AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 1711 76-0484996
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION CLASSIFICATION CODE NUMBER)
OR ORGANIZATION)
</TABLE>
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN D. HELD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
AMERICAN RESIDENTIAL SERVICES, INC.
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
3000 ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.001 10,000,000
per share(2)............................... shares(3) $22.9375 $229,375,000 $69,508
- ---------------------------------------------------------------------------------------------------------------------------------
Convertible Subordinated Debt
Securities(4).............................. $100,000,000 100% $100,000,000 $30,303
=================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
Pursuant to Rule 457(c), the offering price and registration fee with
respect to the Common Stock are computed on the basis of the average of the
high and low prices of the Common Stock on July 15, 1997, as reported on The
New York Stock Exchange, Inc. Composite Transactions Reporting System.
(2) Includes the associated rights to purchase preferred stock.
(3) This Registration Statement also includes 1,352,788 shares of Common Stock
and associated rights to purchase preferred stock which have been previously
registered by the Registrant on Registration Statement No. 333-18623 and for
which the Registrant has previously paid registration fees of $9,377.
(4) Includes such indeterminate number of shares of Common Stock and associated
rights to purchase preferred stock as shall be issuable on conversion of the
Convertible Subordinated Debt Securities being registered hereunder. No
additional consideration will be received for the Common Stock and therefore
no registration fee is required pursuant to Rule 457(i).
------------------------
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus which is a part of this Registration Statement also relates to
1,352,788 shares of Common Stock and associated rights to purchase preferred
stock of the Registrant covered by Registration Statement No. 333-18623
(including all amendments thereto) previously filed by the Registrant on Form
S-4.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
PROSPECTUS SUBJECT TO COMPLETION, DATED JULY , 1997
[LOGO] -- ARS
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
------------------------
American Residential Services, Inc. ("ARS"and, collectively with its
subsidiaries, the "Company") may offer and issue the 11,352,788 shares of its
common stock, $.001 par value per share (the "Common Stock"), and $100,000,000
aggregate principal amount of convertible subordinated debt securities (the
"Convertible Debt Securities") covered by this Prospectus in business
combination transactions (each an "Acquisition") 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, plumbing, electrical, indoor air quality and other systems in
homes and 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, (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 and
(iii) the Convertible Debt Securities issued will be valued at prices reasonably
related to their principal amount. 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.
The Convertible Debt Securities will be convertible into Common Stock at
any time on or after their Convertibility Commencement Date (as defined herein)
and at or before maturity, unless previously redeemed, at their Initial
Conversion Price (as defined herein) as the applicable prospectus supplement or
supplements (each, a "Prospectus Supplement") and pricing supplement or
supplements (each, a "Pricing Supplement") hereto will specify, subject to
adjustment in certain events.
The Convertible Debt Securities will be (i) unsecured obligations of ARS,
(ii) subordinate to all present and future Senior Indebtedness (as defined in
the Indenture described herein or any applicable supplement to that Indenture or
Prospectus Supplement relating to one or more series of Convertible Debt
Securities) of ARS and (iii) effectively subordinated to all indebtedness and
other liabilities of subsidiaries of ARS.
As of July 18, 1997, 14,086,807 shares of Common Stock were issued and
outstanding. The Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "ARS." On July 18, 1997, the last reported sales
price of the Common Stock on the NYSE was $23.625 per share.
Persons receiving shares of the Common Stock or any Convertible Debt
Securities offered hereby may be contractually required to hold some portions of
those shares or Convertible Debt Securities 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 or Convertible Debt
Securities by affiliates of the businesses the Company acquires for a period of
one year from the date of acquisition of shares of Common Stock or the
Convertible Debt Securities, as applicable (or such shorter period as the
Securities and Exchange Commission (the "SEC") may prescribe).
SEE "RISK FACTORS" ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE SECURITIES
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 , 1997.
<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 BY THE CONTEXT, (I)
INFORMATION HEREIN RESPECTING THE COMPANY'S OPERATIONS GIVES EFFECT TO THE
COMPANY'S ACQUISITIONS COMPLETED THROUGH JUNE 30, 1997 AND (II) REFERENCES
HEREIN TO (A) "ARS" MEAN AMERICAN RESIDENTIAL SERVICES, INC. AND (B) THE
"COMPANY" MEAN ARS TOGETHER WITH ALL ITS SUBSIDIARIES.
THE COMPANY
ARS was founded in October 1995 to create the leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning ("HVAC"), plumbing, electrical, indoor air
quality and other systems and major home appliances in homes and small
commercial buildings (collectively, "residential maintenance services") and (ii)
new installations of those systems in homes and small commercial facilities
under construction ("new residential installation services" and, together with
residential maintenance services, "residential services"). ARS also intends,
through its subsidiary, American Mechanical Services ("AMS"), to become a
leading national provider of comprehensive maintenance, repair, replacement,
reconfiguration and monitoring services for HVAC, plumbing and electrical
systems and controls in existing large commercial facilities such as office
buildings, health care facilities, educational facilities and retail centers
(collectively, "commercial maintenance services"). To achieve these goals, the
Company is conducting an aggressive acquisition program and has implemented a
national operating strategy designed to increase internal growth and capitalize
on cost efficiencies. Today, the Company is the largest publicly held company in
the United States engaged principally in providing residential services. In
April 1997, the Company acquired its first business engaged principally in
providing commercial maintenance services and, through July 18, 1997, has
acquired seven businesses providing commercial maintenance services exclusively
and eight businesses providing both commercial maintenance services and
residential services. The Company intends to apply the same acquisition and
national operating strategies to its commercial maintenance services business
that it has implemented in its residential services business.
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 simultaneously with the closing of ARS's
initial public offering of Common Stock (the "IPO"). Since then, and through
July 18, 1997, the Company has acquired an additional 55 businesses providing
either or both residential services and commercial maintenance services
(collectively with the Founding Companies, the "Acquired Businesses").
The Company believes the profitability of its residential maintenance
services business benefits from its new residential installation services
operations as a result of (i) the significant volume of purchases of HVAC
systems for its high-volume installation services and (ii) the addition of new
customer and equipment information in the Company's marketing database. This
database provides the Company with valuable information it can use to expand its
future residential services revenue base. In addition, new residential
installation services provide the Company with cooperative advertising credits
from HVAC system manufacturers which it uses for promoting its services for
existing residential HVAC systems. Through leveraging these benefits, acquiring
additional businesses and internal development, the Company intends to emphasize
the growth of its higher-margin residential maintenance services and commercial
maintenance services businesses.
The Company believes the HVAC, plumbing and electrical industries in the
United States represent an annual market in excess of $60 billion, of which
residential maintenance and commercial maintenance services each account for in
excess of $25 billion. It estimates this market is served by over 50,000
companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It also believes the majority of owners in 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 personnel and providing a full complement of
high-quality residential services and commercial maintenance services. It also
believes the highly fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and
2
<PAGE>
resources of a large number of existing residential services and commercial
maintenance services businesses.
BUSINESS STRATEGY
The Company plans to enhance its market position as a leading national
provider of professional, high-quality residential services and commercial
maintenance 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 demographics. The Company's acquisition strategy involves
entering new geographic markets and expanding within existing markets for
residential services and commercial maintenance services. The Company believes
it can leverage its experience and success in developing a leading market
position in the residential services business to capitalize on consolidation
opportunities in the commercial maintenance services business.
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 or commercial maintenance
services and having the critical mass necessary to be a core business
with which other residential or commercial maintenance services
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 generally seeks 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 pursues "tuck-in" acquisitions of smaller 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 is in the process of expanding its 24-hour
emergency service to substantially all its locations and its
monitoring of service call quality by attempting to contact each of
its service customers promptly following a service call. In addition,
the Company is developing a national training program to improve and
keep current the technical, selling and customer relations skills of
its service personnel. The Company is implementing specialized
computer and modern communications technology at each of its locations
to improve productivity, communications, vehicle dispatch, service
quality and responsiveness to its customers' needs. 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 will continue 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 is currently
implementing programs to reduce costs (as a percentage of revenues)
compared to those of individual acquired businesses in such areas as:
the purchase of HVAC equipment for resale, service vehicles, parts and
tools; vehicle and equipment maintenance; financing arrangements;
employee benefits; and insurance and bonding. The Company believes
that the potential synergies and cost efficiencies in commercial
maintenance services operations are similar to and additive to those
in residential services operations.
o FOCUSED OPERATING MANAGEMENT. The Company believes dividing
residential services operations and commercial maintenance operations
into separate operating groups sharpens the focus of operating
management and personnel in each group on meeting the needs of their
customers by requiring them to specialize in one aspect of the
Company's business.
------------------------
RISK FACTORS
The Securities offered hereby involve a high degree of risk. See "Risk
Factors."
------------------------
3
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following summary unaudited pro forma combined statement of operations
information is derived from the unaudited pro forma financial statements of the
Company included elsewhere herein. Those pro forma financial statements are the
supplemental consolidated financial statements of the Company included elsewhere
herein adjusted as follows: (i) the statement of operations for the year ended
December 31, 1996 gives effect to the following events as if each had occurred
on January 1, 1996 -- (a) all acquisitions by the Company of Acquired Businesses
through June 30, 1997 which have been accounted for as purchase transactions,
(b) the IPO and (c) the issuance and sale of $55.0 million aggregate principal
amount of 7 1/4% Convertible Subordinated Notes due 2004 by ARS and the
application of the net proceeds from that sale by ARS (collectively, the "Note
Financing"); (ii) the statement of operations for the three months ended March
31, 1997 gives effect to the following events as if each had occurred on January
1, 1997 -- (a) all acquisitions by the Company of Acquired Businesses in 1997
(through June 30) which have been accounted for as purchase transactions and (b)
the Note Financing; and (iii) the balance sheet as of March 31, 1997 gives
effect to the following events as if they had occurred on March 31, 1997 -- (a)
all acquisitions by the Company of all Acquired Businesses in the second quarter
of 1997 which have been accounted for as purchase transactions and (b) the Note
Financing. See the Unaudited Pro Forma Combined Financial Statements and the
notes thereto included elsewhere herein and "Selected Supplemental Financial
Information." The summary financial information below should be read in
conjunction with the historical, supplemental and pro forma financial statements
and notes thereto included elsewhere herein.
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------------
PRO FORMA STATEMENT OF OPERATIONS
INFORMATION (UNAUDITED)(1):
Revenues........................ $ 358,828 $82,749
Gross profit.................... 112,525 25,842
Selling, general and
administrative expenses(2).... 82,591 20,510
Goodwill amortization(3)........ 4,189 1,047
Income from operations.......... 25,745 4,285
Interest income and other
expense, net.................. 1,488 218
Interest expense................ (6,875) (1,719)
Net income from continuing
operations.................... $ 10,994 $ 1,564
============= ===================
Net income per share from
continuing operations......... $ 0.79 $ 0.11
============= ===================
Shares used in computing pro
forma net income per share
from continuing
operations(4)................. 13,921 14,320
============= ===================
Ratio of earnings to fixed
charges(5).................... 3.44x 2.33x
============= ===================
MARCH 31, 1997
--------------
PRO FORMA BALANCE SHEET INFORMATION
(UNAUDITED)(1):
Working capital................. $ 23,533
Total assets.................... 261,226
Total debt, including current
portion........................ 85,314
Stockholders' equity............ 133,411
- ------------
(1) The pro forma combined financial statement information presented (i) is not
necessarily indicative of the results the Company would have obtained had
certain events actually occurred when assumed or of the Company's future
results, (ii) is based (in the case of certain purchases) 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, supplemental and pro forma financial statements and
notes thereto included elsewhere herein.
(2) Gives effect to reductions in salary and benefits to former owners of
certain Acquired Businesses, the distribution of certain assets to and the
costs of certain leases assumed by former owners of certain Acquired
Businesses and the effects of certain other 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) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before fixed charges and income tax, while
"fixed charges" consist of interest expense and one-third of rental
expense, which the Company estimates to be representative of the interest
factor therein.
4
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE SECURITIES 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 on September 27, 1996 of its initial public offering of
Common Stock (the "IPO") and its acquisition of seven residential services
businesses (together with the common parent of two of those businesses, the
"Founding Companies") in separate transactions. Since then and through July
18, 1997, the Company has acquired an additional 55 businesses (collectively
with the Founding Companies, the "Acquired Businesses"). The Acquired
Businesses operated as separate, independent businesses prior to their
acquisition by the Company. 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.
RISKS RELATED TO ACQUISITION STRATEGY
The Company's acquisition strategy presents risks that include the
possibility of the adverse effect on existing operations of the Company from the
diversion of management's attention and resources to acquisitions, the possible
loss of acquired customer bases and key personnel, including service personnel,
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 or that the
Company's business and financial performance will not be materially adversely
affected thereby. In this connection, competition for acquisition candidates
could cause the cost of acquiring businesses to increase materially. See
"Business -- Acquisition Strategy." Acquisitions accounted for as purchases
may result in substantial annual noncash charges for goodwill and other
intangible assets in the Company's statement of operations, while material
acquisitions accounted for as pooling-of-interests transactions will require
restatements of the Company's historical financial statements to include the
results of the acquired businesses which could negatively or positively impact
those financial statements.
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 personnel in new areas of operation and leverage its
relationships with existing customers to provide them services they currently
obtain from others.
COMPETITION
The Company is engaged principally in providing (i) comprehensive
maintenance, repair and replacement services for heating, ventilating and air
conditioning ("HVAC"), plumbing, electrical, indoor air quality and other
systems in homes and small commercial buildings (collectively, "residential
maintenance services") and (ii) new installations of those systems in homes and
small commercial facilities under construction ("new residential installation
services" and, together with residential maintenance services,
5
<PAGE>
"residential services"). In addition, the Company is expanding into providing
comprehensive maintenance, repair, replacement, reconfiguration and monitoring
services for HVAC, plumbing and electrical systems and controls in existing
large commercial facilities such as office buildings, health care facilities,
educational facilities and retail centers (collectively, "commercial maintenance
services"). The markets for residential services and commercial maintenance
services 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 and commercial maintenance services sectors of its industry are subject
to rapid consolidation on both a national and a regional scale. The Company
believes that currently only a few other public companies are focused on
providing residential services in some of the service lines provided by the
Company. It also believes only a small number of public companies are engaged
primarily in commercial maintenance services in the service lines on which the
Company intends to focus, but certain HVAC original equipment manufacturers
provide commercial maintenance services as a complement to their manufacturing
and distribution businesses. Other companies, including unregulated affiliates
of electric and gas public utilities, which have objectives the same as or
similar to the Company's objectives, are beginning to enter the industry.
Certain of the Company's competitors 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 AND FLUCTUATIONS IN OPERATING RESULTS
The Company's residential services 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 residential installations can
be substantially lower during the winter months (although the Company expects
that reduction in demand may be partially offset by increases in the demand for
commercial replacement services generally experienced in the winter months).
Demand for residential HVAC services is generally higher in the second and third
quarters. Accordingly, the Company expects its revenues and operating results
generally will be lower in its first and fourth quarters. In addition to the
effects of seasonality, the Company's quarterly results may fluctuate as a
result of a number of other factors, including the timing of acquisitions and
the cyclical nature of the homebuilding industry which will influence the levels
of housing starts from time to time in the markets in which the Company engages
in new residential installation services and affect the Company's ability to
maintain or increase revenues from those services. Accordingly, quarterly
comparisons of the Company's revenues and operating results should not be relied
on as an indication of future performance, and the results of any quarterly
period may not be indicative of results to be expected for a full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality and Fluctuations in Operating Results."
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 personnel who meet the Company's standards of conduct and service
to its customers. See "Business -- Hiring, Training and Safety."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of July 18, 1997, 14,086,807 shares of Common Stock were outstanding.
Those shares currently are or will become either freely tradable or eligible for
resale subject to volume limitations and other requirements of Securities Act
Rule 144 ("Rule 144"), as follows: (i) currently and through
6
<PAGE>
September 30, 1997 -- 11,540,675; (ii) thereafter and through December 31, 1997
- -- 12,252,661; (iii) thereafter and through March 31, 1998 -- 12,288,915; (iv)
thereafter and through June 30, 1998 -- 12,563,323; (v) thereafter and through
September 30, 1998 -- 12,606,419; (vi) thereafter and through December 31, 1998
- -- 13,984,265; (vii) thereafter and through March 31, 1999 -- 13,991,877; (viii)
thereafter and through June 30, 1999 -- 14,029,091; (ix) thereafter and through
March 31, 2000 -- 14,054,683; and (x) thereafter -- 14,086,807. The shares
becoming eligible for resale in the third quarter of 1997 include 376,073 shares
owned by Equus II Incorporated ("Equus II") and 1,456,620 shares owned by
certain directors and executive officers of ARS.
In addition to the shares currently outstanding, ARS has reserved for
issuance 2,156,863 shares currently issuable on conversion of the Company's
$55.0 million aggregate principal amount of 7 1/4% Convertible Subordinated
Notes due 2004 (the "7 1/4% Notes"). ARS has registered these shares under the
Securities Act for resale by means of a Shelf Registration Statement (the
"7 1/4% Notes Shelf"). If 7 1/4% Notes or shares of Common Stock issued on the
conversion of 7 1/4% Notes are disposed of by means of the 7 1/4% Notes Shelf,
the shares underlying those 7 1/4% Notes and those shares issued on conversion
will be freely tradable or (if owned by an affiliate of ARS) eligible for sale
pursuant to Rule 144.
The holders of approximately 4.9 million unregistered shares of Common
Stock have certain demand and piggyback rights to have their shares registered
in the future under the Securities Act. See "Shares Eligible for Future Sale."
None of the demand registration rights may be exercised before September 27,
1997.
At July 18, 1997, options to purchase up to an aggregate of 2,356,500
unissued shares and a warrant held by Equus II to purchase up to 100,000 shares
of Common Stock from ARS were outstanding, of which only options to purchase
466,500 shares and the warrant were exercisable at July 18, 1997. The exercise
prices of these securities range from $8.00 to $25.75 per share.
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.
SUBORDINATION OF CONVERTIBLE DEBT SECURITIES; HOLDING COMPANY STRUCTURE
The Convertible Debt Securities are subordinate in right of payment to all
current and future Senior Indebtedness of ARS. Unless a Prospectus Supplement
provides otherwise for one or more series of Convertible Debt Securities, Senior
Indebtedness includes all secured indebtedness of ARS for money borrowed. As of
March 31, 1997, after giving effect to the sale of the 7 1/4% Notes and the
application of the net proceeds to the Company therefrom and all acquisitions of
Acquired Businesses through June 30, 1997, the aggregate amount of Senior
Indebtedness to which the Convertible Debt Securities would have been
subordinated was approximately $30.3 million, and the estimated aggregate amount
of indebtedness and other balance sheet liabilities of ARS's subsidiaries to
which the Convertible Debt Securities would have been effectively subordinated
was approximately $19.5 million. The Indenture under which ARS will issue the
Convertible Debt Securities (the "Indenture") will not, unless provided
otherwise by a supplement thereto relating to one or more series of Convertible
Debt Securities, limit the amount of additional indebtedness, including Senior
Indebtedness, which ARS can create, incur, assume or guarantee. By reason of the
subordination of the Convertible Debt Securities, if any insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of ARS
occurs, the assets of ARS will be available to pay the amounts due on the
Convertible Debt Securities only after all Senior Indebtedness has been paid in
full.
ARS, as a holding company whose principal assets are the shares of capital
stock of its subsidiaries, does not generate any operating revenues of its own.
Consequently, it depends on dividends, advances and payments from its
subsidiaries to fund its activities and meet its cash needs, including its debt
service requirements. The subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Convertible Debt Securities or to make funds available therefor. Their
ability to pay dividends or make other payments or advances to ARS will depend
on their
7
<PAGE>
operating results and will be subject to various business considerations and to
applicable state laws. In addition, holders of the Convertible Debt Securities
are effectively subordinated to the claims of creditors of ARS's subsidiaries to
the extent of the assets of those subsidiaries. If any insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of any
subsidiary of ARS occurs, creditors of that subsidiary generally will have the
right to be paid in full before any distribution is made to ARS or the holders
of the Convertible Debt Securities. See "Description of the Convertible Debt
Securities."
Substantially all the subsidiaries of ARS have guaranteed the payment of
its obligations under the Company's $100 million revolving credit facility (the
"Credit Facility"), and the stock of those subsidiaries has been pledged by
ARS or their immediate parent corporations as collateral securing those
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources -- The Company."
LIMITATIONS ON REPURCHASE OF CONVERTIBLE DEBT SECURITIES IF A REPURCHASE EVENT
OCCURS
If a Repurchase Event, which consists of either a Change in Control or a
Termination of Trading (each as defined herein), occurs, each holder of
Convertible Debt Securities or 7 1/4% Notes will have the right, at his option,
to require ARS to repurchase all or a portion of his Convertible Debt Securities
or 7 1/4% Notes, as the case may be, at a purchase price equal to 100% of the
principal amount thereof plus accrued interest to the repurchase date. ARS's
ability to repurchase Convertible Debt Securities and 7 1/4% Notes following a
Repurchase Event (i) may be limited by the terms of the Senior Indebtedness and
the subordination provisions of the Indenture and any applicable supplement to
the Indenture and (ii) will depend on the availability of sufficient funds and
compliance with applicable securities laws. Accordingly, no assurance can be
given ARS will repurchase any Convertible Debt Securities following a Repurchase
Event. The term "Repurchase Event" is limited to certain specified
transactions and may not include other events, such as a highly leveraged
business combination or reorganization not involving a Repurchase Event, that
might adversely affect the financial condition of ARS or result in a downgrade
of the credit rating (if any) of the Convertible Debt Securities. See
"Description of the Convertible Debt Securities."
LIMITED MARKET FOR THE CONVERTIBLE DEBT SECURITIES
No market currently exists for any series of the Convertible Debt
Securities and no assurance can be given (i) a market will develop for any
series of the Convertible Debt Securities, (ii) as to the liquidity or
sustainability of any market that may develop or (iii) as to the ability of
holders to sell their Convertible Debt Securities at any price. Future trading
prices of the Convertible Debt Securities will depend on many factors,
including, among others, prevailing interest rates, the Company's operating
results, the price of the Common Stock and the market for similar securities.
POSSIBLE VOLATILITY OF COMMON 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 ON COMMON STOCK
The Restated Certificate of Incorporation of ARS (the "Charter")
authorizes ARS to issue, without stockholder approval, one or more classes or
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) as the Board of Directors of ARS
may determine. See "Description of Capital Stock."
8
<PAGE>
POTENTIAL ANTI-TAKEOVER EFFECTS
ARS has a stockholder rights plan in effect. This plan and provisions of
the Charter and Bylaws of ARS and the Delaware General Corporation Law (the
"DGCL") (under which ARS is organized) may delay, discourage, inhibit, prevent
or render 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 authorization of "blank check" preferred stock,
classification of the Board of Directors, a prohibition of stockholder action by
written consent and DGCL restrictions on business combinations with certain
interested parties. In addition, a "Change of Control" (as defined in the
Credit Facility) constitutes an event of default under the Credit Facility. If a
Change in Control (as defined in both the Indenture and the 7 1/4% Notes
indenture) occurs, each holder of Convertible Debt Securities or 7 1/4% Notes
will have the right, at the holder's option, to require ARS to repurchase all or
a portion of such holder's Convertible Debt Securities or 7 1/4% Notes, as
applicable, at a purchase price equal to 100% of the principal amount thereof
plus accrued interest to the repurchase date. These provisions of the Credit
Facility, the Indenture and the 7 1/4% Notes indenture could impede or prevent a
change of control or depress the price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Company" and "Description
of Capital Stock."
9
<PAGE>
THE COMPANY
ARS
ARS was founded in October 1995 to create the leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning ("HVAC"), plumbing, electrical, indoor air
quality and other systems and major home appliances in homes and small
commercial buildings (collectively "residential maintenance services") and
(ii) new installations of those systems in homes and small commercial facilities
under construction ("new residential installation services" and, together with
residential maintenance services, "residential services"). ARS also intends,
through its subsidiary, American Mechanical Services ("AMS"), to become a
leading national provider of comprehensive maintenance, repair, replacement,
reconfiguration and monitoring services for HVAC, plumbing and electrical
systems and controls in existing large commercial facilities such as office
buildings, health care facilities, educational facilities and retail centers
(collectively, "commercial maintenance services"). To achieve these goals, the
Company is conducting an aggressive acquisition program and has implemented a
national operating strategy designed to increase internal growth and capitalize
on cost efficiencies. Today, the Company is the largest publicly held company in
the United States engaged principally in providing residential services. In
April 1997, the Company acquired its first business engaged principally in
providing commercial maintenance services and through July 18, 1997, has
acquired seven businesses providing commercial maintenance services exclusively
and eight businesses providing both commercial maintenance and residential
services. The Company intends to apply the same acquisition and national
operating strategies to its commercial maintenance services business that it has
implemented in its residential services business. 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
Concurrently with the closing of the IPO, ARS acquired the seven Founding
Companies in the transactions described in "Certain
Transactions -- Organization of the Company." The Founding Companies are
General Heating & Air Conditioning Company, Inc. ("General Heating"), Atlas
Services, Inc. ("Atlas"), Service Enterprises, Inc., which does business as
"Crown Services"("Crown"), Florida Heating & Air Conditioning, Inc.
(together with its affiliated companies, "Florida HAC"), Meridian & Hoosier
Heating and Air Conditioning Company ("Meridian & Hoosier"), ADCOT, Inc.,
which does business as "A-ABC Appliance"("A-ABC"), and Climatic Corporation
of Vero Beach ("Climatic"). The Founding Companies have been in business an
average of 32 years and provide various residential services in and around
Houston (Crown and A-ABC), the Washington-Baltimore metropolitan area and
Richmond, Virginia (General Heating), throughout South Carolina (Atlas),
southeast Florida (Florida HAC and Climatic) and central Indiana (primarily
Indianapolis) (Meridian & Hoosier).
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 residential maintenance services to those markets.
Atlas is a leading provider of electric, HVAC and plumbing new residential
installation services throughout South Carolina. It also provides comprehensive
plumbing, HVAC and electrical residential maintenance services. Crown is the
largest single provider of residential maintenance services in the Houston
metropolitan area, while A-ABC is among the leading providers of residential
maintenance services in the greater Houston and surrounding areas. Neither Crown
nor A-ABC provides new residential installation services. Florida HAC is a
leading installer of HVAC systems and equipment for the residential construction
market, and a leading provider of HVAC residential maintenance services in
southeast Florida, including Broward, Dade and Palm Beach Counties, while
Climatic is a provider of HVAC residential maintenance services in the
four-county area in Florida known as the Treasure Coast region (Indian River,
St. Lucie, Martin and Palm Beach Counties). Climatic also provides HVAC new
residential installation services. Meridian & Hoosier is a leading provider of
HVAC residential maintenance services, and also provides HVAC new residential
installation services, in central Indiana, including
10
<PAGE>
Indianapolis. Meridian & Hoosier and Atlas are the only Founding Companies that
currently provide commercial maintenance services.
SUBSEQUENT ACQUISITIONS
Subsequent to the IPO and the acquisitions of the Founding Companies, the
Company acquired an additional 55 businesses through July 18, 1997, with
aggregate unaudited annualized revenues in 1996 of approximately $367.8 million.
Among the Acquired Businesses was Metro Heating and Air Conditioning, Inc.
("Metro"), the leading provider of HVAC installation, maintenance, repair and
replacement services in the Raleigh/Durham, North Carolina area, which had
unaudited annualized revenues in 1996 of approximately $28.3 million. With the
inclusion of these businesses, at July 18, 1997, the Company provided
residential maintenance services in 15 states and the District of Columbia,
commercial maintenance services in eleven states and the District of Columbia
and new residential installation services in 12 states and the District of
Columbia.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the NYSE under the symbol "ARS." The following
table sets forth the high and low sale prices for the Common Stock (based on the
NYSE Composite Transactions Reporting System) for the periods indicated:
HIGH LOW
--------- ---------
1996:
Third quarter (September 25 to
September 30).................. $ 19.625 $ 16.500
Fourth quarter.................. 27.125 16.625
1997:
First quarter................... 28.500 19.125
Second quarter.................. 24.500 17.500
Third quarter (through July
18)............................ 24.000 21.688
The closing price of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on July 18, 1997 was $23.625. As of
July 18, 1997 there were approximately 180 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 and performance, cash needs and expansion
plans, the income tax laws then in effect, the requirements of Delaware law and
the restrictions the Credit Facility imposes and the Company's future credit
facilities or debt instruments may impose. 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."
12
<PAGE>
CAPITALIZATION
The following unaudited table sets forth the current maturities of
long-term obligations and capitalization of the Company as of March 31, 1997 of
(i) the Company on a historical basis, (ii) the Company on a pro forma combined
basis, giving effect to all acquisitions of Acquired Businesses during the
second quarter of 1997 and the financing and payment of the related purchase
prices (including the issuance of Common Stock) and (iii) the Company on that
pro forma combined basis, as adjusted to give effect to the issuance and sale of
the 7 1/4% Notes to the initial purchasers thereof on April 2, 1997 and the
application of the net proceeds to the Company therefrom to repay indebtedness
outstanding under the Credit Facility.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------------
PRO FORMA
PRO FORMA COMBINED
HISTORICAL COMBINED AS ADJUSTED
---------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term
obligations........................... $ 152 $ 3,834 $ 469
========== =============== ============
Long-term obligations, less current
maturities............................ $ 54,341 $ 81,480 $ 29,845
7 1/4% Convertible Subordinated Notes
due 2004.............................. -- -- 55,000
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;
11,679,617 shares issued and
outstanding historical(1)(2);
13,873,836 shares issued and
outstanding on a pro forma
combined and pro forma combined
as adjusted basis(1)(2).......... 12 14 14
Additional paid-in capital......... 123,214 143,864 143,864
Retained deficit................... (10,323) (10,467) (10,467)
---------- --------------- ------------
Total stockholders' equity.... 112,903 133,411 133,411
---------- --------------- ------------
Total capitalization..... $ 167,244 $ 214,891 $218,256
========== =============== ============
</TABLE>
- ------------
(1) Excludes (i) shares of Common Stock subject to outstanding options granted
by ARS to its directors and officers and employees of the Company and
totaling 1,665,700 as of March 31, 1997 and 2,341,250 as of June 30, 1997
and (ii) a warrant to purchase up to 100,000 shares of Common Stock at a
purchase price of $15.00 per share. See "Management -- Option Grants" and
"Certain Transactions -- Organization of the Company."
(2) Excludes 8,000 shares of Common Stock issued subsequent to March 31, 1997 in
connection with the exercise of an option granted by ARS.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
acquisition by ARS of the Founding Companies (the "Initial Acquisitions").
During the first quarter of 1997, the Company acquired ten businesses, eight of
which were accounted for under the pooling-of-interests method of accounting.
