PROSPECTUS
5,000,000 SHARES
[ARS LOGO]
COMMON STOCK
------------------------
American Residential Services, Inc. ("ARS"and, collectively with its
subsidiaries, the "Company") may offer and issue the shares of its common
stock, $.001 par value per share (the "Common Stock"), covered by this
Prospectus in business combination transactions involving its acquisition,
directly or indirectly, of businesses or other operating assets. It anticipates
these acquisitions will consist principally of businesses that provide (i)
maintenance, repair and replacement services for heating, ventilating and air
conditioning systems, including indoor air quality services, and plumbing,
electrical and other systems primarily in homes and small commercial buildings
and (ii) new installation services of those systems in homes and small
commercial facilities under construction. ARS expects that (i) the terms of
these acquisitions will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and (ii) the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of the shares. It does not expect to pay any
underwriting discounts or commissions, but may pay finder's fees from time to
time with respect to specific acquisitions. Any person receiving any such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). ARS will pay all expenses of this
offering.
As of December 31, 1996, 10,370,865 shares of Common Stock were issued and
outstanding, of which 4,830,000 are registered and available for unrestricted
trading in the public markets unless owned by affiliates of the Company. The
Common Stock is listed on the New York Stock Exchange (the "NYSE") under the
symbol "ARS." Application has been made to list the shares of Common Stock
offered hereby on the NYSE. On December 31, 1996, the last reported sales price
of the Common Stock on the NYSE was $27.125 per share.
Persons receiving shares of the Common Stock offered hereby may be
contractually required to hold some portions of those shares for periods of up
to two years. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares by affiliates
of the businesses the Company acquires for a period of three years (or such
shorter period as the Securities and Exchange Commission (the "SEC") may
prescribe).
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is January 6, 1997.
<PAGE>
[graphics -- gatefold, showing map of the United States with certain Company
locations, service vehicles, facilities and personnel]
ARS IS THE LARGEST PUBLICLY HELD
COMPANY IN THE UNITED STATED
ENGAGED PRINCIPALLY IN PROVIDING
COMPREHENSIVE MAINTENANCE, REPAIR,
REPLACEMENT AND NEW EQUIPMENT
INSTALLATION SERVICES FOR HEATING,
VENTILATION AND AIR CONDITIONING,
PLUMBING, ELECTRICAL, INDOOR AIR
QUALITY SYSTEMS AND MAJOR HOME
APPLIANCES.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION RESPECTING
THE COMPANY'S OPERATIONS GIVES EFFECT TO THE COMPANY'S ACQUISITIONS COMPLETED TO
DATE.
THE COMPANY
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for heating, ventilating and air
conditioning ("HVAC"), plumbing, electrical and indoor air quality systems and
major home appliances (collectively, "residential services"). ARS was founded
in October 1995 to create the leading national provider of these services,
primarily in homes and small commercial buildings, including those under
construction. To achieve this goal, the Company has embarked on an aggressive
acquisition program and is implementing a national operating strategy designed
to increase internal growth and capitalize on cost efficiencies. On September
27, 1996, ARS acquired seven residential services businesses (together with the
common parent of two of those businesses, the "Founding Companies") in
separate transactions (the "Initial Acquisitions") simultaneously with the
closing of ARS's initial public offering of Common Stock (the "IPO"). See
"The Company -- Founding Companies." During the fourth quarter of 1996, the
Company acquired an additional 13 residential services businesses (together with
the Founding Companies, the "Acquired Businesses"). See "The
Company -- Recent Acquisitions."
The Company believes, on the basis of information provided by its
operational management and available industry data, the HVAC, plumbing and
electrical industries in the United States represent an annual market in excess
of $40 billion, of which maintenance, repair and replacement services account
for in excess of $25 billion. It believes this market is served by over 50,000
companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It also believes the majority of owners in its industry have limited
access to adequate capital for modernization, training and expansion and limited
opportunities for liquidity in their businesses.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service technicians and providing a full complement of
high-quality residential services in an industry that has been characterized by
inconsistent quality, reliability and pricing. It also believes the highly
fragmented nature of the residential services industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to achieve its goal of becoming the leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a national operating
strategy that enhances internal revenue growth and profitability and achieves
cost efficiencies.
GROWTH THROUGH ACQUISITION. The Company has implemented an aggressive
acquisition program targeting large metropolitan and high-growth suburban areas
with attractive residential demographics. The Company's acquisition strategy
involves entering new geographic markets and expanding within existing markets.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential services and having the
critical mass necessary to be a core business with which other
residential service operations can be consolidated. An important
criterion for these acquisition candidates is superior operational
management personnel, whom the Company generally seeks to retain.
3
<PAGE>
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and the range of services it offers in that market. The
Company also will pursue "tuck-in" acquisitions of smaller
residential services companies whose operations can be incorporated
into the Company's existing operations without a significant increase
in infrastructure.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The Company has
implemented a national operating strategy employing "best practices" designed
to increase internal growth and profitability through enhanced operations and
the achievement of cost efficiencies.
o INTERNAL GROWTH. The Company reviews its operations at the local and
regional operating levels in order to identify certain "best
practices" that will be implemented throughout its operations. For
example, the Company intends to provide 24-hour emergency service at
each of its locations and to monitor service call quality by
attempting to contact each of its service customers promptly following
a service call. In addition, the Company is developing a national
training program to improve and keep current the technical, selling
and customer relations skills of its service technicians. The Company
also intends to use specialized computer technology at each of its
locations to improve communications, vehicle dispatch and service
quality and responsiveness. Management believes these practices will
enable the Company to provide superior customer service and maximize
sales opportunities. This service-oriented strategy also will allow
the Company to reinforce its brand images at the local level while
fostering its efforts to develop a national brand name.
o COST EFFICIENCIES. The Company believes it should be able to reduce
the total operating expenses of acquired businesses by eliminating
duplicative administrative functions in tuck-in acquisitions and
consolidating certain functions performed separately by each business
prior to its acquisition. In addition, the Company believes that, as a
large, national residential services company, it should experience
reduced costs (as a percentage of revenues) compared to those of
individual acquired businesses in such areas as: the purchase of HVAC
and other equipment for resale, service vehicles, parts and tools;
vehicle and equipment maintenance; financing arrangements; employee
benefits; and insurance and bonding.
------------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
------------------------
4
<PAGE>
SUMMARY UNAUDITED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
For financial reporting purposes, Atlas Services, Inc., one of the Founding
Companies, is presented as the acquiror in all the acquisitions by ARS and the
effective date of the Initial Acquisitions is September 30, 1996. Consequently,
the Company's historical financial statements for periods ended on or before
September 30, 1996 are the consolidated historical financial statements of
Atlas, and the Company's consolidated historical balance sheet as of September
30, 1996 is the consolidated historical balance sheet of Atlas, as adjusted to
give effect to the consummation of the Initial Acquisitions in accordance with
the purchase method of accounting and the closing of the IPO and the application
of its proceeds by the Company. As used in this discussion, the "Company"
means (i) Atlas prior to September 30, 1996 and (ii) ARS and its consolidated
subsidiaries on that date and thereafter. See "Selected Financial Information"
and the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this Prospectus.
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
STATEMENTS OF OPERATIONS DATA
(PRO FORMA COMBINED(1)):
Revenues........................ $184,774 $ 160,570
Gross profit.................... 51,734 45,559
Selling, general and
administrative expenses(2)..... 38,080 33,286
Goodwill amortization(3)........ 2,945 2,208
Operating income................ 10,709 10,065
Interest income and other
expense, net................... 798 704
Interest expense(4)............. (3,279) (2,460)
Income from continuing
operations..................... $ 4,058 $ 4,328
============ =============
Income per share from continuing
operations..................... $ .39 $ .42
============ =============
Shares used in computing pro
forma income per share from
continuing operations(4)....... 10,371 10,371
============ =============
SEPTEMBER 30, 1996
-------------------------
PRO FORMA
HISTORICAL COMBINED(1)
--------- ------------
BALANCE SHEET DATA:
Working capital................. $ 4,373 $ 13,299
Total assets.................... 98,729 178,154
Total debt, including current
portion........................ 7,904 44,018
Stockholders' equity............ 71,094 106,605
- ------------
(1) The pro forma combined statements of operations data assume the acquisition
of each of the Acquired Businesses and the IPO were closed on January 1,
1995, while the pro forma combined balance sheet data assume the following
events that occurred in the fourth quarter of 1996 occurred on September 30,
1996: (i) the issuance and sale of Common Stock pursuant to the exercise of
the underwriters' overallotment option in connection with the IPO and the
exercise of a warrant; (ii) the payment of additional working capital
adjustments in connection with the Initial Acquisitions; and (iii) the
acquisition of 13 Acquired Businesses in the fourth quarter of 1996 and the
financing and payment of the related purchase prices. The pro forma combined
financial statement data presented (i) are not necessarily indicative of the
results the Company would have obtained had these events actually occurred
when assumed or of the Company's future results, (ii) are based on
preliminary estimates of fair value, available information and certain
assumptions management deems appropriate and (iii) should be read in
conjunction with the other historical and pro forma financial statements and
notes thereto included elsewhere herein.
(2) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain
non-recurring expenses.
(3) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(4) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED COMBINED OPERATING HISTORY
ARS, incorporated in Delaware in October 1995, conducted no operations
prior to the closing of the IPO on September 27, 1996 other than in connection
with the IPO and the Initial Acquisitions. The Acquired Businesses operated as
separate, independent businesses prior to their acquisition by the Company, and
the Company used the purchase method of accounting to record the acquisitions.
Consequently, the historical financial information herein may not be indicative
of the Company's future operating results and financial condition. The success
of the Company will depend, in part, on the extent to which the Company is able
to centralize its accounting and other administrative functions, eliminate the
unnecessary duplication of other functions and otherwise integrate the Acquired
Businesses and such additional businesses as it may acquire in the future into a
cohesive, efficient enterprise. No assurance can be given the Company's
management group will be able to manage effectively the combined entity or
completely implement the Company's acquisition or national operating strategy.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company intends to grow primarily by acquiring residential services
businesses that maintain, repair, replace and install HVAC, plumbing, electrical
and other systems and equipment in homes and small commercial buildings in its
existing and in new markets. Its acquisition strategy presents risks that,
singly or in any combination, could materially adversely affect the Company's
business and financial performance. These risks include the possibility of the
adverse effect on existing operations of the Company from the diversion of
management attention and resources to acquisitions, the possible loss of
acquired customer bases and key personnel, including service technicians, and
the contingent and latent risks associated with the past operations of and other
unanticipated problems arising in the acquired businesses. The success of the
Company's acquisition strategy will depend on the extent to which it is able to
acquire, successfully absorb and profitably manage additional businesses, and no
assurance can be given the Company's strategy will succeed. In this connection,
competition for acquisition candidates could cause the cost of acquiring
businesses to increase materially. See "Business -- Business Strategy."
NEED FOR ADDITIONAL FINANCING
The Company currently intends to use shares of its Common Stock, including
the shares covered by this Prospectus, in making future acquisitions. The extent
to which the Company will be able or willing to use the Common Stock for this
purpose will depend on its market value from time to time and the willingness of
potential sellers to accept it as full or partial payment. To the extent the
Company is unable to use its Common Stock to make future acquisitions, its
ability to grow may be limited by the extent to which it is able to raise
capital for this purpose, as well as to expand existing operations, through debt
or additional equity financings. The Company has a $55 million bank credit
facility (the "Credit Facility"), underwritten by NationsBank of Texas, N.A.
("NationsBank"), which may be used for acquisitions, working capital and other
corporate purposes. At January 3, 1997, outstanding borrowings under the Credit
Facility totaled $50.8 million. No assurance can be given the Company will be
able to obtain the capital it will need to finance a successful acquisition
program and its other cash needs in the future. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- The Company."
6
<PAGE>
DEPENDENCE ON HOUSING STARTS
The extent to which the Company is able to maintain or increase revenues
from new installation services for homebuilders will depend on the levels of
housing starts from time to time in the markets in which it operates and likely
will reflect the cyclical nature of the homebuilding industry. That industry is
affected significantly by changes in general and local economic conditions, such
as employment and income levels, the availability and cost of financing for home
buyers, consumer confidence and housing demand. Unless the Company is able
through implementation of its growth strategy to continue to reduce the relative
importance of new installation services to its overall operating results,
downturns in the levels of housing starts could have a material adverse effect
on its results of operations.
FACTORS AFFECTING INTERNAL GROWTH
The factors affecting the Company's ability to generate internal growth
will include the extent to which it is able to expand the range of services
offered to customers, increase existing customer bases through the development
and implementation of cost-effective advertising and other marketing programs
and reduce operating and overhead costs of acquired businesses. Factors
affecting the ability of the Company to expand services will include the extent
to which it is able to attract and retain qualified operational management and
service and installation technicians in new areas of operation and leverage its
relationships with existing customers to provide them services they currently
obtain from others.
COMPETITION
The markets for the residential services the Company provides are highly
competitive and are served principally by small, owner-operated private
companies. Certain of these smaller competitors may have lower overhead cost
structures and, consequently, may be able to provide their services at lower
rates than the Company. The Company believes the residential services industry
is subject to rapid consolidation on both a national and a regional scale. The
Company believes three other public companies currently are focused on providing
residential services in some of the service lines provided by the Company. Other
companies, including unregulated affiliates of electric and gas public
utilities, which have objectives the same as or similar to the Company's
objectives, may enter the industry. These entrants may have greater financial
resources than the Company to finance acquisition and internal growth
opportunities and might be willing to pay higher prices than the Company for the
same opportunities. Consequently, the Company may encounter significant
competition in its efforts to achieve its growth objectives. See "Business --
Competition."
SEASONALITY
The Company's installation, maintenance, repair and replacement operations
are subject to different seasonal variations in the different lines of service.
Except in certain areas of the southern United States, the demand for new
installations can be substantially lower during the winter months. Demand for
HVAC services is generally higher in the second and third quarters. Accordingly,
the Company expects its revenues and operating results generally will be lower
in its first and fourth quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend on the continuing efforts of its executive
officers and the senior management of its principal operating subsidiaries, and
the Company likely will depend on the senior management of any significant
businesses it acquires in the future. The business or prospects of the Company
could be affected adversely if any of these persons does not continue in his or
her management role after joining the Company and the Company is unable to
attract and retain qualified replacements. The success of the Company's growth
strategy, as well as the Company's current operations, will depend on the extent
to which the Company is able to retain, recruit and train qualified service and
installation technicians who meet the Company's standards of conduct and service
to its customers. See "Business -- Hiring, Training and Safety."
7
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of December 31, 1996, 10,370,865 shares of Common Stock were
outstanding. The 4,830,000 shares sold in the IPO (other than shares held by
affiliates of the Company) are freely tradable. The remaining shares outstanding
may be resold publicly only following their effective registration under the
Securities Act or pursuant to an available exemption (such as provided by Rule
144 following a holding period for unregistered shares) from the registration
requirements of that act. The holders of 2,805,053 of those unregistered shares
have certain rights to have their shares registered in the future under the
Securities Act (see "Shares Eligible for Future Sale"), but may not exercise
such registration rights, and have agreed with ARS that, except for limited
private transfers, they will not sell, transfer or otherwise dispose of any of
their shares during the two-year period ending September 27, 1998 (or during
such shorter period as the SEC may prescribe as the holding period for
restricted securities under Rule 144). Sales made pursuant to Rule 144 must
comply with its applicable volume limitations and other requirements. The
holders of substantially all the remaining unregistered shares also have certain
rights to have their shares registered in the future under the Securities Act,
and those holders have agreed with ARS that, except for limited private
transfers, they will not sell, transfer or otherwise dispose of any of their
shares until they have held them for at least two years.
As of December 31, 1996, options to purchase up to 1,504,500 unissued
shares, and a warrant to purchase up to 100,000 unissued shares, of Common Stock
from ARS were outstanding, of which only the warrant is currently exercisable.
The exercise prices of these securities range from $8.00 to $23.50 per share.
See "Management -- Option Grants."
Pursuant to Rule 145 under the Securities Act, the volume limitations and
certain other requirements of Rule 144 will apply to resales of the Common Stock
covered hereby by affiliates of the businesses the Company acquires for a period
of three years (or such shorter period as the SEC may prescribe). In addition,
the Company currently expects persons acquiring shares of Common Stock in this
offering to agree to hold a portion of those shares for periods of up to two
years after the date of acquisition.
The effect, if any, the availability for sale, or sale, of the shares of
Common Stock eligible for future sale will have on the market price of the
Common Stock prevailing from time to time is unpredictable, and no assurance can
be given the effect will not be adverse.
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the stock markets experience significant price and volume
volatility from time to time, which may affect the market price of the Common
Stock for reasons unrelated to the Company's performance at that time.
POTENTIAL ADVERSE EFFECTS OF AUTHORIZED PREFERRED STOCK
The Restated Certificate of Incorporation of ARS authorizes its Board of
Directors to issue, without stockholder approval, one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions and voting rights) as the Board of
Directors may determine. See "Description of Capital Stock -- Preferred
Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS
ARS has a stockholder rights plan in effect. This plan and provisions of
the Restated Certificate of Incorporation and Bylaws of ARS and the Delaware
General Corporation Law (the "DGCL") (under which ARS is organized) may have
the effect of delaying, discouraging, inhibiting, preventing or rendering more
difficult an attempt to obtain control of the Company by means of a tender
offer, business combination, proxy contest or otherwise. These provisions
include the charter authorization of "blank check" preferred stock and
classification of the Board of Directors, a Bylaw restriction on the ability of
stockholders to take actions by written consent and a DGCL provision imposing
restrictions on business combinations with certain interested parties. See
"Description of Capital Stock."
8
<PAGE>
THE COMPANY
ARS. The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and
indoor air quality systems and major home appliances. ARS was founded in October
1995 to create the leading national provider of residential services through the
implementation of both an aggressive acquisition program and a national
operating strategy. Concurrently with the closing of the IPO, ARS acquired the
seven Founding Companies in the transactions described in "Certain
Transactions -- Organization of the Company." ARS is a Delaware corporation.
Its executive offices are located at Post Oak Tower, Suite 725, 5051 Westheimer,
Houston, Texas 77056-5604, and its telephone number at that address is (713)
599-0100.
THE FOUNDING COMPANIES. The Founding Companies are General Heating & Air
Conditioning Company, Inc. ("General Heating"), Atlas Services, Inc.
("Atlas"), Service Enterprises, Inc., which does business as "Crown
Services"("Crown"), Florida Heating & Air Conditioning, Inc. (together with
its affiliated companies, "Florida HAC"), Meridian & Hoosier Heating and Air
Conditioning Company ("Meridian & Hoosier"), ADCOT, Inc., which does business
as "A-ABC Appliance"("A-ABC"), and Climatic Corporation of Vero Beach
("Climatic"). The Founding Companies have been in business an average of 31
years and provide various residential services in and around Houston (Crown and
A-ABC), the Washington-Baltimore metropolitan area and Richmond, Virginia
(General Heating), throughout South Carolina (Atlas), southeast Florida (Florida
HAC and Climatic) and central Indiana (primarily Indianapolis) (Meridian &
Hoosier).
General Heating is a leading installer of HVAC systems and equipment for
residential and light commercial construction markets in its region. It also
provides comprehensive HVAC maintenance, repair and replacement services to
those markets. Atlas is a leading provider of electric, HVAC and plumbing
installation services to residential and light commercial construction markets
throughout South Carolina. It also provides comprehensive plumbing, HVAC and
electrical maintenance, repair and replacement services. Crown is the largest
single provider of residential plumbing, HVAC and electrical maintenance, repair
and replacement services to the residential and light commercial markets in the
Houston metropolitan area, while A-ABC is among the leading providers of home
appliance, HVAC and plumbing maintenance, repair and replacement services to the
residential and light commercial markets in the greater Houston and surrounding
areas. Neither Crown nor A-ABC provides new installation services. Florida HAC
is a leading installer of HVAC systems and equipment for the residential
construction market, and a leading provider of HVAC maintenance, repair and
replacement services to the residential and light commercial markets, in
southeast Florida, including Broward, Dade and Palm Beach Counties, while
Climatic is a provider of HVAC maintenance, repair and replacement services
(including internal air quality ("IAQ") services) to the residential and light
commercial markets in the four-county area in Florida known as the Treasure
Coast region (Indian River, St. Lucie, Martin and Palm Beach Counties). Climatic
also installs HVAC systems and equipment for the residential and light
commercial construction markets. Meridian & Hoosier is a leading provider of
HVAC maintenance, repair and replacement services to the residential and light
commercial markets, and also installs HVAC systems and equipment for the
residential construction market, in central Indiana, including Indianapolis.
Meridian & Hoosier is the only Founding Company that currently maintains,
repairs and replaces commercial heating and air conditioning units in large
commercial facilities.
RECENT ACQUISITIONS. During the fourth quarter of 1996, the Company
acquired an additional 13 residential service businesses for a total
consideration of $41.6 million in cash and short-term notes (which were
subsequently repaid with proceeds from borrowings under the Credit Facility) and
1,282,910 shares of Common Stock. The companies acquired 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
9
<PAGE>
maintenance, repair and installation business in Miami also have added to these
operations. The Company has expanded its Indiana operations to include a
provider of HVAC and plumbing installation, maintenance, repair and replacement
services, an additional provider of HVAC installation, maintenance, repair and
replacement and services and a plumbing company in Indianapolis and a provider
of residential and light commercial HVAC, electrical and plumbing maintenance,
repair, replacement and installation services in Fort Wayne. It has expanded its
Houston operations with two additional providers of HVAC maintenance, repair and
replacement services and entered the Chicago area through its acquisition of a
provider of residential and light commercial HVAC maintenance, repair and
replacement services. Atlas has expanded its HVAC services with a tuck-in
acquisition, and the Company has expanded its Washington-Baltimore metropolitan
area HVAC installation, maintenance, repair and replacement services through the
addition of a Virginia-based business.
PRICE RANGE OF COMMON STOCK
The following table sets forth the range of high and low sale prices for
the Common Stock on the NYSE (as reported on the Composite Transactions
Reporting System) for the periods indicated:
HIGH LOW
--------- ---------
Year ending December 31, 1996:
3rd quarter (September 25 to
September 30).................. $ 19.625 $ 16.500
4th quarter..................... 27.125 16.625
As of December 31, 1996 there were approximately 107 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar for
the Common Stock. The number of record holders does not bear any relationship to
the number of beneficial owners of the Common Stock.
DIVIDEND POLICY
ARS has not paid or declared any dividends since the completion of the IPO
and currently intends to retain earnings to finance the expansion of its
business. Any future dividends will be at the discretion of the Board of
Directors after taking into account various factors, including, among others,
the Company's financial condition, results of operations, cash flows from
operations, current and anticipated cash needs and expansion plans, the income
tax laws then in effect, the requirements of Delaware law, the restrictions
imposed by the Credit Facility and any restrictions that may be imposed by the
Company's future credit facilities or debt instruments. The Credit Facility
prohibits the payment of dividends (except for dividends payable in Common Stock
and certain preferred stock). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Company."
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<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization as of September 30, 1996 of (i) the Company on an
historical basis and (ii) the Company on a pro forma basis as adjusted to give
effect to (a) the issuance and sale of Common Stock pursuant to the exercise of
the underwriters' overallotment option in connection with the IPO, (b) the
acquisition of 13 Acquired Businesses in the fourth quarter of 1996 and the
financing and payment of the related purchase prices, (c) the issuance of Common
Stock as part of consideration in those acquisitions and on the exercise of a
warrant and (d) the incurrence of debt in the fourth quarter of 1996. This table
should be read in conjunction with the Unaudited Pro Forma Combined Financial
Statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
SEPTEMBER 30, 1996
------------------------
PRO FORMA
HISTORICAL COMBINED
---------- ---------
(IN THOUSANDS)
Current maturities of long-term
obligations........................ $ 295 $ 295
========== =========
Long-term obligations, less current
maturities......................... 7,609 43,723
Stockholders' equity:
Preferred Stock: $0.001 par
value, 10,000,000 shares
authorized; none issued or
outstanding....................
Common Stock: $0.001 par value,
50,000,000 shares authorized;
8,449,622 shares issued and
outstanding; and 10,370,865
shares issued and outstanding,
pro forma(1)................... 8 10
Additional paid-in capital...... 81,579 118,622
Retained deficit................ (10,493) (12,027)
---------- ---------
Total stockholders'
equity.................. 71,094 106,605
---------- ---------
Total
capitalization..... $ 78,703 $ 150,328
========== =========
- ------------
(1) Excludes (i) an aggregate of 1,504,500 shares of Common Stock subject to
options outstanding under the Company's 1996 Incentive Plan and (ii) a
warrant to purchase up to 100,000 shares of Common Stock at a purchase price
of $15.00 per share, issued by ARS in connection with the Company's start-up
funding. See "Management -- Option Grants" and "Certain
Transactions -- Organization of the Company."
11
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS, with
September 30, 1996 as the effective date of the Initial Acquisitions.
Consequently, the Company's historical financial statements for periods ended on
or before September 30, 1996 are the consolidated historical financial
statements of Atlas, and the Company's consolidated historical balance sheet as
of September 30, 1996 is the consolidated historical balance sheet of Atlas, as
adjusted to give effect to the consummation of the Initial Acquisitions in
accordance with the purchase method of accounting and the closing of the IPO and
the application of its proceeds by the Company. As used in this discussion, the
"Company" means (i) Atlas prior to September 30, 1996 and (ii) ARS and its
consolidated subsidiaries on that date and thereafter. The following selected
historical financial information of Atlas as of June 30, 1994 and 1995 and
December 31, 1995, for each year in the three-year period ended June 30, 1995
and for the year ended December 31, 1995 has been derived from the audited
financial statements of Atlas included elsewhere herein. The remaining following
selected historical financial information of Atlas has been derived from
unaudited financial statements of Atlas, which have been prepared on the same
basis as the audited financial statements and, in the opinion of Atlas, reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of that information.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
----------------------------------------------------- DECEMBER 31, ---------
1991 1992 1993 1994 1995 1995 1995
--------- --------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues.............................. $ 6,037 $ 7,865 $ 10,210 $ 15,625 $ 21,229 $ 22,048 $ 15,963
Gross profit.......................... 999 1,448 2,027 2,948 3,514 4,237 3,016
Selling, general and administrative
expenses............................ 1,003 1,252 1,761 2,421 2,985 3,022 2,172
Income (loss) from operations......... (4) 196 266 527 529 1,215 844
Interest income and other expense,
net................................. 18 (3) (16) 39 179 37 41
Interest expense...................... (152) (154) (190) (129) (143) (134) (107)
Net income (loss)..................... $ (134) $ 35 $ 35 $ 267 $ 342 $ 684 $ 470
========= ========= ========= ========= ========= ============ =========
PRO FORMA COMBINED(1):
Revenues..................................................................................... $184,774
Gross profit................................................................................. 51,734
Selling, general and administrative expenses(2).............................................. 38,080
Goodwill amortization(3)..................................................................... 2,945
Operating income............................................................................. 10,709
Interest income and other expense, net....................................................... 798
Interest expense(4).......................................................................... (3,279)
Income from continuing operations............................................................ $ 4,058
============
Income per share from continuing operations.................................................. $ .39
============
Shares used in computing pro forma income per share from continuing operations(4)............ 10,371
============
</TABLE>
NINE
MONTHS
ENDED
SEPTEMBER 30
1996
------------
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues ................................................... $ 23,326
Gross profit ............................................... 4,749
Selling, general and administrative
expenses ................................................. 6,855
Income (loss) from operations .............................. (2,106)
Interest income and other expense,
net ...................................................... 167
Interest expense ........................................... (4,431)
Net income (loss) .......................................... $ (6,483)
=========
PRO FORMA COMBINED(1):
Revenues ................................................... $ 160,570
Gross profit ............................................... 45,559
Selling, general and administrative expenses ............... 33,286
Goodwill amortization(3) ................................... 2,208
Operating income ........................................... 10,065
Interest income and other expense, net ..................... 704
Interest expense(4) ........................................ (2,460)
Income from continuing operations .......................... $ 4,328
=========
Income per share from continuing operations ................ $ .42
=========
Shares used in computing pro forma income per share
from continuing operations(4) ............................ 10,371
=========
<TABLE>
<CAPTION>
SEPTEMBER
JUNE 30, 30, 1996
----------------------------------------------------- DECEMBER 31, ----------
1991 1992 1993 1994 1995 1995 HISTORICAL
--------- --------- --------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (397) $ (376) $ (575) $ (604) $ (564) $ (288) $ 4,373
Total assets..................... 3,868 3,992 4,328 6,335 7,141 7,092 98,729
Total debt, including current
portion........................ 2,688 2,423 2,486 2,846 2,530 2,371 7,904
Stockholders' equity............. 463 500 405 681 1,058 1,503 71,094
</TABLE>
SEPTEMBER
30, 1996
----------
PRO FORMA
COMBINED(1)
-----------
BALANCE SHEET DATA:
Working capital (deficit)........ $ 13,299
Total assets..................... 178,154
Total debt, including current
portion........................ 44,018
Stockholders' equity............. 106,605
(FOOTNOTES ON FOLLOWING PAGE)
12
<PAGE>
- ------------
(1) The pro forma combined statements of operations data assume the acquisition
of each of the Acquired Businesses and the IPO were closed on January 1,
1995, while the pro forma combined balance sheet data assume the following
events that occurred in the fourth quarter of 1996 occurred on September 30,
1996: (i) the issuance and sale of Common Stock pursuant to the exercise of
the underwriters' overallotment option in connection with the IPO and the
exercise of a warrant; (ii) the payment of additional working capital
adjustments in connection with the Initial Acquisitions; and (iii) the
acquisition of 13 Acquired Businesses in the fourth quarter of 1996 and the
financing and payment of the related purchase prices. The pro forma combined
financial statement data presented (i) are not necessarily indicative of the
results the Company would have obtained had these events actually occurred
when assumed or of the Company's future results, (ii) are based on
preliminary estimates of fair value, available information and certain
assumptions management deems appropriate and (iii) should be read in
conjunction with the other historical and pro forma financial statements and
notes thereto included elsewhere herein.
(2) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain
nonrecurring expenses.
(3) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(4) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Financial Information"
appearing elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from (i) owners and occupants
of homes and small commercial buildings and (ii) builders and developers of new
homes, residential developments and small commercial buildings. Cost of services
consists primarily of salaries and benefits of service and installation
technicians, parts and materials, subcontracted services, depreciation,
maintenance, fuel and equipment rentals. Selling, general and administrative
expenses consist primarily of compensation and related benefits for owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
Prior to their acquisition by ARS, the Acquired Businesses were managed as
independent private businesses, and their results of operations reflect
different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
Certain owners agreed to reductions in their compensation and benefits in
connection with the acquisition of their businesses by ARS.
ARS, which conducted no operations prior to September 27, 1996 other than
in connection with the IPO and the Initial Acquisitions, is in the process of
integrating the Acquired Businesses and their operations and administrative
functions. This integration process may present opportunities to reduce costs
through the elimination of duplicative functions and through economies of scale,
particularly in obtaining additional contracts through shared customer lists and
greater volume discounts from material suppliers, but will necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost-savings may make
comparison of historical operating results not comparable to, or indicative of,
future performance. Accordingly, neither the anticipated savings nor the
anticipated costs have been included in the unaudited pro forma financial
information presented herein.
