Guaranty shall be payable at Agent's
offices in Houston, Harris County, Texas specified in Schedule I to the Loan
Agreement.
20. All notices, demands, requests, and communications permitted or
required under this Guaranty shall be in writing and, if given to Guarantor at
its address set forth on the signature page hereof or if given to Agent or any
Lender at its address set forth in Schedule I to the Loan Agreement or in the
applicable Assignment and Acceptance, in each case in a manner provided for in
SECTION 10.2 of the Loan Agreement, shall be effective at the time provided for
in SECTION 10.2 of the Loan Agreement.
21. It is the intention of the parties hereto to comply strictly
with all applicable usury laws; accordingly, it is agreed that notwithstanding
any provisions of this Guaranty to the contrary, or in any documents securing
payment hereof or otherwise relating hereto, in no event shall this Guaranty or
such documents require the payment or permit the collection of an aggregate
amount of interest in excess of the maximum amount permitted by such laws,
including, without limitation, the laws of the State of Texas and the laws of
the United States of America. If any interest in excess of such maximum amount
is determined to be contracted for, charged or received under this Guaranty or
under the terms of any such documents securing payment hereof or otherwise
relating hereto, or if under any circumstance whatsoever the amount of interest
(including all amounts payable hereunder which are not denominated as interest
but which are determined to constitute interest under applicable usury laws)
contracted for, charged or received under this Guaranty shall exceed the maximum
amount of interest permitted by such applicable usury laws, then in any such
event (a) the provisions of this paragraph shall govern and control, (b)
Guarantor shall not be obligated to pay the amount of such interest to the
extent that it is in excess of the maximum amount of interest permitted by such
applicable usury laws, (c) any such excess interest which may have been
collected from Guarantor shall be either applied as a credit against the then
unpaid Guaranteed Indebtedness or, if the Guaranteed Indebtedness shall have
been paid in full, refunded to Guarantor, and (d) the effective rate of interest
shall be automatically reduced to the maximum lawful contract rate allowed under
such applicable usury laws as now or hereafter construed by courts of
appropriate jurisdiction. It is further agreed, without limitation of the
foregoing, that all calculations of the rate of interest contracted for, charged
or received under this Guaranty or under such other documents which are made for
the purpose of determining whether such rate exceeds the maximum lawful contract
rate,
E-vi
<PAGE>
shall be made, to the extent permitted by such applicable usury laws, by
amortizing, prorating, allocating and spreading in equal parts during the full
term of this Guaranty, all interest at any time contracted for, charged or
received from Guarantor or otherwise by Lenders in connection with this
Guaranty.
22. In case any of the provisions of this Guaranty shall for any
reason be held to be invalid, illegal, or unenforceable, such invalidity,
illegality, or unenforceability shall not affect any other provision hereof, and
this Guaranty shall be construed as if such invalid, illegal, or unenforceable
provision had never been contained herein.
23. In all instances herein, the singular shall be construed to
include the plural and the masculine to include the feminine.
24. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
ONFLICT OF LAW PRINCIPLES, AND THE APPLICABLE
LAWS OF THE UNITED STATES OF AMERICA.
25. To the extent permitted by applicable law, all actions or
proceedings with respect to the Guaranteed Indebtedness or this Guaranty may be
instituted in the Courts of the State of Texas located in Harris County, Texas,
or in the United States District Court for the Southern District of Texas, and
by execution and delivery of this Guaranty, to the extent permitted by
applicable law, Guarantor irrevocably and unconditionally (a) submits to the
non-exclusive jurisdiction (both subject matter and personal) of each such
court, and (b) waives (i) any objection Guarantor may now or hereafter have to
the laying of venue in any such courts and (ii) any claim that any action or
proceeding brought in any of such courts has been brought in an inconvenient
forum.
26. Guarantor acknowledges and agrees that (a) Borrower has
executed and delivered a Note to each Lender, which evidences a portion of the
Guaranteed Indebtedness, and (b) Guarantor is primarily, and not secondarily,
obligated to each Lender for payment of the Guaranteed Indebtedness evidenced
thereby.
27. This Guaranty and the other Loan Documents supersede all other
prior understandings and agreements, whether written or not, between Guarantor
and the beneficiaries hereof relating specifically to the agreements contained
herein and therein and the transactions contemplated thereby.
28. THIS GUARANTY CONSTITUTES A WRITTEN "LOAN
AGREEMENT" AS DEFINED IN SECTION 26.02 OF THE TEXAS BUSINESS AND
COMMERCE CODE. THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
E-vii
<PAGE>
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
EXECUTED this ____ day of ______________, 1996.
__________________, a _________ corporation
By:
Name:
Title:
Address:
ACKNOWLEDGED AND AGREED TO:
NATIONSBANK OF TEXAS, N.A.,
as Agent on behalf of itself and
the other Lenders and as Issuing
Lender
By:
Albert Welch,
Vice President
E-viii
EXHIBIT 4.7
CONFORMED COPY
NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD,
ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED
OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED,
AND REGULATIONS PROMULGATED THEREUNDER, STATE SECURITIES STATUTES AND
REGULATIONS PROMULGATED THEREUNDER, AND THE TERMS AND CONDITIONS HEREOF.