Consequently, the Company's historical financial statements presented in this
Prospectus for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas retroactively restated for
all acquisitions accounted for under the pooling-of-interests method through
March 31, 1997. As used in this discussion, the "Company" means (i) Atlas prior
to September 30, 1996 and (ii) ARS and its consolidated subsidiaries on that
date and thereafter. The following selected historical financial information has
been derived from the audited consolidated financial statements of the Company
for each year in the three-year period ended December 31, 1996. The remaining
selected historical financial information of the Company has been derived from
unaudited financial statements of the Company, which have been prepared on the
same basis as the audited financial statements and, in the opinion of the
Company, reflect all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of that information. The following selected
unaudited pro forma combined statement of operations information is derived from
the unaudited pro forma combined financial statements of the Company included
elsewhere herein and, (i) in the case of the pro forma combined statement of
operations for the year ended December 31, 1996, gives effect to the
acquisitions of all Acquired Businesses acquired through June 30, 1997, the IPO
and the issuance and sale of the 7 1/4% Notes by ARS and the application of the
proceeds from that sale by ARS (collectively the "Note Financing"), assuming
those transactions had occurred on January 1, 1996 and (ii) in the case of the
pro forma combined statement of operations information for the three months
ended March 31, 1997, gives effect to the acquisitions of all Acquired
Businesses acquired in 1997 (through June 30) and the Note Financing. See the
Unaudited Pro Forma Combined Financial Statements and the notes thereto included
elsewhere herein. The following selected balance sheet information presents (i)
certain historical information derived from the consolidated financial
statements of the Company and (ii) the March 31, 1997 historical balance sheet,
on a pro forma combined basis, as adjusted to give effect to the acquisitions of
all Acquired Businesses acquired during the second quarter of 1997 and the Note
Financing. The summary financial information below should be read in conjunction
with the historical and unaudited pro forma consolidated financial statements
and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
HISTORICAL:
Revenues.............................. $ 22,388 $ 27,607 $ 41,151 $ 48,401 $ 95,518 $ 13,648 $ 55,446
Gross profit.......................... 5,847 6,801 9,565 12,446 27,374 3,932 16,491
Selling, general and administrative
expenses(1)......................... 5,218 5,963 8,766 9,648 25,787 3,205 14,572
Income from continuing operations..... 629 838 799 2,798 1,587 727 1,919
Interest income and other expense,
net................................. 7 95 245 160 457 80 191
Interest expense(1)................... (247) (269) (254) (274) (5,392) (73) (1,110)
Net income (loss) from continuing
operations.......................... $ 185 $ 366 $ 469 $ 1,608 $ (4,305(1) $ 436 $ 559
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share from
continuing operations............... $ 0.08 $ 0.16 $ 0.20 $ 0.68 $ (0.95) $ 0.19 $ 0.05
========= ========= ========= ========= ========= ========= =========
Shares used in computing net income
(loss) per share from continuing
operations.......................... 2,349 2,349 2,349 2,349 4,541 2,349 12,157
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges(2).......................... 2.12x 2.87x 3.03x 6.71x -- 5.10x 1.82x
========= ========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
------------------ ------------------
PRO FORMA COMBINED, AS ADJUSTED(3):
Revenues......................... $358,828 $82,749
Gross profit..................... 112,525 25,842
Selling, general and
administrative expenses(4)...... 82,591 20,510
Goodwill amortization(5)......... 4,189 1,047
Income from operations........... 25,745 4,285
Interest income and other
expenses, net................... 1,488 218
Interest expense................. (6,875) (1,719)
Net income from continuing
operations...................... $ 10,994 $ 1,564
============= ========
Net income per share from
continuing operations........... $ 0.79 $ 0.11
============= ========
Shares used in computing pro
forma net income per share from
continuing operations(6)........ 13,921 14,320
============= ========
Ratio of earnings to fixed
charges(2)...................... 3.44x 2.33x
============= ========
(TABLE CONTINUED ON FOLLOWING PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31, 1997
----------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 HISTORICAL AS ADJUSTED
--------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital (deficit)........ $ (621) $ (527) $ (568) $ (359) $ 16,256 $ 16,408 $ 23,533
Total assets..................... 6,488 8,209 10,814 12,980 196,857 197,491 261,226
Total debt, including current
portion........................ 3,792 3,925 3,769 3,474 53,913 54,493 85,314
Stockholders' equity............. 190 732 1,218 2,232 112,056 112,903 133,411
</TABLE>
- ------------
(1) Includes non-recurring compensation expense of $3,356 (included in selling,
general and administrative expenses) and financing fees of $4,818 (included
in interest expense) related to the purchase of Enterprises Holding Company
("EHC"), the common parent of two Founding Companies. See Note 1 to the
Company's consolidated financial statements.
(2) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before fixed charges and income tax, while
"fixed charges" consist of interest expense and one-third of rental
expense, which the Company estimates to be representative of the interest
factor therein. As a result of the operating loss in 1996, earnings did not
cover fixed charges for that year by $3,438.
(3) The pro forma combined financial statement data presented (i) are not
necessarily indicative of the results the Company would have obtained had
certain events actually occurred when assumed or of the Company's future
results, (ii) are based (in the case of certain purchases) 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.
(4) Gives effect to reductions in salary and benefits to former owners of
certain Acquired Businesses, the distribution of certain assets to and the
costs of certain leases assumed by former owners of certain Acquired
Businesses and the effects of certain other non-recurring expenses.
(5) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(6) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
15
<PAGE>
SELECTED SUPPLEMENTAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
Initial Acquisitions. 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 historical consolidated financial statements of
the Company included elsewhere herein have been restated to give retroactive
effect to the acquisitions of businesses by the Company from October 1, 1996
through March 31, 1997 which have been accounted for as pooling-of-interests
transactions. The supplemental consolidated financial statements of the Company
included elsewhere herein further restate those historical consolidated
financial statements to give retroactive effect to certain acquisitions by the
Company of businesses from April 1, 1997 through June 30, 1997 which have been
accounted for as pooling-of-interests transactions. The following selected
supplemental financial information as of December 31, 1995 and 1996 and for each
of the years in the three-year period ended December 31, 1996 has been derived
from the audited supplemental consolidated financial statements of the Company
included elsewhere herein. The remaining following selected supplemental
financial information has been derived from unaudited supplemental consolidated
financial statements of the Company which have been prepared on the same basis
as the audited supplemental consolidated financial statements and, in the
opinion of the Company, reflects all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of that information. The summary
information below should be read in conjunction with the supplemental
consolidated financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
Revenues.............................. $ 43,585 $ 47,591 $ 69,265 $ 83,410 $ 134,516 $ 23,342 $ 66,069
Gross profit.......................... 11,881 12,018 17,168 21,678 37,400 6,453 19,419
Selling, general and administrative
expenses............................ 11,045 10,531 14,741 16,711 34,153 5,224 16,028
Income from continuing operations..... 836 1,486 2,427 4,967 3,247 1,229 3,391
Interest income and other expense,
net................................. 248 294 629 275 595 127 217
Interest expense...................... (366) (331) (313) (321) (5,452) (88) (1,120)
Net income (loss) from continuing
operations.......................... $ 484 $ 1,139 $ 1,646 $ 2,973 $ (3,246(1) $ 758 $ 1,462
========= ========= ========= ========= ========= ========= =========
Net income (loss) per share from
continuing operations............... $ .13 $ .32 $ .46 $ .83 $ (.56) $ .21 $ .11
========= ========= ========= ========= ========= ========= =========
Shares used in computing net income
(loss) per share from continuing
operations.......................... 3,602 3,602 3,602 3,602 5,794 3,602 13,410
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges(2).......................... 2.55x 4.26x 6.39x 9.51x -- 5.99x 2.95x
========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital.................. $ 1,248 $ 1,675 $ 1,678 $ 954 $ 17,829 $ 19,244
Total assets..................... 12,483 14,558 18,631 22,060 206,151 207,685
Total debt, including current
portion........................ 4,407 4,597 4,434 4,070 55,155 54,965
Stockholders' equity............. 2,983 2,836 3,084 4,478 114,820 116,367
</TABLE>
- ------------
(1) Includes non-recurring compensation expense of $3,356 (included in selling,
general and administrative expenses) and financing fees of $4,818 (included
in interest expense) related to the purchase of EHC. See Note 1 to the
Company's supplemental consolidated financial statements.
(2) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before fixed charges and income tax, while
"fixed charges" consist of interest expense and one-third of rental
expense, which the Company estimates to be representative of the interest
factor therein. As a result of the operating loss in 1996, earnings did not
cover fixed charges for that year by $1,613.
16
<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" and
"Selected Supplemental Financial Information" elsewhere herein. Statements
herein regarding future financial or operational performance and results of the
Company or other similar matters that are not historical facts constitute
forward-looking statements and are subject to numerous risks and uncertainties,
including the availability of attractive acquisition opportunities, the
successful integration and profitable management of businesses acquired, the
improvement of operating efficiencies, the availability of working capital and
funding for future acquisitions, the ability to grow internally through
expansion of services and customer bases and reduction of overhead, the cyclical
nature of the homebuilding industry, the level and nature of competition from
other residential services and commercial maintenance services providers and
other factors discussed herein.
INTRODUCTION
The Company derives its revenues primarily 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
personnel, parts and materials, subcontracted services, depreciation,
maintenance, fuel and equipment rentals. Selling, general and administrative
expenses consist primarily of compensation and related benefits payable to
former owners of Acquired Businesses and to management and administrative
personnel, advertising, office rent and utilities, communications and
professional fees.
Prior to their acquisition by the Company, the Acquired Businesses were
managed as independent private businesses, and their results of operations
reflect different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
Certain owners agreed to reductions in their compensation and benefits in
connection with the acquisition of their businesses by the Company.
ARS, which conducted no operations prior to September 27, 1996 other than
in connection with the IPO and the acquisitions of the Founding Companies (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.
RESULTS OF OPERATIONS -- THE COMPANY -- HISTORICAL
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
Initial Acquisitions. During the first quarter of 1997, the Company acquired ten
businesses, eight of which were accounted for under the pooling-of-interests
method of accounting. The Company's historical financial statements for periods
ended on or before September 30, 1996 are the consolidated historical financial
statements of Atlas retroactively restated for certain acquisitions of Acquired
Businesses accounted for under the pooling-of-interests method. 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, and the
term "Acquired Business" does not include Atlas.
17
<PAGE>
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>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 41,151 100.0% $ 48,401 100.0% $ 95,518 100.0% $ 13,648 100.0%
Cost of services..................... 31,586 76.8 35,955 74.3 68,144 71.3 9,716 71.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 9,565 23.2 12,446 25.7 27,374 28.7 3,932 28.8
Selling, general and administrative
expenses........................... 8,766 21.3 9,648 19.9 25,787 27.0 3,205 23.5
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.. 799 1.9 2,798 5.8 1,587 1.7 727 5.3
Interest income and other expense,
net................................ 245 0.6 160 0.3 457 0.5 80 0.6
Interest expense..................... (254) (0.6) (274) (0.6) (5,392) (5.6) (73) (0.5)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 790 1.9 2,684 5.5 (3,348) (3.4) 734 5.4
Income taxes......................... 321 0.8 1,076 2.2 957 1.0 298 2.2
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 469 1.1 $ 1,608 3.3 $ (4,305) (4.4) $ 436 3.2
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS
ENDED MARCH 31
--------------------
1997
--------------------
Revenues............................. $ 55,446 100.0%
Cost of services..................... 38,955 70.3
--------- ---------
Gross profit......................... 16,491 29.7
Selling, general and administrative
expenses........................... 14,572 26.2
--------- ---------
Income from continuing operations.. 1,919 3.5
Interest income and other expense,
net................................ 191 0.3
Interest expense..................... (1,110) (2.0)
--------- ---------
Income (loss) from continuing
operations before income taxes..... 1,000 1.8
Income taxes......................... 441 0.8
--------- ---------
Net income (loss) from continuing
operations......................... $ 559 1.0
========= =========
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES -- Revenues increased by 307.4% from $13.6 million for the three
months ended March 31, 1996 to $55.4 million for the three months ended March
31, 1997. Approximately $37.0 million of this increase resulted from the
inclusion of revenues from the Acquired Businesses acquired through March 31,
1997 and accounted for as purchase acquisitions. The remainder of the increase
was primarily attributable to increases in new installation projects in Virginia
and South Carolina which were partially offset by revenue reductions in Texas
and Florida resulting from the mild spring weather in those states.
COST OF SERVICES -- Cost of services increased 300.9% to $39.0 million for
the three months ended March 31, 1997, as compared to the corresponding period
in the prior year, reflecting increased costs associated with the higher level
of revenues. Gross profit, as a percentage of revenues, increased from 28.8% for
the three months ended March 31, 1996 to 29.7% for the three months ended March
31, 1997. This improvement was attributable to the purchase acquisitions of
businesses providing residential maintenance services, which generate higher
margins than new residential installation services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $11.4 million to $14.6 million for the three
months ended March 31, 1997, as compared to the corresponding period in the
prior year. The increase was primarily attributable to (i) the operations of the
Acquired Businesses acquired through March 31, 1997 and accounted for as
purchase acquisitions and (ii) the addition of ARS's corporate personnel and
administrative infrastructure.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased $0.1 million from $0.1 million for the three months
ended March 31, 1996 to $0.2 million for the three months ended March 31, 1997.
INTEREST EXPENSE -- Interest expense increased $1.0 million, from $0.1
million for the three months ended March 31, 1996 to $1.1 million for the three
months ended March 31, 1997. The increase was attributable to the use of debt to
fund the cash portion the Company paid in connection with certain Acquired
Businesses it acquired from October 1, 1996 through March 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $47.1 million, or 97.3%, from $48.4 million
for 1995 to $95.5 million for 1996. Approximately $31.2 million of the increase
in revenues was attributable to the operations of Acquired Businesses acquired
in 1996, the addition of $3.7 million of revenues resulting from the acquisition
of three businesses by Atlas in early 1996 and general increased demand for
residential services.
18
<PAGE>
COST OF SERVICES -- Cost of services increased $32.1 million, or 89.2%,
from $36.0 million for 1995 to $68.1 million for 1996. The increase in cost of
services was consistent with the increase in revenues. As a percentage of
revenues, however, cost of services decreased 3.0% from 74.3% for 1995 to 71.3%
for 1996. This decrease resulted primarily from the addition of higher-margin
residential maintenance services associated with certain Acquired Businesses
acquired in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $16.2 million, or 168.8%, from $9.6 million
for 1995 to $25.8 million for 1996. As a percentage of revenues, selling,
general and administrative expenses increased from 19.9% in 1995 to 27.0% in
1996. This increase was primarily attributable to (i) the addition of $7.6
million in expenses associated with the operations of Acquired Businesses
acquired in 1996 and the formation of the ARS corporate office and (ii) an
adjustment of $3.4 million for non-recurring, compensation expenses related to
the Company's acquisition of EHC and $0.6 million for the issuance of 39,987
shares of Common Stock to certain employees, consultants and three officers of
ARS and its affiliates.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.3 million during 1996. This increase was
attributable to (i) gains realized on the non-recurring sale of excess vehicles
and equipment and (ii) rental income earned on owned property leased to third
parties.
INTEREST EXPENSE -- Interest expense increased from $0.3 million for 1995
to $5.4 million for 1996. This increase was attributable to (i) non-recurring
financing charges of $4.8 million paid to the holder of EHC preferred stock in
connection with the acquisition of EHC and (ii) the use of debt financing to
fund the cash portion the Company paid in connection with the Acquired
Businesses it acquired in the fourth quarter of 1996.
INCOME TAXES -- For 1996, the Company recorded a provision for income taxes
of $1.0 million. See Note 10 of the Notes to Supplemental Consolidated Financial
Statements of the Company for further discussion of the tax provision.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES -- Revenues increased $7.2 million, or 17.5%, from $41.2 million
for 1994 to $48.4 million for 1995. Part of this increase was attributable to
the new operating facility in Hilton Head, South Carolina (opened in April
1994). The addition of several large home builder customers in South Carolina in
addition to increased demand for the Company's services in California, Oklahoma
and Michigan primarily accounted for the remaining increase.
COST OF SERVICES -- Cost of services increased $4.4 million, or 13.9%, from
$31.6 million for 1994 to $36.0 million for 1995. The increase in cost of
services was consistent with the increase in revenue, and as a percentage of
revenues, cost of services declined 2.5% from 76.8% to 74.3%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.8 million, or 9.1%, from $8.8 million for
1994 to $9.6 million for 1995.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, decreased $0.1 million from $0.2 million for 1994 to $0.1 million
for 1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.3
million for both 1994 and 1995.
RESULTS OF OPERATIONS -- THE COMPANY -- SUPPLEMENTAL
The historical consolidated financial statements included elsewhere herein
have been restated to give retroactive effect to the acquisitions of Acquired
Businesses by the Company from October 1, 1996 through March 31, 1997 which have
been accounted for as pooling-of-interests transactions. The supplemental
consolidated financial statements of the Company included elsewhere herein
further restate those historical consolidated financial statements to give
retroactive effect to five of the seven acquisitions of Acquired Businesses by
the Company from April 1, 1997 through June 30, 1997 which have been accounted
for as pooling-of-interests transactions. The remaining two of those
acquisitions, being deemed insignificant to prior historical periods, will be
included in the Company's consolidated financial statements beginning with
19
<PAGE>
their respective effective dates. As used in the following discussion, the terms
"Company" and "Acquired Business" have the meanings indicated in
" -- Results of Operations -- The Company -- Historical."
The following table sets forth selected supplemental consolidated financial
data of the Company and that data as a percentage of the Company's supplemental
consolidated revenues for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 69,265 100.0% $ 83,410 100.0% $ 134,516 100.0% $ 23,342 100.0%
Cost of services..................... 52,097 75.2 61,732 74.0 97,116 72.2 16,889 72.4
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 17,168 24.8 21,678 26.0 37,400 27.8 6,453 27.6
Selling, general and administrative
expenses........................... 14,741 21.3 16,711 20.0 34,153 25.4 5,224 22.4
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.. 2,427 3.5 4,967 6.0 3,247 2.4 1,229 5.2
Interest income and other expense,
net................................ 629 0.9 275 0.3 595 0.4 127 0.5
Interest expense..................... (313) (0.5) (321) (0.4) (5,452) (4.1) (88) (0.4)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 2,743 3.9 4,921 5.9 (1,610) (1.3) 1,268 5.3
Income taxes......................... 1,097 1.6 1,948 2.3 1,636 (1.2) 510 2.2
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 1,646 2.3 $ 2,973 3.6 $ (3,246) (2.5) $ 758 3.1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
THREE MONTHS
ENDED MARCH 31
--------------------
1997
--------------------
Revenues............................. $ 66,069 100.0%
Cost of services..................... 46,650 70.6
--------- ---------
Gross profit......................... 19,419 29.4
Selling, general and administrative
expenses........................... 16,028 24.3
--------- ---------
Income from continuing operations.. 3,391 5.1
Interest income and other expense,
net................................ 217 0.3
Interest expense..................... (1,120) (1.7)
--------- ---------
Income (loss) from continuing
operations before income taxes..... 2,488 3.7
Income taxes......................... 1,026 1.5
--------- ---------
Net income (loss) from continuing
operations......................... $ 1,462 2.2
========= =========
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES -- Revenues increased by 183.0% from $23.3 million for the three
months ended March 31, 1996 to $66.1 million for the three months ended March
31, 1997. Approximately $37.0 million of this increase resulted from the
inclusion of revenues from the Acquired Businesses acquired through March 31,
1997 and accounted for as purchase acquisitions. The remainder of the increase
was primarily attributable to increases in new installation projects in Virginia
and South Carolina which were partially offset by revenue reductions in Texas
and Florida resulting from the mild spring weather experienced in those states.
COST OF SERVICES -- Cost of services increased 176.2% to $46.7 million for
the three months ended March 31, 1997, as compared to the corresponding period
in the prior year, reflecting increased costs associated with the higher level
of revenues. Gross profit, as a percentage of revenues, increased from 27.6% for
the three months ended March 31, 1996 to 29.4% for the three months ended March
31, 1997. This improvement was attributable to the purchase acquisitions of
businesses providing residential maintenance services, which generate higher
margins than new residential installation services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $10.8 million to $16.0 million for the three
months ended March 31, 1997, as compared to the corresponding period in the
prior year. The increase was primarily attributable to (i) the operations of the
Acquired Businesses acquired through March 31, 1997 and accounted for as
purchase acquisitions and (ii) the addition of ARS's corporate personnel and
administrative infrastructure.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased $0.1 million from $0.1 million for the three months
ended March 31, 1996 to $0.2 million for the three months ended March 31, 1997.
INTEREST EXPENSE -- Interest expense increased $1.0 million, from $0.1
million for the three months ended March 31, 1996 to $1.1 million for the three
months ended March 31, 1997. The increase was attributable to the use of debt to
fund the cash portion the Company paid in connection with certain Acquired
Businesses it acquired from October 31, 1996 through March 31, 1997.
20
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $51.1 million, or 61.3%, from $83.4 million
for 1995 to $134.5 million for 1996. Approximately $31.2 million of the increase
in revenues was attributable to the operations of Acquired Businesses acquired
in 1996, the addition of $3.7 million of revenues resulting from the acquisition
of three businesses by Atlas in early 1996 and general increased demand for
residential services.
COST OF SERVICES -- Cost of services increased $35.4 million, or 57.4%,
from $61.7 million for 1995 to $97.1 million for 1996. As a percentage of
revenues, however, cost of services decreased 1.8% from 74.0% for 1995 to 72.2%
for 1996. This decrease resulted primarily from the addition of higher-margin
residential maintenance services associated with certain Acquired Businesses
acquired in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $17.5 million, or 104.8%, from $16.7 million
for 1995 to $34.2 million for 1996. As a percentage of revenues, selling,
general and administrative expenses increased from 20.0% for 1995 to 25.4% for
1996. This increase was primarily attributable to (i) the addition of $7.6
million in expenses associated with the operations of Acquired Businesses
acquired in 1996 and the formation of the ARS corporate office and (ii) an
adjustment of $3.4 million for non-recurring, compensation expenses related to
the Company's acquisition of EHC and $0.6 million for the issuance of 39,987
shares of Common Stock to certain employees, consultants and three officers of
ARS and its affiliates.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.3 million during 1996. This increase was
attributable to (i) gains realized on the non-recurring sale of excess vehicles
and equipment and (ii) rental income earned on owned property leased to third
parties.
INTEREST EXPENSE -- Interest expense increased from $0.3 million for 1995
to $5.5 million for 1996. This increase was attributable to (i) non-recurring
financing charges of $4.8 million paid to the holder of EHC preferred stock in
connection with the acquisition of EHC and (ii) the use of debt financing to
fund the cash portion the Company paid in connection with the Acquired
Businesses it acquired in the fourth quarter of 1996.
INCOME TAXES -- For 1996, the Company recorded a provision for income taxes
of $1.7 million. See Note 10 of the Notes to Supplemental Consolidated Financial
Statements of the Company for further discussion of the tax provision.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
REVENUES -- Revenues increased $14.1 million, or 20.3%, from $69.3 million
for 1994 to $83.4 million for 1995. Part of this increase was attributable to
the new operating facility in Hilton Head, South Carolina (opened in April
1994). The addition of several large home builder customers in South Carolina in
addition to increased demand for the Company's services in California, Oklahoma
and Michigan primarily accounted for the remaining increase.
COST OF SERVICES -- Cost of services increased $9.6 million, or 18.4%, from
$52.1 million for 1994 to $61.7 million for 1995. The increase in cost of
services was consistent with the increase in revenue, and as a percentage of
revenues, cost of services declined 1.2% from 75.2% to 74.0%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $2.0 million, or 13.6%, from $14.7 million for
1994 to $16.7 million for 1995.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net decreased $0.3 million from $0.6 million for 1994 to $0.3 million
for 1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.3
million for both 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the three months ended March 31, 1997, net cash used in operating
activities was $0.2 million, capital expenditures totaled $2.1 million and net
repayments of debt amounted to $0.6 million. The Company anticipates capital
expenditures (exclusive of acquisitions) of approximately $6.0 million during
21
<PAGE>
the remainder of 1997, primarily for computer equipment, leasehold improvements
and furniture and fixtures.
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks, including NationsBank of Texas, N.A.,
which acts as the agent. On March 3, 1997, the Company increased the size of the
Credit Facility from $55.0 million to $100.0 million. Borrowings under the
Credit Facility may be used for general corporate purposes, including the
funding of any cash paid in connection with acquisitions, refinancing
indebtedness of businesses acquired, capital expenditures and working capital.
Loans under the Credit Facility bear interest at a designated variable base rate
plus a margin ranging from 0 to 50 basis points, depending on the ratio of the
Company's interest-bearing debt to its trailing twelve-month earnings before
interest, taxes, depeciation and amortization. At the Company's option, the
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 100 to 200 basis points, depending on the same ratio.
The margin is reset on a quarterly basis and also may be reset on the closing of
an acquisition involving cash consideration in excess of $5.0 million or on a
principal repayment in excess of $5.0 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility has a $5.0 million sublimit for standby letters of credit. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of dividends by the
Company (except for dividends payable in Common Stock and certain preferred
stock), does not permit the Company to incur or assume other indebtedness (other
than approved subordinated indebtedness such as the 7 1/4% Notes) in excess of
any amount equal to 5% of its consolidated net worth and requires the Company to
comply with certain financial covenants. The Credit Facility will terminate and
all amounts outstanding, if any, thereunder will be due and payable in September
1999. The Company's subsidiaries have guaranteed the repayment of all amounts
due under the Credit Facility, and the Company has pledged the stock of its
operating subsidiaries as collateral for its obligations under the Credit
Facility. At March 31, 1997, the Company's outstanding borrowings under the
Credit Facility were $54.0 million, bearing interest at a weighted average rate
of 7.78%. As of July 18, 1997, the Company had outstanding borrowings under the
Credit Facility in the amount of $43.5 million, bearing interest at a weighted
average rate of 7.27%.
On April 2, 1997, ARS sold $55.0 million aggregate principal amount of its
7 1/4% Notes. These notes are unsecured obligations of ARS and are convertible
into an aggregate of 2,156,863 shares of Common Stock at a
conversion price of $25.50 per share. ARS used substantially all the net
proceeds from its sale of the 7 1/4% Notes to repay indebtedness outstanding
under the Credit Facility.
In January 1997, ARS registered 5,000,000 shares of Common Stock pursuant
to a shelf registration statement on Form S-4 for issuance from time to time in
connection with acquisitions. In 1997 (through June 30), the Company acquired an
additional 37 companies for an aggregate consideration of $25.0 million in cash
and 3,445,241 shares of Common Stock, all of which were issued under that shelf
registration statement. Funding of the cash portion of the purchase prices and
repayment of indebtedness assumed in connection with those acquisitions was
provided by borrowings under the Credit Facility. The Company believes its cash
flow from operations and the borrowings available under the Credit Facility are
sufficient to support its ongoing operations and anticipated capital
expenditures for the remainder of 1997.
In July 1997, ARS registered an additional 10,000,000 shares of Common
Stock and $100,000,000 of Convertible Debt Securities pursuant to a shelf
registration statement on Form S-4 (the "Acquisition Shelf Registration
Statement"), of which this Prospectus is a part, for issuance from time to time
in connection with future acquisitions.
The Company intends to continue to pursue attractive acquisition
opportunities of both residential services and commercial maintenance services
businesses. The timing, size or success of any acquisitions effort and the
associated potential capital commitments are unpredictable. The Company expects
to pay for future acquisitions primarily through a combination of Common Stock,
working capital, cash flow from operations and borrowings, including the
unborrowed portion of the Credit Facility, issuances of the Convertible Debt
Securities and the possible public or private sale of additional debt or equity
securities.
22
<PAGE>
INFLATION
Due to the relatively low levels of inflation experienced in 1994, 1995 and
1996, inflation did not have a significant effect on the results of the Company
in those periods.
SEASONALITY AND FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced, and expects that it will in the future
experience, quarterly fluctuations in revenues, operating income and cash flows
as a result of changes in weather conditions. Except for certain areas of the
southern United States, the demand for new residential installations is lower in
the winter months because new construction activity is lower as a result of
colder weather (although the Company expects that such reduction in demand may
be partially offset by increases in the demand for commercial replacement
services generally experienced in the winter months). Demand for HVAC services
is generally higher in the second and third quarters. In addition to the effects
of seasonality, the Company's quarterly results may fluctuate as a result of a
number of other factors, including the timing of acquisitions and the cyclical
nature of the homebuilding industry which will influence the levels of housing
starts from time to time in the markets in which the Company engages in new
residential installation services and affect the Company's ability to maintain
or increase revenues from those services. Accordingly, quarterly comparisons of
the Company's revenues and operating results should not be relied on as an
indication of future performance, and the results of any quarterly period may
not be indicative of the results to be expected for a full year.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding Atlas,
which is presented above) is derived from the respective audited financial
statements of the individual Founding Companies included elsewhere herein. The
selected historical financial information presented in the tables below for the
quarterly periods of the Founding Companies is derived from the respective
unaudited interim financial statements of the Founding Companies, which include
all adjustments the Company considers necessary for a fair presentation of the
results of operations and cash flows of those companies for those periods. The
following discussion should be read in conjunction with the separate company
financial statements and related notes thereto appearing elsewhere in this
Prospectus.
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
========= =========
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.
23
<PAGE>
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) a $0.5 million adjustment to write off
certain obsolete inventory; (ii) increased depreciation on replacement of fully
depreciated trucks; (iii) an increase in payroll and related employee benefits;
and (iv) an increase in the cost of delivery of parts and materials, as the
Company's operations were spread over a larger geographic region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 4.0%, from $5.0 million in
1993 to $5.2 million in 1994. This increase was 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.
24
<PAGE>
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 5,817 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 $ 1,243 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
========= =========
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.
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
25
<PAGE>
percentage decrease was attributable to a change in the mix of services provided
from lower-margin services to higher-margin services and an increase in the use
of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ---- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ 0.0 $1.0 $ 1.0 $(0.3) $ (1.8)
========= ==== ========= =========== =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
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 1995 1995 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>
26
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES -- FLORIDA HAC
The following table sets forth selected information from Florida HAC's
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- -----------------------
1994 1995 1995 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
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)
========= ========= ========= =========
</TABLE>
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment. Net cash provided
by (used in) financing activities resulted from borrowing and repayments of
long-term obligations and capital lease obligations and advances to/from the
shareholders of the Company.
Florida HAC had working capital of $0.3 million as of September 30, 1996.
Florida HAC historically funded its operations with cash flows from operations
and borrowings from lenders and its stockholders.
27
<PAGE>
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>
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.
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.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- MERIDIAN & HOOSIER
The following table sets forth selected information from Meridian &
Hoosier's statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- -----------------------
1994 1995 1995 1996
--------- --------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
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 in cash and cash
equivalents........................ $ 0.2 $ 0.4 $ 0.1 $ 0.6
========= ========= ========= =========
</TABLE>
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment and the acquisition
in 1996 of Sagamore. Net cash provided by (used in) financing activities
resulted from borrowing and repayments of long-term obligations and capital
lease obligations.
Meridian & Hoosier had working capital of $0.6 million as of September 30,
1996. It historically funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder.
RESULTS OF OPERATIONS -- A-ABC
The following table sets forth certain historical selected financial data
of A-ABC and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <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% $ 6,855 100.0%
Cost of services.... 6,921 63.5 5,574 64.2 5,709 65.6 4,314 66.0 3,733 54.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........ 3,979 36.5 3,102 35.8 2,998 34.4 2,220 34.0 3,122 45.6
Selling, general and
administrative
expenses.......... 2,830 26.0 2,444 28.2 2,348 27.0 1,722 26.4 2,084 30.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
continuing
operations........ $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 498 7.6 $ 1,038 15.2
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Loss from
discontinued
operations........ $ (1,452) $ (142) $ (115) $ (54) $ (271)
========= ========= ========= ========= =========
</TABLE>
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 million increase in HVAC installations and a $0.1 million increase in
appliance service.
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees,
resulting in reduced labor costs as a percentage of sales.
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.
29
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to
decreases of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million in 1993 to $5.6 million in 1994 and was consistent as a percentage
of revenue with the reduction in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.4 million, or 14.3%, from $2.8 million in
1993 to $2.4 million in 1994. This decrease resulted from a $0.4 million
reduction in advertising expense.
LOSS FROM DISCONTINUED OPERATIONS -- Loss from discontinued operations
decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993 to a $0.1
million loss for 1994. The decrease in the loss was primarily attributable to
reductions of $0.6 million, $0.1 million and $0.3 million in salary and benefit
cost, rent and property tax expense and advertising expense, respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
<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......................... $0.8 $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 provided by (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)
==== ==== ==== ========= =====
</TABLE>
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.
