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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ______________
COMMISSION FILE NO: 1-11849
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0484996
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(713) 599-0100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock, par value $.001 per share New York Stock Exchange
Rights to Purchase Series A Junior
Participating Preferred Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 26, 1997, there were 11,679,617 shares of common stock, par
value $.001 per share, of the Registrant issued and outstanding, 8,568,980 of
which, having an aggregate market value of $176,735,213, based on the closing
price per share of the common stock of the Registrant reported on the New York
Stock Exchange on that date, were held by non-affiliates of the Registrant. For
purposes of the above statement only, all directors and executive officers of
the Registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Registrant's 1997 Annual
Stockholders Meeting are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.......................................... 1
General.................................... 1
Industry Overview.......................... 1
Business Strategy.......................... 2
Organization and Acquisitions.............. 4
Residential Services Provided.............. 5
Commercial Maintenance Services............ 7
Operations................................. 7
Sales and Marketing........................ 9
Hiring, Training and Safety................ 9
Intellectual Property...................... 10
Employees.................................. 10
Sources of Supply.......................... 10
Seasonality................................ 10
Competition................................ 11
Governmental Regulation and Environmental
Matters.................................. 11
Executive Officers......................... 13
Item 2. Properties........................................ 14
Item 3. Legal Proceedings................................. 14
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................. 15
Item 6. Selected Financial Data........................... 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.............. 17
Item 8. Financial Statements and Supplementary Data....... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 147
PART III
Item 10. Directors and Executive Officers of the
Registrant...................................... 147
Item 11. Executive Compensation............................ 147
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................. 147
Item 13. Certain Relationships and Related Transactions.... 147
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................. 147
(i)
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PART I
ITEM 1. BUSINESS.
GENERAL
American Residential Services, Inc. ("ARS") is the largest publicly held
company in the United States engaged principally in providing comprehensive
maintenance, repair, replacement and new equipment installation services for
heating, ventilating and air conditioning ("HVAC"), plumbing, electrical and
indoor air quality ("IAQ") systems and major home appliances, primarily in
homes and small commercial buildings, including those under construction
(collectively, "residential services"). ARS was founded in October 1995 to
create the leading national provider of these services. To achieve this goal,
ARS has embarked on an aggressive acquisition program and is implementing a
national operating strategy designed to enhance internal growth and capitalize
on cost efficiencies.
On September 27, 1996, ARS acquired seven established residential services
businesses (together with the common parent of two of these businesses, the
"Founding Companies") concurrently with the closing of ARS's initial public
offering (the "IPO") of its common stock, par value $.001 per share ("Common
Stock"). Since that time, ARS has acquired 23 additional residential services
businesses, including 13 businesses acquired in the fourth quarter of 1996 (the
"Fourth Quarter 1996 Acquisitions") and ten businesses acquired in the first
quarter of 1997 (the "First Quarter 1997 Acquisitions" and, together with the
Founding Companies and the Fourth Quarter 1996 Acquisitions, the "Acquired
Businesses"). See "Organization and Acquisitions." Unless otherwise
indicated, references herein to (i) "ARS" mean American Residential Services,
Inc. and (ii) the "Company" mean ARS, together with the Acquired Businesses
and its other subsidiaries.
The following table sets forth the unaudited annualized 1995 and 1996
revenues on an aggregate basis for each of (i) the Founding Companies, (ii) the
Fourth Quarter 1996 Acquisitions and (iii) the First Quarter 1997 Acquisitions.
For additional information, refer to "Item 6 -- Selected Financial Data" and
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED DECEMBER 31
----------------------
1995 1996
---------- ----------
(IN THOUSANDS)
Founding Companies................... $ 114,636 $ 134,763
Fourth Quarter 1996 Acquisitions..... 70,138 84,643
First Quarter 1997 Acquisitions...... 26,353 31,289
The Company currently has operations in California, Florida, Illinois,
Indiana, Michigan, North Carolina, Oklahoma, South Carolina, Texas and
Virginia and the Washington-Baltimore metropolitan area. The Company's principal
executive offices are located at Post Oak Tower, Suite 725, 5051 Westheimer
Road, Houston, Texas 77056-5604, and its telephone number at that address is
(713) 599-0100. The Company is a Delaware corporation.
INDUSTRY OVERVIEW
The Company believes the HVAC, plumbing and electrical industries in the
United States represent an annual market in excess of $40 billion, of which
residential maintenance, repair and replacement services account for in excess
of $25 billion. The Company estimates 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 this 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
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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
To enhance its market position as a leading national provider of
residential services, the Company is emphasizing growth through acquisitions and
is continuing to implement a national operating strategy that enhances internal
revenue growth and profitability and achieves cost efficiencies. In addition,
through its recently formed subsidiary American Mechanical Services, Inc.
("AMS"), the Company intends to become the leading provider of comprehensive
maintenance, repair and replacement services for HVAC, plumbing and electrical
systems in existing large commercial facilities such as office buildings, health
care facilities, educational institutions and large retail outlets
(collectively, "commercial maintenance services").
ACQUISITION STRATEGY. The Company has implemented an aggressive
acquisition program that targets large metropolitan and high-growth suburban
areas with attractive demographics. The Company's acquisition strategy involves
entering new geographic markets, expanding within existing markets for
residential services and developing opportunities to expand into providing
commercial maintenance services. Given the large size and fragmentation of the
residential and commercial maintenance services industries, the Company believes
there are numerous potential acquisition candidates both within the markets
currently served by the Company and in other target markets. The Company also
believes it can leverage its experience and success in developing a leading
market position in the residential services business to capitalize on
consolidation opportunities in the commercial maintenance services business.
In new markets, the Company targets for acquisition one or more leading
local or regional residential or commercial maintenance services companies.
Generally, these companies are of sufficient size to provide the basis for
future Company expansion within a given market and are run by successful
entrepreneurs whom the Company endeavors to retain. Through implementation of
its national operating strategy, the Company seeks to aid the acquired companies
(operating on a decentralized basis) in increasing their revenues and improving
their profitability. Once the Company has entered a market, it generally seeks
to acquire other well-established service providers to expand its share of that
market and increase the range of services offered in that market. Some of the
acquisitions within existing markets are large enough to warrant their own
operating and management structure, while other "tuck-in" acquisitions are
small enough to be folded into an existing operation without significantly
increasing the Company's infrastructure. If an acquisition is large enough to
warrant its own operating structure, the Company will develop a regional
operating plan whereby these companies can benefit from regional operating
efficiencies such as shared dispatching from regional call centers, marketing
efforts, centralized maintenance, local purchasing power, expanded service line
management expertise and other economies of scale.
Each acquisition candidate is expected to demonstrate potential for revenue
growth and profitability. The Company also evaluates certain qualitative
characteristics of acquisition candidates, including their reputations in their
respective geographic regions, the size and other characteristics of customer
bases, the quality and experience levels of operating management and service
technicians, the amount, type and condition of their equipment and facilities
and their operating histories. For example, the Company has acquired each of the
winners of CONTRACTING BUSINESS magazine's Residential Contractor of the Year
Award for 1995, 1996 and 1997. The Company believes there are numerous
acquisition candidates that meet the Company's acquisition criteria.
The Company has analyzed various data on the residential services industry
and individual businesses within the industry and believes it is well-positioned
to implement its acquisition program. On the basis of the Company's experience
in connection with the acquisitions of the Acquired Businesses, the Company
believes its operating management will be instrumental in identifying and
completing future acquisitions. Several of these executives have had leadership
roles in both national and regional residential services trade associations,
which have allowed these principals to become personally acquainted with other
owners of residential services businesses across the country. The Company
believes that the visibility of these
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individuals within these associations will increase the industry's awareness of
the Company and its acquisition program, thereby attracting interest from owners
of other residential services companies. In addition, several members of the
Company's executive management team have worked together for a number of years
and have significant experience in negotiating, closing and integrating
acquisitions in various industries. The timing, size and success of the
Company's acquisition efforts and the associated potential capital commitments,
however, cannot be readily predicted.
The Company's 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 businesses acquired. 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 that the Company's acquisition strategy will succeed. In this connection,
competition for acquisition candidates could cause the costs of acquiring
businesses to increase materially. In addition, acquisitions accounted for as
pooling-of-interests transactions will require restatements of the Company's
historical financial statements to include the results of the acquired
businesses, which could negatively impact those financial statements.
The consideration for each acquisition varies 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. As consideration for acquisitions, the Company
uses various combinations of its Common Stock, cash and promissory notes. To
facilitate the use of Common Stock in its acquisitions, the Company registered
5,000,000 shares during January 1997 pursuant to its shelf registration
statement on Form S-4. The extent to which the Company will be able or willing
to use its Common Stock in making future acquisitions, however, will depend on
its market value from time to time and the willingness of potential sellers to
accept it as full or partial payment. The Company also has a $100 million
revolving credit facility (the "Credit Facility"), underwritten by a syndicate
of banks including NationsBank of Texas, N.A. ("NationsBank") as agent, which
may be used for acquisitions, working capital and other corporate purposes. At
March 27, 1997, outstanding borrowings under the Credit Facility totaled $ 55.1
million. The Company's ability to fund future acquisitions may be limited by the
extent to which it is able to raise capital for funding acquisitions, as well as
to expand existing operations, through equity or debt financings, and no
assurance can be given that the Company will be able to obtain the capital it
will need to finance a successful acquisition program and its other cash needs
in the future. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- The
Company."
NATIONAL OPERATING STRATEGY. The Company's national operating strategy
employs "best practices" designed to increase internal growth and
profitability through enhanced operations and the achievement of cost
efficiencies. The Company continually reviews its operations at the local and
regional operating levels in order to identify certain "best practices" that
will be implemented throughout its operations. For example, the Company is in
the process of expanding its 24-hour emergency service to substantially all of
its locations and its monitoring of service-call quality by attempting to
contact each of its service customers promptly following a service call. In
addition, the Company is developing a national training program to improve and
keep current the technical, selling and customer-relations skills of its service
technicians. The Company is implementing specialized computer and modern
communications technology at each of its locations to improve productivity,
communications, vehicle dispatch and service quality and responsiveness.
Management believes these efforts will enable the Company to provide superior
customer service and maximize sales opportunities. This service-oriented
strategy also will allow the Company to reinforce its brand image at the local
level while fostering its efforts to develop a national brand name.
Another focus of the Company's national operating strategy is the continued
reduction of total operating expenses of businesses acquired through the
elimination of duplicative administrative functions in
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tuck-in acquisitions and the consolidation of certain functions performed
separately by each business prior to its acquisition. In addition, the Company
is currently implementing programs to reduce costs (as a percentage of revenues)
compared to those of individual acquired businesses in such areas as: the
purchase of equipment for resale, service vehicles, parts and tools; vehicle and
equipment maintenance; financing arrangements; employee benefits; and insurance
and bonding.
The Company's ability to generate internal growth may be affected by the
extent to which it is able to expand the range of services offered to customers,
increase existing customer bases through the development and implementation of
cost-effective advertising and other marketing programs and reduce operating and
overhead costs of acquired businesses. Factors affecting the ability of the
Company to expand services will include the extent to which it is able to
attract and retain qualified operational management and service and installation
technicians in new areas of operation and leverage its relationships with
existing customers to provide them services they currently obtain from others.
ORGANIZATION AND ACQUISITIONS
THE FOUNDING COMPANIES. ARS was incorporated in October 1995 and, prior to
the closing of its IPO in September 1996, conducted no operations other than in
connection with the IPO and the acquisitions of the Founding Companies. On
September 27, 1996, simultaneously with the closing of the IPO, ARS acquired the
seven Founding Companies for an aggregate consideration of (i) $39.5 million in
cash (including approximately $4.7 million paid as a result of working capital
adjustments) and (ii) 2,942,193 shares of Common Stock. In addition, ARS also
assumed all the indebtedness and preferred stock payment obligations of the
Founding Companies (approximately $22.3 million) and repaid substantially all
such indebtedness and obligations.
The Founding Companies are General Heating & Air Conditioning Company, Inc.
("General Heating"), Atlas Services, Inc. ("Atlas"), Service Enterprises,
Inc., which does business as "Crown Services" ("Crown"), Florida Heating &
Air Conditioning, Inc. (together with its affiliated companies, "Florida
HAC"), Meridian & Hoosier Heating and Air Conditioning Company ("Meridian &
Hoosier"), ADCOT, Inc., which does business as "A-ABC Appliance" ("A-ABC"),
and Climatic Corporation of Vero Beach ("Climatic"). The Founding Companies
have been in business an average of 32 years and provide various residential
services in and around Houston (Crown and A-ABC), the Washington-Baltimore
metropolitan area and Richmond, Virginia (General Heating), throughout South
Carolina (Atlas), southeast Florida (Florida HAC and Climatic) and central
Indiana (primarily Indianapolis) (Meridian & Hoosier). The aggregate unaudited
annualized revenues of the Founding Companies in 1996 were approximately $134.8
million.
General Heating is a leading installer of HVAC systems and equipment for
residential and light commercial construction markets in its region. It also
provides comprehensive HVAC maintenance, repair and replacement services to
those markets. Atlas is a leading provider of electric, HVAC and plumbing
installation services to residential and light commercial construction markets
throughout South Carolina. It also provides comprehensive plumbing, HVAC and
electrical maintenance, repair and replacement services. Crown is the largest
single provider of residential plumbing, HVAC and electrical maintenance, repair
and replacement services to the residential and light commercial markets in the
Houston metropolitan area, while A-ABC is among the leading providers of home
appliance, HVAC and plumbing maintenance, repair and replacement services to the
residential and light commercial markets in the greater Houston and surrounding
areas. Neither Crown nor A-ABC provides new installation services. Florida HAC
is a leading installer of HVAC systems and equipment for the residential
construction market, and a leading provider of HVAC maintenance, repair and
replacement services to the residential and light commercial markets, in
southeast Florida, including Broward, Dade and Palm Beach Counties, while
Climatic is a provider of HVAC maintenance, repair and replacement services
(including IAQ services) to the residential and light commercial markets in the
four-county area in Florida known as the Treasure Coast region (Indian River,
St. Lucie, Martin and Palm Beach Counties). Climatic also installs HVAC systems
and equipment for the residential and light commercial construction markets.
Meridian & Hoosier is a leading provider of HVAC maintenance, repair and
replacement services to the residential and light commercial markets, and also
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installs HVAC systems and equipment for the residential construction market, in
central Indiana, including Indianapolis. Meridian & Hoosier and Atlas are the
only Founding Companies that currently provide commercial maintenance services.
FOURTH QUARTER 1996 ACQUISITIONS. During the fourth quarter of 1996, the
Company acquired an additional 13 residential service businesses, with aggregate
unaudited annualized revenues in 1996 of approximately $84.6 million, for a
total consideration of $41.2 million in cash and short-term notes (which were
subsequently repaid with proceeds from borrowings under the Company's Credit
Facility) and 1,282,910 shares of Common Stock. The Fourth Quarter 1996
Acquisitions include Metro Heating and Air Conditioning, Inc. ("Metro") and
Sasso Air Conditioning, Inc. ("Sasso"). Metro is the leading provider of HVAC
installation, maintenance, repair and replacement services in the
Raleigh/Durham, North Carolina area, while Sasso provides these services in the
West Palm Beach, Florida area and represents a major addition to the Company's
Florida operations. The acquisition of a plumbing maintenance and repair
business in Ft. Lauderdale and an HVAC maintenance, repair and installation
business in Miami also added to these operations. The Company expanded its
Indiana operations to include a provider of HVAC and plumbing installation,
maintenance, repair and replacement services, an additional provider of HVAC
installation, maintenance, repair and replacement services and a plumbing
company in Indianapolis and a provider of residential and light commercial HVAC,
electrical and plumbing maintenance, repair, replacement and installation
services in Fort Wayne. The Company also expanded its Houston operations with
two additional providers of HVAC maintenance, repair and replacement services
and entered the Chicago area through its acquisition of a provider of
residential and light commercial HVAC maintenance, repair and replacement
services. Atlas expanded its HVAC services with a tuck-in acquisition, and the
Company expanded its Washington-Baltimore metropolitan area HVAC installation,
maintenance, repair and replacement services through the addition of a
Virginia-based business, which also provides commercial maintenance services.
FIRST QUARTER 1997 ACQUISITIONS. During the first quarter of 1997, the
Company acquired an additional ten residential service businesses, with
aggregate unaudited annual revenues in 1996 of approximately $31.3 million, for
an aggregate consideration of 1,308,752 shares of Common Stock and $640,000 in
cash. The Company accounted for eight of the First Quarter 1997 Acquisitions
under the pooling-of-interests method of accounting. The First Quarter 1997
Acquisitions include two companies that mark the Company's entry into southern
California: a provider of HVAC installation, maintenance, repair and replacement
services in the San Diego metropolitan area and a provider of HVAC and plumbing
maintenance, repair and replacement services in the greater Los Angeles area. In
addition, the Company entered into the Michigan and Oklahoma markets with the
acquisition of a company providing HVAC installation, maintenance, repair and
replacement services in the Grand Rapids metropolitan area and a company
providing HVAC maintenance, repair and replacement services in Oklahoma City.
The Company also added a provider of plumbing maintenance, repair and
replacement services in Jacksonville to its Florida operations, a tuck-in
company providing HVAC maintenance, repair and replacement services to its North
Carolina operations, three tuck-in companies providing plumbing installation,
maintenance, repair and replacement services to its South Carolina operations
and one tuck-in company providing HVAC installation, maintenance, repair and
replacement services to its South Carolina operations.
RESIDENTIAL 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. In connection with its repair and replacement services, the Company
sells on a retail basis a wide range of HVAC, plumbing, electrical and
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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, the Company installs complete central heating and air
conditioning systems, electrical systems, plumbing systems and other systems in
newly constructed homes and small commercial buildings.
The following table shows, by region, the range of residential maintenance,
repair and replacement services and new installation services currently provided
by the Company:
<TABLE>
<CAPTION>
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
<S> <C> <C> <C> <C>
MAINTENANCE, REPAIR AND REPLACEMENT
SERVICES:
California.............................. X X
Florida................................. X X
Illinois................................ X
Indiana................................. X X X
Michigan................................ X
North Carolina.......................... X
Oklahoma................................ X
South Carolina.......................... X X X
Texas................................... X X X X
Virginia and the Washington-Baltimore
metropolitan area..................... X
NEW INSTALLATION SERVICES:
California.............................. X
Florida................................. X
Indiana................................. X X X
Michigan................................ X
North Carolina.......................... X
South Carolina.......................... X X X X
Virginia and the Washington-Baltimore
metropolitan area..................... X X
</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 mix of services reflected in
the foregoing table is expected to change over time as the Company implements
its growth strategy. In addition, the Company intends to provide a full range of
these services in new geographic areas into which it will expand, principally by
acquisitions. See "Business Strategy."
The unaudited annualized combined revenues for the Acquired Businesses grew
approximately 18.7% during 1996. The Company's unaudited annualized combined
revenues for 1996 for the Founding Companies and the Fourth Quarter 1996
Acquisitions were $219.4 million, of which management estimates maintenance,
repair and replacement services accounted for approximately 52% and new
installation services accounted for approximately 48%. During the first quarter
of 1997, the Company acquired an additional ten residential services businesses.
With the inclusion of those acquisitions on a pro forma basis for 1996,
management estimates maintenance, repair and replacement services would have
accounted for approximately 55% of the Company's total revenues and new
installation services would have accounted for approximately 45%.
The Company believes the profitability of its maintenance, repair and
replacement business generally 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 it can use to expand the
Company's future residential services revenue base. In addition, new
installation services provide the Company with cooperative advertising credits
from certain
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HVAC system manufacturers that 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.
The extent to which the Company is able to maintain or increase revenues
from new installation services for homebuilders depends on the levels of housing
starts from time to time in the markets in which it operates and likely reflects
the cyclical nature of the homebuilding industry. That industry is affected
significantly by changes in general and local economic conditions, such as
employment and income levels, the availability and cost of financing for home
buyers, consumer confidence and housing demand. As the 1996 pro forma
information reflected above indicates, the Company has reduced and intends to
continue to reduce its reliance on revenues from new installation services
through the acquisition of additional service businesses. Unless the Company is
able, through implementation of its growth strategy, to continue to reduce the
relative importance of new installation services to its overall operating
results or achieve geographic diversification, downturns in the levels of
housing starts in the areas in which the Company operates could have a material
adverse effect on its results of operations.
One strategy by which the Company will attempt to increase the reach of its
residential services is through the utilization of ARS Energy Services Company
("ARS Energy"), a subsidiary of the Company 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 utility
companies, equipment manufacturers, home remodeling companies, home supply
distributors, realtors, insurance companies, restaurant chains and other
multi-location retailers.
COMMERCIAL MAINTENANCE SERVICES
Another important element of the Company's growth strategy is expansion
into the commercial maintenance services market to provide services for existing
large commercial, industrial and institutional facilities such as office
buildings, health care facilities, educational institutions and large retail
outlets. Currently, Meridian & Hoosier in Indianapolis, Indiana, and Atlas in
South Carolina (two of the Founding Companies) and Keenan Mechanical Services,
Inc. (one of the Fourth Quarter 1996 Acquisitions) are the only Acquired
Businesses that provide commercial maintenance services. Through AMS, the
Company plans to acquire additional businesses in this market and enter into
long-term maintenance agreements for the types of facilities described above.
The Company is actively pursuing acquisitions of commercial maintenance services
businesses, but currently has no binding agreements to acquire any commercial
maintenance services business. The Company intends to offer true single-source
commercial maintenance service capabilities, including IAQ services, CFC
retrofit capabilities, building automation services, remote monitoring, lighting
services and design and build retrofit capabilities for major facility expansion
or renovation projects.
This element of the Company's growth strategy involves the usual risks
associated with growth through acquisitions (see "Business
Strategy -- Acquisition Strategy"), as well as the potential diversion of
management attention and resources away from the continued development of
opportunities for growth in the residential services business. The Company may
also experience initial operating inefficiencies and other costs associated with
entering a new line of business. In addition, commercial maintenance services
businesses tend to rely more heavily on unionized work forces. The Company
cannot predict how this will affect its ability to acquire, integrate and
operate such businesses. No assurance can be given that the Company's success to
date in the residential services market will translate into success for the
Company's efforts to expand into the commercial maintenance services business.
OPERATIONS
The Company operates on a decentralized basis, with the management of each
operating location responsible for its day-to-day operations, profitability and
growth. Local management is provided support through the Company's marketing and
advertising strategies and programs and in developing optimal pricing
strategies. Financial resources for improved systems and expansion of services,
training programs,
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financial controls, purchasing information and operating expertise are shared
among locations to improve productivity, lower operating costs and improve
customer satisfaction to stimulate internal growth. While the local management
operates with a high degree of autonomy and is empowered to make the necessary
operating decisions, adherence to Company training, safety, customer
satisfaction, accounting and internal control policies is required. Frequent
communication with the Company's executive management team is integral to the
Company's achieving the benefits that are anticipated by the consolidation of
these businesses into a single company.
The Company's residential service operations are coordinated by local
operations centers, which are staffed by order entry and customer service
personnel, operations or service coordinators, and inventory, vehicle
maintenance and office personnel. These centers use specialized computer and
communications technology to process orders, arrange service calls, ensure
timely delivery of required repair parts or new equipment, communicate with
customers and service technicians and invoice customers. A typical maintenance,
repair or replacement service call begins with either the customer telephoning a
local operations center and requesting an estimate or placing an order for
repair service or the Company calling the customer to make an appointment for
periodic service agreement maintenance. Coordination and deployment of service
technicians are managed by the operations center through communications systems
linked to the center's computer system, cellular telephone, pager or radio.
Service personnel work out of service vehicles, which are equipped with an
inventory of equipment and commonly required tools, parts and supplies needed to
complete a variety of jobs. The service technician assigned to a service call is
generally responsible for driving to the service location, initiating the
customer contact, analyzing the problem and job requirements, providing the
price quotation, overseeing the work and collecting payment for the service.
Payment for maintenance, repair and replacement services not covered by a
service contract is generally made in cash or by check or credit card at the job
site, except for certain well-established customers.
The Company's service technicians respond to three general types of
maintenance, repair and replacement service calls: requests for service under
the Company's monitoring service contracts, requests for service under the
Company's warranty service contracts and requests for emergency or other
services not under contract. A substantial majority of these service calls are
for emergency or other services not under contract. Service calls cover a wide
variety of services, including the replacement of entire HVAC systems. Service
histories on past customers are generally available to the customer service
representatives in a continuously updated computer database matched to addresses
in the local service area.
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. Typically, new installation
service begins with the customer providing the architectural plans or mechanical
drawings for the particular home or an entire tract of homes or other facility
to be constructed and either requesting a bid or entering into direct
negotiation for the work required. The Company's new installation personnel
analyze the plans to determine the labor, materials and equipment type and size
required for the installation of the system specified, price the job and either
bid for or negotiate the written contract for the job. In HVAC installations,
most of the required air ducts are fabricated and, together with the other
equipment to be installed, partially pre-assembled in the Company's facilities
and readied for delivery to the job site. The equipment and supplies necessary
for the particular job are ordered from the suppliers or manufacturers, and
delivery generally is timed according to the builder's schedule. The
installation work is coordinated with the builder's construction supervisors.
Scheduled draw payments for these services generally are obtained within 30 days
of completing the installation, at which time any mechanics' and materialmen's
liens securing the rights to such payments are released. Interim payments are
often obtained to cover the Company's labor and materials costs on large
installation projects.
Except for the air ducts fabricated by the Company for use in its
installation services operations, substantially all the equipment and component
parts the Company sells or installs are purchased from manufacturers and other
outside suppliers. As a result of the implementation of its operating
strategies, the Company has begun to consolidate the number of manufacturers and
other outside suppliers from which it
8
<PAGE>
obtains equipment and other items. The Company is not, however, materially
dependent on any of these outside sources. See "Sources of Supply."
SALES AND MARKETING
The Company believes that, in most of its current geographic markets, it
has well-known and established businesses that are leading providers of one or
more residential services in their markets. The Company intends to build on this
foundation through the use of advertising to expand name recognition and the
adoption of best practices to increase the quality of services provided. For
example, the Company is implementing the uniform practice whereby the Company's
customers receive prompt follow-up inquiries to determine customer-satisfaction
levels and to arrange for follow-up service calls if necessary. The Company
believes this practice can be uniformly implemented at each of its service
locations without material cost to the Company.
In each of the market areas in which the Company provides residential
maintenance, repair and replacement services, vigorous advertising campaigns
traditionally have been emphasized by the Acquired Businesses. These campaigns
have used mailouts, yellow pages, newspapers, radio and television to promote
the services offered under their particular trade names or service marks. These
advertising campaigns have been effective in creating name recognition and
customer identification with these companies for the quality of the services
they offer in their local areas. The Company expects for the foreseeable future
to retain the trade names and service marks of these companies in its
advertising and promotional materials in their local areas, but intends over
time to promote and establish the Company's name and service marks nationally.
See "Intellectual Property."
The Company also views its existing service contracts as an important way
of retaining its customer base. The Company has several general types of service
contracts: "maintenance and repair" contracts whereby the Company maintains
and repairs selected residential HVAC, plumbing, electrical and other systems
for a period of time for a fixed fee and "maintenance only" or "repair only"
contracts whereby the Company makes periodic inspections of a residential system
and provides certain preventative maintenance for a period of time for a fixed
fee. The Company believes that such service contracts provide the Company with
flexibility in determining the timing for delivery of its services, thereby
generating greater stability in the level of demand for services throughout
different seasons of the year. See "Seasonality." Certain states regulate the
provision of service under residential services warranty contracts. See
"Governmental Regulation and Environmental Matters."
With respect to its new installation business, the Company's marketing
strategy focuses on cultivating long-term relationships with its national,
regional and local home builder and general contractor customers. The Company's
marketing efforts with these customers primarily involve direct sales contacts
emphasizing the Company's quality of services and reliability. In addition,
labels with the Company's name and phone number are applied to newly installed
equipment, and direct telemarketing sales efforts for service contracts are
timed to closely coincide with the expiration of manufacturer warranties on
Company installed equipment. The Company believes these measures in connection
with its new installation business will lead 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 1996.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all service technicians it uses meet safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company reviews prospective permanent service
technicians to ensure they are trained thoroughly in their trades, the Company's
procedures and customer satisfaction standards, possess the required trade
licenses and have acceptable driving records.
The Company has developed continuous training programs to provide initial,
refresher and upgrade training programs to trainees, apprentices and service and
installation technicians. These programs typically
9
<PAGE>
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 large 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.
INTELLECTUAL PROPERTY
The Company owns various trademarks, service marks and trade names, which
it uses in its local operations, advertising and promotions. The Company
currently anticipates that, for the foreseeable future, the Acquired Businesses
and most other additional businesses subsequently acquired by the Company will
continue to use their respective trade names and service marks in their local
areas, although the Company intends over time to have its operations identified
by the Company's name and logos. The Company is implementing certain uniform
service names and markings for use on its vehicles and in its advertising and
promotional materials. See "Sales and Marketing."
EMPLOYEES
As of March 27, 1997, the Company had approximately 2,500 employees. As it
implements its internal growth and acquisition strategies, the Company expects
that the number of employees will increase. The Company is not currently 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 Company's operations depend on the continuing efforts of its executive
officers and the senior management of its principal operating subsidiaries, and
the Company likely will depend on the senior management of any significant
businesses it acquires in the future. The business or prospects of the Company
could be affected adversely if any of these persons does not continue in his or
her management role after joining the Company and the Company is unable to
attract and retain qualified replacements.
The residential services business is characterized by, among other things,
high turnover rates among service technicians. A substantial majority of the
service technician turnover experienced by the Acquired Businesses in recent
years has been during the extended screening period in the first year of
employment. The success of the Company's growth strategy, as well as the
Company's current operations, 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 is able to offer such a package in a cost-effective manner because of
the relatively large number of persons it employs.
SOURCES OF SUPPLY
The raw materials used in the Company's operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain equipment and raw materials
through volume purchases. The Company has not experienced any significant
difficulty in obtaining adequate supplies to conduct its operations.
SEASONALITY
The Company's operations are subject to different seasonal variations in
the different lines of service. Except for certain areas in the southern United
States, the demand for new residential installations is lower during the winter
months (although the Company expects that such reduction in demand may be
partially offset by increases in demand for commercial replacement services
generally experienced in the winter months). Demand for residential HVAC
services is generally higher in the second and third quarters. In addition to
the effects of seasonality, the Company's quarterly results may fluctuate as a
result of a number
10
<PAGE>
of other matters, including the timing of acquisitions. Accordingly, quarterly
comparisons of the Company's revenues and operating results should not be relied
on as an indication of future performance, and the results of any quarterly
period may not be indicative of the results to be expected for a full year.
COMPETITION
The markets for residential and commercial maintenance services are highly
competitive. The Company believes that the principal competitive factors in
these segments of the 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 and commercial
maintenance services directly addresses these factors. The ability of the
Company to recruit, train and retain highly motivated service technicians to
provide quality services should be enhanced by its ability to utilize
professionally managed recruiting and training programs. In addition, the
Company offers compensation, health and savings benefits that are more
comprehensive than most offered in the industry. See "Hiring, Training and
Safety" and "Employees." 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, in the residential
services market, 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. 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 commercial maintenance services market, the Company believes there
are only a small number of public companies engaged primarily in providing
commercial maintenance services in the services lines on which the Company
intends to focus, but certain HVAC original equipment manufacturers provide
commercial maintenance services as a complement to their manufacturing and
distribution businesses. In the future, competition in both the residential and
commercial maintenance service lines may be encountered from, among others,
other newly formed or existing public or private service companies with
aggressive acquisition programs, the unregulated business segments of regulated
gas and electric utilities or from newly deregulated utilities in those
industries entering into various service areas. Certain of the Company's
competitors and potential competitors have greater financial resources than the
Company to finance acquisition and development opportunities, to pay higher
prices for the same opportunities or to develop and support their own
residential or commercial maintenance services operations if they decide to
enter the business.
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.
11
<PAGE>
A large number of state and local regulations governing the residential and
commercial maintenance 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 license. The Company has implemented a policy to ensure that, where
allowed, any such permits or licenses that may be material to the Company's
operations in a particular geographic region are held by at least two persons
within that region.
The Company's operations are affected by numerous federal, state and local
environmental laws and regulations, including those governing vehicle emissions
and the use and handling of refrigerants. The technical requirements of these
laws and regulations are becoming increasingly expensive, complex and stringent.
Federal and state environmental laws include statutes intended to allocate the
cost of remedying contamination among specifically identified parties. The
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") imposes strict, joint and several liability on
owners or operators of facilities at, from, or to which a release of hazardous
substances has occurred, on parties who generated hazardous substances that were
released at such facilities, and on parties who arranged for the transportation
of hazardous substances to such facilities. A majority of states have adopted
"Superfund"statutes comparable to and, in some cases, more stringent than
CERCLA. If the Company were to be found to be a responsible party under CERCLA
or a similar state statute, the Company could be held liable for all
investigative and remedial costs associated with addressing such contamination.
In addition, claims alleging personal injury or property damage may be brought
against the Company as a result of alleged exposure to hazardous substances
resulting from the Company's operations. The Company has not been notified that
it is a potentially responsible party under CERCLA or any similar state statute.
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons and certain
other refrigerants ("CFCs"). Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
systems, equipment and appliances containing these refrigerants and also
regulate the containment and recycling of these refrigerants. These requirements
have increased the Company's training expenses and expenditures for containment
and recycling equipment. The Clean Air Act is intended to ultimately eliminate
the use of CFCs in the United States and require alternative refrigerants to be
used in replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is expected
to continue to increase such costs in the future. As a result, the number of
conversions of existing HVAC systems which use CFCs to systems using alternative
refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles in
large vehicle fleets to use "alternative fuels,"such as compressed natural gas
("CNG") or propane, and to meet reduced emissions standards. The Company does
not anticipate that the cost of 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 Acquired Businesses,
the Company evaluated the properties to be acquired and property leases to be
assumed in the Acquired Businesses, and engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions at
certain properties owned or operated by the Acquired Businesses. No material
environmental problems were discovered in these reviews, and the Company is not
otherwise aware of any actual or potential environmental liabilities of the
Acquired Businesses that would be material to the Company. The Company is in the
process of implementing various programs to promote compliance with applicable
health and worker safety regulations and to increase employee safety awareness.
12
<PAGE>
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1996 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.
EXECUTIVE OFFICERS
The following table sets forth certain information as of March 1, 1997
concerning each of the executive officers of ARS:
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------
C. Clifford Wright, Jr.......... 44 President and Chief Executive Officer*
Howard S. Hoover, Jr. .......... 58 Chairman of the Board*
Gorden H. Timmons............... 47 Chief Operating Officer*
John D. Held.................... 34 Senior Vice President, General Counsel
and Secretary
Harry O. Nicodemus, IV.......... 49 Vice President, Chief Financial Officer
and Chief Accounting Officer
A. Jefferson Walker III......... 34 Treasurer
Michael B. Mamaux............... 31 Controller
- ------------
* Also serves as a director of the Company.
C. CLIFFORD WRIGHT, JR. has been President and Chief Executive Officer and
a director of the Company since November 1995. From 1991 to 1995, Mr. Wright was
Vice President and Chief Financial Officer of American Ecology Corporation
("American Ecology"), a waste services company. From 1990 to 1991, Mr. Wright
was a Director of Corporate Finance with the public accounting firm of KPMG Peat
Marwick. Prior thereto, he was a divisional vice president in finance and
planning of Browning-Ferris Industries, Inc. ("BFI"), a waste services
company. Mr. Wright is a Certified Public Accountant.