CONVERTIBLE PROMISSORY NOTE
$1,600,000 MARCH 6, 1996
FOR VALUE RECEIVED, the undersigned, AMERICAN RESIDENTIAL SERVICES, INC., a
Delaware corporation (herein, "Maker"), hereby promises to pay (subject to the
immediately following paragraph) to the order of EQUUS II INCORPORATED, a
Delaware corporation (herein, "Holder"), at its principal offices at 2929 Allen
Parkway, 25th Floor, Houston, Texas 77019, the principal sum of ONE MILLION SIX
HUNDRED THOUSAND AND NO/100 DOLLARS ($1,600,000), or, if less, the aggregate
unpaid amount of all Advances made by Holder to Maker pursuant to the Funding
Agreement dated the date hereof (the "Funding Agreement"), between Maker and
Holder (including amounts advanced by Holder to Maker pursuant to the Promissory
Note dated December 6, 1995, issued by Maker in favor of Holder), on the earlier
of (i) December 31, 1996, or (ii) the date on which the Maker closes an initial
public offering ("IPO") of its common stock, par value $.01 per share ("Common
Stock"), together with interest on the unpaid balance thereof at a rate per
annum equal to the Base Rate (as defined in the Funding Agreement) plus 1/4%.
Upon the occurrence and during the continuance of an Event of Default (as
hereinafter defined), all Advances evidenced hereby will bear interest at 18%
per annum.
Simultaneously with the closing of the IPO, the principal amount of the
lesser of (i) all outstanding principal amounts under this Note, or (ii)
$500,000 (the "Conversion Amount"), shall automatically convert (the
"Conversion") into that number of shares of Common Stock, rounded upward to the
nearest whole share, which are equal to the greater of (i) twice the number of
shares of Common Stock (but excluding any shares issuable pursuant to options or
warrants or pursuant to the conversion of any convertible securities) owned,
directly or indirectly, by all shareholders of the Company immediately prior to
the closing of the IPO or (ii) ten percent of Maker's outstanding Common Stock
at such closing (taking into account all other issuances of Maker's Common Stock
that will occur simultaneously or contemporaneously with such closing but
excluding all issuances which may occur as a result of the exercise of then
outstanding warrants or options or the conversion of securities which are
convertible into Common Stock). Prior to the Conversion, the Holder, as such,
shall not be entitled to any rights of a stockholder of the Maker.
The Maker shall at all times reserve and keep available out of its
authorized but unissued stock for the purpose of effecting the Conversion such
number of its duly authorized shares of Common Stock as shall from time to time
be sufficient to effect the Conversion. The Maker covenants that all shares of
Common Stock which may be issued upon the Conversion will upon issuance be fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof. The Maker will not take any action which would cause
the conversion price to be below the then par value per share of the Common
Stock.
Maker may at any time prior to the maturity date (i) prepay the principal
amount hereof which is greater than $500,000 in whole or from time to time in
part, together with accrued interest to the date of such prepayment, without
penalty, or (ii) prepay the Note in its entirety without penalty if the Funding
Agreement is terminated by the Holder (and in which case, the Conversion and any
rights of holder related to or arising out of the Conversion shall automatically
terminate without the necessity of action of any party). This Note is subject to
the terms and conditions of Section 1.1 of the Funding Agreement.
If default is made on the payment of this Note, and this Note is placed in
the hands of an attorney for collection, or collected through probate or
bankruptcy proceedings, or if suit is brought on this Note, Maker agrees to pay
reasonable attorneys fees in addition to all other amounts owing hereunder.
If any of the following events shall occur and be continuing, then the
Holder may by notice in writing to the Maker declare the outstanding principal
balance of this Note, together with any accrued and unpaid interest thereon
(collectively, the "Indebtedness") to be, and thereupon the Indebtedness shall
forthwith become, due and payable without any further notice of any kind to the
Maker or any other party, all of which notices are expressly waived:
(i) The Maker does not pay any principal or interest on or with
respect to the Indebtedness evidenced by this Note when due; or
(ii) The Maker makes an assignment for the benefit of creditors; or
(iii) The Maker admits in writing its inability to pay debts as they
mature, applies to any tribunal for the appointment of a trustee or
receiver of any substantial part of its assets, or commences any
proceedings under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or other liquidation law of any
jurisdiction; or
(iv) Any such application is filed, or any such proceedings are
commenced against the Maker, and the Maker indicates its approval, consent
or acquiescence, or any order is entered appointing such trustee or
receiver, or adjudicating the Maker bankrupt or insolvent, or approving the
petition in any such proceedings, and such order remains in effect for
sixty days; or
(v) Any Event of Default occurs under the Funding Agreement.