30
<PAGE>
BUSINESS
GENERAL
ARS was founded in October 1995 to create the leading national provider of
(i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning ("HVAC"), plumbing, electrical, indoor air
quality and other systems and major home appliances in homes and small
commercial buildings (collectively, "residential maintenance services") and
(ii) new installations of those systems in homes and small commercial facilities
under construction ("new residential installation services" and, together with
residential maintenance services, "residential services"). ARS also intends,
through its subsidiary, American Mechanical Services ("AMS"), to become a
leading national provider of comprehensive maintenance, repair, replacement,
reconfiguration and monitoring services for HVAC, plumbing and electrical
systems and controls in existing large commercial facilities such as office
buildings, health care facilities, educational facilities and retail centers
(collectively, "commercial maintenance services"). To achieve these goals, the
Company is conducting an aggressive acquisition program and has implemented a
national operating strategy designed to increase internal growth and capitalize
on cost efficiencies. Today, the Company is the largest publicly held company in
the United States engaged principally in providing residential services. In
April 1997, the Company acquired its first business engaged principally in
providing commercial maintenance services and, through July 18, 1997, has
acquired seven businesses providing commercial maintenance services exclusively
and eight businesses providing both commercial maintenance services and
residential services. The Company intends to apply the same acquisition and
national operating strategies to its commercial maintenance services business
that it has implemented in its residential services business.
The Company believes the profitability of its residential maintenance
services business benefits from its new residential installation services
operations as a result of (i) the significant volume of purchases of HVAC
systems for its high-volume installation services and (ii) the addition of new
customer and equipment information in the Company's marketing database. This
database provides the Company with valuable information it can use to expand its
future residential services revenue base. In addition, new installation services
provide the Company with cooperative advertising credits from HVAC system
manufacturers which it uses for promoting its services for existing residential
HVAC systems. Through leveraging these benefits, acquiring additional businesses
and internal development, the Company intends to emphasize the growth of its
higher-margin residential maintenance services and commercial maintenance
services business.
INDUSTRY OVERVIEW
The Company believes the HVAC, plumbing and electrical industries in the
United States represent an annual market in excess of $60 billion, of which
residential maintenance services and commercial maintenance services each
account for in excess of $25 billion. It estimates this market is served by over
50,000 companies, consisting predominantly of small, owner-operated businesses
operating in single local geographic areas and providing a limited range of
services. It 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 the commercial maintenance services sector of its
industry presents significant opportunities for internal growth and that
economic conditions, technological developments and health and environmental
concerns drive the market for these services generally and the market for HVAC
and indoor air quality services in particular. Because the windows of most large
office buildings and many other commercial and industrial facilities built over
the past 40 years are sealed, their owners use HVAC systems to provide fresh air
as well as to heat or cool. The Company believes that many owners of large
commercial and industrial facilities, because of competitive and other pressures
to reduce building operating costs and improve indoor air quality, increasingly
are seeking to reduce those costs by replacing or reconfiguring aged
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HVAC systems and outsourcing repair and maintenance work traditionally performed
by building engineers and their crews.
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 and commercial maintenance services. It also
believes the highly fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services and commercial maintenance
services businesses.
BUSINESS STRATEGY
The Company plans to enhance its market position as a leading national
provider of professional, high-quality residential services and commercial
maintenance 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 demographics. The Company's acquisition strategy involves
entering new geographic markets and expanding within existing markets for
residential services and commercial maintenance services. The Company believes
it can leverage its experience and success in developing a leading market
position in the residential services business to capitalize on consolidation
opportunities in the commercial maintenance services business.
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 or commercial maintenance
services and having the critical mass necessary to be a core business
with which other residential services or commercial maintenance
services 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 generally seeks 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 pursues "tuck-in" acquisitions of smaller 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 is in the process of expanding its 24-hour
emergency service to substantially all its locations and its
monitoring of service call quality by attempting to contact each of
its service customers promptly following a service call. In addition,
the Company is developing a national training program to improve and
keep current the technical, selling and customer relations skills of
its service personnel. The Company is implementing specialized
computer and modern communications technology at each of its locations
to improve productivity, communications, vehicle dispatch, service
quality and responsiveness to its customers' needs. 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 will continue to reduce
the total operating expenses of acquired businesses by eliminating
duplicative administrative functions in tuck-in acquisitions and
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consolidating certain functions performed separately by each business
prior to its acquisition. In addition, the Company is currently
implementing programs to reduce costs (as a percentage of revenues)
compared to those of individual acquired businesses in such areas as:
the purchase of HVAC equipment for resale, service vehicles, parts and
tools; vehicle and equipment maintenance; financing arrangements;
employee benefits; and insurance and bonding. The Company believes
that the potential synergies and cost efficiencies in commercial
maintenance services operations are similar to and additive to those
in residential services operations.
o FOCUSED OPERATING MANAGEMENT. The Company believes dividing
residential services operations and commercial maintenance operations
into separate operating groups sharpens the focus of operating
management and personnel in each group on meeting the needs of their
customers by requiring them to specialize in one aspect of the
Company's business.
ACQUISITION STRATEGY
Given the large size and fragmentation of the residential services and
commercial maintenance services sectors of its 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 or commercial maintenance services
businesses. Generally, these businesses 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
businesses (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 or commercial maintenance services
providers in order to expand its share of that market and increase the range of
services offered in that market. Some of the acquisitions within existing
markets 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 will develop a regional operating plan under which its
businesses in that region can benefit from regional operating efficiencies such
as shared dispatching from regional call centers, marketing efforts, centralized
maintenance, local purchasing power, expanded service line management expertise
and other economies of scale.
Each acquisition candidate is expected to demonstrate potential for revenue
growth and profitability. The Company also evaluates certain qualitative
characteristics of acquisition candidates, including their reputations in their
respective geographic regions, the size and other characteristics of customer
bases, the quality and experience levels of operating management and service
personnel, the amount, type and condition of their equipment and facilities and
their operating histories. For example, the Company has acquired each of the
winners of CONTRACTING BUSINESS magazine's Residential Contractor of the Year
Award for 1995, 1996 and 1997. The Company believes there are numerous
acquisition candidates that meet the Company's acquisition criteria.
The Company believes it is regarded by many owners of residential services
and commercial maintenance 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 because of the Company's 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 for its owners.
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The Company has analyzed various data on the residential services and
commercial maintenance services industries and individual businesses within
those industries and believes it is well-positioned to implement its acquisition
program. On the basis of the Company's experience in connection with the
acquisitions of the Acquired Businesses, the Company believes its operating
management will be instrumental in identifying and completing future
acquisitions. Several of these executives have had leadership roles in both
national and regional trade associations, which have allowed them to become
personally acquainted with other owners of residential services and commercial
maintenance services businesses across the country. The Company believes 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 and commercial
maintenance services businesses. 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.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, Convertible Debt Securities, cash and
notes. The consideration for each future acquisition will vary on a case-by-case
basis, with the major factors being historical operating results, the future
prospects of the business to be acquired and the ability of that business to
complement the services offered by the Company. The timing, size and success of
the Company's acquisition efforts and the associated potential capital
commitments, however, cannot be readily predicted. See "Risk Factors -- Risks
Related to Acquisition Strategy" and " -- Potential Effect of Shares Eligible
for Future Sale on Price of Common Stock."
RESIDENTIAL SERVICES PROVIDED
The Company provides a variety of maintenance, repair and replacement
services for HVAC, plumbing, electrical, indoor air quality and other systems
and major appliances in homes and small commercial buildings. It also installs
these systems in new homes and small commercial buildings under construction.
The Company's residential maintenance 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
and appliances. In connection with its repair and replacement services, the
Company sells on a retail basis a wide range of HVAC, plumbing, electrical and
other equipment, including complete heating and air conditioning systems and a
variety of HVAC, plumbing and electrical parts and system components. As a
subcontractor to builders, it installs complete central heating and air
conditioning systems, electrical systems, plumbing systems and other systems in
newly constructed homes and small commercial buildings.
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The following table shows, by region, the range of residential maintenance
services and new residential installation services provided by the various
Acquired Businesses acquired through July 18, 1997.
<TABLE>
<CAPTION>
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
<S> <C> <C> <C> <C>
RESIDENTIAL MAINTENANCE SERVICES:
California........................... X X
Colorado............................. X
Florida.............................. X X
Illinois............................. X
Indiana.............................. X X X
Michigan............................. X
Nebraska............................. X
Nevada............................... X
North Carolina....................... X
Oklahoma............................. X
Pennsylvania......................... X
South Carolina....................... X X X X
Texas................................ X X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X
NEW RESIDENTIAL INSTALLATION
SERVICES:
California........................... X
Florida.............................. X X
Illinois............................. X
Indiana.............................. X X X
Michigan............................. X
Nebraska............................. X
Nevada............................... X
North Carolina....................... X
Pennsylvania......................... X
South Carolina....................... X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X X
</TABLE>
An important element of the Company's growth strategy is to increase the
range of residential services, particularly residential maintenance services, it
provides in each of its regions through acquisitions and internally generated
growth. In addition, the Company intends to provide a full range of these
services in new geographic areas into which it will expand, principally by
acquisitions. See " -- Business Strategy."
The Company has organized ARS Energy Services Company ("ARS Energy") in
order to increase the reach of its residential services. ARS Energy's goal is to
formulate and implement 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 and multi-location retailers.
COMMERCIAL MAINTENANCE SERVICES
Another important element of the Company's growth strategy is expansion
into the commercial maintenance services market to provide services for existing
large commercial facilities such as office buildings, health care facilities,
educational facilities and retail centers. In April 1997, the Company acquired
its first business engaged principally in providing commercial maintenance
services and, through
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July 18, 1997, has acquired seven businesses providing commercial maintenance
services exclusively and eight businesses providing both commercial maintenance
and residential services. Those businesses serve areas in Arizona, California,
Colorado, Florida, Indiana, Maryland, Nebraska, North Carolina, South Carolina,
Texas, Virginia and Washington, D.C. Through AMS, the Company intends to acquire
additional businesses in this market and enter into long-term maintenance
agreements for the types of facilities described above. The Company intends to
offer true single-source commercial maintenance service capabilities, including
internal air quality services, CFC retrofit capabilities, building automation
services, remote monitoring, lighting services and design and build retrofit
capabilities for major facility expansion or renovation projects.
OPERATIONS
The Company operates on a decentralized basis, with the management of each
operating location responsible for its day-to-day operations, profitability and
growth. Local management is provided support through the Company's marketing and
advertising strategies and programs and in developing optimal pricing
strategies. The Company's executive management coordinates the sharing among
operating locations of financial resources for improved systems and expansion of
services, training programs, financial controls, purchasing information and
operating expertise to improve productivity, lower operating costs and improve
customer satisfaction to stimulate internal growth. While the local management
operates with a high degree of autonomy and is empowered to make the necessary
operating decisions, adherence to Company training, safety, customer
satisfaction, accounting and internal control policies is required. Frequent
communication with the Company's executive management team is integral to the
Company's achieving the benefits that are anticipated by the consolidation of
these businesses into a single company.
The Company's residential services and commercial maintenance services
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 equipped with an inventory
of equipment and commonly required tools, parts and supplies needed to complete
a variety of jobs. The residential maintenance service technician assigned to a
service call generally is 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 residential installation services are generally provided
to builders of new homes and small commercial facilities. Typically, new
residential 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
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<PAGE>
required. The Company's new residential installation personnel analyze the plans
to determine the labor, materials and equipment type and size required for
installing 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 Company orders the equipment and supplies necessary for the
particular job from the suppliers or manufacturers and generally arranges for
delivery according to the builder's schedule. The Company coordinates its
installation work with the builder's construction supervisors and generally
obtains scheduled draw payments for its services within 30 days of completing
the installation, at which time any mechanics' and materialmen's liens securing
the rights to those payments are released. The Company often obtains interim
payments to cover its labor and materials costs on large installation projects.
Except for the air ducts the Company fabricates for HVAC system
installations and replacements, the Company purchases substantially all the
equipment and component parts it sells or installs from original equipment
manufacturers ("OEMs") and distributors. As a part of its efforts to achieve
efficiencies in its purchasing of equipment and other supplies, the Company is
reducing the number of OEMs and distributors from which it obtains those
supplies. The Company is not, however, materially dependent on any of these
outside sources. See " -- Sources of Supply."
SALES AND MARKETING
The Company believes that, in most of its current geographic markets, it
has well-known and established businesses that are leading providers of one or
more residential services or commercial maintenance 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 residential maintenance services
customers receive prompt follow-up inquiries to determine customer satisfaction
levels and to arrange for follow-up service calls if necessary. The Company
believes it will be able to implement this practice at each of its residential
maintenance service locations without material cost to it.
In each of the market areas in which the Company provides residential
maintenance services, the Acquired Businesses offering these services
traditionally have emphasized vigorous advertising campaigns. These campaigns
have used mailouts, yellow pages, newspapers, radio and television to promote
the services offered under their particular trade names or service marks. These
advertising campaigns have been effective in creating name recognition and
customer identification with these companies for the quality of the services
they offer in their local areas. The Company expects for the foreseeable future
to retain the trade names and service marks of these companies in its
advertising and promotional materials in their local areas, but intends over
time to promote and establish the ARS 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 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 these systems 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 "Risk Factors -- Seasonality and Fluctuations in Operating
Results." Certain states regulate the provision of service under residential
services warranty contracts. See " -- Governmental Regulation and Environmental
Matters."
In its new residential installation operations, the Company focuses on
cultivating long-term relationships with its national, regional and local home
builder and general contractor customers. These marketing efforts primarily
involve direct sales contacts emphasizing the Company's quality of services and
reliability.
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In addition, the Company applies labels with its name and phone number to newly
installed equipment and times direct telemarketing sales efforts for service
contracts to closely coincide with the expiration of manufacturer warranties on
Company-installed equipment. The Company believes taking these measures in its
new residential installation business will lead to residential maintenance
business.
The Company has numerous customers. No single customer accounted for more
than 10% of the Company's revenues during 1996.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all its service personnel 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 personnel. 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 large classroom and training facility incorporating "hands on"
training stations where service personnel, apprentices and new trainees can work
on functioning HVAC, plumbing, electrical and other systems under the
supervision of skilled tradesmen. A safety supervisor at this facility conducts
both initial and continuous comprehensive training classes for all personnel and
works with operating management to observe and evaluate safety procedures in an
effort to constantly improve the effectiveness of the Company's safety programs.
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's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
The Company owns certain of its facilities and leases the remainder under
leases with remaining terms ranging from month to month (generally in the case
of facilities being consolidated with others) to 10 years on terms the Company
believes to be commercially reasonable. Some of these leases are with directors
of ARS who are former owners of certain of the Founding Companies. See "Certain
Transactions -- Real Estate and Other Transactions."
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 expects that,
for the foreseeable future, the Acquired Businesses and most other additional
businesses it acquires in the future will continue to use their respective trade
names and service marks in their local areas, although the Company intends over
time to have its operations identified by the ARS name and logos. The Company is
implementing certain uniform service names and markings for use on its vehicles
and in its advertising and promotional materials. See "-- Sales and
Marketing."
EMPLOYEES
As of June 30, 1997, the Company had approximately 3,500 employees. As it
implements its internal growth and acquisition strategies, the Company expects
that the number of employees will increase. The
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Company has not experienced any strikes or work stoppages and believes its
relationship with its employees is good.
As of June 30, 1997, none of the Company's employees principally engaged in
providing residential services were represented by a union, while approximately
80 employees principally engaged in providing commercial maintenance services
were represented by a union. The Company believes that a significant percentage
of companies providing commercial maintenance services have employees who are
members of unions. Thus, as the Company expands into the commercial maintenance
services business, it expects the number of union members it employs to
increase.
Both the residential services business and the commercial maintenance
services business are 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.
SOURCES OF SUPPLY
The raw materials the Company uses in its operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain equipment and raw materials
through volume purchases and has not experienced any significant difficulty in
obtaining adequate supplies to conduct its operations.
COMPETITION
The markets for residential services and commercial maintenance services
are highly competitive. The Company believes that the principal competitive
factors in these segments of the industry are (i) timeliness, reliability and
quality of services provided, (ii) range of services provided, (iii) market
share and visibility and (iv) price. The Company believes its strategy of
creating a leading national provider of comprehensive residential services and
commercial maintenance services directly addresses these factors. The ability of
the Company to recruit, train and retain highly motivated service personnel to
provide quality services should be enhanced by its ability to utilize
professionally managed recruiting and training programs. In addition, the
Company offers compensation, health and savings benefits that are more
comprehensive than most offered in the industry. See "-- Hiring, Training and
Safety" and " -- Employees." Quality of service should be enhanced by the
implementation and continuous reinforcement of customer satisfaction policies,
retraining and follow-up with the customer. Competitive pricing is possible
through the implementation of the cost-saving opportunities that exist across
each of the service lines offered and from productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single local geographic area. Certain of these smaller
competitors may have lower overhead cost structures and, consequently, may be
able to provide their services at lower rates. Moreover, in the residential
services market many homeowners have traditionally relied on individual persons
or small repair service firms with whom they have long-established relationships
for a variety of home repairs. The Company believes that currently only a few
other public companies are focused on providing residential services in some of
the same services lines provided by the Company. There are a number of national
chains that sell a variety of plumbing fixtures and equipment, and heating and
air conditioning equipment for residential use and that offer, either directly
or through various subcontractors, installation, warranty and repair services.
Other companies or trade groups engage in franchising their names and marketing
programs in some residential services lines. In the commercial maintenance
services market, the Company believes there are only a small number of public
companies engaged primarily in providing commercial maintenance services in the
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service lines on which the Company intends to focus, but certain HVAC original
equipment manufacturers provide commercial maintenance services as a complement
to their manufacturing and distribution businesses. In the future, competition
in both the residential and commercial maintenance service lines may be
encountered from, among others, other newly formed or existing public or private
service companies with aggressive acquisition programs, the unregulated business
segments of regulated gas and electric utilities or from newly deregulated
utilities in those industries entering into various service areas. Certain of
the Company's competitors and potential competitors have greater financial
resources than the Company to finance acquisition and development opportunities,
to pay higher prices for the same opportunities or to develop and support their
own residential or commercial maintenance services operations if they decide to
enter the business.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Various federal, state and local laws and regulations apply to many aspects
of the Company's operations, including (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 and commercial maintenance services trades require various permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's service technicians who work in the geographic area
covered by the permit or license. The Company has implemented a policy to ensure
that, where allowed, any such permits or licenses that may be material to the
Company's operations in a particular geographic region are held by at least two
persons within that region.
Numerous federal, state and local environmental laws and regulations,
including those governing vehicle emissions and the use and handling of
refrigerants affect the Company's operations. 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") 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, it 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
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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 Company
expects the number of conversions of existing HVAC systems that use CFCs to
systems using alternative refrigerants 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 or propane, and to meet reduced emissions standards. The Company does not
believe that the cost of fleet conversion that may be required under current
laws will be material. Future costs of compliance with these laws will depend on
the number of vehicles purchased in the future for use in the covered geographic
regions, as well as the number and size of future business acquisitions by the
Company in these regions. The Company cannot determine to what extent its future
operations and earnings may be affected by new regulations or changes in
existing regulations relating to vehicle emissions.
Prior to entering into the agreements relating to the Acquired Businesses,
the Company evaluated the properties to be acquired and property leases to be
assumed in the Acquired Businesses and engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions at
certain properties owned or operated by the Acquired Businesses. No material
environmental problems were discovered in these reviews, and the Company is not
otherwise aware of any actual or potential environmental liabilities of the
Acquired Businesses that would be material to the Company. The Company is in the
process of implementing various programs to promote compliance with applicable
health and worker safety regulations and to increase employee safety awareness.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1996 were not material. The Company does not
currently anticipate any material adverse effect on its business or consolidated
financial position as a result of its 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. It
also maintains insurance in such amounts and against such risks as it deems
prudent. No assurance can be given that 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.
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer of the Company and certain key employees (ages are as of
June 30, 1997):
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ------------------------------------ --- ---------------------------------------- --------
<S> <C> <C> <C>
C. Clifford Wright, Jr.............. 44 Director(1)(2), President and Chief I
Executive Officer
Howard S. Hoover, Jr................ 58 Director(1)(2)(3) and Chairman of the II
Board
Gorden H. Timmons................... 48 Director(1) and Chief Operating Officer III
John D. Held........................ 35 Senior Vice President, General Counsel
and Secretary
Harry O. Nicodemus, IV.............. 49 Vice President, Chief Financial Officer
and Chief Accounting Officer
David L. Gosnell(6)................. 34 Vice President -- Operations and
Installation
Terri L. Hardt(6)................... 37 Vice President -- Retail Sales and
Service
Joseph B. Lechtanski................ 47 President of American Mechanical
Services
Michael Mamaux...................... 31 Controller
Ronald R. McCann.................... 47 Vice President -- Human Resources and
Planning
Jennifer L. Tweeton(6).............. 35 Vice President --Investor Relations
A. Jefferson Walker III............. 35 Treasurer
Thomas N. Amonett................... 53 Director(4)(5) I
Robert J. Cruikshank................ 66 Director(2)(4) II
Randall B. Hale..................... 34 Director(4) II
Nolan Lehmann....................... 53 Director(5) III
William P. McCaughey................ 39 Director(2) III
Frank N. Menditch................... 45 Director(3); Regional Vice II
President -- Northeast
Elliot Sokolow...................... 54 Director(3); Assistant to the Chairman I
Don D. Sykora....................... 66 Director(1)(5) III
</TABLE>
- ------------
(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.
(6) Key Employee.
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 ("American
Ecology"). 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.
42
<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 from 1994 to 1995 and was an associate at
the law firm of Baker & Botts, L.L.P. prior thereto.
HARRY O. NICODEMUS, IV has been Vice President, Chief Financial Officer and
Chief Accounting Officer since January 1997. From December 1995 through December
1996, Mr. Nicodemus was Controller of Drilex International Inc. Prior thereto,
he was Vice President, Controller and Chief Accounting Officer of American
Ecology since February 1993. From January 1991 to January 1993, he was
Divisional Vice President and Assistant Controller of BFI. Mr. Nicodemus is a
Certified Public Accountant.
DAVID L. GOSNELL has been Vice President -- Operations and Installation
since June 1997. From August 1996 to June 1997, he served as Director of
Operations and Installations for the Company. Prior thereto, he was employed by
The Munge Company/Stonehedge Construction Company as Vice President from June
1993 to August 1996 and Associate Vice President from January 1992 to June 1993.
TERRI L. HARDT has been Vice President -- Retail Sales and Service since
June 1997. From May 1997 to June 1997, she was Director of Retail Service for
the Company. From May 1996 to May 1997, Ms. Hardt was a Division
Manager -- Heating and Cooling Division with Warm Thoughts Communications, Inc.
From 1995 to May 1996, she was a Training Manager with Business Ventures
Corporation, Inc. From 1994 to 1995, Ms. Hardt was a Small Business Consultant
with Allison & Associates and from 1986 to 1994, she served as President of
Automatic Controls Service, one of the Acquired Businesses.
JOSEPH B. LECHTANSKI has been President of the Company's commercial
maintenance services subsidiary, American Mechanical Services since its
inception in November 1996. Prior thereto, Mr. Lechtanski served as President
and Chief Executive Officer of Natkin Service Company from October 1993 to
October 1996 and Vice President of Global Service Operations of Carrier
Corporation from April 1991 to October 1993.
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.
RONALD R. MCCANN has been Vice President -- Human Resources and Planning
since June 1997. From November 1996 to May 1997, Mr. McCann was Director of
Market Development for the Company. Prior thereto, he was President of Service
Operations Systems, Inc., one of the Acquired Businesses, from August 1984 until
November 1996.
JENNIFER L. TWEETON has been Vice President -- Investor Relations since
June 1997. From July 1996 to June 1997, she was Director of Investor Relations
for the Company. Prior thereto, she was Vice President of Special Projects for
Infrastructure Services, Inc. from March 1996 to July 1996 and Financial
Planning Manager for U.S. Delivery Systems, Inc. from 1994 to March 1996. From
1990 to 1994, Ms. Tweeton was employed by Team, Inc. as Financial Planning
Manager.
A. JEFFERSON WALKER III joined the Company in April 1996 as Treasurer and
was a consultant to the Company from January 1996 to March 1996. From 1993 to
January 1996, he was employed by American Ecology as a Manager-Financial
Analysis and Assistant Treasurer. From 1990 to 1993, Mr. Walker served as a
Senior Financial Analyst and Assistant Banking Officer of Mellon Bank
Corporation in Houston, Texas. Mr. Walker was a financial analyst at BFI from
1988 to 1989.
THOMAS N. AMONETT has been a director since September 1996. He served as
President and Chief Executive Officer of Weatherford Enterra, Inc. from July
1996 to May 1997. From 1992 to 1996, he served as Chairman of the Board and
President of Reunion Resources Company (previously known as Buttes Gas and Oil
Company and now known as Reunion Industries, Inc.). Prior thereto, he was Of
Counsel with the law firm of Fulbright & Jaworski L.L.P. from 1986 to 1992. He
was President and a director of Houston Oil Fields Company from 1982 to 1986.
Mr. Amonett also currently serves as a director of ITEQ, Inc., PetroCorp
Incorporated, Reunion Industries, Inc. and Weatherford Enterra, Inc.
43
<PAGE>
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 LLP. Mr. Cruikshank serves as a director of Houston Industries
Incorporated ("HII"), MAXXAM Inc., Kaiser Aluminum Corporation, Compass
Bank-Houston, Texas Biotechnology Corporation and Weingarten Realty Investors.
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 -- Organization of the
Company" 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 and is
a director and the chairman of the board of Brazos Sportswear, Inc. From 1985 to
1992, he was employed by Arthur Andersen LLP. Mr. Hale is a Certified Public
Accountant. He 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., Brazos
Sportswear, Inc., Drypers Corporation and Garden Ridge Corporation. Mr. Lehmann
was appointed to the Board of Directors pursuant to the Equus Funding Agreement.
WILLIAM P. MCCAUGHEY has been a director since November 1995. Mr. McCaughey
also served the Company as Executive Vice President and Chief Financial Officer
from October 1996 through January 1997 and as Executive Vice
President -- Planning and Development from November 1995 until October 1996.
From 1992 to 1995, Mr. McCaughey was Treasurer of American Ecology. 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.
FRANK N. MENDITCH has been a director since September 1996 and Regional
Vice President -- Northeast since June 1997. Mr. Menditch served as Director of
the Company's Northeast operations from November 1996 to June 1997. He has been
President of General Heating since 1983. 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 and Assistant to
the Chairman since June 1997. Mr. Sokolow served as Director of the Company's
Southeast operations from November 1996 to June 1997. 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.
DON D. SYKORA has been a director since September 1996. He is currently a
consultant to 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 will expire at the 2000 meeting. The terms of the Class II
directors and Class III directors will expire at the 1998 meeting and the 1999
meeting, respectively.
44
<PAGE>
DIRECTOR COMPENSATION
ARS currently pays each director who is not a Company employee (a
"Nonemployee Director") a fee of $1,500 for each Board meeting attended and
$1,000 for each Board committee meeting attended (except for committee meetings
held on the same day as Board meetings) and periodically grants Nonemployee
Directors options to purchase shares of Common Stock pursuant to its 1996
Incentive Plan (the "Incentive Plan"). It does not pay any additional
compensation to Company employees for serving as directors, but will reimburse
all directors for out-of-pocket expenses they incur in connection with attending
meetings of the Board or Board committees or otherwise in their capacity as
directors.
On the closing of the IPO, ARS granted each Nonemployee Director an option
to purchase up to 10,000 shares of Common Stock under the Incentive Plan. These
options will become exercisable at $15 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 (i) have a ten-year term, (ii) have an exercise
price per share equal to the fair market value of a share of Common Stock on the
date of grant and (iii) become exercisable in 33 1/3% annual increments
beginning on the first anniversary of the date of grant.
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
---------------------------------
AWARDS
ANNUAL COMPENSATION ---------------------------------
NAME AND PRINCIPAL --------------------- SHARES UNDERLYING ALL OTHER
POSITION SALARY BONUS(1) STOCK AWARDS OPTIONS COMPENSATION(2)
- ------------------------------------- -------- -------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... $175,000 $ 28,770 -- 200,000 $ 1,240
President and Chief Executive
Officer
Howard S. Hoover, Jr................. $160,000 $ 26,970 -- 150,000 $ 498
Chairman of the Board
William P. McCaughey................. $140,000 $ 23,600 -- 120,000 $ 810
Executive Vice President and Chief
Financial Officer(3)
John D. Held......................... $ 99,230(4) $100,220(5) -- 75,000 $ 685
Senior Vice President, General
Counsel and Secretary
Gorden H. Timmons.................... $ 56,540(6) $ 27,910 -- 150,000 $ 354
Chief Operating Officer
</TABLE>
- ------------
(1) Except as stated in Note (5) below, represents cash performance-based bonus
awards paid for the period from September 27, 1996 to December 31, 1996.
(2) Represents: (i) matching contributions by the Company under the ARS 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 ARS under the ARS Executive Life Insurance
Program in the
45
<PAGE>
amounts of $823 for Mr. Wright, $498 for Mr. Hoover, $455 for Mr. McCaughey
and $378 for Mr. Held.
(3) Mr. McCaughey ceased serving as an executive officer effective January 1997.
(4) Salary earned since the date of commencement of Mr. Held's employment with
ARS in March 1996.
(5) Of this amount, $80,000 represents 5,333 shares of Common Stock awarded to
Mr. Held under the Incentive Plan when the IPO closed and valued at the IPO
price to the public ($15 per share).
(6) Salary earned since the date of commencement of Mr. Timmons' employment with
ARS in September 1996.
OPTION GRANTS
The following table sets forth information regarding the options granted
during 1996 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 and Held have
10-year terms, became exercisable as to 50% of the shares subject thereto on
March 27, 1997 and will become fully exercisable on March 27, 1998. The options
granted to Mr. Timmons have a 10-year term, are currently exercisable as to 20%
of the shares subject thereto and will vest an additional 20% per year,
commencing on September 27, 1997.
46
<PAGE>
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.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Wright, Hoover, Timmons,
Menditch, Sokolow and Held, copies of which are exhibits to the Acquisition
Shelf Registration Statement. 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.
ARS also has employment agreements with other executive officers and key
employees of the Company.
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 422,480 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
47
<PAGE>
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.
In connection with the Initial Acquisitions and as consideration for their
interests in the Founding Companies, certain directors and executive officers 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 820,029 shares; and Mr. Sokolow -- $6.68 million
and 266,666 shares. In addition, the following persons, 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.
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 $178,800
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. Atlas leases office space at another location 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.
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 $511,027 and will increase a minimum of 4% each
year.
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 $236,099 and will increase 5%
each year.
The Company believes the rentals provided under the leases described above
are fair market rentals.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 1997, 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 ARS's directors and executive officers and (iii) all executive officers
and directors of ARS as a group.
SHARES BENEFICIALLY
OWNED(1)
---------------------
NAME NUMBER PERCENT
- ------------------------------------- ----------- -------
Equus II Incorporated(2)............. 1,321,035 9.5%
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Gorden H. Timmons(3)................. 850,029 6.1%
C. Clifford Wright, Jr............... 310,730 2.2%
Elliot Sokolow....................... 276,666 2.0%
William P. McCaughey................. 270,730 1.9%
Frank N. Menditch.................... 232,222 1.7%
Ronald R. McCann..................... 219,500 1.6%
Howard S. Hoover, Jr................. 215,724 1.5%
John D. Held......................... 42,833 *
Joseph B. Lechtanski................. 25,000 *
A. Jefferson Walker III.............. 15,666 *
Michael Mamaux....................... 8,000 *
Nolan Lehmann........................ 2,000 *
Robert J. Cruikshank................. 2,000 *
Harry O. Nicodemus, IV............... 1,000 *
Randall B. Hale...................... 1,000 *
Thomas N. Amonett.................... 1,000 *
Don D. Sykora........................ 1,000 *
All executive officers and directors
as a group (17 persons)(3)......... 2,475,100 17.4%
- ------------
* Less than 1%.