HOWARD S. HOOVER, JR. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by BFI and served during his
tenure as a director and in various management capacities as a member of the
Senior Management Committee, Senior Vice President, General Counsel and
Secretary. From 1992 until 1995, Mr. Hoover was engaged in various business
development and consulting activities.
GORDEN H. TIMMONS has served as Chief Operating Officer and a director of
the Company since September 1996. He founded Atlas in 1976 and served as its
President until September 1996. Mr. Timmons was a founder of the Charleston
Chapter of the Air Conditioning Contractors of America ("ACCA") and is a past
president of that Chapter. Mr. Timmons has been active in computer systems
development for HVAC companies and is a frequent speaker at national industry
conventions.
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
since March 1996. From October 1995 to March 1996, he was an associate at the
law firm of Liddell, Sapp, Zivley, Hill and LaBoon, LLP. Mr. Held was Associate
General Counsel of American Ecology from 1994 to 1995 and an associate at the
law firm of Baker & Botts, L.L.P. prior thereto.
HARRY O. NICODEMUS, IV has served as Vice President, Chief Financial
Officer and Chief Accounting Officer of the Company since January 1997. From
December 1995 through December 1996, Mr. Nicodemus was Controller of Drilex
International, an oilfield services company. Prior thereto, he was Vice
President, Controller and Chief Accounting Officer for American Ecology from
February 1993. From January 1991 to January 1993, he was a divisional vice
president and an assistant controller at BFI. Mr. Nicodemus is a Certified
Public Accountant.
13
<PAGE>
A. JEFFERSON WALKER III joined the Company in April 1996 as Treasurer and
was a consultant to the Company from January 1996 to March 1996. From 1993 to
January 1996, he was employed by American Ecology 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 B. MAMAUX joined the Company in April 1996 as Controller. From 1995
until April 1996, Mr. Mamaux was an assistant corporate controller at U.S.
Delivery Systems, Inc., a national provider of delivery and distribution
management services. Prior thereto, he was a Senior Auditor at the public
accounting firm of Arthur Andersen LLP. Mr. Mamaux is a Certified Public
Accountant.
ITEM 2. PROPERTIES.
The Company owns certain of its facilities and leases the remainder of its
facilities under leases with remaining terms ranging from month-to-month
(generally in the case of facilities being consolidated with others) to 10 years
on terms the Company believes to be commercially reasonable. Certain of these
leases are with officers and directors of the Company who became associated with
the Company in connection with the Company's acquisition of the Acquired
Businesses.
The Company's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company's principal operating
facilities include (i) a 60,000 square foot facility owned by the Company and
located in Houston, Texas, which is the primary base for the Company's Houston
operations, (ii) a 36,000 square foot leased facility in Manassas, Virginia,
which serves as the principal fabrication and production facility for General
Heating, (iii) a 36,000 square foot leased facility in Savage, Maryland, which
serves as a distribution, fabrication, production and administrative facility
for General Heating, (iv) a 68,000 square foot leased facility in Raleigh, North
Carolina, which is the principal operating base for Metro, (v) a 62,500 square
foot leased facility in Charleston, South Carolina, which is the headquarters
for Atlas, (vi) a 15,000 square foot leased facility and a 10,000 square foot
owned facility in Indianapolis, Indiana, which together are the operational and
administrative base for Meridian & Hoosier, (vii) another 24,000 square foot
leased facility in Indianapolis, which serves as the base for the Company's
plumbing services in the Indianapolis area, (viii) a 29,000 square foot leased
facility in Margate, Florida, which serves as the principal office and
fabrication facility for Florida HAC and (ix) a 20,000 square foot leased
facility in the West Palm Beach, Florida area, which is the operational base for
Sasso. The Company also leases its principal executive and administrative
offices in Houston, Texas. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
Total combined rental expense for the Founding Companies' facilities leases
for 1996 (excluding certain discontinued retail appliance operations) was
approximately $2.0 million. For additional information, see Note 9 of the Notes
to Consolidated Financial Statements of the Company.
ITEM 3. LEGAL PROCEEDINGS.
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 it 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.
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<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since September 1996, the Common Stock of ARS has been listed for trading
on the New York Stock Exchange (the "NYSE") under the symbol "ARS." As of
March 26, 1997, there were 11,679,617 shares of Common Stock outstanding, held
by approximately 120 stockholders of record. The number of record holders does
not necessarily bear any relationship to the number of beneficial owners of the
Common Stock.
The following table sets forth the range of high and low sale prices for
the Common Stock on the NYSE (as reported on the Composite Transactions
Reporting System) for the periods indicated:
HIGH LOW
--------- ---------
Year ended December 31, 1996:
3rd quarter (September 25 to
September 30).................... $ 19.625 $ 16.500
4th quarter........................ 27.125 16.625
The last reported sale of the Common Stock on the NYSE on March 26, 1997
was $20.625.
ARS has not paid or declared any dividends since its formation and
currently intends to retain earnings to finance the expansion of its business.
Any future dividends will be at the discretion of the Board of Directors after
taking into account various factors deemed relevant by the Board of Directors.
The Credit Facility prohibits the payment of dividends (except for dividends
payable in Common Stock and certain preferred stock). See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Company" and Note 7 of the
Notes to Consolidated Financial Statements of the Company.
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<PAGE>
During the year ended December 31, 1996, ARS sold 5,078,398 shares of its
Common Stock and two warrants to acquire 108,333 shares of its Common Stock that
were not registered under the Securities Act of 1933, as amended (the
"Securities Act"). Of the shares sold, 4,225,103 were issued in a series of
separate acquisition transactions in which ARS purchased 20 residential services
businesses from their owners for consideration consisting of cash and shares of
Common Stock in 18 acquisitions and shares of Common Stock in two acquisitions.
Seven of these acquisitions closed on September 27, 1996, one closed on October
31, 1996, two closed on November 25, 1996 and ten closed in the period from
December 3 to December 16, 1996. These sales were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offering. Each acquisition involved a
limited number of owners.
On September 27, 1996, Equus II Incorporated ("Equus") converted a
portion ($500,000) of an ARS convertible note into 844,962 shares of Common
Stock. ARS had issued this note to Equus in early 1996 in connection with the
provision by Equus of start-up financing for ARS. Also in connection with this
financing, ARS issued a warrant to purchase 100,000 shares of Common Stock to
Equus. These transactions were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof as transactions not involving
any public offering.
On November 25, 1996, NationsBank of Texas, N.A. exercised a warrant to
purchase 8,333 shares of Common Stock from ARS at a purchase price of $83.33.
This warrant had been issued as a financing fee. Both the warrant and the share
transactions were exempt from the registration requirements of the Securities
Act by virtue of Section 4(2) thereof as transactions not involving any public
offering.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
acquisitions of the Founding Companies (the "Initial Acquisitions").
Consequently, the Company's historical financial statements for periods ended on
or before September 30, 1996 are the consolidated historical financial
statements of Atlas. As used in this discussion, the "Company" means (i) Atlas
prior to September 30, 1996 and (ii) ARS and its consolidated subsidiaries on
that date and thereafter. The following selected historical financial
information has been derived from the audited financial statements of the
Company for each year in the three-year period ended December 31, 1996. The
remaining selected historical financial information of the Company has been
derived from unaudited financial statements of the Company, which have been
prepared on the same basis as the audited financial statements, and in the
opinion of the Company, reflects all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of that information. The summary
financial information below should be read in conjunction with the historical
financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 9,508 $ 12,336 $ 19,183 $ 22,048 $ 64,229
Gross Profit.................... 1,977 2,349 3,134 4,237 16,239
Selling, general and
administrative expenses....... 1,435 1,963 3,138 3,022 16,767
Income (loss) from continuing
operations.................... 542 386 (4) 1,215 (528)
Interest income and other
expense, net.................. 2 (14) 171 37 350
Interest expense................ (130) (155) (143) (134) (5,257)
Net income (loss) from
continuing operations......... $ 269 $ 142 $ 17 $ 684 $ (5,536)(1)
========= ========= ========= ========= ==========
BALANCE SHEET DATA:
Working capital (deficit)....... $ (337) $ (145) $ (371) $ (289) $ 15,509
Total assets.................... 4,124 4,897 6,647 7,092 189,755
Total debt, including current
portion....................... 2,525 2,542 2,716 2,371 52,055
Stockholders' equity............ 566 724 774 1,503 110,549
</TABLE>
- ------------
(1) Includes non-recurring compensation expense of $3,356 (included in selling,
general and administrative expense) and financing fees of $4,818 (included
in interest expense) related to the purchase of EHC. See Note 1 of the Notes
to Consolidated Financial Statements of the Company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Item 6 -- Selected Financial Data"
appearing elsewhere in this Annual Report on Form 10-K. Statements contained in
this Annual Report regarding future financial or operational performance and
results of the Company or other similar matters that are not historical facts
constitute forward-looking statements. These forward-looking statements are
subject to numerous risks and uncertainties, including but not limited to the
availability of attractive acquisition opportunities, the successful integration
and profitable management of businesses acquired, the improvement of operating
efficiencies, the availability of working capital and funding for future
acquisitions, the ability to grow internally through expansion of services and
customer bases and reduction of overhead, the cyclical nature of the
homebuilding industry, and the level and nature of competition from other
residential and commercial maintenance services providers and
other factors discussed in this Annual Report.
17
<PAGE>
INTRODUCTION
The Company's revenues are primarily derived from (i) owners and occupants
of homes and small commercial buildings and (ii) builders and developers of new
homes, residential developments and small commercial buildings. Cost of services
consists primarily of salaries and benefits of service and installation
technicians, parts and materials, subcontracted services, depreciation,
maintenance, fuel and equipment rentals. Selling, general and administrative
expenses consist primarily of compensation and related benefits for owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
Prior to their acquisition by the Company, the Acquired Businesses were
managed as independent private businesses, and their results of operations
reflect different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
Certain owners agreed to reductions in their compensation and benefits in
connection with the acquisition of their businesses by the Company.
ARS, which conducted no operations prior to September 27, 1996 other than
in connection with the IPO and the Initial Acquisitions, is in the process of
integrating the Acquired Businesses and their operations and administrative
functions. This integration process may present opportunities to reduce costs
through the elimination of duplicative functions and through economies of scale,
particularly in obtaining additional contracts through shared customer lists and
greater volume discounts from material suppliers, but will necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost-savings may make
comparison of historical operating results not comparable to, or indicative of,
future performance.
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
Initial Acquisitions. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas. As used in this
discussion, the "Company" means (i) Atlas prior to September 30, 1996 and (ii)
ARS and its consolidated subsidiaries on that date and thereafter.
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 19,183 100.0% $ 22,048 100.0% $ 64,229 100.0%
Cost of services..................... 16,049 83.7 17,811 80.8 47,990 74.7
--------- --------- --------- --------- --------- ---------
Gross profit......................... 3,134 16.3 4,237 19.2 16,239 25.3
Selling, general and administrative
expenses........................... 3,138 16.3 3,022 13.7 16,767 26.1
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... (4) 0.0 1,215 5.5 (528) (0.8)
Interest income and other expense,
net................................ 171 0.9 37 0.2 350 0.5
Interest expense..................... (143) (0.7) (134) (0.6) (5,257) (8.2)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 24 0.2 1,118 5.1 (5,435) (8.5)
Income taxes......................... 7 0.1 434 2.0 101 0.1
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 17 0.1 $ 684 3.1 $ (5,536) (8.6)
========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $42.2 million, or 191.8%, from $22.0 million
for the year ended December 31, 1995 to $64.2 million for the year ended
December 31, 1996. Approximately $31.2 million of the increase in revenues was
attributable to the acquisition of the Founding Companies on September 30, 1996
and the Fourth Quarter 1996 Acquisitions. The remaining increase was primarily
attributable to
18
<PAGE>
several large installation projects and the addition of $3.7 million of revenues
resulting from the acquisition of three businesses by Atlas in early 1996.
COST OF SERVICES -- Cost of services increased $30.2 million, or 169.7%,
from $17.8 million for the year ended December 31, 1995 to $48.0 million for the
year ended December 31, 1996. The increase in cost of services was consistent
with the increase in revenue. As a percentage of revenues, however, cost of
services decreased 6.1% from 80.8% in 1995 to 74.7% in 1996. This decrease
reflects the increase in the fourth quarter of revenues from higher-margin
maintenance, repair and replacement services as a result of higher profit
margins associated with certain businesses acquired in the Initial Acquisitions
and the Fourth Quarter 1996 Aquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $13.8 million, or 460.0%, from $3.0 million
for the year ended December 31, 1995 to $16.8 million for the year ended
December 31, 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 13.7% in 1995 to 26.1% in 1996. This
increase was primarily attributable to (i) the addition of $7.6 million in
expenses associated with the acquisition of Acquired Businesses in 1996 and the
formation of a corporate office and (ii) an adjustment of $3.4 million for non-
recurring, compensation expenses related to the acquisition of Enterprises
Holding Company ("EHC") in connection with the acquisition of EHC by the
Company and $0.6 million for the issuance of 39,987 shares of Common Stock to
certain employees, consultants and three officers of ARS and its affiliates.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.3 million during 1996. This increase was
attributable to (i) gains realized on the non-recurring sale of excess vehicles
and equipment acquired by ARS in connection with the Acquired Businesses and
(ii) rental income earned on owned property leased to third parties.
INTEREST EXPENSE -- Interest expense increased from $0.1 million for the
year ended December 31, 1995 to $5.3 million for the year ended December 31,
1996. This increase was attributable to (i) non-recurring financing charges of
$4.8 million paid to the holder of EHC preferred stock in connection with the
acquisition of EHC and (ii) the use of debt financing to fund the cash portion
of the purchase prices of the Fourth Quarter 1996 Acquisitions.
INCOME TAXES -- For the year ended December 31, 1996, the Company recorded
a provision for income taxes of $0.1 million. See Note 10 of the Notes to
Consolidated Financial Statements of the Company for further discussion of the
tax provision.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES -- Revenues increased $2.8 million, or 14.6%, from $19.2 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 $1.8 million, or 11.3%, from
$16.0 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 2.9% from 83.7% to 80.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were virtually unchanged at $3.1 million and $3.0
million in 1994 and 1995, respectively.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net decreased $0.1 million from $0.2 million in 1994 to $0.1 million in
1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.1
million in both 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the year ended December 31, 1996, net cash used in operating
activities was $0.7 million, capital expenditures totaled $1.7 million and net
repayment of debt amounted to $1.2 million. The Company
19
<PAGE>
anticipates capital expenditures (exclusive of acquisitions) of approximately
$7.1 million during 1997, primarily for computer equipment, leasehold
improvements and furniture and fixtures.
On September 27, 1996, ARS completed the IPO, which involved the issuance
of 4,200,000 shares of Common Stock at a price of $15.00 per share (before
deducting underwriting discounts and commissions). On October 7, 1996, ARS sold
an additional 630,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions) pursuant to the
underwriters' overallotment option ARS granted in connection with the IPO. The
proceeds from these transactions, net of underwriting discounts and commissions
of $1.05 per share and after deducting the expenses of the IPO, were
approximately $60.6 million. Of this amount, $34.8 million was used to fund the
cash portion of the purchase prices relating to the acquisitions of the Founding
Companies. The Company made additional aggregate payments to the former owners
of the Founding Companies of $4.7 million, representing working capital
adjustments based on the September 30, 1996 balance sheets of the Founding
Companies, pursuant to the agreements relating to the acquisitions.
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks, including NationsBank as agent. On March
3, 1997, the Company increased the size of the Credit Facility from $55 million,
which was in place at December 31, 1996, to $100 million. Borrowings under the
Credit Facility may be used for general corporate purposes, including the
funding of any cash that may be paid in connection with acquisitions, the
refinancing of indebtedness of businesses acquired, capital expenditures and
working capital. Loans under the Credit Facility bear interest at a designated
variable base rate plus margins ranging from 0 to 50 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 100 to 200 basis points, depending on the same ratio.
The margin is reset on a quarterly basis and also may be reset upon the closing
of an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), will not permit the Company to incur or
assume other indebtedness in excess of any amount equal to 5% of its
consolidated net worth and will require the Company to comply with certain
financial covenants. The Credit Facility will terminate and all amounts
outstanding, if any, thereunder will be due and payable in September 1999. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the Credit Facility and the Company has pledged the stock of its operating
subsidiaries as collateral for its obligations under the Credit Facility. As of
March 27, 1997, the Company had $55.1 million in outstanding borrowings under
the Credit Facility, bearing interest at a weighted average rate of
approximately 7.8%.
On March 27, 1997, the Company commenced a Rule 144A offering of 7 1/4%
convertible subordinated notes due 2004 (the "Notes") in the aggregate principal
amount of $55 million, prior to the exercise of any over-allotment option. Upon
issuance, the Notes will be unsecured obligations and will be convertible into
Common Stock of the Company based upon certain conditions. The Company intends
to use the net proceeds of the offering of the Notes to repay certain
indebtedness under the Credit Facility and for general corporate purposes. The
Company anticipates that the closing of the offering will occur on April 2,
1997.
During January 1997, the Company registered 5,000,000 shares of its Common
Stock pursuant to a shelf registration statement on Form S-4 (the "Shelf
Registration Statement") for issuance from time to time for future
acquisitions. As of March 26, 1997, 3,691,248 shares remained available for
issuance under the Shelf Registration Statement.
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.2 million in cash and
short-term notes and 1,282,910 shares of Common Stock. In the first quarter of
1997, the Company acquired an additional ten residential services businesses for
an aggregate of 1,308,752 shares of Common Stock, all of which represented
registered shares under the
20
<PAGE>
Shelf Registration Statement, and $640,000 in cash. See "Item
1 -- Business -- Organization and Acquisitions." Funding of the cash portion of
the purchase prices (including the repayment of the short-term notes issued in
connection with two of the Fourth Quarter 1996 Acquisitions) and repayment of
indebtedness assumed in connection with the acquisitions was provided by
borrowings under the Credit Facility. The Company believes its cash flow from
operations and the borrowings available under the Credit Facility are sufficient
to support its ongoing operations and anticipated capital expenditures for 1997.
The Company intends to continue pursuing attractive acquisition
opportunities of both residential and commercial maintenance services
businesses. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings, including the unborrowed portion of
the Credit Facility and the possible public or private sale of additional debt
securities, as well as issuances of additional equity, including shares under
the Shelf Registration Statement. See "Item 1 -- Business -- Business
Strategy."
INFLATION
Due to the relatively low levels of inflation experienced in 1994, 1995 and
1996, inflation did not have a significant effect on the results of the Company
in those periods.
SEASONALITY
The Company has experienced, and 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 for certain areas of the
southern United States, the demand for new residential installations is lower in
the winter months because new construction activity is lower as a result of
colder weather (although the Company expects that such reduction in demand will
be partially offset by increases in the demand for commercial replacement
services generally experienced in the winter months). Demand for HVAC services
is generally higher in the second and third quarters. In addition to the effects
of seasonality, the Company's quarterly results may fluctuate as a result of a
number of other matters, including the timing of acquisitions. Accordingly,
quarterly comparisons of the Company's revenues and operating results should not
be relied on as an indication of future performance, and the results of any
quarterly period may not be indicative of the results to be expected for a full
year.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding Atlas,
which is presented above) is derived from the respective audited financial
statements of the individual Founding Companies included elsewhere herein. The
selected historical financial information presented in the tables below for the
quarterly periods of the Founding Companies is derived from the respective
unaudited interim financial statements of the Founding Companies, which include
all adjustments the Company considers necessary for a fair presentation of the
results of operations and cash flows of those companies for those periods. The
following discussion should be read in conjunction with the separate company
financial statements and related notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
21
<PAGE>
RESULTS OF OPERATIONS -- GENERAL HEATING
The following table sets forth certain historical selected financial data
of General Heating and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- ------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............. $ 34,642 100.0% $ 36,334 100.0% $ 35,159 100.0% $ 25,534 100.0% $ 27,054 100.0%
Cost of services...... 27,393 79.1 29,928 82.4 28,866 82.1 20,965 82.1 21,814 80.6
--------- --------- --------- --------- --------- -------- --------- --------- --------- ---------
Gross profit.......... 7,249 20.9 6,406 17.6 6,293 17.9 4,569 17.9 5,240 19.4
Selling, general
and administrative
expenses............ 5,011 14.5 5,245 14.4 5,280 15.0 3,902 15.3 4,512 16.7
--------- --------- --------- --------- --------- -------- --------- --------- --------- ---------
Income (loss) from
operations.......... $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 667 2.6 $ 728 2.7
========= ========= ========= ========= ========= ======== ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.6 million, or 6.3%, from $25.5 million
for the nine months ended September 30, 1995, to $27.1 million for the nine
months ended September 30, 1996. This increase was attributable to a $0.6
million increase in new installation revenues, a $0.6 million increase in HVAC
replacement revenues and a $0.4 million increase in other revenues.
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) a $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
22
<PAGE>
consistent with the percentage increase in revenues and was attributable to
increases in payroll and related employee benefits.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL HEATING
The following table sets forth selected information from General Heating
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 0.9 $ 2.1 $ 2.9 $ 1.4 $ (0.5)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) (1.2) 1.9
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.6) (4.3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ (0.4) $ (2.9)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, General Heating
generated $5.4 million in cash from operating activities and used $2.6 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $8.0 million.
Cash used in investment activities was primarily attributable to the
purchase and replacement of trucks in General Heating's fleet. In addition, in
1994, General Heating invested approximately $2.5 million in short-term
investment securities.
Cash used in financing activities consists primarily of S corporation
distributions to General Heating's stockholders.
Prior to the closing of the Initial Acquisitions, General Heating made
distributions to its stockholders in respect of its estimated S corporation
accumulated adjustment account as of the date of the closing. These
distributions (approximately $10.9 million as of September 30, 1996) were funded
primarily through working capital, cash provided by General Heating's operating
activities and short-term debt.
General Heating had working capital of $1.8 million as of September 30,
1996. It historically funded its operations with cash flows from operations.
RESULTS OF OPERATIONS -- CROWN
The following table sets forth certain historical selected financial data
of Crown and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $ 16,268 100.0% $ 16,844 100.0% $ 19,124 100.0% $ 14,420 100.0% $ 15,556 100.0%
Cost of services..... 10,332 63.5 10,314 61.2 11,333 59.3 8,603 59.7 9,636 61.9
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......... 5,936 36.5 6,530 38.8 7,791 40.7 5,817 40.3 5,920 38.1
Selling, general
and administrative
expenses........... 5,698 35.0 5,837 34.7 6,165 32.2 4,574 31.7 4,335 27.9
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
operations......... $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 1,243 8.6 $ 1,585 10.2
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 8.3%, from $14.4 million
for the nine months ended September 30, 1995 to $15.6 million for the nine
months ended September 30, 1996. This increase was attributable to increases of
$0.6 million each in plumbing and HVAC revenues.
23
<PAGE>
COST OF SERVICES -- Cost of services increased $1.0 million, or 11.6%, from
$8.6 million for the nine months ended September 30, 1995 to $9.6 million for
the nine months ended September 30, 1996, and increased as a percentage of
revenues from 59.7% in the nine months ended September 30, 1995 to 61.9% in the
nine months ended September 30, 1996. The increase in cost of services as a
percentage of revenue was primarily attributable to a reduction in the pricing
of services in order to increase market share.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.3 million, or 6.5%, from $4.6 million for
the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996, but declined as a percentage of revenues from 31.7% in
the nine months ended September 30, 1995 to 27.9% in the nine months ended
September 30, 1996. This percentage reduction was primarily attributable to a
$0.3 million reduction in owner compensation.
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.3 million, or 13.7%, from $16.8 million
in 1994 to $19.1 million in 1995. The increase in revenues was primarily
attributable to increases of $1.3 million and $0.9 million in HVAC revenues and
plumbing revenues, respectively.
COST OF SERVICES -- Cost of services increased $1.0 million, or 9.7%, from
$10.3 million in 1994 to $11.3 million in 1995, but decreased as a percentage of
revenues from 61.2% in 1994 to 59.3% in 1995. The percentage decrease was
attributable to a change in the mix of services provided from lower-margin
services to higher-margin services and an increase in the use of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ 0.0 $1.0 $ 1.0 $ (0.3) $ (1.8)
========= ==== ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
24
<PAGE>
The change in net cash provided by (used in) investing activities was
primarily attributable to purchases/sales of investments and marketable
securities and proceeds from the sale of property and equipment.
The change in net cash provided by (used in) financing activities was
attributable to net borrowings and repayments of debt obligations and
advances/payments to/from the sole shareholder of Crown.
Crown had working capital of $0.6 million as of September 30, 1996. It
historically funded its operations with cash flows from operations and
borrowings from lenders and its sole shareholder.
RESULTS OF OPERATIONS -- FLORIDA HAC
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1994 1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 15,845 100.0% $ 14,510 100.0% $ 11,057 100.0% $ 11,267 100.0%
Cost of services..................... 12,079 76.2 10,541 72.6 8,248 74.6 8,438 74.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,766 23.8 3,969 27.4 2,809 25.4 2,829 25.1
Selling, general and administrative
expenses........................... 3,321 21.0 3,738 25.8 2,697 24.4 2,839 25.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 445 2.8 $ 231 1.6 $ 112 1.0 $ (10) (0.1)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $.2 million, or 1.8%, from $11.1 million for
the nine months ended September 30, 1995 to $11.3 million for the nine months
ended September 30, 1996.
COST OF SERVICES -- Cost of services increased $.2 million, or 2.4%, from
$8.2 million for the nine months ended September 30, 1995 to $8.4 million for
the nine months ended September 30, 1996 and increased 0.3% as a percentage of
revenues from 74.6% for the nine months ended September 30, 1995 to 74.9% for
the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 3.7%, from $2.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.3 million, or 8.2%, from $15.8 million in
1994 to $14.5 million in 1995. The decrease in revenues was primarily
attributable to a decrease in apartment complex installations.
COST OF SERVICES -- Cost of services decreased $1.6 million, or 13.2%, from
$12.1 million in 1994 to $10.5 million in 1995 and decreased 3.6% as a
percentage of revenues from 76.2% for 1994 to 72.6% for 1995. These decreases
were primarily attributable to a change in the mix of services from lower margin
apartment complexes to higher margin residential homes and improvements in
vendor pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 12.1%, from $3.3 million in
1994 to $3.7 million in 1995. This increase resulted primarily from increases in
compensation paid to shareholders.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- FLORIDA HAC
The following table sets forth selected information from Florida HAC's
statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.6 $ 0.5 $ 0.5 $ 0.1
Net cash used in investing
activities........................ (0.2) (0.2) (0.2) (0.1)
Net cash provided by (used in)
financing activities.............. (0.1) 0.0 (0.5) (0.6)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. $ 0.3 $ 0.3 $ (0.2) $ (0.6)
========= ========= ========= =========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment. Net cash provided
by (used in) financing activities resulted from borrowing and repayments of
long-term obligations and capital lease obligations and advances to/from the
shareholders of the Company.
Florida HAC had working capital of $0.3 million as of September 30, 1996.
Florida HAC historically funded its operations with cash flows from operations
and borrowings from lenders and its stockholders.
RESULTS OF OPERATIONS -- MERIDIAN & HOOSIER
The following table sets forth certain historical selected financial data
of Meridian & Hoosier and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,066 100.0% $ 10,133 100.0% $ 7,499 100.0% $ 11,508 100.0%
Cost of services..................... 5,797 71.9 7,281 71.9 5,357 71.4 7,795 67.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,269 28.1 2,852 28.1 2,142 28.6 3,713 32.3
Selling, general and administrative
expenses........................... 1,988 24.6 2,350 23.2 1,660 22.1 2,785 24.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 281 3.5 $ 502 4.9 $ 482 6.5 $ 928 8.1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $4.0 million, or 53.3%, from $7.5 million
for the nine months ended September 30, 1995 to $11.5 million for the nine
months ended September 30, 1996. Approximately $1.5 million of this increase was
attributable to the purchase of Sagamore Heating & Cooling ("Sagamore") on
January 1, 1996, and a majority of the remaining increase was due to increased
sales of residential replacement services.
COST OF SERVICES -- Cost of services increased $2.4 million, or 44.4%, from
$5.4 million for the nine months ended September 30, 1995 to $7.8 million for
the nine months ended September 30, 1996, but declined 3.7% as a percentage of
revenues from 71.4% for the nine months ended September 30, 1995 to 67.7% for
the nine months ended September 30, 1996. The dollar increase in cost of
services was primarily attributable to the increased sales for the nine months
ended September 30, 1996. The decrease as a percentage of revenues was primarily
attributable to improvements in equipment purchasing resulting from the Sagamore
acquisition and changes in the mix of services provided.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $1.1 million, or 64.7%, from $1.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996. This increase was primarily attributable to added
administrative staff resulting from the acquisition of Sagamore and increased
marketing and selling expenses.
26
<PAGE>
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.0 million, or 24.7%, from $8.1 million in
1994 to $10.1 million in 1995. The increase in revenues was primarily
attributable to increased residential equipment replacement sales of
approximately $1.2 million and the start-up of a new construction division.
COST OF SERVICES -- Cost of services increased $1.5 million, or 25.9%, from
$5.8 million in 1994 to $7.3 million in 1995 and was consistent with the
increase in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.3 million, or 15.0%, from $2.0 million in
1994 to $2.3 million in 1995. This increase resulted from increased marketing
efforts to improve market share.
LIQUIDITY AND CAPITAL RESOURCES -- MERIDIAN & HOOSIER
The following table sets forth selected information from Meridian &
Hoosier's statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.4 $ 0.7 $ 0.3 $ 0.9
Net cash used in investing
activities........................ (0.5) (0.2) (0.1) (1.1)
Net cash provided by (used in)
financing activities.............. 0.3 (0.1) (0.1) 0.8
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. $ 0.2 $ 0.4 $ 0.1 $ 0.6
========= ========= ========= =========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment and the acquisition
in 1996 of Sagamore. Net cash provided by (used in) financing activities
resulted from borrowing and repayments of long-term obligations and capital
lease obligations.
Meridian & Hoosier had working capital of $0.6 million as of September 30,
1996. It historically funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder.
RESULTS OF OPERATIONS -- A-ABC
The following table sets forth certain historical selected financial data
of A-ABC and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............ $ 10,900 100.0% $ 8,676 100.0% $ 8,707 100.0% $ 6,534 100.0% $ 6,855 100.0%
Cost of services.... 6,921 63.5 5,574 64.2 5,709 65.6 4,314 66.0 3,733 54.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........ 3,979 36.5 3,102 35.8 2,998 34.4 2,220 34.0 3,122 45.6
Selling, general and
administrative
expenses.......... 2,830 26.0 2,444 28.2 2,348 27.0 1,722 26.4 2,084 30.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
continuing
operations........ $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 498 7.6 $ 1,038 15.2
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Loss from
discontinued
operations........ $ (1,452) $ (142) $ (115) $ (54) $ (271)
========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.4 million, or 6.1%, from $6.5 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily attributable to
a $0.2 increase in HVAC installations and a $0.1 million increase in appliance
service.
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees,
resulting in reduced labor costs as a percentage of sales.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 23.5%, from $1.7 million for
the nine months ended September 30, 1995 to $2.1 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues remained constant at $8.7 million for 1994 and 1995.
COST OF SERVICES -- Cost of services increased $0.1 million, or 1.8%, from
$5.6 million in 1994 to $5.7 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to
decreases of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million in 1993 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.
LOSS FROM DISCONTINUED OPERATIONS -- Loss from discontinued operations
decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993 to a $0.1
million loss for 1994. The decrease in the loss was primarily attributable to
reductions of $0.6 million, $0.1 million and $0.3 million in salary and benefit
cost, rent and property tax expense and advertising expense, respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
Net cash provided by operating
activities..................... $0.8 $0.3 $0.6 $ 0.1 $ 0.5
Net cash provided by (used in)
investing activities........... (1.2) 0.2 (0.4) (0.2) (0.6)
Net cash used in financing
activities..................... 0.4 (0.4) (0.1) 0.0 (0.1)
---- ---- ---- ----- -----
Net increase (decrease) in
cash and cash equivalents...... $0.0 $0.1 $0.1 $(0.1) $(0.2)
==== ==== ==== ===== =====
From 1993 through the nine months ended September 30, 1996, A-ABC generated
$2.2 million in net cash from operating activities.
Cash used in investment activities was primarily attributable to purchasing
additional trucks and the net change in the cash provided by (used in)
discontinued operations.
Cash used in financing activities consisted primarily of S corporation
distributions to the Company's sole shareholder and net borrowings and
repayments of long-term obligations.
A-ABC had a working capital deficit of $1.2 million at September 30, 1996.
It historically funded its operations with cash flows from operations and
borrowings from lenders and its shareholder.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Historical Financial Statements
American Residential Services,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... 31
Consolidated Balance
Sheets..................... 32
Consolidated Statements of
Operations................. 33
Consolidated Statements of
Stockholders' Equity....... 34
Consolidated Statements of
Cash Flows................. 35
Notes to Consolidated
Financial Statements....... 36
American Residential Services,
Inc.
Report of Independent
Public Accountants......... 48
Balance Sheets............. 49
Statements of Operations... 50
Statements of Shareholders'
Deficit.................... 51
Statements of Cash Flows... 52
Notes to Financial
Statements................. 53
General Heating Engineering
Company, Inc.
Report of Independent
Public Accountants......... 58
Balance Sheets............. 59
Statements of Operations... 60
Statements of Shareholders'
Equity..................... 61
Statements of Cash Flows... 62
Notes to Financial
Statements................. 63
Atlas Services, Inc., and
Subsidiary
Report of Independent
Public Accountants......... 68
Consolidated Balance
Sheets..................... 69
Consolidated Statements of
Operations................. 70
Consolidated Statements of
Shareholders' Equity....... 71
Consolidated Statements of
Cash Flows................. 72
Notes to Consolidated
Financial Statements....... 73
Enterprises Holding Company and
Subsidiaries
Consolidated Balance
Sheet...................... 81
Consolidated Statement of
Operations................. 82
Consolidated Statement of
Shareholders' Equity....... 83
Consolidated Statement of
Cash Flows................. 84
Notes to Consolidated
Financial Statements....... 85
29
<PAGE>
PAGE
----
Service Enterprises, Inc., and
Subsidiaries
Report of Independent
Public Accountants......... 93
Consolidated Balance
Sheets..................... 94
Consolidated Statements of
Operations................. 95
Consolidated Statements of
Shareholder's Equity....... 96
Consolidated Statements of
Cash Flows................. 97
Notes to Consolidated
Financial Statements....... 98
Florida Heating and Air
Conditioning, Inc., and Related
Companies
Report of Independent
Public Accountants......... 105
Combined Balance Sheets.... 106
Combined Statements of
Operations................. 107
Combined Statements of
Shareholders' Equity....... 108
Combined Statements of Cash
Flows...................... 109
Notes to Combined Financial
Statements................. 110
DIAL ONE Meridian and Hoosier,
Inc.
Report of Independent
Public Accountants......... 116
Balance Sheets............. 117
Statements of Operations... 118
Statements of Shareholder's
Equity..................... 119
Statements of Cash Flows... 120
Notes to Financial
Statements................. 121
ADCOT, Inc.
Report of Independent
Public Accountants......... 128
Balance Sheets............. 129
Statements of Operations... 130
Statements of Shareholder's
Deficit.................... 131
Statements of Cash Flows... 132
Notes to Financial
Statements................. 133
Metro Heating and Air
Conditioning, Inc.