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS and September 30, 1996 is the effective date of the
Initial Acquisitions. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas and the Company's
consolidated historical balance sheet as of September 30, 1996 is the
consolidated historical balance sheet of Atlas, as adjusted to give effect to
the consummation of the Initial Acquisitions in accordance with the purchase
method of accounting and the closing of the IPO and the application of its
proceeds by the Company. As used in this discussion, the "Company" means (i)
Atlas prior to September 30, 1996 and (ii) ARS and its consolidated subsidiaries
on that date and thereafter.
14
<PAGE>
RESULTS OF OPERATIONS -- THE COMPANY
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED JUNE 30 YEAR ENDED 30
------------------------------------------ DECEMBER 31, --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 10,210 100.0% $ 15,625 100.0% $ 22,048 100.0% $ 15,963 100.0%
Cost of services..................... 8,183 80.1 12,677 81.1 17,811 80.8 12,947 81.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,027 19.9 2,948 18.9 4,237 19.2 3,016 18.9
Selling, general and administrative
expenses........................... 1,761 17.2 2,421 15.5 3,022 13.7 2,172 13.6
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ 266 2.7 527 3.4 1,215 5.5 844 5.3
Interest income and other expense,
net................................ (16) (0.2) 39 0.2 37 0.2 42 0.3
Interest expense..................... (190) (1.9) (129) (0.8) (134) (0.6) (107) (0.7)
--------- --------- --------- --------- --------- --------- --------- ---------
Pretax income (loss)................. 60 0.6 437 2.8 1,118 5.1 779 4.9
Income taxes......................... 25 0.2 170 1.1 434 2.0 309 1.9
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... $ 35 0.4 $ 267 1.7 $ 684 3.1 $ 470 3.0
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NINE MONTHS
ENDED
SEPTEMBER
30
--------------------
1996
--------------------
Revenues............................. $ 23,326 100.0%
Cost of services..................... 18,577 79.6
--------- ---------
Gross profit......................... 4,749 20.4
Selling, general and administrative
expenses........................... 6,855 29.4
--------- ---------
Income (loss) from operations........ (2,106) (9.0)
Interest income and other expense,
net................................ 167 0.7
Interest expense..................... (4,431) (19.0)
--------- ---------
Pretax income (loss)................. (6,370) (27.3)
Income taxes......................... 114 0.5
--------- ---------
Net income (loss).................... $ (6,484) (27.8)
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $7.3 million, or 45.6%, from $16.0 million
for the nine months ended September 30, 1995 to $23.3 million for the nine
months ended September 30, 1996. The increase was attributable to several large
new installation projects and the addition of approximately $1.9 million of
revenues resulting from the acquisition of three businesses in early 1996.
COST OF SERVICES -- Cost of services increased $5.7 million, or 44.2%, from
$12.9 million for the nine months ended September 30, 1995 to $18.6 million for
the nine months ended September 30, 1996. The increase in cost of services was
consistent with the percentage increase in revenue. As a percentage of revenues,
cost of services declined 1.5% from 81.1% to 79.6% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $4.7 million, or 213.6%, from $2.2 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. This increase was primarily attributable to an
adjustment for non-recurring, non-cash compensation charges of $3.1 million
related to common stock issued to the shareholders of Enterprises Holding
Company ("EHC") in connection with the acquisition of EHC by the Company
(including a $0.3 million estimated working capital adjustment) and $0.6 million
for the issuance of 39,987 shares of Common Stock to employees, three officers
and consultants of ARS and its affiliates. The remaining increase was
attributable to added administrative staff at several operating locations, the
added administrative staff resulting from the 1996 acquisitions by the Company
and approximately $0.4 million of additional owner's compensation in 1996.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.1 million between the nine months ended September
30, 1995 and 1996.
INTEREST EXPENSE -- Interest expense increased from $0.1 million for the
nine months ended September 30, 1995 to $4.4 million for the nine months ended
September 30, 1996. This increase was attributable to (i) non-recurring,
non-cash financing charges of $4.2 million paid to the holder of EHC preferred
stock in connection with the acquisition of EHC and (ii) an increase in
outstanding debt resulting from fixed asset purchases and the acquisitions of
three businesses in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
REVENUES -- Revenues increased $6.4 million, or 41.0%, from $15.6 million
in 1994 to $22.0 million in 1995. Part of this increase was attributable to the
new operating facility in Hilton Head, South Carolina
15
<PAGE>
(opened in April 1994). The addition of several large new home builder customers
accounted for the majority of the remaining increase.
COST OF SERVICES -- Cost of services increased $5.1 million, or 40.2%, from
$12.7 million in 1994 to $17.8 million in 1995. The increase in cost of services
was consistent with the increase in revenue, and as a percentage of revenues,
cost of services declined 0.3% from 81.1% to 80.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 25.0%, from $2.4 million in
1994 to $3.0 million in 1995. As a percentage of revenues, selling, general and
administrative expenses decreased 1.8% from 15.5% in 1994 to 13.7% in 1995. The
dollar increase in selling, general and administrative expense in 1995 was
primarily attributable to the addition of an administrative infrastructure in
Hilton Head and the expansion of office space at an additional location.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net was virtually unchanged at $0.04 million in both 1994 and 1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.1
million in both 1994 and 1995.
YEAR ENDED JUNE 30, 1994 COMPARED TO YEAR ENDED JUNE 30, 1993.
REVENUES -- Revenues increased $5.4 million, or 52.9%, from $10.2 million
in 1993 to $15.6 million in 1994. Part of this increase ($1.8 million) was
attributable to the first full year of operations of the Greenville, South
Carolina location, and the addition of several large new home builder customers
accounted for the majority of the remaining increase.
COST OF SERVICES -- Cost of services increased $4.5 million, or 54.9%, from
$8.2 million in 1994 to $12.7 million in 1995. As a percentage of revenues, cost
of services increased from 80.1% in 1993 to 81.1% in 1994. The increase in cost
of services as a percentage of revenues was attributable to increased employee
turnover and under-utilization of assets at the Greenville location.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, from $1.8 million in 1994 to
$2.4 million in 1995, but decreased as a percentage of revenues from 17.2% in
1993 to 15.5% in 1994. The dollar increase in selling, general and
administrative expenses was primarily attributable to the addition of an
administrative infrastructure in Greenville.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net changed by $0.06 million from an expense of $0.02 million in 1993
to income of $0.04 million in 1994. The change primarily resulted from a $0.05
million loss on the sale of certain real estate in 1993.
INTEREST EXPENSE -- Interest expense decreased $0.1 million from $0.2
million in 1993 to $0.1 million in 1994.
RESULTS OF OPERATIONS -- UNAUDITED PRO FORMA COMBINED
The following should be read in conjunction with the Unaudited Pro Forma
Combined Financial Statements and the notes thereto included elsewhere herein,
and reference is hereby made to those financial statements and notes for
information regarding the basis of and the assumptions underlying the pro forma
results of operations.
16
<PAGE>
The following tables set forth certain selected pro forma financial data of
the Company and that data as a percentage of the Company's pro forma revenues
for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
OTHER OTHER
THE FOUNDING SUBSEQUENT
COMPANY COMPANIES METRO ACQUISITIONS
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 22,048 100.0% $ 92,588 100.0% $ 20,550 100.0% $ 49,588 100.0%
Cost of services........................ 17,811 80.8 67,409 72.8 14,367 69.9 33,453 67.5
Gross profit............................ 4,237 19.2 25,179 27.2 6,183 30.1 16,135 32.5
Selling, general and administrative
expenses.............................. 3,022 13.7 21,327 23.0 4,085 19.9 13,894 28.0
Goodwill amortization................... -- -- -- -- -- -- -- --
Income from operations.................. 1,215 5.5 3,852 4.2 2,098 10.2 2,241 4.5
Interest expense........................ (134) (0.6) (240) (0.3) (35) (0.2) (194) 0.4
Pretax income........................... 1,118 5.1 4,188 4.5 2,079 10.1 2,216 4.5
</TABLE>
YEAR ENDED DECEMBER 31, 1995
--------------------
PRO
FORMA
COMBINED
--------------------
Revenues................................ $ 184,774 100.0%
Cost of services........................ 133,040 72.0
Gross profit............................ 51,734 28.0
Selling, general and administrative
expenses.............................. 38,080 20.6
Goodwill amortization................... 2,945 1.6
Income from operations.................. 10,709 5.8
Interest expense........................ (3,279) (1.8)
Pretax income........................... 8,228 4.4
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------------------------------------------------
OTHER OTHER
THE FOUNDING SUBSEQUENT
COMPANY COMPANIES METRO ACQUISITIONS
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 23,326 100.0% $ 74,935 100.0% $ 19,383 100.0% $ 42,926 100.0%
Cost of services........................ 18,577 79.6 53,443 71.3 13,894 71.7 29,097 67.8
Gross profit............................ 4,749 20.4 21,492 28.7 5,489 28.3 13,829 32.2
Selling, general and administrative
expenses.............................. 3,826 16.4 21,852 29.2 3,888 20.0 11,449 26.7
Goodwill amortization................... -- -- 140 0.2 -- -- -- --
Income (loss) from operations........... 923 4.0 (500) (0.7) 1,601 8.3 2,380 5.5
Interest expense........................ (165) 0.7 (5,242) (7.0) (70) (0.4) (153) (0.4)
Pretax income (loss).................... 917 3.9 (5,468) (7.3) $ 1,546 8.0 2,483 5.8
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------
PRO
FORMA
COMBINED
--------------------
Revenues................................ $ 160,570 100.0%
Cost of services........................ 115,011 71.6
Gross profit............................ 45,559 28.4
Selling, general and administrative
expenses.............................. 33,286 20.7
Goodwill amortization................... 2,208 1.4
Income (loss) from operations........... 10,065 6.3
Interest expense........................ (2,460) (1.5)
Pretax income (loss).................... 8,309 5.2
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the nine months ended September 30, 1996, net cash used in operating
activities was $0.9 million, capital expenditures totaled $0.8 million and net
repayment of debt amounted to $14.7 million. The Company anticipates capital
expenditures (exclusive of acquisitions) of approximately $0.5 million during
the remainder of 1996, primarily for computer equipment, leasehold improvements
and furniture and fixtures.
On September 27, 1996, ARS completed the IPO, which involved the issuance
of 4,200,000 shares of Common Stock at a price of $15.00 per share (before
deducting underwriting discounts and commissions). On October 7, 1996, ARS sold
an additional 630,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions) pursuant to the
underwriters' overallotment option granted by ARS in connection with the IPO.
The proceeds from these transactions, net of underwriting discounts and
commissions of $1.05 per share and after deducting the expenses of the IPO, were
approximately $61.0 million. Of this amount, $34.8 million was used to fund the
cash portion of the purchase prices relating to the acquisitions of the Founding
Companies. The Company made additional aggregate payments to the former owners
of the Founding Companies of $4.7 million, representing working capital
adjustments based on the September 30, 1996 balance sheets of the Founding
Companies, pursuant to the agreements relating to the acquisitions. At September
30, 1996, approximately $3.0 million of these working capital adjustments had
been paid. The remaining balance was paid in the fourth quarter.
On September 17, 1996, the Company entered into the Credit Facility with
NationsBank. The Credit Facility provides the Company with an unsecured
revolving line of credit of up to $55 million, which may be used for general
corporate purposes, including the 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 25 basis points, depending on the ratio of the Company's
interest-bearing debt to its trailing
17
<PAGE>
earnings before interest, taxes, depreciation and amortization. At the Company's
option, the loans may bear interest based on a designated London interbank
offering rate plus a margin ranging from 75 to 175 basis points, depending on
the same ratio. 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 25 to 50 basis points per annum are payable on the unused portion of the line
of credit. The Credit Facility contains a sublimit for standby letters of credit
of up to $5.0 million. The Credit Facility also prohibits the payment of
dividends by the Company (except for dividends payable in Common Stock and
certain preferred stock), will not permit the Company to incur or assume other
indebtedness in excess of any amount equal to 5% of its consolidated net worth
and will require the Company to comply with certain financial convenants. The
Credit Facility will terminate and all amounts outstanding, if any, thereunder
will be due and payable in September 1999. The Company's subsidiaries have
guaranteed the repayment of all amounts due under the Credit Facility. As of
January 3, 1997, the Company had $50.8 million in outstanding borrowings under
the Credit Facility, bearing interest at a weighted average rate of
approximately 7.86%.
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.6 million in cash and
short-term notes and 1,282,910 shares of Common Stock. See "The
Company -- Recent Acquisitions." Funding of the cash portion of the purchase
prices (including the repayment of the short-term notes issued in connection
with two of the acquisitions) and repayment of indebtedness assumed in
connection with the acquisitions was provided by borrowings under the Credit
Facility. As of January 3, 1997, the remaining availability under the Credit
Facility was $4.2 million. While the Company believes its cash flow from
operations is sufficient to support its ongoing operations and anticipated
capital expenditures, the Company will need additional borrowing availability to
support its aggressive acquisition program. The Company has initiated
discussions with NationsBank to evaluate additional financing opportunities,
including a possible increase in the borrowing limit under the Credit Facility.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings, including the unborrowed portion of
the Credit Facility and the possible public or private sale of debt securities,
as well as issuances of additional equity.
Due to the relatively low levels of inflation experienced in 1993, 1994 and
1995 and the first nine months of 1996, inflation did not have a significant
effect on the results of any of the Acquired Businesses in those periods.
SEASONALITY
The Founding Companies have in the past experienced, and the Company
expects that it will in the future experience, quarterly fluctuations in
revenues, operating income and cash flows as a result of changes in weather
conditions. Except in Florida and South Carolina, the demand for new
installations is lower in the winter months because new construction activity is
lower as a result of colder weather. Demand for HVAC services is generally
higher in the second and third quarters.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding Atlas,
which is presented above) is derived from the respective audited financial
statements of the individual Founding Companies included elsewhere herein. The
selected historical financial information presented in the tables below for the
quarterly periods of the Founding Companies is derived from the respective
unaudited interim financial statements of the Founding Companies, which include
all adjustments the Company considers necessary for a fair presentation of the
results of operations and cash flows of those companies for those periods. The
following discussion should be read in conjunction with the separate company
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
18
<PAGE>
RESULTS OF OPERATIONS -- GENERAL HEATING
The following table sets forth certain historical selected financial data
of General Heating and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 34,642 100.0% $ 36,334 100.0% $ 35,159 100.0% $ 25,534 100.0%
Cost of services..................... 27,393 79.1 29,928 82.4 28,866 82.1 20,965 82.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 7,249 20.9 6,406 17.6 6,293 17.9 4,569 17.9
Selling, general and administrative
expenses........................... 5,011 14.5 5,245 14.4 5,280 15.0 3,902 15.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 667 2.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NINE MONTHS
ENDED
SEPTEMBER 30
--------------------
1996
--------------------
Revenues............................. $ 27,054 100.0%
Cost of services..................... 21,814 80.6
--------- ---------
Gross profit......................... 5,240 19.4
Selling, general and administrative
expenses........................... 4,512 16.7
--------- ---------
Income (loss) from operations........ $ 728 2.7
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.6 million, or 6.3%, from $25.5 million
for the nine months ended September 30, 1995, to $27.1 million for the nine
months ended September 30, 1996. This increase was attributable to a $0.6
million increase in new installation revenues, a $0.6 million increase in HVAC
replacement revenues and a $0.4 million increase in other revenues.
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) an $0.5 million adjustment to write off
certain obsolete inventory; (ii) increased depreciation on replacement of fully
depreciated trucks; (iii) an increase in payroll and related employee benefits;
and (iv) an increase in the cost of delivery of parts and materials, as the
Company's operations were spread over a larger geographic region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 4.0%, from $5.0 million in
1993 to $5.2 million in 1994. This increase was
19
<PAGE>
consistent with the percentage increase in revenues and was attributable to
increases in payroll and related employee benefits.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL HEATING
The following table sets forth selected information from General Heating
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 0.9 $ 2.1 $ 2.9 $ 1.4 $ (0.5)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) (1.2) 1.9
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.6) (4.3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ (0.4) $ (2.9)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, General Heating
generated $5.4 million in cash from operating activities and used $2.6 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $8.0 million.
Cash used in investment activities was primarily attributable to the
purchase and replacement of trucks in General Heating's fleet. In addition, in
1994, General Heating invested approximately $2.5 million in short-term
investment securities.
Cash used in financing activities consists primarily of S corporation
distributions to General Heating's stockholders.
Prior to the closing of the Initial Acquisitions, General Heating made
distributions to its stockholders in respect of its estimated S corporation
accumulated adjustment account as of the date of the closing. These
distributions (approximately $10.9 million as of September 30, 1996) were funded
primarily through working capital, cash provided by General Heating's operating
activities and short-term debt.
General Heating had working capital of $1.8 million as of September 30,
1996. It historically funded its operations with cash flows from operations.
RESULTS OF OPERATIONS -- CROWN
The following table sets forth certain historical selected financial data
of Crown and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 16,268 100.0% $ 16,844 100.0% $ 19,124 100.0% $ 14,420 100.0%
Cost of services..................... 10,332 63.5 10,314 61.2 11,333 59.3 8,603 59.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 5,936 36.5 6,530 38.8 7,791 40.7 5,818 40.3
Selling, general and administrative
expenses........................... 5,698 35.0 5,837 34.7 6,165 32.2 4,574 31.7
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 1,244 8.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
NINE MONTHS
ENDED
SEPTEMBER 30
--------------------
1996
--------------------
Revenues............................. $ 15,556 100.0%
Cost of services..................... 9,636 61.9
--------- ---------
Gross profit......................... 5,920 38.1
Selling, general and administrative
expenses........................... 4,335 27.9
--------- ---------
Income from operations............... $ 1,585 10.2
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 8.3%, from $14.4 million
for the nine months ended September 30, 1995 to $15.6 million for the nine
months ended September 30, 1996. This increase was attributable to increases of
$0.6 million each in plumbing and HVAC revenues.
20
<PAGE>
COST OF SERVICES -- Cost of services increased $1.0 million, or 11.6%, from
$8.6 million for the nine months ended September 30, 1995 to $9.6 million for
the nine months ended September 30, 1996, and increased as a percentage of
revenues from 59.7% in the nine months ended September 30, 1995 to 61.9% in the
nine months ended September 30, 1996. The increase in cost of services as a
percentage of revenue was primarily attributable to a reduction in the pricing
of services in order to increase market share.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.3 million, or 6.5%, from $4.6 million for
the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996, but declined as a percentage of revenues from 31.7% in
the nine months ended September 30, 1995 to 27.9% in the nine months ended
September 30, 1996. This percentage reduction was primarily attributable to a
$0.3 million reduction in owner compensation.
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.3 million, or 13.7%, from $16.8 million
in 1994 to $19.1 million in 1995. The increase in revenues was primarily
attributable to increases of $1.3 million and $0.9 million in HVAC revenues and
plumbing revenues, respectively.
COST OF SERVICES -- Cost of services increased $1.0 million, or 9.7%, from
$10.3 million in 1994 to $11.3 million in 1995, but decreased as a percentage of
revenues from 61.2% in 1994 to 59.3% in 1995. The percentage decrease was
attributable to a change in the mix of services provided from lower-margin
services to higher-margin services and an increase in the use of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ -- $1.0 $ 1.0 $ (0.3) $ (1.8)
========= ==== ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
21
<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.
22
<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.
23
<PAGE>
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.0 million, or 24.7%, from $8.1 million in
1994 to $10.1 million in 1995. The increase in revenues was primarily
attributable to increased residential equipment replacement sales of
approximately $1.2 million and the start-up of a new construction division.
COST OF SERVICES -- Cost of services increased $1.5 million, or 25.9%, from
$5.8 million in 1994 to $7.3 million in 1995 and was consistent with the
increase in sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.3 million, or 15.0%, from $2.0 million in
1994 to $2.3 million in 1995. This increase resulted from increased marketing
efforts to improve market share.
LIQUIDITY AND CAPITAL RESOURCES -- MERIDIAN & HOOSIER
The following table sets forth selected information from Meridian &
Hoosier's statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- -------------------
1994 1995 1995 1996
--------- --------- --------- --------
(UNAUDITED)
Net cash provided by operating
activities......................... $ 0.4 $ 0.7 $ 0.3 $ 0.9
Net cash used in investing
activities......................... (0.5) (0.2) (0.1) (1.1)
Net cash provided by (used in)
financing activities............... 0.3 (0.1) (0.1) 0.8
--------- --------- --------- --------
Net increase (decrease) in cash and
cash equivalents................... $ 0.2 $ 0.4 $ 0.1 0.6
========= ========= ========= ========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment and the acquisition
in 1996 of Sagamore. Net cash provided by (used in) financing activities
resulted from borrowing and repayments of long-term obligations and capital
lease obligations.
Meridian & Hoosier had working capital of $0.6 million as of September 30,
1996. It historically funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder.
RESULTS OF OPERATIONS -- A-ABC
The following table sets forth certain historical selected financial data
of A-ABC and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 10,900 100.0% $ 8,676 100.0% $ 8,707 100.0% $ 6,534 100.0%
Cost of services..................... 6,921 63.5 5,574 64.2 5,709 65.6 4,314 66.0
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,979 36.5 3,102 35.8 2,998 34.4 2,220 34.0
Selling, general and administrative
expenses........................... 2,830 26.0 2,444 28.2 2,348 27.0 1,722 26.4
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.... $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 498 7.6
========= ========= ========= ========= ========= ========= ========= =========
Loss from discontinued operations.... $ (1,452) $ (142) $ (115) $ (54)
========= ========= ========= =========
</TABLE>
NINE MONTHS
ENDED
SEPTEMBER 30
--------------------
1996
--------------------
Revenues............................. $ 6,855 100.0%
Cost of services..................... 3,733 54.4
--------- ---------
Gross profit......................... 3,121 45.5
Selling, general and administrative
expenses........................... 2,084 30.4
--------- ---------
Income from continuing operations.... $ 1,037 15.1
========= =========
Loss from discontinued operations.... $ (271)
=========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.4 million, or 6.1%, from $6.5 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily attributable to
a $0.2 increase in HVAC installations and a $0.1 million increase in appliance
service.
24
<PAGE>
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees
resulting in reduced labor costs as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million or 23.5%, from $1.7 million for
the nine months ended September 30, 1995 to $2.1 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues remained constant at $8.7 million for 1994 and 1995.
COST OF SERVICES -- Cost of services increased $0.1 million, or 1.8%, from
$5.6 million in 1994 to $5.7 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to a
decrease of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million to $5.6 million in 1994 and was consistent as a percentage of
revenue with the reduction in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.4 million, or 14.3%, from $2.8 million in
1993 to $2.4 million in 1994. This decrease resulted from a $0.4 million
reduction in advertising expense.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- Loss from discontinued
operations decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993
to a $0.1 million loss for 1994. The decrease in the loss was primarily
attributable to reductions of $0.6 million, $0.1 million and $0.3 million in
salary and benefit cost, rent and property tax expense and advertising expense,
respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
Net cash provided by operating
activities......................... $0.8 $0.3 $0.6 $ 0.1 $ 0.5
Net cash provided by (used in)
investing activities............... (1.2) 0.2 (0.4) (0.2) (0.6)
Net cash used in financing
activities......................... 0.4 (0.4) (0.1) 0.0 (0.1)
---- ---- ---- ----- -----
Net increase (decrease) in cash and
cash equivalents................... $0.0 $0.1 $0.1 $(0.1) $(0.2)
==== ==== ==== ===== =====
From 1993 through the nine months ended September 30, 1996, A-ABC generated
$2.2 million in net cash from operating activities.
Cash used in investment activities was primarily attributable to purchasing
additional trucks and the net change in the cash provided by (used in)
discontinued operations.
Cash used in financing activities consisted primarily of S corporation
distributions to the Company's sole shareholder and net borrowings and
repayments of long-term obligations.
A-ABC had a working capital deficit of $1.2 million at September 30, 1996.
It historically funded its operations with cash flows from operations and
borrowings from lenders and its shareholder.
25
<PAGE>
BUSINESS
GENERAL
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and IAQ
systems and major home appliances. ARS was founded in October 1995 to create the
leading national provider of these services primarily in homes and small
commercial buildings, including those under construction. To achieve this goal,
the Company has embarked on an aggressive acquisition program and has
implemented a national operating strategy to increase internal growth and
capitalize on cost efficiencies.
On September 27, 1996, ARS acquired the Founding Companies simultaneously
with the closing of the IPO. See the "Company -- Founding Companies." During
the year ended December 31, 1995, the Company's pro forma combined revenues
attributable to the Founding Companies totaled $114.6 million, of which
maintenance, repair and replacement services accounted for approximately 48% and
new installation services accounted for approximately 52%. During the fourth
quarter of 1996, the Company acquired an additional 13 residential services
businesses. With the inclusion of those acquisitions, maintenance, repair and
replacement services currently account for approximately 55% of the Company's
total revenues and new installation services currently account for approximately
45%. The Company believes the profitability of its maintenance, repair and
replacement business benefits from its installation services operations as a
result of (i) the significant volume of purchases of HVAC systems for its
high-volume installation services and (ii) the addition of new customer and
equipment information in the Company's marketing database. This database
provides the Company with valuable information that can be used to expand the
Company's future residential services revenue base. In addition, new
installation services provide the Company with cooperative advertising credits
from the HVAC system manufacturers which it uses for promoting its maintenance,
repair and replacement services for residential HVAC systems. Through leveraging
these benefits, acquiring new service companies and internal development, the
Company intends to emphasize the growth of its higher-margin maintenance, repair
and replacement services business.
INDUSTRY OVERVIEW
The Company believes, on the basis of information provided by its
operational management and available industry data, the HVAC, plumbing and
electrical industries in the United States represent an annual market in excess
of $40 billion, of which maintenance, repair and replacement services account
for in excess of $25 billion. It also believes this market is served by over
50,000 companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It believes the majority of owners in its industry have limited access
to adequate capital for modernization, training and expansion and limited
opportunities for liquidity in their businesses.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service technicians and providing a full complement of
high-quality residential services in an industry that has been characterized by
inconsistent quality, reliability and pricing. It also believes the highly
fragmented nature of the residential services industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to achieve its goal of becoming the leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a national operating
strategy that enhances internal revenue growth and profitability and achieves
cost efficiencies.
GROWTH THROUGH ACQUISITION. The Company has implemented an aggressive
acquisition program targeting large metropolitan and high-growth suburban areas
with attractive residential demographics. The
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Company's acquisition strategy involves entering new geographic markets and
expanding within existing markets.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential services and having the
critical mass necessary to be a core business with which other
residential service operations can be consolidated. An important
criterion for these acquisition candidates is superior operational
management personnel, whom the Company generally seeks to retain.
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it will seek to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and range of services it offers in that market. The
Company also will pursue "tuck-in" acquisitions of smaller
residential services companies whose operations can be incorporated
into the Company's existing operations without any significant
increase in infrastructure.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The Company has
implemented a national operating strategy employing "best practices"designed
to increase internal growth and profitability through enhanced operations and
the achievement of cost efficiencies.
o INTERNAL GROWTH. The Company continually reviews its operations at
the local and regional operating levels in order to identify certain
"best practices" that will be implemented throughout its operations.
For example, the Company intends to provide 24-hour emergency service
at each of its locations and to monitor service call quality by
attempting to contact each of its service customers promptly following
a service call. In addition, the Company is developing a national
training program to improve and keep current the technical, selling
and customer relations skills of its service technicians. The Company
intends to use specialized computer technology at each of its
locations to improve communications, vehicle dispatch and service
quality and responsiveness. Management believes these practices will
enable the Company to provide superior customer service and maximize
sales opportunities. This service-oriented strategy will also allow
the Company to reinforce its brand image at the local level while
fostering its efforts to develop a national brand name.
o COST EFFICIENCIES. The Company believes it should be able to reduce
the total operating expenses of acquired businesses by eliminating
duplicative administrative functions in tuck-in acquisitions and
consolidating certain functions performed separately by each business
prior to its acquisition. In addition, the Company believes that, as a
large, national residential services company, it should experience
reduced costs (as a percentage of revenues) compared to those of
individual acquired businesses in such areas as: the purchase of
equipment for resale, service vehicles, parts and tools; vehicle and
equipment maintenance; financing arrangements; employee benefits; and
insurance and bonding.
ACQUISITION STRATEGY
Given the large size and fragmentation of the residential services
industry, the Company believes there are numerous potential acquisition
candidates both within the markets currently served by the Company and in other
large metropolitan and high-growth suburban markets. The Company has implemented
an aggressive acquisition program to expand into these new markets and to
enhance its position in existing markets.
In new markets, the Company targets for acquisition one or more leading
local or regional residential services companies. Generally, these companies are
run by successful entrepreneurs whom the Company endeavors to retain and are of
sufficient size to provide the basis for future Company expansion within a given
market. Through implementation of its national operating strategy, the Company
seeks to aid the acquired companies (operating on a decentralized basis) in
increasing their revenues and improving their profitability. Once the Company
has entered a market, it seeks to acquire other residential services providers
in order to expand its share of that market and increase the range of services
offered in that market. Some of
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the acquisitions within existing markets are large enough to warrant their own
operating and management structure while other acquisitions are small enough to
be folded into an existing operation without significantly increasing the
Company's infrastructure. If an acquisition is large enough to warrant its own
operating structure, the Company seeks to develop a regional operating plan
whereby these companies can benefit from regional operating efficiencies such as
shared marketing efforts, centralized maintenance, local purchasing power,
expanded service line management expertise and other economies of scale.
Each 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 operational management and service
technicians, the amount, type and condition of their equipment and facilities
and their operating histories. The Company believes there are numerous
acquisition candidates that meet the Company's acquisition criteria.
The Company believes it is regarded by many owners of residential services
businesses as an attractive acquiror because of: (i) the Company's strategy for
creating a large, professionally managed company with national name recognition
and a reputation for quality service and customer satisfaction; (ii)
management's experience in consolidations; (iii) the Company's decentralized
operating strategy; (iv) the Company's increased visibility and access to
financial resources as a public company; (v) the potential for increased
profitability due to centralized administrative functions, enhanced systems
capabilities and access to increased marketing resources; and (vi) depending on
the size of the acquisition, the ability of the business being acquired to
participate in the Company's growth and expansion, while realizing liquidity.
The Company has analyzed various data on the residential services industry
and individual businesses within the industry and believes it is well-positioned
to implement its acquisition program. On the basis of the Company's experience
in connection with the acquisitions of the Acquired Businesses, the Company
believes its operational management will be instrumental in identifying and
completing future acquisitions. Several of these executives have had leadership
roles in both national and regional residential services trade associations,
which have allowed these principals to become personally acquainted with other
owners of residential services businesses across the country. The Company
believes that the visibility of these individuals within these associations will
increase the industry's awareness of the Company and its acquisition program,
thereby attracting interest from owners of other residential services companies.
In addition, several members of the Company's executive management team have
worked together for a number of years and have significant experience in
negotiating, closing and integrating acquisitions in various industries. The
timing, size and success of the Company's acquisition efforts and the associated
potential capital commitments cannot be readily predicted.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors being historical operating results, the future prospects of the business
to be acquired and the ability of that business to complement the services
offered by the Company. See "Risk Factors -- Dependence on Acquisitions for
Growth," " -- Need for Additional Financing" and " -- Potential Effect of
Shares Eligible for Future Sale on Price of Common Stock."
SERVICES PROVIDED
The Company provides a variety of maintenance, repair and replacement
services for HVAC, plumbing, electrical and other systems in homes and small
commercial buildings. It also installs such operating systems in new homes and
small commercial buildings under construction. The Company's maintenance, repair
and replacement services include: checkups, cleaning, repair and replacement of
HVAC systems and associated parts; maintenance, repair and replacement of
electrical switches, outlets, lines, panels and fixtures; repair and replacement
of bathroom fixtures, water filters and water heaters; cleaning, repair and
replacement of pipes, sewer lines and residential sanitary systems; and
maintenance, repair and replacement of other residential systems, including home
appliances. 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, it installs complete central heating and air
conditioning systems, electrical systems, plumbing systems and other systems in
newly constructed homes and small commercial buildings.