(1) Shares shown do not include shares held through the ARS 401(k) plan. The
shares beneficially owned include shares issuable on exercise of outstanding
options exercisable within 60 days of June 30, 1997 as follows: Mr. Timmons
-- 30,000 shares; Mr. Wright -- 100,000 shares; Mr. Sokolow -- 10,000
shares; Mr. McCaughey -- 60,000 shares; Mr. Menditch -- 10,000 shares; Mr.
McCann -- 17,500: Mr. Hoover -- 75,000 shares; Mr. Held -- 37,500 shares;
Mr. Lechtanski -- 25,000 shares; Mr. Walker -- 12,500 shares; Mr. Mamaux --
5,000 shares; and all executive officers and directors as a group -- 382,500
shares.
(2) Based on a Schedule 13G dated October 4, 1996. That Schedule 13G indicates
that the 1,321,035 shares reported as beneficially owned includes 100,000
shares obtainable on exercise of a warrant exercisable at $15 per share. The
Schedule 13G indicates that the reporting person has sole voting power and
sole dispositive power with respect to all 1,321,035 shares. Mr. Lehmann, a
director of ARS, is the president of Equus II and Mr. Hale, a director of
ARS, is a vice president of Equus II and thus each may be deemed to be the
beneficial owner of the shares held by Equus II. Messrs. Lehmann and Hale
disclaim beneficial ownership of all those shares.
(3) Includes shares held by a trust of which Mr. Timmons is the trustee and
shares held by a trust of which Mr. Timmons' spouse is the trustee. Mr.
Timmons may be deemed the beneficial owner of the shares held by these two
trusts.
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 Road, 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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DESCRIPTION OF THE CONVERTIBLE DEBT SECURITIES
The Convertible Debt Securities offered hereby (the "Convertible
Securities") will be issued under an Indenture to be dated as of July 31, 1997
(the "Indenture") between ARS and U.S. Trust Company of Texas, N.A., as
trustee (the "Trustee"). The following description of the Convertible
Securities summarizes certain general terms and provisions of the Convertible
Securities to which any Prospectus Supplement (including any Pricing Supplement)
may relate (the "Offered Convertible Securities"). The particular terms of the
Offered Convertible Securities and the extent to which the general terms and
provisions of the Indenture will apply will be described in a Prospectus
Supplement relating to the Offered Convertible Securities. The terms of the
Offered Convertible Securities also will include those made a part of the
Indenture by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The statements under this caption relating to the Convertible Securities
and the Indenture are summaries only, do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions therein of certain terms,
and the Trust Indenture Act. Certain terms defined in the Indenture are
capitalized herein. The Indenture is an exhibit to the Acquisition Shelf
Registration Statement and is incorporated herein by this reference.
GENERAL
The Indenture will provide that Convertible Securities may be issued from
time to time thereunder in one or more series, each in such aggregate principal
amount as ARS may authorize from time to time. All Convertible Securities of one
series need not be issued at the same time and, unless otherwise provided in a
Prospectus Supplement with respect to any series, that series may be reopened,
without the consent of the holders of the Convertible Securities of that series,
for issuance of additional Convertible Securities of that series. The Indenture
will not limit either (i) the aggregate principal amount of Convertible
Securities which can be issued thereunder or (ii) the amount of other
indebtedness or liabilities, secured or unsecured, which ARS or its subsidiaries
may incur.
Unless otherwise indicated in a Prospectus Supplement with respect to one
or more series, the Convertible Securities will not benefit from any covenant or
other provision that would provide protection to Holders of the Convertible
Securities against any sudden and dramatic decline in credit quality of the
Company resulting from any takeover or highly leveraged transaction, including a
recapitalization or similar restructuring, except as described below under
" -- Certain Rights To Require Repurchase of Convertible Securities."
The Convertible Securities are unsecured obligations of ARS.
Unless otherwise indicated in a Prospectus Supplement with respect to one
or more series, principal of, and any premium or interest on, the Convertible
Securities will be payable at the office of the Trustee in New York, New York,
and the Convertible Securities may be surrendered for registration of transfer,
exchange or conversion at that office. ARS may, at its option, pay any interest
on the Convertible Securities by check mailed to the address of each person
entitled thereto as it appears in the applicable Securities Register for the
Convertible Securities on the Regular Record Date for that interest payment.
No service charge will be made for any registration of transfer or exchange
of the Convertible Securities, but ARS may require payment of a sum sufficient
to cover any tax or other governmental charge and any other expenses (including
the fees and expenses of the Trustee) payable in connection therewith. If a
Prospectus Supplement provides for the redemption of a series of Convertible
Securities, ARS will not be required (i) to issue, register the transfer of or
exchange any of those Convertible Securities during a period beginning at the
opening of business 15 days before the day of the mailing of a notice of
redemption and ending at the close of business on the day of that mailing or
(ii) to register the transfer of or exchange any of those Convertible Securities
selected for redemption in whole or in part, except the unredeemed portion of
those Convertible Securities being redeemed in part.
All monies paid by ARS to the Trustee or any Paying Agent, or held by ARS,
in trust for the payment of principal of and any premium and interest on any
Convertible Security which remain unclaimed for two years after that principal,
premium or interest becomes due and payable may be repaid to ARS or released
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from trust, as the case may be. Thereafter, the Holder of that Convertible
Security may, as an unsecured general creditor, look only to ARS for payment
thereof.
Reference is made to the Prospectus Supplement for the following terms of
the Offered Convertible Securities: (i) the title and aggregate principal amount
of the Offered Convertible Securities; (ii) the date or dates, or the method for
determining the date or dates, the Offered Convertible Securities will be issued
(each an "Original Issue Date") and the date or dates on which the Offered
Convertible Securities will mature; (iii) the rate or rates (which may be fixed
or variable) per annum, if any, at which the Offered Convertible Securities will
bear interest or the method of determining such rate or rates; (iv) the date or
dates from which that interest, if any, will accrue and the date or dates on
which that interest, if any, will be payable; (v) the terms for redemption or
early payment, if any, including any mandatory or optional sinking fund or
analogous provision; (vi) the date or dates (each a Convertibility Commencement
Date) on which the Offered Convertible Securities first become convertible into
Common Stock and their Initial Conversion Price; (vii) whether the Offered
Convertible Securities will be issued in fully registered form or in bearer form
or any combination thereof; (viii) whether the Offered Convertible Securities
will be issued in the form of one or more global securities and whether those
global securities are to be issuable in temporary global form or permanent
global form; (ix) if other than U.S. dollars, the currency, currencies or
currency unit or units in which the Offered Convertible Securities will be
denominated and in which the principal of, and premium and interest, if any, on,
the Offered Convertible Securities will be payable; (x) whether the Senior
Indebtedness to which the Offered Convertible Securities will be subordinated by
the Indenture will be as defined in the Indenture or as defined in the
Prospectus Supplement; (xi) whether, and the terms and conditions on which, ARS
or a Holder may elect that, or the other circumstances under which, payment of
principal of, or premium or interest, if any, on the Offered Convertible
Securities is to be made in a currency or currencies or currency unit or units
other than that in which the Offered Convertible Securities are denominated; and
(xii) any other specific terms of the Offered Convertible Securities. Reference
is also made to the Prospectus Supplement for information with respect to any
additional covenants that may be included in the terms of the Offered
Convertible Securities.
The Convertible Securities may be issued as Original Issue Discount
Securities. An Original Issue Discount Security is a Security issued at a price
lower than the amount payable on the Stated Maturity thereof and which provides
that on redemption or acceleration of the maturity thereof an amount less than
the amount payable on the Stated Maturity thereof and determined in accordance
with the terms of the Convertible Security will become due and payable. Special
United States federal income tax considerations applicable to securities issued
at an original issue discount, including Original Issue Discount Securities,
will be set forth in a Prospectus Supplement or Prospectus Supplements relating
thereto.
CONVERSION RIGHTS
Each Convertible Security will be convertible into Common Stock, at the
option of its Holder, at any time on or after its Convertibility Commencement
Date and prior to its redemption (if redeemable) or final maturity, initially at
its Initial Conversion Price per share, subject to adjustment as described
below. The right to convert Convertible Securities that the applicable
Prospectus Supplement provides are subject to redemption will, with respect to
those Convertible Securities that have been called for redemption, terminate at
the close of business on the second business day preceding the Redemption Date
therefor unless ARS defaults in making the payment due on that redemption.
The applicable Prospectus Supplement will set forth, or describe the method
for determining, the first date on which a Convertible Security may be converted
into Common Stock (the "Convertibility Commencement Date"). In the case of
Convertible Securities to be issued as purchase consideration in any acquisition
for which installment-sale treatment is sought for federal income tax purposes,
their Convertibility Commencement Date will be the first day following the first
anniversary of the closing of the acquisition, unless the Prospectus Supplement
provides otherwise. The applicable Prospectus Supplement also will set forth, or
describe the method for determining, the initial conversion price of each
Convertible Security on the assumption that the Convertible Security is
convertible at any time following its Original Issue Date (or the Original Issue
Date of its earliest Predecessor Security) (the "Initial Conversion Price").
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The conversion price of each Convertible Security will be subject to
adjustment as and when any of the following events occurs after its Original
Issue Date (or the Original Issue Date of any of its Predecessor Securities):
(i) the subdivision, combination or reclassification of outstanding shares of
Common Stock; (ii) the payment of a dividend or distribution on the Common Stock
exclusively in Common Stock or any other class of capital stock of ARS which
includes Common Stock; (iii) the issuance of rights or warrants to all holders
of Common Stock entitling them to acquire shares of Common Stock (or securities
convertible into Common Stock) at a price per share less than the then Current
Market Price; (iv) the distribution to all holders of Common Stock of shares of
capital stock of ARS other than Common Stock, evidences of indebtedness of ARS,
cash or assets (including securities, but excluding (a) dividends or
distributions paid exclusively in cash, (b) dividends or distributions provided
for in clause (ii) above and (c) rights and warrants provided for in clause
(iii) above); (v) a distribution consisting exclusively of cash (excluding any
cash distributions referred to in clause (iv) above) to all holders of Common
Stock in an aggregate amount that, together with (a) all other cash
distributions (excluding any cash distributions referred to in clause (iv)
above) made within the 12 months preceding the record date for that distribution
and (b) any cash and the fair market value of other consideration paid in
respect of any tender offer subject to the provisions of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), made by ARS or a subsidiary of
ARS for Common Stock consummated within the 12 months preceding that
distribution, exceeds the greater of (1) 12.5% of ARS's market capitalization
(being at any time the product of the then Current Market Price times the number
of shares of Common Stock then outstanding) on that record date and (2) the
Company's consolidated retained earnings on that record date (determined without
giving effect to that distribution); and (vi) the consummation of a tender offer
made by ARS or any subsidiary of ARS for Common Stock which involves an
aggregate consideration that, together with (a) any cash and other consideration
payable in respect of any tender offer made by ARS or a subsidiary of ARS for
Common Stock consummated within the 12 months preceding the last time on which
tenders of Common Stock may be made pursuant to the current tender offer (the
"Expiration Time") and (b) the aggregate amount of all cash distributions
(excluding any cash distributions referred to in clause (iv) above) to all
holders of Common Stock within the 12 months preceding the consummation of that
tender offer, exceeds the greater of (1) 12.5% of ARS's market capitalization
immediately prior to that Effective Time (determined using all then tendered
shares) and (2) the Company's consolidated retained earnings at the Effective
Time (determined without giving effect to the purchase of tendered shares). No
adjustment of any conversion price will be required to be made until cumulative
adjustments amount to at least 1.0% of that conversion price, as last adjusted.
Any adjustment that would otherwise be required to be made will be carried
forward and taken into account in any subsequent adjustment.
ARS will be permitted to reduce the conversion price of any Convertible
Security as it considers to be advisable in order that any event treated for
federal income tax purposes as a dividend of stock or stock rights will not be
taxable to the holders of Common Stock or, if that is not possible, to diminish
any income taxes that are otherwise payable because of that event. In the case
of any consolidation or merger of ARS with or into any other corporation (other
than one in which no change is made in the outstanding Common Stock), or the
sale or transfer of all or substantially all the properties and assets of ARS,
the Holder of any Convertible Security then Outstanding will, with certain
exceptions, have the right thereafter to convert that Convertible Security only
into the kind and amount of securities, cash and other property receivable on
that consolidation, merger, sale or transfer by a holder of the number of shares
of Common Stock into which that Convertible Security might have been converted
immediately prior to that consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto which are as nearly
equivalent as practical to the conversion price adjustments described above.
ARS will not issue fractional shares of Common Stock on conversion of any
Convertible Security, but, in lieu thereof, will pay a cash adjustment based on
the Closing Price at the close of business on the day of conversion. If any
Convertible Security is surrendered for conversion during the period from the
close of business on any Regular Record Date therefor through and including the
next succeeding Interest Payment Date therefor (except any such Convertible
Security called for redemption on a Redemption Date, or repurchasable on a
Repurchase Date occurring within such period), that Convertible Security when
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surrendered for conversion must be accompanied by payment in New York Clearing
House funds, or other funds acceptable to ARS, of an amount equal to the
interest thereon which the registered Holder on that Regular Date is to receive.
Except as described in the preceding sentence, ARS will not pay any interest on
converted Convertible Securities with respect to any Interest Payment Date
subsequent to the date of conversion. No other payment or adjustment for
interest or dividends will be made on conversion of any Convertible Security.
SUBORDINATION
The payment of the principal of and any premium or interest on the
Convertible Securities and any other payment obligations of ARS in respect of
the Convertible Securities (including any obligation to repurchase the
Convertible Securities) are, to the extent set forth in the Indenture,
subordinated in right of payment to the prior payment in full in cash or cash
equivalents of all Senior Indebtedness, whether outstanding on the date of the
Indenture or thereafter incurred. If there is a payment or distribution of
assets to creditors on any liquidation, dissolution, winding up, receivership,
reorganization, assignment for the benefit of creditors, marshaling of assets
and liabilities or any bankruptcy, insolvency or similar case or proceeding of
ARS, the holders of all Senior Indebtedness will be entitled to receive payment
in full in cash or cash equivalents of all Obligations due or to become due in
respect of that Senior Indebtedness (including interest after the commencement
of any such case or proceeding, notwithstanding that ARS may be excused as a
result of such case or proceeding from the obligation to pay all or any part of
the interest otherwise payable in respect of any Senior Indebtedness) before the
Holders of the Convertible Securities will be entitled to receive any payment in
respect of the principal of or any premium or interest on the Convertible
Securities, and until all Obligations with respect to the Senior Indebtedness
are paid in full in cash or cash equivalents, any distribution to which the
Holders of the Convertible Securities would be entitled must be made to the
holders of the Senior Indebtedness. ARS also may not make any payment (whether
by redemption, purchase, retirement, defeasance or otherwise) on or in respect
of the Convertible Securities if (i) a default in the payment of the principal
of or any premium or interest on any Designated Senior Indebtedness (a "Payment
Default") occurs or (ii) any other default occurs and is continuing with
respect to any Designated Senior Indebtedness which permits holders of
Designated Senior Indebtedness as to which that default relates to accelerate
its maturity (a "Nonpayment Default") and the Trustee receives notice of that
default (a "Payment Blockage Notice") from (a) if that Nonpayment Default
shall have occurred under the Credit Facility or any other debt facility with
banks or other lenders which provides revolving credit loans, term loans,
receivables financing (including through the sale of receivables) or letters of
credit (each an "Other Debt Facility"), the representative of the Credit
Facility or that Other Debt Facility, as the case may be, or (b) if that
Nonpayment Default shall have occurred with respect to any other issue of
Designated Senior Indebtedness, the holders, or a representative of the holders,
of at least 20% of that Designated Senior Indebtedness. The payments on or in
respect of the Convertible Securities shall be resumed (i) in the case of a
Payment Default respecting Designated Senior Indebtedness, on the date on which
that default is cured or waived, and (ii) in the case of a Nonpayment Default
respecting Designated Senior Indebtedness, the earliest of (a) the date on which
that Nonpayment Default is cured or waived, (b) the date the applicable Payment
Blockage Notice is retracted by written notice to the Trustee from a
representative of the holders of the Designated Senior Indebtedness which have
given that Payment Blockage Notice and (c) 179 days after the date on which the
applicable Payment Blockage Notice is received by the Trustee, unless any
Payment Default has occurred and is continuing or an Event of Default of the
type referred to in clause (vii) of the first sentence under " -- Events of
Default" has occurred. No new period of payment blockage may be commenced
unless and until 360 days have elapsed since the date of commencement of the
payment blockage period resulting from the immediately prior Payment Blockage
Notice, and no Nonpayment Default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice.
If the Maturity of any Convertible Securities is accelerated because of an
Event of Default with respect thereto, (i) the Indenture requires ARS to
promptly notify holders of Designated Senior Indebtedness of that event and (ii)
the Holders of those Convertible Securities will, to the extent permitted by
law, be prohibited
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for a period of 180 days thereafter from making any bankruptcy filing with
respect to ARS or, to the extent permitted by law, from filing suit to enforce
their rights under the Indenture.
Unless a Prospectus Supplement provides otherwise for one or more series of
Convertible Securities, the Indenture's definition of "Senior Indebtedness"
will apply to the Convertible Securities. The Indenture will define "Senior
Indebtedness" as the principal of and premium, if any, and interest on and
other Obligations in respect of (i) all secured indebtedness of ARS for money
borrowed (including any secured indebtedness under the Credit Facility and any
successor thereto and any secured indebtedness under all Other Debt Facilities,
whether outstanding on the date of execution of the Indenture or thereafter
created, incurred or assumed, and (ii) any amendments, renewals, extensions,
modifications, refinancings and refundings of any of the foregoing. For purposes
of this definition, "indebtedness for money borrowed" when used with respect
to ARS means (i) any obligation of, or any obligation guaranteed by, ARS for the
repayment of borrowed money (including fees, penalties and other obligations in
respect thereof), whether or not evidenced by bonds, debentures, notes or other
written instruments, (ii) any deferred payment obligation of, or any such
obligation guaranteed by, ARS for the payment of the purchase price of property
or assets evidenced by a note or similar instrument and (iii) any obligation of,
or any such obligation guaranteed by, ARS for the payment of rent or other
amounts under a lease of property or assets, which obligation is required to be
classified and accounted for as a capitalized lease on the balance sheet of ARS
under generally accepted accounting principles. For a description of the Credit
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 7 to the Company's historical financial
statements. As used in the Indenture: (i) "Obligations" in respect of the
Senior Indebtedness include any principal, interest, premiums, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any such indebtedness; and (ii) "Designated Senior
Indebtedness" means (a) Obligations under the Credit Facility and all Other
Debt Facilities and (b) any other Senior Indebtedness the principal amount of
which is $25.0 million or more and that has been designated by ARS as
"Designated Senior Indebtedness." The Prospectus Supplement relating to any
series of Convertible Securities may provide that the "Senior Indebtedness" to
which the Convertible Securities of that series will be subordinated by the
Indenture will include all indebtedness of ARS for money borrowed, whether
secured or unsecured, except any such indebtedness that, by the terms of the
instrument or instruments by which it was created or incurred, expressly
provides that it (i) is junior in right of payment to those Convertible
Securities or (ii) ranks PARI PASSU in right of payment with those Convertible
Securities.
The Convertible Securities will be obligations exclusively of ARS. ARS
currently conducts its operations through its subsidiaries, which are separate
and distinct legal entities and have no obligation, contingent or otherwise, to
pay any amounts due in respect of the Convertible Securities or to make any
funds available therefor, whether by dividends, loans or other payments. The
ability of any subsidiary of ARS to loan or advance funds or pay dividends to
ARS (i) may be subject to contractual or statutory restrictions, (ii) will be
contingent on the subsidiary's earnings and cash flows and (iii) will be subject
to various business considerations.
The Convertible Securities will be effectively subordinated to all
indebtedness and other liabilities and commitments (including trade payables and
lease obligations) of subsidiaries of ARS. Any right of ARS to receive assets of
any of its subsidiaries on the liquidation or reorganization of that subsidiary
(and any consequent right of the Holders of the Convertible Securities to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, except to the extent that ARS is itself recognized
as a creditor of that subsidiary, in which case the claims of ARS would still be
subordinated to any security in the assets of that subsidiary and any
indebtedness of that subsidiary senior to that held by ARS.
The Indenture does not limit or prohibit the incurrence of (i) Senior
Indebtedness or (ii) indebtedness, liabilities or other commitments by ARS or
its subsidiaries. As of March 31, 1997 after giving effect to the sale of the
7 1/4% Notes and the application of the net proceeds to the Company therefrom
and all acquisitions of Acquired Businesses through June 30, 1997, the aggregate
amount of Senior Indebtedness to
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which the Convertible Securities would have been subordinated was approximately
$30.3 million, and the estimated aggregate amount of indebtedness and other
balance sheet liabilities of ARS's subsidiaries to which the Convertible
Securities would have been effectively subordinated was approximately $19.5
million. Also at that date, ARS had outstanding $55.0 million aggregate
principal amount of 7 1/4% Notes. By their terms, the 7 1/4% Notes will be
subordinated in right of payment to the Convertible Securities except to the
extent that a Prospectus Supplement otherwise provides in the case of one or
more series of Convertible Securities. ARS expects to incur Senior Indebtedness
from time to time in the future, including Senior Indebtedness under the Credit
Facility. See "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture will provide that ARS will not consolidate with or merge into
any other Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one transaction or a series of
related transactions, or permit any single Person to consolidate with or merge
into ARS, unless (i) if applicable, the Person formed by such consolidation or
into which ARS is merged or the Person or corporation which acquires the
properties and assets of the Company substantially as an entirety is a
corporation, limited liability company, partnership or trust organized and
validly existing under the laws of the United States or any state thereof or the
District of Columbia and expressly assumes payment of the principal of and any
premium and interest on the Convertible Securities and the performance or
observance of each obligation of ARS under the Indenture, (ii) immediately after
giving effect to such transaction, no Event of Default will have occurred and be
continuing, (iii) such consolidation, merger, conveyance, transfer or lease does
not adversely affect the validity or enforceability of the Convertible
Securities and (iv) ARS has delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each stating that such consolidation, merger,
conveyance, transfer or lease complies with the provisions of the Indenture.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF CONVERTIBLE SECURITIES
If any Repurchase Event (as defined below) occurs on or prior to Maturity
of any Affected Convertible Security (as defined below), each Holder of Affected
Convertible Securities will have the right, at the Holder's option, to require
ARS to repurchase all or any part of the Holder's Affected Convertible
Securities on the date (the "Repurchase Date") that is 30 days after the date
ARS gives notice of the Repurchase Event as described below at a price (the
"Repurchase Price") equal to 100% of the principal amount thereof, together
with accrued and unpaid interest to the Repurchase Date. On or prior to the
Repurchase Date, ARS is required to deposit with the Trustee or a Paying Agent
an amount of money sufficient to pay the Repurchase Price of the Affected
Convertible Securities to be repurchased on the Repurchase Date.
Failure by ARS (i) to provide timely notice of a Repurchase Event to
Holders of Affected Convertible Securities, as provided for below, or (ii) to
repurchase the Affected Convertible Securities when required will result in an
Event of Default under the Indenture whether or not that repurchase is permitted
by the subordination provisions of the Indenture.
On or before the 15th day after a Repurchase Event occurs, ARS will be
obligated to mail to the Holders of all Affected Convertible Securities a notice
of that occurrence which states the event constituting the Repurchase Event and
the date thereof, the Repurchase Date, the date by which the repurchase right
must be exercised, the Repurchase Price and the procedures the Holder must
follow to exercise its repurchase right. To exercise this right, a Holder must
deliver to ARS or its designated agent and to the Trustee, on or before the
close of business on the Repurchase Date, written notice of the Holder's
exercise of that right, together (in the case of written notice to the Trustee)
with the certificates evidencing the Affected Convertible Securities to be
repurchased, duly endorsed for transfer to ARS. Any such notice will be
irrevocable.
A "Repurchase Event" will be the occurrence of a Change in Control or a
Termination of Trading. A "Change in Control" will occur when: (i) all or
substantially all the assets of the Company or of the Company and its
subsidiaries, taken as a whole, are sold in one transaction or any series of
related
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transactions as an entirety to any Person or related group of Persons; (ii) any
consolidation or merger of ARS occurs (a) in which ARS is not the continuing or
surviving corporation (other than a consolidation or merger with a wholly owned
subsidiary of ARS in which all shares of Common Stock outstanding immediately
prior to the effectiveness thereof are changed into or exchanged for the same
consideration) or (b) pursuant to which the Common Stock would be converted into
cash, securities or other property, in each case other than a consolidation or
merger of ARS in which the holders of the Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
total voting power of all classes of capital stock entitled to vote generally in
the election of directors of the continuing or surviving corporation immediately
after such consolidation or merger in substantially the same proportion as their
ownership of Common Stock immediately before such transaction; (iii) any Person,
or any Persons acting together that would constitute a "group" for purposes of
Section 13(d) of the Exchange Act, together with any affiliates thereof, shall
beneficially own (as defined in Exchange Act Rule 13d-3) at least 50% of the
total voting power of all classes of capital stock of ARS entitled to vote
generally in the election of directors of ARS; (iv) at any time during any
consecutive two-year period, individuals who at the beginning of that period
constituted the Board of Directors of ARS (the "Board") (together with any new
directors whose election by the Board or whose nomination for election by the
stockholders of ARS was approved by a vote of 66 2/3% of the directors then
still in office who were either directors at the beginning of that period or
whose election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board then in office; or (v) ARS is
liquidated or dissolved or adopts a plan of liquidation or dissolution.
A "Termination of Trading" will occur if the Common Stock (or other
common stock into which the Convertible Securities are then convertible) is
neither listed for trading on a national securities exchange in the United
States nor approved for trading on an established automated over-the-counter
trading market in the United States.
If a Repurchase Event occurs, the then Outstanding Convertible Securities
will be the "Affected Convertible Securities" whose Holders will have the
repurchase right described above.
The right of Holders to require ARS to repurchase Affected Convertible
Securities if a Repurchase Event occurs could create an Event of Default under
Senior Indebtedness, as a result of which any repurchase could, absent a waiver
of the repurchase right, be blocked by the subordination provisions of the
Indenture. See " -- Subordination." Failure by ARS to repurchase the Affected
Convertible Securities when required will result in an Event of Default with
respect to the Affected Convertible Securities whether or not the repurchase is
permitted by those subordination provisions. The ability of ARS to pay cash to
the Holders of Affected Convertible Securities on a repurchase may be limited by
certain financial covenants contained in Senior Indebtedness.
If a Repurchase Event occurs and Holders exercise their rights to require
ARS to repurchase Affected Convertible Securities, ARS intends to comply with
applicable tender offer rules under the Exchange Act, including Rules 13e-4 and
14e-1, as then in effect, with respect to any repurchase.
The foregoing provisions (i) may not afford Holders protection in the event
of highly leveraged or other transactions involving ARS which may adversely
affect Holders and (ii) may discourage open market purchases of the Common Stock
or a non-negotiated tender or exchange offer for such stock and, accordingly,
may limit a stockholder's ability to realize a premium over the market price of
the Common Stock in connection with any such transaction.
EVENTS OF DEFAULT
Unless otherwise provided by a Prospectus Supplement with respect to any
series of the Convertible Securities, the following are Events of Default under
the Indenture with respect to that series: (i) default in the payment of
principal of or any premium on any Convertible Security when due (even if that
payment is prohibited by the subordination provisions of the Indenture); (ii)
default in the payment of any interest on any Convertible Security of that
series when due, which default continues for 30 days (even if that payment is
prohibited by the subordination provisions of the Indenture); (iii) failure to
provide timely notice of a
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Repurchase Event to Holders of Affected Convertible Securities of that series as
required by the Indenture; (iv) default in the payment of the Repurchase Price
in respect of any Affected Convertible Security of that series on the Repurchase
Date therefor (even if that payment is prohibited by the subordination
provisions of the Indenture); (v) default in the performance or breach of any
other covenant or warranty of ARS in the Indenture (other than a covenant
included in the Indenture for one or more series of Convertible Securities other
than Convertible Securities of that series) which continues for 60 days after
written notice as provided in the Indenture; (vi) default under one or more
bonds, debentures, notes or other evidences of indebtedness for money borrowed
by ARS or any of its consolidated subsidiaries or under one or more mortgages,
indentures or instruments under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by ARS or any of its
consolidated subsidiaries, whether that indebtedness now exists or is hereafter
created, which default individually or in the aggregate constitutes a failure to
pay the principal of indebtedness in excess of $10 million when due and payable
after the expiration of any applicable grace period with respect thereto or
results in indebtedness in excess of $10 million becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without that indebtedness having been discharged, or that acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to ARS by the Trustee or to ARS and the Trustee by Holders of at
least 25% in aggregate principal amount of the Outstanding Convertible
Securities a written notice specifying such default and requiring ARS to cause
such indebtedness to be discharged or cause such acceleration to be rescinded or
annulled; (vii) certain events in bankruptcy or reorganization of or similar
events respecting ARS or any of its Significant Subsidiaries; and (viii) any
other Event of Default as the applicable Prospectus Supplement may specify with
respect to the Convertible Securities of that series.
If an Event of Default with respect to any Outstanding series of
Convertible Securities occurs and is continuing, the Trustee or Holders of not
less than 25% in aggregate principal amount of the Outstanding Convertible
Securities of that series (if the Event of Default is one of the types described
in clause (i), (ii) or (viii) above) or at least 25% in aggregate principal
amount of all Outstanding Convertible Securities (if the Event of Default is of
any other type) may declare the principal of and any premium and interest on all
the Outstanding Convertible Securities of the applicable series (or of all
Outstanding Convertible Securities, as the case may be) to be due and payable
immediately, but if a majority in principal amount of Holders of Outstanding
Convertible Securities of the applicable series (or of all Outstanding
Convertible Securities, as the case may be) waive any past default (except the
nonpayment of any premium or interest on or principal of any Convertible
Security and subject to certain other limitations), then such default will cease
to exist and any Event of Default arising therefrom will be deemed cured for
every purpose of the Indenture; but no such waiver will extend to any subsequent
or other default. If an Event of Default occurs and is continuing as a result of
an event of bankruptcy or reorganization of ARS or any of its Significant
Subsidiaries, the principal of and any premium and accrued and unpaid interest
on all Outstanding Convertible Securities will automatically become due and
payable without any declaration or other act on the part of the Trustee or any
Holder of any Convertible Securities. ARS is required to furnish to the Trustee
annually a statement as to the performance by ARS of certain of its obligations
under the Indenture and as to any default in that performance. The Indenture
provides that the Trustee may withhold notice to Holders of the Convertible
Securities of any series of any continuing default (except in the case of a
default in payment of the principal of or any premium or interest on those
Convertible Securities), if the Trustee considers it in the interest of those
Holders to do so.
MODIFICATIONS AND AMENDMENTS
ARS and the Trustee may modify or amend the Indenture without the consent
of Holders to: (i) set forth the terms of the Convertible Securities of any
series, including for purposes of that series any change in the definition of
Senior Indebtedness; (ii) evidence the succession of another Person to ARS and
the assumption by any such successor of the covenants of ARS in the Indenture
and the Convertible Securities; (iii) for the benefit of the Holders of
Convertible Securities of any or all series, add to the covenants of ARS, add an
additional Event of Default or surrender any right or power conferred upon ARS;
(iv) secure
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the Convertible Securities; (v) make provision with respect to the conversion
rights of Holders in the event of a consolidation, merger or sale of assets
involving ARS, as required by the Indenture; (vi) evidence and provide for the
acceptance of appointment by a successor Trustee or successor Trustees with
respect to the Convertible Securities; or (vii) cure any ambiguity in or
omission from, or, correct or supplement any provision in, the Indenture or the
Convertible Securities which may be defective or inconsistent with any other
provision or make any other provisions with respect to matters or questions
arising under the Indenture which shall not be inconsistent with the provisions
of the Indenture; provided, however, that no such modification or amendment
described in this clause (vii) may adversely affect the interest of Holders of
Securities of any series in any material respect.