Report of Independent
Public Accountants......... 137
Balance Sheets............. 138
Statements of Operations... 139
Statements of Shareholders'
Equity..................... 140
Statements of Cash Flows... 141
Notes to Financial
Statements................. 142
30
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Residential Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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
American Residential Services, Inc., and subsidiaries as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with Atlas Services, Inc. as the
accounting acquiror.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
31
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
---------------------
1995 1996
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 241 $ 6,641
Accounts receivable --
Trade, net of allowance of
$40 and $729............. 2,164 20,167
Other...................... 212 872
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 254 792
Inventories..................... 532 9,652
Prepaid expenses and other
current assets................. 146 1,493
Net assets of discontinued
operations..................... -- 338
--------- ----------
Total current
assets................. 3,549 39,955
PROPERTY AND EQUIPMENT, net.......... 3,137 17,450
GOODWILL, net........................ -- 131,193
OTHER NONCURRENT ASSETS.............. 406 1,157
--------- ----------
Total assets.......... $ 7,092 $ 189,755
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 597 $ 201
Short-term debt................. 210 --
Accounts payable and accrued
expenses....................... 2,392 19,292
Unearned revenue on service and
warranty contracts............. 163 3,411
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 476 1,542
--------- ----------
Total current
liabilities............ 3,838 24,446
LONG-TERM DEBT, net of current
maturities......................... 1,564 51,854
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633
DEFERRED INCOME TAXES................ 187 2,273
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized;
none issued and outstanding... -- --
Common stock, $.001 par value,
50,000,000 shares authorized;
1,066,656 and 10,370,865
shares issued and
outstanding.................... 1 10
Additional paid-in-capital...... 128 120,735
Retained earnings (deficit)..... 1,374 (10,196)
--------- ----------
Total stockholders'
equity................. 1,503 110,549
--------- ----------
Total liabilities and
stockholders' equity... $ 7,092 $ 189,755
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES............................. $ 19,183 $ 22,048 $ 64,229
COST OF SERVICES..................... 16,049 17,811 47,990
--------- --------- ---------
Gross Profit.................... 3,134 4,237 16,239
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,138 3,022 13,411
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........ (4) 1,215 (528)
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818)
Interest Expense................ (143) (134) (439)
Interest Income................. 13 17 12
Other........................... 158 20 338
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 24 1,118 (5,435)
PROVISION FOR INCOME TAXES........... 7 434 101
--------- --------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 17 684 (5,536)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3)
--------- --------- ---------
NET INCOME (LOSS).................... $ 17 $ 684 $ (5,539)
========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 1,067 1,067 3,259
========= ========= =========
EARNINGS PER SHARE:
Continuing Operations........... $ 0.02 $ 0.64 $ (1.70)
Discontinued Operations......... -- -- --
--------- --------- ---------
Total...................... $ 0.02 $ 0.64 $ (1.70)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.............. 1,067 $ 1 $ 128 $ 673 $ 802
Net income......................... -- -- -- 17 17
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1994.............. 1,067 1 128 690 819
Net income......................... -- -- -- 684 684
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1995.............. 1,067 1 128 1,374 1,503
Public Offering, net of Offering
Costs............................ 4,830 5 60,626 -- 60,631
Purchase of Founding Companies..... 3,184 3 29,231 -- 29,234
Purchase of Purchased Companies.... 1,282 1 30,625 -- 30,626
Exercise of Warrant................ 8 125 -- 125
Cash Distributions to Founding
Companies stockholders........... -- -- -- (6,031) (6,031)
Net loss........................... -- -- -- (5,539) (5,539)
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1996.............. 10,371 $ 10 $ 120,735 $ (10,196) $ 110,549
========= ====== ========== ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 17 $ 684 $ (5,539)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........ 369 491 1,649
Stock portion of compensation and
financing fees related to
purchase of EHC.................. -- -- 6,276
Deferred income taxes (benefit)...... (135) (51) (20)
Gain on sale of property and
equipment........................ -- -- (59)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (655) (505) (222)
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............. (456) 539 (62)
Inventories............... (75) (139) 44
Prepaid expenses and other
current assets........ 4 7 (755)
Other noncurrent assets... (96) (67) (94)
Increase (decrease) in --
Accounts payable and
accrued expenses...... 1,454 (219) (1,749)
Unearned revenue on
service and warranty
contracts............. 111 (10) 56
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts............. 23 52 (177)
--------- --------- ----------
Net cash provided by (used
in) operating
activities............ 561 782 (652)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................ 50 -- 239
Additions to property and equipment....... (949) (258) (1,691)
Cash paid for acquisitions, net of cash
acquired................................. -- -- (44,458)
--------- --------- ----------
Net cash used in investing
activities............... (899) (258) (45,910)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 1,166 442 39,328
Principal payments of short- and long-term
debt..................................... (992) (843) (40,495)
Issuances of Common Stock, net of offering
costs.................................... -- 45 60,631
Distributions to Founding Companies
stockholders............................. -- -- (6,031)
Other, net................................ -- -- (471)
--------- --------- ----------
Net cash provided by (used
in) financing
activities............... 174 (356) 52,962
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (164) 168 6,400
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 237 73 241
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period....... $ 73 $ 241 $ 6,641
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 218 $ 177 $ 656
Income taxes.............................. 226 252 184
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions seven residential service businesses
(together with Enterprises Holding Company ("EHC"), which is the common parent
of two of the businesses), (the "Founding Companies") in exchange for
consideration consisting of a combination of cash and shares of its common
stock, par value $.001 per share (the "Common Stock"). The Company's initial
public offering (the "Offering") of ARS's Common Stock closed simultaneously
with the closing of the acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the accounting
acquiror. The acquisition of the remaining Founding Companies was accounted for
using the purchase method of accounting, with the results of operations included
from September 30, 1996, the effective closing date of the acquisitions for
accounting purposes. The allocation of purchase price to the assets acquired and
liabilities assumed has been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available. The
accompanying consolidated financial statements reflect the Company on a
historical basis with Atlas as the accounting acquiror.
During the fourth quarter of 1996, ARS acquired an additional 13
residential service businesses (the "Purchased Companies") which were also
accounted for using the purchase method of accounting. The Founding Companies
and Purchased Companies are referred to herein collectively as the "Acquired
Businesses."
In connection with the purchase of EHC, the purchase price paid to the
shareholders of EHC in excess of the purchase price paid by EHC for its previous
acquisition of Service Enterprises, Inc. and Adcot, Inc. is recorded as
nonrecurring compensation expense of $3,356,000 and financing fees of $4,818,000
in the accompanying statements of operations for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ARS and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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.
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
principally a weighted-average method.
36
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
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 warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of 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 typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
37
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. This statement encourages entities to account for employee
stock option or similar equity instruments using a fair value approach for all
such plans. However, it also allows an entity to continue to measure
compensation costs for those plans using the method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees". Those entities which elect
to remain with the accounting in APB No. 25 are required to include pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting had been applied. The Company has elected to account for
such plans under the provisions of APB No. 25. Therefore, there is no effect on
the Company's financial position and results of operations as a result of this
pronouncement. Reference is made to Note 8 for the SFAS No.123 disclosures.
INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective date of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition date.
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.
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.
38
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in the formation of
ARS................................ -- -- 318
Weighted average portion of shares
issued to the remaining
stockholders of the Founding
Companies.......................... -- -- 472
Weighted average portion of shares
sold in the Offering............... -- -- 1,204
Weighted average portion of shares
awarded to certain employees and
consultants........................ -- -- 10
Weighted average portion of shares
issued for the acquisition of the
Purchased Companies................ -- -- 84
Stock options and warrant, net of
assumed repurchases of common
shares as treasury stock........... -- -- 104
--------- --------- ---------
Weighted average shares
outstanding........................ 1,067 1,067 3,259
========= ========= =========
3. BUSINESS COMBINATIONS:
In addition to the acquisitions of the Founding Companies, during the
fourth quarter of 1996, the Company acquired the Purchased Companies for an
aggregate of approximately $41.2 million in cash and short-term notes and
1,282,910 shares of Common Stock. Funding of the cash portion of the purchase
prices and repayment of indebtedness assumed in connection with the acquisitions
was provided by borrowings under the Company's Credit Facility. The accompanying
consolidated balance sheet includes preliminary allocations of the respective
purchase price which are subject to final adjustment. Also, the purchase price
is based on preliminary estimates of value assigned to the Company's Common
Stock issued in all acquisitions accounted for under the purchase method of
accounting which carry certain restrictions regarding disposition by the
holders, and such value may be revised as additional information becomes
available. Set forth below are unaudited pro forma combined revenues and income
data reflecting the pro forma effect of these acquisitions on the Company's
results from continuing operations for the years ended December 31, 1995 and
1996. The unaudited pro forma data presented below consists of the income
statement data from continuing operations as presented in these consolidated
financial statements plus (i) the Founding Companies for the year ended December
31, 1995 and the nine months ended September 30, 1996 and (ii) all fourth
quarter acquisitions as if the acquisitions were effective on the first day of
the year being reported through the respective dates of acquisition (in
thousands, except per share amounts) (unaudited).
1995 1996
---------- ----------
Revenues................................ $ 184,774 $ 219,406
========== ==========
Net income from continuing operations... $ 4,058 $ 5,653
========== ==========
Net income per share from continuing
operations............................ $ 0.39 $ 0.54
========== ==========
Pro forma adjustments included in the amounts above primarily relate to:
(a) compensation differential, (b) adjustment for nonrecurring compensation
expense of $3,356,000 and financing fees of $4,818,000 related to the purchase
of EHC, (c) adjustment for rent expense on certain leased facilities, (d)
adjustment for the effects of assets distributed to and costs of certain leases
assumed by owners of certain of the Acquired Businesses, (e) adjustment for pro
forma goodwill amortization expense using a 40-year estimated life, (f)
elimination of historical interest expense related to certain obligations which
were repaid or not assumed by the Company reduced by interest expense on
borrowed funds used to pay the cash portion of the purchase price for Acquired
Businesses, and (g) adjustment to the federal and state income tax
39
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provisions based on pro forma operating results. Net income per share for 1995
and 1996 assumes all shares issued for the acquisitions of the Acquired
Businesses had been outstanding for the periods presented.
The following unaudited pro forma financial information presented below
consists of income statement data from continuing operations as presented in
these consolidated financial statements plus (i) the acquisition of the Founding
Companies, assuming those acquisitions had occurred on January 1, 1996 and (ii)
the acquisition of the Purchased Companies from their respective dates of
acquisition for accounting purposes (in thousands, except per share amounts):
DECEMBER
31,
1996
----------
(UNAUDITED)
Revenue................................. $ 139,164
Cost of services........................ 101,433
----------
Gross profit............................ 37,731
Selling, general and administrative
expenses.............................. 30,642
----------
Income from operations.................. 7,089
Interest expense........................ 399
Interest and other income............... 556
----------
Pretax income from continuing
operations............................ 7,246
Provision for income taxes.............. 3,362
----------
Net income from continuing operations... $ 3,884
==========
Weighted average shares outstanding..... 9,267
==========
Earnings per share from continuing
operations............................ $ 0.42
==========
This unaudited pro forma financial information contains the same type of
pro forma adjustments described above.
The pro forma results presented are not necessarily indicative of actual
results which might have occurred had the operations and management teams of the
Company and the Acquired Businesses been combined at the beginning of the
periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
DECEMBER 31
ESTIMATED USEFUL ---------------------
LIVES IN YEARS 1995 1996
---------------- --------- ----------
Land and land improvements............. -- $ 508 $ 2,697
Buildings and leasehold improvements... 5-40 1,388 5,319
Transportation equipment............... 5 2,069 8,500
Machinery and equipment................ 5-7 738 1,495
Furniture and fixtures................. 5-10 313 1,946
--------- ----------
5,016 19,957
Less -- Accumulated depreciation....... 1,879 2,507
--------- ----------
Property and equipment, net....... $ 3,137 $ 17,450
========= ==========
40
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Balance at beginning of year............ $ 30 $ 40
Additions charged to costs and
expenses......................... 40 164
Deductions for uncollectible
receivables written off.......... (30) (63)
Allowance for doubtful accounts at
acquisition dates................ -- 588
--------- ----------
Balance at end of year.................. $ 40 $ 729
========= ==========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Accounts payable, trade................. $ 1,601 $ 9,033
Accrued compensation and benefits....... 225 5,685
Accrued insurance....................... 269 1,648
Accrued warranty expense................ -- 707
Federal and state income taxes
payable............................... -- 509
Other accrued expenses.................. 297 1,710
--------- ----------
$ 2,392 $ 19,292
========= ==========
Installation contracts in progress are as follows (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Costs incurred on contracts in
progress.............................. $ 2,411 $ 11,162
Estimated earnings, net of losses....... 1,078 5,186
--------- ----------
3,489 16,348
Less -- Billings to date................ 3,711 17,098
--------- ----------
$ (222) $ (750)
========= ==========
The following are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Costs and estimated earnings in excess
of billings
on uncompleted contracts.............. $ 254 $ 792
Billings in excess of costs and
estimated earnings
on uncompleted contracts.............. (476) (1,542)
--------- ----------
$ (222) $ (750)
========= ==========
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division subsequent to
September 30, 1996 is included in the statements of operations under
discontinued operations
41
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and therefore revenues, costs of sales, selling, general and administrative
expenses, other income and expense, and income taxes exclude amounts associated
with the discontinued division. Revenues from this division were approximately
$2.9 million from the date of acquisition by ARS through December 31, 1996.
Certain expenses have been allocated to discontinued operations, which were
allocated based upon estimated divisional usage. All assets of the operations
are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from
the Company's Credit Facility...... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain Purchased Companies
repaid in January 1997 from
borrowing under Credit Facility.... -- 24,613
Other................................ 126 242
--------- ---------
2,161 52,055
Less -- Current maturities........... 597 201
--------- ---------
$ 1,564 $ 51,854
========= =========
On March 3, 1997, the Company increased the total commitment of its credit
facility (the "Credit Facility") from $55 million, which was in place at
December 31, 1996, to $100 million. The Credit Facility provides the Company
with a revolving line of credit up to $100 million, which may be used for
general corporate purposes, including the funding of any cash that may be paid
in connection with acquisitions, the refinancing of indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest, at the Company's option, at the designated variable base
rate plus margins ranging from 0 to 50 basis points, or at a designated London
interbank offering rate (LIBOR) plus a margin ranging from 100 to 200 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. The
margin is reset on a quarterly basis and also may be reset upon the closing of
an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), does not permit the
42
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company to incur or assume other indebtedness in excess of 5% of consolidated
net worth and will require the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding, if
any, thereunder will be due and payable in September 1999. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. ARS has also pledged the stock of its subsidiaries to guarantee
repayment of the indebtedness under the Credit Facility. As of December 31,
1996, the Company had $27.2 million in outstanding borrowings under the Credit
Facility, bearing interest at a weighted average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows and reflect the January 1997 repayment of amounts due to sellers of
certain Purchased Companies with borrowings under the Credit Facility (in
thousands):
Year ending December 31 --
1997............................ $ 201
1998............................ 41
1999............................ 51,813
---------
$ 52,055
=========
Management estimates that the fair value of its debt obligations
approximates the historical value of $52.1 million at December 31, 1996.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has approved a 1996 Incentive Plan (the Plan), which amended
and restated a prior stock option plan and provides for the granting or awarding
of stock options and stock appreciation rights to non-employee directors,
officers and other key employees and independent contractors. The Company
accounts for this Plan under APB Opinion No. 25, and no compensation expense has
been recognized. 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 (1,550,000 shares at December 31, 1996). 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 December 31,
1996, the Company has granted 10 year options covering an aggregate of 1,504,500
shares of Common Stock.
The following table summarizes activity under the Plan for the year ended
December 31, 1996:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Outstanding at December 31, 1995..... -- -- --
Granted......................... 1,554,500 $8.00 - $23.75 $13.09
Exercised....................... -- -- --
Forfeited and canceled.......... (50,000) $15.00 $15.00
---------
Outstanding at December 31, 1996..... 1,504,500 $12.59
=========
Weighted average fair value of
options granted during 1996........ $ 6.18
Weighted average remaining
contractual life................... 9.35 years
43
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share would have been increased by the
following pro forma amounts (in thousands, except per share data):
YEAR ENDED
DECEMBER 31, 1996
Net Loss:
As Reported..................... $(5,539)
Pro forma....................... $(6,514)
Loss Per Share:
As Reported..................... $ (1.70)
Pro forma....................... $ (2.00)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 32.19%; risk-free interest rate of 6.72%; and expected lives of 10 years.
STOCK WARRANT
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
Year ending December 31 --
1997............................... $ 3,486
1998............................... 3,044
1999............................... 2,836
2000............................... 2,554
2001............................... 1,912
Thereafter......................... 7,005
---------
$ 20,837
=========
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $88,000, $174,000, and $896,000, respectively. Included in these
amounts are rent expenses and commissions paid to related parties of
approximately $25,000, $82,000, and $330,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
44
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31
---------------------------------
1994 1995 1996
----------- --------- ---------
Federal --
Current............................ $ 6 $ 420 $ 108
Deferred........................... -- (44) (4)
State --
Current............................ 1 65 13
Deferred........................... -- (7) (16)
--- --------- ---------
$ 7 $ 434 $ 101
=== ========= =========
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 (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------
1994 1995 1996
----------- --------- ---------
Tax provision at the statutory rate..... $ 8 $ 380 $ (1,902)
Increase (decrease) resulting from --
State income taxes................. -- 38 13
Nondeductible expenses............. -- 29 145
Nondeductible costs related to
purchase of EHC.................. -- -- 1,740
Other.............................. (1) (13) 105
--- --------- ---------
$ 7 $ 434 $ 101
=== ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of revenues 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 (in
thousands):
YEAR ENDED DECEMBER
31
--------------------
1995 1996
--------- ---------
Accruals and reserves not deductible
until paid............................ $ (180) $ (401)
Net changes in accounting methods for
Acquired Businesses................... -- 2,170
Depreciation and amortization........... 196 99
Prepaids not deductible until paid...... -- 304
Other................................... 45 176
--------- ---------
Total deferred income tax liabilities... $ 61 $ 2,348
========= =========
45
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Deferred tax assets --
Current......................... $ (235) $ (821)
Long-term....................... (7) (609)
--------- ---------
Total...................... (242) (1,430)
--------- ---------
Deferred tax liabilities --
Current......................... 109 896
Long-term....................... 194 2,882
--------- ---------
Total...................... 303 3,778
--------- ---------
Net deferred income tax
liabilities............. $ 61 $ 2,348
========= =========
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
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. During the fourth quarter of 1996, the Company
established a self-insurance retention program for a portion of its medical
claims. The Company is now responsible for the first $75,000 per employee of
medical claims filed under its medical insurance policy. In addition, the
Company established a self-insurance retention program for damages to
Company-owned vehicles. The accrued insurance claims payable represents
management's estimate of the Company's potential claims costs in satisfying the
self-insurance retention for claims occurring through December 31, 1996. The
accrual is based on known facts and historical trends, and management believes
such accrual to be adequate.
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) account. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
46
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED):
ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1996
In the first quarter of 1997, the Company acquired all the outstanding
stock or assets of ten companies in exchange for 1,308,752 shares of Common
Stock and $640,000 in cash. These companies provide installation and
maintenance, repair and replacement of plumbing, air conditioning and heating
and electrical systems. Eight of these acquisitions will be accounted for as
poolings-of-interests.
The following table summarizes the unaudited restated consolidated
revenues, net income (loss) and per share data from continuing operations of the
Company after giving effect to these transactions (in thousands, except per
share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 (UNAUDITED)
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ----------------------
NET NET NET INCOME
REVENUES INCOME REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income (loss):
As presently reported.............. $19,183 $ 17 $22,048 $ 684 $64,229 $ (5,539)
Subsequent acquisitions............ 21,968 452 26,353 924 31,289 1,231
-------- ------ -------- ------ -------- ----------
As restated........................ $41,151 $ 469 $48,401 $1,608 $95,518 $ (4,308)
======== ====== ======== ====== ======== ==========
Net income (loss) per share:
As presently reported.............. $0.02 $0.64 $ (1.70)
Subsequent acquisitions............ 0.18 0.04 0.75
------ ------ ----------
As restated........................ $0.20 $0.68 $ (0.95)
====== ====== ==========
</TABLE>
CONVERTIBLE SUBORDINATED NOTES OFFERING
On March 27, 1997, the Company commenced a Rule 144A offering of 7 1/4%
convertible subordinated notes due 2004 (the "Notes") in the aggregate
principal amount of $55 million, prior to exercise of any over-allotment option.
Upon issuance, the Notes will be unsecured obligations and will be convertible
into Common Stock of the Company based on certain conditions. The Company
intends to use the net proceeds of the offering of the Notes to repay certain
indebtedness under its existing Credit Facility and for general corporate
purposes. The Company anticipates that the closing of the offering will occur on
April 2, 1997.
47
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying balance sheets of American Residential
Services, Inc. (a Delaware corporation), as of December 31, 1995 and June 30,
1996, and the related statements of operations, shareholders' deficit and cash
flows from Inception (October 24, 1995) through December 31, 1995 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Residential
Services, Inc. as of December 31, 1995 and June 30, 1996 and the results of its
operations and its cash flows from Inception through December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1996 (except with respect
to the matter discussed in Note 7,
as to which the date is September 9, 1996)
48
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1995 1996
------------ --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 9,784 $ 235,088
Prepaid expenses and other
current assets................ 3,327 46,957
------------ --------------
Total current assets....... 13,111 282,045
PROPERTY AND EQUIPMENT, net.......... -- 45,141
OTHER NONCURRENT ASSETS.............. 19,325 3,297,698
------------ --------------
Total assets............... $ 32,436 $ 3,624,884
============ ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 50,000 $ 1,200,000
Accounts payable and accrued
expenses...................... 141,077 3,437,334
------------ --------------
Total current
liabilities............. 191,077 4,637,334
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred Stock: $.001 par
value, 10,000,000 shares
authorized; none issued or
outstanding................... -- --
Common stock, $.001 par value,
50,000,000 shares authorized,
449,471 shares issued and
outstanding................... 449 449
Additional paid-in capital...... 551 551
Deficit......................... (159,641) (1,013,450)
------------ --------------
Total shareholders'
deficit................. (158,641) (1,012,450)
------------ --------------
Total liabilities and
shareholders' deficit... $ 32,436 $ 3,624,884
============ ==============
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
INCEPTION SIX
(OCTOBER 24, 1995) MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ ------------
REVENUES............................. $ -- $ --
COST OF SERVICES..................... -- --
------------------ ------------
Gross profit.................... -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 159,641 833,997
OPERATING LOSS....................... (159,641) (833,997)
------------------ ------------
INTEREST EXPENSE..................... -- (19,812)
------------------ ------------
NET LOSS............................. $ (159,641) $ (853,809)
================== ============
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------- ----------- -------------- -------------
BALANCE, Inception,
<S> <C> <C> <C> <C> <C>
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.
51
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCEPTION
(OCTOBER 24, 1995) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (159,641) $ (853,809)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation and amortization... -- 2,606
Changes in operating assets and
liabilities --
Increase in --
Prepaid expenses and other
current assets.......... (3,327) (43,630)
Other noncurrent assets.... (19,325) (3,278,373)
Increase in --
Accounts payable and
accrued expenses........ 141,077 3,296,257
------------------ -----------
Net cash used in operating
activities.................... (41,216) (876,949)
------------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... -- (47,747)
------------------ -----------
Net cash used in investing
activities.................... -- (47,747)
------------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 50,000 1,150,000
Proceeds from issuance of common
stock......................... 1,000 --
------------------ -----------
Net cash provided by
financing activities.... 51,000 1,150,000
------------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 9,784 225,304
CASH AND CASH EQUIVALENTS, beginning
of period.......................... -- 9,784
------------------ -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 9,784 $ 235,088
================== ===========
The accompanying notes are an integral part of these financial statements.
52
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Residential Services, Inc. (ARS or the Company), was founded on
October 24, 1995 to create a leading national provider of (i) comprehensive
maintenance, repair and replacement services for heating, ventilating and air
conditioning, plumbing, electrical, and other systems in homes and commercial
buildings and (ii) new installation services of those systems in homes and
commercial facilities under construction. ARS intends to acquire seven local and
regional residential services companies (the Acquisitions), complete an initial
public offering (the Offering) of its common stock and, subsequent to the
Offering, continue to acquire, through merger or purchase, similar companies to
expand its national and regional operations. In June 1996, ARS filed a
registration on Form S-1 for the sale of its common stock.
ARS's primary assets at December 31, 1995 and June 30, 1996 are cash and
deferred offering costs. ARS has not conducted any operations, and all
activities to date have related to the Acquisitions and the Offering. Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
4). There is no assurance that the Acquisitions discussed below will be
completed and that ARS will be able to generate future operating revenues.
Funding for the deferred offering costs has been provided by Equus II
Incorporated (Equus II). ARS is dependent upon the Offering to fund the amounts
due to Equus II, the pending acquisitions and future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for current year losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
53
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but
does not require, a fair value-based method of accounting for employee stock
option plans which results in compensation expense recognition when stock
options are granted. As permitted by SFAS No. 123, the Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Prepaid expenses and other current assets consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Prepaid insurance.................... $-- $ 39,291
Other................................ 3,327 7,666
------------- ----------
$ 3,327 $ 46,957
============= ==========
Other noncurrent assets consists of
the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Deferred offering costs.............. $19,325 $3,225,040
Other................................ -- 72,658
------------- ----------
$19,325 $3,297,698
============= ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Accrued accounting and legal
expense............................ $ -- $ 3,134,310
Accrued compensation and benefits.... 79,167 249,643
Other accrued expenses............... 61,910 53,381
------------ ------------
$141,077 $ 3,437,334
============ ============
SHORT-TERM DEBT:
The Company had borrowings from Equus II under a $2.6 million credit
facility totaling $50,000 and $1,200,000 at December 31, 1995 and June 30, 1996,
respectively. The borrowings are unsecured, bear interest at prime plus .25
percent (8.5 percent at June 30, 1996) and mature December 31, 1996. A portion
of this facility is convertible into 10 percent of the outstanding common stock
of ARS prior to completion of the Offering.
54
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' DEFICIT:
In connection with the organization and initial capitalization of ARS, the
Company issued 1,000 shares of common stock for $1,000 (see Note 7).
5. COMMITMENTS AND CONTINGENCIES:
BONUS AWARDS
In June 1996, the Board of Directors granted certain key employees
incentive cash bonus awards for 1996 which are based, subject to the overall
performance of the Company, on the performance of the Common Stock after the
Offering as compared to the performance of each of the stocks included in the
Standard & Poor's 500 Stock Index (the S&P 500). The amount of each award will
be determined by multiplying the officer's annual base salary by a percentage
determined by ranking the Common Stock's price performance, including reinvested
dividends, if any (Total Stockholder Return), among Total Stockholder Returns of
all the stocks in the S&P 500.
6. RELATED PARTY TRANSACTION:
The Company has signed a definitive agreement to acquire Enterprises
Holding Company (EHC), a related company through common ownership, to be
effective with the Offering. EHC will be acquired for a total consideration,
subject to a working capital adjustment, consisting of 378,400 shares of Common
Stock and the assumption and/or repayment of approximately $17.3 million of
indebtedness and other obligations (including $2.6 million of EHC preferred
stock being converted into 137,139 shares of Common Stock and $0.5 million
cash), approximately $14.3 million of which will be repaid either out of a
portion of the net proceeds of the Offering or through bank borrowings.
7. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS:
ARS effected a 333-for-one-stock split on February 2, 1996, and an
approximately 1.35 for-one-stock split on June 14, 1996 of its common stock for
each share of common stock then outstanding. In addition, on February 2, 1996,
authorized shares were increased from 1,000 to 50,000,000. The effects of the
common stock dividends have been retroactively reflected on the balance sheet
and in the accompanying notes.
55
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approved the 1996 Incentive Plan (the Plan), which amends
and restates the 1996 Stock Option Plan and provides for the granting or
awarding of stock options and stock appreciation rights to nonemployee
directors, officers and other key employees (including officers of the Founding
Companies) and independent contractors. The number of shares authorized and
reserved for issuance under the Plan is limited to the greater of 1,550,000
shares or 15 percent of the number of shares of Common Stock outstanding on the
last day of the preceding calendar quarter. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of September 9, 1996, the
Company has granted 10 year options covering an aggregate of 1,445,000 shares of
common stock. Management believes the option price of the options granted is
equal to or in excess of the market value of the stock at the date of grant.
OPTIONS OPTION
DATE OF GRANT GRANTED PRICE
- ------------------------------------- --------- --------------
January 31, 1996..................... 495,000 $ 8.00
March 6, 1996........................ 75,000 9.60
March 29, 1996....................... 25,000 10.20
April 30, 1996....................... 50,000 10.80
June 12, 1996........................ 655,000 Offering Price
July 15, 1996........................ 85,000 Offering Price
August 30, 1996...................... 15,000 Offering Price
September 9, 1996.................... 45,000 Offering Price
---------
1,445,000
=========
ARS and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the Founding Companies) to be
effective with the Offering. The Founding Companies are General Heating
Engineering Company, Inc.; Atlas Services, Inc., and Subsidiary; Service
Enterprises, Inc. and subsidiaries (Crown); Florida Heating and Air
Conditioning, Inc., and Related Companies; DIAL ONE Meridian and Hoosier, Inc.;
ADCOT, Inc. (A-ABC); and Climatic Corporation of Vero Beach. Crown and A-ABC
will be acquired indirectly through the direct acquisition of their parent
corporation, EHC. The aggregate consideration that will be paid by ARS to
acquire the Founding Companies is, subject to working capital adjustments,
approximately $34.8 million in cash and 2,805,065 shares of ARS common stock
(based on an assumed initial public offering price of $15 per share, the
midpoint of the estimated initial public offering price range).
On March 19, 1996, the Company issued to Equus II a warrant to purchase
100,000 shares of Common Stock exercisable at the Offering price. The warrants
are exercisable at any time after the closing of the Offering of the Company
until five years from such date. The number of shares represented by the warrant
is subject to adjustment for stock dividends and stock splits.
Subsequent to December 31, 1995, the Company has incurred additional costs,
including professional fees and travel, associated with the acquisition of the
Founding Companies and the Offering. Accordingly, accrued liabilities and
amounts due to Equus II have increased to approximately $1.2 million as of June
30, 1996. A portion of this note will be converted into 844,965 shares of ARS
Common Stock in connection with the Offering.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On September 27, 1996, ARS completed the Offering, which involved the
issuance of 4,200,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions). On October 7, 1996,
ARS sold an additional 630,000 shares of Common Stock at a price of $15.00 per
share (before deducting underwriting discounts and commissions) pursuant to an
overallotment option
56
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted by the Company in connection with the Offering. The proceeds from these
transactions, net of underwriting discounts and commissions of $1.05 per share
and after deducting estimated expenses of the Offering, were approximately $61.0
million. Of this amount, $34.8 million was used to fund the cash portion of the
purchase prices relating to the acquisitions of the Founding Companies. The
Company also has paid to the former owners approximately $4.7 million as working
capital adjustments of which approximately $1.8 million was paid in the fourth
quarter of 1996. In addition, a portion of the Equus II note was converted to
844,965 shares of ARS Common Stock.
57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To General Heating Engineering Company, Inc.:
We have audited the accompanying balance sheets of General Heating
Engineering Company, Inc. (a Delaware corporation), as of December 31, 1994 and
1995, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Heating Engineering
Company, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
58
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
BALANCE SHEETS
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,258,467 $ 3,369,929
Investments..................... 2,475,000 2,000,000
Accounts receivable --
Trade, net of allowance of
$159,910 and
$126,650............... 4,129,536 3,740,406
Other receivables.......... 129,308 47,588
Notes receivable --
Shareholders............... 92,500 308,139
Other...................... -- 39,870
Inventories..................... 2,375,590 2,215,659
Prepaid expenses and other
current assets................. 17,331 13,871
-------------- --------------
Total current
assets............ 11,477,732 11,735,462
PROPERTY AND EQUIPMENT, net.......... 1,941,076 2,100,638
OTHER NONCURRENT ASSETS.............. 376,017 483,014
-------------- --------------
Total assets.......... $ 13,794,825 $ 14,319,114
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses....................... $ 2,736,479 $ 3,248,968
Unearned revenue on service and
warranty contracts............. 797,820 894,766
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 319,323 139,764
-------------- --------------
Total current
liabilities....... 3,853,622 4,283,498
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $20 par value,
5,000 shares
authorized, 2,752 shares
issued, 462 shares
outstanding.................... 55,040 55,040
Additional paid-in capital...... 666,913 666,913
Retained earnings............... 10,811,994 10,906,407
Treasury stock, 2,290 shares at
cost........................... (1,592,744) (1,592,744)
-------------- --------------
Total shareholders'
equity............ 9,941,203 10,035,616
-------------- --------------
Total liabilities and
shareholders'
equity............ $ 13,794,825 $ 14,319,114
============== ==============
The accompanying notes are an integral part of these financial statements.