The following table shows, by region, the range of maintenance, repair and
replacement services and new installation services provided by the Company as of
the date of this Prospectus.
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
MAINTENANCE, REPAIR AND REPLACEMENT
SERVICES:
Houston Metropolitan Area............ X X X X
Washington-Baltimore Metropolitan
Area and
Richmond, Virginia................. X
Chicago.............................. X
Raleigh/Durham, North Carolina....... X
South Carolina....................... X X X
Southeast Florida.................... X X
Indiana (Indianapolis and Fort
Wayne)............................. X X X
NEW INSTALLATION SERVICES:
Washington-Baltimore Metropolitan
Area and
Richmond, Virginia................. X X
Raleigh/Durham, North Carolina....... X
South Carolina....................... X X X
Southeast Florida.................... X X
Indiana (Indianapolis and Fort
Wayne)............................. X X X
An important element of the Company's growth strategy is to increase the
range of residential services, particularly the maintenance, repair and
replacement services it provides, in each of its regions through acquisitions
and internally generated growth. Accordingly, the mix of services reflected in
the foregoing table is expected to change over time as the Company implements
its growth strategy. In addition, the Company intends to provide a full range of
these services in new geographic areas into which it will expand, principally by
acquisitions. See " -- Business Strategy."
One strategy by which the Company will attempt to increase the reach of its
residential services is through the utilization of its ARS Energy Services
Company ("ARS Energy") subsidiary. This subsidiary has been organized for the
purpose of formulating and implementing strategic alliances with major national
and regional companies that may be able to integrate the Company's residential
services with their own products or services and thereby make the Company's
services available to their customers. These participants may include utilities,
equipment manufacturers, home remodeling companies, home supply distributors,
realtors, insurance companies, restaurant chains and other multi-location
retailers.
Meridian & Hoosier is the only one of the Acquired Businesses that
currently maintains, repairs and replaces commercial heating and air
conditioning units in large commercial facilities. As a result of acquisitions
or otherwise, the Company's provision of these and other services to such
facilities may be expanded.
OPERATIONS
The Company operates on a decentralized basis, with the management of each
operating location responsible for its day-to-day operations, profitability and
growth. Local management is supported by the Company's marketing and advertising
strategies and programs and is provided support in developing optimal pricing
strategies. Financial resources for improved systems and expansion of services,
training programs, financial controls, purchasing information and operating
expertise is shared among locations to
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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 services under
the Company's monitoring service contracts, requests for service under the
Company's warranty service contracts and requests for emergency or other
services not under contract. A substantial majority of these service calls are
for emergency or other services not under contract. Service calls cover a wide
variety of services, including the replacement of entire HVAC systems. Service
histories on past customers are generally available to the customer service
representatives in a continuously updated computer database matched to addresses
in the local service area.
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. Typically, new installation
service begins with the customer providing the architectural plans or mechanical
drawings for the particular home or an entire tract of homes or other facility
to be constructed and either requesting a bid or entering into direct
negotiation for the work required. The Company's new installation personnel
analyze the plans to determine the labor, materials and equipment type and size
required for the installation of the system specified, price the job and either
bid for or negotiate the written contract for the job. In HVAC installations,
most of the required air ducts are fabricated and, together with the other
equipment to be installed, partially pre-assembled in the Company's facilities
and readied for delivery to the job site. The equipment and supplies necessary
for the particular job are ordered from the suppliers or manufacturers, and
delivery generally is timed according to the builder's schedule. The
installation work is coordinated with the builder's construction supervisors.
Scheduled draw payments for these services generally are obtained within 30 days
of completing the installation, at which time any mechanics' and materialmen's
liens securing the rights to such payments are released. Interim payments are
often obtained to cover the Company's labor and materials costs on large
installation projects.
Except for the air ducts fabricated by the Company for use in its
installation services operations, substantially all the equipment and component
parts the Company sells or installs are purchased from manufacturers and other
outside suppliers. As a result of the implementation of its operating
strategies, the Company has begun to consolidate the number of manufacturers and
other outside suppliers from which it obtains equipment and other items. The
Company is not, however, materially dependent on any of these outside sources.
See " -- Sources of Supply."
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SALES AND MARKETING
The Company believes that, in each of its current geographic markets, it
has well-known and established businesses that, other than in Chicago, are
leading providers of one or more residential services in their markets. The
Company intends to build on this foundation through the use of advertising to
expand name recognition and the adoption of best practices to increase the
quality of services provided. For example, the Company 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 the these companies for the quality of the services
they offer in their local areas. The Company expects for the foreseeable future
to retain the trade names and service marks of these companies in its
advertising and promotional materials in their local areas, but intends over
time to promote and establish the Company's name and service marks nationally.
See " -- Intellectual Property."
The Company also views its existing service contracts as an important way
of retaining its customer base. The Company has several general types of service
contracts: "maintenance and repair" contracts whereby the Company maintains
and repairs selected residential HVAC, plumbing, electrical and other systems
for a period of time for a fixed fee and "maintenance only" or "repair only"
contracts whereby the Company makes periodic inspections of a residential system
and provides certain preventative maintenance for a period of time for a fixed
fee. The Company believes that such service contracts provide the Company with
flexibility in determining the timing for delivery of its services, thereby
generating greater stability in the level of demand for services throughout
different seasons of the year. See " -- Seasonality." Certain states regulate
the provision of service under residential services warranty contracts. See
" -- Governmental Regulation and Environmental Matters."
With respect to its new installation business, the Company's marketing
strategy focuses on cultivating long-term relationships with its national,
regional and local home builder and general contractor customers. The Company's
marketing efforts with these customers primarily involve direct sales contacts
emphasizing the Company's quality of services and reliability. In addition,
labels with the Company's name and phone number are applied to newly installed
equipment, and direct telemarketing sales efforts for service contracts are
timed to closely coincide with the expiration of manufacturer warranties on
Company installed equipment. Therefore, the Company believes new installation
business generally leads to maintenance, repair and replacement business.
The Company has numerous customers. No single customer accounted for more
than 10% of the Company's revenues during fiscal 1995.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all service technicians it uses meet safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company reviews prospective permanent service
technicians to ensure they are trained thoroughly in their trades, the Company's
procedures and customer satisfaction standards, possess the required trade
licenses and have acceptable driving records.
The Company has developed continuous training programs to provide initial,
refresher and upgrade training programs to trainees, apprentices and service and
installation technicians. These programs typically are presented by the
Company's senior master plumbers, electricians, heating and air conditioning
service technicians and safety supervisors. For example, in Houston, the Company
operates a 150-seat classroom and training facility incorporating "hands on"
training stations where service personnel, apprentices and
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new trainees can work on functioning HVAC, plumbing, electrical and other
systems under the supervision of skilled tradesmen. A safety supervisor at this
facility conducts both initial and continuous comprehensive training classes for
all personnel and works with operating management to observe and evaluate safety
procedures in an effort to constantly improve the effectiveness of the Company's
safety programs.
VEHICLES AND FACILITIES
The Company operates a fleet of owned or leased service trucks, vans and
support vehicles in its operations. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the Company's
current operations.
The Company owns certain of its facilities and leases the remainder of its
facilities under leases with remaining terms ranging from several months (in the
case of certain facilities being consolidated with others) to 10 years on terms
the Company believes to be commercially reasonable. Some of these leases are
with officers and directors of the Company who became associated with the
Company in connection with the Acquired Businesses. See "Certain
Transactions -- Real Estate and Other Transactions." Total rental expense for
the facilities leases of the Founding Companies in fiscal 1995 (excluding
certain discontinued retail appliance operations) was approximately $1.6
million.
The Company's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company's principal operating
facilities include (i) a 60,000 square foot facility owned by the Company and
located in Houston, Texas, which is the primary base for the Company's Houston
operations, (ii) a 36,000 square foot leased facility in Manassas, Virginia,
which serves as the principal fabrication and production facility for General
Heating, (iii) a 36,000 square foot leased facility in Savage, Maryland, which
serves as a distribution, fabrication, production and administrative facility
for General Heating, (iv) a 68,000 square foot leased facility in Raleigh, North
Carolina, which is the principal operating base for Metro, (v) a 62,500 square
foot leased facility in Charleston, South Carolina, which is the headquarters
for Atlas, (vi) a 29,000 square foot leased facility in Margate, Florida, which
serves as the principal office and fabrication facility for Florida HAC and
(vii) a 20,000 square foot leased facility in the West Palm Beach, Florida area,
which is the operational base for Sasso. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
The Company leases its principal executive and administrative offices in
Houston, Texas.
INTELLECTUAL PROPERTY
The Company owns various trademarks, service marks and trade names, which
it uses in its local operations, advertising and promotions. It is expected
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. The Company
is implementing certain uniform service names and markings for use on its
vehicles and in its advertising and promotional materials. See
"Business -- Sales and Marketing."
EMPLOYEES
As of December 31, 1996, the Company had approximately 2,200 employees. As
it implements its internal growth and acquisition strategies, the Company
expects that the number of employees will increase. The Company is not a party
to any collective bargaining agreements. The Company has not experienced any
strikes or work stoppages and believes its relationship with its employees is
good.
The residential services business is characterized by, among other things,
high turnover rates among service technicians. A substantial majority of the
service technician turnover experienced by the Acquired Businesses in recent
years has been during the extended screening period in the first year of
employment. The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians and
operational management personnel. One way by which the Company hopes to attract,
retain and motivate such personnel is by offering them a more comprehensive
benefits
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package at less cost to the employee than is typical in the industry. The
Company is able to offer such a package in a cost effective manner because of
the large number of persons it employs.
SOURCES OF SUPPLY
The raw materials used in the Company's operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain raw materials through volume
purchases. The Company does not currently have any significant company-wide
contracts relating to the supply of equipment or materials. The Company has not
experienced any significant difficulty in obtaining adequate supplies to conduct
its operations.
SEASONALITY
The Company's installation, maintenance, repair and replacement operations
are subject to different seasonal variations in the different lines of service.
Except certain areas in the southern United States, the demand for new
installations is lower during the winter months because new construction
activity is lower as a result of colder weather. Demand for HVAC services is
generally higher in the second and third quarters. Accordingly, the Company
expects its revenues and operating results generally will be correspondingly
lower in its first and fourth quarters.
COMPETITION
The market for residential services is highly competitive. The Company
believes that the principal competitive factors in the residential services
industry are (i) timeliness, reliability and quality of services provided, (ii)
range of services provided, (iii) market share and visibility and (iv) price.
The Company believes its strategy of creating a leading national provider of
comprehensive residential services directly addresses these factors. The ability
of the Company to recruit, train and retain highly motivated service technicians
to provide quality services should be enhanced by its ability to utilize
professionally managed recruiting and training programs. In addition, the
Company offers compensation, health and savings benefits that are more
comprehensive than most offered in the industry. See "-- 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, many homeowners have
traditionally relied on individual persons or small repair service firms with
whom they have long-established relationships for a variety of home repairs. The
Company believes there are currently only three public companies, Chemed
Corporation (through a subsidiary, Roto-Rooter, Inc.), Service Experts, Inc. and
Baltimore Gas & Electric Company (through a subsidiary), focused on providing
residential services in some of the same services lines provided by the Company.
There are a number of national chains, such as Home Depot, Sears and Builders
Square, that sell a variety of plumbing fixtures and equipment, and heating and
air conditioning equipment for residential use and offer, either directly or
through various subcontractors, installation, warranty and repair services.
Other companies or trade groups engage in franchising their names and marketing
programs in some residential services lines. In the future, competition may be
encountered from, among others, other public residential service companies with
aggressive acquisition programs, the unregulated business segments of regulated
gas and electric utilities or from newly deregulated utilities in those
industries entering into various residential service areas. Certain of the
Company's competitors and potential competitors have greater financial resources
than the Company to finance residential services acquisition and development
opportunities, to pay higher prices for the same opportunities or to develop and
support their own residential services operations if they decide to enter the
business.
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GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their respective
trades, (ii) building, HVAC, plumbing and electrical codes and zoning
ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and protection
of the environment.
The Company believes it has all required permits and licenses to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services trades require various permits and licenses to be held by individuals.
In some cases, a required permit or license held by a single individual may be
sufficient to authorize specified activities for all the Company's service
technicians who work in the geographic area covered by the permit or licenses.
The Company 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. A significant
proportion of the vehicles in the Crown fleet that are currently in service have
been converted to use either CNG or gasoline. The Company does not anticipate
that the cost of additional fleet conversion that may be required under current
laws will be material. Future costs of compliance with these laws will be
dependent upon the number of vehicles purchased in the future for use in the
covered geographic regions, as well as
34
<PAGE>
the number and size of future business acquisitions by the Company in these
regions. The Company cannot determine to what extent its future operations and
earnings may be affected by new regulations or changes in existing regulations
relating to vehicle emissions.
Prior to entering into the agreements relating to the Acquired Businesses,
the Company evaluated the properties to be acquired and property leases to be
assumed in the Acquired Businesses, and engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions at
certain properties owned or operated by the Acquired Businesses. No material
environmental problems were discovered in these reviews, and the Company is not
otherwise aware of any actual or potential environmental liabilities of the
Acquired Businesses that would be material to the Company. The Company in the
process of implementing various programs to promote compliance with applicable
health and worker safety regulations and to increase employee safety awareness.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1995 were not material. The Company does not
currently anticipate any material adverse effect on its business or consolidated
financial position as a result of future compliance with existing environmental
laws and regulations controlling the discharge of materials into the
environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may be
material.
LITIGATION AND INSURANCE
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. The Company is
not currently involved in any litigation the Company believes will have a
material adverse effect on its financial condition or results of operations.
The Company maintains various worker safety and quality control programs in
an attempt to reduce the risk of potential damage to persons and property. In
addition, the Company maintains insurance in such amounts and against such risks
as it deems prudent. No assurance can be given such insurance will be sufficient
under all circumstances to protect the Company against significant claims for
damages. The occurrence of a significant event not fully insured against could
materially and adversely affect the Company's financial condition and results of
operations. Moreover, no assurance can be given the Company will be able to
maintain adequate insurance in the future at commercially reasonable rates or on
acceptable terms.
35
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer of ARS (ages are as of December 31, 1996):
NAME AGE POSITION
- ----------------------------- --- ----------------------------------------
C. Clifford Wright, Jr....... 44 Director(1)(2), President and Chief
Executive Officer
Howard S. Hoover, Jr......... 58 Director(1)(2)(3) and Chairman of the
Board
Gorden H. Timmons............ 47 Director(1) and Chief Operating Officer
William P. McCaughey......... 38 Director(2), Executive Vice President
and Chief Financial Officer
John D. Held................. 34 Senior Vice President, General Counsel
and Secretary
Frank N. Menditch............ 45 Director(3); President of General
Heating
Elliot Sokolow............... 54 Director(3); President of Florida HAC
A. Jefferson Walker III...... 34 Treasurer
Michael Mamaux............... 30 Controller
Thomas N. Amonett............ 54 Director(4)(5)
Robert J. Cruikshank......... 66 Director(2)(4)
Randall B. Hale.............. 34 Director(4)
Nolan Lehmann................ 52 Director(5)
Don D. Sykora................ 66 Director(1)(5)
- ------------
(1) Member of the Board's Executive Committee.
(2) Member of the Board's Nominating Committee.
(3) Member of the Board's Industry Relations Committee.
(4) Member of the Board's Audit Committee.
(5) Member of the Board's Compensation Committee.
C. CLIFFORD WRIGHT, JR. has been President and Chief Executive Officer and
a director since November 1995. From 1991 to 1995, Mr. Wright was Vice President
and Chief Financial Officer of American Ecology Corporation. From 1990 to 1991,
Mr. Wright was a Director of Corporate Finance with KPMG Peat Marwick. Prior
thereto, he was a divisional vice president in finance and planning of
Browning-Ferris Industries, Inc. ("BFI"). Mr. Wright is a Certified Public
Accountant.
HOWARD S. HOOVER, JR. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by BFI and served during his
tenure as a director and in various management capacities as a member of the
Senior Management Committee, Senior Vice President, General Counsel and
Secretary. From 1992 until 1995, Mr. Hoover was engaged in various business
development and consulting activities.
GORDEN H. TIMMONS has served as Chief Operating Officer and a director
since September 1996. He founded Atlas in 1976 and served as its President until
September 1996. Mr. Timmons was a founder of the Charleston Chapter of the Air
Conditioning Contractors of America ("ACCA") and is a past President of that
Chapter. Mr. Timmons has been active in computer systems development for HVAC
companies and is a frequent speaker at national industry conventions.
WILLIAM P. MCCAUGHEY has been Executive Vice President and Chief Financial
Officer since October 1996. He served as Executive Vice President -- Planning
and Development from November 1995 until October 1996. Mr. McCaughey has been a
director since November 1995. From 1992 to 1995, Mr. McCaughey was Treasurer of
American Ecology Corporation. From 1991 to 1992, he was President of
Environmental Financial Services, Inc., a research and consulting firm. He
served as Vice President and Corporate Treasurer of Republic Waste Industries,
Inc. from 1990 to 1991 and, prior thereto, was employed by BFI in several
financial positions from 1982 to 1990. Mr. McCaughey is a Chartered Financial
Analyst.
36
<PAGE>
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
since March 1996. From October 1995 to March 1996, he was an associate at the
law firm of Liddell, Sapp, Zivley, Hill and LaBoon, LLP. Mr. Held was Associate
General Counsel of American Ecology Corporation from 1994 to 1995 and was an
associate at the law firm of Baker & Botts, L.L.P. prior thereto.
FRANK N. MENDITCH has been a director since September 1996. He has been
President of General Heating for more than the past five years. Mr. Menditch is
a past president of the National Capital Chapter of ACCA and of the Metro
Washington Heat Pump Association.
ELLIOT SOKOLOW has been a director since September 1996. He was a founder
of Florida HAC in 1970 and has served as its president since 1977. Mr. Sokolow
served as national President of ACCA in 1992 and 1993 and is the President-Elect
of the Florida Air Conditioning Contractors Association.
A. JEFFERSON WALKER III joined the Company in April 1996 as Treasurer and
was a consultant to the Company from January 1996 to March 1996. From 1993 to
January 1996, he was employed by American Ecology Corporation as a
Manager-Financial Analysis and Assistant Treasurer. From 1990 to 1993, Mr.
Walker served as a Senior Financial Analyst and Assistant Banking Officer of
Mellon Bank Corporation in Houston, Texas. Mr. Walker was a financial analyst at
BFI from 1988 to 1989.
MICHAEL MAMAUX joined the Company in April 1996 as Controller. From 1995
until April 1996, Mr. Mamaux was an assistant corporate controller at U.S.
Delivery Systems, Inc. Prior thereto, he was a Senior Auditor at Arthur Andersen
LLP. Mr. Mamaux is a Certified Public Accountant.
THOMAS N. AMONETT has been a director since September 1996. He has served
as President and a director of Reunion Resources Company (previously known as
Buttes Gas and Oil Company), a Houston-based company primarily engaged in
manufacturing high volume, precision plastic products; providing engineered
plastic services; oil and gas exploration, development and production; and wine
grape vineyard development, since 1992 and as acting Chief Executive Officer of
Weatherford Enterra, Inc. since July 1996. Previously, he was Of Counsel with
the law firm of Fulbright & Jaworski L.L.P. from 1986 to 1992. Prior thereto, he
was President and a director of Houston Oil Fields Company, an oil and gas
exploration and production company, from 1982 to 1986. Mr. Amonett also
currently serves as a director of Air-Cure Technologies, Inc., PetroCorp
Incorporated and Weatherford Enterra, Inc.
ROBERT J. CRUIKSHANK has been a director since September 1996. He is
primarily engaged in managing his personal investments in Houston. Prior to his
retirement in 1993, he was a Senior Partner in the accounting firm of Deloitte &
Touche. Mr. Cruikshank serves as a director of Houston Industries Incorporated,
MAXXAM Inc., Kaiser Aluminum Corporation, Compass Bank-Houston and Texas
Biotechnology Corporation.
RANDALL B. HALE has been a director since September 1996. He has been a
Vice President of Equus Capital Management Corporation ("ECMC") and Equus II
Incorporated ("Equus II") (see "Certain Transactions" and "Security
Ownership of Certain Beneficial Owners and Management") since 1992 and a
director of ECMC since February 1996. Mr. Hale currently serves as an officer or
director of several private businesses. From 1985 to 1992, he was employed by
Arthur Andersen LLP. Mr. Hale is a Certified Public Accountant. Mr. Hale was
appointed to the Board of Directors pursuant to the funding agreement between
ARS and Equus II (the "Equus Funding Agreement"), which terminated pursuant to
its terms on completion of the IPO. See "Certain Transactions -- Organization
of the Company."
NOLAN LEHMANN has been a director since September 1996. He has been the
President of ECMC since its formation in 1983 and of Equus II since its
formation in 1991 (see "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"). Prior thereto, Mr. Lehmann was
employed by Service Corporation International, where he held various positions,
including vice president -- regional manager and vice president -- corporate
development. Mr. Lehmann currently serves as a director of a number of public
and private companies, including Allied Waste Industries, Inc., Champion
Healthcare Corporation, Drypers Corporation and Garden Ridge Corporation. Mr.
Lehmann is a Certified Public Accountant. Mr. Lehmann was appointed to the Board
of Directors pursuant to the Equus Funding Agreement.
37
<PAGE>
DON D. SYKORA has been a director since September 1996. He is currently a
consultant to Houston Industries Incorporated ("HII"). He served as President
and Chief Operating Officer of HII from 1993 until his retirement in 1995. From
1990 to 1993, Mr. Sykora was President and Chief Operating Officer of HII's
principal operating subsidiary, Houston Lighting & Power Company. Mr. Sykora is
currently serving as a director of Powell Industries, Inc., Pool Oilfield
Services, Inc. and TransTexas Gas Corp.
The Board of Directors is divided into three classes, each of which,
following a transitional period, will serve for three years, with one class
being elected each year at the annual stockholders' meeting. The term of the
Class I directors (Messrs. Wright, Sokolow and Amonett) will expire at the 1997
meeting. The term of the Class II directors (Messrs. Hoover, Menditch,
Cruikshank and Hale) will expire at the 1998 meeting. The term of the Class III
directors (Messrs. Timmons, McCaughey, Lehmann and Sykora) will expire at the
1999 meeting.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") receives a fee of $1,500 for each Board
meeting attended and $1,000 for each Board committee meeting attended (unless
held on the same day as a Board meeting) and will be periodically granted
options to purchase Common Stock pursuant to the Company's 1996 Incentive Plan
(the "Incentive Plan"). All directors are reimbursed for out-of-pocket
expenses incurred in attending meetings of the Board or Board committees and for
other expenses incurred in their capacity as directors.
On the closing of the IPO, each Nonemployee Director was granted an option
to purchase up to 10,000 shares of Common Stock. These options will become
exercisable at $15.00 per share (the IPO price to the public) in 33 1/3% annual
increments beginning in September 1997 and expire in June 2006. On the first
business day of the month following the date on which each annual meeting of the
Company's stockholders is held, each Nonemployee Director also will
automatically be granted an option to purchase up to 5,000 shares of Common
Stock. Such options will have a ten-year term, will have an exercise price per
share equal to the fair market value of a share of Common Stock on the date of
grant and will become exercisable in 33 1/3% annual increments beginning on the
first anniversary of the date of grant.
38
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding aggregate cash
compensation, restricted stock and stock option awards and other compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers for services rendered to the Company during 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
ANNUAL AWARDS
COMPENSATION -------------------------------------
NAME AND PRINCIPAL ----------------- RESTRICTED STOCK SHARES UNDERLYING ALL OTHER
POSITION SALARY BONUS AWARDS OPTIONS COMPENSATION(5)
- ------------------------------------- -------- ----- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... $175,000 (3) -- 200,000 $ 1,240
President and Chief Executive
Officer
Howard S. Hoover, Jr................. $160,000 (3) -- 150,000 $ 498
Chairman of the Board
William P. McCaughey................. $140,000 (3) -- 120,000 $ 810
Executive Vice President and Chief
Financial Officer
John D. Held......................... $ 99,230(1) (3) $ 80,000(4) 75,000 $ 685
Senior Vice President, General
Counsel and Secretary
Gorden H. Timmons.................... $ 56,540(2) (3) -- 150,000 $ 354
Chief Operating Officer
</TABLE>
- ------------
(1) Salary earned since the date of commencement of Mr. Held's employment with
ARS in March 1996.
(2) Salary earned since the date of commencement of Mr. Timmons' employment with
ARS in September 1996.
(3) Bonuses will be paid in accordance with the plan described below under
"-- Bonus Awards." Amounts are not reflected in the table as such bonus
awards have not yet been determined by the Compensation Committee of the
Company's Board of Directors.
(4) As of December 31, 1996, 5,333 shares of restricted Common Stock were held
by Mr. Held pursuant to the Company's Incentive Plan, with an aggregate
value of $144,658, based upon the closing price of the Common Stock as
reported on the New York Stock Exchange on December 31, 1996.
(5) Represents: (i) matching contributions by the Company under the Company's
401(k) plan for the executive officers named in the above table in the
amounts of $417 for Mr. Wright, $355 for Mr. McCaughey, $307 for Mr. Held
and $354 for Mr. Timmons; and (ii) the dollar value of insurance coverage
provided to the named executive officers by the Company under the Company's
Executive Life Insurance Program in the amounts of $823 for Mr. Wright, $498
for Mr. Hoover, $455 for Mr. McCaughey and $378 for Mr. Held.
39
<PAGE>
OPTION GRANTS
Options to purchase a total of 1,504,500 shares of Common Stock were
granted during 1996 and were outstanding under the Incentive Plan as of December
31, 1996. All these options have 10-year terms and are exercisable at prices
ranging from $8.00 to $23.50 per share. Of the options granted during 1996,
87,500 options are incentive stock options (50,000 of which were granted to the
executive officers named in the Summary Compensation Table). The following table
sets forth information regarding the options granted to the executive officers
named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
OF SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE --------------------------
NAME GRANTED IN 1996 PRICE(1) EXPIRATION DATE 5% 10%
- ------------------------------------- ---------- ---------- -------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... 200,000 13.3% $ 8.00 January 31, 2006 $ 1,006,000 $ 2,550,000
Howard S. Hoover, Jr................. 150,000 10.0% $ 8.00 January 31, 2006 $ 754,500 $ 1,912,500
William P. McCaughey................. 120,000 8.0% $ 8.00 January 31, 2006 $ 603,600 $ 1,530,000
John D. Held......................... 75,000 5.0% $ 9.60 March 6, 2006 $ 453,000 $ 1,147,500
Gorden H. Timmons.................... 150,000 10.0% $ 15.00 June 12, 2006 $ 1,414,500 $ 3,586,500
</TABLE>
- ------------
(1) All options shown in this table were granted prior to the closing of the
Initial Acquisitions and the IPO, and the ARS Board of Directors determined
that, as of the respective grant dates of these options, their per-share
exercise prices exceeded the then fair market value of a share of Common
Stock. This presentation assumes the exercise price of each of these options
equaled that fair market value on the grant date.
(2) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the assumed fair market value
on the grant date, from the grant date to the end of the option term.
The options granted to Messrs. Wright, Hoover, McCaughey, Held and one
other executive officer are exercisable in 50% increments on March 27, 1997 and
March 27, 1998, respectively. The other outstanding options granted to employees
of the Company during 1996 generally will become exercisable in 20% annual
increments beginning in 1997.
AGGREGATE OPTION HOLDINGS AND YEAR-END VALUES
No options were exercised during 1996. The following table presents
information regarding the value of options outstanding at December 31, 1996 for
each of the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
C. Clifford Wright, Jr............... -- 200,000 -- $ 3,825,000
Howard S. Hoover, Jr................. -- 150,000 -- $ 2,868,750
William P. McCaughey................. -- 120,000 -- $ 2,295,000
John D. Held......................... -- 75,000 -- $ 1,314,375
Gorden H. Timmons.................... -- 150,000 -- $ 1,818,750
</TABLE>
- ------------
(1) The closing price for the Common Stock as listed on the New York Stock
Exchange on December 31, 1996 was $27.125. Value is calculated on the basis
of the difference between the option exercise price and $27.125, multiplied
by the number of shares of Common Stock underlying the options.
40
<PAGE>
BONUS AWARDS
In June 1996, the Board of Directors granted Messrs. Wright, Hoover,
McCaughey and Held incentive cash bonus awards for 1996 which are based, subject
to the overall performance of the Company, on the performance of the Common
Stock after the IPO as compared to the performance of each of the stocks
included in the Standard & Poor's 500 Stock Index (the "S&P 500"). The amount
of each award will be determined by multiplying the officer's salary earned from
September 27, 1996 through December 31, 1996 by a percentage determined by
ranking the Common Stock's price performance including reinvested dividends, if
any ("Total Stockholder Return"), among Total Stockholder Returns of all the
stocks in the S&P 500, as follows:
PERCENTILE RANKING OF PERCENTAGE OF BASE
COMPANY'S TOTAL SALARY AS
STOCKHOLDER RETURN BONUS AWARD
- ------------------------------------- ------------------
50% or less.......................... 0%
51% - 65%............................ 50%
66% - 74%............................ 100%
75% - 89%............................ 150%
90% - 95%............................ 200%
96% - 100%........................... 250%
For 1996, the incentive bonus award calculation will be made from September
27, 1996 through December 31, and such awards are expected to be paid in 1997.
The officers granted these awards will not be eligible to participate in any
other Company cash bonus award program in 1996. The 1996 bonus for Mr. Timmons,
if any, will be determined in accordance with 50% of the above formula and is
expected to be paid in 1997 and the balance of such officer's 1996 bonus award,
if any, will be based upon performance standards established by the Compensation
Committee of the Board of Directors. The Compensation Committee of the Board of
Directors has not determined the amounts of such awards as of the date of this
Prospectus. The 1996 bonuses for other officers and key employees of the Company
will be based upon the performance standards established by the Compensation
Committee.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Wright, Hoover, Timmons,
McCaughey, Menditch, Sokolow and Held, copies of which are included as exhibits
to the Registration Statement of which this Prospectus is a part. Each of these
agreements (i) provides for an annual minimum base salary, (ii) entitles the
employee to participate in all the Company's compensation plans (as defined) in
which executive officers of ARS participate and (iii) has a continuous
three-year term subject to the right of either party to terminate the employee's
employment at any time. If the employee's employment is terminated by the
Company without cause (as defined) or by the employee with good reason (as
defined), the employee will be entitled, during each of the years in the
three-year period beginning on the termination date, to (i) periodic payments
equal to his average annual cash compensation (as defined) from the Company,
including bonuses, if any, during the two years (or such shorter period of
employment) preceding the termination date and (ii) continued participation in
all the Company's compensation plans (other than the granting of new awards
under the Incentive Plan or any other performance-based plan). Except in the
case of a termination for cause, any stock options previously granted to the
employee under the Incentive Plan that have not been exercised and are
outstanding as of the time immediately prior to the date of his termination will
remain outstanding (and continue to become exercisable pursuant to their
respective terms) until exercised or the expiration of their term, whichever is
earlier. If a change of control (as defined) of the Company occurs, the employee
may terminate his employment at any time during the 365-day period following
that event and receive a lump sum payment equal to three times his highest
annual base salary under the agreement (plus such amounts as may be necessary to
hold the employee harmless from the consequences of any resulting excise or
other similar purpose tax relating to "parachute payments" under the Internal
Revenue Code of 1986, as amended. Each employment agreement contains a covenant
limiting competition with the Company for a period of one year following
termination of employment.