Anything in this Note to the contrary notwithstanding, Maker shall never be
required to pay unearned interest on this Note and shall never be required to
pay interest on this Note at a rate in excess of the maximum rate that may be
lawfully charged under applicable law. If the effective rate of interest which
would otherwise be payable under this Note would exceed the maximum rate of
interest allowed by applicable law, then the amount of interest payable under
this Note shall be reduced to the amount allowed under said applicable law, and
the amount paid in excess of such amount shall be credited to the principal of
this Note.
THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS.
IN WITNESS WHEREOF, the Maker has executed this Note on the 6th day of
March, 1996, to be effective as of such date.
AMERICAN RESIDENTIAL SERVICES, INC.
By /s/ C. CLIFFORD WRIGHT, JR.
C. Clifford Wright, Jr., President and
Chief Executive Officer
EXHIBIT 4.8
CONFORMED COPY
NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE SOLD,
ASSIGNED, PLEDGED, HYPOTHECATED, ENCUMBERED OR IN ANY OTHER MANNER TRANSFERRED
OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT OF 1933, AS AMENDED,
AND REGULATIONS PROMULGATED THEREUNDER, STATE SECURITIES STATUTES AND
REGULATIONS PROMULGATED THEREUNDER, AND THE TERMS AND CONDITIONS HEREOF.
PROMISSORY NOTE
$1,000,000
For value received, the undersigned, AMERICAN RESIDENTIAL SERVICES, INC., a
Delaware corporation (herein "Maker"), hereby promises to pay to the order of
EQUUS II INCORPORATED, a Delaware corporation (herein "Holder"), at its
principal offices at 2929 Allen Parkway, 25th Floor, Houston, Texas 77019, the
principal sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000), or, if less, the
aggregate unpaid amount of all Advances made by Holder to Maker pursuant to the
Funding Agreement dated as of March 6, 1996 between Maker and Holder (the
"Funding Agreement"), which is not an Advance evidenced by the Convertible Note
of Maker dated March 6, 1996 on the earlier of (i) December 31, 1996, or (ii)
the date on which the Maker closes an initial public offering ("IPO") of its
common stock, par value $.001 per share ("Common Stock"), together with interest
on the unpaid balance thereof at a rate per annum equal to the Base Rate (as
defined in the Funding Agreement) plus 1/4%. Upon the occurrence and during the
continuance of an Event of Default as hereinafter defined), all Advances
evidenced hereby will bear interest at 18% per annum. The Note has been executed
in addition to the Convertible Note of Maker dated March 6, 1996.
Maker may at any time prior to the maturity date prepay the principal amount
hereof in whole or from time to time in part, together with accrued interest to
the date of such prepayment, without penalty. This Note is also subject to the
terms and conditions of Section 1 of the Funding Agreement.
If default is made on the payment of this Note, and this Note is placed in
the hands of an attorney for collection, or collected through probate or
bankruptcy proceedings, or if suit is brought on this Note, maker agrees to pay
reasonable attorneys fees in addition to all other amounts owing hereunder.
If any of the following events shall occur and be continuing, then the
Holder may by notice in writing to the Maker declare the outstanding principal
balance of this Note, together with any accrued and unpaid interest thereon
(collectively, the "Indebtedness") to be and thereupon the Indebtedness shall
forthwith become, due and payable without any further notice of any kind to the
Maker or any other party, all of which notices are expressly waived:
i. The Maker does not pay any principal or interest on or with respect to
the Indebtedness evidenced by this Note when due; or
ii. The Maker makes an assignment for the benefit of creditors; or
iii. The Maker admits in writing its inability to pay debts as they mature,
applies to any tribunal for the appointment of a trustee or receiver of any
substantial part of its assets, or commences any proceedings under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution or other liquidation law of any jurisdiction; or
iv. Any such application is filed, or any such proceedings are commenced
against the Maker, and the Maker indicates its approval, consent or
acquiescence, or any order is entered appointing such trustees or receiver, or
adjudicating the Maker bankrupt or insolvent, or approving the petition in any
such proceedings, and such order remains in effect for sixty days; or
v. Any Event of Default occurs under the Funding Agreement or the
Convertible Note of Maker dated March 6, 1996.
Anything in this Note to the contrary notwithstanding, Maker shall never be
required to pay unearned interest on this Note and shall never be required to
pay interest on this Note at a rate in excess of the maximum rate that may be
lawfully charged under applicable law. If the effective rate of interest which
would otherwise be payable under this Note would exceed the maximum rate of
interest allowed by applicable law, then the amount of interest payable under
this Note shall be reduced to the amount of interest payable under this Note
shall be reduced to the amount allowed under said applicable law, and the amount
paid in excess of such amount shall be credited to the principal of this Note.
THIS NOTE IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS.
IN WITNESS WHEREOF, the Maker has executed this Note on the 22nd day of
July, 1996, to be effective as of such date.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ C. CLIFFORD WRIGHT JR.
C. Clifford Wright Jr., President and
Chief Executive Officer
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
September 18, 1996