59
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 34,642,267 $ 36,333,827 $ 35,159,389 $ 25,533,943 $ 27,053,588
COST OF SERVICES..................... 27,393,298 29,927,352 28,866,207 20,964,789 21,814,017
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 7,248,969 6,406,475 6,293,182 4,569,154 5,239,571
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,011,270 5,244,776 5,280,402 3,901,706 4,511,968
-------------- -------------- -------------- -------------- --------------
Income from operations.......... 2,237,699 1,161,699 1,012,780 667,448 727,603
OTHER INCOME:
Interest income................. 189,223 177,149 299,116 224,281 106,461
Other........................... 7,891 66,724 58,517 -- 30,406
-------------- -------------- -------------- -------------- --------------
NET INCOME........................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
60
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK SHAREHOLD-
----------------- PAID-IN RETAINED --------------------- ERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------- ----------- ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,752 $55,040 $ 648,912 $ 9,811,451 (2,290) $ (1,592,744) $ 8,922,659
Dividend......................... -- -- -- (1,744,798) -- -- (1,744,798)
Net income....................... -- -- -- 2,434,813 -- -- 2,434,813
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1993........... 2,752 55,040 648,912 10,501,466 (2,290) (1,592,744) 9,612,674
Capital contributions............ -- -- 18,001 -- -- -- 18,001
Dividends........................ -- -- -- (1,095,044) -- -- (1,095,044)
Net income....................... -- -- -- 1,405,572 -- -- 1,405,572
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1994........... 2,752 55,040 666,913 10,811,994 (2,290) (1,592,744) 9,941,203
Dividends........................ -- -- -- (1,276,000) -- -- (1,276,000)
Net income....................... -- -- -- 1,370,413 -- -- 1,370,413
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1995........... 2,752 $55,040 $ 666,913 $ 10,906,407 (2,290) $ (1,592,744) $ 10,035,616
====== ======= =========== ============ ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
61
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 465,076 495,396 508,497 388,446 386,082
Loss on sale of investments...... -- -- 13,626 -- --
(Gain) loss on sale of property
and equipment.................. 4,811 (38,978) 56,152 -- (30,406)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ (1,427,017) 210,329 470,850 50,590 (1,064,511)
Inventories.................... (416,216) 49,258 159,931 (590,681) (367,755)
Prepaid expenses and other
current assets.............. (37,843) (1,907) 3,460 (478,475) (84,556)
Other noncurrent assets........ (83,112) (22,741) (106,997) 9,865 (17,106)
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 631,061 143,263 512,489 1,030,329 (193,889)
Unearned revenue on service and
warranty contracts.......... 17,782 31,739 96,946 428,742 (14,721)
Billings in excess of costs and
estimated earnings on
uncompleted contracts....... (732,654) (152,605) (179,559) (319,323) 50,339
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
operating activities........ 856,701 2,119,326 2,905,808 1,411,222 (472,053)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 5,000 112,530 42,533 26,607 41,900
Additions of property and
equipment........................ (941,748) (786,863) (766,744) (483,169) (186,357)
Purchase of investments............ -- (2,475,000) (4,193,948) (3,975,000) (1,000,000)
Proceeds from sale of
investments...................... -- -- 4,655,322 3,225,000 3,000,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
investing activities........ (936,748) (3,149,333) (262,837) (1,206,562) 1,855,543
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- -- -- -- 3,524,063
(Increase) decrease in notes
receivable....................... -- 882,500 (255,509) -- --
Dividends.......................... (1,744,798) (1,095,044) (1,276,000) (622,000) (7,773,469)
Capital contributions.............. -- 18,001 -- -- --
------------ ------------ ------------ ----------- ------------
Net cash used in financing
activities.................. (1,744,798) (194,543) (1,531,509) (622,000) (4,249,406)
------------ ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,824,845) (1,224,550) 1,111,462 (417,340) (2,865,916)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 5,307,862 3,483,017 2,258,467 2,258,467 3,369,929
------------ ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 3,483,017 $ 2,258,467 $ 3,369,929 $ 1,841,127 $ 504,013
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
62
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
General Heating Engineering Company, Inc. (a Delaware corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of air conditioning, heating and fireplace systems in new and
preexisting residential and commercial buildings in Washington, D.C. and the
surrounding area.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are valued at the lower of cost or market using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
63
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. A reserve for warranty costs is recorded upon
completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, each shareholder reports his share of the
Company's taxable earnings or losses in his personal federal and state tax
returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............. 7 $ 3,258,907 $ 3,376,461
Furniture and fixtures............... 7 159,227 169,453
Leasehold improvements............... 20 800,370 879,938
Machinery and equipment.............. 10 858,033 919,393
Computer and telephone equipment..... 5 442,853 467,219
------------ ------------
5,519,390 5,812,464
Less -- Accumulated depreciation and
amortization....................... 3,578,314 3,711,826
------------ ------------
Property and equipment,
net........................ $ 1,941,076 $ 2,100,638
============ ============
64
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Adoption of this standard did not materially impact the Company's financial
statements. The following is a summary of investment securities:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Certificates of deposit.............. $ -- $ 2,000,000
U.S. Treasury notes.................. 2,475,000 --
------------ ------------
$ 2,475,000 $ 2,000,000
============ ============
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
--------------------------------------
1993 1994 1995
---------- ------------ ------------
Balance at beginning of year......... $ 146,848 $ 127,443 $ 159,910
Additions charged to costs and
expenses........................... 45,996 104,613 71,930
Deductions for uncollectible
receivables
written off........................ (67,954) (103,848) (127,810)
Bad debt recoveries.................. 2,553 31,702 22,620
---------- ------------ ------------
$ 127,443 $ 159,910 $ 126,650
========== ============ ============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Accounts payable, trade.............. $ 1,586,930 $ 1,998,941
Accrued compensation and benefits.... 823,476 916,013
Warranty accrual..................... 292,895 292,895
Other accrued expenses............... 33,178 41,119
-------------- --------------
$ 2,736,479 $ 3,248,968
============== ==============
Installation contracts in progress are as follows:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Costs incurred on contracts in
progress........................... $ 19,975,656 $ 18,705,791
Estimated earnings, net of losses.... 9,912,429 8,989,404
-------------- --------------
29,888,085 27,695,195
Less -- Billings to date............. 30,207,408 27,834,959
-------------- --------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... $ (319,323) $ (139,764)
============== ==============
5. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company, up to a maximum liability of 1 percent of each
participating employee's annual compensation. The Company has the right to
65
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
make additional discretionary contributions. Total contributions by the Company
under this plan to provide contributions and pay expenses were approximately
$42,000, $67,000 and $78,000 during 1993, 1994 and 1995, respectively. Amounts
due to this plan were approximately $50,000 and $30,000 for the years ended
December 31, 1994 and 1995, respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical or life insurance, dental and short-term disability
benefits. The funds withheld are used to pay actual claims, administrative
expenses and stop-loss insurance protection premiums. Such stop-loss insurance
covers claims to a maximum aggregate liability of $1,000,000 and $35,000 per
participant. For the years ended December 31, 1993, 1994 and 1995, the Company
contributed approximately $57,000, $91,000 and $129,000, respectively, to this
plan in addition to amounts withheld from employees. Contributions due to this
plan were approximately $91,000 and $216,000 for the years ended December 31,
1994 and 1995, respectively.
6. LEASES:
The Company conducts a portion of its operations in leased facilities under
operating lease agreements with a company primarily owned by the shareholders.
Total amounts paid under these related-party leases were approximately $261,000,
$387,000 and $384,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. In January 1996, the Company extended each of these leases,
commencing January 1, 1996, for 10 years. The following schedule shows the
future minimum rentals to be made under these leases:
Year ending December 31 --
1996.......................... $ 517,281
1997.......................... 517,505
1998.......................... 531,468
1999.......................... 552,728
2000.......................... 574,837
Thereafter.................... 3,367,564
------------
$ 6,061,383
============
7. RELATED-PARTY TRANSACTIONS:
The Company has notes receivable from its shareholders in the amounts of
$92,500 and $308,139 as of December 31, 1994 and 1995, respectively. These notes
are unsecured, bear interest at 7 percent per annum and are due upon demand.
Interest income recognized by the Company on these notes during the years ended
December 31, 1994 and 1995, was approximately $1,000 and $12,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
66
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
At December 31, 1995, the Company had an outstanding letter of credit of
$75,000 to secure the purchase of certain inventories.
9. SALES TO SIGNIFICANT CUSTOMERS:
During 1993, 1994 and 1995, one customer accounted for approximately 13
percent, 16 percent and 21 percent, respectively, of the Company's revenue.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of the cash surrender value of life insurance,
with a total carrying value of approximately $387,000. In addition, the Company
made distributions in respect of the Company's estimated S Corporation
accumulated adjustment account of approximately $8,488,000 at the time of
closing. As of September 30, 1996, additional distributions in the aggregate
amount of $2,642,000 had been accrued but had not yet been distributed.
67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Services, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Services, Inc. (a South Carolina corporation), and subsidiary as of June 30,
1994 and 1995, and December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1995, and the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
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
68
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 204,883 $ 383,190 $ 241,263
Accounts receivable --
Trade, net of allowance of
$29,989, $39,866 and $39,866.. 1,634,219 2,098,213 2,163,990
Affiliates...................... 188,829 178,554 211,939
Inventories........................ 478,447 474,093 531,819
Prepaid expenses and other current
assets.......................... 20,763 112,207 146,283
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 323,901 382,653 254,039
------------ ------------ ------------
Total current assets....... 2,851,042 3,628,910 3,549,333
PROPERTY AND EQUIPMENT, net.......... 3,203,143 3,169,128 3,136,363
OTHER NONCURRENT ASSETS.............. 280,321 342,776 406,316
------------ ------------ ------------
Total assets............... $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 577,545 $ 619,851 $ 596,941
Short-term debt.................... 220,807 207,335 209,948
Accounts payable and accrued
expenses........................ 2,328,709 2,859,998 2,391,955
Unearned revenue on service and
warranty contracts.............. 135,487 150,628 162,755
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 192,408 355,186 475,731
------------ ------------ ------------
Total current
liabilities............. 3,454,956 4,192,998 3,837,330
LONG-TERM DEBT, net of current
maturities......................... 2,047,763 1,702,324 1,564,309
DEFERRED INCOME TAXES................ 150,506 187,806 187,237
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000
shares authorized, 2,254, 2,345
and 24,303 shares issued and
outstanding..................... 2,254 2,345 24,303
Additional paid-in capital......... 48,011 81,877 105,040
Retained earnings.................. 631,016 973,464 1,373,793
------------ ------------ ------------
Total shareholders'
equity.................. 681,281 1,057,686 1,503,136
------------ ------------ ------------
Total liabilities and
shareholders'
equity.................. $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
69
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------------- DECEMBER 31, --------------------------
1993 1994 1995 1995 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,209,885 $ 15,625,211 $ 21,228,756 $22,048,103 $ 15,963,449 $ 23,325,855
COST OF SERVICES..................... 8,182,867 12,676,789 17,714,515 17,810,928 12,947,027 18,576,719
------------ ------------ ------------ ------------ ------------ ------------
Gross profit..................... 2,027,018 2,948,422 3,514,241 4,237,175 3,016,422 4,749,136
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,760,805 2,421,016 2,985,258 3,021,692 2,171,958 3,826,413
------------ ------------ ------------ ------------ ------------ ------------
Income from operations........... 266,213 527,406 528,983 1,215,483 844,464 922,723
OTHER INCOME (EXPENSE):
Interest income.................. 12,086 12,742 13,004 16,671 12,272 (3,927)
Interest expense................. (189,927) (129,303) (143,123) (134,236) (107,445) (165,147)
Other............................ (27,690) 26,814 165,821 20,327 29,289 162,926
------------ ------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES........... 60,682 437,659 564,685 1,118,245 778,580 916,575
PROVISION FOR INCOME TAXES........... 24,914 170,478 222,237 434,258 308,617 344,000
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME........................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 469,963 $ 572,575
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
70
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992............... 2,191 $ 2,191 $ 32,611 $ 328,067 $ 362,869
Stock issuance.................. 30 30 6,850 -- 6,880
Net income...................... -- -- -- 35,768 35,768
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1993............... 2,221 2,221 39,461 363,835 405,517
Stock issuance.................. 33 33 8,550 -- 8,583
Net income...................... -- -- -- 267,181 267,181
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1994............... 2,254 2,254 48,011 631,016 681,281
Stock issuance.................. 91 91 33,866 -- 33,957
Net income...................... -- -- -- 342,448 342,448
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1995............... 2,345 $ 2,345 $ 81,877 $ 973,464 $1,057,686
====== ======= ========== ========== ==============
BALANCE, December 31, 1994........... 2,345 $ 2,345 $ 81,877 $ 689,806 $ 774,028
Stock split (10 for 1).......... 21,105 21,105 (21,105) -- --
Stock issuance.................. 853 853 44,268 -- 45,121
Net income...................... -- -- -- 683,987 683,987
------ ------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 24,303 $24,303 $ 105,040 $1,373,793 $1,503,136
====== ======= ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
71
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------- DECEMBER 31, ----------------------
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 469,963 $ 572,575
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 271,683 375,186 501,796 490,554 347,041 516,285
Deferred income taxes
(benefit)....................... (1,144) 20,022 (22,265) (50,894) 12,941 42,345
Loss on sale of property and
equipment....................... 54,786 -- -- -- -- (393)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (13,227) (822,197) (453,719) (505,195) (850,898) (1,671,231)
Inventories................. (175,733) (134,837) 4,354 (139,118) (98,348) (333,153)
Prepaid expenses and other
current assets............. 13,350 (1,800) (31,878) 7,150 (14,968) (260,708)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (27,506) (276,261) (58,752) 539,181 506,909 (196,287)
Other noncurrent assets..... (62,020) (63,362) (101,110) (66,703) -- 105,716
Increase (decrease) in --
Accounts payable and accrued
expenses................... 211,091 1,233,347 531,289 (219,215) (105,941) 1,182,536
Unearned revenue on service
and warranty contracts..... 49,963 53,271 15,141 (10,274) 18,216 (48,301)
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... (10,909) 51,603 162,778 52,327 364,723 343,359
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
operating activities... 346,102 702,153 890,082 781,800 649,638 252,743
---------- ---------- ---------- ------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 173,037 -- -- -- -- 136,998
Additions to property and
equipment......................... (439,920) (980,761) (429,127) (258,257) (206,586) (828,203)
Cash paid for acquisitions, net of
cash acquired..................... -- -- -- -- -- (131,065)
---------- ---------- ---------- ------------ ---------- ----------
Net cash used in
investing activities... (266,883) (980,761) (429,127) (258,257) (206,586) (822,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long- and short-term
debt.............................. 478,187 887,990 347,001 442,394 647,755 728,010
Principal payments of long- and
short-term debt................... (513,870) (529,624) (663,606) (843,201) (965,355) (604,002)
Proceeds from stock issuance....... 6,880 8,583 33,957 45,121 79,078 --
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
(used in) financing
activities............. (28,803) 366,949 (282,648) (355,686) (238,522) 124,008
---------- ---------- ---------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 50,416 88,341 178,307 167,857 204,530 (445,519)
CASH AND CASH EQUIVALENTS, beginning
of period........................... 66,126 116,542 204,883 73,406 73,406 241,263
---------- ---------- ---------- ------------ ---------- ----------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 116,542 $ 204,883 $ 383,190 $ 241,263 $ 277,936 $ (204,256)
========== ========== ========== ============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 286,112 $ 210,549 $ 225,374 $ 177,031 $ 132,773 $ 165,147
Income taxes..................... $ -- $ 56,477 $ 271,924 $ 251,750 $ 188,813 $ 473,234
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
72
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Atlas Services, Inc., (a South Carolina corporation) and subsidiary (the
Company), are primarily engaged in the installation and maintenance, repair and
replacement of plumbing, air conditioning and heating and electrical systems in
new and preexisting residential and commercial buildings throughout South
Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Atlas Services, Inc., and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the results of operations and cash flows with
respect to the consolidated interim financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the contract on a straight-line basis.
73
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK-SPLIT
During 1995, the Company effected a ten-for-one stock split of the
Company's Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
74
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30
USEFUL LIVES ---------------------------- DECEMBER 31,
IN YEARS 1994 1995 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Land and land improvements........... -- $ 508,129 $ 508,129 $ 508,129
Buildings and leasehold
improvements....................... 40 1,387,578 1,396,235 1,387,599
Transportation equipment............. 5 1,703,373 1,955,070 2,068,795
Machinery and equipment.............. 5 - 7 591,299 666,548 738,347
Furniture and fixtures............... 5 - 10 233,373 290,961 313,025
------------- ------------- -------------
4,423,752 4,816,943 5,015,895
Less -- Accumulated depreciation..... 1,220,609 1,647,815 1,879,532
------------- ------------- -------------
Property and equipment, net..... $ 3,203,143 $ 3,169,128 $ 3,136,363
============= ============= =============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------- DECEMBER 31,
1993 1994 1995 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of year......... $ 0 $ 0 $ 29,989 $ 29,989
Additions charged to costs and
expenses........................... 79,128 84,119 45,952 40,381
Deductions for uncollectible
receivables written off............ (79,128) (54,130) (36,075) (30,504)
---------- ---------- ---------- ------------
$ 0 $ 29,989 $ 39,866 $ 39,866
========== ========== ========== ============
</TABLE>
Accounts payable and accrued expenses consist of the following:
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
Accounts payable, trade............ $ 1,707,084 $ 2,113,376 $ 1,600,736
Accrued compensation and benefits.. 369,780 236,780 224,767
Accrued insurance.................. 98,456 257,741 269,135
Other accrued expenses............. 153,389 252,101 297,317
------------- ------------- -------------
$ 2,328,709 $ 2,859,998 $ 2,391,955
============= ============= =============
Installation contracts in progress are as follows:
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)
============= ============= ============
75
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are included in the accompanying balance sheets under the
following captions:
JUNE 30
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 323,901 $ 382,653 $ 254,039
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (192,408) (355,186) (475,731)
----------- ----------- ------------
$ 131,493 $ 27,467 $ (221,692)
=========== =========== ============
5. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving line of credit payable to a bank,
due July 21, 1996, with interest due monthly at 9.375 percent and is secured by
accounts receivable and inventory. The amounts outstanding as of June 30, 1994
and 1995, and December 31, 1995, are $220,807, $207,335 and $209,948,
respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
Mortgage note payable to a bank, with
monthly installments of $8,056
principal plus interest at 7.25%,
secured by real estate and life
insurance policies, due December
1998............................... $ 1,401,667 $ 1,305,000 $ 1,256,666
Mortgage note payable to a bank, with
monthly installments of $1,000
principal plus interest at prime
plus 1.25% (9.75% at December 31,
1995), secured by real estate, due
May 1997........................... 103,400 93,400 87,977
Mortgage note payable to a bank, with
monthly installments of $581,
bearing interest at 9.5%, secured
by real estate, due June 2017...... 56,775 56,173 53,185
Transportation equipment notes
payable and capitalized leases,
with monthly installments totaling
$48,255, due from July 1994 to
January 1998, bearing interest from
5.9% to 13.3%, secured by
transportation equipment........... 816,486 675,929 574,953
Note payable on equipment, with
monthly installments of $2,083
principal plus interest at prime
plus 1.50% (10% at December 31,
1995), secured by equipment, due
June 1998.......................... 100,000 75,000 62,500
Other................................ 146,980 116,673 125,969
------------- ------------- ------------
2,625,308 2,322,175 2,161,250
Less -- Current maturities........... 577,545 619,851 596,941
------------- ------------- ------------
$ 2,047,763 $ 1,702,324 $ 1,564,309
============= ============= ============
</TABLE>
76
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 596,941
1997............................ 334,907
1998............................ 158,688
1999............................ 110,343
2000............................ 109,567
Thereafter...................... 850,804
-------------
$ 2,161,250
=============
Management estimates that the fair value of its debt obligations
approximates the historical value of $2,371,198 at December 31, 1995.
6. RETIREMENT PLANS:
The Company has a defined contribution profit-sharing plan covering
substantially all employees. The Company's contribution for each of the years
ended June 30, 1993, 1994 and 1995, and December 31, 1995, amounted to
approximately $25,000, $35,000, $30,000 and $21,000, respectively.
7. LEASES:
The Company leases four facilities under noncancelable leases, which expire
in January 1998, January 2005, May 2005 and February 2006. Rental expense for
the years ended June 30, 1993, 1994 and 1995, and December 31, 1995, was
approximately $44,000, $72,000, $127,000 and $174,000, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of $0,
$2,000, $39,000 and $82,000 for the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, respectively. The following represents future minimum
rental payments under noncancelable operating leases:
Year ending December 31 --
1996............................ $ 259,577
1997............................ 266,680
1998............................ 230,187
1999............................ 228,600
2000............................ 228,600
Thereafter...................... 1,045,550
-------------
$ 2,259,194
=============
77
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain owned facilities under three noncancelable
leases to third parties, which expire in September 1997, October 1998 and
November 2000. Rental income received for the years ended June 30, 1993, 1994
and 1995, and December 31, 1995, was approximately $148,000, $135,000, $105,000
and $86,000, respectively. The following represents future minimum rental income
under noncancelable leases:
Year ending December 31 --
1996............................ $ 167,250
1997............................ 148,500
1998............................ 83,875
1999............................ 42,000
2000............................ 38,500
-----------
$ 480,125
===========
8. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
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
========= =========== =========== ============
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>
78
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Accruals and reserves not deductible
until paid......................... $ (65,224) $ (127,289) $ (180,124)
Depreciation and amortization........ 157,365 196,365 195,771
Other................................ 42,609 43,409 45,944
----------- ------------ ------------
Total deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Deferred tax assets --
Current......................... $ (79,907) $ (163,948) $ (235,433)
Long-term....................... (1,865) (1,865) (6,723)
----------- ------------ ------------
Total..................... (81,772) (165,813) (242,156)
----------- ------------ ------------
Deferred tax liabilities --
Current......................... 64,151 88,627 109,787
Long-term....................... 152,371 189,671 193,960
----------- ------------ ------------
Total..................... 216,522 278,298 303,747
----------- ------------ ------------
Net deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
9. RELATED-PARTY TRANSACTIONS:
The Company has a receivable from its majority shareholder in the amount of
approximately $172,000, $171,000 and $195,000 as of June 30, 1994 and 1995, and
December 31, 1995, respectively. This receivable accrues interest at 8 percent.
Interest income recognized during the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, was approximately $10,000, $13,000, $13,000 and $17,000,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. SALES TO SIGNIFICANT CUSTOMERS:
During the years ended June 30, 1993 and 1995, one customer accounted for
approximately 11 percent, and 11 percent, respectively, of the Company's
revenue.
79
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
80
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30,
1996
------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 324,283
Accounts receivable --
Trade, net of allowance of
$58,675................... 500,795
Other receivables.......... 322,311
Inventories..................... 1,472,638
Prepaid expenses and other
current assets................. 263,547
------------
Total current
assets............... 2,883,574
PROPERTY AND EQUIPMENT, net.......... 5,055,957
GOODWILL, net........................ 12,636,127
OTHER NONCURRENT ASSETS.............. 322,372
------------
Total assets.......... $ 20,898,030
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... 1,832,231
Accounts payable and accrued
expenses....................... 2,184,207
Unearned revenue on extended
warranty contracts, current.... 304,745
------------
Total current
liabilities.......... 4,321,183
LONG-TERM DEBT, net of current
maturities......................... 12,947,631
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 612,942
DEFERRED INCOME TAXES................ 114,133
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... 92,060
COMMITMENTS AND CONTINGENCIES
SERIES A PREFERRED STOCK $100 par;
49,810 shares authorized, 25,381
issued and outstanding............. 2,538,100
SERIES B PREFERRED STOCK, $100 par;
190 shares authorized, issued and
outstanding........................ 19,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
1,000,000 shares authorized,
1,000 issued and outstanding... 1,000
Retained earnings............... 251,981
------------
Total shareholders'
equity............... 252,981
------------
Total liabilities and
shareholders'
equity............... $ 20,898,030
============
The accompanying notes are an integral part of these consolidated financial
statements.
81
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
---------------------
(UNAUDITED)
REVENUES............................. $22,410,865
COST OF SERVICES..................... 13,369,713
---------------------
Gross profit.................... 9,041,152
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,629,887
---------------------
Income from operations.......... 2,411,265
OTHER INCOME (EXPENSE):
Interest income................. 28,652
Interest expense................ (776,957)
Other........................... 19,477
---------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 1,682,437
PROVISION FOR INCOME TAXES........... 537,034
---------------------
NET INCOME FROM CONTINUING
OPERATIONS......................... 1,145,403
INCOME FROM DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
82
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ----------------- -------------
<S> <C> <C> <C> <C>
Balance, Inception, February 16, 1996
(unaudited)........................ -- $ -- $ -- $ --
Stock issuance (unaudited)...... 1,000 1,000 -- 1,000
Preferred stock dividends
(unaudited)................... -- -- (57,100) (57,100)
Net income (unaudited).......... -- -- 309,081 309,081
------ ------ ----------------- -------------
Balance, June 30, 1996 (unaudited)... 1,000 $1,000 $ 251,981 $ 252,981
====== ====== ================= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
83
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
--------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 758,327
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 304,146
Gain on sale of property and
equipment...................... (16,672)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ (50,763)
Inventories................ 268,404
Prepaid expenses and other
current assets............... 85,495
Other noncurrent assets.... 254,755
Increase (decrease) in --
Accounts payable and
accrued expenses......... (525,250)
Unearned revenue on
extended warranty
contracts................ (61,675)
--------------------
Net cash provided by
operating
activities.......... 1,016,767
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment.................. 16,672
Additions of property and
equipment...................... (74,464)
Cash paid for acquisitions, net
of cash acquired............... (17,367,498)
--------------------
Net cash used in
investing
activities.......... (17,425,290)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 16,047,000
Principal payments of long-term
debt........................... (1,782,403)
Dividends....................... (108,102)
Proceeds from stock issuance.... 2,558,100
--------------------
Net cash provided by
financing
activities.......... 16,714,595
--------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 306,072
CASH AND CASH EQUIVALENTS, beginning
of period.......................... --
--------------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 306,072
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 756,197
Income taxes............... $ 349,735
The accompanying notes are an integral part of these consolidated financial
statements.
84
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Enterprises Holding Company (EHC or "the Company") (a Texas corporation),
and subsidiaries was formed February 16, 1996 solely for the purpose of
acquiring the operations of Service Enterprises, Inc. (SEI) and subsidiaries.
On March 19, 1996, EHC acquired all of the outstanding stock of SEI and
certain real estate owned by the former shareholder of SEI for $17,500,000. (See
SEI's financial statements elsewhere herein.) SEI is primarily engaged in the
maintenance, repair and replacement service-related activities of plumbing, air
conditioning, electrical repair and other home improvement services in Houston
and the surrounding areas.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. (ADCOT) for $2,000,000. (See ADCOT's financial statements included
elsewhere herein.)
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS.
All outstanding shares of EHC's common stock and preferred stock will be
exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Enterprises Holding Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the period from
inception, February 16, 1996, through September 30, 1996 are unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
INVENTORIES
Inventories consist of parts and service related supplies held for use in
the ordinary course of business and are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
85
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSET ACQUIRED
The excess of the aggregate purchase price paid by the Company in the
acquisition of businesses, accounted for as a purchase, over the fair market
value of the net assets acquired is amortized on a straight-line basis over 40
years. As of June 30, 1996, accumulated amortization was approximately $87,000.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
86
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES JUNE 30,
IN YEARS 1996
------------- --------------
Land................................. -- $1,433,246
Building and improvements............ 20 1,756,260
Leasehold improvements............... 5 - 10 405,580
Equipment............................ 3 - 7 3,652,650
Furniture and fixtures............... 3 - 7 1,160,701
--------------
8,408,437
Less -- Accumulated depreciation and
amortization....................... 3,352,480
--------------
Property and equipment,
net..................... $5,055,957
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
1996
----------
Balance at inception, February 16,
1996.................................. $ 0
Balance acquired at acquisition date.... 53,495
Additions charged to costs and
expenses.............................. 10,273
Deductions for uncollectible receivables
written off........................... (5,093)
----------
$ 58,675
==========
Prepaid expenses and other current assets consist of the following:
JUNE 30,
1996
----------
Prepaid insurance....................... $ 174,800
Deferred income taxes................... 39,068
Other prepaid assets.................... 49,679
----------
$ 263,547
==========
Accounts payable and accrued expenses consist of the following:
JUNE 30,
1996
------------
Accounts payable, trade................. $ 971,331
Accrued compensation and benefits....... 282,453
Other accrued expenses.................. 930,423
------------
$ 2,184,207
============
5. DISCONTINUED OPERATIONS:
Subsequent to the purchase of ADCOT by SEI, the board of directors of EHC
approved the disposition of ADCOT's retail appliance sales division. The
allocation of purchase price to the fair market value of the net assets of ADCOT
acquired by SEI will be based on preliminary estimates of fair value and may be
87
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
revised when additional information concerning asset and liability valuations is
obtained. Accordingly, any gain or loss on the sale of the appliance sales
division will be considered an adjustment of purchase price.
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
Note payable to Equus II Incorporated,
with quarterly installments of
$187,500 beginning June 19, 1999,
bearing interest at 12% payable
quarterly, due March 19, 2003,
unsecured and subordinated to notes
payable to a bank..................... $ 4,800,000
Revolving credit facility of $5,000,000,
bearing interest at prime plus 1%
(9.25% at June 30, 1996) due June 15,
1999, secured by equipment, inventory
and accounts receivable............... 4,372,500
Note payable to a bank, with quarterly
installments of $34,208 beginning
January 15, 1997, bearing interest at
8.34% payable quarterly, due June 15,
1999, secured by real estate.......... 2,025,500
Notes payable to former shareholder of
Crown, with quarterly installments of
$100,000, bearing interest at prime
(8.25% at June 30, 1996), due March
19, 1999, unsecured................... 1,000,000
Note payable to a bank with quarterly
installments of $46,688, beginning
January 15, 1997, bearing interest at
prime plus 1%, due June 1999, secured
by accounts receivable inventory and
property.............................. 747,000
Note payable to a bank, with quarterly
installments of $17,571 beginning
January 15, 1997, bearing interest at
prime plus 1% payable quarterly, due
June 15, 1999, secured by real
estate................................ 474,500
Note payable to a bank, bearing interest
at prime plus 1%, due October 15, 1996
secured by accounts receivable,
inventory and equipment............... 1,000,000
Various notes payable, bearing interest
at rates ranging from 8.0% to 9.0%,
due from February 1998 to August 1999,
secured by equipment.................. 360,362
--------------
Total.................... 14,779,862
Less -- Current maturities.............. (1,832,231)
--------------
Long-term debt, net of
current maturities.... $ 12,947,631
==============
88
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The aggregate maturities of long-term debt as of June 30, 1996, are as
follows:
December 31,
1997............................... $ 1,832,231
1998............................... 1,659,731
1999............................... 7,050,400
2000............................... 750,000
2001............................... 750,000
Thereafter......................... 2,737,500
--------------
$ 14,779,862
==============
Management estimates that the fair value of its debt obligations
approximates the historical value of $14,779,862 at June 30, 1996.
8. SHAREHOLDERS' EQUITY
In connection with the organization and initial capitalization of EHC, the
Company issued 1,000 shares of common stock for a total of $1,000 in February
1996.
As an amendment to the Company's certificate of incorporation, on March 19,
1996, the Company created an additional series of preferred stock designated as
Series B Preferred Stock and increased the total number of authorized shares to
1,050,000 shares, consisting of 1,000,000 shares of common stock, par value $.01
per share, and 50,000 shares of preferred stock, par value $100 per share. The
first series of preferred stock is the Series A Preferred Stock with authorized
shares of 49,810 and the second series of preferred stock is the Series B
Preferred Stock with authorized shares of 190.
SERIES A PREFERRED STOCK
On March 19, 1996, the Company issued 24,810 shares of voting, Series A
Preferred Stock, par value $100 per share, (Series A). The holder of the Series
A shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year, commencing June 30, 1996. On June 30, 1996, the
Company recorded a dividend of $56,700 payable in 567 shares of Series A
Preferred Stock.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
SERIES B PREFERRED STOCK
On March 19, 1996, the Company issued 190 shares of voting Series B
Preferred Stock, par value $100 per share, (Series B). The holder of the Series
B shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year,
89
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
commencing June 30, 1996. On June 30, 1996, the Company recorded a dividend of
$400 payable in 4 shares of Series A Preferred Stock.
The holder of Series B shares has the right and option to convert all of
the then outstanding shares of Series B Preferred Stock into an aggregate number
of shares of common stock equal to 95% of the number of shares of common stock
outstanding at the conversion date if the IPO date does not occur before March
1, 1997 or a default occurs before March 1, 1997.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
9. LEASES:
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized in the period from inception
(February 16, 1996) through June 30, 1996 was approximately $10,350.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
Six months ended 1996.............. $ 20,700
1997............................... 35,700
1998............................... 25,000
---------
$ 81,400
=========
10. INCOME TAXES:
Federal and state income taxes are as follows:
FOR THE
NINE MONTHS
ENDED
JUNE 30,
1995
-------------
Federal --
Current............................ $ 210,740
Deferred........................... --
State --
Current............................ 18,595
Deferred........................... --
-------------
$ 229,335
=============
90
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
Provision (benefit) at the statutory
rate.................................. $ 181,136
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. 15,983
Nondeductible expenses............. 32,216
Other...................................
-------------------
$ 229,335
===================
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1996
----------
Depreciation and amortization........... $ 36,213
Net operating loss carryforward......... (33,098)
Accruals and reserves not deductible
until paid............................ (40,685)
Other................................... 112,635
----------
Net deferred income tax
liabilities............ $ 75,065
==========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1996
----------
Deferred tax assets --
Current............................ $ 39,068
Long-term.......................... 100,640
----------
Total.................... 139,708
Deferred tax liabilities, long-term..... 214,773
----------
Net deferred income tax
liabilities............ $ 75,065
==========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
91
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
GUARANTEES
SEI's former shareholder is required to make seven annual payments of
$75,000 each under a lawsuit settlement. SEI's former shareholder is also
required under this settlement to make four annual payments of $20,000 each,
beginning in 2003. The Company has guaranteed these settlement payments.
12. SUBSEQUENT EVENT:
The acquisition of the Company by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
92
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Service Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Service
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Enterprises, Inc., and subsidiaries as of December 31, 1994 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
93
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,093,394 $ 2,100,996
Certificates of deposit......... 1,100,000 1,100,000
Accounts receivable --
Trade, net of allowance of
$53,257 and $58,575..... 340,961 411,139
Shareholder and
affiliates.............. 278,187 10,308
Other receivables.......... 53,780 59,737
Inventories..................... 632,614 737,495
Prepaid expenses and other
current assets................. 194,038 251,941
------------ ------------
Total current
assets............ 3,692,974 4,671,616
PROPERTY AND EQUIPMENT, net.......... 988,147 1,277,677
OTHER NONCURRENT ASSETS.............. 185,333 193,333
------------ ------------
Total assets.......... $ 4,866,454 $ 6,142,626
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ -- $ 129,000
Short-term debt................. 620,312 251,562
Accounts payable and accrued
expenses....................... 672,082 890,945
------------ ------------
Total current
liabilities....... 1,292,394 1,271,507
LONG-TERM DEBT, net of current
maturities......................... -- 366,451
DEFERRED INCOME TAXES................ 130,367 114,133
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Preferred stock, $.01 par;
1,000,000 shares authorized,
none issued.................... -- --
Common stock, $.01 stated value;
2,000,000 and 50,000,000 shares
authorized, 2,000,000 and
14,000,000 issued and
outstanding.................... 20,000 140,000
Additional paid-in capital...... 1,205,760 1,085,760
Retained earnings............... 2,217,933 3,164,775
------------ ------------
Total shareholder's
equity............ 3,443,693 4,390,535
------------ ------------
Total liabilities and
shareholder's
equity............ $ 4,866,454 $ 6,142,626
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
94
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 16,268,452 $ 16,843,520 $ 19,123,858 $ 3,555,446 $ 4,152,017
COST OF SERVICES..................... 10,331,520 10,314,231 11,333,228 2,155,171 2,643,026
-------------- -------------- -------------- ------------ ------------
Gross profit.................... 5,936,932 6,529,289 7,790,630 1,400,275 1,508,991
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,698,182 5,836,643 6,164,598 1,347,708 1,519,226
-------------- -------------- -------------- ------------ ------------
Income from operations.......... 238,750 692,646 1,626,032 52,567 (10,235)
OTHER INCOME (EXPENSE):
Interest income................. 149,124 93,370 119,074 23,506 15,957
Interest expense................ (158,943) (76,544) (58,065) (14,401) (16,248)
Equity in losses of
unconsolidated affiliate...... (130,022) (61,751) -- -- --
Other........................... (661,414) 156,796 (10,546) (1,490) (9,220)
-------------- -------------- -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (562,505) 804,517 1,676,495 60,182 (19,746)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (215,106) 589,241 629,653 23,298 (4,170)
-------------- -------------- -------------- ------------ ------------
NET INCOME (LOSS).................... $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
============== ============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
95
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,000,000.. $ 20,000 $ 982,010 $2,650,056 $3,652,066
Net loss........................ -- -- -- (347,399) (347,399)
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1993........... 2,000,000 20,000 982,010 2,302,657 3,304,667
Capital contribution............ -- -- 223,750 -- 223,750
Dividend........................ -- -- -- (300,000) (300,000)
Net income...................... -- -- -- 215,276 215,276
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1994........... 2,000,000 20,000 1,205,760 2,217,933 3,443,693
Dividend........................ -- -- -- (100,000) (100,000)
Stock split (7 for 1)........... 12,000,000 120,000 (120,000) -- --
Net income...................... -- -- -- 1,046,842 1,046,842
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 14,000,000 140,000 1,085,760 3,164,775 4,390,535
========== ======== ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
96
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization.... 328,882 364,708 371,402 82,558 93,532
Deferred income taxes
(benefit)...................... (233,911) 55,319 7,309 -- --
Equity in losses of
unconsolidated affiliate....... 130,022 61,751 -- -- --
Loss on sale of real estate...... 475,159 18,114 -- -- --
Gain on sale of property and
equipment...................... (99,629) (21,069) (13,699) -- --
Gain on sale of investment....... -- (219,125) -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... 59,245 (51,248) (76,135) 98,071 34,162
Inventories................. 3,113 158,356 (104,881) (153,073) (94,646)
Prepaid expenses and other
current assets............ 50,525 72,648 (89,446) (240,528) 499
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 85,821 11,014 218,863 469,611 13,498
------------ ------------ ----------- ----------- ------------
Net cash provided by
operating activities.... 451,828 665,744 1,360,255 293,523 31,469
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real
estate........................... -- 978,727 -- -- --
Proceeds from sale of property and
equipment........................ 115,906 38,628 24,793 -- --
Additions of property and
equipment........................ (861,640) (233,903) (672,026) -- --
(Purchase) sale of certificates of
deposit.......................... -- (1,100,000) -- -- 1,100,000
Proceeds from sale of investment... -- 450,961 -- -- --
Purchase of marketable
securities....................... -- (110,188) -- -- --
Proceeds from note receivable...... -- 100,000 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in) investing
activities.............. (745,734) 124,225 (647,233) -- 1,100,000
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Advances) payments of receivable
from shareholder and
affiliates....................... (558,319) 1,636,469 267,879 (184,852) (2,113,308)
Borrowings of long- and short-term
debt............................. 1,804,649 137,500 495,451 -- --
Principal payments of long- and
short-term debt.................. (1,006,266) (1,495,266) (368,750) (97,187) (747,013)
Dividends.......................... -- (300,000) (100,000) -- --
Capital contribution............... -- 223,750 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in) financing
activities.............. 240,064 202,453 294,580 (282,039) (2,860,321)
------------ ------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (53,842) 992,422 1,007,602 11,484 (1,728,852)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 154,814 100,972 1,093,394 1,093,394 2,100,996
------------ ------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 100,972 $ 1,093,394 $ 2,100,996 $ 1,104,878 $ 372,144
============ ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 98,522 $ 78,294 $ 61,230 $ 14,401 $ 23,399
Income taxes..................... $ 135,000 $ 220,951 $ 540,000 $ -- $ 10,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
97
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Service Enterprises, Inc. (SEI) (a Texas corporation), and subsidiaries
(the Company) are primarily engaged in the maintenance, repair and replacement
service-related activities of plumbing, air conditioning, electrical repair and
other home improvement services in Houston and the surrounding areas.