41
<PAGE>
The Company also has employment agreements with Messrs. Walker and Mamaux
and with certain managers of the Company's principal operating facilities.
1996 INCENTIVE PLAN
The objectives of the Incentive Plan, which was approved by the Board of
Directors and stockholders of ARS and generally is administered by the
Compensation Committee of the Board of Directors, are to (i) attract and retain
the services of key employees, qualified independent directors and qualified
consultants and other independent contractors and (ii) encourage the sense of
proprietorship in and stimulate the active interest of those persons in the
development and financial success of the Company by making awards ("Awards")
designed to provide participants in the Incentive Plan with a proprietary
interest in the growth and performance of the Company.
The Company has reserved 1,550,000 shares of Common Stock for use in
connection with the Incentive Plan. Beginning with the Company's last fiscal
quarter of 1996 and continuing each fiscal quarter thereafter, the number of
shares available for use in connection with the Incentive Plan will be the
greater of 1,550,000 or 15% of the number of shares of Common Stock outstanding
on the last day of the preceding calendar quarter. Shares subject to Awards that
are forfeited or terminated, exchanged for Awards that do not involve Common
Stock or expire unexercised, or are settled in cash in lieu of Common Stock or
otherwise such that the shares covered thereby are not issued, again become
available for Awards.
Persons available for Awards are (i) employees holding positions of
responsibility with the Company or any of its subsidiaries and whose performance
can have a significant effect on the success of the Company as well as
individuals who have agreed to become employees within six months of the date of
grant, (ii) Nonemployee Directors and (iii) nonemployee consultants and other
independent contractors providing, or who will provide, services to the Company
or any of its subsidiaries.
Awards may be in the form of (i) options to purchase a specified number of
shares of Common Stock at a specified price, which may be denominated in one or
both of Common Stock or units denominated in Common Stock, (ii) rights to
receive a payment, in cash or Common Stock, equal to the fair market value or
other specified value of a number of shares of Common Stock on the rights'
exercise date over a specified exercise price, (iii) restricted or unrestricted
grants of Common Stock or units denominated in Common Stock, (iv) grants
denominated in cash and (v) grants denominated in cash, Common Stock, units
denominated in Common Stock or any other property which are made subject to the
attainment of one or more performance goals.
OTHER PLANS
The Company has adopted deferred compensation, supplemental disability,
supplemental life and retirement or other benefit or welfare plans, including a
Section 401(k) plan, in which executive officers of the Company will be eligible
to participate.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
ARS was initially capitalized in October 1995 with $1,000 provided by
Messrs. Wright, Hoover and McCaughey. As a result of stock splits, the 1,000
shares initially issued by ARS to its founders total 422,483 shares of Common
Stock. Prior to the IPO, Equus II advanced funds to ARS pursuant to a $2.6
million commitment to enable ARS to pay various expenses incurred in connection
with its efforts to create the Company and effect the IPO. On the closing of the
IPO, $0.5 million of this note was converted into 844,962 shares of Common
Stock, and ARS repaid the balance of the note with proceeds from the IPO. As a
part of its funding arrangements with Equus II, ARS issued a warrant to Equus II
in March 1996 to purchase up to 100,000 shares of Common Stock at $15 per share.
That warrant will expire in 2001 to the extent not exercised.
The aggregate consideration paid by ARS to acquire the Founding Companies
consisted of (i) approximately $39.5 million in cash (including approximately
$4.7 million paid as a result of working
42
<PAGE>
capital adjustments) and (ii) 2,942,192 shares of Common Stock (including
137,139 shares into which the preferred stock of EHC was converted). In
addition, the Company also assumed all the indebtedness and preferred stock
payment obligations of the Founding Companies (approximately $22.3 million) and
repaid substantially all such indebtedness and obligations.
Pursuant to the agreements relating to the Initial Acquisitions, all
stockholders of each of the Founding Companies (other than Equus II and the
minority interest owners in Atlas) agreed not to compete with the Company prior
to September 24, 2000.
In connection with the Initial Acquisitions and as consideration for their
interests in the Founding Companies, certain directors of ARS, together with a
family trust in one case, received cash and shares of Common Stock, as follows:
Mr. Menditch -- $5.24 million and 222,222 shares; Mr. Timmons -- $5.83 million
and 820,027 shares; and Mr. Sokolow -- $6.68 million and 266,666 shares. In
addition, the following, together with family trusts in one case, received as
consideration for their interests in EHC, the following: Mr. Wright -- 52,300
shares and $237,000; Mr. Hoover -- 34,866 shares and $158,000; Mr.
McCaughey -- 52,300 shares and $237,000; and Equus II -- 376,073 shares and
$1.27 million. The consideration paid by ARS for EHC also included the repayment
or assumption of $13.2 million of indebtedness and other obligations EHC had
incurred to purchase Crown in March 1996 and A-ABC in May 1996. In addition, ARS
issued a warrant (since exercised) to purchase 8,333 shares of Common Stock at a
total purchase price of $83.33 in exchange for a warrant previously issued by
EHC to NationsBank (which, together with Equus II, had financed EHC's purchases
of Crown and A-ABC). EHC had paid $17.5 million in cash to purchase Crown and
certain real estate used in its business and $2.0 million in cash to purchase
A-ABC. For purposes of purchasing EHC, ARS valued EHC on a basis consistent with
the other Initial Acquisitions, using the same multiple of cash flow, as
adjusted for owners' compensation and other nonrecurring items and for working
capital and the fair market value of real estate, if any, being acquired.
On the closing of the IPO, the Company issued 39,987 shares of Common Stock
pursuant to the Company's Incentive Plan to employees, three officers (other
than Messrs. Wright, Hoover and McCaughey) and consultants of ARS and its
affiliates and recognized $600,000 of compensation expense.
REAL ESTATE AND OTHER TRANSACTIONS
Atlas leases office and warehouse space at two locations from a company in
which Mr. Timmons has a 50% ownership interest. Rentals under these leases,
which extend to May 2005 and May 2006, respectively, currently total $183,800
annually and will increase if a specified prime interest rate increases to 11%
or above. Atlas also leases office and warehouse space from a partnership in
which members of Mr. Timmons' immediate family have a 50% ownership interest.
This lease extends to February 2006 and provides for total annual rentals of
$42,000. Office space at another location is leased by Atlas from a partnership
in which Mr. Timmons owns a 90% interest. The lease commenced in November 1996
for a three-year term, with initial annual rentals of $25,600. Atlas had a
receivable from Mr. Timmons of approximately $195,000 as of December 31, 1995,
which he subsequently paid in full.
General Heating leases office and warehouse space under four leases from a
limited partnership owned by Mr. Menditch, his brothers and trusts for the
benefit of their children. Annual rentals under the leases, which expire at the
end of 2005, currently total $491,373 and will increase a minimum of 4% each
year. General Heating had receivables from Mr. Menditch of approximately
$308,139 as of December 31, 1995, which he subsequently paid in full.
Florida HAC leases its principal office and warehouse space from a limited
partnership 80% owned by Mr. Sokolow. The annual rental under the lease, which
is scheduled to expire May 31, 2005, currently is $224,856 and will increase 5%
each year. Florida HAC had borrowings outstanding from Mr. Sokolow of
approximately $641,804 as of December 31, 1995. Florida HAC subsequently repaid
this amount.
The Company believes the rentals provided under the leases described above
are fair market rentals.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1996, the "beneficial
ownership" (as defined by the SEC) of the Common Stock of (i) each person known
to beneficially own more than 5% of the outstanding shares of Common Stock, (ii)
each of the Company's directors and executive officers and (iii) all executive
officers and directors of the Company as a group.
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ------------------------------------- ----------- -------
Equus II Incorporated(2)............. 1,321,037 12.7%
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Gorden H. Timmons(3)................. 820,027 7.9%
Elliot Sokolow....................... 266,666 2.6%
Frank N. Menditch.................... 222,222 2.1%
C. Clifford Wright, Jr............... 210,731 2.0%
William P. McCaughey................. 210,731 2.0%
Howard S. Hoover, Jr................. 140,725 1.4%
John D. Held......................... 5,333 *
A. Jefferson Walker III.............. 3,666 *
Michael Mamaux....................... 3,000 *
Nolan Lehmann........................ 2,000 *
Robert J. Cruikshank................. 2,000 *
Randall B. Hale...................... 1,000 *
Thomas N. Amonett.................... 1,000 *
Don D. Sykora........................ 1,000 *
All executive officers and directors
as a group (14 persons)(3)......... 1,890,101 18.2%
- ------------
* Less than 1%.
(1) Shares shown do not include (i) shares that could be acquired upon exercise
of currently outstanding stock options which do not vest within 60 days
hereof or (ii) shares held through the Company's 401(k) plan.
(2) Shares shown include 100,000 shares obtainable on exercise of a warrant
exercisable at $15.00 per share. Nolan Lehmann, a director of the Company,
is the President of Equus II and thus may be deemed to be the beneficial
owner of shares held by Equus II. Mr. Lehmann disclaims beneficial ownership
of all those shares.
(3) Includes shares held by a trust of which Mr. Timmons is the trustee and may
be deemed the beneficial owner.
Except as otherwise indicated, the address of each person listed in the
above table is c/o American Residential Services, Inc., Post Oak Tower, Suite
725, 5051 Westheimer, Houston, Texas 77056-5604. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
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SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1996, 10,370,865 shares of Common Stock were
outstanding. The 4,830,000 shares sold in the IPO (other than to affiliates of
the Company) are freely tradable by the public. The remaining outstanding shares
of Common Stock (collectively, the "Restricted Shares") have not been
registered under the Securities Act and may be resold publicly only following
their effective registration under that act or pursuant to an available
exemption from the registration requirements of that act (such as Rule 144
thereunder).
The shares of Common Stock reserved or to be available for issuance
pursuant to the Incentive Plan are registered for issuance under the Securities
Act. These shares generally may be sold in the open market by holders who are
not affiliates of the Company and, subject to the volume and other limitations
of Rule 144, by holders who are affiliates of the Company.
In general, under Rule 144 as currently in effect, if a minimum of two
years has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person (or
persons whose shares of Common Stock are aggregated), including persons who may
be deemed "affiliates" of the Company, would be entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of (i) 1% of the then outstanding shares of Common Stock and (ii) the
average weekly trading volume during a preceding period of four calendar weeks.
Sales under Rule 144 are also subject to certain provisions as to the manner of
sale, notice requirements and the availability of current public information
about the Company. In addition, under Rule 144(k), if a period of at least three
years has elapsed since the later of the date restricted securities were
acquired from the Company or the date they were acquired from an affiliate of
the Company, a stockholder who is not an affiliate of the Company at the time of
sale and has not been an affiliate for at least three months prior to the sale
would be entitled to sell shares of Common Stock in the public market
immediately without compliance with the foregoing requirements under Rule 144.
Rule 144 does not require the same person to have held the securities for the
applicable periods. The foregoing summary of Rule 144 is not intended to be a
complete description thereof. The SEC has proposed an amendment to Rule 144 that
would shorten the three- and two-year holding periods described above to two
years and one year, respectively.
The Company has agreed not to offer or sell any shares of Common Stock
during the 180-day period following September 24, 1996 (the "Lockup Period")
without the prior written consent of Smith Barney Inc., except that the Company
may issue Common Stock in connection with acquisitions or on the exercise of
options or warrants outstanding as of September 27, 1996. Further, all the
executive officers of ARS, substantially all the former owners of the Founding
Companies and Equus II are contractually prohibited from selling the shares they
own during the Lockup Period. In addition, the holders of the 2,805,053 shares
of Common Stock issued in connection with the Initial Acquisitions have agreed
with the Company that, except for limited private transfers, they will not sell,
transfer or otherwise dispose of any of their shares during the two-year period
ending September 27, 1998 (or during such shorter period as the SEC may
prescribe as the holding period for restricted securities under Rule 144). The
holders of substantially all the shares of Common Stock issued in 1996 in
connection with acquisitions subsequent to the Initial Acquisitions have agreed
with the Company that, except for limited private transfers, they will not sell,
transfer or otherwise dispose of any of their shares until they have held them
for at least two years.
The Company has entered into a registration rights agreement with most of
the former owners of the Acquired Businesses (the "Registration Rights
Agreement"), which provides certain registration rights with respect to the
Common Stock issued to such stockholders in connection with the acquisitions of
those businesses. The Registration Rights Agreement provides for a single demand
registration right, exercisable by the holders of a majority of the shares of
Common Stock subject to the agreement, pursuant to which the Company will file a
registration statement under the Securities Act to register the sale of shares
by those requesting stockholders and any other holders of Common Stock subject
to the agreement who desire to sell pursuant to such registration statement. The
demand request may not be made until the expiration of two years after September
24, 1996 (subject to a corresponding reduction if the two-year holding period
for restricted securities under Rule 144 is reduced by the Commission). In
addition, subject to certain
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conditions and limitations, the Registration Rights Agreement will provide the
holders of Common Stock subject to the agreement with the right to participate
in registrations by the Company of its equity securities in underwritten
offerings. The registration rights conferred by the Registration Rights
Agreement will terminate on December 31, 2000. In addition, pursuant to separate
registration rights agreements with Equus II and NationsBank, both Equus II and
NationsBank have the right, in the event the Company proposes to register under
the Securities Act any Common Stock for its own account or for the account of
others, subject to certain exceptions, to require the Company to include shares
owned by them in the registration.
In the case of each registration rights agreement described above, the
Company is generally required to pay the costs associated with such an offering
other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. In
addition, in the case of the separate registration rights agreements with Equus
II and NationsBank, the Company is obligated to pay the fees and expenses of
legal counsel for the selling stockholders thereunder. Each registration rights
agreement provides that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter determines that market conditions require such a
limitation. Under each agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the registration rights agreement.
Pursuant to Rule 145 under the Securities Act, the volume limitations and
certain other requirements of Rule 144 will apply to resales of the Common Stock
covered hereby by affiliates of the businesses the Company acquires for a period
of three years (or such shorter period as the SEC may prescribe). In addition,
persons receiving shares of Common Stock offered hereby in connection with an
acquisition will ordinarily be required to agree to hold portions of such shares
for periods of up to two years after the date of such acquisition. These
agreements may be modified by the Company in connection with any particular
business combination.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of ARS consists of 50,000,000 shares of Common
Stock, par value $.001 per share, and 10,000,000 shares of preferred stock, par
value $.001 per share (the "Preferred Stock"). At December 31, 1996,
10,370,865 shares of Common Stock were issued and outstanding. The following
summary is qualified in its entirety by reference to the Restated Certificate of
Incorporation of ARS (the "Certificate of Incorporation"), which is included
as an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, and each share has one
vote. The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive
rights, is not convertible, redeemable, assessable or entitled to the benefits
of any sinking fund. The holders of Common Stock are entitled to dividends in
such amounts and at such times as may be declared by the Board of Directors out
of funds legally available therefore. See "Dividend Policy" for information
regarding the Company's dividend policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and limitations prescribed by law, the Board
of Directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether
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dividends are cumulative), dividend rates, terms of redemption (including
sinking fund provisions), redemption prices, conversion rights and liquidation
preferences of the shares constituting any class or series of the Preferred
Stock, in each case without any further action or vote by the holders of Common
Stock.
Although ARS has no present intention to issue shares of Preferred Stock,
the issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For example, the issuance of a series of Preferred Stock might impede a business
combination by including class voting rights that would enable the holders to
block such a transaction; or such issuance might facilitate a business
combination by including voting rights that would provide a required percentage
vote of the stockholders. In addition, under certain circumstances, the issuance
of Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of ARS, the Board of Directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then-market
price of such stock. The Board of Directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which the securities of
ARS are traded.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from ARS a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock"), at a purchase price of
$40.00 per Fractional Share, subject to adjustment in certain events (the
"Purchase Price"). The following summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement between ARS and a Rights Agent (the "Rights Agreement"), the
form of which is included as an exhibit to the Registration Statement of which
this Prospectus is a part.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur upon the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of Common Stock (the date of the announcement being the "Stock Acquisition
Date") or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as Equus II, together with all affiliates
and associates thereof, remains the beneficial owner of 15% or more of the
outstanding shares of Common Stock, Equus II shall not be or become an Acquiring
Person unless and until it, together with all affiliates and associates thereof,
becomes the beneficial owner of additional shares of Common Stock constituting
1% or more of the then-outstanding shares of Common Stock or any other person
who is the beneficial owner of at least 1% of the then outstanding shares of
Common Stock shall become an affiliate or associate of Equus II. In certain
circumstances the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 30, 2006, unless earlier redeemed or exchanged
by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the
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Distribution Date, the separate Rights Certificates alone will represent the
Rights. All shares of Common Stock issued prior to the Distribution Date will be
issued with Rights. Shares of Common Stock issued after the Distribution Date in
connection with certain employee benefit plans or upon conversion of certain
securities will be issued with Rights. Except as otherwise determined by the
Board of Directors, no other shares of Common Stock issued after the
Distribution Date will be issued with Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board of Directors determines to be fair to and otherwise in the
best interests of the Company and its stockholders (a "Permitted Offer")),
each holder of a Right will thereafter have the right to receive, on exercise of
that Right, a number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a Current Market Price
(as defined in the Rights Agreement) equal to two times the exercise price of
the Right. Notwithstanding the foregoing, following the occurrence of any
Triggering Event, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person (or by
certain related parties) will be null and void in the circumstances set forth in
the Rights Agreement. Rights are not exercisable following the occurrence of any
Flip-In Event until such time as the Rights are no longer redeemable by the
Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) the Company is acquired in a merger
or other business combination transaction (other than certain mergers that
follow a Permitted Offer) or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as set forth above) shall thereafter have the right
to receive, on exercise of such Right, a number of shares of common stock of the
acquiring company having a Current Market Price equal to two times the exercise
price of the Right. Flip-In Events and Flip-Over Events are collectively
referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, and/or other equity securities
deemed to have the same value as one share of Common Stock, per Right, subject
to adjustment.
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Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors only in order to cure
any ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.
The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Company's Board of Directors. As a result, the
overall effect of the Rights may be to render more difficult or discourage any
attempt to acquire the Company, even if such acquisition may be favorable to the
interests of the Company's stockholders. Because the Board of Directors can
redeem the Rights or approve a Permitted Offer, the Rights should not interfere
with a merger or other business combination approved by the Board. The Rights
are being issued to protect the Company's stockholders from coercive or abusive
takeover tactics and to afford the Company's Board of Directors more negotiating
leverage in dealing with prospective acquirors.
STATUTORY BUSINESS COMBINATION PROVISION
ARS is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination"(as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Certificate of Incorporation
limits the liability of directors of ARS to ARS or its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of ARS will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
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director's duty of loyalty to ARS or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for
any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited ARS and its stockholders.
The Bylaws of ARS provide indemnification to its officers and directors and
certain other persons with respect to certain matters, and ARS has entered into
agreements with each of its directors and executive officers providing for
indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board, the President or a majority of the Board of
Directors.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. The
classified board provision could prevent a party who acquires control of a
majority of the outstanding voting stock of ARS from obtaining control of the
Board of Directors until the second annual stockholders meeting following the
date the acquiror obtains the controlling interest. See
"Management -- Directors and Executive Officers."
The Certificate of Incorporation provides that the number of directors
shall be as determined by the Board of Directors from time to time, but shall
not be less than three. It also provides that directors may be removed only for
cause, and then only by the affirmative vote of the holders of at least a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of the Certificate of Incorporation authorizing
the Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain provisions (i) requiring that advance notice be
delivered to ARS of any business to be brought by a stockholder before an annual
meeting of stockholders and (ii) establishing certain procedures to be followed
by stockholders in nominating persons for election to the Board of Directors.
Generally, such advance notice provisions provide that written notice must be
given to the Secretary of ARS by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting, not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders (with certain exceptions if the date of the annual meeting is
different by more than specified amounts from the anniversary date), and (ii) in
the event of nominations of persons for election to the Board of Directors by
any stockholder, (a) with respect to an election to be held at the annual
meeting of stockholders, not less than 90 days prior to the anniversary date of
the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than specified
amounts from the anniversary date), and (b) with respect to an election to be
held at a special meeting of stockholders for the election of directors, not
later than the close of business on the 10th day following the day on which
notice of the date of the special meeting was mailed to stockholders or public
disclosure of the date of the special meeting was made, whichever first occurs.
Such notice must set forth specific information regarding such stockholder and
such business or director nominee, as described in the Bylaws. The foregoing
summary is qualified in its entirety by reference to the Bylaws, which are
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
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PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 5,000,000 shares of
Common Stock, which ARS may issue from time to time in connection with future
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions.
ARS expects that the terms on which it may issue the shares of Common Stock
covered hereby will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and that the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of shares.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by John D. Held, Esq., Senior Vice President, General
Counsel and Secretary of the Company. Mr. Held owns 5,333 shares of Common Stock
and Incentive Plan options to purchase 75,000 shares of Common Stock.
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
ARS is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the SEC. These reports,
proxy statements and other information, once filed, may be inspected, without
charge, at the public reference facilities of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any portion of these documents can be obtained at
prescribed rates from the Public Reference Section of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The SEC maintains an Internet web site that contains such reports, proxy
statements and other information regarding issuers (including ARS) filed
electronically with the SEC. The address of that site is http://www.sec.gov.
ARS has filed a Registration Statement on Form S-4 under the Securities Act
with the SEC with respect to this offering. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, or the exhibits and schedules thereto, in accordance
with the rules and regulations of the SEC, and reference hereby is made to that
omitted information. The statements made in this Prospectus concerning documents
filed or incorporated by reference as exhibits to the Registration Statement
accurately describe the material provisions of those documents and are qualified
in their entirety by reference to those exhibits for complete statements of
their provisions. The Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the principal office of the SEC in
Washington, D.C., as described above, and are also available at the SEC's
Internet web site described above.
The Common Stock is listed on the NYSE. Proxy statements, reports and other
information concerning the Company that are filed under the Exchange Act can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
51
<PAGE>
PAGE
-----
Unaudited Pro Forma Combined
Financial Statements
Basis of Presentation........... F-3
Pro Forma Combined Balance Sheet
as of September 30, 1996
(unaudited).................... F-4
Pro Forma Combined Statement of
Operations for the Year Ended
December 31, 1995
(unaudited).................... F-5
Pro Forma Combined Statement of
Operations for the Nine Months
Ended September 30, 1996
(unaudited).................... F-6
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-7
Historical Financial Statements
American Residential Services,
Inc. and Subsidiaries
Consolidated Balance
Sheets..................... F-9
Consolidated Statements of
Operations................. F-10
Pro Forma Combined
Statements of Operations... F-11
Consolidated Statements of
Cash Flows................. F-12
Notes to Consolidated
Financial Statements....... F-13
American Residential Services,
Inc.
Report of Independent
Public Accountants......... F-15
Balance Sheets............. F-16
Statements of Operations... F-17
Statements of Shareholders'
Deficit.................... F-18
Statements of Cash Flows... F-19
Notes to Financial
Statements................. F-20
General Heating Engineering
Company, Inc.
Report of Independent
Public Accountants......... F-25
Balance Sheets............. F-26
Statements of Operations... F-27
Statements of Shareholders'
Equity..................... F-28
Statements of Cash Flows... F-29
Notes to Financial
Statements................. F-30
Atlas Services, Inc., and
Subsidiary
Report of Independent
Public Accountants......... F-35
Consolidated Balance
Sheets..................... F-36
Consolidated Statements of
Operations................. F-37
Consolidated Statements of
Shareholders' Equity....... F-38
Consolidated Statements of
Cash Flows................. F-39
Notes to Consolidated
Financial Statements....... F-40
F-1
<PAGE>
PAGE
-----
Enterprises Holding Company and
Subsidiaries
Consolidated Balance
Sheet...................... F-48
Consolidated Statement of
Operations................. F-49
Consolidated Statement of
Shareholders' Equity....... F-50
Consolidated Statement of
Cash Flows................. F-51
Notes to Consolidated
Financial Statements....... F-52
Service Enterprises, Inc., and
Subsidiaries
Report of Independent
Public Accountants......... F-60
Consolidated Balance
Sheets..................... F-61
Consolidated Statements of
Operations................. F-62
Consolidated Statements of
Shareholder's Equity....... F-63
Consolidated Statements of
Cash Flows................. F-64
Notes to Consolidated
Financial Statements....... F-65
Florida Heating and Air
Conditioning, Inc., and Related
Companies
Report of Independent
Public Accountants......... F-72
Combined Balance Sheets.... F-73
Combined Statements of
Operations................. F-74
Combined Statements of
Shareholders' Equity....... F-75
Combined Statements of Cash
Flows...................... F-76
Notes to Combined Financial
Statements................. F-77
DIAL ONE Meridian and Hoosier,
Inc.
Report of Independent
Public Accountants......... F-83
Balance Sheets............. F-84
Statements of Operations... F-85
Statements of Shareholder's
Equity..................... F-86
Statements of Cash Flows... F-87
Notes to Financial
Statements................. F-88
ADCOT, Inc.
Report of Independent
Public Accountants......... F-95
Balance Sheets............. F-96
Statements of Operations... F-97
Statements of Shareholder's
Deficit.................... F-98
Statements of Cash Flows... F-99
Notes to Financial
Statements................. F-100
Metro Heating and Air
Conditioning, Inc.
Report of Independent
Public Accountants......... F-104
Balance Sheets............. F-105
Statements of Operations... F-106
Statements of Shareholders'
Equity..................... F-107
Statements of Cash Flows... F-108
Notes to Financial
Statements................. F-109
F-2
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements give effect
to the acquisitions by American Residential Services, Inc. ("ARS"), of
substantially all the net assets of seven residential services businesses
(together with the common parent of two of those businesses, the "Founding
Companies") in separate transactions (the "Initial Acquisitions")
simultaneously with the closing of ARS's initial public offering of its Common
Stock (the "Offering") on September 27, 1996. The acquisitions were accounted
for using the purchase method of accounting, and Atlas Services, Inc., one of
the Founding Companies, has been identified as the acquiror for financial
statement presentation purposes. During the fourth quarter of 1996, ARS acquired
an additional 13 residential service businesses (together with the Founding
Companies, the "Acquired Businesses") which also were accounted for using the
purchase method of accounting. One of the 13 businesses acquired, Metro Heating
and Air Conditioning, Inc. ("Metro"), is deemed, pursuant to the applicable
rules of the Securities and Exchange Commission, to be a "significant
subsidary." Accordingly, Metro has been shown separately in the accompanying
unaudited pro forma combined financial statements and the audited historical
financial statements of Metro are included separately herein. The other 12
acquisitions completed subsequent to September 30, 1996 are presented as "Other
Subsequent Acquisitions" in the pro forma presentation.
The unaudited pro forma combined balance sheet gives effect to the
following events that occurred in the fourth quarter of 1996 as if they had
occurred on September 30, 1996: (i) the issuance and sale of (a) 630,000 shares
of Common Stock for net proceeds of $8.8 million pursuant to the exercise of the
underwriters' overallotment option in connection with the IPO and (b) 8,333
shares of Common Stock for nominal consideration pursuant to the exercise of a
warrant; (ii) the payment of $1.8 million as additional working capital
adjustments in connection with the Initial Acquisitions; and (iii) the
acquisition of Metro and the Other Subsequent Acquisitions and the financing and
payment of the related purchase prices. The allocation of purchase price to the
assets acquired and liabilities assumed has been initially assigned and recorded
based on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available. Also, the purchase price is based on available information, certain
assumptions management deems appropriate and preliminary estimates of fair value
assigned to the shares of ARS Common Stock issued in such transactions which
carry certain restrictions regarding disposition by their holders, and such
value may be revised as additional information becomes available. The unaudited
pro forma combined statements of operations give effect to the Acquired
Businesses as if they had occurred at the beginning of each period presented.
The unaudited pro forma combined financial information presented herein
does not purport to represent what the Company's financial position or results
of operations would have actually been had such events occurred at the beginning
of the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Acquired Businesses. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere in this Prospectus. Also see "Risk Factors"
included elsewhere herein.
F-3
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
ARS AND SUBSEQUENT PRO FORMA
SUBSIDIARIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
------------ --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,376 $ 891 $ 3,683 $ (1,760)(a) $ 5,190
Accounts receivable --
Trade, net of allowance.... 14,156 2,565 5,541 -- 22,262
Other receivables.......... 416 81 145 -- 642
Inventories..................... 5,345 1,887 3,008 -- 10,240
Prepaid expenses and other
current assets................ 742 -- 527 -- 1,269
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 470 63 -- -- 533
------------ --------- ------------ ----------- ---------
Total current
assets............. 23,505 5,487 12,904 (1,760) 40,136
PROPERTY AND EQUIPMENT, net.......... 13,041 2,512 2,735 -- 18,288
OTHER NONCURRENT ASSETS.............. 1,132 2 592 125(c) 1,851
GOODWILL............................. 60,973 -- 376 226(a) 117,801
56,226(b)
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 78 -- -- -- 78
------------ --------- ------------ ----------- ---------
Total assets.......... $ 98,729 $ 8,001 $ 16,607 $ 54,817 $ 178,154
============ ========= ============ =========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term
debt.......................... $ 295 $ 1,000 $ 1,602 $ (2,602)(b) $ 295
Accounts payable and accrued
expenses...................... 14,908 1,799 4,897 (60)(b) 21,544
Unearned revenue on service and
warranty contracts, current... 1,834 316 332 (3)(b) 2,479
Billings in excess of cost and
estimated earnings on
uncompleted contracts......... 1,793 25 85 -- 1,903
Deferred income taxes........... 302 -- 314 -- 616
------------ --------- ------------ ----------- ---------
Total current
liabilities........ 19,132 3,140 7,230 (2,665) 26,837
LONG-TERM DEBT, net of current
maturities......................... 7,609 -- 1,924 42,979(b) 43,723
(8,789)(d)
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS NONCURRENT............... 612 -- 95 -- 707
DEFERRED INCOME TAXES................ 262 -- -- -- 262
OTHER NON-CURRENT LIABILITIES........ 20 -- -- -- 20
SHAREHOLDERS' EQUITY
Common stock.................... 8 6 147 (152)(b) 10
1(d)
Additional paid-in capital...... 81,579 -- 174 27,956(b) 118,622
125(c)
8,788(d)
Retained earnings (deficit)..... (10,493) 4,855 7,037 (1,534)(a) (12,027)
(11,892)(b)
------------ --------- ------------ ----------- ---------
Total shareholders'
equity............. 71,094 4,861 7,358 23,292 106,605
------------ --------- ------------ ----------- ---------
Total liabilities and
shareholders'
equity............. $ 98,729 $ 8,001 $ 16,607 $ 54,817 $ 178,154
============ ========= ============ =========== =========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
FOUNDING SUBSEQUENT PRO FORMA
ATLAS COMPANIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
--------- --------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 22,048 $92,588 $ 20,550 $ 49,588 -- $184,774
COST OF SERVICES..................... 17,811 67,409 14,367 33,453 -- 133,040
--------- --------- --------- ------------ ----------- ---------
Gross Profit..................... 4,237 25,179 6,183 16,135 -- 51,734
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,022 21,327 4,085 13,894 (3,543)(e) 38,080
(221)(g)
(484)(h)
GOODWILL AMORTIZATION................ -- -- -- -- 2,945(i) 2,945
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 1,215 3,852 2,098 2,241 1,303 10,709
OTHER INCOME (EXPENSE):
Interest income.................. 17 445 12 6 -- 480
Interest expense................. (134) (240) (35) (194) (2,676)(j) (3,279 )
Other............................ 20 131 4 163 -- 318
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 1,118 4,188 2,079 2,216 (1,373) 8,228
PROVISION FOR INCOME TAXES........... 434 866 -- 832 2,038(k) 4,170
--------- --------- --------- ------------ ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 684 $ 3,322 $ 2,079 $ 1,384 $(3,411) $ 4,058
========= ========= ========= ============ =========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .39
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 10,371 (l)
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER OTHER
FOUNDING SUBSEQUENT PRO FORMA
ATLAS COMPANIES METRO ACQUISITIONS ADJUSTMENTS COMBINED
------- --------- ------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $23,326 $74,935 $19,383 $42,926 $-- $160,570
COST OF SERVICES..................... 18,577 53,443 13,894 29,097 -- 115,011
------- --------- ------- ------------- ----------- ---------
Gross Profit..................... 4,749 21,492 5,489 13,829 45,559
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,826 21,852 3,888 11,449 (3,099) (e) 33,286
(3,064)(f)
(1,003)(g)
(563)(h)
GOODWILL AMORTIZATION................ -- 140 -- -- 2,068(i) 2,208
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM OPERATIONS........ 923 (500) 1,601 2,380 5,661 10,065
OTHER INCOME (EXPENSE):
Interest income.................. (4) 213 9 5 -- 223
Interest expense................. (165) (5,242) (70) (153) 4,221(f) (2,460 )
(1,051)(j)
Other............................ 163 61 6 251 -- 481
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 917 (5,468) 1,546 2,483 8,831 8,309
PROVISION FOR INCOME TAXES........... 344 874 -- 936 1,827(k) 3,981
------- --------- ------- ------------- ----------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 573 $(6,342) $ 1,546 $ 1,547 $ 7,004 $ 4,328
======= ========= ======= ============= =========== =========
PRO FORMA INCOME PER SHARE FROM
CONTINUING OPERATIONS.............. $ .42
=========
SHARES USED IN COMPUTING PRO FORMA
INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... 10,371 (l)
=========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. AMERICAN RESIDENTIAL SERVICES, INC. BACKGROUND:
American Residential Services, Inc. (ARS and, together with its
subsidiaries, the "Company") was formed to create a leading national provider
of (i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning, plumbing, electrical and other systems in
homes and commercial buildings and (ii) new installation services of those
systems in homes and commercial facilities under construction. On September 27,
1996, ARS acquired seven residential services businesses (together with the
common parent of two of those businesses, the "Founding Companies") in
separate transactions (the "Initial Acquisitions") simultaneously with the
closing of ARS's initial public offering (the "Offering") of its common stock
("Common Stock"). During the fourth quarter of 1996, ARS acquired an
additional 13 residential services businesses (together with the Founding
Companies, the "Acquired Businesses"). ARS conducted no operations prior to
September 30, 1996 except in connection with the Offering and the Initial
Acquisitions.