ARS and the Trustee may modify or amend the Indenture with the consent of
the Holders of a majority in principal amount of the Outstanding Convertible
Securities affected thereby; provided, that no such amendment or modification
may, without the consent of each Outstanding Convertible Security affected
thereby, (i) change the stated maturity date of the principal of, or any
installment of principal or interest on, any Convertible Security or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
on the redemption thereof, or change the coin or currency in which any
Convertible Security or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any payment on or with
respect to any Convertible Security, (ii) reduce the percentage in principal
amount of the Outstanding Convertible Securities the consent of whose Holders
is required for any such supplemental indenture, or the consent of whose Holders
is required for any waiver of compliance with certain provisions of the
applicable Indenture or certain defaults thereunder and their consequences or
(iii) modify any of the provisions of the Indenture relating to the
subordination of the Outstanding Convertible Securities in a manner adverse to
the Holders thereof.
SATISFACTION AND DISCHARGE
ARS may discharge its obligations under the Indenture while Convertible
Securities remain Outstanding, subject to certain conditions, if (i) all
Outstanding Convertible Securities have become due and payable or will become
due and payable at their scheduled maturity within one year or (ii) all
Outstanding Convertible Securities are scheduled for redemption within one year,
and in either case ARS has deposited with the Trustee an amount in cash
sufficient (without any consideration of any investment of that cash) to pay and
discharge all Outstanding Convertible Securities on the date of their scheduled
maturity or the scheduled date of redemption.
MEETINGS OF HOLDERS
The Indenture contains provisions for convening meetings of the Holders of
Convertible Securities of any series. A meeting may be called at any time by the
Trustee or, on request, by ARS or the holders of at least 10% in principal
amount of the Outstanding Convertible Securities of any series, in any such case
on notice given as provided in the Indenture. Except for any consent that must
be given by the Holder of each Outstanding Convertible Security affected
thereby, as described above under " -- Modifications and Amendments," any
resolution presented at a meeting or adjourned meeting at which a quorum is
present may be adopted by the affirmative vote of the Holders of a majority in
principal amount of the Outstanding Convertible Securities of that series;
provided, however, that, except for any consent that must be given by the Holder
of each Outstanding Convertible Security affected thereby, as described above
under " -- Modifications and Amendments," any resolution with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action that may be made, given or taken by the Holders of a specified
percentage, which is less than a majority in principal amount of the Outstanding
Convertible Securities of a series, may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Convertible Securities of that series. Subject to the proviso set forth above,
any resolution passed or decision taken at any meeting of Holders of Convertible
Securities of that series duly held in accordance with the Indenture will be
binding on all Holders of Convertible Securities of that series. The quorum at
any meeting called to adopt a resolution, and at any reconvened meeting, will be
Persons holding or representing a majority in principal amount of the
Outstanding Convertible Securities of a series.
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FORM, DENOMINATION AND REGISTRATION
Unless the applicable Prospectus Supplement provides otherwise, the
Convertible Securities will be issued in fully registered form, without coupons,
in denominations of $1,000 and any integral multiples thereof.
GOVERNING LAW
The Indenture and the Convertible Securities will be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to that state's conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. The Trustee is permitted to engage in other transactions,
except that, if it acquires any conflicting interest (as defined), it must
eliminate that conflict or resign.
ARS and its subsidiaries may maintain deposit accounts and conduct other
banking transactions with the Trustee in the ordinary course of business. The
Trustee also is the Trustee under the 7 1/4% Notes indenture.
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 July 18, 1997, 14,086,807
shares of Common Stock were issued and outstanding. The following summary is
qualified in its entirety by reference to the Charter, which is an exhibit to
the Acquisition Shelf Registration Statement.
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 so choose. The Common Stock carries no preemptive rights, is
not convertible, redeemable, assessable or entitled to the benefits of any
sinking fund. Holders of Common Stock are entitled to dividends in such amounts
and at such times as the Board may declare out of funds legally available
therefor. See "Dividend Policy" for information regarding the dividend policy
of ARS.
PREFERRED STOCK
The Board may direct ARS to issue Preferred Stock from time to time.
Subject to certain Charter provisions and applicable law, it may, without any
action by holders of the Common Stock, (i) adopt resolutions to issue the shares
in one or more classes or series, (ii) fix the number of shares and change the
number of shares constituting any series and (iii) provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions
thereof, including dividend rights and rates, redemption terms and prices,
repurchase obligations, conversion rights and liquidation preferences of the
shares constituting any class or series.
The Board could cause ARS to issue shares of, or rights to purchase,
Preferred Stock, the terms of which might (i) discourage an unsolicited proposal
to acquire the Company, (ii) facilitate a particular business combination
involving the Company or (iii) adversely affect the voting power of holders of
the Common Stock. Any such action could discourage a 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 its then market
price.
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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 an exhibit to the Acquisition Shelf Registration Statement.
The Rights currently are attached to all certificates representing shares
of Common Stock now outstanding or hereafter issued, including the shares of
Common Stock into which the Notes are convertible. No separate certificates for
the Rights ("Rights Certificates") have been or will be distributed, except as
described below. 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. In
certain circumstances the Distribution Date may be deferred by the Board of
Directors. Certain inadvertent acquisitions will not result in a person's
becoming an Acquiring Person if the person promptly divests itself of sufficient
Common Stock. Until the Distribution Date, (a) the Rights will be evidenced by
the Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 30, 2006, unless earlier redeemed or exchanged
by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the Distribution Date, the separate
Rights Certificates alone will represent the Rights. All shares of Common Stock
issued prior to the Distribution Date will be issued with Rights. Shares of
Common Stock issued after the Distribution Date in connection with certain
employee benefit plans or upon conversion of certain securities will be issued
with Rights. Except as otherwise determined by the Board of Directors, no other
shares of Common Stock issued after the Distribution Date will be issued with
Rights.
In the event (a "Flip-In Event") that a person becomes an Acquiring
Person (except pursuant to a tender or exchange offer for all outstanding shares
of Common Stock at a price and on terms that a majority of the independent
members of the Board of Directors determines to be fair to and otherwise in the
best interests of the Company and its stockholders (a "Permitted Offer")),
each holder of a Right will thereafter have the right to receive, on exercise of
that Right, a number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a Current Market Price
(as defined in the Rights Agreement) equal to two times the exercise price of
the Right. Notwithstanding the foregoing, following the occurrence of any
Triggering Event, all Rights that are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially owned by any Acquiring Person (or by
certain related parties) will be null and void in the circumstances set forth in
the Rights Agreement. Rights are not exercisable following the occurrence of any
Flip-In Event until such time as the Rights are no longer redeemable by the
Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) the Company is acquired in a merger
or other business combination transaction (other 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
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common stock of the acquiring company having a Current Market Price equal to two
times the exercise price of the Right. Flip-In Events and Flip-Over Events are
collectively referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, and/or other equity securities
deemed to have the same value as one share of Common Stock, per Right, subject
to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors only in order to cure
any ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.
The Rights will have certain 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
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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 Delaware corporations to limit or eliminate the
personal liability of their directors to them 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 Charter limits the
liability of directors of ARS to ARS or its stockholders to the fullest extent
permitted by Delaware law. Specifically, no member of the Board will be
personally liable for monetary damages for breach of the member's fiduciary
duty as a director, except for liability (i) for any breach of the member'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 member derived an improper personal benefit. This Charter
provision could 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. The Bylaws of ARS (the "Bylaws") 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 Charter 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 only the Chairman of the Board, the President or a majority of the Board
may call a special meeting of stockholders.
The Charter provides that the Board will consist of three classes of
directors serving for staggered terms. This Charter provision could prevent a
party who acquires control of a majority of the outstanding voting stock of ARS
from obtaining control of the Board until the second annual stockholders meeting
following the date that party obtains that control.
The Charter provides that the number of directors will be as determined by
the Board from time to time, but will 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
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vote. This provision, in conjunction with the Charter provisions 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 advance-notice and other procedural requirements that
apply to stockholder nominations of persons for election to the Board at any
annual or special meeting of stockholders and to stockholder proposals that any
other action be taken at any annual meeting. In the case of any annual meeting,
a stockholder proposing to nominate a person for election to the Board or
proposing that any other action be taken must give the Secretary of ARS written
notice of the proposal not less than 90 days before the anniversary date of the
immediately preceding annual meeting (subject to certain exceptions if the
pending annual meeting date differs by more than specified periods from that
anniversary date). If a special meeting is called for the election of directors,
a stockholder proposing to nominate a person for that election must give the
Secretary of ARS written notice of the proposal no later than the close of
business on the 10th day following the first to occur of (i) the day on which
notice of the date of the special meeting was mailed to stockholders or (ii) the
day public disclosure of the date of the special meeting was made. The Bylaws
prescribe the specific information any advance written stockholder notice must
contain. The foregoing summary is qualified in its entirety by reference to the
Bylaws, which are an exhibit to the Acquisition Shelf Registration Statement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
As of July 18, 1997, 14,086,807 shares of Common Stock were outstanding.
Those shares currently are or will become either freely tradable or eligible for
resale subject to volume limitations and other requirements of Rule 144, as
follows: (i) currently and through September 30, 1997 -- 11,540,675; (ii)
thereafter and through December 31, 1997 -- 12,252,661; (iii) thereafter and
through March 31, 1998 -- 12,288,915; (iv) thereafter and through June 30, 1998
- -- 12,563,323; (v) thereafter and through September 30, 1998 -- 12,606,419; (vi)
thereafter and through December 31, 1998 -- 13,984,265; (vii) thereafter and
through March 31, 1999 -- 13,991,877; (viii) thereafter and through June 30,
1999 -- 14,029,091; (ix) thereafter and through March 31, 2000 -- 14,054,683;
and (x) thereafter -- 14,086,807. The shares becoming eligible for resale in the
third quarter of 1997 include 376,073 shares owned by Equus II and 1,456,620
shares owned by certain directors and executive officers of ARS.
In addition to the shares currently outstanding, the Company has reserved
for issuance the 2,156,863 shares currently issuable on conversion of the 7 1/4%
Notes. ARS has registered these shares under the Securities Act for resale by
means of the 7 1/4% Notes Shelf. If 7 1/4% Notes or shares of Common Stock
issued on the conversion of 7 1/4% Notes are disposed of by means of the 7 1/4%
Notes Shelf, the shares underlying those 7 1/4% Notes and those shares will be
freely tradable or (if owned by an affiliate of ARS) eligible for sale pursuant
to Rule 144.
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, if a minimum of one year 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
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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 two 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 amendments to Rule 144 that would, among other things,
eliminate the manner of sale requirements and revise the notice provisions of
that rule. The SEC has also solicited comments on other possible changes to Rule
144, including possible revisions to the one- and two-year holding periods and
the volume limitations referred to above.
At July 18, 1997, options to purchase up to an aggregate of 2,356,500
unissued shares and a warrant held by Equus II to purchase up to 100,000 shares
of Common Stock from ARS were outstanding, of which only options to purchase
466,500 shares and the warrant were exercisable at July 18, 1997. The exercise
prices of these securities range from $8.00 to $25.75 per share.
ARS has entered into a registration rights agreement with most of the
former owners of the Acquired Businesses it acquired in 1996 (the "Registration
Rights Agreement"), which provides certain registration rights with respect to
the Common Stock issued to such stockholders as acquisition consideration. 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 ARS 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 September 24, 1997. In addition, subject to certain conditions
and limitations, the Registration Rights Agreement will provide the holders of
Common Stock subject to the agreement with the right to participate in
registrations by ARS 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, if ARS 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 ARS to include shares owned by them in the registration.
In the case of each registration rights agreement described above, ARS 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, ARS
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
registration rights agreement, ARS will indemnify the selling stockholders
thereunder, and such stockholders will indemnify ARS, against certain
liabilities in respect of any registration statement or offering that includes
shares pursuant to that agreement.
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.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discusses the material United States federal income tax
consequences under generally applicable current law of the acquisition,
ownership, conversion and disposition of Convertible Securities and Common Stock
acquired from ARS in connection with the direct and indirect acquisition of
businesses, properties or securities in a business combination transaction (a
"Business Combination
64
<PAGE>
Transaction") and the acquisition, ownership, conversion and disposition of
Common Stock which was acquired on the conversion of one or more Convertible
Securities acquired from ARS in a Business Combination Transaction by persons
who hold those Convertible Securities and any such Common Stock as capital
assets. It does not, however, discuss the effect of (i) special rules, such as
those which apply to tax-exempt organizations, insurance companies, financial
institutions, persons who hold the Convertible Securities or Common Stock in
connection with a straddle or dealers, (ii) rules, that may permit (a) gain
realized on the receipt of Convertible Securities in exchange for property which
is transferred to ARS in a Business Combination Transaction to be reported on
the installment method or (b) the receipt of Convertible Securities or Common
Stock in a Business Combination Transaction without the recognition of gain or
loss or (iii) any foreign, state or local tax law. Accordingly, each person who
is considering the acquisition of Convertible Securities or Common Stock in a
Business Combination Transaction pursuant to this Prospectus is advised to
consult his or her own tax advisor regarding the matters discussed herein in
light of his or her particular circumstances and the application of state, local
and foreign tax laws.
The following statements are based upon the Internal Revenue Code of 1986,
as amended (the "Code"), existing regulations thereunder and the current
judicial and administrative interpretations thereof.
OWNERSHIP BY U.S. PERSONS
The following applies to a person who is a citizen or resident of the
United States (a "U.S. Holder"), a corporation or partnership created or
organized in the United States or any state thereof or an estate or trust the
income of which is includible in income for United States federal income tax
purposes regardless of its source.
INTEREST ON CONVERTIBLE SECURITIES. The portion of any stated interest on a
Convertible Security which is qualified stated interest will be taxable as
ordinary income at the time that interest is paid or accrued in accordance with
the U.S. Holder's method of accounting for United States federal income tax
purposes. The portion of the stated interest on a Convertible Security which is
not qualified stated interest and, in certain circumstances, a portion of the
stated principal on a Convertible Security will be classified as original issue
discount. Any such original issue discount will be included in income at times
which generally precede the payment of that original issue discount. The effect
of the foregoing principles on a particular Convertible Security will depend, in
part, on the terms of the Convertible Security. A person who is considering the
acquisition of a Convertible Security in a Business Combination Transaction
pursuant to this Prospectus should consult with his or her tax advisor regarding
the amount of any such original issue discount with respect to that Convertible
Security and the effect thereof on such person.
CONVERSION OF CONVERTIBLE SECURITIES. A U.S. Holder who does not use the
installment method to report income on the receipt of a Convertible Security in
a Business Combination Transaction will generally not recognize gain or loss on
the conversion of that Convertible Security into Common Stock except that he or
she will recognize a capital gain or loss as a result of the receipt of cash in
lieu of a fractional share equal to the amount of cash reduced by the basis of
the portion of the Convertible Security in respect of which that cash was paid.
The basis of the Common Stock that is received on the conversion will be the
adjusted basis of the converted Convertible Security at the time of conversion
increased by any gain that is recognized, decreased by any loss that is
recognized and decreased by any cash that is received. The holding period of
that Common Stock will include the holding period of the converted Convertible
Security.
Rev. Rul. 72-264 provides that (i) a U.S. Holder who uses the installment
method to report income on the receipt of a Convertible Security (any such
Convertible Security is referred to herein as an "Installment Method Convertible
Security") in a Business Combination Transaction will recognize gain or loss on
the conversion of that Installment Method Convertible Security into Common Stock
and (ii) the amount of that gain or loss will be the amount of cash received in
lieu of a fractional share increased by the fair market value of the Common
Stock received reduced by the basis (as defined in Section 453B(b) of the Code)
of that Convertible Security. Any gain or loss which is so recognized will be
considered to result from
65
<PAGE>
the sale or exchange of the property in exchange for which the Installment
Method Convertible Security was received.
CONSTRUCTIVE DIVIDEND. A distribution to holders of Common Stock may cause
a deemed distribution (which will be a dividend to the extent of the current or
accumulated earnings and profits of ARS) to the holders of Convertible
Securities if the conversion price or conversion ratio of the Convertible
Securities is adjusted to reflect that distribution.
SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK. Gain or loss
will be recognized on the sale or exchange of Convertible Securities or of
Common Stock in an amount equal to the difference between (i) the amount of cash
and the fair market value of any other property received by the U.S. Holder
(excluding, in the case of Convertible Securities, any amount representing
accrued, but theretofore unrecognized, interest, which will be taxable as such)
and (ii) the Holder's adjusted basis in the property sold or exchanged. If the
Convertible Security is an Installment Method Convertible Security, then any
gain or loss that is recognized on the sale or exchange thereof will be
considered to result from the sale or exchange of the property in exchange for
which the Installment Method Convertible Security was received. If the
Convertible Security is not an Installment Method Convertible Security, then any
such gain (other than gain characterized as interest under the market discount
rules) or loss with respect to that Convertible Security will be a capital gain
or loss and will be a long-term capital gain or loss if the holding period of
that Convertible Security is more than one year. Gain or loss that is recognized
on the sale or exchange of Common Stock will be a capital gain or loss and will
be a long-term capital gain or loss if the holding period of the Common Stock is
more than one year.
DIVIDENDS ON COMMON STOCK. Distributions on the Common Stock will be
dividends to the extent of the current or accumulated earnings and profits of
ARS, then a nontaxable return of capital reducing the holder's adjusted basis in
the Common Stock until such adjusted basis is reduced to zero and finally an
amount received in exchange for the Common Stock. Dividends paid to domestic
corporations may qualify for the dividends received deduction subject to the
limiting provisions that apply thereto.
OWNERSHIP BY NON-U.S. HOLDERS
The following applies to a person who is not a U.S. Holder (a "Non-U.S.
Holder") and to the income received thereby, such as interest, dividends and
gain or loss on disposition, with respect to Convertible Securities and Common
Stock which is not effectively connected with the conduct by the Non-U.S. Holder
of a trade or business within the United States. Any such items of income
generally will be subject to the United States federal income tax that applies
to U.S. Holders generally, and, in the case of such a Non-U.S. Holder that is a
foreign corporation, those items also will be subject to the branch profits tax.
INTEREST ON CONVERTIBLE SECURITIES. Interest paid on Convertible
Securities to a Non-U.S. Holder will not be subject to United States federal
income tax or to withholding in respect thereof if: (i) the beneficial owner (or
if certain requirements are satisfied, a member of a class of financial
institutions) certifies, under penalties of perjury, that the beneficial owner
is not a U.S. Holder and provides the beneficial owner's name and address; (ii)
the Non-U.S. Holder does not own actually or constructively 10% or more of the
total voting power of all classes of stock of ARS entitled to vote (Common Stock
into which a Convertible Security can be converted is constructively owned for
these purposes); (iii) the Non-U.S. Holder is not a controlled foreign
corporation with respect to which ARS is a "related person" within the meaning
of Section 864(d)(4) of the Code; and (iv) the Non-U.S. Holder is not a bank
holding the Convertible Securities as a result of an extension of credit made
pursuant to a loan agreement entered into in the ordinary course of its trade or
business. Accrued market discount on a Convertible Security is not treated for
these purposes as interest income.
If the foregoing conditions are not satisfied, then the interest generally
will be subject to United States federal income tax withholding at a rate of 30%
(or any lower rate provided by any applicable treaty).
SALE OR EXCHANGE OF CONVERTIBLE SECURITIES OR COMMON STOCK; CONVERSION OF
CONVERTIBLE SECURITIES. A Non-U.S. Holder generally will not be subject to
United States federal income tax on gain recognized on the sale or exchange of
Convertible Securities or Common Stock or on the conversion of a
66
<PAGE>
Convertible Security unless (i) the Holder is an individual who is present in
the United States for 183 or more days in the taxable year and certain other
conditions are satisfied or (ii) ARS is (as is not expected) a "United States
real property holding corporation," as defined in Section 897 of the Code, and
certain exceptions do not apply. Notwithstanding the foregoing, if any
Convertible Security is received in exchange for property used in the conduct of
a trade or business within the United States and the gain that was realized on
the receipt of that Convertible Security was reported on the installment method,
then any gain that is realized on the collection, conversion, sale, exchange or
other disposition of that Convertible Security may be subject to United States
income tax as though the Non-U.S. Holder were a citizen or resident of the
United States.
DIVIDENDS ON COMMON STOCK. Any distribution on Common Stock to a Non-U.S.
Holder will be subject to United States federal income tax withholding at a rate
of 30% (or any lower rate provided by any applicable treaty).
ESTATE TAX. An individual Non-U.S. Holder of a Convertible Security will
not be required to include the value of that Convertible Security in his gross
estate for United States federal estate tax purposes, provided that the Holder
did not at the time of death actually or constructively own 10% or more of the
combined voting power of all classes of stock of ARS and, at the time of the
Holder's death, payments of interest on that Convertible Security would not have
been effectively connected with the conduct by the Holder of a trade or business
in the United States. An individual Non-U.S. Holder who is treated as the owner
of, or has made certain lifetime transfers of, an interest in the Common Stock
will be required to include the value thereof in his gross estate for United
States federal estate tax purposes (and may be subject to United States federal
estate tax with respect thereto), unless otherwise provided by an applicable
estate tax treaty.
BACKUP WITHHOLDING; INFORMATION REPORTING
A noncorporate U.S. Holder holding Convertible Securities or Common Stock
(and any Non-U.S. Holder failing to provide a certificate that it is not a U.S.
Holder) will be subject to backup withholding at the rate of 31% with respect to
interest paid on the Convertible Securities, dividends paid on Common Stock and
the proceeds of any sale, exchange or redemption thereof if the payee fails to
furnish a taxpayer identification number and in certain other circumstances. Any
amounts so withheld will be allowed as a refund or a credit against the Holder's
United States federal income tax liability, provided that certain information is
furnished to the Internal Revenue Service.
Information reporting will be required with respect to a payment of
proceeds from the sale or exchange of Convertible Securities or Common Stock
through a foreign office of a broker that is a United States person or of
certain foreign brokers unless the broker has documentary evidence in its files
that the owner is a Non-U.S. Holder and the broker has no actual knowledge to
the contrary.
The Internal Revenue Service has proposed regulations that, if issued as
final regulations, would require certain Non-U.S. Holders to provide additional
information in order to establish an exemption from, or reduce the rate of,
withholding tax or backup withholding tax and in particular would require that
foreign partnerships and partners of a foreign partnership provide certain
information and comply with certain certification requirements not required
under existing law. Such proposed regulations are proposed to be effective
generally for payments made after December 31, 1997. It is not possible to
predict whether, or in what form, the proposed regulations ultimately will be
adopted.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 11,352,788 shares of
Common Stock and $100,000,000 of Convertible Debt Securities, 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 (i) terms on which it may issue the shares of Common
Stock and Convertible Debt Securities covered hereby will be determined by
direct negotiations with the owners or controlling
67
<PAGE>
persons of the businesses or assets to be acquired, (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 shares and (iii) the Convertible Debt Securities
issued will be valued at prices reasonably related to their principal amount.
EXPERTS
The audited financial statements included in this Registration Statement
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 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) that file electronically with the SEC. The address of
that site is http://www.sec.gov.
ARS has filed the Acquisition Shelf 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 Acquisition Shelf Registration Statement,
does not contain all the information set forth therein, 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 Acquisition Shelf 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
Acquisition Shelf 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.
Proxy statements, reports and other information concerning the Company that
are filed under the Exchange Act also can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Unaudited Pro Forma Combined Financial Statements -- American
Residential Services, Inc. and Subsidiaries
Basis of Presentation (unaudited) .................................. F-3
Pro Forma Combined Balance Sheet as of March 31, 1997
(unaudited) ..................................................... F-4
Pro Forma Combined Statement of Operations for the Year
Ended December 31, 1996 (unaudited) ............................. F-5
Pro Forma Combined Statement of Operations for the three
months ended March 31, 1997 (unaudited) ......................... F-6
Notes to Unaudited Pro Forma Combined Financial
Statements (unaudited) .......................................... F-7
Historical Financial Statements
American Residential Services, Inc. and Subsidiaries
Report of Independent Public Accountants ...................... F-9
Consolidated Balance Sheets ................................... F-10
Consolidated Statements of Operations ......................... F-11
Consolidated Statments of Stockholders' Equity ................ F-12
Consolidated Statements of Cash Flows ......................... F-13
Notes to Consolidated Financial Statements .................... F-14
American Residential Services, Inc. and Subsidiaries
Report of Independent Public Accountants ...................... F-27
Supplemental Consolidated Balance Sheets ...................... F-28
Supplemental ConsolidatedStatement of Operations .............. F-29
Supplemental Consolidated Statement of Stockholders' Equity ... F-30
Supplemental Consolidated Statement of Cash Flows ............. F-31
Notes to Supplemental Consolidated Financial Statements ....... F-32
American Residential Services, Inc. ................................
Report of Independent Public Accountants ...................... F-45
Balance Sheets ................................................ F-46
Statements of Operations ...................................... F-47
Statements of Shareholders' Deficit ........................... F-48
Statements of Cash Flows ...................................... F-49
Notes to Financial Statements ................................. F-50
General Heating Engineering Company, Inc. ..........................
Report of Independent Public Accountants ...................... F-54
Balance Sheets ................................................ F-55
Statements of Operations ...................................... F-56
Statements of Shareholders' Equity ............................ F-57
Statements of Cash Flows ...................................... F-58
Notes to Financial Statements ................................. F-59
Atlas Services, Inc., and Subsidiary
Report of Independent Public Accountants ...................... F-64
Consolidated Balance Sheets ................................... F-65
Consolidated Statements of Operations ......................... F-66
Consolidated Statements of Shareholders' Equity ............... F-67
Consolidated Statements of Cash Flows ......................... F-68
Notes to Consolidated Financial Statements .................... F-69
F-1
<PAGE>
Enterprises Holding Company and Subsidiaries
Report of Independent Public Accountants ...................... F-77
Consolidated Balance Sheet .................................... F-78
Consolidated Statement of Operations .......................... F-79
Consolidated Statement of Shareholders' Equity ................ F-80
Consolidated Statement of Cash Flows .......................... F-81
Notes to Consolidated Financial Statements .................... F-82
Service Enterprises, Inc., and Subsidiaries
Report of Independent Public Accountants ...................... F-89
Consolidated Balance Sheets ................................... F-90
Consolidated Statements of Operations ......................... F-91
Consolidated Statements of Shareholder's Equity ............... F-92
Consolidated Statements of Cash Flows ......................... F-93
Notes to Consolidated Financial Statements .................... F-94
Florida Heating and Air Conditioning, Inc., and Related Companies
Report of Independent Public Accountants ..................... F-101
Combined Balance Sheets ...................................... F-102
Combined Statements of Operations ............................ F-103
Combined Statements of Shareholders' Equity .................. F-104
Combined Statements of Cash Flows ............................ F-105
Notes to Combined Financial Statements ....................... F-106
DIAL ONE Meridian and Hoosier, Inc. ...............................
Report of Independent Public Accountants ..................... F-112
Balance Sheets ............................................... F-113
Statements of Operations ..................................... F-114
Statements of Shareholder's Equity ........................... F-115
Statements of Cash Flows ..................................... F-116
Notes to Financial Statements ................................ F-117
ADCOT, Inc. .......................................................
Report of Independent Public Accountants ..................... F-124
Balance Sheets ............................................... F-125
Statements of Operations ..................................... F-126
Statements of Shareholder's Deficit .......................... F-127
Statements of Cash Flows ..................................... F-128
Notes to Financial Statements ................................ F-129
Metro Heating and Air Conditioning, Inc. ..........................
Report of Independent Public Accountants ..................... F-133
Balance Sheets ............................................... F-134
Statements of Operations ..................................... F-135
Statements of Shareholders' Equity ........................... F-136
Statements of Cash Flows ..................................... F-137
Notes to Financial Statements ................................ F-138
BenchMark Group
Report of Independent Public Accountants ..................... F-143
Combined Balance Sheet ....................................... F-144
Combined Statement of Operations ............................. F-145
Combined Statement of Stockholders' Equity and
Partners' Capital ......................................... F-146
Combined Statement of Cash Flows ............................. F-147
Notes to Combined Financial Statements ....................... F-148
F-2
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(UNAUDITED)
The following unaudited pro forma combined financial statements include the
supplemental consolidated financial statements included elsewhere herein at
December 31, 1996 and for the year then ended and at March 31, 1997 and for the
three months then ended adjusted as follows: (i) the pro forma statement of
operations for the year ended December 31, 1996 gives effect to the following
events as if they had occurred on January 1, 1996 -- (a) all acquisitions by
American Residential Services, Inc. ("ARS" and, together with its
subsidiaries, the "Company") of businesses during the period from September
30, 1996 through June 30, 1997 (the "Acquired Businesses") which have been
accounted for as purchase transactions, (b) the closing of ARS' initial public
offering of its Common Stock (the "Offering") on September 27, 1996 and (c)
the issuance and sale by ARS of its 7 1/4% Convertible Subordinated Notes due
2004 on April 2, 1997 and the application of the net proceeds from that sale by
ARS (collectively, the "Note Financing"); (ii) the pro forma statement of
operations for the three months ended March 31, 1997 gives effect to the
following events as if they had occurred on January 1, 1997 -- (a) all
acquisitions by the Company of Acquired Businesses in 1997 (through June 30)
which have been accounted for as purchase transactions and (b) the Note
Financing; and (iii) the pro forma balance sheet at March 31, 1997 gives effect
to the following events as if they had occurred on March 31, 1997 -- (a) all
acquisitions by the Company of Acquired Businesses in the second quarter of 1997
(through June 30) which have been accounted for as purchase transactions and (b)
the Note Financing. The allocation of purchase prices to the assets acquired and
liabilities assumed relating to certain of the Acquired Businesses accounted for
using the purchase method of accounting 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 prices are 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 certain of these
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 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 herein. Also see "Risk Factors" included elsewhere
herein.
F-3
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND
SUPPLEMENTAL QUARTER
FINANCIAL 1997 PRO FORMA AS
STATEMENTS ACQUISITIONS(1) ADJUSTMENTS COMBINED OFFERING ADJUSTED
------------ --------------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 4,569 $ 2,688 $ (20)(a) $ 7,237 $ (2,050)(c) $ 5,187
Accounts receivable --
Trade, net of allowance...... 28,123 5,460 -- 33,583 -- 33,583
Other........................ 2,079 1,216 (255)(a) 3,040 -- 3,040
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 1,696 150 -- 1,846 -- 1,846
Inventories...................... 12,991 2,345 -- 15,336 -- 15,336
Prepaid expenses and other
current assets................. 2,684 818 (49)(a) 3,453 3,453
Net assets of discontinued
operations..................... 233 -- -- 233 -- 233
------------ --------------- ----------- --------- -------- --------
Total current assets..... 52,375 12,677 (324) 64,728 (2,050) 62,678
PROPERTY AND EQUIPMENT, net.......... 21,633 4,988 -- 26,621 -- 26,621
GOODWILL, net........................ 131,473 148 35,955(a) 167,576 -- 167,576
OTHER NONCURRENT ASSETS.............. 2,204 98 (1)(a) 2,301 2,050(c) 4,351
------------ --------------- ----------- --------- -------- --------
Total assets............. $207,685 $17,911 $35,630 $261,226 $ -- $261,226
============ =============== =========== ========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 469 $ 3,365 $-- $ 3,834 $ (3,365)(c) $ 469
Accounts payable and accrued
expenses....................... 26,821 5,784 (740)(a) 31,865 -- 31,865
Unearned revenue on service and
warranty contracts............. 3,609 527 -- 4,136 -- 4,136
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 2,232 443 -- 2,675 -- 2,675
------------ --------------- ----------- --------- -------- --------
Total current
liabilities............ 33,131 10,119 (740) 42,510 (3,365) 39,145
LONG-TERM DEBT, net of current
maturities......................... 54,496 2,540 24,444(b) 81,480 (51,635)(c) 29,845
CONVERTIBLE SUBORDINATED NOTES....... -- -- -- -- 55,000(c) 55,000
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. 613 120 -- 733 -- 733
DEFERRED INCOME TAXES................ 3,078 14 -- 3,092 -- 3,092
STOCKHOLDERS' EQUITY
Common stock..................... 13 379 (378)(a) 14 -- 14
Additional paid-in capital....... 126,821 738 17,043(a) 143,864 -- 143,864
(738)(b)
Retained earnings (deficit)...... (10,467) 4,001 (4,001)(a) (10,467) -- (10,467)
------------ --------------- ----------- --------- -------- --------
Total stockholders'
equity................. 116,367 5,118 11,926 133,411 -- 133,411
------------ --------------- ----------- --------- -------- --------
Total liabilities and
stockholders' equity... $207,685 $17,911 $35,630 $261,226 $ -- $261,226
============ =============== =========== ========= ======== ========
</TABLE>
- ------------
(1) Includes the pro forma effect of all second quarter acquisitions through
June 30, 1997, accounted for using the purchase method of accounting.