On March 19, 1996, all of the outstanding stock of SEI and certain real
estate owned by the former shareholder of SEI was acquired by Enterprises
Holding Company (EHC) for $17,500,000. EHC was formed solely for the purpose of
acquiring the Company and has no other operations. The accompanying unaudited
financial statements of the Company for the quarter ended March 31, 1996, do not
reflect the effect of the purchase of the Company by EHC.
In April 1996, the Company entered into a stock purchase agreement with
ADCOT, Inc. (ADCOT), to purchase all of the outstanding common stock of ADCOT
for $2,000,000. (See ADCOT's financial statements included elsewhere herein.)
EHC intends to enter into a definitive agreement with American Residential
Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS. All
outstanding shares of EHC's common stock and a portion of EHC's preferred stock
will be exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Service Enterprises, Inc., and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1995 and March 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the results of operations and cash
flows with respect to the consolidated interim financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
98
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues when services are performed.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK SPLIT
During 1994, the Company effected a seven-for-one stock split of Company
Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------- ------------ ------------
Leasehold improvements............... 5 - 10 $ 140,983 $ 140,333
Transportation equipment............. 5 1,357,588 1,930,724
Tools and equipment.................. 3 - 7 182,797 181,893
Telephone equipment.................. 5 - 7 230,582 181,886
Furniture and fixtures............... 3 - 7 509,423 453,034
------------ ------------
2,421,373 2,887,870
Less -- Accumulated depreciation and
amortization....................... 1,433,226 1,610,193
------------ ------------
Property and
equipment, net..... $ 988,147 $ 1,277,677
============ ============
99
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT IN AFFILIATED COMPANY:
During July 1994, the Company sold a portion of its investment in American
Natural Gas Power, Inc. (ANGP), for $225,000 and an unsecured
noninterest-bearing note receivable for $35,000 due on demand or, if no demand
is made, due in June 1996. After the sale, the Company's interest in ANGP
decreased from approximately 33 percent at December 31, 1993, to approximately 8
percent at December 31, 1994, and accordingly is no longer accounted for under
the equity method. Included in other income is a net realized gain on sale of
$228,353 for the year ended December 31, 1994.
5. NOTE RECEIVABLE:
In January 1994, the Company sold an investment in real estate to an
individual. The consideration included a note receivable for $300,000,
collateralized by a second lien on the real estate, which bears interest at 4
percent, payable monthly, with principal due January 1999.
In the event that the aggregate of all principal payments made on or before
the third anniversary of this note, January 25, 1997, equals $200,000, this note
shall be discounted such that the note is fully discharged by the prepayment of
such $200,000 within the initial three-year period. This note has been recorded
at its prepayment value of $200,000, discounted to a market rate of interest,
and is included in other noncurrent assets on the accompanying consolidated
balance sheet.
Management estimates that the fair value of its note receivable
approximates its discounted historical carrying value of $193,000 at December
31, 1995.
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
-------------------------------
1993 1994 1995
--------- --------- ---------
Balance at beginning of year......... $ 22,000 $ 38,080 $ 53,257
Additions charged to costs and
expenses........................... 36,429 55,407 46,996
Deductions for uncollectible
receivables written off............ (24,118) (54,212) (53,495)
Bad debt recoveries.................. 3,769 13,982 11,817
--------- --------- ---------
$ 38,080 $ 53,257 $ 58,575
========= ========= =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 303,280 $ 507,810
Accrued compensation and benefits.... 120,501 143,708
Accrued income taxes................. 29,809 71,781
Accrued taxes other than income
taxes.............................. 146,389 131,388
Other accrued expenses............... 72,103 36,258
---------- ----------
$ 672,082 $ 890,945
========== ==========
100
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
$850,000 demand line of credit with
bank; collateralized by
transportation equipment, accounts
receivable and inventory, interest
at prime plus 1% (9.5% at December
31, 1995), payable monthly,
principal due June 1996............ $ 200,000 $ 200,000
Demand note payable to bank;
cross-collateralized with the line
of credit, bearing interest at
prime plus 1%, principal of $25,000
plus interest, payable in monthly
installments through January
1996............................... 300,000 --
Demand note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, payable monthly, principal due
September 1996..................... 120,312 51,562
---------- ----------
$ 620,312 $ 251,562
========== ==========
Long-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, interest only through June
1996, payable monthly, then
principal of $21,500, plus
interest, payable in monthly
installments through June 1998..... $ -- $ 495,451
Less -- Current portion......... -- 129,000
---------- ----------
$ -- $ 366,451
========== ==========
The aggregate maturities of long-term debt are as follows:
Year ending December 31 --
1996............................ $ 129,000
1997............................ 258,000
1998............................ 108,451
----------
$ 495,451
==========
In connection with the bank indebtedness, the Company has entered into an
agreement which provides for certain affirmative covenants and restrictions,
including certain required financial ratios and restrictions on retained
earnings. As of December 31, 1995, the Company was in compliance with these
covenants.
The notes payable have been personally guaranteed by the Company's
shareholder.
Management estimates that the fair value of its debt obligations
approximates the historical value of $747,013 at December 31, 1995.
8. LEASES:
The Company operates in leased facilities under an agreement with its
shareholder and affiliates. The amount paid under these leases was $291,600,
$291,600 and $301,600 in 1993, 1994 and 1995, respectively. These leases were
canceled concurrent with the purchase of the Company and the leased facilities
by EHC.
101
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, the Company renewed a parking lot lease agreement with an
affiliated company, which expired September 30, 1995. The Company continued its
lease on a month-to-month basis. Amounts paid under this lease in 1993, 1994 and
1995 totaled $22,500, $30,000 and $25,000, respectively.
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized during 1993, 1994 and 1995 was
approximately $13,650, $11,400 and $16,400, respectively.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
1996............................ $ 41,400
1997............................ 35,700
1998............................ 25,000
----------
$ 102,100
==========
9. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Federal --
Current......................... $ 18,602 $ 466,159 $ 553,973
Deferred........................ (205,440) 48,585 6,419
State --
Current......................... 203 67,764 68,371
Deferred........................ (28,471) 6,733 890
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Provision (benefit) at the statutory
rate............................... $ (191,252) $ 273,536 $ 570,008
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction......... (18,657) 49,169 45,713
Nondeductible expenses.......... 6,553 184,418 18,743
Related-party gain on sale...... -- 76,075 --
Other................................ (11,750) 6,043 (4,811)
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
102
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 56,200 $ 36,213
Net operating loss carryforward...... (33,098) (33,098)
Accruals and reserves not deductible
until paid......................... (65,203) (40,685)
Other................................ 109,857 112,635
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 62,611 $ 39,068
Long-term....................... 103,598 100,640
---------- ----------
Total................. 166,209 139,708
Deferred tax liabilities,
long-term.......................... 233,965 214,773
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
10. RELATED-PARTY TRANSACTIONS:
The Company has receivables from its shareholder and from certain
affiliated entities related through common ownership and control in the amount
of $278,187 and $10,308 at December 31, 1994 and 1995, respectively. Receivables
from shareholder accrue interest at 5.5 percent. Interest income recognized
during 1993, 1994 and 1995 was approximately $147,800, $54,000 and $27,000,
respectively.
The Company acquired an investment in real estate held for sale from its
shareholder for $1,750,000 in January 1993. In January 1994, the investment was
sold for approximately $1,275,000, net of closing costs. At December 31, 1993,
the investment was written down to its net realizable value resulting in an
unrealized loss of approximately $475,000 included in other income (expense) on
the consolidated statement of operations.
In 1991, the Company received 250,000 shares of registered Exploration
Company of Louisiana (Exploration) common stock valued at $125,000 from its
shareholder in exchange for shares of stock in ANGP. During March 1994, the
Company sold the 250,000 shares of common stock of Exploration to its
shareholder for $348,750 resulting in a gain of $223,750 which has been
accounted for as additional paid-in capital.
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
103
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
GUARANTEES
The Company's former shareholder is required to make seven annual payments
of $75,000 each under a lawsuit settlement. The Company's former shareholder is
also required under this settlement to make four annual payments of $20,000
each, beginning in 2003. The Company has guaranteed these settlement payments.
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On March 19, 1996, Enterprise Holding Company ("EHC") acquired all of the
outstanding stock of SEI and certain real estate owned by the former shareholder
of SEI for $17,500,000.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. for $2,000,000.
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC would be acquired by
ARS. The acquisition of EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
104
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Florida Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Florida Heating
and Air Conditioning, Inc. (a Florida corporation), and related companies as of
December 31, 1994 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Florida
Heating and Air Conditioning, Inc., and related companies as of December 31,
1994 and 1995, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
105
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 735,749 $ 1,022,154
Accounts receivable --
Trade, net of allowance of
$41,305, $41,305 and
$41,305................. 1,418,022 1,394,895
Other receivables.......... 376,211 444,680
Inventories..................... 269,295 306,523
Prepaid expenses and other
current assets................. 61,056 52,992
------------ ------------
Total current
assets............ 2,860,333 3,221,244
PROPERTY AND EQUIPMENT, net.......... 458,964 495,110
OTHER NONCURRENT ASSETS.............. 27,896 38,509
------------ ------------
Total assets.......... $ 3,347,193 $ 3,754,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 52,477 $ 100,166
Accounts payable and accrued
expenses....................... 1,296,472 1,626,569
Payable to shareholder.......... 640,447 641,804
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 508,209 367,519
Deferred income taxes........... 256,022 287,454
------------ ------------
Total current
liabilities....... 2,753,627 3,023,512
LONG-TERM DEBT, net of current
maturities......................... 45,689 18,017
DEFERRED INCOME TAXES................ 68,015 42,339
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.................... 9,800 9,800
Additional paid-in capital...... 4,000 4,000
Retained earnings............... 466,062 657,195
------------ ------------
Total shareholders'
equity............ 479,862 670,995
------------ ------------
Total liabilities and
shareholders'
equity............ $ 3,347,193 $ 3,754,863
============ ============
The accompanying notes are an integral part of these combined financial
statements.
106
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 15,845,183 $ 14,510,455 $ 11,057,138 $ 11,266,545
COST OF SERVICES..................... 12,079,290 10,541,122 8,248,236 8,437,954
-------------- -------------- -------------- --------------
Gross profit.................... 3,765,893 3,969,333 2,808,902 2,828,591
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,321,394 3,738,253 2,697,057 2,838,858
-------------- -------------- -------------- --------------
Income from operations.......... 444,499 231,080 111,845 (10,267)
OTHER INCOME (EXPENSE):
Interest expense................ (23,338) (11,743) (10,303) (20,126)
Other........................... 12,833 (8,238) (4,008) 13,933
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES........... 433,994 211,099 97,534 (16,460)
PROVISION FOR INCOME TAXES........... 3,832 13,966 10,053 9,000
-------------- -------------- -------------- --------------
NET INCOME........................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
107
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,600 $9,800 $4,000 $ 90,960 $104,760
Dividend........................ -- -- -- (55,060) (55,060)
Net income...................... -- -- -- 430,162 430,162
------ ------ ---------- --------- --------------
BALANCE, December 31, 1994........... 2,600 9,800 4,000 466,062 479,862
Dividend........................ -- -- -- (6,000) (6,000)
Net income...................... -- -- -- 197,133 197,133
------ ------ ---------- --------- --------------
BALANCE, December 31, 1995........... 2,600 $9,800 $4,000 $ 657,195 $670,995
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
108
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 183,860 195,662 144,785 135,500
Deferred income taxes........... 1,274 5,756 364,260 --
Gain on sale of property and
equipment..................... 25,241 (12,303) (12,303) (307)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........... (331,298) (45,342) (207,121) (191,897)
Inventories................... (33,374) (37,228) (549,819) (45,901)
Prepaid expenses and other
current assets............. 112,642 8,064 261,902 18,949
Other noncurrent assets....... (4,915) (10,613) (4,837) 27,024
Increase (decrease) in --
Accounts payable and accrued
expenses................... (15,654) 330,097 343,316 151,116
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... 269,917 (140,690) 87,372 68,221
------------ ------------ ------------ ------------
Net cash provided by operating
activities.................... 637,855 490,536 515,036 137,245
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 38,190 16,704 16,704 28,778
Additions of property and
equipment....................... (199,281) (236,209) (222,551) (151,498)
------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (161,091) (219,505) (205,847) (122,720)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... -- 1,357 (547,643) (641,804)
Borrowings of long-term debt....... 276,291 185,511 185,511 (161,352)
Principal payments of long-term
debt............................ (346,573) (165,494) (133,392) 203,251
Dividends.......................... (55,060) (6,000) (6,000) (6,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (125,342) 15,374 (501,524) (605,905)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 351,422 286,405 (192,335) (591,380)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 384,327 735,749 735,749 1,022,154
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 735,749 $ 1,022,154 $ 543,414 $ 430,774
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 25,931 $ 11,743 $ 5,871 $ 20,126
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
109
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Florida Heating and Air Conditioning, Inc. (a Florida corporation) and its
three affiliated companies (collectively, the Company), are primarily engaged in
the installation and maintenance, repair and replacement of air conditioning and
heating systems in new and preexisting residential and commercial buildings in
Southeast Florida.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Florida Heating and Air Conditioning, Inc., and its affiliated
companies (see Note 11) which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim combined financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
110
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the companies in the affiliated group have elected S Corporation
status as defined by the Internal Revenue Code, whereby the Company is not
subject to taxation for federal purposes. Under S Corporation status, the
shareholders report their share of the Company's taxable earnings or losses in
their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
111
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............. 5 $ 869,115 $ 1,051,880
Machinery and equipment.............. 7 115,186 115,774
Computer and telephone equipment..... 5 - 7 343,166 354,674
Leasehold improvements............... 7 57,151 57,151
Furniture and fixtures............... 7 39,308 39,308
------------ ------------
1,423,926 1,618,787
Less -- Accumulated depreciation and
amortization....................... 964,962 1,123,677
------------ ------------
Property and
equipment, net..... $ 458,964 $ 495,110
============ ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 41,305 $ 41,305
Additions to costs and expenses...... 53,132 25,038
Deductions for uncollectible
receivables written off............ (53,132) (25,038)
---------- ----------
$ 41,305 $ 41,305
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Accounts payable, trade.............. $ 1,002,209 $ 1,283,034
Accrued compensation and benefits.... 150,638 198,175
Other accrued expenses............... 143,625 145,360
------------ ------------
$ 1,296,472 $ 1,626,569
============ ============
Installation contracts in progress are as follows:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Costs incurred on contracts in
progress........................... $ 1,680,864 $ 985,003
Estimated earnings, net of losses.... 575,928 351,711
------------ ------------
2,256,792 1,336,714
Less -- Billings to date............. 2,765,002 1,704,233
------------ ------------
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. $ (508,210) $ (367,519)
============ ============
112
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $10,500. The notes bear interest at
rates ranging from 7 percent to 9 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 100,166
1997............................ 18,017
----------
$ 118,183
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $118,183 at December 31, 1995.
The Company has a $200,000 line of credit with a financial services
company. The line of credit expires August 31, 1996, and bears interest at prime
plus 1 percent per annum. The line of credit is secured by a lien on accounts
receivable and inventory and is guaranteed by the shareholders. There was no
balance outstanding under this line of credit at December 31, 1995.
6. LEASES:
The Company leases facilities from a company which is owned by the
shareholders. The lease expires in 2000 and provides for rents increasing at 5
percent per year. Total amounts paid under this related-party lease were
approximately $198,000 and $198,000 for the years ended December 31, 1994 and
1995, respectively. The Company also leases a facility from a third party, which
expires in 1997. The rent paid under this lease was approximately $15,000 per
year for the year ended December 31, 1994 and 1995. The leases provide for the
Company to pay taxes, maintenance, insurance and certain other operating costs
of the leased property. The leases contain renewal provisions.
The Company leases vehicles for a shareholder and affiliates. The lease
payments under these vehicle leases were approximately $31,000 and $45,000 for
the years ended December 31, 1994 and 1995, respectively.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 234,897
1997............................ 204,438
1998............................ 184,252
1999............................ 193,465
2000............................ 82,242
-----------
$ 899,294
===========
113
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The S Corporation in the affiliated group will terminate its S Corporation
status concurrent with the effective date of the Offering. The Company is
subject to taxation in certain states based upon the jurisdiction in which
revenues are earned.
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995
--------- ---------
Federal --
Current......................... $ 2,098 $ 6,733
Deferred........................ 1,088 4,915
State --
Current......................... 460 1,477
Deferred........................ 186 841
--------- ---------
$ 3,832 $ 13,966
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------
1994 1995
------------ ----------
Provision at the statutory rate...... $ 147,558 $ 71,774
Increase (decrease) resulting from --
Income of S Corporation......... (143,878) (59,557)
State income tax, net of benefit
for federal deduction......... 370 1,398
Other........................... (218) 351
------------ ----------
$ 3,832 $ 13,966
============ ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Loss from limited partnership
investment......................... $ 192,585 $ 230,844
Cash to accrual adjustment........... 189,614 136,674
Other................................ (58,162) (37,725)
---------- ----------
Net deferred income tax
liabilities.......................... $ 324,037 $ 329,793
========== ==========
114
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 16,275 $ 11,972
Long-term....................... 27,975 25,998
---------- ----------
Total...................... 44,250 37,970
Deferred tax liabilities --
Current......................... 272,297 299,426
Long-term....................... 95,990 68,337
---------- ----------
Total...................... 368,287 367,763
---------- ----------
Net deferred income tax
liabilities............. $ 324,037 $ 329,793
========== ==========
8. RELATED-PARTY TRANSACTIONS:
One of the shareholders loans the Company funds as needed. The loans are
payable on demand and, under certain conditions, bear interest at prime plus 1
percent. The amount payable to the shareholder is $640,447 and $641,804 at
December 31, 1994 and 1995, respectively. No interest was incurred or paid
during the years ended December 31, 1994 and 1995, related to these loans.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1994 two customers accounted for approximately 22% of the Company's
sales. During 1995, one customer accounted for approximately 14% of the
Company's sales.
11. SHAREHOLDERS' EQUITY:
The common stock ownership of the corporate entities is as follows:
AS OF DECEMBER 31, 1995 AND 1994
------------------------------------
SHARES SHARES PAR
AUTHORIZED OUTSTANDING VALUE
----------- ----------- ------
Florida Heating and Air Conditioning,
Inc. .............................. 1,000 800 $10.00
Florida Heating and Air Conditioning
Service, Inc. ..................... 600 600 1.00
Florida Heating and Air Duct, Inc.... 10,000 600 1.00
Bullseye Air Conditioning, Inc. ..... 600 600 1.00
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company entered into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
115
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIAL ONE Meridian and Hoosier, Inc.:
We have audited the accompanying balance sheets of DIAL ONE Meridian and
Hoosier, Inc. (an Indiana corporation), as of December 31, 1994 and 1995, and
the related statements of operations, shareholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIAL ONE Meridian and
Hoosier, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
116
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427,005 $ 856,754
Investments..................... 150,000 --
Accounts receivable --
Trade, net of allowance of
$41,595 and $54,050..... 869,316 989,963
Shareholder and
affiliates.............. 6,316 14,261
Other receivables.......... 19,098 26,459
Inventories..................... 345,934 249,773
Prepaid expenses and other
current assets................. 72,239 96,545
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 42,717 16,825
------------ ------------
Total current
assets............ 1,932,625 2,250,580
PROPERTY AND EQUIPMENT, net.......... 829,316 919,238
OTHER NONCURRENT ASSETS.............. 28,567 18,819
------------ ------------
Total assets.......... $ 2,790,508 $ 3,188,637
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 262,046 $ 266,830
Accounts payable and accrued
expenses....................... 488,197 638,224
Unearned revenue on service
contracts...................... 353,045 423,259
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 78,049 32,131
------------ ------------
Total current
liabilities....... 1,181,337 1,360,444
LONG-TERM DEBT, net of current
maturities......................... 610,180 544,483
DEFERRED INCOME TAXES................ -- 13,309
OTHER NONCURRENT LIABILITIES......... -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value;
1,000 shares authorized, 598
shares issued and 588
outstanding.................... 7,201 7,201
Additional paid-in capital...... 35,000 35,000
Retained earnings............... 956,890 1,228,300
Treasury stock, 10 shares at
cost........................... (100) (100)
------------ ------------
Total shareholder's
equity............ 998,991 1,270,401
------------ ------------
Total liabilities and
shareholder's
equity............ $ 2,790,508 $ 3,188,637
============ ============
The accompanying notes are an integral part of these financial statements.
117
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
---------------------------- ----------------------------
1994 1995 1995 1996
------------ -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,066,155 $ 10,132,706 $ 7,499,254 $ 11,508,090
COST OF SERVICES..................... 5,797,066 7,280,888 5,357,009 7,795,049
------------ -------------- ------------ --------------
Gross profit.................... 2,269,089 2,851,818 2,142,245 3,713,041
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,988,791 2,349,482 1,660,059 2,784,557
------------ -------------- ------------ --------------
Income from
operations......... 280,298 502,336 482,186 928,484
OTHER INCOME (EXPENSE):
Interest income................. 8,517 23,399 13,820 25,642
Interest expense................ (56,585) (86,097) (64,725) (111,835)
Other........................... 36,817 10,259 13,371 18,000
------------ -------------- ------------ --------------
INCOME BEFORE INCOME TAXES........... 269,047 449,897 444,652 860,291
PROVISION FOR INCOME TAXES........... 110,365 178,487 176,442 328,208
------------ -------------- ------------ --------------
NET INCOME........................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
============ ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
118
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 588 $7,201 $ 35,000 $ 798,208 $ (100) $ 840,309
------ ------ ---------- ---------- -------- --------------
Net income...................... -- -- -- 158,682 -- 158,682
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1994........... 588 7,201 35,000 956,890 (100) 998,991
Net income...................... -- -- -- 271,410 -- 271,410
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1995........... 588 $7,201 $ 35,000 $1,228,300 $ (100) $1,270,401
====== ====== ========== ========== ======== ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
119
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
-------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 205,310 245,028 190,423 242,023
Deferred income taxes........... 108,303 45,302 32,890 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivables....... (183,259) (128,008) (772,782) (583,573)
Inventories................ (129,922) 96,161 58,137 (5,756)
Prepaid expenses and other
current assets.......... (14,768) (29,873) 30,511 33,694
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 29,530 25,892 28,577 18,615
Other noncurrent assets.... 2,606 (16,678) (2,589) --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 86,294 150,027 161,430 373,482
Unearned revenue on service
contracts............... 60,469 70,214 44,661 140,661
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 27,852 (45,918) 217,618 161,757
Other noncurrent
liabilities............. -- -- -- --
------------ ------------ ------------ --------------
Net cash provided by operating
activities.................... 351,097 683,557 257,086 912,986
------------ ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... (318,444) (334,950) (224,668) (783,078)
Purchase of investment.......... (150,000) -- -- --
Proceeds from sale of
investment.................... -- 150,000 150,000 --
Cash paid for acquisition, net
of cash acquired.............. -- -- -- (297,496)
------------ ------------ ------------ --------------
Net cash used in investing
activities.............. (468,444) (184,950) (74,668) (1,080,574)
------------ ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 451,815 200,639 126,226 1,065,854
Principal payments of long-term
debt.......................... (183,134) (261,552) (199,865) (258,375)
(Advances) payments of
receivable from shareholder
and affiliates................ 17,940 (7,945) -- (7,622)
------------ ------------ ------------ --------------
Net cash provided by (used
in) financing
activities.............. 286,621 (68,858) (73,639) 799,857
------------ ------------ ------------ --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 169,274 429,749 108,779 632,269
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 257,731 427,005 427,005 856,754
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 427,005 $ 856,754 $ 535,784 $ 1,489,023
============ ============ ============ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 56,585 $ 86,097 $ 54,290 $ 99,632
Income taxes.................... $ 20,000 $ 126,137 $ 6,280 $ 152,758
</TABLE>
The accompanying notes are an integral part of these financial statements.
120
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
DIAL ONE Meridian and Hoosier, Inc., (an Indiana corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of residential and commercial air conditioning and heating systems
in Indianapolis and the surrounding areas.
The Company and its shareholder intend to enter into a definitive agreement
with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of parts and supplies for use in the ordinary course of
business and are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
121
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
WARRANTY COSTS
The Company warrants labor for one or five years after installation on new
air conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Land and building.................... 30 $ 145,920 $ 183,320
Leasehold improvements............... 10 191,823 212,461
Transportation equipment............. 3 - 4 827,628 950,262
Machinery and equipment.............. 7 162,243 165,367
Furniture and fixtures............... 5 280,527 369,956
Telephone equipment.................. 7 - 10 47,291 109,016
------------ ------------
1,655,432 1,990,382
Less -- Accumulated depreciation and
amortization......................... 826,116 1,071,144
------------ ------------
Property and equipment,
net..................... $ 829,316 $ 919,238
============ ============
122
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 13,609 $ 41,595
Additions charged to costs and
expenses........................... 43,451 32,071
Deductions for uncollectible
receivables written off............ (15,465) (19,616)
---------- ----------
$ 41,595 $ 54,050
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 128,155 $ 185,409
Accrued compensation and benefits.... 228,886 254,393
Warranty accrual..................... 60,754 79,102
Other accrued expenses............... 70,402 119,320
---------- ----------
$ 488,197 $ 638,224
========== ==========
Installation contracts in progress are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs incurred on contracts in
progress............................. $ 195,350 $ 243,727
Estimated earnings, net of losses.... 93,439 96,263
---------- ----------
288,789 339,990
Less -- Billings to date............. 324,121 355,296
---------- ----------
$ (35,332) $ (15,306)
========== ==========
The following are included in the accompanying balance sheets under the
following captions:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 42,717 $ 16,825
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (78,049) (32,131)
---------- ----------
$ (35,332) $ (15,306)
========== ==========
123
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable, due in monthly
installments of $4,167 plus
interest at prime plus 1.25% (9.75%
at December 31, 1995) and secured
by accounts receivable, inventory
and equipment, matures November 30,
1999............................... $ 245,837 $ 195,833
Land contract, maturing in November
2003, due in monthly installments
of $1,456 including interest at 8%,
collateralized with the related
property deed held in escrow....... 111,123 102,238
Note payable, due in monthly
installments of $2,500 plus
interest at prime plus 1.25% and
secured by accounts receivable,
inventory and equipment, matures
July 31, 1998...................... 107,500 77,500
Capital leases, maturing from 1996 to
2000, interest ranging from 8.94%
to 10%, secured by transportation
equipment.......................... 403,057 420,536
Other................................ 4,709 15,206
---------- ----------
872,226 811,313
Less -- Current maturities........... 262,046 266,830
---------- ----------
$ 610,180 $ 544,483
========== ==========
The Company has a $250,000 bank line of credit expiring July 31, 1996, with
interest payable monthly at prime plus .75 percent. As of December 31, 1995,
there were no borrowings on this agreement. In addition, the Company has a
$100,000 bank lease line of credit expiring January 2, 2000, with interest at
8.94 percent payable monthly. As of December 31, 1995, borrowings on the lease
line were $23,214 and are included in capital leases.
The notes payable contain covenants which require the Company to maintain
specified financial covenants. As of December 31, 1995, the Company was in
compliance with these covenants.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 93,071
1997............................ 94,220
1998............................ 83,015
1999............................ 61,867
2000............................ 13,263
Thereafter...................... 45,341
----------
$ 390,777
==========
124
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
The future minimum lease payments under capital leases are as follows:
Year ending December 31 --
1996............................ $ 219,291
1997............................ 159,026
1998............................ 95,352
1999............................ 23,855
2000............................ --
----------
Total minimum lease
payments................ 497,524
Less -- Amounts representing
interest............................. (76,988)
----------
Net minimum lease
payments................ 420,536
Less -- Current portion of
obligations under capital leases... 173,759
----------
Long-term portion of
obligations under
capital leases.......... $ 246,777
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $811,313 at December 31, 1995.
6. LEASES:
The Company leases a facility from its shareholder. The lease was renewed
on January 1, 1995, and expires on December 31, 1999. The lease requires monthly
payments of $7,500. The amount paid under this lease in 1994 and 1995 was
approximately $76,000 and $90,000, respectively.
7. INCOME TAX:
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
----------------------
1994 1995
---------- ----------
Federal --
Current......................... $ -- $ 97,907
Deferred........................ 85,943 39,549
State --
Current......................... 2,062 35,278
Deferred........................ 22,360 5,753
---------- ----------
$ 110,365 $ 178,487
========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
Tax provision at the statutory
rate................................. $ 91,476 $ 152,965
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 16,118 27,080
Nondeductible expenses.......... 3,080 321
Other........................... (309) (1,879)
---------- ----------
$ 110,365 $ 178,487
========== ==========
125
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 4,675 $ 13,859
Accruals and reserves not deductible
until paid......................... (50,724) (43,433)
Other................................ (27,652) 1,175
---------- ----------
Total deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ (47,275) $ (41,708)
Long-term....................... (26,426) --
---------- ----------
Total...................... (73,701) (41,708)
Deferred tax liabilities,
long-term.......................... -- 13,309
---------- ----------
Net deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
8. FRANCHISE AGREEMENTS:
In October 1993, the Company renewed a four-year franchise agreement with
DIAL ONE of Central Indiana, Inc. (DIAL ONE), a company wholly owned by the
shareholder of the Company. The Company pays $15,000 annually plus a royalty fee
of 3 percent of gross sales in excess of a predefined base. Total amounts
incurred in 1994 and 1995 under this agreement were approximately $92,000 and
$56,000, respectively.
The Company pays the LINC Corporation for consulting services under a
franchise agreement through its commercial division. Fees are based on a royalty
fee on gross revenues with a minimum payment of $15,000 a year. In 1994 and
1995, the Company incurred approximately $58,000 and $61,000, respectively,
under the terms of the agreement.
9. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company for the first $200 of each participant's
contribution. The Company has the right to make additional discretionary
contributions. Total contributions by the Company under this plan were
approximately $64,000 and $86,000 for 1994 and 1995, respectively.
10. RELATED-PARTY TRANSACTIONS:
The Company is a DIAL ONE franchisee (see Note 8) under an agreement with
DIAL ONE. The Company also shares certain costs with DIAL ONE for personnel and
overhead, which are billed monthly to DIAL ONE, based on that company's pro rata
share of those expenses. In 1995, the Company received $24,000 in rental income
from DIAL ONE for space occupied in the building that the Company owns. At
December 31, 1994 and 1995, the Company had a balance due from DIAL ONE of
approximately $6,000 and $14,000, respectively.
126
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
12. SUBSEQUENT EVENT:
Effective January 1, 1996, the Company acquired 100 percent of the
outstanding shares of stock in Sagamore Heating & Cooling, Inc. (Sagamore) for
$281,000. Consideration paid by the Company included $100,000 in cash and a
$181,000 note payable to the former owner. The Company consolidated Sagamore
effective as of the date of acquisition.
13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholder entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company changed its name to Meridian &
Hoosier Heating and Air Conditioning Company and entered into agreements with
the shareholder to lease land and buildings used in the Company's operations for
a negotiated amount and term.
127
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ADCOT, Inc.:
We have audited the accompanying balance sheets of ADCOT, Inc. (a Texas
corporation), as of December 31, 1994 and 1995, and the related statements of
operations, shareholder's deficit and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADCOT, Inc., as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996 (except with respect to
the matter discussed in Note 4, as to
which the date is June 5, 1996)
128
<PAGE>
ADCOT, INC.
BALANCE SHEETS
DECEMBER 31
----------------------------
1994 1995
-------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 122,966 $ 256,104
Accounts receivable --
Trade...................... 3,132 --
Shareholder and
affiliates.............. 10,476 11,968
Other receivables.......... -- --
Inventories..................... 416,332 411,892
Prepaid expenses and other
current assets................ -- 23,607
-------------- ------------
Total current
assets............. 552,906 703,571
PROPERTY AND EQUIPMENT, net.......... 294,820 299,757
OTHER NONCURRENT ASSETS.............. -- 999
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 34,065 123,494
-------------- ------------
Total assets.......... $ 881,791 $ 1,127,821
============== ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 15,692 $ 77,263
Accounts payable and accrued
expenses...................... 770,780 754,768
Payable to shareholders and
affiliates.................... 266,297 241,008
Unearned revenue on extended
warranty contracts, current... 375,668 351,514
-------------- ------------
Total current
liabilities........ 1,428,437 1,424,553
LONG-TERM DEBT, net of current
maturities......................... -- 96,277
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 637,614 579,307
OTHER LONG-TERM LIABILITIES.......... 39,014 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIT:
Common stock, $1 par value;
100,000 shares authorized,
10,000 issued and
outstanding................... 10,000 10,000
Deficit......................... (1,233,274) (982,316)
-------------- ------------
Total shareholder's
deficit............ (1,223,274) (972,316)
-------------- ------------
Total liabilities and
shareholder's
deficit............ $ 881,791 $ 1,127,821
============== ============
The accompanying notes are an integral part of these financial statements.