2. ACQUISITION OF ACQUIRED BUSINESSES:
For financial statement presentation purposes, Atlas Services, Inc., one of
the Founding Companies, is treated as the accounting acquiror, and the effective
date of the Initial Acquisitions is September 30, 1996.
The estimated purchase price for the Acquired Businesses is subject to
certain purchase price adjustments following closing. The allocation of purchase
price to the assets acquired and liabilities assumed has been initially assigned
and recorded based on preliminary estimates of fair value and may be revised as
additional information concerning the valuation of such assets and liabilities
becomes available. Also, the purchase price is based on preliminary estimates of
value assigned to the shares of Common Stock issued in such transactions which
carry certain restrictions regarding disposition by their holders, and such
value may be revised as additional information becomes available. See "Certain
Transactions -- Organization of the Company."
Based upon management's preliminary analysis, ARS anticipates that the
historical carrying value of the Acquired Businesses' assets and liabilities
will approximate fair value. The amount allocated to goodwill is $117.8 million.
Management of ARS has not identified any other material tangible or identifiable
intangible assets of the Acquired Businesses to which a portion of the purchase
price could reasonably be allocated.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the distribution of remaining working capital payments
to the previous owners of the Founding Companies.
(b) Records the allocation of purchase price to Metro Heating and
Air Conditioning, Inc. (Metro) and the 12 other residential services
businesses (the Other Subsequent Acquisitions) by the Company in the fourth
quarter of 1996 as if their acquisition occurred on September 30, 1996.
(c) Records the exercise of a warrant to purchase shares of Common
Stock having a value of $125,000 and recorded as a financing fee.
(d) Records the issuance of 630,000 shares of common stock at $13.95
per share (net of underwriting discounts and commissions) (representing net
proceeds to ARS of $8.8 million) pursuant to the exercise of the
underwriters' overallotment option in connection with the Offering.
F-7
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS ADJUSTMENTS:
(e) Adjusts compensation to the level the owners of certain of the
Acquired Businesses have agreed to receive subsequent to the acquisitions
of the Acquired Businesses.
(f) To adjust for non-recurring, non-cash charges relating to shares
of Common Stock issued to the shareholders of Enterprises Holding Company,
including working capital adjustments of $1.2 million.
(g) Adjusts rent expense on certain facilities leased from certain
previous owners and adjusts for other non-recurring expenses.
(h) Adjusts for the effect of assets distributed to and the costs of
certain leases assumed by the owners of certain Acquired Businesses.
(i) Records the pro forma goodwill amortization expense using a
40-year estimated life.
(j) Records change in interest expense for pro forma adjustments to
debt.
(k) Records the incremental provision for federal and state income
taxes relating to the compensation differential, S corporation income and
other pro forma adjustments.
(l) The number of shares outstanding on completion of the Offering
and the purchase of the Subsequent Acquisitions includes the following, but
excludes a warrant to purchase 100,000 shares that became exercisable
immediately after the Offering and an aggregate 1,504,500 shares subject to
options granted under the Company's 1996 Incentive Plan as the effect of
such options is less than three percent of total shares outstanding.
Outstanding (as adjusted to reflect
a stock split).................... 422,480
Issued in the Offering............. 4,830,000
Issued to acquire Founding
Companies......................... 2,805,053
Conversion of a portion of an ARS
convertibile note................. 844,962
Conversion of a portion of the EHC
Preferred Stock................... 137,140
Shares awarded under Company's 1996
Incentive Plan.................... 39,987
Exercise of lender's warrant....... 8,333
Shares issued in the Metro and
Other Subsequent Acquisition
transactions...................... 1,282,910
------------
Shares estimated to be
outstanding....................... 10,370,865
============
F-8
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 241,263 $ 2,376,090
Accounts receivable.............
Trade, net................. 2,163,990 14,155,657
Shareholder and
affiliate............... 211,939 --
Other receivables.......... -- 416,097
Inventories..................... 531,819 5,345,255
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 254,039 469,894
Prepaid expenses and other
current assets................ 146,283 741,540
------------ -------------
Total current assets....... 3,549,333 23,504,533
PROPERTY AND EQUIPMENT, net.......... 3,136,363 13,041,445
GOODWILL, net........................ 49,194 60,973,453
OTHER NONCURRENT ASSETS.............. 357,122 1,132,322
NET ASSETS OF DISCONTINUED
OPERATIONS......................... -- 77,793
------------ -------------
Total assets............... $7,092,012 $ 98,729,546
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
obligations................... $ 596,941 $ 294,671
Short-term debt................. 209,948 --
Accounts payable and accrued
liabilities................... 2,391,955 14,908,477
Unearned revenue on service and
warranty contracts............ 162,755 1,833,801
Current billings in excess of
cost and estimated earnings on
uncompleted contracts......... 475,731 1,793,152
Deferred income taxes........... -- 301,937
------------ -------------
Total current
liabilities............. 3,837,330 19,132,038
LONG-TERM OBLIGATIONS, net of current
maturities......................... 1,564,309 7,608,563
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS, NONCURRENT..... -- 612,942
DEFERRED INCOME TAXES, net of current
portion............................ 187,237 262,367
OTHER NONCURRENT LIABILITIES......... -- 20,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $1 par value,
100,000 shares authorized,
24,303 issued and outstanding,
and $.001 par value,
50,000,000 shares authorized,
8,449,622 shares issued and
outstanding................... 24,303 8,450
Additional paid-in capital...... 105,040 81,578,718
Retained earnings (deficit)..... 1,373,793 (10,493,532)
------------ -------------
Total stockholders'
equity.................. 1,503,136 71,093,636
------------ -------------
Total liabilities and
stockholders' equity.... $7,092,012 $ 98,729,546
============ =============
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- ------------------------------
1995 1996 1995 1996
------------ -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES............................. $ 5,609,303 $ 9,233,483 $ 15,963,449 $ 23,325,855
COST OF SERVICES..................... 4,537,755 7,219,742 12,947,027 18,576,719
------------ -------------- -------------- --------------
Gross Profit.................... 1,071,548 2,013,741 3,016,422 4,749,136
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES*.......................... 732,732 4,587,042 2,171,958 6,855,015
------------ -------------- -------------- --------------
Operating income (loss)......... 338,816 (2,573,301) 844,464 (2,105,879)
OTHER INCOME (EXPENSE):
Interest expense*............... (26,789) (4,334,535) (107,445) (4,430,985)
Interest income................. 6,250 -- 12,272 4,308
Other........................... (8,962) 118,686 29,289 162,926
------------ -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT).......................... 309,315 (6,789,150) 778,580 (6,369,630)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. 119,395 (36,342) 308,617 113,858
------------ -------------- -------------- --------------
NET INCOME (LOSS).................... $ 189,920 $ (6,752,808) $ 469,963 $ (6,483,488)
============ ============== ============== ==============
</TABLE>
- ------------
* Includes $3.1 million and $4.2 million in compensation and finance costs,
respectively, related to the purchase of Enterprises Holding Company, an
affiliate of ARS.
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------- -------------------
1995 1996 1995 1996
-------- --------- --------- --------
REVENUES............................. $ 30,869 $ 36,725 $ 84,725 $ 98,261
COST OF SERVICES..................... 22,827 26,526 63,193 72,020
-------- --------- --------- --------
Gross Profit.................... 8,042 10,199 21,532 26,241
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,814 7,869 17,003 21,047
-------- --------- --------- --------
Operating income................ 2,228 2,330 4,529 5,194
OTHER INCOME (EXPENSE):
Interest expense................ -- -- -- (125)
Interest income................. 128 -- 252 52
Other........................... 38 224 114 313
-------- --------- --------- --------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 2,394 2,554 4,895 5,434
PROVISION FOR INCOME TAXES........... 1,124 1,133 2,268 2,492
-------- --------- --------- --------
INCOME FROM CONTINUING OPERATIONS.... $ 1,270 $ 1,421 $ 2,627 $ 2,942
======== ========= ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING.. 9,080 9,080 9,080 9,080
======== ========= ========= ========
EARNINGS PER SHARE................... $ .14 $ .16 $ .29 $ .32
======== ========= ========= ========
The accompanying notes are an integral part of these pro forma combined
financial statements.
F-11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
1995 1996
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................... $ 469,963 $ (6,483,488)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization... 347,041 511,226
Compensation and financing fees
on purchase of Enterprises
Holding Company............... -- 6,275,790
Deferred tax expense............ 12,941 42,345
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable,
net................ (850,898) (1,879,738)
Cost and estimated
earnings in excess
of billings........ 506,909 (196,287)
Inventory............. (98,348) (333,153)
Prepaid and other
current assets..... (14,968) (260,708)
Increase (decrease) in --
Accounts payable and
accrued
liabilities........ (105,941) 1,085,011
Deferred revenue...... 364,723 295,058
Other, net...................... 18,216 43,037
------------ --------------
Net cash provided by (used
in) operating
activities.............. 649,638 (900,907)
------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment..................... (206,586) (828,203)
Proceeds from sales of property
and equipment................. -- 136,998
Cash paid for business
acquisitions, net of cash
acquired...................... -- (28,467,699)
------------ --------------
Net cash used in investing
activities.............. (206,586) (29,158,904)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term
obligations................... (965,355) (21,722,606)
Proceeds from long-term
obligations................... 647,755 7,048,616
Issuances of Common Stock, net
of offering costs............. 79,078 52,724,965
Distribution to Founding Company
stockholders.................. -- (5,383,837)
Other, net...................... -- (472,500)
------------ --------------
Net cash provided by (used
in) investing
activities.............. (238,522) 32,194,638
------------ --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 204,530 2,134,827
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD................ 73,406 241,263
------------ --------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD............................. $ 277,936 $ 2,376,090
============ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for:
Interest................... $ 132,773 $ 165,147
Income taxes............... 188,813 473,234
For financial statement presentation purposes, Atlas Services, Inc. has
been identified as the accounting acquiror. The effective date of the Initial
Acquisitions for accounting purposes is September 30, 1996.
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
In October 1995, 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, plumbings, electrical and other systems in
homes and small commercial buildings and (ii) new installation services of those
systems in homes and small commercial facilities under construction. On
September 27, 1996, ARS acquired in separate transactions 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 closing of
the initial public offering (the "Offering") of ARS's Common Stock also
occurred on that date.
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 Founding Companies was accounted for
using the purchase method of accounting, with the results of operations included
from September 30, 1996, the effective closing date of the acquisitions for
accounting purposes. The allocation of purchase price to the assets acquired and
liabilities assumed has been initially assigned and recorded based on
preliminary estimates of fair value and may be revised as additional information
concerning the valuation of such assets and liabilities becomes available. Also,
the purchase price is based on preliminary estimates of value assigned to the
Company's Common Stock issued in such transactions which carry certain
restrictions regarding disposition by the holders, and such value may be revised
as additional information becomes available.
The accompanying consolidated statements of operations for the three and
nine months ended September 30, 1995 and 1996 reflect the Company on a
historical basis with Atlas as the accounting acquiror. The accompanying pro
forma combined statements of operations for the three and nine months ended
September 30, 1995 and 1996 reflect the results of the Company on a historical
basis adjusted for the effects of the acquisition of the Founding Companies
(including those acquired through the acquisition of EHC), the Offering and
certain assumptions that management deems reasonable and appropriate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the accounting policies of the
Company during the periods presented. For a description of these policies, refer
to Note 2 of Notes to Financial Statements of ARS as of and for the periods
ended December 31, 1995 and June 30, 1996 and each of the Founding Companies'
historical financial statements included herein.
3. LONG-TERM DEBT
On September 17, 1996, the Company entered into a credit facility with
NationsBank of Texas, N.A. (the "Credit Facility"). The Credit Facility
provides the Company with an unsecured revolving line of credit of up to $55
million, which may be used for general corporate purposes, including the 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 designated variable base
rate plus margins ranging from 0 to 25 basis points, depending on the ratio of
the Company's interest-bearing debt to its trailing earnings before interest,
taxes, depreciation and amortization. At the Company's option, the loans may
bear interest based on a designated London interbank offering rate plus a margin
ranging from 75 to 175 basis points, depending on the same ratio. 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 25 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also prohibits the payment of
F-13
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 1996
(UNAUDITED)
dividends by Company (except for dividends payable in Common Stock and certain
preferred stock), will not permit the Company to incur or assume other
indebtedness in excess of any amount equal to 5% of its consolidated net worth
and will require the Company to comply with certain financial covenants. The
Credit Facility will terminate and all amounts outstanding, if any, thereunder
will be due and payable in September 1999. The Company's subsidiaries have
guaranteed the repayment of all amounts due under the Credit Facility. As of
September 30, 1996, the Company had $6.3 million in outstanding borrowings under
the Credit Facility, bearing interest at a weighted average rate of
approximately 8.25% (the prime rate).
4. CAPITAL STOCK
On September 27, 1996, ARS completed the Offering, which involved the sale
by ARS of 4,200,000 shares of Common Stock at a price to the public of $15.00
per share. The net proceeds to ARS from the Offering (after deducting
underwriting discounts and commissions and offering expenses) were approximately
$52.2 million. Of this amount, $34.8 million was used to pay the cash portion of
the purchase prices relating to the acquisitions for the Founding Companies. On
October 7, 1996, ARS sold an additional 630,000 shares of Common Stock at $15.00
per share (which represents net proceeds to the Company of $8.8 million after
underwriting discounts and commissions) pursuant to an overallotment option
granted by ARS to the underwriters in connection with the Offering.
5. PRO FORMA EARNINGS PER SHARE
The computation of pro forma net income per share for the three and nine
months ended September 30, 1995 and 1996 is based on 9,079,622 weighted average
shares of Common Stock outstanding, which includes (i) 422,480 shares issued to
the founders of ARS, (ii) 844,962 shares issued on conversion of part of an ARS
convertible note, (iii) 2,805,053 shares issued as consideration in the
acquisitions of the Founding Companies, (iv) 137,140 shares issued in exchange
for $2.1 million of preferred stock of Enterprises Holding Company, the
predecessor owner of two of the Founding Companies, (v) 39,987 shares awarded
under the Company's 1996 Incentive Plan to certain employees and consultants of
the Company, (vi) 4,200,000 shares sold in the Offering and (vii) 630,000 shares
sold pursuant to the overallotment option.
6. INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective dates of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition dates.
7. SUBSEQUENT EVENTS
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.6 million in cash and
short-term notes and 1,282,910 shares of Common Stock. Funding of the cash
portion of the purchase prices and repayment of indebtedness assumed in
connection with the acquisitions was provided by borrowings under the Credit
Facility. In addition, the Company intends to fund the repayment of the
short-term notes issued in the acquisitions by additional borrowings under the
Credit Facility. After giving effect to these anticipated borrowings, the
remaining availability under the Credit Facility would be less than $2.4
million. While the Company believes its cash flow from operations is sufficient
to support its ongoing operations and anticipated capital expenditures, the
Company may need additional borrowing availability to support the Company's
aggressive acquisition program. The Company has initiated discussions with
NationsBank to evaluate additional financing opportunities, including a possible
increase in the borrowing limit under the Credit Facility.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying balance sheets of American Residential
Services, Inc. (a Delaware corporation), as of December 31, 1995 and June 30,
1996, and the related statements of operations, shareholders' deficit and cash
flows from Inception (October 24, 1995) through December 31, 1995 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Residential
Services, Inc. as of December 31, 1995 and June 30, 1996 and the results of its
operations and its cash flows from Inception through December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1996 (except with respect
to the matter discussed in Note 7,
as to which the date is September 9, 1996)
F-15
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
BALANCE SHEETS
DECEMBER 31, JUNE 30,
1995 1996
------------ --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 9,784 $ 235,088
Prepaid expenses and other
current assets................ 3,327 46,957
------------ --------------
Total current assets....... 13,111 282,045
PROPERTY AND EQUIPMENT, net.......... -- 45,141
OTHER NONCURRENT ASSETS.............. 19,325 3,297,698
------------ --------------
Total assets............... $ 32,436 $ 3,624,884
============ ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term debt................. $ 50,000 $ 1,200,000
Accounts payable and accrued
expenses...................... 141,077 3,437,334
------------ --------------
Total current
liabilities............. 191,077 4,637,334
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Preferred Stock: $.001 par
value, 10,000,000 shares
authorized; none issued or
outstanding................... -- --
Common stock, $.001 par value,
50,000,000 shares authorized,
449,471 shares issued and
outstanding................... 449 449
Additional paid-in capital...... 551 551
Deficit......................... (159,641) (1,013,450)
------------ --------------
Total shareholders'
deficit................. (158,641) (1,012,450)
------------ --------------
Total liabilities and
shareholders' deficit... $ 32,436 $ 3,624,884
============ ==============
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
INCEPTION SIX
(OCTOBER 24, 1995) MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ ------------
REVENUES............................. $ -- $ --
COST OF SERVICES..................... -- --
------------------ ------------
Gross profit.................... -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 159,641 833,997
OPERATING LOSS....................... (159,641) (833,997)
------------------ ------------
INTEREST EXPENSE..................... -- (19,812)
------------------ ------------
NET LOSS............................. $ (159,641) $ (853,809)
================== ============
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, Inception,
October 24, 1995................... -- $ -- $-- $ -- $ --
Stock Issuance.................. 449,471 449 551 -- 1,000
Net loss........................ -- -- -- (159,641) (159,641)
--------- ------- ----------- -------------- -------------
BALANCE, December 31, 1995........... 449,471 449 551 (159,641) (158,641)
Net loss........................ -- -- -- (853,809) (853,809)
--------- ------- ----------- -------------- -------------
BALANCE, June 30, 1996............... 449,471 $ 449 $ 551 $ (1,013,450) $ (1,012,450)
========= ======= =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCEPTION
(OCTOBER 24, 1995) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (159,641) $ (853,809)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation and amortization... -- 2,606
Changes in operating assets and
liabilities --
Increase in --
Prepaid expenses and other
current assets.......... (3,327) (43,630)
Other noncurrent assets.... (19,325) (3,278,373)
Increase in --
Accounts payable and
accrued expenses........ 141,077 3,296,257
------------------ -----------
Net cash used in operating
activities.................... (41,216) (876,949)
------------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... -- (47,747)
------------------ -----------
Net cash used in investing
activities.................... -- (47,747)
------------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 50,000 1,150,000
Proceeds from issuance of common
stock......................... 1,000 --
------------------ -----------
Net cash provided by
financing activities.... 51,000 1,150,000
------------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 9,784 225,304
CASH AND CASH EQUIVALENTS, beginning
of period.......................... -- 9,784
------------------ -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 9,784 $ 235,088
================== ===========
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Residential Services, Inc. (ARS or the Company), was founded on
October 24, 1995 to create a leading national provider of (i) comprehensive
maintenance, repair and replacement services for heating, ventilating and air
conditioning, plumbing, electrical, and other systems in homes and commercial
buildings and (ii) new installation services of those systems in homes and
commercial facilities under construction. ARS intends to acquire seven local and
regional residential services companies (the Acquisitions), complete an initial
public offering (the Offering) of its common stock and, subsequent to the
Offering, continue to acquire, through merger or purchase, similar companies to
expand its national and regional operations. In June 1996, ARS filed a
registration on Form S-1 for the sale of its common stock.
ARS's primary assets at December 31, 1995 and June 30, 1996 are cash and
deferred offering costs. ARS has not conducted any operations, and all
activities to date have related to the Acquisitions and the Offering. Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
4). There is no assurance that the Acquisitions discussed below will be
completed and that ARS will be able to generate future operating revenues.
Funding for the deferred offering costs has been provided by Equus II
Incorporated (Equus II). ARS is dependent upon the Offering to fund the amounts
due to Equus II, the pending acquisitions and future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for current year losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-20
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but
does not require, a fair value-based method of accounting for employee stock
option plans which results in compensation expense recognition when stock
options are granted. As permitted by SFAS No. 123, the Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Prepaid expenses and other current assets consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Prepaid insurance.................... $-- $ 39,291
Other................................ 3,327 7,666
------------- ----------
$ 3,327 $ 46,957
============= ==========
Other noncurrent assets consists of
the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Deferred offering costs.............. $19,325 $3,225,040
Other................................ -- 72,658
------------- ----------
$19,325 $3,297,698
============= ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Accrued accounting and legal
expense............................ $ -- $ 3,134,310
Accrued compensation and benefits.... 79,167 249,643
Other accrued expenses............... 61,910 53,381
------------ ------------
$141,077 $ 3,437,334
============ ============
SHORT-TERM DEBT:
The Company had borrowings from Equus II under a $2.6 million credit
facility totaling $50,000 and $1,200,000 at December 31, 1995 and June 30, 1996,
respectively. The borrowings are unsecured, bear interest at prime plus .25
percent (8.5 percent at June 30, 1996) and mature December 31, 1996. A portion
of this facility is convertible into 10 percent of the outstanding common stock
of ARS prior to completion of the Offering.
F-21
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' DEFICIT:
In connection with the organization and initial capitalization of ARS, the
Company issued 1,000 shares of common stock for $1,000 (see Note 7).
5. COMMITMENTS AND CONTINGENCIES:
BONUS AWARDS
In June 1996, the Board of Directors granted certain key employees
incentive cash bonus awards for 1996 which are based, subject to the overall
performance of the Company, on the performance of the Common Stock after the
Offering as compared to the performance of each of the stocks included in the
Standard & Poor's 500 Stock Index (the S&P 500). The amount of each award will
be determined by multiplying the officer's annual base salary by a percentage
determined by ranking the Common Stock's price performance, including reinvested
dividends, if any (Total Stockholder Return), among Total Stockholder Returns of
all the stocks in the S&P 500.
6. RELATED PARTY TRANSACTION:
The Company has signed a definitive agreement to acquire Enterprises
Holding Company (EHC), a related company through common ownership, to be
effective with the Offering. EHC will be acquired for a total consideration,
subject to a working capital adjustment, consisting of 378,400 shares of Common
Stock and the assumption and/or repayment of approximately $17.3 million of
indebtedness and other obligations (including $2.6 million of EHC preferred
stock being converted into 137,139 shares of Common Stock and $0.5 million
cash), approximately $14.3 million of which will be repaid either out of a
portion of the net proceeds of the Offering or through bank borrowings.
7. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS:
ARS effected a 333-for-one-stock split on February 2, 1996, and an
approximately 1.35 for-one-stock split on June 14, 1996 of its common stock for
each share of common stock then outstanding. In addition, on February 2, 1996,
authorized shares were increased from 1,000 to 50,000,000. The effects of the
common stock dividends have been retroactively reflected on the balance sheet
and in the accompanying notes.
F-22
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approved the 1996 Incentive Plan (the Plan), which amends
and restates the 1996 Stock Option Plan and provides for the granting or
awarding of stock options and stock appreciation rights to nonemployee
directors, officers and other key employees (including officers of the Founding
Companies) and independent contractors. The number of shares authorized and
reserved for issuance under the Plan is limited to the greater of 1,550,000
shares or 15 percent of the number of shares of Common Stock outstanding on the
last day of the preceding calendar quarter. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of September 9, 1996, the
Company has granted 10 year options covering an aggregate of 1,445,000 shares of
common stock. Management believes the option price of the options granted is
equal to or in excess of the market value of the stock at the date of grant.
OPTIONS OPTION
DATE OF GRANT GRANTED PRICE
- ------------------------------------- --------- --------------
January 31, 1996..................... 495,000 $ 8.00
March 6, 1996........................ 75,000 9.60
March 29, 1996....................... 25,000 10.20
April 30, 1996....................... 50,000 10.80
June 12, 1996........................ 655,000 Offering Price
July 15, 1996........................ 85,000 Offering Price
August 30, 1996...................... 15,000 Offering Price
September 9, 1996.................... 45,000 Offering Price
---------
1,445,000
=========
ARS and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the Founding Companies) to be
effective with the Offering. The Founding Companies are General Heating
Engineering Company, Inc.; Atlas Services, Inc., and Subsidiary; Service
Enterprises, Inc. and subsidiaries (Crown); Florida Heating and Air
Conditioning, Inc., and Related Companies; DIAL ONE Meridian and Hoosier, Inc.;
ADCOT, Inc. (A-ABC); and Climatic Corporation of Vero Beach. Crown and A-ABC
will be acquired indirectly through the direct acquisition of their parent
corporation, EHC. The aggregate consideration that will be paid by ARS to
acquire the Founding Companies is, subject to working capital adjustments,
approximately $34.8 million in cash and 2,805,065 shares of ARS common stock
(based on an assumed initial public offering price of $15 per share, the
midpoint of the estimated initial public offering price range).
On March 19, 1996, the Company issued to Equus II a warrant to purchase
100,000 shares of Common Stock exercisable at the Offering price. The warrants
are exercisable at any time after the closing of the Offering of the Company
until five years from such date. The number of shares represented by the warrant
is subject to adjustment for stock dividends and stock splits.
Subsequent to December 31, 1995, the Company has incurred additional costs,
including professional fees and travel, associated with the acquisition of the
Founding Companies and the Offering. Accordingly, accrued liabilities and
amounts due to Equus II have increased to approximately $1.2 million as of June
30, 1996. A portion of this note will be converted into 844,965 shares of ARS
Common Stock in connection with the Offering.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On September 27, 1996, ARS completed the Offering, which involved the
issuance of 4,200,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions). On October 7, 1996,
ARS sold an additional 630,000 shares of Common Stock at a price of $15.00 per
share (before deducting underwriting discounts and commissions) pursuant to an
overallotment option
F-23
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted by the Company in connection with the Offering. The proceeds from these
transactions, net of underwriting discounts and commissions of $1.05 per share
and after deducting estimated expenses of the Offering, were approximately $61.0
million. Of this amount, $34.8 million was used to fund the cash portion of the
purchase prices relating to the acquisitions of the Founding Companies. The
Company also has paid to the former owners approximately $4.7 million as working
capital adjustments of which approximately $1.8 million was paid in the fourth
quarter of 1996. In addition, a portion of the Equus II note was converted to
844,965 shares of ARS Common Stock.
On September 17, 1996, the Company entered into a credit facility (the
"Credit Facility") with NationsBank of Texas, Inc. ("NationsBank"). The
Credit Facility provides the Company with an unsecured revolving line of credit
of up to $55 million, which may be used for general corporate purposes,
including the refinancing of Founding Company indebtedness, future acquisitions,
capital expenditures and working capital. Loans under the Credit Facility bear
interest at a designated variable base rate plus margins ranging from 0 to 25
basis points, depending on the ratio of the Company's interest-bearing debt to
its trailing earnings before interest, taxes, depreciation and amortization. At
the Company's option, the loans may bear interest based on a designated London
interbank offering rate plus a margin ranging from 75 to 175 basis points,
depending on the same ratio. Commitment fees of 25 to 50 basis points per annum
are payable on the unused portion of the line of credit. The Credit Facility
contains a sublimit for standby letters of credit of up to $5.0 million. The
Credit Facility also prohibits the payment of dividends by the Company (except
for dividends payable in Common Stock and certain preferred stock), will not
permit the Company to incur or assume other indebtedness in excess of any amount
equal to 5% of its consolidated net worth and will require the Company to comply
with certain financial convenants. The Credit Facility will terminate and all
amounts outstanding, if any, thereunder will be due and payable in September
1999. The Company's subsidiaries have guaranteed the repayment of all amounts
due under the Credit Facility. As of September 30, 1996, the Company had $6.3
million in outstanding borrowings under the Credit Facility, bearing interest at
a weighted average rate of approximately 8.25% (the prime rate).