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, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL ACQUISITIONS
FINANCIAL -------------------- PRO FORMA
STATEMENTS 1996(1) 1997(2) ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
------------ --------- --------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $134,516 $ 155,177 $ 69,135 $-- $358,828 $ -- $ 358,828
COST OF SERVICES..................... 97,116 107,191 41,996 -- 246,303 -- 246,303
------------ --------- --------- ----------- --------- -------- -----------
Gross Profit..................... 37,400 47,986 27,139 -- 112,525 -- 112,525
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 30,302 40,063 24,672 (8,961)(a) 82,591 -- 82,591
(2,963)(b)
(522)(c)
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC.................... 3,356 -- -- (3,356)(d) -- -- --
GOODWILL AMORTIZATION................ 495 -- -- 3,694(e) 4,189 -- 4,189
------------ --------- --------- ----------- --------- -------- -----------
INCOME FROM OPERATIONS............... 3,247 7,923 2,467 12,108 25,745 -- 25,745
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC................ (4,818) -- -- 4,818(f) -- -- --
Interest Expense................. (634) (1,234) (528) (4,034)(f) (6,430) (445)(i) (6,875)
Interest Income.................. 106 270 64 -- 440 -- 440
Other............................ 489 264 289 -- 1,048 -- 1,048
------------ --------- --------- ----------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (1,610) 7,223 2,292 12,892 20,803 (445) 20,358
PROVISION FOR INCOME TAXES........... 1,636 2,080 -- 5,826(g) 9,542 (178)(g) 9,364
------------ --------- --------- ----------- --------- -------- -----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (3,246) $ 5,143 $ 2,292 $ 7,066 $ 11,261 $ (267) $ 10,994
============ ========= ========= =========== ========= ======== ===========
SHARES USED IN COMPUTING INCOME
PER SHARE FROM CONTINUING
OPERATIONS......................... 5,794 8,127 13,921 (h) 13,921
============ =========== ========= ===========
NET INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS.............. $ (0.56) $ 0.81 $ 0.79
============ ========= ===========
</TABLE>
- ------------
(1) Includes the pro forma effect of all acquisitions in 1996 (excluding Atlas)
accounted for using the purchase method of accounting.
(2) Includes the pro forma effect of all acquisitions in 1997, through June 30,
1997, accounted for using the purchase method of accounting.
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
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL
FINANCIAL 1997(1) PRO FORMA
STATEMENTS ACQUISITIONS ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
------------ ------------ ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 66,069 $ 16,680 $ -- $82,749 $ -- $82,749
COST OF SERVICES..................... 46,650 10,257 -- 56,907 -- 56,907
------------ ------------ ----------- --------- -------- -----------
Gross Profit..................... 19,419 6,423 -- 25,842 -- 25,842
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 15,223 6,153 (486)(a) 20,510 -- 20,510
(380)(b)
GOODWILL AMORTIZATION................ 805 -- 242(e) 1,047 -- 1,047
------------ ------------ ----------- --------- -------- -----------
INCOME FROM OPERATIONS............... 3,391 270 624 4,285 -- 4,285
OTHER INCOME (EXPENSE):
Interest Expense................. (1,120) (109) (498)(f) (1,727) 8(i) (1,719)
Interest Income.................. 30 9 -- 39 -- 39
Other............................ 187 (8) -- 179 -- 179
------------ ------------ ----------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 2,488 162 126 2,776 8 2,784
PROVISION FOR INCOME TAXES........... 1,026 -- 191(g) 1,217 3(g) 1,220
------------ ------------ ----------- --------- -------- -----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 1,462 $ 162 $ (65) $ 1,559 $ 5 $ 1,564
============ ============ =========== ========= ======== ===========
SHARES USED IN COMPUTING INCOME PER
SHARE FROM CONTINUING OPERATIONS... 13,410 910(h) 14,320 14,320
============ =========== ========= ===========
NET INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... $ 0.11 $ 0.11 $ 0.11
============ ========= ===========
</TABLE>
- ------------
(1) Includes the pro forma effect of all acquisitions in 1997, through June 30,
1997, accounted for using the purchase method of accounting as if the
acquisitions had occurred on January 1, 1997.
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 founded in October 1995 to create the 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 Enterprise Holding Company ("EHC"), 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 (the "Fourth Quarter 1996 Acquisitions"). In addition,
during the first quarter of 1997, ARS acquired ten residential service
businesses (the "First Quarter 1997 Acquisitions") and during the second
quarter of 1997 acquired an additional 27 residential service and commercial
maintenance service businesses (the "Second Quarter 1997 Acquisitions", and,
together with the Founding Companies, the Fourth Quarter 1996 Acquisitions, and
the First Quarter 1997 Acquisitions, the "Acquired Businesses").
Eight of the First Quarter 1997 Acquisitions and eight of the Second
Quarter 1997 Acquisitions were acquired under the pooling-of-interests method of
accounting. The historical financial statements of ARS have been retroactively
restated for 13 of the 15 1997 acquisitions acquired under the
pooling-of-interest method. The remaining two acquisitions are not significant
to prior historical periods and will be included in the consolidated results of
the Company beginning on the date of acquisition.
2. ACQUISITION OF ACQUIRED BUSINESSES:
For financial statement presentation purposes, Atlas Services, Inc., one of
the Founding Companies, was treated as the accounting acquiror.
The estimated purchase prices for the Acquired Businesses accounted for
using the purchase method of accounting are subject to certain purchase price
adjustments following closing. The allocation of purchase prices to the assets
acquired and liabilities assumed in certain purchase transactions 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 prices are based on
preliminary estimates of value assigned to the shares of Common Stock issued in
certain of these transactions which carry certain restrictions regarding
disposition by their holders, and such value may be revised as additional
information becomes available.
Based upon management's preliminary analysis, ARS anticipates that the
historical carrying value of the Acquired Businesses' assets and liabilities
will approximate fair value. 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 prices could reasonably be allocated.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) To record the elimination of assets and liabilities not acquired by
ARS and record the preliminary allocation of total consideration to
the net tangible assets purchased.
(b) To record the borrowing of $24.4 million of debt and the issuance of
883,249 shares of Common Stock in connection with the acquisition of
the Second Quarter 1997 Acquisitions.
(c) To record (i) the issuance of $55.0 million in convertible
subordinated notes, (ii) the retirement of debt outstanding under the
Company's revolving credit facility and certain other debt and (iii)
the deferral of $2.1 million of offering costs to be amortized over 7
years.
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:
(a) 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.
(b) Adjusts rent expense on certain facilities leased from certain
previous owners to amounts which such owners agreed to following the
acquisition of certain of the Acquired Businesses and adjusts for other
nonrecurring expenses.
(c) Adjusts for the effect of assets distributed to and the costs of
certain leases assumed by the owners of certain Acquired Businesses.
(d) Adjusts for nonrecurring charges relating to shares of Common
Stock issued to the shareholders of EHC.
(e) Records pro forma goodwill amortization expense using a 40-year
estimated life.
(f) Records the elimination of financing fees related to shares of
Common Stock issued in connection with the acquisition of EHC and adjusts
interest expense for pro forma adjustments to debt.
(g) Records the incremental provision for federal and state income
taxes relating to the compensation differential, S corporation income and
other pro forma adjustments.
(h) Pro forma weighted average shares outstanding for 1996 and the
three months ended March 31, 1997 are computed as follows (in thousands):
DECEMBER 31, MARCH 31,
1996 1997
------------- ---------
Shares outstanding...................... 12,907 12,933
Shares issued for First Quarter 1997
Acquisitions accounted for under the
purchase method of accounting......... 27 --
Shares issued for Second Quarter 1997
Acquisitions accounted for under the
purchase method of accounting......... 883 883
Stock options and warrant, net of
assumed repurchases of common shares
as treasury stock..................... 104 504
------------- ---------
13,921 14,320
============= =========
(i) Records the amortization of deferred offering costs and other
adjustments to interest expense, assuming an incremental borrowing rate of
7.25%, resulting from sale of the Convertible Subordinated Notes.
F-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Residential Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Residential Services, Inc., and subsidiaries as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with Atlas Services, Inc. as the
accounting acquiror restated for the effect of pooling-of-interests
transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 1997
F-9
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
--------------------- -----------
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,120 $ 7,860 $ 2,872
Accounts receivable --
Trade, net of allowance of
$200, $964 and $954..... 4,039 22,001 23,200
Other...................... 604 1,658 1,868
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 289 853 1,367
Inventories..................... 1,369 10,488 12,138
Prepaid expenses and other
current assets................ 326 1,903 1,972
Net assets of discontinued
operations.................... -- 338 233
--------- ---------- -----------
Total current
assets.............. 7,747 45,101 43,650
PROPERTY AND EQUIPMENT, net.......... 4,640 19,223 20,203
GOODWILL, net........................ -- 131,193 131,473
OTHER NONCURRENT ASSETS.............. 593 1,340 2,165
--------- ---------- -----------
Total assets.......... $ 12,980 $ 196,857 $ 197,491
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 920 $ 982 $ 152
Short-term debt................. 210 -- --
Accounts payable and accrued
expenses...................... 5,876 22,466 21,600
Unearned revenue on service and
warranty contracts............ 583 3,850 3,559
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 517 1,547 1,931
--------- ---------- -----------
Total current
liabilities......... 8,106 28,845 27,242
LONG-TERM DEBT, net of current
maturities......................... 2,344 52,931 54,341
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633 613
DEFERRED INCOME TAXES................ 298 2,392 2,392
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized; none issued and
outstanding................... -- -- --
Common stock, $.001 par value,
50,000,000 shares authorized;
2,349,094, 11,653,303 and
11,679,617 shares issued and
outstanding................... 2 12 12
Additional paid-in-capital...... 1,180 122,569 123,214
Retained earnings (deficit)..... 1,050 (10,525) (10,323)
--------- ---------- -----------
Total stockholders'
equity.............. 2,232 112,056 112,903
--------- ---------- -----------
Total liabilities and
stockholders' equity.. $ 12,980 $ 196,857 $ 197,491
========= ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 41,151 $ 48,401 $ 95,518 $ 13,648 $ 55,446
COST OF SERVICES..................... 31,586 35,955 68,144 9,716 38,955
--------- --------- --------- --------- ---------
Gross Profit.................... 9,565 12,446 27,374 3,932 16,491
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,766 9,648 22,431 3,205 14,572
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356 -- --
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS............... 799 2,798 1,587 727 1,919
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818) -- --
Interest Expense................ (254) (274) (574) (73) (1,110)
Interest Income................. 32 42 44 8 15
Other........................... 213 118 413 72 176
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES.............................. 790 2,684 (3,348) 734 1,000
PROVISION FOR INCOME TAXES........... 321 1,076 957 298 441
--------- --------- --------- --------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 469 1,608 (4,305) 436 559
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3) -- (32)
--------- --------- --------- --------- ---------
NET INCOME (LOSS).................... $ 469 $ 1,608 $ (4,308) $ 436 $ 527
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 2,349 2,349 4,541 2,349 12,157
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Continuing Operations........... $ 0.20 $ 0.68 $ (0.95) $ 0.19 $ 0.05
Discontinued Operations......... -- -- -- -- (0.01)
--------- --------- --------- --------- ---------
Total...................... $ 0.20 $ 0.68 $ (0.95) $ 0.19 $ 0.04
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.............. 2,349 $ 2 $ 336 $ 394 $ 732
Capital contributions.............. -- -- 352 -- 352
Dividends paid by Pooled
Companies........................ -- -- -- (541) (541)
Other equity transactions of Pooled
Companies........................ -- -- 206 -- 206
Net income......................... -- -- -- 469 469
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1994.............. 2,349 2 894 322 1,218
Capital contributions.............. -- -- 283 -- 283
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- 3 -- 3
Dividends paid by Pooled
Companies........................ -- -- -- (880) (880)
Net income......................... -- -- -- 1,608 1,608
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1995.............. 2,349 2 1,180 1,050 2,232
Public Offering, net of Offering
Costs............................ 4,830 5 60,626 -- 60,631
Acquisition of Founding
Companies........................ 3,184 3 29,231 -- 29,234
Acquisition of Fourth Quarter 1996
Acquisitions..................... 1,282 2 30,624 -- 30,626
Exercise of Warrant................ 8 -- 125 -- 125
Cash Distributions to Founding
Companies stockholders........... -- -- -- (6,031) (6,031)
Capital contributions.............. -- -- 800 -- 800
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- (17) (34) (51)
Dividends paid by Pooled
Companies........................ -- -- -- (1,202) (1,202)
Net loss........................... -- -- -- (4,308) (4,308)
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1996.............. 11,653 12 122,569 (10,525) 112,056
Acquisition of First Quarter 1997
Purchased Companies
(unaudited)...................... 27 -- 556 -- 556
Capital contributions equal to the
current income taxes of S
Corporations (unaudited)......... -- -- 135 -- 135
Dividends paid by Pooled Companies
(unaudited)...................... -- -- -- (325) (325)
Other equity transactions of
Pooled Companies (unaudited)..... -- -- (46) -- (46)
Net income (unaudited)............. -- -- -- 527 527
--------- ------ ---------- --------- -------------
BALANCE, March 31, 1997 (unaudited)..... 11,680 $ 12 $ 123,214 $ (10,323) $ 112,903
========= ====== ========== ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 469 $ 1,608 $ (4,308) $ 436 $ 527
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........ 769 988 2,523 351 1,934
Taxes on acquired S Corporations..... 352 283 800 -- 135
Stock portion of compensation and
financing fees related to purchase
of EHC............................ -- -- 6,276 -- --
Deferred income taxes (benefit)...... (46) 94 (411) (362) 239
(Gain) loss on sale of property and
equipment......................... 11 9 (77) (12) 201
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (987) (1,177) (989) (410) (974)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (456) 504 14 82 (513)
Inventories............... (213) (309) 28 (317) (1,463)
Prepaid expenses and other
current assets.......... 47 (45) (749) 21 (66)
Other noncurrent assets... (97) (155) (89) -- --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 1,505 858 (1,849) 1,209 (1,536)
Unearned revenue on
service and warranty
contracts............... 163 86 93 (11) (362)
Billings in excess of
costs and estimated
earnings on uncompleted
contracts............... 23 93 (241) (35) 384
Other..................... (91) (51) (37) (35) (610)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating
activities.............. 1,449 2,786 984 917 (2,104)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 122 87 328 46 47
Additions to property and equipment....... (1,562) (938) (2,487) (272) (1,990)
Cash paid for acquisitions, net of cash
acquired................................ -- -- (44,458) -- (673)
--------- --------- --------- --------- ---------
Net cash used in investing
activities.............. (1,440) (851) (46,617) (226) (2,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 1,804 855 40,458 290 37,630
Principal payments of short- and long-term
debt.................................... (1,510) (1,265) (40,885) (299) (37,466)
Issuances of Common Stock, net of offering
costs................................... 206 45 60,631 -- --
Distributions to Founding Companies
stockholders............................ -- -- (6,031) -- --
S Corporation dividends paid by Pooled
Companies............................... (541) (880) (1,202) (133) (325)
Other, net................................ -- -- (598) 118 (107)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) financing
activities.............. (41) (1,245) 52,373 (24) (268)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (32) 690 6,740 667 (4,988)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 462 430 1,120 1,120 7,860
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period....... $ 430 $ 1,120 $ 7,860 $ 1,787 $ 2,872
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 339 $ 316 $ 790 $ 42 $ 658
Income taxes.............................. 226 252 184 150 323
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions seven residential service businesses
(together with Enterprises Holding Company ("EHC"), which is the common parent
of two of the businesses), (the "Founding Companies") in exchange for
consideration consisting of a combination of cash and shares of its common
stock, par value $.001 per share (the "Common Stock"). The Company's initial
public offering (the "Offering") of ARS's Common Stock closed simultaneously
with the closing of the acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the
accounting acquiror. The acquisition of the remaining Founding Companies was
accounted for using the purchase method of accounting, with the results of
operations included from September 30, 1996, the effective closing date of the
acquisitions for accounting purposes. The allocation of purchase prices 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.
Subsequent to the acquisition of the Founding Companies and the Offering,
ARS acquired 13 residential service businesses during the fourth quarter of 1996
(the "Fourth Quarter 1996 Acquisitions") and an additional ten residential
service businesses during the first quarter of 1997 (the "First Quarter 1997
Acquisitions" and, collectively with the Fourth Quarter 1996 Acquisitions and
the Founding Companies, the "Acquired Businesses"). For accounting purposes,
the Fourth Quarter 1996 Acquisitions and two of the First Quarter 1997
Acquisitions were accounted for using the purchase method of accounting. The
remaining eight companies acquired as part of the First Quarter 1997
Acquisitions (the "Pooled Companies") have been accounted for under the
pooling-of-interests method with the historical financial statements of ARS
retroactively restated for the effects thereof.
The accompanying consolidated financial statements reflect the Company on a
historical basis with Atlas as the accounting acquiror. The historical financial
statements have been restated for all periods presented for the effect of the
eight acquisitions accounted for as pooling-of-interests.
In connection with the purchase of EHC, the purchase price paid to the
shareholders of EHC in excess of the purchase price paid by EHC for its previous
acquisition of Service Enterprises, Inc. and Adcot, Inc. is recorded as
nonrecurring compensation expense of $3,356,000 and financing fees of $4,818,000
in the accompanying statements of operations for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ARS and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1996 and 1997 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
F-14
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using
principally a weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are
F-15
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", are effective
for transactions entered into in fiscal years that begin after December 15,
1995. This statement encourages entities to account for employee stock option or
similar equity instruments using a fair value approach for all such plans.
However, it also allows an entity to continue to measure compensation costs for
those plans using the method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Those entities which elect to remain with the
accounting in APB No. 25 are required to include pro forma disclosures of net
income and earnings per share as if the fair value-based method of accounting
had been applied. The Company has elected to account for such plans under the
provisions of APB No. 25. Therefore, there is no effect on the Company's
financial position and results of operations as a result of this pronouncement.
Reference is made to Note 8 for the SFAS No. 123 disclosures.
INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective date of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition date.
The Company follows the liability method of accounting for income taxes in
accordance with 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 businesses acquired as pooling-of-interests were S
Corporations for income tax purposes prior to their acquisition by the Company.
Accordingly, any income tax liabilities for the periods prior to the acquisition
date are the responsibility of the respective stockholders. For purposes of
these consolidated financial statements, federal and state income taxes have
been provided as if these companies had filed C Corporation tax returns for the
pre-acquisition periods, with the current income tax expense of these S
Corporations reflected as an increase to additional paid-in capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and
F-16
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in acquisitions
accounted for under the pooling-
of-interests method................ 1,282 1,282 1,282
Shares issued in the formation of
ARS................................ -- -- 318
Weighted average portion of shares
issued to the remaining
stockholders of the Founding
Companies.......................... -- -- 472
Weighted average portion of shares
sold in the Offering............... -- -- 1,204
Weighted average portion of shares
awarded to certain employees and
consultants........................ -- -- 10
Weighted average portion of shares
issued for the acquisition of the
Fourth Quarter 1996 Acquisitions... -- -- 84
Stock options and warrant, net of
assumed repurchases of common
shares as treasury stock........... -- -- 104
--------- --------- ---------
Weighted average shares
outstanding........................ 2,349 2,349 4,541
========= ========= =========
In February 1997, the Financial Standards Accounting Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 revises the methodology to be used in computing earnings per share
("EPS") such that the computations required for primary and fully diluted EPS
are to be replaced with "basic" and "diluted" EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as fully
diluted EPS, except that, among other changes, the average share price for the
period is used in all cases when applying the treasury stock method to
potentially dilutive outstanding options.
The Company will adopt SFAS No. 128 effective December 15, 1997 and will
restate EPS for all periods presented. For the years ended December 31, 1994,
1995 and 1996, basic and diluted EPS under SFAS No. 128 are the same and do not
differ from the EPS as presented.
3. BUSINESS COMBINATIONS:
POOLINGS
In the first quarter of 1997, the Company acquired all of the outstanding
stock of the eight Pooled Companies in exchange for 1,282,438 shares of Common
Stock. These companies provide installation and maintenance, repair and
replacement of plumbing, air conditioning and heating and electrical systems.
These acquisitions have been accounted for under the pooling-of-interests method
of accounting.
F-17
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited restated consolidated
revenues, net income (loss) and per share data from continuing operations of the
Company after giving effect to these transactions (in thousands, except per
share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ----------------------
NET NET NET INCOME
REVENUES INCOME REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income (loss):
As presently reported.............. $19,183 $ 17 $22,048 $ 684 $64,229 $ (5,536)
Subsequent acquisitions............ 21,968 452 26,353 924 31,289 1,231
-------- ------ -------- ------ -------- ----------
As restated........................ $41,151 $ 469 $48,401 $1,608 $95,518 $ (4,305)
======== ====== ======== ====== ======== ==========
Net income (loss) per share:
As presently reported.............. $0.02 $ 0.64 $ (1.70)
Subsequent acquisitions............ 0.18 0.04 0.75
------ ------ ----------
As restated........................ $0.20 $ 0.68 $ (0.95)
====== ====== ==========
</TABLE>
PURCHASES
In addition to the acquisition of the Founding Companies, during the fourth
quarter of 1996, the Company acquired 13 companies for an aggregate of
approximately $41.2 million in cash and short-term notes and 1,282,910 shares of
Common Stock. Funding of the cash portion of the purchase prices and repayment
of indebtedness assumed in connection with the acquisitions was provided by
borrowings under the Company's Credit Facility. The accompanying consolidated
balance sheet includes preliminary allocations of the respective purchase price
which are subject to final adjustment. Also, the purchase prices are based on
preliminary estimates of fair value assigned to the Company's Common Stock
issued in all acquisitions accounted for under the purchase method of accounting
which carry certain restrictions regarding dispositions by the holders, and such
value may be revised as additional information becomes available. Set forth
below are unaudited pro forma combined revenues and income data reflecting the
pro forma effect of these acquisitions on the Company's results from continuing
operations for the years ended December 31, 1995 and 1996. The unaudited pro
forma data presented below consists of the income statement data from continuing
operations as presented in these consolidated financial statements plus (i) the
Founding Companies for the year ended December 31, 1995 and the nine months
ended September 30, 1996 and (ii) all Fourth Quarter 1996 Acquisitions as if the
acquisitions were effective on the first day of the year being reported through
the respective dates of acquisition (in thousands, except per share amounts)
(unaudited).
1995 1996
---------- ----------
Revenues................................ $ 211,127 $ 250,695
========== ==========
Net income from continuing operations... $ 5,751 $ 7,244
========== ==========
Net income per share from continuing
operations............................ $ 0.49 $ 0.62
========== ==========
Pro forma adjustments included in the amounts above primarily relate to:
(a) compensation differential, (b) adjustment for nonrecurring compensation
expense of $3,356,000 and financing fees of $4,818,000 related to the purchase
of EHC, (c) adjustment for rent expense on certain leased facilities, (d)
adjustment for the effects of assets distributed to and costs of certain leases
assumed by owners of certain of the Founding Companies and the Fourth Quarter
1996 Acquisitions, (e) adjustment for pro forma goodwill amortization expense
using a 40-year estimated life, (f) elimination of historical interest expense
related to certain obligations which were repaid or not assumed by the Company
reduced by interest expense on
F-18
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowed funds used to pay the cash portion of the purchase price for the
Founding Companies and the Fourth Quarter 1996 Acquisitions, and (g) adjustment
to the federal and state income tax provisions based on pro forma operating
results. Net income per share for 1995 and 1996 assumes all shares issued for
the acquisitions of the Founding Companies and the Fourth Quarter 1996
Acquisitions had been outstanding for the periods presented.
The pro forma results presented are not necessarily indicative of actual
results that might have occurred had the operations and management teams of the
Company and the Founding Companies and the Fourth Quarter 1996 Acquisitions been
combined at the beginning of the periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
DECEMBER 31
ESTIMATED USEFUL --------------------
LIVES IN YEARS 1995 1996
---------------- --------- ---------
Land and land improvements............ -- $ 538 $ 2,727
Buildings and leasehold improvements.. 5-40 1,774 5,786
Transportation equipment.............. 5 4,252 11,101
Machinery and equipment............... 5-7 1,267 2,081
Furniture and fixtures................ 5-10 516 2,179
--------- ---------
8,347 23,874
Less -- Accumulated depreciation...... 3,707 4,651
--------- ---------
Property and equipment, net...... $ 4,640 $ 19,223
========= =========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Balance at beginning of year............ $ 184 $ 200
Additions charged to costs and
expenses......................... 78 256
Deductions for uncollectible
receivables written off.......... (62) (80)
Allowance for doubtful accounts at
acquisition dates................ -- 588
--------- ---------
Balance at end of year.................. $ 200 $ 964
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 3,174 $ 10,302
Accrued compensation and benefits....... 563 6,101
Accrued insurance....................... 269 1,648
Accrued warranty expense................ 155 944
Federal and state income taxes
payable............................... -- 509
Other accrued expenses.................. 1,715 2,962
--------- ---------
$ 5,876 $ 22,466
========= =========
F-19
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress.............................. $ 2,914 $ 11,342
Estimated earnings, net of losses....... 1,239 5,264
--------- ---------
4,153 16,606
Less -- Billings to date................ 4,381 17,300
--------- ---------
$ (228) $ (694)
========= =========
The following are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Costs and estimated earnings in excess
of billings on uncompleted contracts.. $ 289 $ 853
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (517) (1,547)
--------- ---------
$ (228) $ (694)
========= =========
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division subsequent to
September 30, 1996 is included in the statements of operations under
discontinued operations and therefore revenues, costs of sales, selling, general
and administrative expenses, other income and expense, and income taxes exclude
amounts associated with the discontinued division. Revenues from this division
were approximately $2.9 million from the date of acquisition by ARS through
December 31, 1996. Certain expenses have been allocated to discontinued
operations, which were allocated based upon estimated divisional usage. All
assets of the operations are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
F-20
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from the Company's Credit
Facility........................... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain Fourth Quarter 1996
Acquisitions repaid in January 1997
from borrowing under Credit
Facility........................... -- 24,613
Other................................ 1,229 2,100
--------- ---------
3,264 53,913
Less -- Current maturities........... 920 982
--------- ---------
$ 2,344 $ 52,931
========= =========
On March 3, 1997, the Company increased the total commitment of its credit
facility (the "Credit Facility") from $55 million, which was in place at
December 31, 1996, to $100 million. The Credit Facility provides the Company
with a revolving line of credit up to $100 million, which may be used for
general corporate purposes, including the funding of any cash that may be paid
in connection with acquisitions, the refinancing of indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest, at the Company's option, at the designated variable base
rate plus margins ranging from 0 to 50 basis points, or at a designated London
interbank offering rate ("LIBOR") plus a margin ranging from 100 to 200 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. The
margin is reset on a quarterly basis and also may be reset upon the closing of
an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), does not permit the Company to incur or
assume other indebtedness in excess of 5% of consolidated net worth and will
require the Company to comply with certain financial covenants. The Credit
Facility will terminate and all amounts outstanding, if any, thereunder will be
due and payable in September 1999. The Company's subsidiaries have guaranteed
the repayment of all amounts due under the Credit Facility. ARS has also pledged
the stock of its subsidiaries to guarantee repayment of the indebtedness under
the Credit Facility. As of December 31, 1996, the Company had $27.2 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
F-21
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows (in thousands):
Year ending December 31 --
1997............................ $ 982
1998............................ 323
1999............................ 202
2000............................ 153
2001............................ 278
Thereafter...................... 51,975
---------
$ 53,913
=========
The maturities schedule above reflects the issuance of the convertible
subordinated notes discussed in Note 13. The Company used substantially all of
the net proceeds of the offering of the convertible subordinated notes to repay
indebtedness outstanding under its existing Credit Facility.
Management estimates that the fair value of its debt obligations
approximates the historical value of $53.9 million at December 31, 1996.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has approved a 1996 Incentive Plan (the Plan), which amended
and restated a prior stock option plan and provides for the granting or awarding
of stock options and stock appreciation rights to non-employee directors,
officers and other key employees and independent contractors. The Company
accounts for this Plan under APB Opinion No. 25, and no compensation expense has
been recognized. The number of shares authorized and reserved for issuance under
the Plan is limited to the greater of 1,550,000 shares or 15 percent of the
number of shares of Common Stock outstanding on the last day of the preceding
calendar quarter (1,550,000 shares at December 31, 1996). In general, the terms
of the option awards (including vesting schedules) will be established by the
Compensation Committee of the Company's Board of Directors. As of December 31,
1996, the Company has granted 10 year options covering an aggregate of 1,504,500
shares of Common Stock.
The following table summarizes activity under the Plan for the year ended
December 31, 1996:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Outstanding at December 31, 1995..... -- -- --
Granted......................... 1,554,500 $8.00 - $23.75 $13.09
Exercised....................... -- -- --
Forfeited and canceled.......... (50,000) $15.00 $15.00
---------
Outstanding at December 31, 1996..... 1,504,500 $12.59
=========
Weighted average fair value of
options granted during 1996........ $ 6.18
Weighted average remaining
contractual life................... 9.35 years
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
F-22
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share would have been increased by the
following pro forma amounts (in thousands, except per share data):
YEAR ENDED
DECEMBER 31, 1996
-----------------
Net Loss:
As Reported..................... $(4,308)
Pro forma....................... $(5,283)
Loss Per Share:
As Reported..................... $ (.95)
Pro forma....................... $ (1.16)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 32.19%; risk-free interest rate of 6.72%; and expected lives of 10 years.
STOCK WARRANT
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
Year ending December 31 --
1997............................... $ 3,679
1998............................... 3,166
1999............................... 2,891
2000............................... 2,554
2001............................... 1,912
Thereafter......................... 7,005
---------
$ 21,207
=========
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $409,000, $587,000, and $1,276,000, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of
approximately $117,000, $227,000, and $482,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-23
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Federal --
Current............................ $ 300 $ 823 $ 1,130
Deferred........................... (41) 80 (324)
State --
Current............................ 67 159 238
Deferred........................... (5) 14 (87)
--------- --------- ---------
$ 321 $ 1,076 $ 957
========= ========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Tax provision at the statutory rate..... $ 268 $ 913 $ (1,138)
Increase (decrease) resulting from --
State income taxes................. 40 114 114
Nondeductible expenses............. 16 42 154
Nondeductible costs related to
purchase of EHC.................. -- -- 1,740
Other.............................. (3) 7 87
--------- --------- ---------
$ 321 $ 1,076 $ 957
========= ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred tax assets and liabilities result principally from the following (in
thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accruals and reserves not deductible
until paid......................... $ (242) $ (848)
Net changes in accounting methods for
the Founding Companies, the Fourth
Quarter 1996 Acquisitions and the
Pooled Companies................... 23 1,474
Depreciation and amortization........ 349 276
Loss on Investment................... -- 268
Other................................ 67 918
--------- ---------
Total deferred income tax
liabilities........................ $ 197 $ 2,088
========= =========
F-24
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Deferred tax assets --
Current......................... $ (401) $ (1,412)
Long-term....................... (9) (618)
--------- ---------
Total...................... (410) (2,030)
--------- ---------
Deferred tax liabilities --
Current......................... 300 1,108
Long-term....................... 307 3,010
--------- ---------
Total...................... 607 4,118
--------- ---------
Net deferred income tax
liabilities............. $ 197 $ 2,088
========= =========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. During the fourth quarter of 1996, the Company
established a self-insurance retention program for a portion of its medical
claims. The Company is now responsible for the first $75,000 per employee of
medical claims filed under its medical insurance policy. In addition, the
Company established a self-insurance retention program for damages to
Company-owned vehicles. The accrued insurance claims payable represents
management's estimate of the Company's potential claims costs in satisfying the
self-insurance retention for claims occurring through December 31, 1996. The
accrual is based on known facts and historical trends, and management believes
such accrual to be adequate.