129
<PAGE>
ADCOT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
-------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,899,840 $ 8,675,616 $ 8,707,403 $ 3,982,983 $ 3,445,084
COST OF SERVICES..................... 6,921,371 5,574,296 5,709,114 2,721,218 2,147,264
-------------- ------------ ------------ ------------ ------------
Gross profit.................... 3,978,469 3,101,320 2,998,289 1,261,765 1,297,820
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 2,830,130 2,443,678 2,347,954 1,107,956 835,868
-------------- ------------ ------------ ------------ ------------
Income from operations.......... 1,148,339 657,642 650,335 153,809 461,952
OTHER INCOME (EXPENSE):
Interest expense................ (81,798) (36,224) (83,754) (30,942) (15,370)
Other........................... 3,503 24,430 65,530 27,421 11,163
-------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE STATE INCOME
TAXES.............................. 1,070,044 645,848 632,111 150,288 457,745
PROVISION FOR STATE INCOME TAXES..... -- -- 43,165 6,824 20,598
-------------- ------------ ------------ ------------ ------------
NET INCOME FROM
CONTINUING OPERATIONS.. 1,070,044 645,848 588,946 143,464 437,147
LOSS FROM DISCONTINUED
OPERATIONS, net of applicable state
income taxes....................... (1,452,024) (141,923) (114,900) (91,999) (245,187)
-------------- ------------ ------------ ------------ ------------
NET INCOME (LOSS).................... $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
============== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
130
<PAGE>
ADCOT, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- SHAREHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
--------- ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 10,000 $10,000 $ (1,355,219) $ (1,345,219)
Net loss........................ -- -- (381,980) (381,980)
--------- ------- -------------- -------------
BALANCE, December 31, 1993........... 10,000 10,000 (1,737,199) (1,727,199)
Net income...................... -- -- 503,925 503,925
--------- ------- -------------- -------------
BALANCE, December 31, 1994........... 10,000 10,000 (1,233,274) (1,223,274)
Dividends....................... -- -- (223,088) (223,088)
Net income...................... -- -- 474,046 474,046
--------- ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 $10,000 $ (982,316) $ (972,316)
========= ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
131
<PAGE>
ADCOT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
------------ ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 307,552 271,420 261,704 123,587 184,644
Gain on sale of property and
equipment...................... -- (18,251) (19,519) (19,518) --
Write-off of property and
equipment...................... -- -- 26,118 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ 104,276 (6,318) 1,640 2,459 (110,851)
Inventories.................... 154,349 225,814 4,440 (109,517) (59,220)
Prepaid expenses and other
current assets.............. (114,200) 127,891 (23,607) (23,185) (26,337)
Other noncurrent assets........ (9,068) 10,369 (999) -- 999
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 691,700 (786,089) (16,012) 76,767 570,418
Unearned revenue on extended
warranty contracts.......... 3,661 (8,288) (82,461) (41,229) 3
------------ ---------- ---------- ----------- ------------
Net cash provided by
operating activities...... 756,290 320,473 625,350 60,829 751,616
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ -- 19,503 21,188 21,188 --
Additions to property and
equipment........................ (16,478) (49,403) (294,428) (185,554) (349,988)
Cash provided by (used in)
discontinued operations.......... (1,116,116) 188,714 (89,429) 252,196 (218,054)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) investing activities.. (1,132,594) 158,814 (362,669) 87,830 (568,042)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholder and
affiliates....................... 580,431 (314,134) (25,289) (155,000) (229,040)
Borrowings of long-term debt....... 63,750 -- 214,553 143,618 249,110
Principal payments of long-term
debt............................. (93,260) (106,035) (56,705) (30,208) (62,288)
Increase (decrease) in other
long-term liabilities............ (173,024) 39,014 (39,014) (29,625) --
Dividends.......................... -- -- (223,088) (178,088) (303,001)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) financing activities.. 377,897 (381,155) (129,543) (249,303) (345,219)
------------ ---------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,593 98,132 133,138 (100,644) (161,645)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 23,241 24,834 122,966 122,966 256,104
------------ ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 24,834 $ 122,966 $ 256,104 $ 22,322 $ 94,459
============ ========== ========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 109,064 $ 79,658 $ 111,536 $ 32,468 $ 15,370
</TABLE>
The accompanying notes are an integral part of these financial statements.
132
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
ADCOT, Inc. (a Texas corporation) (the Company) (d.b.a. A-ABC Appliance),
is primarily engaged in the sales of consumer appliances and the service-related
activities of plumbing, air conditioning, appliance and electrical repair and
other home improvement services in Houston and the surrounding areas.
In April 1996, the Company and its shareholder entered into a stock
purchase agreement with Service Enterprises, Inc. (SEI) to sell all of its
outstanding common stock for $2,000,000 to SEI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1995 and
the five months ended May 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of appliances and service-related parts and supplies
held for use in the ordinary course of business and are valued at the lower of
cost or market using the weighted-average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax return.
The Company is subject to Texas franchise tax which is an income-based tax.
Accordingly, the Company has recorded a provision for this tax in the
accompanying statement of operations for 1995. No provision for franchise taxes
was recorded in the 1993 or 1994 statement of operations as the Company's
franchise tax was offset by a business loss carryover.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
133
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Leasehold improvements............... 5 - 15 $ 221,120 $ 256,245
Transportation equipment............. 5 815,190 849,183
Computer and telephone equipment..... 5 - 7 351,383 --
Furniture and fixtures............... 5 - 7 1,053,293 1,109,215
------------ ------------
2,440,986 2,214,643
Less -- Accumulated depreciation and
amortization....................... 2,146,166 1,914,886
------------ ------------
Property and equipment,
net..................... $ 294,820 $ 299,757
============ ============
4. DISCONTINUED OPERATIONS:
Subsequent to the purchase of the Company by SEI, the board of directors of
SEI's parent company (Enterprises Holding Company) approved the disposition of
the Company's retail appliance sales division. The allocation of purchase price
to the fair market value of the net assets of the Company acquired by SEI will
be based on preliminary estimates of fair value and may be revised when
additional information concerning asset and liability valuations is obtained.
Accordingly, any gain or loss on the sale of the appliance sales division will
be considered an adjustment of purchase price.
The net losses of these operations prior to April 1, 1996, are included in
the statements of operations under discontinued operations. Revenues, cost of
sales, selling, general and administrative expenses, other income and expense,
and income taxes for fiscal years 1993, 1994 and 1995 exclude amounts associated
with the discontinued division. Revenues from such operations were approximately
$12,185,000, $12,101,000 and $11,915,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Certain expenses have been allocated to
discontinued operations, which were allocated based upon estimated divisional
usage. All assets of the operations are expected to be sold in 1996.
134
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net assets of discontinued operations included in the
balance sheets are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Net working capital (deficit)........ $ (64,208) $ 55,667
Property and equipment, net.......... 98,273 99,919
Other liabilities.................... -- (32,092)
---------- ----------
$ 34,065 $ 123,494
========== ==========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 488,819 $ 495,031
Accrued compensation and benefits.... 93,193 87,725
Accrued taxes, other than income..... 147,066 101,383
Other accrued expenses............... 41,702 70,629
---------- ----------
$ 770,780 $ 754,768
========== ==========
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
The Company also has floor plan financing available from three other
companies with similar terms. However, the Company does not utilize these, and
had no balances outstanding at December 31, 1994 and 1995.
The inventory floor plan facilities are personally guaranteed by the sole
shareholder and/or an officer of the Company.
7. LONG-TERM DEBT:
Long-term debt consists of the installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes are 36 months with monthly payments of principal and interest
of approximately $9,000. The notes bear interest at rates ranging from 8.25
percent to 11 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 77,263
1997............................ 67,241
1998............................ 29,036
----------
$ 173,540
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $173,540 at December 31, 1995.
135
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES:
OPERATING LEASES
The Company leases certain facilities from its sole shareholder and his
affiliates. The leases expire from 1997 through 2010. The rent paid under these
related-party leases was approximately $316,000, $305,000 and $370,000 in 1993,
1994 and 1995, respectively.
Other nonrelated-party leases for retail facilities expire in 1997. The
rent paid under nonrelated-party leases was approximately $198,000, $183,000 and
$162,000 in 1993, 1994 and 1995, respectively.
The lease terms generally range from five to 15 years. The leases generally
provide for the Company to pay taxes, maintenance, insurance and certain other
operating costs of the leased property. The leases on most of the properties
contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 558,140
1997............................ 430,034
1998............................ 330,288
1999............................ 292,848
2000............................ 240,432
Thereafter...................... 725,820
------------
$ 2,577,562
============
9. RELATED-PARTY TRANSACTIONS:
The Company has payables to its sole shareholder and certain other related
parties in the amounts of $266,297 and $241,008 at December 31, 1994 and 1995,
respectively. Interest accrues on these payables at 8 percent per annum.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On May 28, 1996, Service Enterprises, Inc. ("SEI"), a subsidiary of
Enterprises Holding Company ("EHC") purchased all of the outstanding common
stock of ADCOT for $2,000,000.
The acquisition of the EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
136
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro Heating and Air Conditioning, Inc.:
We have audited the accompanying balance sheet of Metro Heating and Air
Conditioning, Inc. (a North Carolina corporation), as of December 31, 1995, and
the related statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metro Heating and Air
Conditioning, Inc., as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 6, 1996
137
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $1,338,654 $ 890,726
Accounts receivable --
Trade, net of allowance of
$45,000.......................... 1,781,532 2,564,979
Other receivables.................. 135,686 81,211
Inventories........................... 1,492,548 1,887,274
Prepaid expenses and other current
assets............................. 27,236 --
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 311,901 63,516
------------ -------------
Total current assets.......... 5,087,557 5,487,706
PROPERTY AND EQUIPMENT, net............. 1,828,966 2,512,259
OTHER NONCURRENT ASSETS................. 1,089 2,000
------------ -------------
Total assets.................. $6,917,612 $ 8,001,965
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt....................... $ -- $ 1,000,000
Accounts payable and accrued
expenses........................... 1,623,495 1,589,943
Payable to shareholders............... 652,636 209,465
Unearned revenue on service
contracts.......................... 277,190 316,500
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 225,991 24,708
------------ -------------
Total current liabilities..... 2,779,312 3,140,616
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000
shares authorized, 6,000 shares
issued and outstanding............. 6,000 6,000
Retained earnings..................... 4,132,300 4,855,349
------------ -------------
Total shareholders' equity.... 4,138,300 4,861,349
------------ -------------
Total liabilities and
shareholders' equity....... $6,917,612 $ 8,001,965
============ =============
The accompanying notes are an integral part of these financial statements.
138
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, ------------------------------
1995 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $ 20,549,846 $ 14,893,513 $ 19,383,471
COST OF SERVICES........................ 14,367,437 10,524,811 13,894,337
-------------- -------------- --------------
Gross profit....................... 6,182,409 4,368,702 5,489,134
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,084,813 2,896,523 3,888,374
-------------- -------------- --------------
Income from operations............. 2,097,596 1,472,179 1,600,760
OTHER INCOME (EXPENSE):
Interest income.................... 12,486 4,574 8,992
Interest expense................... (34,829) (34,196) (70,256)
Other.............................. 3,849 (1,538) 6,481
-------------- -------------- --------------
NET INCOME.............................. $ 2,079,102 $ 1,441,019 $ 1,545,977
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
139
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 6,000 $6,000 $ 3,089,128 $ 3,095,128
Dividends.......................... -- -- (1,035,930) (1,035,930)
Net income......................... -- -- 2,079,102 2,079,102
------ ------ ----------- -------------
BALANCE, December 31, 1995.............. 6,000 6,000 4,132,300 4,138,300
Dividends (unaudited).............. -- -- (822,928) (822,928)
Net income (unaudited)............. -- -- 1,545,977 1,545,977
------ ------ ----------- -------------
BALANCE, September 30, 1996
(unaudited)........................... 6,000 $6,000 $ 4,855,349 $ 4,861,349
====== ====== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
140
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, --------------------------
1995 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 2,079,102 $ 1,441,019 $ 1,545,977
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............ 512,107 306,118 470,118
(Gain)/loss on sale of
property and
equipment............... (1,284) 3,790 --
Changes in operating assets
and liabilities --
(Increase) decrease
in --
Accounts receivable... (222,078) (81,910) (728,972)
Inventories........... (42,371) 9,295 (394,726)
Prepaid expenses and
other current
assets............. 1,423 13,063 27,236
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.......... (192,806) 75,695 248,385
Other noncurrent
assets............. 40,640 40,640 (911)
Increase (decrease)
in --
Accounts payable and
accrued expenses... 525,716 47,317 (33,552)
Unearned revenue on
service
contracts.......... 67,275 51,929 39,310
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.......... 14,351 (211,640) (201,283)
------------- ------------ ------------
Net cash provided
by operating
activities...... 2,782,075 1,695,316 971,582
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 5,625 2,775 --
Additions of property and
equipment..................... (850,274) (573,629) (946,530)
Cash paid for acquisition....... -- -- (206,881)
------------- ------------ ------------
Net cash used in
investing
activities...... (844,649) (570,854) (1,153,411)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 350,000 350,000 1,000,000
Repayments of short-term debt... (350,000) (350,000) --
Increase (decrease) in payable
to shareholders............... (276,520) (810,000) (443,171)
Dividends....................... (1,035,930) (541,296) (822,928)
------------- ------------ ------------
Net cash used in
financing
activities...... (1,312,450) (1,351,296) (266,099)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 624,976 (226,834) (447,928)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 713,678 713,678 1,338,654
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,338,654 $ 486,844 $ 890,726
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 34,822 $ 34,190 $ 26,011
</TABLE>
The accompanying notes are an integral part of these financial statements.
141
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Metro Heating and Air Conditioning, Inc. (the Company), is primarily
engaged in the installation and maintenance, repair and replacement of air
conditioning and heating systems in new and preexisting residential and
commercial buildings in North Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1996, and for the nine
months ended September 30, 1995 and 1996, are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning and heating
equipment, refrigeration supplies and accessories held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for twelve
months after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
142
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1995
------------ ------------
Transportation equipment................ 5 $ 2,198,404
Machinery and equipment................. 5-7 273,555
Computer and telephone equipment........ 5 416,804
Leasehold improvements.................. 7-10 942,468
Furniture and fixtures.................. 5-7 707,987
------------
4,539,218
Less -- Accumulated depreciation and
amortization.......................... (2,710,252)
------------
Property and equipment, net........ $ 1,828,966
============
143
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
1995
------------
Balance at beginning of year......... $ 30,000
Additions charged to costs and
expenses........................... 26,350
Deductions for uncollectible
receivables written off............ (11,350)
------------
$ 45,000
============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
1995
------------
Accounts payable, trade................. $ 846,157
Accrued profit-sharing contribution..... 375,437
Accrued compensation and benefits....... 262,901
Accrued warranty expense................ 139,000
------------
$1,623,495
============
Installation contracts in progress are as follows:
DECEMBER 31,
1995
------------
Costs incurred on contracts in
progress.............................. $ 565,148
Estimated earnings, net of losses....... 557,681
------------
1,122,829
Less -- Billings to date................ 896,838
------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. $ 225,991
============
The following are included in the accompanying balance sheet under the
following captions:
DECEMBER 31,
1995
------------
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. $ 311,901
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (225,991)
------------
$ 85,910
============
5. SHORT-TERM DEBT:
The Company has a $1,000,000 line of credit with a bank. The line of credit
bears interest at the prime rate (8.5 percent at December 31, 1995) per annum.
There was no balance outstanding under this line of credit at December 31, 1995.
In January 1996, the line of credit was increased to $1,500,000 and the maturity
was extended from May 1996 to April 30, 1997.
144
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases two facilities and a parking lot from the owners of the
Company. The lease for the two facilities expires in 2004, and the lease for the
parking lot expires in 2006 and provides for rents increasing at 2 percent per
year. The rent paid under these related-party leases was approximately $192,000
for the year ended December 31, 1995. The leases provide for the Company to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property. The leases contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................... $ 197,000
1997............................... 201,000
1998............................... 205,000
1999............................... 209,000
2000............................... 214,000
Thereafter......................... 926,000
------------
$ 1,952,000
============
7. RELATED-PARTY TRANSACTIONS:
Two of the shareholders loan funds to the Company as needed. The loans are
payable on demand and bear interest at 5.25 percent. The amount payable to the
shareholders is $652,636 at December 31, 1995. Interest of approximately $27,000
was incurred during the year ended December 31, 1995, related to these loans.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
9. PROFIT-SHARING PLAN:
In January 1982, the Company established a defined contribution 401(k)
profit-sharing plan for employees meeting certain employment requirements. In
January 1983, the plan was amended to include a 401(k) component. Eligible
employees may contribute up to the lesser of 15 percent of their annual
compensation or the maximum amount permitted under IRS regulations to their
401(k) account. The plan provides for an annual contribution made by the
Company, as determined by the board of directors. The Company's contribution was
approximately $375,000 for the year ended December 31, 1995.
145
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS:
Effective February 29, 1996, Metro entered into an asset purchase agreement
with Tillman Heating and Air Conditioning Company (THAC) of Durham, North
Carolina for approximately $590,000, consisting of cash and assumption of
certain liabilities. In conjunction with the purchase, the Company entered into
a lease with a related party for the business premises of THAC.
Concurrent with the acquisition, ARS will enter into agreements with the
former shareholders to lease land and buildings used in ARS' operations for a
negotiated amount and term.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On December 11, 1996, ARS acquired the Company.
146
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information called for by Item 10 (other than the information
regarding Executive Officers, which is set forth in "Item 1. Business --
Executive Officers") and Items 11, 12 and 13, reference is made to the Company's
definitive proxy statement for its 1997 Annual Meeting of Stockholders, which
will be filed with the Securities and Exchange Commission (the "Commission")
within 120 days after December 31, 1996, and which is incorporated herein by
reference (except for the material included under the captions "Report of
Compensation Committee" and "Performance Graph").
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
For the financial statements filed as part of this Annual Report on
Form 10-K, refer to "Index to Financial Statements" included in
"Item 8. Financial Statements and Supplementary Data."
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not
required or the required information is shown in the Company's
consolidated financial statements or the notes thereto.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*2.1 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which American
Residential Services, Inc. ("ARS") and Climatic Corporation of Vero Beach are parties
(Form S-1, Reg. No. 333-06195, Ex. 2.1).
*2.2 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.2).
*2.3 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Atlas
Services, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.3).
*2.4 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and DIAL ONE
Meridian and Hoosier, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.4).
*2.5 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Bullseye
Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.5).
*2.6 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Duct, Inc. are parties (Form S-1, No. 333-06195, Ex. 2.6).
</TABLE>
147
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*2.7 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Service, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex.
2.7).
*2.8 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and General
Heating Engineering Company, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.8).
*2.9 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and
Enterprises Holding Company ("EHC") are parties (Form S-1, Reg. No. 333-06195, Ex. 2.9).
*2.10 -- Form of Uniform Provisions for the Acquisition of Founding Companies (Form S-1, Reg. No.
333-06195, Ex. 2.10).
*2.11 -- Agreement and Plan of Reorganization dated as of December 11, 1996 to which ARS and Metro
Heating and Air Conditioning, Inc. are parties (Form S-4, Reg. No. 333-18623, Ex. 2.11).
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.1).
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Form S-1,
Reg. No. 333-06195, Ex. 3.3).
*4.1 -- Form of Certificate representing Common Stock (Form S-1, Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights Certificate as Exhibit B thereto (Form
S-8, Reg. No. 333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the stockholders listed on the signature pages
thereto (Form S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996 between ARS and Equus II
Incorporated (Form S-1, Reg. No. 333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March 19, 1996 between EHC and
NationsBank of Texas, N.A. ("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
4.6 -- Revolving Loan Agreement dated March 3, 1997 among ARS, NationsBank and the other parties
designated therein.
4.7 -- First Amendment to Revolving Loan Agreement dated March 24, 1997, among ARS, NationsBank
and the other parties designated therein.
ARS 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 ARS
and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item
601(b) of Regulation S-K, ARS agrees to furnish a copy of such instruments to the
Commission upon request.
+*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195, Ex. 10.1).
+*10.2 -- Employment Agreement dated as of November 1, 1995 between ARS and Howard S. Hoover, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.2).
+*10.3 -- Employment Agreement dated as of November 1, 1995 between ARS and C. Clifford Wright, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.3).
+10.4 Employment Agreement dated as of January 20, 1997 between ARS and Harry O. Nicodemus, IV.
+*10.5 -- Employment Agreement dated as of March 6, 1996 between ARS and John D. Held, as amended
(Form S-1, Reg. No. 333-06195, Ex. 10.5).
+*10.6 -- Employment Agreement dated as of March 6, 1996 between ARS and A. Jefferson Walker III
(Form S-1, Reg. No. 333-06195, Ex. 10.6).
</TABLE>
148
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
+*10.7 -- Employment Agreement dated as of April 15, 1996 between ARS and Michael Mamaux (Form S-1,
Reg. No. 333-06195, Ex. 10.7).
+*10.8 -- Employment Agreement dated as of June 13, 1996 between ARS and Elliot Sokolow (Form S-1,
Reg. No. 333-06195, Ex. 10.8).
+*10.9 -- Employment Agreement dated as of June 13, 1996 between ARS and Gorden H. Timmons (Form
S-1, Reg. No. 333-06195, Ex. 10.10).
+*10.10 -- Employment Agreement dated as of June 13, 1996 between ARS and Frank N. Menditch (Form
S-1, Reg. No. 333-06195, Ex. 10.12).
+*10.11 -- Employment Agreement dated as of November 1, 1995 between ARS and William P. McCaughey, as
amended (Form S-1, Reg. No. 333-06195, Ex. 10.4).
*10.12 -- Form of Indemnification Agreement between ARS and each of its directors and officers (Form
S-1, Reg. No. 333-06195, Ex. 10.15).
+*10.13 -- Executive Supplemental Disability Plan of ARS (Form S-1, Reg. No. 333-06195, Ex. 10.16).
+*10.14 -- Executive Supplemental Life Insurance Plan of ARS (Form S-1, Reg. No. 333-06195, Ex.
10.17).
+*10.15 -- ARS Deferred Compensation Plan (Form S-1, Reg. No. 333-06195, Ex. 10.18).
21.1 -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
</TABLE>
- ------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
The Company filed Current Reports on Form 8-K dated (i) December
11, 1996 to report the acquisition by the Company of Metro
Heating and Air Conditioning, Inc. ("Metro"), which
incorporated by reference (A) the balance sheets of Metro at
December 31, 1995 and December 31, 1996, (B) the statements of
operations and statements of cash flows of Metro for the year
ended December 31, 1995 and the nine months ended September 30,
1995 and September 30, 1996, and (C) the statements of
shareholders' equity of Metro for the year ended December 31,
1995 and the nine months ended September 30, 1996, and (ii) March
4, 1997 to announce the Company's proposed private placement of
convertible subordinated notes.
149
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMERICAN RESIDENTIAL SERVICES, INC.
Date: March 31, 1997 By: /s/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON MARCH 31,
1997 IN THE CAPACITIES INDICATED.
SIGNATURE TITLE
- ----------------------------- ------------------------------------------------
/s/ C. CLIFFORD WRIGHT, JR. President, Chief Executive Officer, and Director
C. CLIFFORD WRIGHT, JR. (Principal Executive Officer)
/s/ HARRY O. NICODEMUS, IV Vice President, Chief Financial Officer and Chief
HARRY O. NICODEMUS, IV Accounting Officer (Principal Financial Officer
and Principal Accounting Officer)
/s/ HOWARD S. HOOVER, JR. Chairman of the Board
HOWARD S. HOOVER, JR.
/s/ GORDEN H. TIMMONS Chief Operating Officer and Director
GORDEN H. TIMMONS
/s/ THOMAS N. AMONETT Director
THOMAS N. AMONETT
/s/ ROBERT J. CRUIKSHANK Director
ROBERT J. CRUIKSHANK
/s/ RANDALL B. HALE Director
RANDALL B. HALE
/s/ NOLAN LEHMANN Director
NOLAN LEHMANN
/s/ WILLIAM P. McCAUGHEY Director
WILLIAM P. MCCAUGHEY
/s/ FRANK N. MENDITCH Director
FRANK N. MENDITCH
/s/ ELLIOT SOKOLOW Director
ELLIOT SOKOLOW
/s/ DON D. SYKORA Director
DON SYKORA
150
REVOLVING LOAN AGREEMENT
DATED
MARCH 3, 1997
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
<PAGE>
TABLE OF CONTENTS
ARTICLE I TERMS DEFINED......................................-1-
Section 1.1 Definitions........................................-1-
Section 1.2 Singular and Plural of Definitions................-26-
Section 1.3 Money.............................................-27-
Section 1.4 Captions; References..............................-27-
Section 1.5 Accounting Terms and Determinations...............-27-
Section 1.6 Knowledge.........................................-27-
ARTICLE II TERMS OF CREDIT FACILITY COMMITMENT...............-27-
Section 2.1 Credit Facility Commitment........................-27-
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....................-30-
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...........................-38-
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...................-42-
ARTICLE V REPRESENTATIONS AND WARRANTIES....................-43-
Section 5.1 Existence and Power of Borrower...................-43-
Section 5.2 Subsidiaries......................................-43-
Section 5.3 Authorization; Contravention......................-43-
Section 5.4 Enforceable Obligations...........................-44-
Section 5.5 Financial Information.............................-44-
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Section 5.6 Litigation........................................-44-
Section 5.7 ERISA.............................................-44-
Section 5.8 Taxes and Filing of Tax Returns...................-45-
Section 5.9 Ownership of Assets...............................-45-
Section 5.10 Business; Compliance..............................-45-
Section 5.11 Licenses, Permits.................................-45-
Section 5.12 Compliance with Law...............................-45-
Section 5.13 Full Disclosure...................................-46-
Section 5.14 Environmental Matters.............................-46-
Section 5.15 Purpose of Credit.................................-46-
Section 5.16 Governmental Regulations..........................-47-
Section 5.17 Indebtedness......................................-47-
Section 5.18 Insurance.........................................-47-
Section 5.19 Solvency..........................................-47-
ARTICLE VI AFFIRMATIVE COVENANTS.............................-47-
Section 6.1 Information From Borrower.........................-48-
Section 6.2 Maintenance of Existence, etc.....................-49-
Section 6.3 Business..........................................-49-
Section 6.4 Right of Inspection...............................-50-
Section 6.5 Maintenance of Insurance..........................-50-
Section 6.6 Payment of Taxes, Impositions and Claims..........-51-
Section 6.7 Compliance with Laws and Documents................-51-
Section 6.8 Environmental Law Compliance and Indemnity........-51-
Section 6.9 Use of Proceeds...................................-52-
Section 6.10 Additional Documents..............................-53-
Section 6.11 Compliance with Due Diligence Standards;
Offices and Files.................................-53-
Section 6.12 Conversion of Non-Operating Subsidiary............-53-
ARTICLE VII NEGATIVE COVENANTS.....................................-53-
Section 7.1 Financial Covenants...............................-53-
Section 7.2 Limitation on Capital Expenditures................-54-
Section 7.3 Limitation on Debt................................-54-
Section 7.4 Limitation on Sale of Assets......................-54-
Section 7.5 Limitation on Liens...............................-54-
Section 7.6 Consolidations, Mergers, Sales of Assets. .......-55-
Section 7.7 Investments.......................................-55-
Section 7.8 Distributions.....................................-55-
Section 7.9 Transactions with Affiliates and Associates.......-55-
Section 7.10 Employee Plans....................................-56-
Section 7.11 Use Violations....................................-56-
Section 7.12 Fiscal Year and Accounting Methods................-57-
Section 7.13 Governmental Regulations..........................-57-
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ARTICLE VIII DEFAULTS AND REMEDIES.............................-57-
Section 8.1 Events of Default.................................-57-
Section 8.2 Remedies..........................................-58-
Section 8.3 Rights of Set-Off.................................-59-
Section 8.4 Remedies Cumulative, Concurrent and
Non-Exclusive.....................................-60-
Section 8.5 No Conditions Precedent to Exercise Remedies......-60-
Section 8.6 Additional Waivers................................-60-
Section 8.7 Discontinuance of Proceedings.....................-60-
ARTICLE IX AGENT AND THE LENDERS.............................-61-
Section 9.1 Appointment and Authorization of Agent............-61-
Section 9.2 Possession of Instruments by Agent................-62-
Section 9.3 Expenses..........................................-62-
Section 9.4 Delegation of Duties; Reliance; Consultation......-62-
Section 9.5 Limitation of Agent's Liability...................-63-
Section 9.6 Default...........................................-64-
Section 9.7 Lenders' Decision.................................-64-
Section 9.8 Limitation of Liability of Lenders................-65-
Section 9.9 Relationship of Lenders...........................-65-
Section 9.10 Debtor-Creditor Relationship......................-65-
Section 9.11 Credit Decisions..................................-65-
Section 9.12 Removal of Agent..................................-65-
Section 9.14 Sharing of Payments and Setoffs...................-66-
Section 9.15 Non-advancing Lenders.............................-67-
Section 9.16 Benefit of Lenders................................-68-
ARTICLE X MISCELLANEOUS.....................................-68-
Section 10.1 Continuing Agreement..............................-68-
Section 10.2 Notices...........................................-68-
Section 10.3 No Waivers........................................-69-
Section 10.4 Expenses; Documentary Taxes; Indemnification......-69-
Section 10.5 Amendments and Waivers: Consent to Deviation......-70-
Section 10.6 Survival..........................................-70-
Section 10.7 Prior Understandings; No Defenses;
Release; No Oral Agreements.......................-70-
Section 10.8 Limitation on Interest............................-70-
Section 10.9 Invalid Provisions................................-71-
Section 10.10 Successors and Assigns............................-71-
Section 10.11 Senior Debt; Borrower Subordination...............-74-
Section 10.12 Revolving Loan....................................-74-
Section 10.13 Construction......................................-74-
Section 10.15 Submission To Jurisdiction; Service of Process....-74-
Section 10.16 JURY TRIAL WAIVER.................................-75-
Section 10.17 Counterparts......................................-75-
Section 10.18 Inconsistent Provisions...........................-75-
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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 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
EXHIBIT F FORM OF SECURITY AGREEMENT (STOCK PLEDGE)
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REVOLVING LOAN AGREEMENT
THIS REVOLVING LOAN AGREEMENT is entered into March 3, 1997, 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 One Hundred Million and No/100
Dollars ($100,000,000.00). 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 (a) any acquisition prior to the Closing
Date by Borrower, directly or indirectly through one or more of its
Subsidiaries, of assets (directly or indirectly through the acquisition of
Capital Stock) that satisfied, to the extent required, the "Acquisition
Criteria" of, and as such term is defined in, the Prior Loan Agreement and (b)
any acquisition on or after the Closing Date by Borrower, directly or indirectly
through one or more of its Subsidiaries, of assets (directly or indirectly
through the acquisition of Capital Stock) that 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
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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 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 AGREEMENT" means, with respect to each Previously
Acquired Business, the Agreement and Plan of Reorganization pursuant to which
Borrower acquired that Previously Acquired Business.
"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 shorter of
(x) the period commencing on January 1, 1997, through the Acquisition
Date of that Acquired Business, or (y) the 12-month period preceding
the Acquisition Date of that Acquired Business, does not exceed
2
<PAGE>
$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);
(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 in respect of
the Acquired Business shall have been, or will be, fully and timely
satisfied.
"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 an annual administration fee to be paid to Agent
in accordance with the terms and provisions of a letter agreement dated February
27, 1997, between Agent and Borrower.
"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.
3
<PAGE>
"APPLICABLE ENVIRONMENTAL LAWS" has the meaning set forth in SECTION
6.8(b).
"APPLICABLE RATE" has the meaning set forth in SECTION 3.3.
"APPROVED CONSIDERATION" means: (a) with respect to each Previously
Acquired Business (and their respective Subsidiaries), with an Acquisition Date
prior to January 1, 1997, the Acquisition Consideration payable by Borrower
pursuant to the Acquisition Agreement relating to that Previously 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 Dallas, Texas) or (b) the sum of (i) the Federal
Funds Rate in effect on such day,
4
<PAGE>
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, 0.50%; 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
(c) which are beneficially owned, directly or indirectly,
by (i) any other Person (or any Affiliate or Associate thereof) with
which the specified
5
<PAGE>
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 (including a
Securities Act Rule 144A offering) 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, 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
6
<PAGE>
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 after September 27, 1996: (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 date of this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"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, 0.50% per annum; and (b) for any
subsequent period from and including any Reset Date, beginning with the initial
Reset
7
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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 $100,000,000.00, 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' 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.
8
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"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.
"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 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
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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 earlier to occur of (a) the Termination Date, or (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. 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 of Borrower and its Subsidiaries contained in the
Prospectus and hereafter 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: Exempt Trade Payables; Unsecured Trade Payables; and accrued
expenses, 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) OR 3.3(a) , plus 2.0%, and (b) the Maximum Lawful Rate;
provided, however, if there
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<PAGE>
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.
"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
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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.
"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.
"EXEMPT TRADE PAYABLES" means (a) with respect to a Previously
Acquired Business, Secured Trade Payables of that Previously Acquired Business
at any time existing prior to May 31, 1997, and (b) for any other Acquired
Business, Secured Trade Payables of that Acquired Business at any time existing
prior to 90 days after the Acquisition Date of that Acquired Business.
"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
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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 Structure and Arrangement Fee Letter dated
January 28, 1997, 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.
"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,
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<PAGE>
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 collection or deposit
in the ordinary course of the endorser's business.
"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.
"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);
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<PAGE>
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.
"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, 2.00%; 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
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<PAGE>
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. 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, the Stock Security Agreements, and
all other agreements, certificates, 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
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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 and/or
Regulation G.
"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 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
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<PAGE>
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.
"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.
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"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) 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;
(f) Approved Subordinated Debt; and
(g) additional Debt (including Secured Debt) of Borrower and its
Subsidiaries; provided, that (1) the outstanding principal amount of such
additional Debt shall not exceed at any time during any fiscal quarter of
Borrower an amount equal to 5% of Borrower's Consolidated Net Worth and (2) the
outstanding principal amount of Secured Debt of Borrower and its Subsidiaries
shall not exceed at any time during any fiscal quarter of Borrower an amount
equal to 2.5% of Borrower's Consolidated Net Worth, in each case, calculated as
of the end of the most recent fiscal quarter of Borrower and its Subsidiaries
for which Borrower has delivered financial statements pursuant to Section 6.1.
"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 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
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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, operating lease lessor,
or similar Person in assets of that Person pursuant to any consignment or
operating lease 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 (1) bids, tenders, statutory obligations,
surety and appeal bonds, performance and return of money bonds and other
obligations of like nature, (2) Exempt Trade Payables, and (3) trade contracts
to the extent no effective UCC-1 Financing Statement is on file with respect to
the Lien granted under or in connection with such trade contract unless such
Lien is otherwise permitted under this subparagraph (i) or subparagraph (c),
(d), (g), (h), (j), (l), or (s) of this definition;
(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 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 permitted by SECTION 7.3 and other
Liens listed on Schedule III, which shall have been 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
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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;
(r) legal or equitable encumbrances deemed to exist by reason of
negative pledge clauses such as SECTION 7.5; and
(s) additional Liens encumbering assets of any Acquired Business or
any Subsidiary of that Acquired Business contemplated by Section 2.5(d).