During the fourth quarter of 1996, the Company acquired the business
operations of 13 companies for an aggregate of approximately $41.6 million in
cash and short-term notes and 1,282,910 shares of Common Stock. Funding of the
cash portion of the purchase prices and repayment of indebtedness assumed in
connection with the acquisitions was provided by borrowings under the Credit
Facility. In addition, the Company intends to fund the repayment of the
short-term notes issued in the acquisitions by additional borrowings under the
Credit Facility. After giving effect to these anticipated borrowings, the
remaining availability under the Credit Facility would be less than $2.4
million. While the Company believes its cash flow from operations is sufficient
to support its ongoing operations and anticipated capital expenditures, the
Company may need additional borrowing availability to support the Company's
aggressive acquisition program. The Company has initiated discussions with
NationsBank to evaluate additional financing opportunities, including a possible
increase in the borrowing limit under the Credit Facility.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To General Heating Engineering Company, Inc.:
We have audited the accompanying balance sheets of General Heating
Engineering Company, Inc. (a Delaware corporation), as of December 31, 1994 and
1995, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Heating Engineering
Company, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-25
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
BALANCE SHEETS
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,258,467 $ 3,369,929
Investments..................... 2,475,000 2,000,000
Accounts receivable --
Trade, net of allowance of
$159,910 and
$126,650............... 4,129,536 3,740,406
Other receivables.......... 129,308 47,588
Notes receivable --
Shareholders............... 92,500 308,139
Other...................... -- 39,870
Inventories..................... 2,375,590 2,215,659
Prepaid expenses and other
current assets................. 17,331 13,871
-------------- --------------
Total current
assets............ 11,477,732 11,735,462
PROPERTY AND EQUIPMENT, net.......... 1,941,076 2,100,638
OTHER NONCURRENT ASSETS.............. 376,017 483,014
-------------- --------------
Total assets.......... $ 13,794,825 $ 14,319,114
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses....................... $ 2,736,479 $ 3,248,968
Unearned revenue on service and
warranty contracts............. 797,820 894,766
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 319,323 139,764
-------------- --------------
Total current
liabilities....... 3,853,622 4,283,498
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $20 par value,
5,000 shares
authorized, 2,752 shares
issued, 462 shares
outstanding.................... 55,040 55,040
Additional paid-in capital...... 666,913 666,913
Retained earnings............... 10,811,994 10,906,407
Treasury stock, 2,290 shares at
cost........................... (1,592,744) (1,592,744)
-------------- --------------
Total shareholders'
equity............ 9,941,203 10,035,616
-------------- --------------
Total liabilities and
shareholders'
equity............ $ 13,794,825 $ 14,319,114
============== ==============
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 34,642,267 $ 36,333,827 $ 35,159,389 $ 25,533,943 $ 27,053,588
COST OF SERVICES..................... 27,393,298 29,927,352 28,866,207 20,964,789 21,814,017
-------------- -------------- -------------- -------------- --------------
Gross profit.................... 7,248,969 6,406,475 6,293,182 4,569,154 5,239,571
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,011,270 5,244,776 5,280,402 3,901,706 4,511,968
-------------- -------------- -------------- -------------- --------------
Income from operations.......... 2,237,699 1,161,699 1,012,780 667,448 727,603
OTHER INCOME:
Interest income................. 189,223 177,149 299,116 224,281 106,461
Other........................... 7,891 66,724 58,517 -- 30,406
-------------- -------------- -------------- -------------- --------------
NET INCOME........................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
============== ============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK SHAREHOLD-
----------------- PAID-IN RETAINED --------------------- ERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------- ----------- ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,752 $55,040 $ 648,912 $ 9,811,451 (2,290) $ (1,592,744) $ 8,922,659
Dividend......................... -- -- -- (1,744,798) -- -- (1,744,798)
Net income....................... -- -- -- 2,434,813 -- -- 2,434,813
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1993........... 2,752 55,040 648,912 10,501,466 (2,290) (1,592,744) 9,612,674
Capital contributions............ -- -- 18,001 -- -- -- 18,001
Dividends........................ -- -- -- (1,095,044) -- -- (1,095,044)
Net income....................... -- -- -- 1,405,572 -- -- 1,405,572
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1994........... 2,752 55,040 666,913 10,811,994 (2,290) (1,592,744) 9,941,203
Dividends........................ -- -- -- (1,276,000) -- -- (1,276,000)
Net income....................... -- -- -- 1,370,413 -- -- 1,370,413
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1995........... 2,752 $55,040 $ 666,913 $ 10,906,407 (2,290) $ (1,592,744) $ 10,035,616
====== ======= =========== ============ ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
---------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 2,434,813 $ 1,405,572 $ 1,370,413 $ 891,729 $ 864,470
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization.... 465,076 495,396 508,497 388,446 386,082
Loss on sale of investments...... -- -- 13,626 -- --
(Gain) loss on sale of property
and equipment.................. 4,811 (38,978) 56,152 -- (30,406)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ (1,427,017) 210,329 470,850 50,590 (1,064,511)
Inventories.................... (416,216) 49,258 159,931 (590,681) (367,755)
Prepaid expenses and other
current assets.............. (37,843) (1,907) 3,460 (478,475) (84,556)
Other noncurrent assets........ (83,112) (22,741) (106,997) 9,865 (17,106)
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 631,061 143,263 512,489 1,030,329 (193,889)
Unearned revenue on service and
warranty contracts.......... 17,782 31,739 96,946 428,742 (14,721)
Billings in excess of costs and
estimated earnings on
uncompleted contracts....... (732,654) (152,605) (179,559) (319,323) 50,339
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
operating activities........ 856,701 2,119,326 2,905,808 1,411,222 (472,053)
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ 5,000 112,530 42,533 26,607 41,900
Additions of property and
equipment........................ (941,748) (786,863) (766,744) (483,169) (186,357)
Purchase of investments............ -- (2,475,000) (4,193,948) (3,975,000) (1,000,000)
Proceeds from sale of
investments...................... -- -- 4,655,322 3,225,000 3,000,000
------------ ------------ ------------ ----------- ------------
Net cash provided by (used in)
investing activities........ (936,748) (3,149,333) (262,837) (1,206,562) 1,855,543
------------ ------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt....... -- -- -- -- 3,524,063
(Increase) decrease in notes
receivable....................... -- 882,500 (255,509) -- --
Dividends.......................... (1,744,798) (1,095,044) (1,276,000) (622,000) (7,773,469)
Capital contributions.............. -- 18,001 -- -- --
------------ ------------ ------------ ----------- ------------
Net cash used in financing
activities.................. (1,744,798) (194,543) (1,531,509) (622,000) (4,249,406)
------------ ------------ ------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (1,824,845) (1,224,550) 1,111,462 (417,340) (2,865,916)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 5,307,862 3,483,017 2,258,467 2,258,467 3,369,929
------------ ------------ ------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 3,483,017 $ 2,258,467 $ 3,369,929 $ 1,841,127 $ 504,013
============ ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
General Heating Engineering Company, Inc. (a Delaware corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of air conditioning, heating and fireplace systems in new and
preexisting residential and commercial buildings in Washington, D.C. and the
surrounding area.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are valued at the lower of cost or market using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-30
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. A reserve for warranty costs is recorded upon
completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, each shareholder reports his share of the
Company's taxable earnings or losses in his personal federal and state tax
returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............. 7 $ 3,258,907 $ 3,376,461
Furniture and fixtures............... 7 159,227 169,453
Leasehold improvements............... 20 800,370 879,938
Machinery and equipment.............. 10 858,033 919,393
Computer and telephone equipment..... 5 442,853 467,219
------------ ------------
5,519,390 5,812,464
Less -- Accumulated depreciation and
amortization....................... 3,578,314 3,711,826
------------ ------------
Property and equipment,
net........................ $ 1,941,076 $ 2,100,638
============ ============
F-31
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."
Adoption of this standard did not materially impact the Company's financial
statements. The following is a summary of investment securities:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Certificates of deposit.............. $ -- $ 2,000,000
U.S. Treasury notes.................. 2,475,000 --
------------ ------------
$ 2,475,000 $ 2,000,000
============ ============
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
--------------------------------------
1993 1994 1995
---------- ------------ ------------
Balance at beginning of year......... $ 146,848 $ 127,443 $ 159,910
Additions charged to costs and
expenses........................... 45,996 104,613 71,930
Deductions for uncollectible
receivables
written off........................ (67,954) (103,848) (127,810)
Bad debt recoveries.................. 2,553 31,702 22,620
---------- ------------ ------------
$ 127,443 $ 159,910 $ 126,650
========== ============ ============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Accounts payable, trade.............. $ 1,586,930 $ 1,998,941
Accrued compensation and benefits.... 823,476 916,013
Warranty accrual..................... 292,895 292,895
Other accrued expenses............... 33,178 41,119
-------------- --------------
$ 2,736,479 $ 3,248,968
============== ==============
Installation contracts in progress are as follows:
DECEMBER 31
------------------------------
1994 1995
-------------- --------------
Costs incurred on contracts in
progress........................... $ 19,975,656 $ 18,705,791
Estimated earnings, net of losses.... 9,912,429 8,989,404
-------------- --------------
29,888,085 27,695,195
Less -- Billings to date............. 30,207,408 27,834,959
-------------- --------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... $ (319,323) $ (139,764)
============== ==============
5. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company, up to a maximum liability of 1 percent of each
participating employee's annual compensation. The Company has the right to
F-32
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
make additional discretionary contributions. Total contributions by the Company
under this plan to provide contributions and pay expenses were approximately
$42,000, $67,000 and $78,000 during 1993, 1994 and 1995, respectively. Amounts
due to this plan were approximately $50,000 and $30,000 for the years ended
December 31, 1994 and 1995, respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical or life insurance, dental and short-term disability
benefits. The funds withheld are used to pay actual claims, administrative
expenses and stop-loss insurance protection premiums. Such stop-loss insurance
covers claims to a maximum aggregate liability of $1,000,000 and $35,000 per
participant. For the years ended December 31, 1993, 1994 and 1995, the Company
contributed approximately $57,000, $91,000 and $129,000, respectively, to this
plan in addition to amounts withheld from employees. Contributions due to this
plan were approximately $91,000 and $216,000 for the years ended December 31,
1994 and 1995, respectively.
6. LEASES:
The Company conducts a portion of its operations in leased facilities under
operating lease agreements with a company primarily owned by the shareholders.
Total amounts paid under these related-party leases were approximately $261,000,
$387,000 and $384,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. In January 1996, the Company extended each of these leases,
commencing January 1, 1996, for 10 years. The following schedule shows the
future minimum rentals to be made under these leases:
Year ending December 31 --
1996.......................... $ 517,281
1997.......................... 517,505
1998.......................... 531,468
1999.......................... 552,728
2000.......................... 574,837
Thereafter.................... 3,367,564
------------
$ 6,061,383
============
7. RELATED-PARTY TRANSACTIONS:
The Company has notes receivable from its shareholders in the amounts of
$92,500 and $308,139 as of December 31, 1994 and 1995, respectively. These notes
are unsecured, bear interest at 7 percent per annum and are due upon demand.
Interest income recognized by the Company on these notes during the years ended
December 31, 1994 and 1995, was approximately $1,000 and $12,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-33
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
At December 31, 1995, the Company had an outstanding letter of credit of
$75,000 to secure the purchase of certain inventories.
9. SALES TO SIGNIFICANT CUSTOMERS:
During 1993, 1994 and 1995, one customer accounted for approximately 13
percent, 16 percent and 21 percent, respectively, of the Company's revenue.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of the cash surrender value of life insurance,
with a total carrying value of approximately $387,000. In addition, the Company
made distributions in respect of the Company's estimated S Corporation
accumulated adjustment account of approximately $8,488,000 at the time of
closing. As of September 30, 1996, additional distributions in the aggregate
amount of $2,642,000 had been accrued but had not yet been distributed.
F-34
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Services, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Services, Inc. (a South Carolina corporation), and subsidiary as of June 30,
1994 and 1995, and December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1995, and the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
represent fairly, in all material respects, the consolidated financial position
of Atlas Services, Inc., and subsidiary as of June 30, 1994 and 1995, and
December 31, 1995, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended June 30, 1995, and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-35
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30
-------------------------- DECEMBER 31,
1994 1995 1995
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......... $ 204,883 $ 383,190 $ 241,263
Accounts receivable --
Trade, net of allowance of
$29,989, $39,866 and $39,866.. 1,634,219 2,098,213 2,163,990
Affiliates...................... 188,829 178,554 211,939
Inventories........................ 478,447 474,093 531,819
Prepaid expenses and other current
assets.......................... 20,763 112,207 146,283
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 323,901 382,653 254,039
------------ ------------ ------------
Total current assets....... 2,851,042 3,628,910 3,549,333
PROPERTY AND EQUIPMENT, net.......... 3,203,143 3,169,128 3,136,363
OTHER NONCURRENT ASSETS.............. 280,321 342,776 406,316
------------ ------------ ------------
Total assets............... $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt............................ $ 577,545 $ 619,851 $ 596,941
Short-term debt.................... 220,807 207,335 209,948
Accounts payable and accrued
expenses........................ 2,328,709 2,859,998 2,391,955
Unearned revenue on service and
warranty contracts.............. 135,487 150,628 162,755
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 192,408 355,186 475,731
------------ ------------ ------------
Total current
liabilities............. 3,454,956 4,192,998 3,837,330
LONG-TERM DEBT, net of current
maturities......................... 2,047,763 1,702,324 1,564,309
DEFERRED INCOME TAXES................ 150,506 187,806 187,237
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value; 100,000
shares authorized, 2,254, 2,345
and 24,303 shares issued and
outstanding..................... 2,254 2,345 24,303
Additional paid-in capital......... 48,011 81,877 105,040
Retained earnings.................. 631,016 973,464 1,373,793
------------ ------------ ------------
Total shareholders'
equity.................. 681,281 1,057,686 1,503,136
------------ ------------ ------------
Total liabilities and
shareholders'
equity.................. $ 6,334,506 $ 7,140,814 $7,092,012
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------------- DECEMBER 31, --------------------------
1993 1994 1995 1995 1995 1996
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,209,885 $ 15,625,211 $ 21,228,756 $22,048,103 $ 15,963,449 $ 23,325,855
COST OF SERVICES..................... 8,182,867 12,676,789 17,714,515 17,810,928 12,947,027 18,576,719
------------ ------------ ------------ ------------ ------------ ------------
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.
F-37
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1992............... 2,191 $ 2,191 $ 32,611 $ 328,067 $ 362,869
Stock issuance.................. 30 30 6,850 -- 6,880
Net income...................... -- -- -- 35,768 35,768
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1993............... 2,221 2,221 39,461 363,835 405,517
Stock issuance.................. 33 33 8,550 -- 8,583
Net income...................... -- -- -- 267,181 267,181
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1994............... 2,254 2,254 48,011 631,016 681,281
Stock issuance.................. 91 91 33,866 -- 33,957
Net income...................... -- -- -- 342,448 342,448
------ ------- ---------- ---------- --------------
BALANCE, June 30, 1995............... 2,345 $ 2,345 $ 81,877 $ 973,464 $1,057,686
====== ======= ========== ========== ==============
BALANCE, December 31, 1994........... 2,345 $ 2,345 $ 81,877 $ 689,806 $ 774,028
Stock split (10 for 1).......... 21,105 21,105 (21,105) -- --
Stock issuance.................. 853 853 44,268 -- 45,121
Net income...................... -- -- -- 683,987 683,987
------ ------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 24,303 $24,303 $ 105,040 $1,373,793 $1,503,136
====== ======= ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30 YEAR ENDED SEPTEMBER 30
---------------------------------- DECEMBER 31, ----------------------
1993 1994 1995 1995 1995 1996
---------- ---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 35,768 $ 267,181 $ 342,448 $ 683,987 $ 469,963 $ 572,575
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and amortization.... 271,683 375,186 501,796 490,554 347,041 516,285
Deferred income taxes
(benefit)....................... (1,144) 20,022 (22,265) (50,894) 12,941 42,345
Loss on sale of property and
equipment....................... 54,786 -- -- -- -- (393)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... (13,227) (822,197) (453,719) (505,195) (850,898) (1,671,231)
Inventories................. (175,733) (134,837) 4,354 (139,118) (98,348) (333,153)
Prepaid expenses and other
current assets............. 13,350 (1,800) (31,878) 7,150 (14,968) (260,708)
Costs and estimated earnings
in excess of billings on
uncompleted contracts...... (27,506) (276,261) (58,752) 539,181 506,909 (196,287)
Other noncurrent assets..... (62,020) (63,362) (101,110) (66,703) -- 105,716
Increase (decrease) in --
Accounts payable and accrued
expenses................... 211,091 1,233,347 531,289 (219,215) (105,941) 1,182,536
Unearned revenue on service
and warranty contracts..... 49,963 53,271 15,141 (10,274) 18,216 (48,301)
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... (10,909) 51,603 162,778 52,327 364,723 343,359
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
operating activities... 346,102 702,153 890,082 781,800 649,638 252,743
---------- ---------- ---------- ------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment......................... 173,037 -- -- -- -- 136,998
Additions to property and
equipment......................... (439,920) (980,761) (429,127) (258,257) (206,586) (828,203)
Cash paid for acquisitions, net of cash acquired.. -- -- -- -- -- (131,065)
---------- ---------- ---------- ------------ ---------- ----------
Net cash used in
investing activities... (266,883) (980,761) (429,127) (258,257) (206,586) (822,270)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of long- and short-term
debt.............................. 478,187 887,990 347,001 442,394 647,755 728,010
Principal payments of long- and
short-term debt................... (513,870) (529,624) (663,606) (843,201) (965,355) (604,002)
Proceeds from stock issuance....... 6,880 8,583 33,957 45,121 79,078 --
---------- ---------- ---------- ------------ ---------- ----------
Net cash provided by
(used in) financing
activities............. (28,803) 366,949 (282,648) (355,686) (238,522) 124,008
---------- ---------- ---------- ------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 50,416 88,341 178,307 167,857 204,530 (445,519)
CASH AND CASH EQUIVALENTS, beginning
of period........................... 66,126 116,542 204,883 73,406 73,406 241,263
---------- ---------- ---------- ------------ ---------- ----------
CASH AND CASH EQUIVALENTS, end of
period.............................. $ 116,542 $ 204,883 $ 383,190 $ 241,263 $ 277,936 $ (204,256)
========== ========== ========== ============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 286,112 $ 210,549 $ 225,374 $ 177,031 $ 132,773 $ 165,147
Income taxes..................... $ -- $ 56,477 $ 271,924 $ 251,750 $ 188,813 $ 473,234
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Atlas Services, Inc., (a South Carolina corporation) and subsidiary (the
Company), are primarily engaged in the installation and maintenance, repair and
replacement of plumbing, air conditioning and heating and electrical systems in
new and preexisting residential and commercial buildings throughout South
Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Atlas Services, Inc., and its wholly owned subsidiary. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the results of operations and cash flows with
respect to the consolidated interim financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the contract on a straight-line basis.
F-40
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK-SPLIT
During 1995, the Company effected a ten-for-one stock split of the
Company's Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-41
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED JUNE 30
USEFUL LIVES ---------------------------- DECEMBER 31,
IN YEARS 1994 1995 1995
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Land and land improvements........... -- $ 508,129 $ 508,129 $ 508,129
Buildings and leasehold
improvements....................... 40 1,387,578 1,396,235 1,387,599
Transportation equipment............. 5 1,703,373 1,955,070 2,068,795
Machinery and equipment.............. 5 - 7 591,299 666,548 738,347
Furniture and fixtures............... 5 - 10 233,373 290,961 313,025
------------- ------------- -------------
4,423,752 4,816,943 5,015,895
Less -- Accumulated depreciation..... 1,220,609 1,647,815 1,879,532
------------- ------------- -------------
Property and equipment, net..... $ 3,203,143 $ 3,169,128 $ 3,136,363
============= ============= =============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------------- DECEMBER 31,
1993 1994 1995 1995
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at beginning of year......... $ 0 $ 0 $ 29,989 $ 29,989
Additions charged to costs and
expenses........................... 79,128 84,119 45,952 40,381
Deductions for uncollectible
receivables written off............ (79,128) (54,130) (36,075) (30,504)
---------- ---------- ---------- ------------
$ 0 $ 29,989 $ 39,866 $ 39,866
========== ========== ========== ============
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
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)
============= ============= ============
</TABLE>
F-42
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are included in the accompanying balance sheets under the
following captions:
JUNE 30
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... $ 323,901 $ 382,653 $ 254,039
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (192,408) (355,186) (475,731)
----------- ----------- ------------
$ 131,493 $ 27,467 $ (221,692)
=========== =========== ============
5. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving line of credit payable to a bank,
due July 21, 1996, with interest due monthly at 9.375 percent and is secured by
accounts receivable and inventory. The amounts outstanding as of June 30, 1994
and 1995, and December 31, 1995, are $220,807, $207,335 and $209,948,
respectively.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
Mortgage note payable to a bank, with
monthly installments of $8,056
principal plus interest at 7.25%,
secured by real estate and life
insurance policies, due December
1998............................... $ 1,401,667 $ 1,305,000 $ 1,256,666
Mortgage note payable to a bank, with
monthly installments of $1,000
principal plus interest at prime
plus 1.25% (9.75% at December 31,
1995), secured by real estate, due
May 1997........................... 103,400 93,400 87,977
Mortgage note payable to a bank, with
monthly installments of $581,
bearing interest at 9.5%, secured
by real estate, due June 2017...... 56,775 56,173 53,185
Transportation equipment notes
payable and capitalized leases,
with monthly installments totaling
$48,255, due from July 1994 to
January 1998, bearing interest from
5.9% to 13.3%, secured by
transportation equipment........... 816,486 675,929 574,953
Note payable on equipment, with
monthly installments of $2,083
principal plus interest at prime
plus 1.50% (10% at December 31,
1995), secured by equipment, due
June 1998.......................... 100,000 75,000 62,500
Other................................ 146,980 116,673 125,969
------------- ------------- ------------
2,625,308 2,322,175 2,161,250
Less -- Current maturities........... 577,545 619,851 596,941
------------- ------------- ------------
$ 2,047,763 $ 1,702,324 $ 1,564,309
============= ============= ============
</TABLE>
F-43
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 596,941
1997............................ 334,907
1998............................ 158,688
1999............................ 110,343
2000............................ 109,567
Thereafter...................... 850,804
-------------
$ 2,161,250
=============
Management estimates that the fair value of its debt obligations
approximates the historical value of $2,371,198 at December 31, 1995.
6. RETIREMENT PLANS:
The Company has a defined contribution profit-sharing plan covering
substantially all employees. The Company's contribution for each of the years
ended June 30, 1993, 1994 and 1995, and December 31, 1995, amounted to
approximately $25,000, $35,000, $30,000 and $21,000, respectively.
7. LEASES:
The Company leases four facilities under noncancelable leases, which expire
in January 1998, January 2005, May 2005 and February 2006. Rental expense for
the years ended June 30, 1993, 1994 and 1995, and December 31, 1995, was
approximately $44,000, $72,000, $127,000 and $174,000, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of $0,
$2,000, $39,000 and $82,000 for the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, respectively. The following represents future minimum
rental payments under noncancelable operating leases:
Year ending December 31 --
1996............................ $ 259,577
1997............................ 266,680
1998............................ 230,187
1999............................ 228,600
2000............................ 228,600
Thereafter...................... 1,045,550
-------------
$ 2,259,194
=============
F-44
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain owned facilities under three noncancelable
leases to third parties, which expire in September 1997, October 1998 and
November 2000. Rental income received for the years ended June 30, 1993, 1994
and 1995, and December 31, 1995, was approximately $148,000, $135,000, $105,000
and $86,000, respectively. The following represents future minimum rental income
under noncancelable leases:
Year ending December 31 --
1996............................ $ 167,250
1997............................ 148,500
1998............................ 83,875
1999............................ 42,000
2000............................ 38,500
-----------
$ 480,125
===========
8. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ 23,106 $ 129,390 $ 215,040 $419,486
Deferred........................ (3,107) 18,236 (19,913) (43,440)
State --
Current......................... 2,952 21,066 29,462 65,666
Deferred........................ 1,963 1,786 (2,352) (7,454)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
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:
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
Tax provision at the statutory
rate............................... $ 20,632 $ 148,804 $ 191,993 $380,203
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction........ 3,244 15,081 17,892 38,420
Nondeductible expenses.......... 5,272 14,264 33,308 29,088
Other........................... (4,234) (7,671) (20,956) (13,453)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
</TABLE>
F-45
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Accruals and reserves not deductible
until paid......................... $ (65,224) $ (127,289) $ (180,124)
Depreciation and amortization........ 157,365 196,365 195,771
Other................................ 42,609 43,409 45,944
----------- ------------ ------------
Total deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30
------------------------- DECEMBER 31,
1994 1995 1995
----------- ------------ ------------
Deferred tax assets --
Current......................... $ (79,907) $ (163,948) $ (235,433)
Long-term....................... (1,865) (1,865) (6,723)
----------- ------------ ------------
Total..................... (81,772) (165,813) (242,156)
----------- ------------ ------------
Deferred tax liabilities --
Current......................... 64,151 88,627 109,787
Long-term....................... 152,371 189,671 193,960
----------- ------------ ------------
Total..................... 216,522 278,298 303,747
----------- ------------ ------------
Net deferred income tax
liabilities............. $ 134,750 $ 112,485 $ 61,591
=========== ============ ============
9. RELATED-PARTY TRANSACTIONS:
The Company has a receivable from its majority shareholder in the amount of
approximately $172,000, $171,000 and $195,000 as of June 30, 1994 and 1995, and
December 31, 1995, respectively. This receivable accrues interest at 8 percent.
Interest income recognized during the years ended June 30, 1993, 1994 and 1995,
and December 31, 1995, was approximately $10,000, $13,000, $13,000 and $17,000,
respectively.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. SALES TO SIGNIFICANT CUSTOMERS:
During the years ended June 30, 1993 and 1995, one customer accounted for
approximately 11 percent, and 11 percent, respectively, of the Company's
revenue.
F-46
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of cash surrender value of life insurance and
equipment net of distributed liabilities, with a total net carrying value of
approximately $101,000 and $22,000 as of September 30, 1996.
F-47
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30,
1996
------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 324,283
Accounts receivable --
Trade, net of allowance of
$58,675................... 500,795
Other receivables.......... 322,311
Inventories..................... 1,472,638
Prepaid expenses and other
current assets................. 263,547
------------
Total current
assets............... 2,883,574
PROPERTY AND EQUIPMENT, net.......... 5,055,957
GOODWILL, net........................ 12,636,127
OTHER NONCURRENT ASSETS.............. 322,372
------------
Total assets.......... $ 20,898,030
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... 1,832,231
Accounts payable and accrued
expenses....................... 2,184,207
Unearned revenue on extended
warranty contracts, current.... 304,745
------------
Total current
liabilities.......... 4,321,183
LONG-TERM DEBT, net of current
maturities......................... 12,947,631
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 612,942
DEFERRED INCOME TAXES................ 114,133
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... 92,060
COMMITMENTS AND CONTINGENCIES
SERIES A PREFERRED STOCK $100 par;
49,810 shares authorized, 25,381
issued and outstanding............. 2,538,100
SERIES B PREFERRED STOCK, $100 par;
190 shares authorized, issued and
outstanding........................ 19,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
1,000,000 shares authorized,
1,000 issued and outstanding... 1,000
Retained earnings............... 251,981
------------
Total shareholders'
equity............... 252,981
------------
Total liabilities and
shareholders'
equity............... $ 20,898,030
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
---------------------
(UNAUDITED)
REVENUES............................. $22,410,865
COST OF SERVICES..................... 13,369,713
---------------------
Gross profit.................... 9,041,152
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,629,887
---------------------
Income from operations.......... 2,411,265
OTHER INCOME (EXPENSE):
Interest income................. 28,652
Interest expense................ (776,957)
Other........................... 19,477
---------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 1,682,437
PROVISION FOR INCOME TAXES........... 537,034
---------------------
NET INCOME FROM CONTINUING
OPERATIONS......................... 1,145,403
INCOME FROM DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ----------------- -------------
<S> <C> <C> <C> <C>
Balance, Inception, February 16, 1996
(unaudited)........................ -- $ -- $ -- $ --
Stock issuance (unaudited)...... 1,000 1,000 -- 1,000
Preferred stock dividends
(unaudited)................... -- -- (57,100) (57,100)
Net income (unaudited).......... -- -- 309,081 309,081
------ ------ ----------------- -------------
Balance, June 30, 1996 (unaudited)... 1,000 $1,000 $ 251,981 $ 252,981
====== ====== ================= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
--------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 758,327
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 304,146
Gain on sale of property and
equipment...................... (16,672)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ (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.
F-51
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Enterprises Holding Company (EHC or "the Company") (a Texas corporation),
and subsidiaries was formed February 16, 1996 solely for the purpose of
acquiring the operations of Service Enterprises, Inc. (SEI) and subsidiaries.
On March 19, 1996, EHC acquired all of the outstanding stock of SEI and
certain real estate owned by the former shareholder of SEI for $17,500,000. (See
SEI's financial statements elsewhere herein.) SEI is primarily engaged in the
maintenance, repair and replacement service-related activities of plumbing, air
conditioning, electrical repair and other home improvement services in Houston
and the surrounding areas.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. (ADCOT) for $2,000,000. (See ADCOT's financial statements included
elsewhere herein.)
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS.
All outstanding shares of EHC's common stock and preferred stock will be
exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Enterprises Holding Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the period from
inception, February 16, 1996, through September 30, 1996 are unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
INVENTORIES
Inventories consist of parts and service related supplies held for use in
the ordinary course of business and are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-52
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSET ACQUIRED
The excess of the aggregate purchase price paid by the Company in the
acquisition of businesses, accounted for as a purchase, over the fair market
value of the net assets acquired is amortized on a straight-line basis over 40
years. As of June 30, 1996, accumulated amortization was approximately $87,000.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
F-53
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES JUNE 30,
IN YEARS 1996
------------- --------------
Land................................. -- $1,433,246
Building and improvements............ 20 1,756,260
Leasehold improvements............... 5 - 10 405,580
Equipment............................ 3 - 7 3,652,650
Furniture and fixtures............... 3 - 7 1,160,701
--------------
8,408,437
Less -- Accumulated depreciation and
amortization....................... 3,352,480
--------------
Property and equipment,
net..................... $5,055,957
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
1996
----------
Balance at inception, February 16,
1996.................................. $ 0
Balance acquired at acquisition date.... 53,495
Additions charged to costs and
expenses.............................. 10,273
Deductions for uncollectible receivables
written off........................... (5,093)
----------
$ 58,675
==========
Prepaid expenses and other current assets consist of the following:
JUNE 30,
1996
----------
Prepaid insurance....................... $ 174,800
Deferred income taxes................... 39,068
Other prepaid assets.................... 49,679
----------
$ 263,547
==========
Accounts payable and accrued expenses consist of the following:
JUNE 30,
1996
------------
Accounts payable, trade................. $ 971,331
Accrued compensation and benefits....... 282,453
Other accrued expenses.................. 930,423
------------
$ 2,184,207
============
5. DISCONTINUED OPERATIONS:
Subsequent to the purchase of ADCOT by SEI, the board of directors of EHC
approved the disposition of ADCOT's retail appliance sales division. The
allocation of purchase price to the fair market value of the net assets of ADCOT
acquired by SEI will be based on preliminary estimates of fair value and may be
F-54
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
revised when additional information concerning asset and liability valuations is
obtained. Accordingly, any gain or loss on the sale of the appliance sales
division will be considered an adjustment of purchase price.