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) account. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
F-25
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS:
CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued a series of 7 1/4% convertible
subordinated notes due 2004 (the "7 1/4% Notes") in the aggregate principal
amount of $55 million. The 7 1/4% Notes are unsecured obligations and are
convertible at $25.50 per share into an aggregate of 2,156,862 shares of Common
Stock of the Company based on certain conditions. The Company used substantially
all of the net proceeds of the offering of the 7 1/4% Notes to repay
indebtedness outstanding under its existing Credit Facility.
ACQUISITIONS
As discussed in Note 1, two of the First Quarter 1997 Acquisitions were
accounted for using the purchase method of accounting. Aggregate consideration
for these acquisitions was 26,314 shares of Common Stock and $640,000 in cash.
14. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
During the second quarter of 1997 the Company acquired 27 residential
service and commercial maintenance businesses. Total consideration for these
businesses consisted of $24.4 million in cash and 2,136,489 shares of Common
Stock. Of these acquisitions, five were acquired in pooling-of-interests
transactions and the Company's Historical Financial Statements will be
retroactively restated for the impact of such transactions. Of the remaining 22
acquisitions, 20 were acquired and will be accounted for under the purchase
method of accounting. The remaining two acquisitions were acquired as
pooling-of-interests acquisitions and will be included in the consolidated
results of the Company beginning on the date of acquisition as these
transactions were deemed not significant to prior historical periods.
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying supplemental consolidated balance sheets
of American Residential Services, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 1995 and 1996, and the related supplemental consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These supplemental
consolidated financial statements give retroactive effect to certain
acquisitions made by the Company during the second quarter of 1997 which have
been accounted for as pooling-of-interests transactions. These supplemental
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
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 supplemental consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the supplemental
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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the supplemental consolidated
financial position of American Residential Services, Inc., and subsidiaries as
of December 31, 1995 and 1996, and the supplemental consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, after giving effect to certain pooling-of-interests
transactions, in conformity with generally accepted accounting principles.
As discussed in Note 1, the accompanying supplemental consolidated
financial statements reflect the Company on a historical basis with Atlas
Services, Inc. as the accounting acquiror restated for the effect of certain
pooling-of-interests transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
June 30, 1997
F-27
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
--------------------- -----------
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,638 $ 9,239 $ 4,569
Accounts receivable --
Trade, net of allowance of
$431, $1,227 and
$1,188.................. 9,048 27,504 28,123
Other...................... 640 2,010 2,079
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 624 1,003 1,696
Inventories..................... 2,010 11,254 12,991
Prepaid expenses and other
current assets................ 515 1,559 2,684
Net assets of discontinued
operations.................... -- 338 233
--------- ---------- -----------
Total current
assets.............. 15,475 52,907 52,375
PROPERTY AND EQUIPMENT, net.......... 5,879 20,671 21,633
GOODWILL, net........................ -- 131,193 131,473
OTHER NONCURRENT ASSETS.............. 706 1,380 2,204
--------- ---------- -----------
Total assets.......... $ 22,060 $ 206,151 $ 207,685
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 1,067 $ 2,029 $ 469
Short-term debt................. 309 -- --
Accounts payable and accrued
expenses...................... 11,724 27,192 26,821
Unearned revenue on service and
warranty contracts............ 720 3,977 3,609
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 701 1,880 2,232
--------- ---------- -----------
Total current
liabilities......... 14,521 35,078 33,131
LONG-TERM DEBT, net of current
maturities......................... 2,694 53,126 54,496
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633 613
DEFERRED INCOME TAXES................ 367 2,494 3,078
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized; none issued and
outstanding................... -- -- --
Common stock, $.001 par value,
50,000,000 shares authorized;
3,602,334, 12,906,543 and
12,932,857 shares issued and
outstanding................... 4 13 13
Additional paid-in-capital...... 3,509 125,637 126,821
Retained earnings (deficit)..... 965 (10,830) (10,467)
--------- ---------- -----------
Total stockholders'
equity.............. 4,478 114,820 116,367
--------- ---------- -----------
Total liabilities and
stockholders'
equity.............. $ 22,060 $ 206,151 $ 207,685
========= ========== ===========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-28
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
-------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 69,265 $ 83,410 $ 134,516 $ 23,342 $ 66,069
COST OF SERVICES..................... 52,097 61,732 97,116 16,889 46,650
--------- --------- ---------- ---------- ---------
Gross Profit.................... 17,168 21,678 37,400 6,453 19,419
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 14,741 16,711 30,797 5,224 16,028
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356 -- --
--------- --------- ---------- ---------- ---------
INCOME FROM OPERATIONS............... 2,427 4,967 3,247 1,229 3,391
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818) -- --
Interest Expense................ (313) (321) (634) (88) (1,120)
Interest Income................. 76 143 106 24 30
Other........................... 553 132 489 103 187
--------- --------- ---------- ---------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES.............................. 2,743 4,921 (1,610) 1,268 2,488
PROVISION FOR INCOME TAXES........... 1,097 1,948 1,636 510 1,026
--------- --------- ---------- ---------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 1,646 2,973 (3,246) 758 1,462
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3) -- (32)
--------- --------- ---------- ---------- ---------
NET INCOME (LOSS).................... $ 1,646 $ 2,973 $ (3,249) $ 758 $ 1,430
========= ========= ========== ========== =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 3,602 3,602 5,794 3,602 13,410
========= ========= ========== ========== =========
EARNINGS PER SHARE:
Continuing Operations........... $ 0.46 $ 0.83 $ (0.56) $ 0.21 $ 0.11
Discontinued Operations......... -- -- -- -- --
--------- --------- ---------- ---------- ---------
Total...................... $ 0.46 $ 0.83 $ (0.56) $ 0.21 $ 0.11
========= ========= ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-29
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.............. 3,602 $ 4 $ 1,087 $ 1,878 $ 2,969
Capital contributions.............. -- -- 930 -- 930
Dividends paid by Pooled
Companies........................ -- -- -- (2,736) (2,736)
Other equity transactions of Pooled
Companies........................ -- -- 292 -- 292
Net income......................... -- -- -- 1,646 1,646
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1994.............. 3,602 4 2,309 788 3,101
Capital contributions.............. -- -- 1,196 -- 1,196
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- 4 -- 4
Dividends paid by Pooled
Companies........................ -- -- -- (2,796) (2,796)
Net income......................... -- -- -- 2,973 2,973
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1995.............. 3,602 4 3,509 965 4,478
Public Offering, net of Offering
Costs............................ 4,830 5 60,626 -- 60,631
Acquisition of Founding
Companies........................ 3,185 3 29,231 -- 29,234
Acquisition of Fourth Quarter 1996
Acquisitions..................... 1,282 1 30,625 -- 30,626
Exercise of Warrant................ 8 -- 125 -- 125
Cash Distributions to Founding
Companies stockholders........... -- -- -- (6,031) (6,031)
Capital contributions.............. -- -- 1,539 -- 1,539
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- (18) (2) (20)
Dividends paid by Pooled
Companies........................ -- -- -- (2,513) (2,513)
Net loss........................... -- -- -- (3,249) (3,249)
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1996.............. 12,907 13 125,637 (10,830) 114,820
Acquisition of First Quarter 1997
Purchased Companies
(unaudited)...................... 26 -- 556 -- 556
Capital contributions
(unaudited)...................... -- -- 674 -- 674
Dividends paid by Pooled Companies
(unaudited)...................... -- -- -- (1,067) (1,067)
Other equity transactions of Pooled
Companies (unaudited)............ -- -- (46) -- (46)
Net income (unaudited)............. -- -- -- 1,430 1,430
--------- ------ ---------- --------- -------------
BALANCE, March 31, 1997 (unaudited)..... 12,933 $ 13 $ 126,821 $ (10,467) $ 116,367
========= ====== ========== ========= =============
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-30
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 1,646 $ 2,973 $ (3,249) $ 758 $ 1,430
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........ 1,111 1,263 2,918 438 2,033
Taxes on acquired S Corporations..... 930 1,196 1,539 236 674
Stock portion of compensation and
financing fees related to purchase
of EHC............................ -- -- 6,276 -- --
Deferred income taxes (benefit)...... 139 (11) (489) (319) 221
(Gain) loss on sale of property and
equipment......................... 11 9 (77) (12) 201
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (3,225) (2,068) (1,406) (199) (408)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (283) 297 200 (129) (693)
Inventories............... (279) (348) (96) (364) (1,550)
Prepaid expenses and other
current assets.......... 973 528 (1,145) (133) (365)
Other noncurrent assets... 264 (174) (14) (20) --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 3,368 2,803 (2,305) 345 (1,037)
Unearned revenue on
service and warranty
contracts............... 212 125 83 (76) (439)
Billings in excess of
costs and estimated
earnings on uncompleted
contracts............... 42 113 (92) (82) 352
Other..................... (333) (868) (77) (35) (610)
--------- --------- ---------- --------- ----------
Net cash provided by (used
in) operating
activities.............. 4,576 5,838 2,056 408 (191)
--------- --------- ---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 242 209 553 66 48
Additions to property and equipment....... (2,027) (1,805) (3,261) (383) (2,076)
Cash paid for acquisitions, net of cash
acquired................................ -- -- (44,458) -- (673)
--------- --------- ---------- --------- ----------
Net cash used in investing
activities.............. (1,785) (1,596) (47,166) (317) (2,701)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 2,056 1,119 42,575 884 37,630
Principal payments of short- and long-term
debt.................................... (1,892) (1,714) (42,332) (857) (38,236)
Issuances of Common Stock, net of offering
costs................................... -- -- 60,631 -- --
Distributions to Founding Companies
stockholders............................ -- -- (6,031) -- --
S Corporation dividends paid by Pooled
Companies............................... (2,736) (2,796) (2,513) (133) (1,067)
Other, net................................ 206 45 (619) 99 (105)
--------- --------- ---------- --------- ----------
Net cash provided by (used
in) financing
activities.............. (2,366) (3,346) 51,711 (7) (1,778)
--------- --------- ---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 425 896 6,601 84 (4,670)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 1,317 1,742 2,638 2,638 9,239
--------- --------- ---------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period....... $ 1,742 $ 2,638 $ 9,239 $ 2,722 $ 4,569
========= ========= ========== ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 386 $ 350 $ 823 $ 45 $ 661
Income taxes.............................. 491 843 518 322 644
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-31
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions seven residential service businesses
(together with Enterprises Holding Company ("EHC"), which is the common parent
of two of the businesses), (the "Founding Companies") in exchange for
consideration consisting of a combination of cash and shares of its common
stock, par value $.001 per share (the "Common Stock"). The initial public
offering (the "Offering") of the Common Stock closed simultaneously with the
closing of the acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the
accounting acquiror. The acquisition of the remaining Founding Companies was
accounted for using the purchase method of accounting, with the results of
operations included from September 30, 1996, the effective closing date of the
acquisitions for accounting purposes. The allocation of purchase prices 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.
Subsequent to the acquisition of the Founding Companies and the Offering,
ARS acquired 13 residential service businesses during the fourth quarter of 1996
(the "Fourth Quarter 1996 Acquisitions") and an additional 37 residential
service businesses from January 1, 1997 through June 30, 1997 (the "1997
Acquisitions" and collectively with the Fourth Quarter 1996 Acquisitions and
the Founding Companies, the "Acquired Businesses"). For accounting purposes,
the Fourth Quarter 1996 Acquisitions and 22 of the 1997 Acquisitions were
accounted for using the purchase method of accounting. The remaining 15 1997
Acquisitions were acquired under the pooling-of-interests method of accounting.
The historical financial statements of ARS have been retroactively restated for
13 of the 15 1997 acquisitions acquired under the pooling-of-interests method.
The accompanying supplemental consolidated financial statements reflect the
Company on a historical basis with Atlas as the accounting acquiror. The
historical financial statements have been restated for all periods presented for
the effect of the 13 acquisitions accounted for as pooling-of-interests
discussed above.
In connection with the purchase of EHC, the purchase price paid to the
shareholders of EHC in excess of the purchase price paid by EHC for its previous
acquisition of Service Enterprises, Inc. and Adcot, Inc. is recorded as
nonrecurring compensation expense of $3,356,000 and financing fees of $4,818,000
in the accompanying statements of operations for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying supplemental consolidated financial statements include the
accounts of ARS and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim supplemental consolidated financial statements for the three
months ended March 31, 1996 and 1997 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 supplemental consolidated interim
F-32
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using
principally a weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are
F-33
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", are effective
for transactions entered into in fiscal years that begin after December 15,
1995. This statement encourages entities to account for employee stock option or
similar equity instruments using a fair value approach for all such plans.
However, it also allows an entity to continue to measure compensation costs for
those plans using the method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees". Those entities which elect to remain with the
accounting in APB No. 25 are required to include pro forma disclosures of net
income and earnings per share as if the fair value-based method of accounting
had been applied. The Company has elected to account for such plans under the
provisions of APB No. 25. Therefore, there is no effect on the Company's
financial position and results of operations as a result of this pronouncement.
Reference is made to Note 8 for the SFAS No. 123 disclosures.
INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective date of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition date.
The Company follows the liability method of accounting for income taxes in
accordance with 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 businesses acquired as pooling-of-interests were S
Corporations for income tax purposes prior to their acquisition by the Company.
Accordingly, any income tax liabilities for the periods prior to the acquisition
date are the responsibility of the respective stockholders. For purposes of
these supplemental consolidated financial statements, federal and state income
taxes have been provided as if these companies had filed C Corporation tax
returns for the pre-acquisition periods, with the current income tax expense of
these S Corporations reflected as an increase to additional paid-in capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and
F-34
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in acquisitions
accounted for under the pooling-
of-interests method................ 2,535 2,535 2,535
Shares issued in the formation of
ARS................................ -- -- 318
Weighted average portion of shares
issued to the remaining
stockholders of the Founding
Companies.......................... -- -- 472
Weighted average portion of shares
sold in the Offering............... -- -- 1,204
Weighted average portion of shares
awarded to certain employees and
consultants........................ -- -- 10
Weighted average portion of shares
issued for the acquisition of the
Fourth Quarter 1996 Acquisitions... -- -- 84
Stock options and warrant, net of
assumed repurchases of common
shares as treasury stock........... -- -- 104
--------- --------- ---------
Weighted average shares
outstanding........................ 3,602 3,602 5,794
========= ========= =========
In February 1997, the Financial Standards Accounting Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 revises the methodology to be used in computing earnings per share
("EPS") such that the computations required for primary and fully diluted EPS
are to be replaced with "basic" and "diluted" EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed in the same manner as fully
diluted EPS, except that, among other changes, the average share price for the
period is used in all cases when apploying the treasury stock method to
potentially dilutive outstanding options.
The Company will adopt SFAS No. 128 effective December 15, 1997 and will
restate EPS for all periods presented. For the years ended December 31, 1994,
1995 and 1996, basic and diluted EPS under SFAS No. 128 are the same and do not
differ from the EPS as presented.
3. BUSINESS COMBINATIONS:
POOLINGS
During the period from January 1, 1997 through June 30, 1997, the Company
acquired all the outstanding stock of the Pooled Companies in exchange for
2,535,678 shares of Common Stock. These companies provide installation and
maintenance, repair and replacement of plumbing, air conditioning and heating
and electrical systems. These acquisitions have been accounted for under the
pooling-of-interests method of accounting.
F-35
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited restated consolidated
revenues, net income (loss) and per share data from continuing operations of the
Company after giving effect to these transactions (in thousands, except per
share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ----------------------
NET NET NET INCOME
REVENUES INCOME REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income (loss):
As presently reported.............. $41,151 $ 469 $48,401 $1,608 $ 95,518 $ (4,305)
Subsequent acquisitions............ 28,114 1,177 35,009 1,365 38,998 1,056
-------- ------ -------- ------ -------- ----------
As restated........................ $69,265 $1,646 $83,410 $2,973 $134,516 $ (3,249)
======== ====== ======== ====== ======== ==========
Net income (loss) per share:
As presently reported.............. $0.20 $ 0.68 $ (0.95)
Subsequent acquisitions............ 0.26 0.15 0.39
------ ------ ----------
As restated........................ $0.46 $ 0.83 $ (0.56)
====== ====== ==========
</TABLE>
PURCHASES
In addition to the acquisition of the Founding Companies, during the fourth
quarter of 1996, the Company acquired 13 companies for an aggregate of
approximately $41.2 million in cash and short-term notes and 1,282,910 shares of
Common Stock. Funding of the cash portion of the purchase prices and repayment
of indebtedness assumed in connection with the acquisitions was provided by
borrowings under the Company's Credit Facility. The accompanying supplemental
consolidated balance sheet includes preliminary allocations of the respective
purchase price which are subject to final adjustment. Also, the purchase prices
are based on preliminary estimates of fair value assigned to the Company's
Common Stock issued in all acquisitions accounted for under the purchase method
of accounting which carry certain restrictions regarding dispositions by the
holders, and such value may be revised as additional information becomes
available. Set forth below are unaudited pro forma combined revenues and income
data reflecting the pro forma effect of these acquisitions on the Company's
results from continuing operations for the years ended December 31, 1995 and
1996. The unaudited pro forma data presented below consists of the income
statement data from continuing operations as presented in these supplemental
consolidated financial statements plus (i) the Founding Companies for the year
ended December 31, 1995 and the nine months ended September 30, 1996 and (ii)
all fourth quarter acquisitions as if the acquisitions were effective on the
first day of the year being reported through the respective dates of acquisition
(in thousands, except per share amounts) (unaudited).
1995 1996
---------- ----------
Revenues................................ $ 246,136 $ 289,708
========== ==========
Net income from continuing operations... $ 8,646 $ 9,868
========== ==========
Net income per share from continuing
operations............................ $ 0.67 $ 0.76
========== ==========
Pro forma adjustments included in the amounts above primarily relate to:
(a) compensation differential, (b) adjustment for nonrecurring compensation
expense of $3,356,000 and financing fees of $4,818,000 related to the purchase
of EHC, (c) adjustment for rent expense on certain leased facilities, (d)
adjustment for the effects of assets distributed to and costs of certain leases
assumed by owners of certain of the Founding Companies and the Fourth Quarter
1996 Acquisitions, (e) adjustment for pro forma goodwill amortization expense
using a 40-year estimated life, (f) elimination of historical interest expense
related to certain obligations which were repaid or not assumed by the Company
reduced by interest expense on
F-36
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowed funds used to pay the cash portion of the purchase price for the
Founding Companies and the Fourth Quarter 1996 Acquisitions, and (g) adjustment
to the federal and state income tax provisions based on pro forma operating
results. Net income per share for 1995 and 1996 assumes all shares issued for
the acquisitions of the Acquired Businesses had been outstanding for the periods
presented.
The pro forma results presented are not necessarily indicative of actual
results which might have occurred had the operations and management teams of the
Company and the Acquired Businesses been combined at the beginning of the
periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
DECEMBER 31
ESTIMATED USEFUL --------------------
LIVES IN YEARS 1995 1996
---------------- --------- ---------
Land and land improvements............ -- $ 553 $ 2,742
Buildings and leasehold improvements.. 5-40 2,020 6,040
Transportation equipment.............. 5 6,859 14,179
Machinery and equipment............... 5-7 2,480 3,437
Furniture and fixtures................ 5-10 939 2,676
--------- ---------
12,851 29,074
Less -- Accumulated depreciation...... 6,972 8,403
--------- ---------
Property and equipment, net...... $ 5,879 $ 20,671
========= =========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Balance at beginning of year............ $ 384 $ 431
Additions charged to costs and
expenses.......................... 125 311
Deductions for uncollectible
receivables written off........... (78) (114)
Allowance for doubtful accounts at
acquisition dates................. -- 599
--------- ---------
Balance at end of year.................. $ 431 $ 1,227
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 5,710 $ 12,688
Accrued compensation and benefits....... 1,099 6,725
Accrued insurance....................... 281 1,087
Accrued warranty expense................ 280 1,655
Federal and state income taxes
payable............................... 73 532
Other accrued expenses.................. 4,281 4,505
--------- ---------
$ 11,724 $ 27,192
========= =========
F-37
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Costs incurred on contracts in
progress.............................. $ 6,883 $ 22,044
Estimated earnings, net of losses....... 2,065 6,784
--------- ----------
8,948 28,828
Less -- Billings to date................ 9,025 29,705
--------- ----------
$ (77) $ (877)
========= ==========
The following are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Costs and estimated earnings in excess
of billings on uncompleted contracts.. $ 624 $ 1,003
Billings in excess of costs and
estimated earnings
on uncompleted contracts.............. (701) (1,880)
--------- ---------
$ (77) $ (877)
========= =========
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division subsequent to
September 30, 1996 is included in the statements of operations under
discontinued operations and therefore revenues, costs of services, selling,
general and administrative expenses, other income and expense, and income taxes
exclude amounts associated with the discontinued division. Revenues from this
division were approximately $2.9 million from the date of acquisition by ARS
through December 31, 1996. Certain expenses have been allocated to discontinued
operations, which were allocated based upon estimated divisional usage. All
assets of the operations are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
supplemental consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
F-38
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from the Company's Credit
Facility........................... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain Fourth Quarter 1996
Acquisitions repaid in January 1997
from borrowing under Credit
Facility........................... -- 24,613
Other................................ 1,726 3,342
--------- ---------
3,761 55,155
Less -- Current maturities........... 1,067 2,029
--------- ---------
$ 2,694 $ 53,126
========= =========
On March 3, 1997, the Company increased the total commitment of its credit
facility (the "Credit Facility") from $55 million, which was in place at
December 31, 1996, to $100 million. The Credit Facility provides the Company
with a revolving line of credit up to $100 million, which may be used for
general corporate purposes, including the funding of any cash that may be paid
in connection with acquisitions, the refinancing of indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest, at the Company's option, at the designated variable base
rate plus margins ranging from 0 to 50 basis points, or at a designated London
interbank offering rate ("LIBOR") plus a margin ranging from 100 to 200 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. The
margin is reset on a quarterly basis and also may be reset upon the closing of
an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), does not permit the Company to incur or
assume other indebtedness in excess of 5% of consolidated net worth and will
require the Company to comply with certain financial covenants. The Credit
Facility will terminate and all amounts outstanding, if any, thereunder will be
due and payable in September 1999. The Company's subsidiaries have guaranteed
the repayment of all amounts due under the Credit Facility. ARS has also pledged
the stock of its subsidiaries to guarantee repayment of the indebtedness under
the Credit Facility. As of December 31, 1996, the Company had $27.2 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
F-39
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows (in thousands):
Year ending December 31 --
1997............................ $ 2,029
1998............................ 425
1999............................ 259
2000............................ 177
2001............................ 290
Thereafter...................... 51,975
---------
$ 55,155
=========
The maturities schedule above reflects the issuance of the convertible
subordinated notes discussed in Note 13. The Company used substantially all of
the net proceeds of the offering of the convertible subordinated notes to repay
indebtedness outstanding under its existing Credit Facility.
Management estimates that the fair value of its debt obligations
approximates the historical value of $55.2 million at December 31, 1996.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has approved a 1996 Incentive Plan (the "Plan"), which
amended and restated a prior stock option plan and provides for the granting or
awarding of stock options and stock appreciation rights to non-employee
directors, officers and other key employees and independent contractors. The
Company accounts for this Plan under APB Opinion No. 25, and no compensation
expense has been recognized. The number of shares authorized and reserved for
issuance under the Plan is limited to the greater of 1,550,000 shares or 15
percent of the number of shares of Common Stock outstanding on the last day of
the preceding calendar quarter (1,550,000 shares at December 31, 1996). In
general, the terms of the option awards (including vesting schedules) will be
established by the Compensation Committee of the Company's Board of Directors.
As of December 31, 1996, the Company has granted 10 year options covering an
aggregate of 1,504,500 shares of Common Stock.
The following table summarizes activity under the Plan for the year ended
December 31, 1996:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Outstanding at December 31, 1995..... -- -- --
Granted......................... 1,554,500 $8.00 - $23.75 $13.09
Exercised....................... -- -- --
Forfeited and canceled.......... (50,000) $15.00 $15.00
---------
Outstanding at December 31, 1996..... 1,504,500 $12.59
=========
Weighted average fair value of
options granted during 1996........ $ 6.18
Weighted average remaining
contractual life................... 9.35 years
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
F-40
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share would have been increased by the
following pro forma amounts (in thousands, except per share data):
YEAR ENDED
DECEMBER 31, 1996
-----------------
Net Loss:
As Reported..................... $(3,249)
Pro forma....................... $(4,224)
Loss Per Share:
As Reported..................... $ (0.56)
Pro forma....................... $ (0.73)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 32.19%; risk-free interest rate of 6.72%; and expected lives of 10 years.
STOCK WARRANT
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
Year ending December 31 --
1997............................... $ 3,957
1998............................... 3,231
1999............................... 2,923
2000............................... 2,568
2001............................... 1,912
Thereafter......................... 7,005
---------
$ 21,596
=========
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $894,843, $1,039,730, and $1,769,087, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of
approximately $117,000, $227,000, and $482,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-41
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Federal --
Current............................ $ 774 $ 1,570 $ 1,722
Deferred........................... 119 9 (422)
State --
Current............................ 184 389 453
Deferred........................... 20 (20) (117)
--------- --------- ---------
$ 1,097 $ 1,948 $ 1,636
========= ========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Tax provision at the statutory rate..... $ 932 $ 1,673 $ (547)
Increase (decrease) resulting from --
State income taxes................. 133 214 186
Nondeductible expenses............. (24) (26) 82
Nondeductible costs related to
purchase of EHC.................. -- -- 1,740
Other.............................. 56 87 175
--------- --------- ---------
$ 1,097 $ 1,948 $ 1,636
========= ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred tax assets and liabilities result principally from the following (in
thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accruals and reserves not deductible
until paid......................... $ 85 $ (587)
Net changes in accounting methods for
the Founding Companies, the Fourth
Quarter 1996 Acquisitions and the
Pooled Companies................... (808) 781
Depreciation and amortization........ 343 307
Loss on Investment................... -- 268
Other................................ 139 991
--------- ---------
Total deferred income tax
liabilities........................ $ (241) $ 1,760
========= =========
F-42
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Deferred tax assets --
Current......................... $ (296) $ (1,376)
Long-term....................... (19) (617)
--------- ---------
Total...................... (315) (1,993)
--------- ---------
Deferred tax liabilities --
Current......................... (312) 642
Long-term....................... 386 3,111
--------- ---------
Total...................... 74 3,753
--------- ---------
Net deferred income tax
liabilities............. $ (241) $ 1,760
========= =========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. During the fourth quarter of 1996, the Company
established a self-insurance retention program for a portion of its medical
claims. The Company is now responsible for the first $75,000 per employee of
medical claims filed under its medical insurance policy. In addition, the
Company established a self-insurance retention program for damages to
Company-owned vehicles. The accrued insurance claims payable represents
management's estimate of the Company's potential claims costs in satisfying the
self-insurance retention for claims occurring through December 31, 1996. The
accrual is based on known facts and historical trends, and management believes
such accrual to be adequate.
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) account. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
F-43
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS:
CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued a series of 7 1/4% convertible
subordinated notes due 2004 (the "7 1/4% Notes") in the aggregate principal
amount of $55 million. The 7 1/4% Notes are unsecured obligations and are
convertible at $25.50 per share into an aggregate of 2,156,863 shares of Common
Stock of the Company based on certain conditions. The Company used substantially
all of the net proceeds of the offering of the 7 1/4% Notes to repay
indebtedness outstanding under its existing Credit Facility.
ACQUISITIONS
In addition to the Pooled Companies, from January 1, 1997 to June 30, 1997,
the Company acquired 24 residential service and commercial maintenance
businesses for an aggregate consideration of $24.4 million in cash and 883,249
shares of Common Stock. Of the 24 acquisitions, 22 were accounted for under the
purchase method of accounting. The remaining two acquisitions were acquired as
pooling-of-interests acquisitions and will be included in the consolidated
results of the Company beginning on the date of acquisition as these
transactions were not deemed significant to prior historical periods.
F-44
<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, for the six
months ended June 30, 1996 and for the nine months ended September 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, its shareholders' deficit and its cash flows from Inception through
December 31, 1995, for the six months ended June 30, 1996, and for the nine
months ended September 30, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 30, 1996
F-45
<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-46
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION SIX
(OCTOBER 24, 1995) MONTHS NINE MONTHS
THROUGH ENDED ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
------------------ ------------ -------------
<S> <C> <C> <C>
REVENUES............................. $ -- $ -- $ --
COST OF SERVICES..................... -- -- --
------------------ ------------ -------------
Gross profit.................... -- -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 159,641 833,997 1,649,767
------------------ ------------ -------------
OPERATING LOSS....................... (159,641) (833,997) (1,649,767)
------------------ ------------ -------------
INTEREST EXPENSE..................... -- (19,812) (44,007)
INTEREST INCOME...................... -- -- 7,000
------------------ ------------ -------------
NET LOSS............................. $ (159,641) $ (853,809) $ (1,686,774)
================== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<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)
Net loss........................ -- -- -- (832,965) (832,965)
--------- ------- ----------- -------------- -------------
BALANCE, September 30, 1996.......... 449,471 $ 449 $ 551 $ (1,846,415) $ (1,845,415)
========= ======= =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION
(OCTOBER 24, 1995) SIX MONTHS NINE MONTHS
THROUGH ENDED ENDED
DECEMBER 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996
------------------ ----------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (159,641) $ (853,809) $ (1,686,774)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation and amortization... -- 2,606 3,909
Changes in operating assets and
liabilities --
Increase in --
Prepaid expenses and other
current assets.......... (3,327) (43,630) (35,333)
Other noncurrent assets.... (19,325) (3,278,373) (524,609)
Increase in --
Accounts payable and
accrued expenses........ 141,077 3,296,257 939,675
------------------ ----------- --------------
Net cash used in operating
activities.................... (41,216) (876,949) (1,303,132)
------------------ ----------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... -- (47,747) (262,034)
------------------ ----------- --------------
Net cash used in investing
activities.................... -- (47,747) (262,034)
------------------ ----------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 50,000 1,150,000 2,059,123
Proceeds from issuance of common
stock......................... 1,000 -- --
------------------ ----------- --------------
Net cash provided by
financing activities.... 51,000 1,150,000 2,059,123
------------------ ----------- --------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 9,784 225,304 493,957
CASH AND CASH EQUIVALENTS, beginning
of period.......................... -- 9,784 9,784
------------------ ----------- --------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 9,784 $ 235,088 $ 503,741
================== =========== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<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's primary assets at December 31,
1995 and June 30, 1996 are cash and deferred offering costs.