"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;
(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;
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(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.
"PREVIOUSLY ACQUIRED BUSINESS" means each Acquired Business having an
Acquisition Date prior to the Closing Date.
"PRINCIPAL DEBT" means, at the time of any determination thereof, the
then aggregate unpaid principal amount of all Advances.
"PRIOR LOAN AGREEMENT" means the Revolving Loan Agreement dated
September 17, 1996, among Borrower, NationsBank and certain other Lenders.
"PROSPECTUS" means the Prospectus dated January 6, 1997, relating to
the Registration Statement on Form S-4 (Registration Statement No. 333-18623)
filed with the SEC by Borrower and declared effective on January 3, 1997.
"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
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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 G" means Regulation G 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.
"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.
"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
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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) 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-five percent
(65%) 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-five percent
(65%) 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), (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 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.
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"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 Capitalized Lease Obligations and other Debt of
any Person secured by consensual Liens on any assets of that Person or any
Subsidiary or any Subsidiary of that Person.
"SECURED TRADE PAYABLES" means, as to any Person, trade payables
incurred in connection with the acquisition of inventory in the ordinary course
of that Person's business that are secured by consensual Liens on any assets
(whether tangible or intangible) of that Person or any Subsidiary of that
Person, exclusive of Liens in favor of any consignor or similar third party in
assets of that Person pursuant to any consignment arrangement entered into in
the ordinary course of that Person's business.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"STOCK SECURITY AGREEMENTS" means each Security Agreement executed
and delivered by each owner of the outstanding stock of each Subsidiary, each in
substantially in the form of Exhibit G, securing the payment and performance of
the Obligations.
"STRUCTURING FEE" means the "arrangement 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.
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"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, other than Impositions; provided,
however, with respect to Agent, any Lender, and Issuing Lender, the term "Taxes"
shall not include any income taxes, franchise taxes 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.
"UNSECURED TRADE PAYABLES" means any trade payables that are not
Secured Trade Payables.
"UPFRONT FEES" the "upfront fees" agreed by Borrower to be paid by it
on the Closing Date to each Lender in consideration of such Lender's agreement
to be a Lender hereunder.
"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 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.
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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 "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
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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, 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
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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.
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 payment. 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
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to this SECTION 2.3(c) shall be made irrespective of the conditions precedent
otherwise applicable to Advances hereunder.
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 April
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) UPFRONT FEES. On the Closing Date Borrower shall pay to each
Lender its Upfront 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 Closing Date the Structuring
Fee.
(e) AGENT'S FEE. 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 Previously Acquired Businesses) by Borrower or any of its Subsidiaries,
each of the following:
(i) if requested by Agent, a copy of the letter of intent
pursuant to which Borrower or any Subsidiary intends to acquire an
Acquired Business and its Subsidiaries;
(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 and all earn-out and other contingent
obligations that Borrower has reasonably
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determined will be payable in connection with such acquisition,
reflecting whether or not the aggregate amount of cash consideration
for the acquisition of such Acquired Business will 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 set of financial statements for each Acquired
Business for which the Acquisition Consideration is in excess of
$10,000,000.00, and if requested by Agent, a set of financial
statements for each Acquired Business for which the Acquisition
Consideration is $10,000,000.00 or less (all such financial
statements shall be prepared on a form and in a manner satisfactory
to Agent);
(iv) a summary spread sheet for the Acquired Business,
prepared on a form and in a manner satisfactory to Agent, outlining
the name of the Acquired Business, the locations of the Acquired
Business, the Acquisition Consideration for the Acquired Business
(including a breakdown between cash and stock), and the
service/installation revenue mix of the Acquired Business;
(v) 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;
(vi) if requested by Agent, 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
(vii) 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
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and including the beginning of that period through, but not including, the
Acquisition Date of that Acquired Business.
(c) (i) Within 30 Business Days following the acquisition of any
Acquired Business by Borrower or one of its Subsidiaries, Borrower shall deliver
to Agent: (A) if the Acquired Business is a new operating Subsidiary of
Borrower, (1) 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 Guaranties are duly
authorized, and (2) to the extent not previously delivered hereunder, a Stock
Security Agreement executed and delivered by the holders of the outstanding
Capital Stock of that Entity, and if that Entity has any Subsidiaries, a Stock
Security Agreement from that Entity in respect of the Capital Stock of each such
Subsidiary, together with the original stock certificates of that Entity and
such Subsidiaries (to the extent available at such time), all financing
statements, stock powers, Form U-1's and opinions required by Agent to evidence
that the delivery of such Stock Security Agreements are duly authorized and
create a perfected first priority security interest in the applicable Capital
Stock (if delivered at such time) and other collateral described therein,
subject to the Permitted Encumbrances; (B) if requested by Agent, copies of the
acquisition agreement and 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 (C)
the Charter Documents of the Acquired Business and each Subsidiary thereof, all
assumed name certificates used by the Acquired Business and such Subsidiaries
and evidence that the Acquired Business and such Subsidiaries 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; and (ii) within 45 Business Days following the acquisition of any
Acquired Business by Borrower or one of its Subsidiaries, Borrower shall deliver
to Agent the original stock certificates of that Entity and each Subsidiary
thereof to the extent not previously delivered pursuant to clause (i)(A)(2)
above.
(d) Within 90 days following the acquisition of any Acquired Business
(including, without limitation, the Previously 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 Previously Acquired Businesses),
Borrower shall provide to Agent any of the items listed in subsection (a) that
Agent has agreed (hereunder or in connection with the Prior Loan Agreement) in
writing may be delivered after the acquisition of the Acquired Business.
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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 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.
(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
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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 (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 SECTIONS 2.6(b),2.6(C), 2.6(d) AND 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
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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.
Section 3.4 INTEREST PAYMENTS. Interest on the Notes shall be due and
payable as it accrues (a) on the first day of each calendar quarter, commencing
on April 1, 1997, and on the first day of each July, October, January, and April
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
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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 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
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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 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).
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(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 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, 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
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applied 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 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.
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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 receipt and approval by
Agent of each of the following on or prior to the Closing Date:
(a) this Agreement and the Notes, each properly executed by Borrower;
(b) all fees and other amounts required to be paid by Borrower on the
Closing Date pursuant to the Fee Letter and this Agreement;
(c) a Guaranty from each Subsidiary of Borrower (other than any
nonoperating, special purpose Subsidiary of Borrower organized for the purpose
of consummating the future acquisition of an Acquired Business and any Acquired
Business having an Acquisition Date within five Business Days prior to the
Closing Date and any Subsidiary of that Acquired Business);
(d) Stock Security Agreements executed and delivered by each of the
holders of the outstanding stock of each Subsidiary of Borrower (other than any
nonoperating, special purpose Subsidiary of Borrower organized for the purpose
of consummating the future acquisition of an Acquired Business and any Acquired
Business having an Acquisition Date within five Business Days prior to the
Closing Date and any Subsidiary of that Acquired Business), together with the
original stock certificates of all such companies, and all stock powers,
financing statements, form U-1s, and other documents, agreements, and
instruments required by Agent in connection with the pledge of such stock;
(e) a current organizational chart of Borrower and its Subsidiaries;
(f) if requested by Agent, copies of all Acquisition Agreements and
other material agreements of Borrower relating to Borrower's agreement to
purchase each of the Previously Acquired Businesses;
(g) one or more opinions of counsel for Borrower and each Subsidiary
of Borrower (other than any nonoperating, special purpose Subsidiary of Borrower
organized for the purpose of consummating the future acquisition of an Acquired
Business and any Acquired Business having an Acquisition Date within five
Business Days prior to the Closing Date and any Subsidiary of that Acquired
Business) (which may include opinions of Borrower's general counsel), opining as
to the due incorporation and existence of Borrower and such Subsidiaries, 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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(h) all resolutions, certificates or documents Agent may reasonably
request relating to the formation, existence and good standing of Borrower and
each Subsidiary of Borrower, 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 and each Subsidiary of Borrower (other
than any nonoperating, special purpose Subsidiary of Borrower organized for the
purpose of consummating the future acquisition of an Acquired Business and any
Acquired Business having an Acquisition Date within five Business Days prior to
the Closing Date and any Subsidiary of that 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 that is party to a Loan Document, and
(D) certificates of corporate existence and good standing issued by the state of
incorporation of Borrower and each Subsidiary of Borrower (other than any
nonoperating, special purpose Subsidiary of Borrower organized for the purpose
of consummating the future acquisition of an Acquired Business and any Acquired
Business having an Acquisition Date within five Business Days prior to the
Closing Date and any Subsidiary of that Acquired Business) and from the
appropriate governmental authority of each state in which Borrower and each such
Subsidiary of Borrower is qualified or registered to do business as a foreign
corporation;
(i) 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;
(j) 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 issued;
(k) 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;
(l) a schedule of all Debt of Borrower and its Subsidiaries
outstanding on the Closing Date after giving effect to the consummation of the
transactions contemplated on the Closing Date;
(m) if requested by Agent, a copy of the Prospectus;
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(n) the commitments of the Lenders party to the Prior Loan Agreement
shall have terminated and Borrower shall have requested Loans hereunder
(providing appropriate wiring instructions to Agent in connection therewith) in
such aggregate amount as to enable Borrower to discharge in full all obligations
of Borrower thereunder becoming due and payable as a result thereof; and
(o) such other documents, instruments, certificates and information
as may be reasonably requested by Agent.
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:
(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;
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(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 (other than each Subsidiary which is a nonoperating, special purpose
Subsidiary of Borrower which is existing solely for the purpose of consummating
the future acquisition of an Acquired Business) have executed or will execute a
Subsidiary Guaranty in accordance with the terms of this Agreement, and with
respect to such Subsidiary, Borrower has satisfied 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
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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.
(c) Since September 30, 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
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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.
Section 5.10 BUSINESS; COMPLIANCE. Each of Borrower and 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.
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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 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
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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.
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:
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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 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.
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(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 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.
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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 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
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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, 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
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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.
(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
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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 Regulations).
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.
Section 6.12 CONVERSION OF NON-OPERATING SUBSIDIARY. Within 15
Business Days following the conversion of a non-operating Subsidiary to an
operating Subsidiary other than in connection with the consummation of an
Acquired Business, Borrower shall deliver to Agent each of the items described
in SECTIONS 2.5(C)(I)(A) AND (C) and 2.5(C)(II) as if such Subsidiary were an
Acquired Business under SECTION 2.5(C) (except that the time periods referenced
in SECTION 2.5(C) for delivering such items shall not be applicable to this
SECTION 6.12).
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. For purposes of this subsection,
"REQUIRED MINIMUM" shall initially mean an amount equal to $63,984,600.00. 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
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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 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 December 31, 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.
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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 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;
(iii) ADCOT, Inc. may dispose of its discontinued retail appliance store
operations and properties; and (iv) Hession Plumbing Company, Inc. may dispose
of its operations in Mooresville, Indiana, as contemplated by the Acquisition
Agreement relating to such Acquired Business.
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, (f) memberships in professional or trade associations or other
organizations, (g) the note receivable to be acquired by Borrower or any of its
Subsidiaries in connection with the disposition by Hession Plumbing Company,
Inc. referred to in Section 7.6, and (h) note receivables acquired by Borrower
or any of its Subsidiaries from former shareholders of any Acquired Business in
connection with the acquisition of such Acquired Business.
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
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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 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.
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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).
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 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) A default by Borrower or any of its Subsidiaries (whether as
principal or guarantor or other surety) in the payment of any Debt having an
outstanding principal amount in excess of $500,000.00, which is not cured within
any applicable notice or
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grace period, or the occurrence of any other event or condition which results in
the acceleration of the maturity of any Debt of Borrower or any Subsidiary of
Borrower;
(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
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the Required Lenders, upon notice thereof to Borrower (except that such notice
shall not 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.
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
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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 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,
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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 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.
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(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 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
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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.
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
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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 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
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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.
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 the Required Lenders, may remove for cause the then
current Agent, as Agent, and appoint (with the prior approval of Borrower,
except as
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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 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
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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 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
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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
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
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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 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, 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
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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 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 1010. Prior to entering
into any discussions with any potential participant or assignee
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of its interest in the Credit Facility, the applicable Lender 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 and Agent's
consent shall not be unreasonably withheld or delayed and Borrower's consent
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
(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
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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 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
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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) 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 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.
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(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 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.
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<PAGE>
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
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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BANQUE PARIBAS
By:/s/SCOTT CLINGAN
Scott Clingan,
Vice President
By:/s/LARRY ROBINSON
Larry Robinson,
Vice President
SUMITOMO BANK, LTD.
By:/s/JOHN O'NEILL
John O'Neill,
Vice President
GUARANTY FEDERAL BANK, F.S.B.
By:/s/MARK WAYNE
Mark Wayne,
Vice President
THE FUJI BANK LIMITED, a Houston
Agency
By:/s/PHILIP C. LAUINGER III
Philip C. Lauinger III,
Vice President & Joint Manager
NATIONAL CITY BANK OF KENTUCKY
By:/s/DONALD R. PULLEN, JR.
Donald R. Pullen, Jr.,
Vice President
77
<PAGE>
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
Banque Paribas
1200 Smith
Suite 3100
Houston, Texas 77002
Attn: Mr. Scott Clingan, V.P.
Ph: 713/659-4811
Fax: 713/659-5234
Sumitomo Bank, Ltd.
909 Fannin
Two Houston Center
Suite 3750
Houston, Texas 77010
Attn: Mr. John O'Neill, V.P.
Ph: 713/759-0770
Fax: 713/759-1419
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<PAGE>
Guaranty Federal Bank, F.S.B.
333 Clay Street
Suite 4430
Houston, Texas 77002
Attn: Mr. Mark Wayne, V.P.
Ph: 713/759-9230
Fax: 713/759-0765
The Fuji Bank Limited, a Houston Agency
1221 McKinney
One Houston Center
Suite 4100
Houston, Texas 77010
Attn: Mr. Greg Parten, V.P.
Ph: 713/650-7851
Fax: 713/759-0048
National City Bank of Kentucky
101 South 5th Street, 8th Floor
Louisville, Kentucky 40202
Attn: Mr. Donald R. Pullen, Jr., V.P.
Ph: 502/581-6352
Fax: 502/581-5122
C. BORROWER:
AMERICAN RESIDENTIAL SERVICES, INC.
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056
Attention: A. Jefferson Walker III, Treasurer
Fax No.: (713) 599-0200
Telephone No.: (713) 599-9023
II. LOAN COMMITMENT AMOUNTS
Loan Commitment LOAN PERCENTAGE
AMOUNT
------ ---------------
NationsBank of Texas, N.A. $35,000,000.00 35%
Banque Paribas $15,000,000.00 15%
Sumitomo Bank, Ltd. $10,000,000.00 10%
I-2
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Guaranty Federal Bank, F.S.B. $10,000,000.00 10%
The Fuji Bank Limited, $10,000,000.00 10%
a Houston agency
National City Bank of Kentucky $20,000,000.00 20%
TOTAL $100,000,000.00 100%
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SCHEDULE II
- --------------------------------------------------------------------------------
A B C D
Funded Debt to Applicable LIBOR Applicable Base Unused Commitment
EBITDA Ratio Margin Rate Margin Fee Percentage
- --------------------------------------------------------------------------------
Less than 1.00x 1.00% 0% 0.30%
- --------------------------------------------------------------------------------
Greater than or equal 1.25% 0% 0.35%
to 1.00x, but less than
1.50x
- --------------------------------------------------------------------------------
Greater than or equal 1.50% .25% 0.40%
to 1.50x, but less than
2.00x
- --------------------------------------------------------------------------------
Greater than or equal 1.75% 0.375% 0.45%
to 2.00x, but less than
2.50x
- --------------------------------------------------------------------------------
Greater than or equal 2.0% 0.50% 0.50%
to 2.5x
- --------------------------------------------------------------------------------
II-1
<PAGE>
SCHEDULE III
EXISTING LIENS
ADCOT, INC. (A-ABC)
1. Instrument No.: 9400075232
Expiration Date: April 18, 1999
Secured Party: Jerry J. Moore Investments
P.O. Box 6564
Houston, Texas 77265
Collateral Types: "All property (including, but not limited to, furniture,
furnishings, fixtures, equipment, inventory and machinery)
now or hereafter placed in the demised premises, such
demised premises being commonly known as 9552/54 FM
1960 West, Houston, Texas 77070, in the Ideal Plaza
Shopping Center, excluding all appliances floor planned by
GECC, Maytag, or any other manufacturer."
III-1
<PAGE>
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
<PAGE>
EXHIBIT A
PROMISSORY NOTE
$___________ Houston, Texas ______________ ____, 199_
FOR VALUE RECEIVED, AMERICAN RESIDENTIAL SERVICES, INC., a Delaware
corporation ("MAKER"), promises to pay to the order of ____________________
("LENDER") at the office of Agent located at ___________ Houston, Harris County,
Texas, or at such other address in Houston, Harris County, Texas, given to Maker
by Agent, the principal sum of _______________________ Dollars ($_________), 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 March 3, 1997 (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 (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.
(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
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<PAGE>
hereunder. All payments made pursuant to SECTION 3.5(a) 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) 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
A-2
<PAGE>
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 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
A-3
<PAGE>
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.
(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
A-4
<PAGE>
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.
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-5
<PAGE>
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 March 3,
1997, 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 and effect as though made on the date
hereof, except for such representations and warranties that speak as
of a particular date.
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<PAGE>
(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
<PAGE>
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").
R E C I T A L S:
I. Reference is made to the Revolving Loan Agreement, dated March 3,
1997, 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.
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.
C-1
<PAGE>
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
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
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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 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.
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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:____________________
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ACKNOWLEDGED and ACCEPTED as of
the _____ day of _________________, 199__.
BORROWER:
AMERICAN RESIDENTIAL SERVICES, INC.
By:_______________________
Name:_____________________
Title:____________________
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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 March 3, 1997, 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 $__________
[ ] 3 months $__________
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<PAGE>
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
<PAGE>
EXHIBIT E
[FORM]
GUARANTY
Each of the undersigned ("GUARANTOR", whether one or more), 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, jointly and
severally, agree with Agent, Issuing Lender, and each Lender as follows:
1. Guarantor, jointly and severally, 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 March 3, 1997, 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.
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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 rearrange, 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 notice of which is waived by Guarantor in this
paragraph or in any other paragraph of this Guaranty.
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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
Guaranteed 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.
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,
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<PAGE>
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.
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,
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<PAGE>
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 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.
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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, 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.
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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 CONFLICT 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 EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
29. This Guaranty and each other Subsidiary Guaranty executed by any
Subsidiary of Borrower pursuant to the Loan Agreement (this Guaranty and such
other Subsidiary Guaranties being hereinafter collectively referred to as the
"SUBSIDIARY GUARANTY AGREEMENTS" and each Guarantor hereunder and each such
other guaranteeing Subsidiary of Borrower being hereinafter collectively
referred to as the "SUBSIDIARY GUARANTORS") is executed by each Subsidiary
Guarantor on a joint and several basis with each other Subsidiary Guarantor,
and, notwithstanding anything to the apparent contrary in any Subsidiary
Guaranty Agreement, all representations, warranties, agreements and covenants
made by the Subsidiary Guarantors in the
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respective Subsidiary Guaranty Agreements are made jointly and severally for all
purposes.
EXECUTED this ____ day of ______________, 1997.
__________________, 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
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EXHIBIT F
SECURITY AGREEMENT
(Stock Pledge)
THIS SECURITY AGREEMENT (this "SECURITY AGREEMENT") entered into as
of the ____ day of __________, 1997, from AMERICAN RESIDENTIAL SERVICES, INC., a
Delaware corporation [__________] (the "PLEDGOR"), in favor of NATIONSBANK OF
TEXAS, N.A., a national banking association, in its capacity as Agent and
Issuing Lender under the hereinafter defined Loan Agreement, and each Lender
from time to time party to such Loan Agreement.
W I T N E S S E T H :
WHEREAS, pursuant to the terms and conditions of a Revolving Loan
Agreement dated March 3, 1997, by and among Pledgor [AMERICAN RESIDENTIAL
SERVICES, INC. ("BORROWER")] and the Lenders described therein (as such
agreement may be amended, modified, restated, or supplemented from time to time,
the "LOAN AGREEMENT"), such Lenders have agreed to extend credit to the Pledgor
[BORROWER]; and
WHEREAS, the Pledgor owns Capital Stock in the Issuers, and it is a
condition precedent to the obligation of the Lenders to make Loans and otherwise
extend credit to the Pledgor [Borrower] under the Loan Agreement that the
Pledgor shall have executed and delivered this Security Agreement to the Agent
for the ratable benefit of the Lenders.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Pledgor hereby agrees with the Lenders as follows:
ARTICLE 1
DEFINITIONS AND INTERPRETATION
1.1 TERMS DEFINED ABOVE. As used in this Security Agreement, the
terms ["BORROWER,"] "LOAN AGREEMENT," "PLEDGOR," and "SECURITY AGREEMENT" have
the meanings indicated above.
1.2 TERMS DEFINED IN LOAN AGREEMENT. Each capitalized term used but
not defined herein shall have the meaning assigned to such term in the Loan
Agreement (regardless of whether or not specific reference is made to the Loan
Agreement).
1.3 ADDITIONAL DEFINED TERMS. As used in this Security Agreement, the
following terms will have the meanings indicated:
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(a) "COLLATERAL" shall mean:
(i) all Debtor's right, title and interest in and
to (1) the Securities, (2) any and all certificates,
documents, chattel paper, instruments and general
intangibles relating to, evidencing or representing any
Securities, (3) any and all dividends, cash, instruments
and other property and rights from time to time received,
receivable or otherwise distributed in respect of, in
exchange or substitution for or as a result of a conversion
of any or all of the Securities, (4) any and all rights to
receive allocations of loss, gain, deduction, credit or
similar items in respect of any Securities and (5) any and
all rights of Debtor attendant to the ownership of the
Securities as a corporate shareholder, as a member in a
limited liability company, as a partner in a partnership or
similar holder of Capital Stock in any Entity, including,
without limitation, the right to vote any Securities or
participate in the management of any Entity in accordance
with the Charter Documents of such Entity; and
(ii) any and all proceeds, cash proceeds, cash
equivalents, products, replacements, and additions of and
to any of the above.
(b) "EVENT OF DEFAULT" shall mean any Event of Default
under and as defined in the Loan Agreement, or the failure of the
Pledgor to comply with Regulations G, T, U, or X of the Board of
Governors of the Federal Reserve System, as amended.
(c)"ISSUER" shall mean each direct Subsidiary of the
Pledgor, whether now existing or hereafter acquired.
(d) "SECURITIES" shall mean the issued and outstanding
Capital Stock of the Issuers listed on Schedule I hereto, together
with all other Capital Stock that may now or hereafter be owned by
the Pledgor in any of its now owned or hereafter acquired direct
Subsidiaries.
1.4 UNDEFINED FINANCIAL ACCOUNTING TERMS. Undefined financial
accounting terms used in this Security Agreement shall have the meanings
assigned to such terms according to GAAP.
1.5 TERMS DEFINED IN TEXAS BUSINESS AND COMMERCE CODE. Any term used
herein that is defined in the Texas Business and Commerce Code shall have the
meaning assigned to such term therein, unless the context otherwise requires or
such term is otherwise defined herein.
1.6 REFERENCES. The words "hereby," "herein," "hereinabove,"
"hereinafter," "hereinbelow," "hereof," "hereunder," and words of similar import
when used in this Security Agreement shall refer to this Security Agreement as a
whole and not to any particular Article, Section, or provision of this Security
Agreement.
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References in this Security Agreement to Article or Section numbers
are to such Articles or Sections of this Security Agreement unless
otherwise specified. All Schedules and Exhibits attached hereto are incorporated
herein by reference and made a part hereof for all purposes.
1.7 ARTICLES AND SECTIONS. This Security Agreement, for
convenience only, has been divided into Articles and Sections; and it is
understood that the rights and other legal relations of the parties hereto shall
be determined from this instrument as an entirety and without regard to the
aforesaid division into Articles and Sections and without regard to headings
prefixed to such Articles or Sections.
1.8 NUMBER AND GENDER. Whenever the context requires,
reference herein made to the single number shall be understood to include the
plural; and likewise, the plural shall be understood to include the singular.
Words denoting sex shall be construed to include the masculine, feminine and
neuter, when such construction is appropriate; and specific enumeration shall
not exclude the general but shall be construed as cumulative. Definitions of
terms defined in the singular or plural shall be equally applicable to the
plural or singular, as the case may be, unless otherwise indicated.
ARTICLE 2
SECURITY INTEREST
2.1 GRANT OF SECURITY INTEREST IN COLLATERAL. The Pledgor,
for value received, the receipt and sufficiency of which are hereby
acknowledged, and to induce each Lender to extend credit to Pledgor [BORROWER],
the Pledgor hereby pledges to the Agent, and hereby grants to the Agent, for the
ratable benefit of the Lenders, a first lien on and a security interest in the
Collateral to secure the payment and performance by the Pledgor [BORROWER] of
each Note and of the other Obligations outstanding from time to time under the
Loan Agreement, and to secure Pledgor's obligations under this Security
Agreement.
2.2 DELIVERY OF COLLATERAL. All certificates or instruments
representing or evidencing the Securities shall be delivered to and held by
Agent, for and on behalf of each Lender, for the sole purpose of possession of
the Collateral or any portion thereof pursuant to this Security Agreement, and
shall be in suitable form for transfer by delivery, or shall be accompanied by
duly executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Agent, acting on behalf of each Lender; and Agent,
for and on behalf of each Lender, shall at all times have actual possession of
the Securities and shall be deemed to have possession of any of the Collateral
in transit to it or set apart for it.
2.3 POWER OF ATTORNEY. The Pledgor hereby irrevocably
constitutes and appoints the Agent and any authorized officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of the Pledgor and
in the name of the Pledgor or in their own names (acting by or through Agent),
from time to time in the Required Lenders' discretion, for the purpose of
carrying out the terms of this Security
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Agreement, to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to accomplish the
purposes of this Security Agreement after the Obligations have been declared due
and payable pursuant to Section 5.1, including, without limitation, the
following:
(a) to transfer to or register any or all of the
Collateral in the name of the Lenders or any of their nominees (all
as determined by the Required Lenders);
(b) (i) to receive payment of and receipt for any and all
moneys, claims and other amounts due and to become due at any time in
respect of or arising out of any Collateral, (ii) to commence and
prosecute any suits, actions or proceedings at law or in equity in
any court of competent jurisdiction to collect the Collateral or any
part thereof and to enforce any other right in respect of any
Collateral, (iii) to defend any suit, action or proceeding brought
against the Pledgor with respect to any Collateral, (iv) to settle,
compromise or adjust any suit, action or proceeding described above
and, in connection therewith, to give such discharges or releases as
the Required Lenders may deem appropriate, and (v) to complete any
blanks contained in any instruments of transfer or assignment of the
Securities; and
(c) to exchange any of the Collateral for other property
upon reorganization, recapitalization, or other readjustment of any
Issuer of the Securities and in connection therewith to deposit any
of the Collateral with any depository upon such terms as the Required
Lenders may determine; and to exercise, at the option of the Required
Lenders, voting rights as to any of the Collateral;
all without notice and without liability except to account for property actually
received by or on behalf of the Lenders. The Pledgor hereby ratifies all that
said attorney shall lawfully do or cause to be done within the scope of the
power of attorney granted hereunder. This power of attorney is a power coupled
with an interest and shall be irrevocable so long as any Obligation remains
outstanding or any commitment exists to make Advances. The powers conferred on
the Agent hereunder are solely to protect the interests of the Agent and the
Lenders in the Collateral and shall not impose any duty upon it to exercise any
such powers. The Agent shall be accountable only for amounts that it actually
receives as a result of the exercise of such powers and neither the Lenders, the
Agent, nor any of their respective officers, directors, employees or agents
shall be responsible to the Pledgor for any act or failure to act, except for
gross negligence or wilful misconduct.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce the Lenders to enter into the Loan Agreement and extend
credit to the Pledgor [BORROWER], the Pledgor represents and warrants to Agent
and the
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Lenders (which representations and warranties shall survive the delivery of this
Security Agreement and the other Loan Documents) that:
3.1 STATUS OF SECURITIES. All signatures on the certificates
evidencing the Securities are genuine or authorized; the transfer of the
Securities by the Pledgor to the Agent, as provided herein, is effective; and
the Pledgor knows of no fact that might impair the validity of the Securities.
The Securities (a) have been duly authorized and validly issued, (b) are
genuine, validly outstanding, fully paid, and nonassessable, (c) were not issued
in violation of the preemptive rights of any Person or any agreement by which
the Pledgor or any issuer of such Collateral is bound, and (d) have not been
materially altered.
3.2 OWNERSHIP AND LIENS. Except for the security interest of the
Lenders granted herein, the Pledgor owns (and at the time of transfer or
delivery hereunder of the Collateral to the Agent owned or will own) good title
to the Collateral free and clear of any other security interests, liens, adverse
claims, or options other than Permitted Encumbrances; and the Pledgor has (and
at the time of transfer or delivery of the Collateral to the Agent had or will
have) full right, power, and authority to convey, assign, transfer, and deliver
the Collateral to the Agent, as provided herein, and to grant a security
interest in the Collateral to the Agent, as provided herein.
3.3 BENEFIT. Pledgor has benefitted, directly and indirectly, from
its execution and delivery of this Security Agreement.
ARTICLE 4
COVENANTS AND AGREEMENTS
The Pledgor agrees, so long as any Obligation remains outstanding or
unpaid or any commitment of the Lenders to make Advances exists:
4.1 PAYMENT OF TAXES AND IMPOSITIONS. To comply with the
terms and requirements of the Loan Agreement respecting the payment of Taxes and
Impositions in respect of the Collateral; and upon the occurrence of an Event of
Default in respect of the payment of such Taxes and Impositions, the Agent may,
but will not be obligated to, pay all or any part of same.
4.2 FURTHER ASSURANCES. To cure any defects in the execution
and delivery of any of the Loan Documents executed by the Pledgor, and execute,
acknowledge, and deliver such other assurances and instruments and take such
other action as shall, in the opinion of the Agent (acting on behalf of the
Lenders) be necessary to fulfill the terms of the Loan Documents executed by the
Pledgor and to confirm, perfect, and preserve the security interest created and
intended to be created hereby and to vest more completely in and assure to the
Agent and the Lenders their rights under this Security Agreement.
4.3 PROHIBITED LIENS AND FILINGS. That it will not pledge,
mortgage, or otherwise encumber, create, or suffer a security interest to exist
in any of the Collateral (other than pursuant to this Security Agreement and
Permitted
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Encumbrances) or sell, assign, or otherwise transfer any of the Collateral to
anyone other than the Agent and the Lenders as provided herein, unless otherwise
permitted by the Loan Agreement, or file or permit to be filed any financing
statement or other security instrument with respect to the Collateral other than
in favor of the Agent and the Lenders as provided herein.
ARTICLE 5
RIGHTS AND REMEDIES
5.1 REMEDIES UPON DEFAULT. (a) Upon the occurrence and during the
continuance of an Event of Default, the Lenders may at their option, acting
through the Agent, but subject to and in accordance with the Loan Agreement,
declare all Obligations immediately due and payable, without presentment,
demand, protest, notice of protest, default or dishonor, notice of intent to
accelerate maturity, notice of acceleration of maturity or other notice of any
kind, all of which are hereby expressly waived by the Pledgor, and may (acting
through the Agent) exercise any and all other remedies provided by law or
pursuant to the Loan Documents.
(b) If all or any part of the Obligations shall become due and
payable, the Lenders, subject to and in accordance with the terms and
requirements of the Loan Agreement, acting through the Agent, may then, or at
any time thereafter, apply, set-off, collect, sell in one or more sales, or
otherwise dispose of, any or all of the Collateral, in its then condition or
following any commercially reasonable preparation or processing, in such order
as the Lenders may elect. Any such sale may be made either at public or private
sale at the place of business of the Agent, any brokers' board or securities
exchange or other reasonable location, either for cash or upon credit or for
future delivery. The Lenders (for their own account through the Agent) may be
the purchaser of any or all Collateral so sold and may hold the same thereafter
in its own right free from any claim of the Pledgor or, to the extent permitted
by law, right of redemption. No such purchase or holding by the Lenders shall be
deemed a retention by the Lenders in satisfaction of the Obligations. All
demands, notices, and advertisements, and the presentment of property at sale
are hereby waived. Agent shall give Pledgor at least ten days' prior written
notice of any sale or other disposition of the Collateral. The Agent may require
the Pledgor to assemble the Collateral and make it available to the Agent at a
place designated by the Agent that is reasonably convenient to the Lenders and
the Pledgor. Any sale hereunder may be conducted by an auctioneer or any officer
or agent of the Agent.
(c) In connection with the sale of Collateral which is stock or other
investment securities, the Lenders may be required by applicable law to limit
prospective purchasers to the extent deemed necessary to render such sale exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "ACT"), and any applicable state securities laws. No sale so made in good
faith by the Agent shall be deemed not to be "commercially reasonable" because
so made; provided, however, that nothing in this Security Agreement shall be
deemed to impose any obligation whatsoever to file a registration statement
under the Act or any state securities law with respect to any sale of Collateral
by the Agent.
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<PAGE>
5.2 VOTING RIGHTS, DIVIDENDS, ETC. PRIOR TO DEFAULT. So long as the
ObligaItions have not been accelerated pursuant to Section 5.1:
(a) the Pledgor will be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or
any part thereof for any purpose not inconsistent with the terms of
this Security Agreement;
(b) subject to the further provisions of this Security
Agreement, the Pledgor shall be entitled to receive and retain any
and all dividends and other distribution paid or made in respect of
the Collateral; provided, however, that any and all dividends paid or
payable in Capital Stock of any Issuer or any Capital
Stock received, receivable or otherwise distributed in respect of or
in exchange for any Collateral shall be forthwith delivered to the
Agent for and on behalf of the Lenders to hold as Collateral for the
benefit of the Lenders (or applied to reduce the Obligations if
delivered to the Agent for and on behalf of the Lenders in the form
of cash) and shall, if received by the Pledgor, be received in trust
for the benefit of the Lenders, be segregated from the other property
or funds of the Pledgor, and be forthwith delivered to the Agent for
and on behalf the Lenders as Collateral in the same form as so
received (with any necessary endorsement); and
(c) the Agent for and on behalf of the Lenders shall
execute and deliver (or cause to be executed and delivered) to the
Pledgor all such proxies and other instruments as the Pledgor may
reasonably request for the purpose of enabling the Pledgor to
exercise the voting and other rights which it is entitled to exercise
pursuant to Section 5.2(a) above and to receive the dividends and
other distributions and other distributions in respect of the
Securities which it is authorized to receive and retain.
5.3 VOTING RIGHTS, DIVIDENDS, ETC. AFTER DEFAULT. After the
Obligations shall have been accelerated pursuant to Section 5.1:
(a) at the option of the Required Lenders with notice to
the Pledgor, all rights of the Pledgor to exercise the voting and
other consensual rights which it would otherwise be entitled to
exercise pursuant to Section 5.2(a) above and to receive the
dividends and interest payments which it would otherwise be
authorized to receive and retain pursuant to Section 5.2(b) above
shall cease and shall thereupon become vested in the Agent, who shall
thereupon have the sole right to exercise such voting and other
consensual rights and to receive and hold as Collateral such
dividends; and
(b) all dividends which are received by the Pledgor
contrary to the provisions of Section 5.3(a) above shall be received
in trust for the benefit of the Lenders, shall be segregated from
other funds of the Pledgor and shall be forthwith paid over to the
Agent for and on behalf
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<PAGE>
of the Lenders as Collateral in the same form as so received (with
any necessary endorsement).