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
Note payable to Equus II Incorporated,
with quarterly installments of
$187,500 beginning June 19, 1999,
bearing interest at 12% payable
quarterly, due March 19, 2003,
unsecured and subordinated to notes
payable to a bank..................... $ 4,800,000
Revolving credit facility of $5,000,000,
bearing interest at prime plus 1%
(9.25% at June 30, 1996) due June 15,
1999, secured by equipment, inventory
and accounts receivable............... 4,372,500
Note payable to a bank, with quarterly
installments of $34,208 beginning
January 15, 1997, bearing interest at
8.34% payable quarterly, due June 15,
1999, secured by real estate.......... 2,025,500
Notes payable to former shareholder of
Crown, with quarterly installments of
$100,000, bearing interest at prime
(8.25% at June 30, 1996), due March
19, 1999, unsecured................... 1,000,000
Note payable to a bank with quarterly
installments of $46,688, beginning
January 15, 1997, bearing interest at
prime plus 1%, due June 1999, secured
by accounts receivable inventory and
property.............................. 747,000
Note payable to a bank, with quarterly
installments of $17,571 beginning
January 15, 1997, bearing interest at
prime plus 1% payable quarterly, due
June 15, 1999, secured by real
estate................................ 474,500
Note payable to a bank, bearing interest
at prime plus 1%, due October 15, 1996
secured by accounts receivable,
inventory and equipment............... 1,000,000
Various notes payable, bearing interest
at rates ranging from 8.0% to 9.0%,
due from February 1998 to August 1999,
secured by equipment.................. 360,362
--------------
Total.................... 14,779,862
Less -- Current maturities.............. (1,832,231)
--------------
Long-term debt, net of
current maturities.... $ 12,947,631
==============
F-55
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The aggregate maturities of long-term debt as of June 30, 1996, are as
follows:
December 31,
1997............................... $ 1,832,231
1998............................... 1,659,731
1999............................... 7,050,400
2000............................... 750,000
2001............................... 750,000
Thereafter......................... 2,737,500
--------------
$ 14,779,862
==============
Management estimates that the fair value of its debt obligations
approximates the historical value of $14,779,862 at June 30, 1996.
8. SHAREHOLDERS' EQUITY
In connection with the organization and initial capitalization of EHC, the
Company issued 1,000 shares of common stock for a total of $1,000 in February
1996.
As an amendment to the Company's certificate of incorporation, on March 19,
1996, the Company created an additional series of preferred stock designated as
Series B Preferred Stock and increased the total number of authorized shares to
1,050,000 shares, consisting of 1,000,000 shares of common stock, par value $.01
per share, and 50,000 shares of preferred stock, par value $100 per share. The
first series of preferred stock is the Series A Preferred Stock with authorized
shares of 49,810 and the second series of preferred stock is the Series B
Preferred Stock with authorized shares of 190.
SERIES A PREFERRED STOCK
On March 19, 1996, the Company issued 24,810 shares of voting, Series A
Preferred Stock, par value $100 per share, (Series A). The holder of the Series
A shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year, commencing June 30, 1996. On June 30, 1996, the
Company recorded a dividend of $56,700 payable in 567 shares of Series A
Preferred Stock.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
SERIES B PREFERRED STOCK
On March 19, 1996, the Company issued 190 shares of voting Series B
Preferred Stock, par value $100 per share, (Series B). The holder of the Series
B shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year,
F-56
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
commencing June 30, 1996. On June 30, 1996, the Company recorded a dividend of
$400 payable in 4 shares of Series A Preferred Stock.
The holder of Series B shares has the right and option to convert all of
the then outstanding shares of Series B Preferred Stock into an aggregate number
of shares of common stock equal to 95% of the number of shares of common stock
outstanding at the conversion date if the IPO date does not occur before March
1, 1997 or a default occurs before March 1, 1997.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
9. LEASES:
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized in the period from inception
(February 16, 1996) through June 30, 1996 was approximately $10,350.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
Six months ended 1996.............. $ 20,700
1997............................... 35,700
1998............................... 25,000
---------
$ 81,400
=========
10. INCOME TAXES:
Federal and state income taxes are as follows:
FOR THE
NINE MONTHS
ENDED
JUNE 30,
1995
-------------
Federal --
Current............................ $ 210,740
Deferred........................... --
State --
Current............................ 18,595
Deferred........................... --
-------------
$ 229,335
=============
F-57
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
Provision (benefit) at the statutory
rate.................................. $ 181,136
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. 15,983
Nondeductible expenses............. 32,216
Other...................................
-------------------
$ 229,335
===================
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1996
----------
Depreciation and amortization........... $ 36,213
Net operating loss carryforward......... (33,098)
Accruals and reserves not deductible
until paid............................ (40,685)
Other................................... 112,635
----------
Net deferred income tax
liabilities............ $ 75,065
==========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1996
----------
Deferred tax assets --
Current............................ $ 39,068
Long-term.......................... 100,640
----------
Total.................... 139,708
Deferred tax liabilities, long-term..... 214,773
----------
Net deferred income tax
liabilities............ $ 75,065
==========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-58
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
GUARANTEES
SEI's former shareholder is required to make seven annual payments of
$75,000 each under a lawsuit settlement. SEI's former shareholder is also
required under this settlement to make four annual payments of $20,000 each,
beginning in 2003. The Company has guaranteed these settlement payments.
12. SUBSEQUENT EVENT:
The acquisition of the Company by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-59
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Service Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Service
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Enterprises, Inc., and subsidiaries as of December 31, 1994 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-60
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,093,394 $ 2,100,996
Certificates of deposit......... 1,100,000 1,100,000
Accounts receivable --
Trade, net of allowance of
$53,257 and $58,575..... 340,961 411,139
Shareholder and
affiliates.............. 278,187 10,308
Other receivables.......... 53,780 59,737
Inventories..................... 632,614 737,495
Prepaid expenses and other
current assets................. 194,038 251,941
------------ ------------
Total current
assets............ 3,692,974 4,671,616
PROPERTY AND EQUIPMENT, net.......... 988,147 1,277,677
OTHER NONCURRENT ASSETS.............. 185,333 193,333
------------ ------------
Total assets.......... $ 4,866,454 $ 6,142,626
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ -- $ 129,000
Short-term debt................. 620,312 251,562
Accounts payable and accrued
expenses....................... 672,082 890,945
------------ ------------
Total current
liabilities....... 1,292,394 1,271,507
LONG-TERM DEBT, net of current
maturities......................... -- 366,451
DEFERRED INCOME TAXES................ 130,367 114,133
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Preferred stock, $.01 par;
1,000,000 shares authorized,
none issued.................... -- --
Common stock, $.01 stated value;
2,000,000 and 50,000,000 shares
authorized, 2,000,000 and
14,000,000 issued and
outstanding.................... 20,000 140,000
Additional paid-in capital...... 1,205,760 1,085,760
Retained earnings............... 2,217,933 3,164,775
------------ ------------
Total shareholder's
equity............ 3,443,693 4,390,535
------------ ------------
Total liabilities and
shareholder's
equity............ $ 4,866,454 $ 6,142,626
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 16,268,452 $ 16,843,520 $ 19,123,858 $ 3,555,446 $ 4,152,017
COST OF SERVICES..................... 10,331,520 10,314,231 11,333,228 2,155,171 2,643,026
-------------- -------------- -------------- ------------ ------------
Gross profit.................... 5,936,932 6,529,289 7,790,630 1,400,275 1,508,991
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 5,698,182 5,836,643 6,164,598 1,347,708 1,519,226
-------------- -------------- -------------- ------------ ------------
Income from operations.......... 238,750 692,646 1,626,032 52,567 (10,235)
OTHER INCOME (EXPENSE):
Interest income................. 149,124 93,370 119,074 23,506 15,957
Interest expense................ (158,943) (76,544) (58,065) (14,401) (16,248)
Equity in losses of
unconsolidated affiliate...... (130,022) (61,751) -- -- --
Other........................... (661,414) 156,796 (10,546) (1,490) (9,220)
-------------- -------------- -------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES.... (562,505) 804,517 1,676,495 60,182 (19,746)
PROVISION (BENEFIT) FOR INCOME
TAXES.............................. (215,106) 589,241 629,653 23,298 (4,170)
-------------- -------------- -------------- ------------ ------------
NET INCOME (LOSS).................... $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
============== ============== ============== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-62
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,000,000 $ 20,000 $ 982,010 $2,650,056 $3,652,066
Net loss........................ -- -- -- (347,399) (347,399)
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1993........... 2,000,000 20,000 982,010 2,302,657 3,304,667
Capital contribution............ -- -- 223,750 -- 223,750
Dividend........................ -- -- -- (300,000) (300,000)
Net income...................... -- -- -- 215,276 215,276
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1994........... 2,000,000 20,000 1,205,760 2,217,933 3,443,693
Dividend........................ -- -- -- (100,000) (100,000)
Stock split (7 for 1)........... 12,000,000 120,000 (120,000) -- --
Net income...................... -- -- -- 1,046,842 1,046,842
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 14,000,000 140,000 1,085,760 3,164,775 4,390,535
========== ======== ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-63
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (347,399) $ 215,276 $ 1,046,842 $ 36,884 $ (15,576)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities --
Depreciation and amortization.... 328,882 364,708 371,402 82,558 93,532
Deferred income taxes
(benefit)...................... (233,911) 55,319 7,309 -- --
Equity in losses of
unconsolidated affiliate....... 130,022 61,751 -- -- --
Loss on sale of real estate...... 475,159 18,114 -- -- --
Gain on sale of property and
equipment...................... (99,629) (21,069) (13,699) -- --
Gain on sale of investment....... -- (219,125) -- -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable......... 59,245 (51,248) (76,135) 98,071 34,162
Inventories................. 3,113 158,356 (104,881) (153,073) (94,646)
Prepaid expenses and other
current assets............ 50,525 72,648 (89,446) (240,528) 499
Increase (decrease) in --
Accounts payable and accrued
expenses.................. 85,821 11,014 218,863 469,611 13,498
------------ ------------ ----------- ----------- ------------
Net cash provided by
operating activities.... 451,828 665,744 1,360,255 293,523 31,469
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of real
estate........................... -- 978,727 -- -- --
Proceeds from sale of property and
equipment........................ 115,906 38,628 24,793 -- --
Additions of property and
equipment........................ (861,640) (233,903) (672,026) -- --
(Purchase) sale of certificates of
deposit.......................... -- (1,100,000) -- -- 1,100,000
Proceeds from sale of investment... -- 450,961 -- -- --
Purchase of marketable
securities....................... -- (110,188) -- -- --
Proceeds from note receivable...... -- 100,000 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in) investing
activities.............. (745,734) 124,225 (647,233) -- 1,100,000
------------ ------------ ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Advances) payments of receivable
from shareholder
and affiliates................... (558,319) 1,636,469 267,879 (184,852) (2,113,308)
Borrowings of long- and short-term
debt............................. 1,804,649 137,500 495,451 -- --
Principal payments of long- and
short-term debt.................. (1,006,266) (1,495,266) (368,750) (97,187) (747,013)
Dividends.......................... -- (300,000) (100,000) -- --
Capital contribution............... -- 223,750 -- -- --
------------ ------------ ----------- ----------- ------------
Net cash provided by (used
in) financing
activities.............. 240,064 202,453 294,580 (282,039) (2,860,321)
------------ ------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (53,842) 992,422 1,007,602 11,484 (1,728,852)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 154,814 100,972 1,093,394 1,093,394 2,100,996
------------ ------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 100,972 $ 1,093,394 $ 2,100,996 $ 1,104,878 $ 372,144
============ ============ =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 98,522 $ 78,294 $ 61,230 $ 14,401 $ 23,399
Income taxes..................... $ 135,000 $ 220,951 $ 540,000 $ -- $ 10,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-64
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Service Enterprises, Inc. (SEI) (a Texas corporation), and subsidiaries
(the Company) are primarily engaged in the maintenance, repair and replacement
service-related activities of plumbing, air conditioning, electrical repair and
other home improvement services in Houston and the surrounding areas.
On March 19, 1996, all of the outstanding stock of SEI and certain real
estate owned by the former shareholder of SEI was acquired by Enterprises
Holding Company (EHC) for $17,500,000. EHC was formed solely for the purpose of
acquiring the Company and has no other operations. The accompanying unaudited
financial statements of the Company for the quarter ended March 31, 1996, do not
reflect the effect of the purchase of the Company by EHC.
In April 1996, the Company entered into a stock purchase agreement with
ADCOT, Inc. (ADCOT), to purchase all of the outstanding common stock of ADCOT
for $2,000,000. (See ADCOT's financial statements included elsewhere herein.)
EHC intends to enter into a definitive agreement with American Residential
Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS. All
outstanding shares of EHC's common stock and a portion of EHC's preferred stock
will be exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Service Enterprises, Inc., and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1995 and March 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the results of operations and cash
flows with respect to the consolidated interim financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-65
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenues when services are performed.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
STOCK SPLIT
During 1994, the Company effected a seven-for-one stock split of Company
Common Stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------- ------------ ------------
Leasehold improvements............ 5 - 10 $ 140,983 $ 140,333
Transportation equipment.......... 5 1,357,588 1,930,724
Tools and equipment............... 3 - 7 182,797 181,893
Telephone equipment............... 5 - 7 230,582 181,886
Furniture and fixtures............ 3 - 7 509,423 453,034
------------ ------------
2,421,373 2,887,870
Less -- Accumulated depreciation
and amortization................ 1,433,226 1,610,193
------------ ------------
Property and
equipment, net........ $ 988,147 $ 1,277,677
============ ============
F-66
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVESTMENT IN AFFILIATED COMPANY:
During July 1994, the Company sold a portion of its investment in American
Natural Gas Power, Inc. (ANGP), for $225,000 and an unsecured
noninterest-bearing note receivable for $35,000 due on demand or, if no demand
is made, due in June 1996. After the sale, the Company's interest in ANGP
decreased from approximately 33 percent at December 31, 1993, to approximately 8
percent at December 31, 1994, and accordingly is no longer accounted for under
the equity method. Included in other income is a net realized gain on sale of
$228,353 for the year ended December 31, 1994.
5. NOTE RECEIVABLE:
In January 1994, the Company sold an investment in real estate to an
individual. The consideration included a note receivable for $300,000,
collateralized by a second lien on the real estate, which bears interest at 4
percent, payable monthly, with principal due January 1999.
In the event that the aggregate of all principal payments made on or before
the third anniversary of this note, January 25, 1997, equals $200,000, this note
shall be discounted such that the note is fully discharged by the prepayment of
such $200,000 within the initial three-year period. This note has been recorded
at its prepayment value of $200,000, discounted to a market rate of interest,
and is included in other noncurrent assets on the accompanying consolidated
balance sheet.
Management estimates that the fair value of its note receivable
approximates its discounted historical carrying value of $193,000 at December
31, 1995.
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
-------------------------------
1993 1994 1995
--------- --------- ---------
Balance at beginning of year......... $ 22,000 $ 38,080 $ 53,257
Additions charged to costs and
expenses........................... 36,429 55,407 46,996
Deductions for uncollectible
receivables written off............ (24,118) (54,212) (53,495)
Bad debt recoveries.................. 3,769 13,982 11,817
--------- --------- ---------
$ 38,080 $ 53,257 $ 58,575
========= ========= =========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 303,280 $ 507,810
Accrued compensation and benefits.... 120,501 143,708
Accrued income taxes................. 29,809 71,781
Accrued taxes other than income
taxes.............................. 146,389 131,388
Other accrued expenses............... 72,103 36,258
---------- ----------
$ 672,082 $ 890,945
========== ==========
F-67
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
$850,000 demand line of credit with
bank; collateralized by
transportation equipment, accounts
receivable and inventory, interest
at prime plus 1% (9.5% at December
31, 1995), payable monthly,
principal due June 1996............ $ 200,000 $ 200,000
Demand note payable to bank;
cross-collateralized with the line
of credit, bearing interest at
prime plus 1%, principal of $25,000
plus interest, payable in monthly
installments through January
1996............................... 300,000 --
Demand note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, payable monthly, principal due
September 1996..................... 120,312 51,562
---------- ----------
$ 620,312 $ 251,562
========== ==========
Long-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, interest only through June
1996, payable monthly, then
principal of $21,500, plus
interest, payable in monthly
installments through June 1998..... $ -- $ 495,451
Less -- Current portion......... -- 129,000
---------- ----------
$ -- $ 366,451
========== ==========
The aggregate maturities of long-term debt are as follows:
Year ending December 31 --
1996............................ $ 129,000
1997............................ 258,000
1998............................ 108,451
----------
$ 495,451
==========
In connection with the bank indebtedness, the Company has entered into an
agreement which provides for certain affirmative covenants and restrictions,
including certain required financial ratios and restrictions on retained
earnings. As of December 31, 1995, the Company was in compliance with these
covenants.
The notes payable have been personally guaranteed by the Company's
shareholder.
Management estimates that the fair value of its debt obligations
approximates the historical value of $747,013 at December 31, 1995.
8. LEASES:
The Company operates in leased facilities under an agreement with its
shareholder and affiliates. The amount paid under these leases was $291,600,
$291,600 and $301,600 in 1993, 1994 and 1995, respectively. These leases were
canceled concurrent with the purchase of the Company and the leased facilities
by EHC.
F-68
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, the Company renewed a parking lot lease agreement with an
affiliated company, which expired September 30, 1995. The Company continued its
lease on a month-to-month basis. Amounts paid under this lease in 1993, 1994 and
1995 totaled $22,500, $30,000 and $25,000, respectively.
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized during 1993, 1994 and 1995 was
approximately $13,650, $11,400 and $16,400, respectively.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
1996............................ $ 41,400
1997............................ 35,700
1998............................ 25,000
----------
$ 102,100
==========
9. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Federal --
Current......................... $ 18,602 $ 466,159 $ 553,973
Deferred........................ (205,440) 48,585 6,419
State --
Current......................... 203 67,764 68,371
Deferred........................ (28,471) 6,733 890
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Provision (benefit) at the statutory
rate............................... $ (191,252) $ 273,536 $ 570,008
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction......... (18,657) 49,169 45,713
Nondeductible expenses.......... 6,553 184,418 18,743
Related-party gain on sale...... -- 76,075 --
Other................................ (11,750) 6,043 (4,811)
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
F-69
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 56,200 $ 36,213
Net operating loss carryforward...... (33,098) (33,098)
Accruals and reserves not deductible
until paid......................... (65,203) (40,685)
Other................................ 109,857 112,635
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 62,611 $ 39,068
Long-term....................... 103,598 100,640
---------- ----------
Total................. 166,209 139,708
Deferred tax liabilities,
long-term.......................... 233,965 214,773
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
10. RELATED-PARTY TRANSACTIONS:
The Company has receivables from its shareholder and from certain
affiliated entities related through common ownership and control in the amount
of $278,187 and $10,308 at December 31, 1994 and 1995, respectively. Receivables
from shareholder accrue interest at 5.5 percent. Interest income recognized
during 1993, 1994 and 1995 was approximately $147,800, $54,000 and $27,000,
respectively.
The Company acquired an investment in real estate held for sale from its
shareholder for $1,750,000 in January 1993. In January 1994, the investment was
sold for approximately $1,275,000, net of closing costs. At December 31, 1993,
the investment was written down to its net realizable value resulting in an
unrealized loss of approximately $475,000 included in other income (expense) on
the consolidated statement of operations.
In 1991, the Company received 250,000 shares of registered Exploration
Company of Louisiana (Exploration) common stock valued at $125,000 from its
shareholder in exchange for shares of stock in ANGP. During March 1994, the
Company sold the 250,000 shares of common stock of Exploration to its
shareholder for $348,750 resulting in a gain of $223,750 which has been
accounted for as additional paid-in capital.
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
F-70
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
GUARANTEES
The Company's former shareholder is required to make seven annual payments
of $75,000 each under a lawsuit settlement. The Company's former shareholder is
also required under this settlement to make four annual payments of $20,000
each, beginning in 2003. The Company has guaranteed these settlement payments.
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On March 19, 1996, Enterprise Holding Company ("EHC") acquired all of the
outstanding stock of SEI and certain real estate owned by the former shareholder
of SEI for $17,500,000.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. for $2,000,000.
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC would be acquired by
ARS. The acquisition of EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Florida Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Florida Heating
and Air Conditioning, Inc. (a Florida corporation), and related companies as of
December 31, 1994 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Florida
Heating and Air Conditioning, Inc., and related companies as of December 31,
1994 and 1995, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-72
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 735,749 $ 1,022,154
Accounts receivable --
Trade, net of allowance of
$41,305, $41,305 and
$41,305................. 1,418,022 1,394,895
Other receivables.......... 376,211 444,680
Inventories..................... 269,295 306,523
Prepaid expenses and other
current assets................. 61,056 52,992
------------ ------------
Total current
assets............ 2,860,333 3,221,244
PROPERTY AND EQUIPMENT, net.......... 458,964 495,110
OTHER NONCURRENT ASSETS.............. 27,896 38,509
------------ ------------
Total assets.......... $ 3,347,193 $ 3,754,863
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 52,477 $ 100,166
Accounts payable and accrued
expenses....................... 1,296,472 1,626,569
Payable to shareholder.......... 640,447 641,804
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 508,209 367,519
Deferred income taxes........... 256,022 287,454
------------ ------------
Total current
liabilities....... 2,753,627 3,023,512
LONG-TERM DEBT, net of current
maturities......................... 45,689 18,017
DEFERRED INCOME TAXES................ 68,015 42,339
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock.................... 9,800 9,800
Additional paid-in capital...... 4,000 4,000
Retained earnings............... 466,062 657,195
------------ ------------
Total shareholders'
equity............ 479,862 670,995
------------ ------------
Total liabilities and
shareholders'
equity............ $ 3,347,193 $ 3,754,863
============ ============
The accompanying notes are an integral part of these combined financial
statements.
F-73
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 15,845,183 $ 14,510,455 $ 11,057,138 $ 11,266,545
COST OF SERVICES..................... 12,079,290 10,541,122 8,248,236 8,437,954
-------------- -------------- -------------- --------------
Gross profit.................... 3,765,893 3,969,333 2,808,902 2,828,591
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,321,394 3,738,253 2,697,057 2,838,858
-------------- -------------- -------------- --------------
Income from operations.......... 444,499 231,080 111,845 (10,267)
OTHER INCOME (EXPENSE):
Interest expense................ (23,338) (11,743) (10,303) (20,126)
Other........................... 12,833 (8,238) (4,008) 13,933
-------------- -------------- -------------- --------------
INCOME BEFORE INCOME TAXES........... 433,994 211,099 97,534 (16,460)
PROVISION FOR INCOME TAXES........... 3,832 13,966 10,053 9,000
-------------- -------------- -------------- --------------
NET INCOME........................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-74
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,600 $9,800 $4,000 $ 90,960 $104,760
Dividend........................ -- -- -- (55,060) (55,060)
Net income...................... -- -- -- 430,162 430,162
------ ------ ---------- --------- --------------
BALANCE, December 31, 1994........... 2,600 9,800 4,000 466,062 479,862
Dividend........................ -- -- -- (6,000) (6,000)
Net income...................... -- -- -- 197,133 197,133
------ ------ ---------- --------- --------------
BALANCE, December 31, 1995........... 2,600 $9,800 $4,000 $ 657,195 $670,995
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-75
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 183,860 195,662 144,785 135,500
Deferred income taxes........... 1,274 5,756 364,260 --
Gain on sale of property and
equipment..................... 25,241 (12,303) (12,303) (307)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........... (331,298) (45,342) (207,121) (191,897)
Inventories................... (33,374) (37,228) (549,819) (45,901)
Prepaid expenses and other
current assets............. 112,642 8,064 261,902 18,949
Other noncurrent assets....... (4,915) (10,613) (4,837) 27,024
Increase (decrease) in --
Accounts payable and accrued
expenses................... (15,654) 330,097 343,316 151,116
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... 269,917 (140,690) 87,372 68,221
------------ ------------ ------------ ------------
Net cash provided by operating
activities.................... 637,855 490,536 515,036 137,245
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 38,190 16,704 16,704 28,778
Additions of property and
equipment....................... (199,281) (236,209) (222,551) (151,498)
------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (161,091) (219,505) (205,847) (122,720)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... -- 1,357 (547,643) (641,804)
Borrowings of long-term debt....... 276,291 185,511 185,511 (161,352)
Principal payments of long-term
debt............................ (346,573) (165,494) (133,392) 203,251
Dividends.......................... (55,060) (6,000) (6,000) (6,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (125,342) 15,374 (501,524) (605,905)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 351,422 286,405 (192,335) (591,380)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 384,327 735,749 735,749 1,022,154
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 735,749 $ 1,022,154 $ 543,414 $ 430,774
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 25,931 $ 11,743 $ 5,871 $ 20,126
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-76
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Florida Heating and Air Conditioning, Inc. (a Florida corporation) and its
three affiliated companies (collectively, the Company), are primarily engaged in
the installation and maintenance, repair and replacement of air conditioning and
heating systems in new and preexisting residential and commercial buildings in
Southeast Florida.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Florida Heating and Air Conditioning, Inc., and its affiliated
companies (see Note 11) which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim combined financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
F-77
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the companies in the affiliated group have elected S Corporation
status as defined by the Internal Revenue Code, whereby the Company is not
subject to taxation for federal purposes. Under S Corporation status, the
shareholders report their share of the Company's taxable earnings or losses in
their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-78
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment........... 5 $ 869,115 $ 1,051,880
Machinery and equipment............ 7 115,186 115,774
Computer and telephone equipment... 5 - 7 343,166 354,674
Leasehold improvements............. 7 57,151 57,151
Furniture and fixtures............. 7 39,308 39,308
------------ ------------
1,423,926 1,618,787
Less -- Accumulated depreciation
and amortization................. 964,962 1,123,677
------------ ------------
Property and
equipment, net......... $ 458,964 $ 495,110
============ ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 41,305 $ 41,305
Additions to costs and expenses...... 53,132 25,038
Deductions for uncollectible
receivables written off............ (53,132) (25,038)
---------- ----------
$ 41,305 $ 41,305
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Accounts payable, trade.............. $ 1,002,209 $ 1,283,034
Accrued compensation and benefits.... 150,638 198,175
Other accrued expenses............... 143,625 145,360
------------ ------------
$ 1,296,472 $ 1,626,569
============ ============
Installation contracts in progress are as follows:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Costs incurred on contracts in
progress........................... $ 1,680,864 $ 985,003
Estimated earnings, net of losses.... 575,928 351,711
------------ ------------
2,256,792 1,336,714
Less -- Billings to date............. 2,765,002 1,704,233
------------ ------------
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. $ (508,210) $ (367,519)
============ ============
F-79
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $10,500. The notes bear interest at
rates ranging from 7 percent to 9 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 100,166
1997............................ 18,017
----------
$ 118,183
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $118,183 at December 31, 1995.
The Company has a $200,000 line of credit with a financial services
company. The line of credit expires August 31, 1996, and bears interest at prime
plus 1 percent per annum. The line of credit is secured by a lien on accounts
receivable and inventory and is guaranteed by the shareholders. There was no
balance outstanding under this line of credit at December 31, 1995.
6. LEASES:
The Company leases facilities from a company which is owned by the
shareholders. The lease expires in 2000 and provides for rents increasing at 5
percent per year. Total amounts paid under this related-party lease were
approximately $198,000 and $198,000 for the years ended December 31, 1994 and
1995, respectively. The Company also leases a facility from a third party, which
expires in 1997. The rent paid under this lease was approximately $15,000 per
year for the year ended December 31, 1994 and 1995. The leases provide for the
Company to pay taxes, maintenance, insurance and certain other operating costs
of the leased property. The leases contain renewal provisions.
The Company leases vehicles for a shareholder and affiliates. The lease
payments under these vehicle leases were approximately $31,000 and $45,000 for
the years ended December 31, 1994 and 1995, respectively.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 234,897
1997............................ 204,438
1998............................ 184,252
1999............................ 193,465
2000............................ 82,242
-----------
$ 899,294
===========
F-80
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The S Corporation in the affiliated group will terminate its S Corporation
status concurrent with the effective date of the Offering. The Company is
subject to taxation in certain states based upon the jurisdiction in which
revenues are earned.
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995
--------- ---------
Federal --
Current......................... $ 2,098 $ 6,733
Deferred........................ 1,088 4,915
State --
Current......................... 460 1,477
Deferred........................ 186 841
--------- ---------
$ 3,832 $ 13,966
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------
1994 1995
------------ ----------
Provision at the statutory rate...... $ 147,558 $ 71,774
Increase (decrease) resulting from --
Income of S Corporation......... (143,878) (59,557)
State income tax, net of benefit
for federal deduction......... 370 1,398
Other........................... (218) 351
------------ ----------
$ 3,832 $ 13,966
============ ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Loss from limited partnership
investment......................... $ 192,585 $ 230,844
Cash to accrual adjustment........... 189,614 136,674
Other................................ (58,162) (37,725)
---------- ----------
Net deferred income tax
liabilities.......................... $ 324,037 $ 329,793
========== ==========
F-81
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 16,275 $ 11,972
Long-term....................... 27,975 25,998
---------- ----------
Total...................... 44,250 37,970
Deferred tax liabilities --
Current......................... 272,297 299,426
Long-term....................... 95,990 68,337
---------- ----------
Total...................... 368,287 367,763
---------- ----------
Net deferred income tax
liabilities............. $ 324,037 $ 329,793
========== ==========
8. RELATED-PARTY TRANSACTIONS:
One of the shareholders loans the Company funds as needed. The loans are
payable on demand and, under certain conditions, bear interest at prime plus 1
percent. The amount payable to the shareholder is $640,447 and $641,804 at
December 31, 1994 and 1995, respectively. No interest was incurred or paid
during the years ended December 31, 1994 and 1995, related to these loans.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1994 two customers accounted for approximately 22% of the Company's
sales. During 1995, one customer accounted for approximately 14% of the
Company's sales.