5.4 PROCEEDS. Prior to all or any part of the Obligations becoming
due and payable as specified in Section 5.1, all property received by the
Lenders (through the Agent or otherwise) on account of the Collateral shall be
held as Collateral (or applied to reduce the Obligations if received by or on
behalf of the Lenders in the form of cash). After all or any part of the
Obligations shall become due and payable as specified in Section 5.1, the
proceeds of any sale or other disposition of the Collateral and all sums
received or collected by the Lenders (through the Agent or otherwise) from or on
account of the Collateral shall be applied by the Lenders (or the Agent, as the
case may be) in the manner set forth in ss.9.504 of the UCC.
5.5 LENDERS' DUTIES. Except as required by the Loan Agreement, the
Lenders and the Agent shall be under no duty whatsoever to make or give any
presentment, demand for performance, notice of nonperformance, protest, notice
of protest, notice of dishonor, or other notice or demand in connection with any
Collateral or the Obligations, or to take any steps necessary to preserve any
rights against prior parties. The Lenders and the Agent shall not be liable for
failure to collect or realize upon any or all of the Obligations or Collateral,
or for any delay in so doing, nor shall the Lenders and the Agent be under any
duty to take any action whatsoever with regard thereto. The Lenders (or the
Agent, as the case may be) shall use reasonable care in the custody and
preservation of any Collateral in its possession. As between the Pledgor and the
Lenders and the Agent, neither the Lenders nor the Agent shall have any duty to
comply with any recording, filing, or other legal requirements necessary to
establish or maintain the validity, priority, or enforceability of, or the
Lenders' rights in or to, any of the Collateral.
5.6 THE LENDERS' ACTIONS. The Pledgor waives any right to require the
Lenders (or the Agent, as the case may be) to proceed against any person,
exhaust any collateral or pursue any other remedy in the Lenders' power; waives
any and all notice of acceptance of this Security Agreement or of creation,
modification, renewal, or extension for any period of any Obligations; and
waives any defense arising by reason of any disability or other defense of any
guarantor or other Person primarily or secondarily liable with respect to all or
any portion of the Obligations ("OTHER LIABLE PARTY"), or by reason of the
cessation from any cause whatsoever of the liability of any Other Liable Party.
All dealings between the Pledgor and the Lenders shall conclusively be presumed
to have been had or consummated in reliance upon this Security Agreement. Until
all Obligations shall have been paid and/or performed in full and the commitment
to make Advances shall have terminated, the Pledgor (i) shall have no right to
subrogation, (ii) waives any right to enforce any remedy that the Lenders (or
the Agent, as the case may be) now has or may hereafter have against any Other
Liable Party, and (iii) except as otherwise expressly provided in this Security
Agreement, waives any benefit of and right to participate in any Collateral or
other security for the Obligations whatsoever now or hereafter held by or on
behalf of the Lenders.
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ARTICLE 6
MISCELLANEOUS
6.1 TRANSFER OF OBLIGATIONS AND COLLATERAL. Subject to the terms of
the Loan Agreement, the Pledgor hereby agrees that any of the Lenders may
transfer any or all of their respective interests in and to the Obligations.
Upon any such transfer, the affected Lender may transfer any or all of its
interest in and to the Collateral and shall be fully discharged thereafter from
all liability with respect to the Collateral so transferred, and the transferee
shall be vested with all rights, powers, and remedies of the particular Lender
hereunder with respect to Collateral so transferred. With respect to its
interest in any Collateral not so transferred, the affected Lender shall retain
all rights, powers, and remedies hereby given.
6.2 CUMULATIVE SECURITY. The execution and delivery of this Security
Agreement in no manner shall impair or affect any other security (by endorsement
or otherwise) for the payment of the Obligations. No security taken hereafter as
security for payment of all or any portion of the Obligations shall impair in
any manner or affect this Security Agreement. All such present and future
additional security is to be considered as cumulative security.
6.3 CONTINUING AGREEMENT. This is a continuing agreement and the
conveyance hereunder shall remain in full force and effect and all the rights,
powers, and remedies of the Agent and the Lenders hereunder shall continue to
exist until the Obligations shall be paid in full and the commitment of the
Lenders to make Advances has terminated. Furthermore, it is contemplated by the
parties hereto that there may be times during the Credit Period when no
Obligations shall be owing. Notwithstanding such occurrences, this Security
Agreement shall remain valid and shall be in full force and effect as to
subsequent Obligations provided that the Agent has not otherwise agreed in
writing that this Security Agreement has terminated. Otherwise, to the extent
permitted by law, this Security Agreement shall continue irrespective of the
fact that the liability of any Other Liable Party may have ceased and
notwithstanding the death or incapacity of the Pledgor or any Other Liable Party
or any other event or proceeding affecting the Pledgor, and/or any Other Liable
Party, which but for this provision would discharge the Obligations of the
Pledgor hereunder.
6.4 CUMULATIVE RIGHTS. The rights, powers, and remedies of the
Lenders hereunder shall be in addition to all rights, powers, and remedies given
by statute or rule of law and are cumulative. The exercise of any one or more of
the rights, powers, and remedies provided herein shall not be construed as a
waiver of any other rights, powers, and remedies of the Lenders. The Agent shall
have the rights, powers, and remedies of a secured party under the Texas
Business and Commerce Code, as amended.
6.5 EXERCISE OF RIGHTS. Neither the Lenders' acceptance (through the
Agent or otherwise) of partial or delinquent payments nor any forbearance,
failure, or delay by the Lenders (through the Agent or otherwise) in exercising
any right, power or remedy shall be deemed a waiver of any obligation of the
Pledgor or any Other Liable Party or of any right, power, or remedy of the Agent
and the Lenders or preclude any other or further exercise thereof; and no single
or partial exercise of any
F-9
<PAGE>
right, power, or remedy shall preclude any other or further exercise thereof or
the exercise of any other right, power, or remedy.
6.6 REMEDY AND WAIVER. The Lenders (through the Agent or otherwise)
may remedy or waive any default without waiving the default remedied or waiving
any prior or subsequent default.
6.7 NON-JUDICIAL REMEDIES. To the extent permitted by law, the
Lenders (through the Agent) may enforce their rights hereunder without prior
judicial process or judicial hearing. Nothing herein is intended to prevent the
Lenders or the Pledgor from resorting to judicial process at such party's
option.
6.8 PRESERVATION OF LIABILITY. Neither this Security Agreement nor,
to the extent permitted by law, the exercise by the Agent or the Lenders of (or
the failure to so exercise) any right, power, or remedy conferred herein or by
law shall be construed as relieving the Pledgor or any Other Liable Party from
full liability in respect of the Obligations pursuant to the Loan Agreement or
any guaranty thereof until such time as the commitment of the Lenders to make
Advances under the Loan Agreement has terminated and the Obligations that have
become due and payable have been paid in full.
6.9 NOTICES AND OTHER COMMUNICATIONS. Except as to verbal notices
expressly authorized herein, which verbal notices shall be confirmed in writing,
all notices, requests, and communications hereunder shall be in writing
(including by telecopy or facsimile). Unless otherwise expressly provided
herein, any such notice, request, demand, or other communication shall be deemed
to have been duly given or made at the times provided for in the Loan Agreement
when given or made in the manner provided for in the Loan Agreement, addressed
as follows:
(a) if to the Agent or Lenders, to:
NationsBank of Texas, N.A.
700 Louisiana
Houston, Texas 77002
Attention: Albert Welch
(b) if to the Pledgor, to:
American Residential Services, Inc.[_]
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056
Any party may, by proper written notice hereunder to the others,
change the individuals or addresses to which such notices to it shall thereafter
be sent.
6.10 PARTIES IN INTEREST. All covenants and agreements herein
contained by or on behalf of the Pledgor, the Agent, or the Lenders shall be
binding upon and inure to the benefit of the Pledgor, the Agent, or the Lenders,
as the case may be, and their respective legal representatives, successors, and
assigns.
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6.11 AMENDMENT AND WAIVER. This Security Agreement may not be amended
nor may any of its terms be waived except in writing duly signed by the party
against whom enforcement of the amendment or waiver is sought.
6.12 INVALIDITY. If any provision of this Security Agreement is
rendered or declared illegal, invalid, or unenforceable by reason of any
existing or subsequently enacted legislation or by a judicial decision that has
become final, the Pledgor and the Lenders (acting through the Agent) shall
promptly meet and negotiate substitute provisions for those rendered illegal,
invalid, or unenforceable, but all of the remaining provisions shall remain in
full force and effect.
6.13 GOVERNING LAW. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF TEXAS WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF
RELATING TO CONFLICTS OF LAW, PROVIDED, HOWEVER, THAT VERNON'S TEXAS CIVIL
STATUTES, ARTICLE 5069, CHAPTER 15 (WHICH REGULATES CERTAIN REVOLVING CREDIT
LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) SHALL NOT APPLY.
6.14 ENTIRE AGREEMENT. THIS SECURITY AGREEMENT CONSTITUTES THE ENTIRE
AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT HEREOF AND
SHALL SUPERSEDE ANY PRIOR AGREEMENTS, WHETHER WRITTEN OR ORAL, BETWEEN THE
PARTIES HERETO RELATING TO THE SUBJECT HEREOF. FURTHERMORE, IN THIS REGARD, THIS
SECURITY AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT, COLLECTIVELY,
THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCH
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCH PARTIES.
IN WITNESS WHEREOF, this Security Agreement is executed as of the
date first above written.
PLEDGOR:
AMERICAN RESIDENTIAL SERVICES,
INC. [_________________]
By:________________________
John D. Held
Senior Vice President
NATIONSBANK OF TEXAS, N.A., as
Agent on behalf of itself and each
of the other Lenders and as Issuing Lender
By:_________________________
Albert Welch, Vice President
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FIRST AMENDMENT TO REVOLVING LOAN AGREEMENT
This First Amendment to Revolving Loan Agreement (this "First
Amendment") is made and entered into as of the 24th day of March, 1997, by and
among AMERICAN RESIDENTIAL SERVICES, INC., a Delaware corporation ("Borrower"),
NATIONSBANK OF TEXAS, N.A., as Agent and Issuing Lender under the hereinafter
defined Loan Agreement, and those Lenders under that Loan Agreement which have
executed and delivered this First Amendment.
W I T N E S S E T H
WHEREAS, pursuant to that certain Revolving Loan Agreement (the
"Loan Agreement") dated March 3, 1997, among Borrower, NationsBank of Texas,
N.A., as Agent and Issuing Lender, and the other entities designated therein as
Lenders, Lenders and Issuing Lender agreed to make loans and other extensions of
credit to Borrower upon the terms and conditions therein contained; and
WHEREAS, the parties hereto desire to modify and amend certain
terms and provisions of the Loan Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is modified and
amended as follows:
1.1 The definition of "Consolidated Funded Debt" in Article I of
the Loan Agreement is deleted in its entirety and the following is substituted
in place thereof:
"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, other than
Approved Convertible Subordinated Notes).
1.2 The following terms and the definitions assigned to such
terms are added to and made a part of Article I of the Loan Agreement:
"Approved Convertible Subordinated Notes" shall mean the
Convertible Subordinated Notes due on a stated maturity
<PAGE>
date in April 2004, issued by Borrower pursuant to the
Convertible Subordinated Notes Indenture.
"Convertible Subordinated Notes Indenture" shall mean the
Indenture dated a date in March 1997, between Borrower and U.S.
Trust Company of Texas, N.A., as Indenture Trustee, pursuant to
which Borrower intends to issue convertible subordinated notes up
to an aggregate principal amount of $63,250,000.00, maturity in
2004, as amended, modified, or supplemented from time to time to
the extent permitted by this Agreement.
1.3 The following subsection is added to and made a part of
Section 6.1 of the Loan Agreement as subsection (h) thereof:
Promptly after its receipt thereof, copies of all notices and
other written communications received by Borrower under the
Convertible Subordinated Notes Indenture from any holder or owner
of an Approved Convertible Subordinated Note or from the Trustee
under that Indenture.
1.4 Section 7.1(d) of the Loan Agreement is deleted in its
entirety and the following is substituted in place thereof:
FUNDED DEBT TO EBITDA RATIO. Borrower shall not permit the Funded
Debt to EBITDA Ratio (a) at March 31, 1997 to be greater than
2.75 to 1.0 and (b) at the end of any other fiscal quarter of
Borrower, beginning with its fiscal quarter ended June 30, 1997,
to be greater than 2.25 to 1.0.
1.5 The following subsection is added to and made a part of
Article VII of the Loan Agreement as Section 7.14 thereof:
NO MODIFICATION OF APPROVED SUBORDINATED DEBT. Borrower shall
not, without the prior approval of the Required Lenders, (a)
modify the date or manner of payment of any Approved Subordinated
Debt, (b) increase the principal balance of any Approved
Subordinated Debt, or (c) modify any of the subordination
provisions in any note, indenture, or other agreement evidencing
or governing any Approved Subordinated Debt.
1.6 The following subsection is added to and made a part of
Section 8.1 of the Loan Agreement as subsection (l) thereof:
There shall occur a "Repurchase Event" under and as such term is
defined in the Convertible Subordinated Notes Indenture.
-2-
<PAGE>
2. MODIFICATION FEE. As independent consideration for entering into this
First Amendment, contemporaneously with the execution and delivery of this First
Amendment by the requisite parties hereto, Borrower shall pay to Agent a
modification fee equal to $15,000.00 for the pro rata account (based on their
respective Loan Percentages) of those Lenders which are signatories to this
First Amendment. Those Lenders which are signatories to this First Amendment
constitute not less than the Required Lenders for the purpose of modifying and
amending the Loan Agreement in accordance with the terms of this First
Amendment.
3. APPROVAL OF SUBORDINATED DEBT. The issuance of the indebtedness
evidenced by the Approved Convertible Subordinated Notes is approved, and when
issued, will constitute Approved Subordinated Debt under the Loan Agreement.
4. STATUS OF INDEBTEDNESS. Borrower acknowledges that the indebtedness
outstanding under the respective Notes on the date hereof is not subject to any
offsets, deductions, credits, charges, or claims of whatsoever kind or
character.
5. DEFINED TERMS. Words and terms used herein which are defined in the
Loan Agreement are used herein as defined therein, except as specifically
modified by the terms of this First Amendment.
6. REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Borrower in Article V of the Loan Agreement are true and correct in all
material respects as of the date of this First Amendment, except for those
representations and warranties that are limited by the terms thereof to a
specific date.
7. MISCELLANEOUS.
7.1 PRESERVATION OF THE LOAN AGREEMENT. Except as specifically
amended and modified by the terms of this First Amendment, all of the terms,
provisions, covenants, warranties, and agreements contained in the Loan
Agreement and in the other Loan Documents shall remain in full force and effect.
7.2 COUNTERPARTS. This First Amendment may be executed in two or
more counterparts, and it shall not be necessary that any one of the
counterparts be executed by all of the parties hereto. Each fully or partially
executed counterpart shall be deemed an original, but all such counterparts
taken together shall constitute but one and the same instrument.
7.3 NO ORAL AGREEMENTS. THE LOAN AGREEMENT, AS AMENDED
BY THIS FIRST AMENDMENT, AND THE OTHER WRITTEN 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.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this First
Amendment as of the date first above written.
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
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
-4-
<PAGE>
NATIONAL CITY BANK OF KENTUCKY
By: /s/DONALD R. PULLEN, JR.
Donald R. Pullen, Jr.,
Vice President
BANQUE PARIBAS
By: /S/SCOTT CLINGAN
Scott Clingan,
Vice President
By: /s/LARRY ROBINSN
Name: Larry Robinsn
Title: Vice President
THE FUJI BANK LIMITED, Houston Agency
By: /s/PHILIP C. LAUINGER III
Philip C. Lauinger III
Vice President & Joint Manager
GUARANTY FEDERAL BANK, F.S.B.
By: /s/MARK WAYNE
Mark Wayne,
Vice President
SUMITOMO BANK, LTD.
By: /s/JOHN O'NEILL
John O'Neill,
Vice President
By: /s/BRUCE PORTILLO
Name: Bruce Portillo
Title: Vice President
-5-
<PAGE>
By their execution hereof, the undersigned Subsidiaries of Borrower, guarantors
of the Obligations, acknowledge and agree to this First Amendment:
A.K. LANDAN, INC., a California corporation
AMERICAN MECHANICAL SERVICES, INC., a
Delaware corporation
ANNANDALE & FAIRFAX AIR CONDITIONING
& HEATING, INC., a Virginia corporation
ARS ENERGY SERVICES COMPANY, a
Delaware corporation
ARS RESIDENTIAL HOLDING COMPANY, a
Delaware corporation
ARS RESIDENTIAL MANAGEMENT
COMPANY, a Delaware corporation
ARS RESIDENTIAL SERVICES, INC., a
Delaware corporation
ADCOT, INC. (d/b/a A-ABC Appliances, a
Texas corporation
ATLAS SERVICES, INC., a South Carolina
corporation
BULLSEYE AIR CONDITIONING, INC., a
Florida corporation
CLIMATIC CORPORATION OF VERO BEACH,
a Florida corporation
DOC PLUMBING, INC., a South Carolina
corporation
By:/s/John D. Held
John D. Held,
Vice President
-6-
<PAGE>
FLORIDA HEATING & AIR CONDITIONING,
INC., a Florida corporation
FLORIDA HEATING AND AIR DUCT, INC., a
Florida corporation
GENERAL HEATING & AIR CONDITIONING
COMPANY, INC., a Delaware corporation
GOLDEN TRIANGLE MECHANICAL, INC., a
South Carolina corporation
HESSION PLUMBING COMPANY, INC., an
Indiana corporation
ILLINOIS HEATING & AIR CONDITIONING,
INC., an Illinois corporation
KEENAN MECHANICAL SERVICES, INC., a
Virginia corporation
KIRBY HEATING & AIR, INC., a South Carolina
corporation
KORTE ELECTRIC, INC., a Delaware
corporation
LARRY TEAGUE & SONS, a Florida
corporation
MCCANNICS, INC., a Delaware corporation
MERIDIAN & HOOSIER HEATING AND AIR
CONDITIONING COMPANY, an Indiana
corporation
METRO HEATING AND AIR CONDITIONING,
a Delaware corporation
By:/s/JOHN D. HELD
John D. Held,
Vice President
-7-
<PAGE>
PRICEMASTERS HEATING & AIR
CONDITIONING CO., an Illinois corporation
R.F. MASTERS, INC., a South Carolina
corporation
ROOTER EXPRESS SERVICE, INC., a South
Carolina corporation
SAGAMORE HEATING & COOLING, INC., an
Indiana corporation
SASSO AIR CONDITIONING, INC., a Delaware
corporation
SERVICE ENTERPRISE HOLDINGS, LLC, a
Texas limited liability company
SERVICE ENTERPRISES - HOUSTON, INC.
(d/b/a Crown Services), a Delaware
corporation
SOUTHCOAST HEATING AND AIR
CONDITIONING, INC., a California corporation
TED'S PLUMBING, INC., a Florida corporation
TRADEMARK ENTERPRISES, INC., a Delaware
corporation
USA HEATING & AIR CONDITIONING, INC., a
Delaware corporation
WEST HOUSTON SERVICES, INC., a Delaware
corporation
By:/s/JOHN D. HELD
John D. Held,
Vice President
-8-
EMPLOYMENT AGREEMENT
This Employment Agreement dated as of January 20, 1997 (this
"AGREEMENT") is entered into by and between American Residential Services, Inc.,
a Delaware corporation (the "CORPORATION"), and Harry O. Nicodemus IV (the
"EMPLOYEE").
1. EMPLOYMENT. The Corporation hereby employs the Employee and the
Employee hereby accepts employment with the Corporation upon the terms and
subject to the conditions set forth herein.
2. DUTIES AND RESPONSIBILITIES. Subject to the power of the board of
directors of the Corporation to manage the business and affairs of the
Corporation and to elect and remove officers of the Corporation and its
subsidiaries, the Employee shall serve the Corporation as Vice President, Chief
Financial Officer and Chief Accounting Officer and shall perform the services
and functions relating to such office or otherwise reasonably incident to such
offices. The Employee shall report directly to the Chief Executive Officer of
the Corporation, or such other officer of the Corporation as the board of
directors of the Corporation may determine.
3. COMPENSATION AND OTHER EMPLOYEE BENEFITS.
As compensation for his services under the terms of this
Agreement:
Subject to section 4 hereof, the Employee shall be paid an
annual salary of $125,000, payable in accordance with the
then-current payroll policies of the Corporation (such
annual salary is herein referred to as the "BASE SALARY");
the Base Salary shall be subject to increase (but not
decrease) at the discretion of the Corporation;
(b) subject to the right of the Corporation to amend or
terminate any employee and/or group or senior executive
benefit, bonus and/or stock option plan, the Employee shall
be entitled to receive the following employee benefits:
the Employee shall have the right to participate in such
medical and dental plans as are adopted by the Corporation,
as well as any or future employee and/or group benefit
plans of the Corporation that are available to its exempt
salaried employees generally (including, without
limitation, disability, accident, medical, life insurance
and hospitalization plans);
(2) the Employee shall have the right to participate, at
levels determined by the board of directors (or the
compensation committee thereof), in such executive benefit,
bonus and/or stock option plans of the Corporation as shall
be
1
<PAGE>
determined by the board of directors (or the compensation
committee thereof); and
(3) the Employee shall be entitled to reimbursement from
the Corporation for reasonable out-of-pocket expenses
incurred by him in the course of the performance of his
duties hereunder.
4. TERM.
The term of the Employee's employment under this Agreement
shall commence on the date of this Agreement and the term shall
continuously extend, without the necessity of action of either party,
for a continually renewing period of one year's duration, until an
event has occurred as described in, or one of the parties shall have
made an appropriate election pursuant to, the provisions of Section 6
of this Agreement. Such term is referred to herein as the "EMPLOYMENT
TERM".
5. COMPETITION AND CONFIDENTIALITY.
(a) If, during the Employment Term (or any extension
thereof), the employment of the Employee is terminated pursuant to
Section 6(a) or Section 6(e), or if the Employee voluntarily
terminates his employment pursuant to Section 6(d), or if this
Agreement expires pursuant to its terms, then for the period of time
remaining in the Employment Term, the Employee shall not (i) accept
employment with or render service to any person, firm or corporation
that is engaged in a business directly competitive with the plumbing,
heating, air conditioning or electrical business of the Corporation,
(ii) directly or indirectly own manage, operate, finance or control
or participate in the ownership, management, operation or control of,
or be connected as a principal, agent, representative, consultant,
advisor, investor, owner, partner, financier, manager or joint
venturer with, or permit his name to be used by or in connection
with, any business or enterprise directly competitive with the
residential service business of the Corporation (provided, however,
that the Employee may invest as an investor in the voting securities
of any person that is a reporting company under the Securities
Exchange Act of 1934, as amended, so long as (A) the aggregate amount
of such securities that the Employee owns directly or indirectly is
less than five percent of the total outstanding voting securities of
such person and (B) the Employee has no other affiliation with such
person), or (iii) solicit the employment of any person who, within
six months before or after the date of the Employee's termination, is
employed by the Corporation on a full or part-time basis. For the
purposes of this Section 5, the Corporation shall be deemed to
include all of the subsidiaries of the Corporation.
(b) It is the desire and intent of each of the parties that
the provisions of Section 5(a) shall be enforced to the fullest
extent permissible under the laws and public policies applied in the
State of Texas. Accordingly, if any particular portion of Section
2
<PAGE>
5(a)shall be adjudicated to be invalid or unenforceable, Section 5(a)
shall be deemed amended to (i) reform the particular portion to
provide for such maximum restrictions as will be valid and
enforceable, or if that is not possible, then (ii) delete therefrom
the portion thus adjudicated to be invalid or unenforceable. Section
5(a) shall inure to the benefit of any successor to the Corporation.
(c) During the Employment Term and for a period of two
years after termination of the Employment Term, the Employee will not
divulge or appropriate to his own use or to the use of others any
secret or confidential information pertaining to the business of the
Corporation obtained by the Employee in his capacity as an employee
of the Corporation. For purposes of this Agreement, the term secret
and confidential information does not include any information that is
or becomes generally available to and known by the public (other than
as a result of an unpermitted disclosure directly or indirectly by
the Employee).
(d) The Employee acknowledges that Sections 5(a) and (c)
are expressly for the benefit of the Corporation, that the
Corporation would be irreparably injured by a violation of Section
5(a) or (c), and that the Corporation would have no adequate remedy
at law in the event of such violation. Therefore, the Employee
acknowledges and agrees that injunctive relief, specific performance
or any other appropriate equitable remedy (without any bond or other
security being required) are appropriate remedies to enforce
compliance by the Corporation with Sections 5(a) and (c).
6. TERMINATION OF EMPLOYMENT.
(a) FOR DUE CAUSE. Nothing herein shall prevent the
Corporation from terminating, without prior notice, the Employee for
"Due Cause" (as hereinafter defined), in which event the Employee
shall be entitled to receive his Base Salary on a pro rata basis to
the date of termination. In the event of such termination for Due
Cause, all other rights and benefits the Employee may have under the
employee and/or group or senior executive benefit, bonus and/or stock
option plans and programs of the Corporation, generally, shall be
determined in accordance with the terms and conditions of such plans
and programs. The term "DUE CAUSE" shall mean (i) the Employee has
committed a willful serious act, such as fraud, embezzlement or
theft, against the Corporation intending to enrich himself at the
expense of the Corporation, (ii) the Employee has been convicted of a
felony, (iii) the Employee has engaged in improper conduct which has
caused demonstrable and serious injury, monetary or otherwise, to the
Corporation, (iv) the Employee, in carrying out his duties hereunder,
has been guilty of willful gross neglect or willful gross misconduct,
(v) the Employee has refused to carry out his duties in gross
dereliction of duty and, after receiving written notice to such
effect from the Corporation, the Employee fails to cure the existing
problem within five days, or (vi) the Employee has materially
breached this Agreement and has not remedied such breach within five
days after receipt of written notice from the Corporation that a
breach of this Agreement has occurred.
3
<PAGE>
(b) DUE TO DEATH. In the event of the death of the
Employee, this Agreement shall terminate on the date of death and the
estate of the Employee shall be entitled to the Employee's Base
Salary through the end of the month in which he died. In the event of
such termination due to death, all other rights and benefits the
Employee (or his estate) may have under the employee and/or group or
senior executive benefit, bonus and/or stock option plans and
programs of the Corporation, generally, shall be determined in
accordance with the terms and conditions of such plans and programs.
(c) DISABILITY. In the event the Employee suffers a
"Disability" (as hereinafter defined), this Agreement shall terminate
on the date on which the Disability occurs and the Employee shall be
entitled to his Base Salary through the end of the month in which his
employment is terminated due to the Disability. In the event of such
termination due to Disability, all other rights and benefits the
Employee may have under the
employee and/or group or senior executive benefit, bonus and/or stock
option plans and programs of the Corporation, generally, shall be
determined in accordance with the terms and conditions of such plans
and programs. For purposes of this Agreement, "DISABILITY" shall mean
the inability or incapacity (by reason of a medically determinable
physical or mental impairment) of the Employee to perform the duties
and responsibilities related to the job or position with the
Corporation described in Section 2 for a period that can be
reasonably expected to last more than 180 days. Such inability or
incapacity shall be documented to the reasonable satisfaction of the
Corporation by appropriate correspondence from registered physicians
reasonably satisfactory to the Corporation.
(d) VOLUNTARY TERMINATION. The Employee may voluntarily
terminate his employment under this Agreement at any time by
providing at least 21 days' prior written notice to the Corporation.
In such event, the Employee shall be entitled to receive his Base
Salary until the date his employment terminates and all other
benefits the Employee may have under the employee and/or group or
senior executive benefit, bonus and/or stock option plans and
programs of the Corporation, generally, shall be determined in
accordance with the terms and conditions of such plans and programs.
(e) CONSTRUCTIVE TERMINATION.
(i) If the Corporation (i) terminates the employment of the
Employee other than for Due Cause or because of a
Disability, (ii) demotes the Employee to a lesser position
than as provided in Section 2, (iii) decreases the
Employee's Base Salary below the level provided for by the
terms of Section 3(a), or (iv) requires the Employee to
move his principal residence from the Houston, Texas area,
then such action by the Corporation, unless consented to in
writing by the Employee, shall be deemed to be a
constructive termination by the Corporation of the
Employee's employment ("CONSTRUCTIVE TERMINATION").
4
<PAGE>
(ii) In the event of a Constructive Termination, the
Employee shall be entitled to receive, from the date
of Constructive Termination, his Base Salary (as
provided in Section 3(a)) for a period equal to the
remaining period in the Employment Term, payable in
accordance with the then-current payroll policies of
the Corporation. In the event of such Constructive
Termination, all other rights and benefits the
Employee may have under the employee and/or group or
senior executive benefit, bonus and/or stock option
plans and programs of the Corporation, generally,
shall be determined in accordance with the terms and
conditions of such plans and programs.
(iii)In the event of the death or Disability of
the Employee following Constructive
Termination, the amounts set forth in Section
6(e)(ii) shall continue to be owing and shall
be paid to the estate of the Employee or the
Employee, as applicable.
7. NOTICES. All notices, requests, demands and other communications
given under or by reason of this Agreement shall be in writing and shall be
deemed given when delivered in person or when mailed, by certified mail (return
receipt requested), postage prepaid, addressed as follows (or to such other
address as a party may specify by notice pursuant to this provision):
(a) If to the Corporation:
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer Road
Houston, Texas 77056
Attn: Chief Executive Officer
If to the Employee:
Harry O. Nicodemus IV
1810 Crutchfield
Katy, Texas 77449
8. CONTROLLING LAW. The execution, validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of Texas.
9. ADDITIONAL INSTRUMENTS. The Employee and the Corporation shall
execute and deliver any and all additional instruments and agreements that may
be necessary or proper to carry out the purposes of this Agreement.
5
<PAGE>
10. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement contains the
entire agreement of the Employee and the Corporation relating to the matters
contained herein and supersedes all prior agreements and understandings, oral or
written, between the Employee and the Corporation with respect to the subject
matter hereof. This Agreement may be changed only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
11. SEPARABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by the decision of any arbitrator or by decree of a court
of last resort, the Employee and the Corporation shall promptly meet and
negotiate substitute provisions for those rendered or declared illegal or
unenforceable to preserve the original intent of this Agreement to the extent
legally possible, but all other provisions of this Agreement shall remain in
full force and effect.
12. ASSIGNMENTS. The Corporation may assign this Agreement to any
person or entity succeeding to all or substantially all of the business
interests of the Corporation by merger or otherwise. The rights and obligations
of the Employee under this Agreement are personal to him, and no such rights,
benefits or obligations shall be subject to voluntary or involuntary alienation,
assignment or transfer, except as otherwise contemplated hereby.
13. EFFECT OF AGREEMENT. Subject to the provisions of Section 12 with
respect to assignments, this Agreement shall be binding upon the Employee and
his heirs, executors, administrators, legal representatives and assigns and upon
the Corporation and its respective successors and assigns, except as otherwise
contemplated hereby.
14. EXECUTION. This Agreement may be executed in multiple
counterparts each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
15. WAIVER OF BREACH. The waiver by either party to this Agreement of
a breach of any provision of the Agreement by the other party shall not operate
or be construed as a waiver by such party of any subsequent breach by such other
party.
6
<PAGE>
IN WITNESS WHEREOF, the Employee and the Corporation have executed this
Agreement effective as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC.
/s/C. CLIFFORD WRIGHT, JR.
C. Clifford Wright, Jr.
Chief Executive Officer
/s/HARRY O. NICODEMUS
Harry O. Nicodemus
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 21, 1997)
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
- --------------- -------------
<S> <C>
A. K. Landan, Inc. California
American Mechanical Services, Inc. Delaware
American Residential Services of Michigan, Inc. Michigan
Annandale & Fairfax Air Conditioning & Heating, Inc. (d/b/a Keenan Heating & Cooling) Virginia
ARS American Residential Services of Oklahoma, Inc. Oklahoma
ARS Energy Services Company Delaware
ARS Residential Holding Company Delaware
ARS Residential Management Company Delaware
ARS Residential Services, Inc. Delaware
McCannics, Inc. Delaware
Service Enterprise Holdings, LLC Texas
Adcot, Inc. (d/b/a A-ABC Appliances) Texas
Service Enterprises - Houston, Inc. (d/b/a Crown Services) Delaware
Trademark Enterprises, Inc. Delaware
Atlas Services, Inc. South Carolina
Golden Triangle Mechanical, Inc. South Carolina
Doc Plumbing, Inc. South Carolina
Electro Acquisition Inc. North Carolina
Florida Heating & Air Conditioning, Inc. (including d/b/a De Moss Air Conditioning Services, Inc.) Florida
Bullseye Air Conditioning, Inc. Florida
Climatic Corporation of Vero Beach Florida
Florida Heating and Air Duct, Inc. Florida
General Heating & Air Conditioning Company, Inc. Delaware
Godby Acquisition Inc. Indiana
Hession Plumbing Company, Inc. Indiana
Illinois Heating & Air Conditioning, Inc. (d/b/a Kranz Heating & Cooling, Inc.) Illinois
Keenan Mechanical Services, Inc. Virginia
Kirby Heating & Air, Inc. South Carolina
Korte Electric, Inc. Delaware
Larry Teague & Sons Plumbing, Inc. Florida
Meridian & Hoosier Heating and Air Conditioning Company (d/b/a Dial One Meridian and Hoosier, Inc.) Indiana
Sagamore Heating & Cooling, Inc. Indiana
Metro Heating and Air Conditioning, Inc. Delaware
Pricemasters Heating & Air Conditioning Co. (d/b/a Ross Heating & Cooling Inc.; Kranz Mechanical Corporation) Illinois
R. F. Master, Inc. South Carolina
Rental Acquisition Inc. Indiana
Rooter Express Service, Inc. South Carolina
Sasso Air Conditioning, Inc. Delaware
Southcoast Heating and Air Conditioning, Inc. California
Ted's Plumbing, Inc. Florida
Torrey Acquisition Inc. Delaware
USA Heating & Air Conditioning, Inc. Delaware
West Houston Services, Inc. Delaware
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated March 14, 1997, included herein, into the Company's
previously filed Registration Statement on Form S-8 No. 333-13299. It should be
noted that we have not audited any financial statements of the Company
subsequent to December 31, 1996 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN RESIDENTIAL SERVICES,
INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,641
<SECURITIES> 0
<RECEIVABLES> 20,896
<ALLOWANCES> 729
<INVENTORY> 9,652
<CURRENT-ASSETS> 39,955
<PP&E> 19,957
<DEPRECIATION> 2,507
<TOTAL-ASSETS> 189,755
<CURRENT-LIABILITIES> 24,446
<BONDS> 51,854
0
0
<COMMON> 10
<OTHER-SE> 110,539
<TOTAL-LIABILITY-AND-EQUITY> 189,755
<SALES> 64,229
<TOTAL-REVENUES> 64,229
<CGS> 47,990
<TOTAL-COSTS> 47,990
<OTHER-EXPENSES> 16,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,257
<INCOME-PRETAX> (5,435)
<INCOME-TAX> 101
<INCOME-CONTINUING> (5,536)
<DISCONTINUED> (3)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,539)
<EPS-PRIMARY> (1.70)
<EPS-DILUTED> 0
</TABLE>