11. SHAREHOLDERS' EQUITY:
The common stock ownership of the corporate entities is as follows:
AS OF DECEMBER 31, 1995 AND 1994
------------------------------------
SHARES SHARES PAR
AUTHORIZED OUTSTANDING VALUE
----------- ----------- ------
Florida Heating and Air Conditioning,
Inc. .............................. 1,000 800 $10.00
Florida Heating and Air Conditioning
Service, Inc. ..................... 600 600 1.00
Florida Heating and Air Duct, Inc.... 10,000 600 1.00
Bullseye Air Conditioning, Inc. ..... 600 600 1.00
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company entered into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-82
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIAL ONE Meridian and Hoosier, Inc.:
We have audited the accompanying balance sheets of DIAL ONE Meridian and
Hoosier, Inc. (an Indiana corporation), as of December 31, 1994 and 1995, and
the related statements of operations, shareholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIAL ONE Meridian and
Hoosier, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-83
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
BALANCE SHEETS
DECEMBER 31
--------------------------
1994 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 427,005 $ 856,754
Investments..................... 150,000 --
Accounts receivable --
Trade, net of allowance of
$41,595 and $54,050..... 869,316 989,963
Shareholder and
affiliates.............. 6,316 14,261
Other receivables.......... 19,098 26,459
Inventories..................... 345,934 249,773
Prepaid expenses and other
current assets................. 72,239 96,545
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 42,717 16,825
------------ ------------
Total current
assets............ 1,932,625 2,250,580
PROPERTY AND EQUIPMENT, net.......... 829,316 919,238
OTHER NONCURRENT ASSETS.............. 28,567 18,819
------------ ------------
Total assets.......... $ 2,790,508 $ 3,188,637
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 262,046 $ 266,830
Accounts payable and accrued
expenses....................... 488,197 638,224
Unearned revenue on service
contracts...................... 353,045 423,259
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 78,049 32,131
------------ ------------
Total current
liabilities....... 1,181,337 1,360,444
LONG-TERM DEBT, net of current
maturities......................... 610,180 544,483
DEFERRED INCOME TAXES................ -- 13,309
OTHER NONCURRENT LIABILITIES......... -- --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, no par value;
1,000 shares authorized, 598
shares issued and 588
outstanding.................... 7,201 7,201
Additional paid-in capital...... 35,000 35,000
Retained earnings............... 956,890 1,228,300
Treasury stock, 10 shares at
cost........................... (100) (100)
------------ ------------
Total shareholder's
equity............ 998,991 1,270,401
------------ ------------
Total liabilities and
shareholder's
equity............ $ 2,790,508 $ 3,188,637
============ ============
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
---------------------------- ----------------------------
1994 1995 1995 1996
------------ -------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES............................. $ 8,066,155 $ 10,132,706 $ 7,499,254 $ 11,508,090
COST OF SERVICES..................... 5,797,066 7,280,888 5,357,009 7,795,049
------------ -------------- ------------ --------------
Gross profit.................... 2,269,089 2,851,818 2,142,245 3,713,041
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,988,791 2,349,482 1,660,059 2,784,557
------------ -------------- ------------ --------------
Income from
operations......... 280,298 502,336 482,186 928,484
OTHER INCOME (EXPENSE):
Interest income................. 8,517 23,399 13,820 25,642
Interest expense................ (56,585) (86,097) (64,725) (111,835)
Other........................... 36,817 10,259 13,371 18,000
------------ -------------- ------------ --------------
INCOME BEFORE INCOME TAXES........... 269,047 449,897 444,652 860,291
PROVISION FOR INCOME TAXES........... 110,365 178,487 176,442 328,208
------------ -------------- ------------ --------------
NET INCOME........................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
============ ============== ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 588 $7,201 $ 35,000 $ 798,208 $ (100) $ 840,309
------ ------ ---------- ---------- -------- --------------
Net income...................... -- -- -- 158,682 -- 158,682
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1994........... 588 7,201 35,000 956,890 (100) 998,991
Net income...................... -- -- -- 271,410 -- 271,410
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1995........... 588 $7,201 $ 35,000 $1,228,300 $ (100) $1,270,401
====== ====== ========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31 ENDED SEPTEMBER 30
-------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 158,682 $ 271,410 $ 268,210 $ 532,083
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 205,310 245,028 190,423 242,023
Deferred income taxes........... 108,303 45,302 32,890 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivables....... (183,259) (128,008) (772,782) (583,573)
Inventories................ (129,922) 96,161 58,137 (5,756)
Prepaid expenses and other
current assets.......... (14,768) (29,873) 30,511 33,694
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... 29,530 25,892 28,577 18,615
Other noncurrent assets.... 2,606 (16,678) (2,589) --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 86,294 150,027 161,430 373,482
Unearned revenue on service
contracts............... 60,469 70,214 44,661 140,661
Billings in excess of costs
and estimated earnings
on uncompleted
contracts............... 27,852 (45,918) 217,618 161,757
Other noncurrent
liabilities............. -- -- -- --
------------ ------------ ------------ --------------
Net cash provided by operating
activities.................... 351,097 683,557 257,086 912,986
------------ ------------ ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... (318,444) (334,950) (224,668) (783,078)
Purchase of investment.......... (150,000) -- -- --
Proceeds from sale of
investment.................... -- 150,000 150,000 --
Cash paid for acquisition, net
of cash acquired.............. -- -- -- (297,496)
------------ ------------ ------------ --------------
Net cash used in investing
activities.............. (468,444) (184,950) (74,668) (1,080,574)
------------ ------------ ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 451,815 200,639 126,226 1,065,854
Principal payments of long-term
debt.......................... (183,134) (261,552) (199,865) (258,375)
(Advances) payments of
receivable from shareholder
and affiliates................ 17,940 (7,945) -- (7,622)
------------ ------------ ------------ --------------
Net cash provided by (used
in) financing
activities.............. 286,621 (68,858) (73,639) 799,857
------------ ------------ ------------ --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 169,274 429,749 108,779 632,269
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 257,731 427,005 427,005 856,754
------------ ------------ ------------ --------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 427,005 $ 856,754 $ 535,784 $ 1,489,023
============ ============ ============ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 56,585 $ 86,097 $ 54,290 $ 99,632
Income taxes.................... $ 20,000 $ 126,137 $ 6,280 $ 152,758
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
DIAL ONE Meridian and Hoosier, Inc., (an Indiana corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of residential and commercial air conditioning and heating systems
in Indianapolis and the surrounding areas.
The Company and its shareholder intend to enter into a definitive agreement
with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of parts and supplies for use in the ordinary course of
business and are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-88
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
WARRANTY COSTS
The Company warrants labor for one or five years after installation on new
air conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Land and building.................. 30 $ 145,920 $ 183,320
Leasehold improvements............. 10 191,823 212,461
Transportation equipment........... 3 - 4 827,628 950,262
Machinery and equipment............ 7 162,243 165,367
Furniture and fixtures............. 5 280,527 369,956
Telephone equipment................ 7 - 10 47,291 109,016
------------ ------------
1,655,432 1,990,382
Less -- Accumulated depreciation
and amortization................. 826,116 1,071,144
------------ ------------
Property and equipment,
net....................... $ 829,316 $ 919,238
============ ============
F-89
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 13,609 $ 41,595
Additions charged to costs and
expenses........................... 43,451 32,071
Deductions for uncollectible
receivables written off............ (15,465) (19,616)
---------- ----------
$ 41,595 $ 54,050
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 128,155 $ 185,409
Accrued compensation and benefits.... 228,886 254,393
Warranty accrual..................... 60,754 79,102
Other accrued expenses............... 70,402 119,320
---------- ----------
$ 488,197 $ 638,224
========== ==========
Installation contracts in progress are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs incurred on contracts in
progress............................. $ 195,350 $ 243,727
Estimated earnings, net of losses.... 93,439 96,263
---------- ----------
288,789 339,990
Less -- Billings to date............. 324,121 355,296
---------- ----------
$ (35,332) $ (15,306)
========== ==========
The following are included in the accompanying balance sheets under the
following captions:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 42,717 $ 16,825
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (78,049) (32,131)
---------- ----------
$ (35,332) $ (15,306)
========== ==========
F-90
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable, due in monthly
installments of $4,167 plus
interest at prime plus 1.25% (9.75%
at December 31, 1995) and secured
by accounts receivable, inventory
and equipment, matures November 30,
1999............................... $ 245,837 $ 195,833
Land contract, maturing in November
2003, due in monthly installments
of $1,456 including interest at 8%,
collateralized with the related
property deed held in escrow....... 111,123 102,238
Note payable, due in monthly
installments of $2,500 plus
interest at prime plus 1.25% and
secured by accounts receivable,
inventory and equipment, matures
July 31, 1998...................... 107,500 77,500
Capital leases, maturing from 1996 to
2000, interest ranging from 8.94%
to 10%, secured by transportation
equipment.......................... 403,057 420,536
Other................................ 4,709 15,206
---------- ----------
872,226 811,313
Less -- Current maturities........... 262,046 266,830
---------- ----------
$ 610,180 $ 544,483
========== ==========
The Company has a $250,000 bank line of credit expiring July 31, 1996, with
interest payable monthly at prime plus .75 percent. As of December 31, 1995,
there were no borrowings on this agreement. In addition, the Company has a
$100,000 bank lease line of credit expiring January 2, 2000, with interest at
8.94 percent payable monthly. As of December 31, 1995, borrowings on the lease
line were $23,214 and are included in capital leases.
The notes payable contain covenants which require the Company to maintain
specified financial covenants. As of December 31, 1995, the Company was in
compliance with these covenants.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 93,071
1997............................ 94,220
1998............................ 83,015
1999............................ 61,867
2000............................ 13,263
Thereafter...................... 45,341
----------
$ 390,777
==========
F-91
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
The future minimum lease payments under capital leases are as follows:
Year ending December 31 --
1996............................ $ 219,291
1997............................ 159,026
1998............................ 95,352
1999............................ 23,855
2000............................ --
----------
Total minimum lease
payments................ 497,524
Less -- Amounts representing
interest............................. (76,988)
----------
Net minimum lease
payments................ 420,536
Less -- Current portion of
obligations under capital leases... 173,759
----------
Long-term portion of
obligations under
capital leases.......... $ 246,777
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $811,313 at December 31, 1995.
6. LEASES:
The Company leases a facility from its shareholder. The lease was renewed
on January 1, 1995, and expires on December 31, 1999. The lease requires monthly
payments of $7,500. The amount paid under this lease in 1994 and 1995 was
approximately $76,000 and $90,000, respectively.
7. INCOME TAX:
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
----------------------
1994 1995
---------- ----------
Federal --
Current......................... $ -- $ 97,907
Deferred........................ 85,943 39,549
State --
Current......................... 2,062 35,278
Deferred........................ 22,360 5,753
---------- ----------
$ 110,365 $ 178,487
========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
Tax provision at the statutory
rate................................. $ 91,476 $ 152,965
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 16,118 27,080
Nondeductible expenses.......... 3,080 321
Other........................... (309) (1,879)
---------- ----------
$ 110,365 $ 178,487
========== ==========
F-92
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 4,675 $ 13,859
Accruals and reserves not deductible
until paid......................... (50,724) (43,433)
Other................................ (27,652) 1,175
---------- ----------
Total deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ (47,275) $ (41,708)
Long-term....................... (26,426) --
---------- ----------
Total...................... (73,701) (41,708)
Deferred tax liabilities,
long-term.......................... -- 13,309
---------- ----------
Net deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
8. FRANCHISE AGREEMENTS:
In October 1993, the Company renewed a four-year franchise agreement with
DIAL ONE of Central Indiana, Inc. (DIAL ONE), a company wholly owned by the
shareholder of the Company. The Company pays $15,000 annually plus a royalty fee
of 3 percent of gross sales in excess of a predefined base. Total amounts
incurred in 1994 and 1995 under this agreement were approximately $92,000 and
$56,000, respectively.
The Company pays the LINC Corporation for consulting services under a
franchise agreement through its commercial division. Fees are based on a royalty
fee on gross revenues with a minimum payment of $15,000 a year. In 1994 and
1995, the Company incurred approximately $58,000 and $61,000, respectively,
under the terms of the agreement.
9. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company for the first $200 of each participant's
contribution. The Company has the right to make additional discretionary
contributions. Total contributions by the Company under this plan were
approximately $64,000 and $86,000 for 1994 and 1995, respectively.
10. RELATED-PARTY TRANSACTIONS:
The Company is a DIAL ONE franchisee (see Note 8) under an agreement with
DIAL ONE. The Company also shares certain costs with DIAL ONE for personnel and
overhead, which are billed monthly to DIAL ONE, based on that company's pro rata
share of those expenses. In 1995, the Company received $24,000 in rental income
from DIAL ONE for space occupied in the building that the Company owns. At
December 31, 1994 and 1995, the Company had a balance due from DIAL ONE of
approximately $6,000 and $14,000, respectively.
F-93
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
12. SUBSEQUENT EVENT:
Effective January 1, 1996, the Company acquired 100 percent of the
outstanding shares of stock in Sagamore Heating & Cooling, Inc. (Sagamore) for
$281,000. Consideration paid by the Company included $100,000 in cash and a
$181,000 note payable to the former owner. The Company consolidated Sagamore
effective as of the date of acquisition.
13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholder entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company changed its name to Meridian &
Hoosier Heating and Air Conditioning Company and entered into agreements with
the shareholder to lease land and buildings used in the Company's operations for
a negotiated amount and term.
F-94
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ADCOT, Inc.:
We have audited the accompanying balance sheets of ADCOT, Inc. (a Texas
corporation), as of December 31, 1994 and 1995, and the related statements of
operations, shareholder's deficit and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADCOT, Inc., as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996 (except with respect to
the matter discussed in Note 4, as to
which the date is June 5, 1996)
F-95
<PAGE>
ADCOT, INC.
BALANCE SHEETS
DECEMBER 31
----------------------------
1994 1995
-------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 122,966 $ 256,104
Accounts receivable --
Trade...................... 3,132 --
Shareholder and
affiliates.............. 10,476 11,968
Other receivables.......... -- --
Inventories..................... 416,332 411,892
Prepaid expenses and other
current assets................ -- 23,607
-------------- ------------
Total current
assets............. 552,906 703,571
PROPERTY AND EQUIPMENT, net.......... 294,820 299,757
OTHER NONCURRENT ASSETS.............. -- 999
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 34,065 123,494
-------------- ------------
Total assets.......... $ 881,791 $ 1,127,821
============== ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 15,692 $ 77,263
Accounts payable and accrued
expenses...................... 770,780 754,768
Payable to shareholders and
affiliates.................... 266,297 241,008
Unearned revenue on extended
warranty contracts, current... 375,668 351,514
-------------- ------------
Total current
liabilities........ 1,428,437 1,424,553
LONG-TERM DEBT, net of current
maturities......................... -- 96,277
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 637,614 579,307
OTHER LONG-TERM LIABILITIES.......... 39,014 --
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S DEFICIT:
Common stock, $1 par value;
100,000 shares authorized,
10,000 issued and
outstanding................... 10,000 10,000
Deficit......................... (1,233,274) (982,316)
-------------- ------------
Total shareholder's
deficit............ (1,223,274) (972,316)
-------------- ------------
Total liabilities and
shareholder's
deficit............ $ 881,791 $ 1,127,821
============== ============
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
ADCOT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
-------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 10,899,840 $ 8,675,616 $ 8,707,403 $ 3,982,983 $ 3,445,084
COST OF SERVICES..................... 6,921,371 5,574,296 5,709,114 2,721,218 2,147,264
-------------- ------------ ------------ ------------ ------------
Gross profit.................... 3,978,469 3,101,320 2,998,289 1,261,765 1,297,820
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES............ 2,830,130 2,443,678 2,347,954 1,107,956 835,868
-------------- ------------ ------------ ------------ ------------
Income from operations.......... 1,148,339 657,642 650,335 153,809 461,952
OTHER INCOME (EXPENSE):
Interest expense................ (81,798) (36,224) (83,754) (30,942) (15,370)
Other........................... 3,503 24,430 65,530 27,421 11,163
-------------- ------------ ------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE STATE INCOME
TAXES.............................. 1,070,044 645,848 632,111 150,288 457,745
PROVISION FOR STATE INCOME TAXES..... -- -- 43,165 6,824 20,598
-------------- ------------ ------------ ------------ ------------
NET INCOME FROM
CONTINUING OPERATIONS.. 1,070,044 645,848 588,946 143,464 437,147
LOSS FROM DISCONTINUED
OPERATIONS, net of applicable state
income taxes....................... (1,452,024) (141,923) (114,900) (91,999) (245,187)
-------------- ------------ ------------ ------------ ------------
NET INCOME (LOSS).................... $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
============== ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE>
ADCOT, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- SHAREHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
--------- ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 10,000 $10,000 $ (1,355,219) $ (1,345,219)
Net loss........................ -- -- (381,980) (381,980)
--------- ------- -------------- -------------
BALANCE, December 31, 1993........... 10,000 10,000 (1,737,199) (1,727,199)
Net income...................... -- -- 503,925 503,925
--------- ------- -------------- -------------
BALANCE, December 31, 1994........... 10,000 10,000 (1,233,274) (1,223,274)
Dividends....................... -- -- (223,088) (223,088)
Net income...................... -- -- 474,046 474,046
--------- ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 $10,000 $ (982,316) $ (972,316)
========= ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE>
ADCOT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS FIVE MONTHS
YEAR ENDED DECEMBER 31 ENDED ENDED
------------------------------------ JUNE 30, MAY 31,
1993 1994 1995 1995 1996
------------ ---------- ---------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (381,980) $ 503,925 $ 474,046 $ 51,465 $ 191,960
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities --
Depreciation and amortization.... 307,552 271,420 261,704 123,587 184,644
Gain on sale of property and
equipment...................... -- (18,251) (19,519) (19,518) --
Write-off of property and
equipment...................... -- -- 26,118 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............ 104,276 (6,318) 1,640 2,459 (110,851)
Inventories.................... 154,349 225,814 4,440 (109,517) (59,220)
Prepaid expenses and other
current assets.............. (114,200) 127,891 (23,607) (23,185) (26,337)
Other noncurrent assets........ (9,068) 10,369 (999) -- 999
Increase (decrease) in --
Accounts payable and accrued
expenses.................... 691,700 (786,089) (16,012) 76,767 570,418
Unearned revenue on extended
warranty contracts.......... 3,661 (8,288) (82,461) (41,229) 3
------------ ---------- ---------- ----------- ------------
Net cash provided by
operating activities...... 756,290 320,473 625,350 60,829 751,616
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment........................ -- 19,503 21,188 21,188 --
Additions to property and
equipment........................ (16,478) (49,403) (294,428) (185,554) (349,988)
Cash provided by (used in)
discontinued operations.......... (1,116,116) 188,714 (89,429) 252,196 (218,054)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) investing
activities................ (1,132,594) 158,814 (362,669) 87,830 (568,042)
------------ ---------- ---------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholder and
affiliates....................... 580,431 (314,134) (25,289) (155,000) (229,040)
Borrowings of long-term debt....... 63,750 -- 214,553 143,618 249,110
Principal payments of long-term
debt............................. (93,260) (106,035) (56,705) (30,208) (62,288)
Increase (decrease) in other
long-term liabilities............ (173,024) 39,014 (39,014) (29,625) --
Dividends.......................... -- -- (223,088) (178,088) (303,001)
------------ ---------- ---------- ----------- ------------
Net cash provided by (used
in) financing
activities................ 377,897 (381,155) (129,543) (249,303) (345,219)
------------ ---------- ---------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 1,593 98,132 133,138 (100,644) (161,645)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 23,241 24,834 122,966 122,966 256,104
------------ ---------- ---------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 24,834 $ 122,966 $ 256,104 $ 22,322 $ 94,459
============ ========== ========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest......................... $ 109,064 $ 79,658 $ 111,536 $ 32,468 $ 15,370
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
ADCOT, Inc. (a Texas corporation) (the Company) (d.b.a. A-ABC Appliance),
is primarily engaged in the sales of consumer appliances and the service-related
activities of plumbing, air conditioning, appliance and electrical repair and
other home improvement services in Houston and the surrounding areas.
In April 1996, the Company and its shareholder entered into a stock
purchase agreement with Service Enterprises, Inc. (SEI) to sell all of its
outstanding common stock for $2,000,000 to SEI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1995 and
the five months ended May 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of appliances and service-related parts and supplies
held for use in the ordinary course of business and are valued at the lower of
cost or market using the weighted-average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax return.
The Company is subject to Texas franchise tax which is an income-based tax.
Accordingly, the Company has recorded a provision for this tax in the
accompanying statement of operations for 1995. No provision for franchise taxes
was recorded in the 1993 or 1994 statement of operations as the Company's
franchise tax was offset by a business loss carryover.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
F-100
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Leasehold improvements............... 5 - 15 $ 221,120 $ 256,245
Transportation equipment............. 5 815,190 849,183
Computer and telephone equipment..... 5 - 7 351,383 --
Furniture and fixtures............... 5 - 7 1,053,293 1,109,215
------------ ------------
2,440,986 2,214,643
Less -- Accumulated depreciation and
amortization....................... 2,146,166 1,914,886
------------ ------------
Property and equipment,
net..................... $ 294,820 $ 299,757
============ ============
4. DISCONTINUED OPERATIONS:
Subsequent to the purchase of the Company by SEI, the board of directors of
SEI's parent company (Enterprises Holding Company) approved the disposition of
the Company's retail appliance sales division. The allocation of purchase price
to the fair market value of the net assets of the Company acquired by SEI will
be based on preliminary estimates of fair value and may be revised when
additional information concerning asset and liability valuations is obtained.
Accordingly, any gain or loss on the sale of the appliance sales division will
be considered an adjustment of purchase price.
The net losses of these operations prior to April 1, 1996, are included in
the statements of operations under discontinued operations. Revenues, cost of
sales, selling, general and administrative expenses, other income and expense,
and income taxes for fiscal years 1993, 1994 and 1995 exclude amounts associated
with the discontinued division. Revenues from such operations were approximately
$12,185,000, $12,101,000 and $11,915,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Certain expenses have been allocated to
discontinued operations, which were allocated based upon estimated divisional
usage. All assets of the operations are expected to be sold in 1996.
F-101
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The components of net assets of discontinued operations included in the
balance sheets are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Net working capital (deficit)........ $ (64,208) $ 55,667
Property and equipment, net.......... 98,273 99,919
Other liabilities.................... -- (32,092)
---------- ----------
$ 34,065 $ 123,494
========== ==========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 488,819 $ 495,031
Accrued compensation and benefits.... 93,193 87,725
Accrued taxes, other than income..... 147,066 101,383
Other accrued expenses............... 41,702 70,629
---------- ----------
$ 770,780 $ 754,768
========== ==========
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
The Company also has floor plan financing available from three other
companies with similar terms. However, the Company does not utilize these, and
had no balances outstanding at December 31, 1994 and 1995.
The inventory floor plan facilities are personally guaranteed by the sole
shareholder and/or an officer of the Company.
7. LONG-TERM DEBT:
Long-term debt consists of the installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes are 36 months with monthly payments of principal and interest
of approximately $9,000. The notes bear interest at rates ranging from 8.25
percent to 11 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 77,263
1997............................ 67,241
1998............................ 29,036
----------
$ 173,540
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $173,540 at December 31, 1995.
F-102
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES:
OPERATING LEASES
The Company leases certain facilities from its sole shareholder and his
affiliates. The leases expire from 1997 through 2010. The rent paid under these
related-party leases was approximately $316,000, $305,000 and $370,000 in 1993,
1994 and 1995, respectively.
Other nonrelated-party leases for retail facilities expire in 1997. The
rent paid under nonrelated-party leases was approximately $198,000, $183,000 and
$162,000 in 1993, 1994 and 1995, respectively.
The lease terms generally range from five to 15 years. The leases generally
provide for the Company to pay taxes, maintenance, insurance and certain other
operating costs of the leased property. The leases on most of the properties
contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 558,140
1997............................ 430,034
1998............................ 330,288
1999............................ 292,848
2000............................ 240,432
Thereafter...................... 725,820
------------
$ 2,577,562
============
9. RELATED-PARTY TRANSACTIONS:
The Company has payables to its sole shareholder and certain other related
parties in the amounts of $266,297 and $241,008 at December 31, 1994 and 1995,
respectively. Interest accrues on these payables at 8 percent per annum.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On May 28, 1996, Service Enterprises, Inc. ("SEI"), a subsidiary of
Enterprises Holding Company ("EHC") purchased all of the outstanding common
stock of ADCOT for $2,000,000.
The acquisition of the EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Metro Heating and Air Conditioning, Inc.:
We have audited the accompanying balance sheet of Metro Heating and Air
Conditioning, Inc. (a North Carolina corporation), as of December 31, 1995, and
the related statements of operations, shareholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Metro Heating and Air
Conditioning, Inc., as of December 31, 1995, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 6, 1996
F-104
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............. $1,338,654 $ 890,726
Accounts receivable --
Trade, net of allowance of
$45,000.......................... 1,781,532 2,564,979
Other receivables.................. 135,686 81,211
Inventories........................... 1,492,548 1,887,274
Prepaid expenses and other current
assets............................. 27,236 --
Costs and estimated earnings in excess
of billings on uncompleted
contracts.......................... 311,901 63,516
------------ -------------
Total current assets.......... 5,087,557 5,487,706
PROPERTY AND EQUIPMENT, net............. 1,828,966 2,512,259
OTHER NONCURRENT ASSETS................. 1,089 2,000
------------ -------------
Total assets.................. $6,917,612 $ 8,001,965
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt....................... $ -- $ 1,000,000
Accounts payable and accrued
expenses........................... 1,623,495 1,589,943
Payable to shareholders............... 652,636 209,465
Unearned revenue on service
contracts.......................... 277,190 316,500
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... 225,991 24,708
------------ -------------
Total current liabilities..... 2,779,312 3,140,616
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000
shares authorized, 6,000 shares
issued and outstanding............. 6,000 6,000
Retained earnings..................... 4,132,300 4,855,349
------------ -------------
Total shareholders' equity.... 4,138,300 4,861,349
------------ -------------
Total liabilities and
shareholders' equity....... $6,917,612 $ 8,001,965
============ =============
The accompanying notes are an integral part of these financial statements.
F-105
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, ------------------------------
1995 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................ $ 20,549,846 $ 14,893,513 $ 19,383,471
COST OF SERVICES........................ 14,367,437 10,524,811 13,894,337
-------------- -------------- --------------
Gross profit....................... 6,182,409 4,368,702 5,489,134
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 4,084,813 2,896,523 3,888,374
-------------- -------------- --------------
Income from operations............. 2,097,596 1,472,179 1,600,760
OTHER INCOME (EXPENSE):
Interest income.................... 12,486 4,574 8,992
Interest expense................... (34,829) (34,196) (70,256)
Other.............................. 3,849 (1,538) 6,481
-------------- -------------- --------------
NET INCOME.............................. $ 2,079,102 $ 1,441,019 $ 1,545,977
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 6,000 $6,000 $ 3,089,128 $ 3,095,128
Dividends.......................... -- -- (1,035,930) (1,035,930)
Net income......................... -- -- 2,079,102 2,079,102
------ ------ ----------- -------------
BALANCE, December 31, 1995.............. 6,000 6,000 4,132,300 4,138,300
Dividends (unaudited).............. -- -- (822,928) (822,928)
Net income (unaudited)............. -- -- 1,545,977 1,545,977
------ ------ ----------- -------------
BALANCE, September 30, 1996
(unaudited)........................... 6,000 $6,000 $ 4,855,349 $ 4,861,349
====== ====== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, --------------------------
1995 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 2,079,102 $ 1,441,019 $ 1,545,977
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............ 512,107 306,118 470,118
(Gain)/loss on sale of
property and
equipment............... (1,284) 3,790 --
Changes in operating assets
and liabilities --
(Increase) decrease
in --
Accounts receivable... (222,078) (81,910) (728,972)
Inventories........... (42,371) 9,295 (394,726)
Prepaid expenses and
other current
assets............. 1,423 13,063 27,236
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.......... (192,806) 75,695 248,385
Other noncurrent
assets............. 40,640 40,640 (911)
Increase (decrease)
in --
Accounts payable and
accrued expenses... 525,716 47,317 (33,552)
Unearned revenue on
service
contracts.......... 67,275 51,929 39,310
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts.......... 14,351 (211,640) (201,283)
------------- ------------ ------------
Net cash provided
by operating
activities...... 2,781,075 1,695,316 971,582
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 5,625 2,775 --
Additions of property and
equipment..................... (850,274) (573,629) (946,530)
Cash paid for acquisition....... -- -- (206,881)
------------- ------------ ------------
Net cash used in
investing
activities...... (844,649) (570,854) (1,153,411)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 350,000 350,000 1,000,000
Repayments of short-term debt... (350,000) (350,000) --
Increase (decrease) in payable
to shareholders............... (276,520) (810,000) (443,171)
Dividends....................... (1,035,930) (541,296) (822,928)
------------- ------------ ------------
Net cash used in
financing
activities...... (1,312,450) (1,351,296) (266,099)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 624,976 (226,834) (447,928)
CASH AND CASH EQUIVALENTS, beginning
of
period............................. 713,678 713,678 1,338,654
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,338,654 $ 486,844 $ 890,726
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 34,822 $ 34,190 $ 26,011
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Metro Heating and Air Conditioning, Inc. (the Company), is primarily
engaged in the installation and maintenance, repair and replacement of air
conditioning and heating systems in new and preexisting residential and
commercial buildings in North Carolina.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements as of September 30, 1996, and for the nine
months ended September 30, 1995 and 1996, are unaudited, and certain information
and footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning and heating
equipment, refrigeration supplies and accessories held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for twelve
months after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
F-109
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1995
------------ ------------
Transportation equipment................ 5 $ 12,198,404
Machinery and equipment................. 5-7 273,555
Computer and telephone equipment........ 5 416,804
Leasehold improvements.................. 7-10 942,468
Furniture and fixtures.................. 5-7 707,987
------------
4,539,218
Less -- Accumulated depreciation and
amortization.......................... (2,710,252)
------------
Property and equipment, net........ $ 1,828,966
============
F-110
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
DECEMBER 31,
1995
------------
Balance at beginning of year......... $ 30,000
Additions charged to costs and
expenses........................... 26,350
Deductions for uncollectible
receivables written off............ (11,350)
------------
$ 45,000
============
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
1995
------------
Accounts payable, trade................. $ 846,157
Accrued profit-sharing contribution..... 375,437
Accrued compensation and benefits....... 262,901
Accrued warranty expense................ 139,000
------------
$1,623,495
============
Installation contracts in progress are as follows:
DECEMBER 31,
1995
------------
Costs incurred on contracts in
progress.............................. $ 565,148
Estimated earnings, net of losses....... 557,681
------------
1,122,829
Less -- Billings to date................ 896,838
------------
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. $ 225,991
============
The following are included in the accompanying balance sheet under the
following captions:
DECEMBER 31,
1995
------------
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. $ 311,901
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (225,991)
------------
$ 85,910
============
5. SHORT-TERM DEBT:
The Company has a $1,000,000 line of credit with a bank. The line of credit
bears interest at the prime rate (8.5 percent at December 31, 1995) per annum.
There was no balance outstanding under this line of credit at December 31, 1995.
In January 1996, the line of credit was increased to $1,500,000 and the maturity
was extended from May 1996 to April 30, 1997.
F-111
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LEASES:
The Company leases two facilities and a parking lot from the owners of the
Company. The lease for the two facilities expires in 2004, and the lease for the
parking lot expires in 2006 and provides for rents increasing at 2 percent per
year. The rent paid under these related-party leases was approximately $192,000
for the year ended December 31, 1995. The leases provide for the Company to pay
taxes, maintenance, insurance and certain other operating costs of the leased
property. The leases contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................... $ 197,000
1997............................... 201,000
1998............................... 205,000
1999............................... 209,000
2000............................... 214,000
Thereafter......................... 926,000
------------
$ 1,952,000
============
7. RELATED-PARTY TRANSACTIONS:
Two of the shareholders loan funds to the Company as needed. The loans are
payable on demand and bear interest at 5.25 percent. The amount payable to the
shareholders is $652,636 at December 31, 1995. Interest of approximately $27,000
was incurred during the year ended December 31, 1995, related to these loans.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal actions will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
9. PROFIT-SHARING PLAN:
In January 1982, the Company established a defined contribution 401(k)
profit-sharing plan for employees meeting certain employment requirements. In
January 1983, the plan was amended to include a 401(k) component. Eligible
employees may contribute up to the lesser of 15 percent of their annual
compensation or the maximum amount permitted under IRS regulations to their
401(k) account. The plan provides for an annual contribution made by the
Company, as determined by the board of directors. The Company's contribution was
approximately $375,000 for the year ended December 31, 1995.
F-112
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENTS:
Effective February 29, 1996, Metro entered into an asset purchase agreement
with Tillman Heating and Air Conditioning Company (THAC) of Durham, North
Carolina for approximately $590,000, consisting of cash and assumption of
certain liabilities. In conjunction with the purchase, the Company entered into
a lease with a related party for the business premises of THAC.
Concurrent with the acquisition, ARS will enter into agreements with the
former shareholders to lease land and buildings used in ARS' operations for a
negotiated amount and term.
11. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On December 11, 1996, ARS acquired the Company.
F-113
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH
OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 3
Risk Factors......................... 6
The Company.......................... 9
Price Range of Common Stock.......... 10
Dividend Policy...................... 10
Capitalization....................... 11
Selected Financial Information....... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 14
Business............................. 26
Management........................... 36
Certain Transactions................. 42
Security Ownership of Certain
Beneficial Owners and Management... 44
Shares Eligible for Future Sale...... 45
Description of Capital Stock......... 46
Plan of Distribution................. 51
Legal Matters........................ 51
Experts.............................. 51
Additional Information............... 51
Index to Financial Statements........ F-1
5,000,000 SHARES
[LOGO -- ARS]
AMERICAN RESIDENTIAL
SERVICES, INC.
COMMON STOCK
------------
PROSPECTUS
JANUARY 6, 1997
------------
================================================================================