On September 27, 1996, ARS completed an offering (the "Offering") of its
Common Stock, 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). Simultaneously with the closing of the Initial Public Offering
("IPO"), ARS acquired in separate transactions seven residential service
businesses (together with Enterprise Holding Company ("EHC"), the common
parent of two of the businesses, the "Founding Companies") for an aggregate
consideration of (i) $34.8 million in cash (subject to working capital
adjustments) and (ii) 2,805,065 shares of Common Stock. In addition, ARS also
assumed all the indebtedness and preferred stock payment obligations of the
Founding Companies (approximately $22.3 million). ARS has not conducted any
operations through September 27, 1996, and all activities to date have related
to the Acquisitions and the IPO. The effective closing date of the acquisitions
of the Founding Companies and the IPO for accounting purposes is September 30,
1996. The accompanying financial statements reflect the activities of ARS up to
the closing of the acquisitions of the Founding Companies and the IPO.
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.
F-50
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 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. See Note 1.
F-51
<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 signed a definitive agreement to acquire Enterprises Holding
Company (EHC), a related company through common ownership, to be effective with
the Offering. EHC was 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-52
<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
=========
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 was converted into 844,965 shares of ARS Common
Stock in connection with the Offering.
F-53
<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 and the
nine months ended September 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 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 and the nine months ended September 30, 1996, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-54
<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-55
<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-56
<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
Dividends........................ -- -- -- (7,773,469) -- -- (7,773,469)
Net income....................... -- -- -- 864,470 -- -- 864,470
------ ------- ---------- ------------ ------ ------------ ------------
BALANCE, September 30, 1996.......... 2,752 $55,040 $666,913 $ 3,997,408 (2,290) $ (1,592,744) $ 3,126,617
====== ======= ========== ============ ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<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-58
<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.
In June 1996, the Company and its shareholders entered into a definitive
agreement with American Residential Services, Inc. (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.
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 $7,773,000 at the time of
closing. As of September 30, 1996, additional distributions in the aggregate
amount of $2,642,000 have been accrued but had not yet been distributed.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 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
F-59
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. 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-60
<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-61
<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, $78,000, and $58,000 during 1993, 1994, 1995 and the nine
month period ended September 30, 1996, 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, 1995 and the nine
month period ended September 30, 1996, the Company contributed approximately
$57,000, $91,000, $129,000 and $71,000, 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, $384,000, and $407,000 for the years ended December 31, 1993, 1994,
1995, and the nine month period ended September 30, 1996, 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, and the nine month period ended September 30, 1996
was approximately $1,000, $12,000, and $9,000, 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.
F-62
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO 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.
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.
F-63
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Atlas Services, Inc.:
We have audited the accompanying consolidated balance sheets of Atlas
Services, Inc. (a South Carolina corporation), and subsidiary as of June 30,
1994 and 1995, and December 31, 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended June 30, 1995, and the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Atlas Services, Inc., and subsidiary as of June 30, 1994 and 1995, and December
31, 1995, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended June 30, 1995, and the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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
============= ============= =============
</TABLE>
Installation contracts in progress are as follows:
<TABLE>
<CAPTION>
JUNE 30
---------------------------- DECEMBER 31,
1994 1995 1995
------------- ------------- ------------
<S> <C> <C> <C>
Costs incurred on contracts in
progress........................... $ 1,293,427 $ 2,592,291 $ 2,411,212
Estimated earnings, net of losses.... 586,972 719,579 1,077,841
------------- ------------- ------------
1,880,399 3,311,870 3,489,053
Less -- Billings to date............. 1,748,906 3,284,403 3,710,745
------------- ------------- ------------
$ 131,493 $ 27,467 $ (221,692)
============= ============= ============
</TABLE>
F-71
<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-72
<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-73
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain owned facilities under three noncancelable
leases to third parties, which expire in September 1997, October 1998 and
November 2000. Rental income received for the years ended June 30, 1993, 1994
and 1995, and December 31, 1995, was approximately $148,000, $135,000, $105,000
and $86,000, respectively. The following represents future minimum rental income
under noncancelable leases:
Year ending December 31 --
1996............................ $ 167,250
1997............................ 148,500
1998............................ 83,875
1999............................ 42,000
2000............................ 38,500
-----------
$ 480,125
===========
8. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ 23,106 $ 129,390 $ 215,040 $419,486
Deferred........................ (3,107) 18,236 (19,913) (43,440)
State --
Current......................... 2,952 21,066 29,462 65,666
Deferred........................ 1,963 1,786 (2,352) (7,454)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 YEAR ENDED
----------------------------------- DECEMBER 31,
1993 1994 1995 1995
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Tax provision at the statutory
rate............................... $ 20,632 $ 148,804 $ 191,993 $380,203
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction........ 3,244 15,081 17,892 38,420
Nondeductible expenses.......... 5,272 14,264 33,308 29,088
Other........................... (4,234) (7,671) (20,956) (13,453)
--------- ----------- ----------- ------------
$ 24,914 $ 170,478 $ 222,237 $434,258
========= =========== =========== ============
</TABLE>
F-74
<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-75
<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.
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Enterprise Holding Company:
We have audited the accompanying consolidated balance sheet of Enterprises
Holding Company (a Texas Corporation), and subsidiaries as of September 30,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from Inception (February 16, 1996) through
September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Enterprises
Holding Company as of September 30, 1996 and the consolidated results of
operations and cash flows for the period from Inception (February 16, 1996)
through September 30, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-77
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
1996
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 306,072
Accounts receivable --
Trade, net of allowance of
$17,575................... 443,328
Other receivables.......... 155,000
Inventories..................... 1,034,849
Prepaid expenses and other
current assets................. 213,891
------------
Total current
assets............... 2,153,140
PROPERTY AND EQUIPMENT, net.......... 5,310,076
GOODWILL, net........................ 12,296,094
OTHER NONCURRENT ASSETS.............. 204,333
NET ASSETS OF DISCONTINUED
OPERATIONS......................... 77,793
------------
Total assets.......... $ 20,041,436
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 176,110
Accounts payable and accrued
expenses....................... 1,708,317
Unearned revenue on extended
warranty contracts, current.... 256,207
------------
Total current
liabilities.......... 2,140,634
LONG-TERM DEBT, net of current
maturities......................... 13,849,181
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 612,942
DEFERRED INCOME TAXES................ 114,133
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............... 766,446
------------
Total shareholders'
equity............... 767,446
------------
Total liabilities and
shareholders'
equity............... $ 20,041,436
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-78
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
---------------------
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
LOSS DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-79
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ ------------ --------------
<S> <C> <C> <C> <C>
Balance, Inception, February 16,
1996............................... -- $ -- $ -- $--
Stock issuance.................. 1,000 1,000 -- 1,000
Preferred stock dividends....... -- -- (108,102) (108,102)
Net income...................... -- -- 874,548 874,548
------ ------ ------------ --------------
Balance, September 30, 1996.......... 1,000 $1,000 $ 766,446 $767,446
====== ====== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-80
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
--------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 874,548
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
Decrease in --
Accounts payable and
accrued expenses......... (641,471)
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-81
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The acquisition of the
Company by ARS was completed on September 27, 1996 concurrent with the initial
public offering 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.
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.
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 September 30, 1996, accumulated amortization was approximately
$108,000.
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.
F-82
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES SEPTEMBER 30,
IN YEARS 1996
------------- -------------
Land................................. -- $ 1,433,245
Building and improvements............ 20 1,756,261
Leasehold improvements............... 5 - 10 544,487
Equipment............................ 3 - 7 3,622,043
Furniture and fixtures............... 3 - 7 813,333
-------------
8,169,369
Less -- Accumulated depreciation and
amortization....................... 2,859,293
-------------
Property and equipment,
net..................... $ 5,310,076
=============
F-83
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.................................. $ --
Balance acquired at acquisition date.... 53,495
Additions charged to costs and
expenses.............................. 10,273
Deductions for uncollectible receivables
written off........................... (46,193)
----------
$ 17,575
==========
Prepaid expenses and other current assets consist of the following:
SEPTEMBER 30,
1996
-------------
Prepaid insurance....................... $ 131,100
Deferred income taxes................... 39,068
Other................................... 43,723
-------------
$ 213,891
=============
Accounts payable and accrued expenses consist of the following:
SEPTEMBER 30,
1996
-------------
Accounts payable, trade................. $ 673,814
Accrued compensation and benefits....... 282,453
Other accrued expenses.................. 752,050
-------------
$ 1,708,317
=============
5. DISCONTINUED OPERATIONS:
Subsequent to the purchase of ADCOT by SEI, the board of directors of EHC
approved the disposition of ADCOT's retail appliance sales division. The
allocation of purchase price to the fair market value of the net assets of ADCOT
acquired by SEI will be based on preliminary estimates of fair value and may be
revised when additional information concerning asset and liability valuations is
obtained. Accordingly, any gain or loss on the sale of the appliance sales
division will be considered an adjustment of purchase price.
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
F-84
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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............... 3,625,000
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.................. 353,291
--------------
Total.................... 14,025,291
Less -- Current maturities.............. (176,110)
--------------
Long-term debt, net of
current maturities.... $ 13,849,181
==============
The aggregate maturities of long-term debt as of September 30, 1996, are as
follows:
December 31,
1997............................... $ 176,110
1998............................... 1,659,731
1999............................... 7,050,400
2000............................... 750,000
2001............................... 750,000
Thereafter......................... 3,639,050
--------------
$ 14,025,291
==============
Management estimates that the fair value of its debt obligations
approximates the historical value of $14.0 million at September 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.
F-85
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 redeemed the Preferred Stock on the IPO date 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, 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 redeemed the Preferred Stock on the IPO date 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 September 30, 1996 was approximately $24,000.
F-86
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
Three months ended 1996............ $ 10,350
1997............................... 35,700
1998............................... 25,000
---------
$ 71,050
=========
10. INCOME TAXES:
Federal and state income taxes are as follows:
FOR THE
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
Federal --
Current............................ $ 435,720
Deferred........................... 34,184
State --
Current............................ 62,246
Deferred........................... 4,884
-------------
$ 537,034
=============
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
SEPTEMBER 30, 1996
------------------
Provision (benefit) at the statutory
rate.................................. $479,938
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. 39,068
Nondeductible expenses............. 18,028
Other................................... --
------------------
$537,034
==================
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:
SEPTEMBER 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
=============
F-87
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
SEPTEMBER 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.
GUARANTEES
SEI's former shareholder is required to make seven annual payments of
$75,000 each under a lawsuit settlement. SEI's former shareholder is also
required under this settlement to make four annual payments of $20,000 each,
beginning in 2003. The Company has guaranteed these settlement payments.
F-88
<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 and the three month period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
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 and the three month
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-89
<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-90
<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-91
<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
Net income...................... -- -- -- (15,576) (15,576)
---------- -------- ---------- ---------- --------------
BALANCE, March 31, 1996.............. 14,000,000 $140,000 $1,085,760 $3,149,199 $4,374,959
========== ======== ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-92
<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-93
<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.) 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. All outstanding shares of EHC's common stock
and a portion of EHC's preferred stock were exchanged for cash and shares of
ARS's common stock.
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 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-94
<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-95
<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-96
<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, $301,600, and $77,600 in 1993, 1994, 1995, and the three month period
ended March 31, 1996, respectively. These leases were canceled concurrent with
the purchase of the Company and the leased facilities by EHC.
F-97
<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,
1995, and for the three month period ended March 31, 1996 totaled $22,500,
$30,000, $25,000, and $6,000, 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, 1995, and for
the three month period ended March 31, 1996 was approximately $13,650, $11,400,
$16,400, and $4,000, 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:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------------------ MARCH 31,
1993 1994 1995 1996
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Federal --
Current......................... $ 18,602 $ 466,159 $ 553,973 $ (5,248)
Deferred........................ (205,440) 48,585 6,419 1,580
State --
Current......................... 203 67,764 68,371 (750)
Deferred........................ (28,471) 6,733 890 248
------------ ---------- ---------- ------------
$ (215,106) $ 589,241 $ 629,653 $ (4,170)
============ ========== ========== ============
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED
------------------------------------ MARCH 31,
1993 1994 1995 1996
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Provision (benefit) at the statutory
rate............................... $ (191,252) $ 273,536 $ 570,008 $ (6,911)
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction......... (18,657) 49,169 45,713 (570)
Nondeductible expenses.......... 6,553 184,418 18,743 3,311
Related-party gain on sale...... -- 76,075 -- --
Other................................ (11,750) 6,043 (4,811) --
------------ ---------- ---------- ------------
$ (215,106) $ 589,241 $ 629,653 $ (4,170)
============ ========== ========== ============
</TABLE>
F-98
<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, 1995 and the three month period ended March 31, 1996 was
approximately $147,800, $54,000, $27,000, and $7,000, 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-99
<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.
F-100
<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 and the nine month
period ended September 30, 1996. 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 and the nine month period ended September 30, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-101
<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-102
<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-103
<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
Dividend........................ -- -- -- (6,000) (6,000)
Net loss........................ -- -- -- (25,460) (25,460)
------ ------ ---------- --------- --------------
BALANCE, September 30, 1996.......... 2,600 $9,800 $4,000 $ 625,735 $639,535
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-104
<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 (loss).................. $ 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-105
<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.
In June 1996, the Company and its shareholders entered into a definitive
agreement with American Residential Services, Inc. (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.
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.
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 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.
F-106
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-107
<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-108
<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, $198,000, and $149,000 for the years ended December 31,
1994 and 1995, and the nine months ended September 30, 1996, 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, $15,000, and $11,000 per
year for the year ended December 31, 1994 and 1995, and the nine month period
ended September 30, 1996. 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, $45,000, and
$34,000 for the years ended December 31, 1994, 1995, and the nine month period
ended September 30, 1996, 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-109
<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 NINE MONTH
DECEMBER 31 PERIOD ENDED
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
Federal --
Current......................... $ 2,098 $ 6,733 $(3,063)
Deferred........................ 1,088 4,915 10,938
State --
Current......................... 460 1,477 (438)
Deferred........................ 186 841 1,563
--------- --------- -------------
$ 3,832 $ 13,966 $ 9,000
========= ========= =============
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:
NINE MONTH
YEAR ENDED DECEMBER 31 PERIOD ENDED
------------------------ SEPTEMBER 30,
1994 1995 1996
------------ ---------- -------------
Provision at the statutory rate...... $ 147,558 $ 71,774 $(5,597)
Increase (decrease) resulting from --
Income of S Corporation......... (143,878) (59,557) 4,797
State income tax, net of benefit
for federal deduction......... 370 1,398 (214)
Other........................... (218) 351 10,014
------------ ---------- -------------
$ 3,832 $ 13,966 $ 9,000
============ ========== =============
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-110
<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 and for the nine month period
ended September 30, 1996, 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
F-111
<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 and the nine month period ended September 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 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 and the nine month period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-112
<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-113
<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-114
<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
Net income...................... -- -- -- 532,083 -- 532,083
------ ------ ---------- ---------- -------- --------------
BALANCE, September 30, 1996.......... 588 $7,201 $ 35,000 $1,760,383 $ (100) $1,802,484
====== ====== ========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-115
<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-116
<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.
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.
In June 1996, the Company and its shareholder entered into a definitive
agreement with American Residential Services,, Inc. (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.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 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.
F-117
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO 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 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.
F-118
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
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
============ ============
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)
========== ==========
F-119
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
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)
========== ==========
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.
F-120
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
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
==========
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, 1995, and the nine
month period ended September 30, 1996 was approximately $76,000, $90,000, and
$68,000, respectively.
F-121
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
7. INCOME TAX:
Federal and state income taxes are as follows:
FOR THE
YEAR ENDED NINE MONTH
DECEMBER 31 PERIOD ENDED
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
Federal --
Current......................... $ -- $ 97,907 $ 260,494
Deferred........................ 85,943 39,549 26,688
State --
Current......................... 2,062 35,278 37,213
Deferred........................ 22,360 5,753 3,813
---------- ---------- -------------
$ 110,365 $ 178,487 $ 328,208
========== ========== =============
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 $ 292,499
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 16,118 27,080 51,617
Nondeductible expenses.......... 3,080 321 2,010
Other........................... (309) (1,879) (17,918)
---------- ---------- -------------
$ 110,365 $ 178,487 $ 328,208
========== ========== =============
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)
========== ==========
F-122
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
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 and the nine month period ended September 30, 1996
under this agreement were approximately $92,000, $56,000, and $25,000,
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, and the nine month period ended September 30, 1996 the Company incurred
approximately $58,000, $61,000, and $57,000, 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, $86,000, and $65,000 for 1994 and 1995, and the nine
month period ended September 30, 1996, 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 and in the nine month period ended September
30, 1996, the Company received $24,000 and $18,000, respectively 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.
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.
F-123
<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 and the five month period ended May 31, 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 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 and the five month
period ended May 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-124
<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-125
<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-126
<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)
Dividends....................... -- -- (303,001) (303,001)
Net income...................... -- -- 191,960 191,960
--------- ------- -------------- -------------
BALANCE, May 31, 1996................ 10,000 $10,000 $ (1,093,357) $ (1,083,357)
========= ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<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-128
<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.
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 American Residential Services, Inc. ("ARS")
was completed on September 27, 1996 concurrent with the initial public offering
of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1995 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 and the five months ended May 31,
1996. 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-129
<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 and the five month period
ended May 31, 1996 exclude amounts associated with the discontinued division.
Revenues from such operations were approximately $12,185,000, $12,101,000,
$11,915,000and $4,965,000 for the years ended December 31, 1993, 1994, 1995, and
the five month period ended May 31, 1996 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 1997.
F-130
<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-131
<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, $370,000, and
$154,000 in 1993, 1994 and 1995, and for the five month period ended May 31,
1996, respectively.
Other nonrelated-party leases for retail facilities expire in 1997. The
rent paid under nonrelated-party leases was approximately $198,000, $183,000,
$162,000, and $68,000 in 1993, 1994 and 1995, and for the five month period
ended May 31, 1996, 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.
F-132
<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-133
<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-134
<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-135
<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-136
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31, --------------------------
1995 1995 1996
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 2,079,102 $ 1,441,019 $ 1,545,977
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............ 512,107 306,118 470,118
(Gain)/loss on sale of
property and
equipment............... (1,284) 3,790 --
Changes in operating assets
and liabilities --
(Increase) decrease in --
Accounts receivable... (222,078) (81,910) (728,972)
Inventories........... (42,371) 9,295 (394,726)
Prepaid expenses and
other current
assets............. 1,423 13,063 27,236
Costs and estimated
earnings in excess
of billings on
uncompleted
contracts.......... (192,806) 75,695 248,385
Other noncurrent
assets............. 40,640 40,640 (911)
Increase (decrease) in --
Accounts payable and
accrued expenses... 525,716 47,317 (33,552)
Unearned revenue on
service contracts.. 67,275 51,929 39,310
Billings in excess of
costs and estimated
earnings on uncompleted
contracts.......... 14,351 (211,640) (201,283)
------------- ------------ ------------
Net cash provided
by operating
activities...... 2,782,075 1,695,316 971,582
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment................. 5,625 2,775 --
Additions of property and
equipment..................... (850,274) (573,629) (946,530)
Cash paid for acquisition....... -- -- (206,881)
------------- ------------ ------------
Net cash used in
investing
activities...... (844,649) (570,854) (1,153,411)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 350,000 350,000 1,000,000
Repayments of short-term debt... (350,000) (350,000) --
Increase (decrease) in payable
to shareholders............... (276,520) (810,000) (443,171)
Dividends....................... (1,035,930) (541,296) (822,928)
------------- ------------ ------------
Net cash used in
financing
activities...... (1,312,450) (1,351,296) (266,099)
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 624,976 (226,834) (447,928)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 713,678 713,678 1,338,654
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 1,338,654 $ 486,844 $ 890,726
============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 34,822 $ 34,190 $ 26,011
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-137
<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-138
<PAGE>
METRO HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES DECEMBER 31,
IN YEARS 1995
------------ ------------
Transportation equipment................ 5 $ 2,198,404
Machinery and equipment................. 5-7 273,555
Computer and telephone equipment........ 5 416,804
Leasehold improvements.................. 7-10 942,468
Furniture and fixtures.................. 5-7 707,987
------------
4,539,218
Less -- Accumulated depreciation and
amortization.......................... (2,710,252)
------------
Property and equipment, net........ $ 1,828,966
============
F-139
<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-140
<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-141
<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-142
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of BenchMark Environmental Services, Inc.
and the Partners of Continental Mechanical
Systems, Ltd.:
We have audited the accompanying combined balance sheet of BENCHMARK
ENVIRONMENTAL SERVICES, INC. and CONTINENTAL MECHANICAL SYSTEMS, LTD. (the
"Group") as of March 31, 1997, and the related combined statements of
operations, stockholders' equity and partners' capital and cash flows for the
year then ended. These combined financial statements are the responsibility of
the Group's management. Our responsibility is to express an opinion on these
combined 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 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Group as of
March 31, 1997, 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
Denver, Colorado
June 6, 1997
F-143
<PAGE>
BENCHMARK GROUP
COMBINED BALANCE SHEET
AS OF MARCH 31, 1997
ASSETS
CURRENT ASSETS:
Cash............................... $ 382,327
Accounts receivable, less allowance
of $52,400 for doubtful accounts
(Notes 3 and 4).................. 1,325,916
Maintenance parts and supplies
inventory......................... 284,752
Notes receivable from officers..... 247,383
Other.............................. 53,908
--------------
Total current assets.......... 2,294,286
--------------
VEHICLES, FURNITURE, EQUIPMENT AND
IMPROVEMENTS
(Notes 4 and 5):
Vehicles........................... 987,205
Furniture and fixtures............. 343,830
Equipment.......................... 518,027
Leasehold improvements............. 46,357
--------------
1,895,419
Less accumulated depreciation and
amortization...................... (1,327,636)
--------------
Total vehicles, furniture,
equipment and improvements,
net.......................... 567,783
GOODWILL, net........................... 58,902
--------------
$ 2,920,971
==============
LIABILITIES, STOCKHOLDERS' EQUITY AND
PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable and accrued
expenses.......................... $ 884,099
Billings in excess of revenue
earned (Note 2)................... 297,376
Current maturities of long-term
debt and capital lease obligations
(Notes 4 and 5).................. 300,903
--------------
Total current liabilities..... 1,482,378
--------------
LONG-TERM DEBT AND CAPITAL LEASES, net
of current portion (Note 4)........... 549,037
--------------
COMMITMENTS AND CONTINGENCIES (Notes 3,
5 and 7)
STOCKHOLDERS' EQUITY AND PARTNERS'
CAPITAL:
Common stock, no par value;
authorized, 50,000 shares;
issued and outstanding, 10,892
shares........................... 385,470
Retained earnings.................. 169,701
Partners' capital.................. 334,385
--------------
Total stockholders' equity and
partners' capital............ 889,556
--------------
$ 2,920,971
==============
The accompanying notes are an integral part of this combined balance sheet.
F-144
<PAGE>
BENCHMARK GROUP
COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
REVENUES:
Fixed-term contracts............ $ 4,252,498
Maintenance contracts........... 2,377,954
Spot service and other.......... 4,964,178
--------------
Total revenues............. 11,594,630
--------------
OPERATING EXPENSES:
Cost of field operations........ 7,408,777
Salary and employee benefits.... 2,316,286
General and administrative...... 1,160,577
--------------
Total operating expenses... 10,885,640
--------------
OPERATING INCOME..................... 708,990
INTEREST EXPENSE..................... 102,303
--------------
NET INCOME........................... $ 606,687
==============
The accompanying notes are an integral part of this combined statement.
F-145
<PAGE>
BENCHMARK GROUP
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED PARTNERS'
SHARES AMOUNT EARNINGS CAPITAL TOTAL
--------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCES, March 31, 1996................ 10,892 $ 385,470 $ 169,701 $ (272,302) $ 282,869
Net income......................... -- -- -- 606,687 606,687
--------- ---------- --------- ------------ ----------
BALANCES, March 31, 1997................ 10,892 $ 385,470 $ 169,701 $ 334,385 $ 889,556
========= ========== ========= ============ ==========
</TABLE>
The accompanying notes are an integral part of this combined statement.
F-146
<PAGE>
BENCHMARK GROUP
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 606,687
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and
amortization................. 205,619
Gain on disposal of
equipment.................... (12,156)
Changes in operating assets
and liabilities --
Accounts receivable..... 624,635
Maintenance parts and
supplies inventory.... 5,298
Other assets............ (27,840)
Accounts payable and
accrued expenses...... (667,436)
Billings in excess of
revenue earned........ (163,364)
----------
Net cash provided
by operating
activities......... 571,443
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of vehicles, furniture,
equipment and improvements...... (84,949)
Proceeds from the sale of
equipment....................... 22,498
Purchase of assets of Cross Town
Refrigeration................... (37,500)
Advances to officers............... (243,463)
Proceeds from advances to
officers........................ 26,799
----------
Net cash used in
investing
activities......... (316,615)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt....... 423,520
Payments on long-term debt and
capital leases.................. (424,249)
----------
Net cash used in
financing
activities......... (729)
----------
INCREASE IN CASH..................... 254,099
CASH, beginning of year.............. 128,228
----------
CASH, end of year.................... $ 382,327
==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
During the year ended March 31,
1997, total interest paid was
$97,184
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING ACTIVITIES:
Vehicles and equipment were
acquired through capital leases
totaling $72,395
Issuance of unsecured promissory
notes, in connection with the
purchase of the assets of Cross
Town Refrigeration, totaling
$37,500.
The accompanying notes are an integral part of this combined statement.
F-147
<PAGE>
BENCHMARK GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(1) ORGANIZATION AND PRINCIPLES OF COMBINATION
BUSINESS DESCRIPTION
The BenchMark Group (the "Group") has been engaged in providing
mechanical and energy management services to commercial real estate owners and
managers since its inception in 1979. The Group specializes in existing
commercial building maintenance, service, repair and retrofit and revitalizing
mechanical equipment.
PRINCIPLES OF COMBINATION
The accompanying combined financial statements include BenchMark
Environmental Services, Inc. ("BES"), a Colorado corporation, and Continental
Mechanical Systems, Ltd. ("CMSL"), a Colorado limited partnership. These
entities have similar ownership interests and operate under common management.
All significant inter-entity accounts and transactions have been eliminated.
CMSL operates through the following divisions:
In Colorado as Continental Mechanical Systems
In Texas as Texas Mechanical Systems
In Arizona as Arizona Air Mechanix
In California as Charter Mechanical Systems
ACQUISITIONS
Effective January 3, 1997, CMSL acquired all the assets of Cross Town
Refrigeration ("Cross Town"). The base purchase price of $75,000 was paid in
the form of $37,500 in cash and a $37,500 unsecured promissory note to the owner
of Cross Town. The promissory note is due January 1, 1999 with interest and
principal payable in monthly installments (Note 4).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MAINTENANCE PARTS AND SUPPLIES INVENTORY
The Group records its inventory at the lower of cost (first-in, first-out
method) or market.
NOTES RECEIVABLE FROM OFFICERS
The Group has made loans to officers from time to time, bearing interest at
7% and maturing within the next fiscal year. In connection with the acquisition
of CMSL by another company (see Note 8), these notes were converted to notes
payable to the acquiring company due December 31, 1997. Due to their short-term
maturity, the Group believes the fair value of these notes approximates their
carrying amounts.
VEHICLES, FURNITURE, EQUIPMENT AND IMPROVEMENTS
Vehicles, furniture, equipment and improvements are recorded at cost or, in
the case of capitalized leases, at the present value of future lease payments.
Assets are depreciated using the straight-line method over their estimated
useful lives.
GOODWILL
Goodwill totaling $59,900 was recorded in connection with the purchase of
all of the assets of Cross Town. Goodwill is amortized using the straight-line
method over the estimated useful life of 15 years.
REVENUE RECOGNITION
Revenues from fixed-price contracts are recognized using the
percentage-of-completion method of accounting based on the portion of the total
contract price that the costs expended to date bears to the
F-148
<PAGE>
BENCHMARK GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
anticipated final total cost using current estimates of costs to complete. This
method is used since management considers expended costs to be the best
available measure of progress on these contracts. Cost of field operations
includes direct labor and benefits, materials, subcontract costs and job-related
overhead costs. General and administrative expenses are charged to operations as
incurred and are not allocated to jobs.
INCOME TAXES
No provision has been made for income taxes on the operating results of
CMSL since they are the responsibility of the partners and venturers. BES, which
files a separate return, accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 generally requires that deferred income taxes be provided
using the asset and liability method at currently enacted tax rates. The Group
recorded no provision or benefit from income taxes for the year ended March 31,
1997, because all net income was attributable to CMSL and there was no
difference between the tax and financial reporting basis of BES' assets and
liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. In particular, changes in estimates for
project costs could adversely affect related revenues calculated under the
percentage-of-completion method. The estimates used in these financial
statements could differ from actual results.
(3) ACCOUNTS RECEIVABLE
Included in receivables at March 31, 1997 are $69,355 of receivables
representing revenues recognized on contracts in excess of amounts billed.
The Group's receivables are generally not collateralized. However, the
Group has the right to file liens. The Group can pursue legal action to collect
certain past due receivables or resolve collection disputes. Management believes
that they have provided an adequate allowance for doubtful accounts.
In addition, concentrations of credit risk with respect to accounts
receivable are limited due to the large number of payors comprising the Group's
customer base. Accordingly, the Group does not believe any significant
concentrations of credit risk exist at March 31, 1997.
F-149
<PAGE>
BENCHMARK GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt at March 31, 1997, consists of the following:
Bank:
Term loan payable to bank, interest
payable at bank's base rate (8.50%
at March 31, 1997) plus 2.0%,
payable in monthly installments of
$15,625 plus interest, with the
balance due in June 2000.......... $ 609,374
Other:
Note payable to third party,
interest payable monthly at a rate
of 10% per annum, payable in
monthly installments of $1,730,
with the balance due in January
1999.............................. 33,769
Note payable to third party,
non-interest bearing, due May 1,
1998.............................. 15,000
Note payable to third party,
non-interest bearing, due May 30,
1998.............................. 16,604
Obligations under capitalized
leases, interest payable at
varying fixed interest rates from
4% to 22%, and variable rates
based on the lessor's commercial
paper rate (6.48% to 6.625% at
March 31, 1997), monthly
installments due through 2001,
collateralized by equipment and
vehicles with a net carrying value
of $232,111 at March 31, 1997
(Note 5).......................... 175,193
------------
849,940
Less current maturities................. (300,903)
------------
Total......................... $ 549,037
============
The Group has available a $250,000 revolving line of credit with the same
bank that holds the term loan facility. This line of credit, of which no balance
was outstanding at March 31, 1997, matures on June 15, 1997. Due to the variable
interest rate of the term loan, the Group believes its fair value approximates
its carrying amount.
The term loan and revolving line of credit are cross-collateralized by
substantially all accounts receivable, furniture, equipment and improvements
other than vehicles, and a life insurance policy on the President of the Group.
In addition, these borrowings are personally guaranteed by the President and
Executive Vice President of the Group.
The scheduled annual principal reductions of long-term debt, as based on
the Group's term and revolving line of credit, exclusive of capital leases (Note
5), are due as follows:
Years ending March 31:
1998............................ $ 205,615
1999............................ 234,758
2000............................ 187,500
2001............................ 46,874
----------
Total...................... $ 674,747
==========
F-150
<PAGE>
BENCHMARK GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LEASES
CAPITAL LEASES
The Group leases vehicles and equipment with various entities under
financing agreements that qualify as capitalized leases for a period of three to
five years. At the end of the lease term, the Group has the option to purchase
the assets at a bargain purchase price. Certain of these leases contain
restrictions including maintenance of certain operating ratios. Following is a
summary of future minimum lease payments:
Years ending March 31:
1998............................ $ 109,929
1999............................ 41,332
2000............................ 29,870
2001............................ 20,578
----------
Total future minimum lease
payments................ 201,709
Less amounts representing
interest................ (26,516)
----------
Total obligation under
capital leases.......... 175,193
Less current maturities.... (95,288)
----------
Total...................... $ 79,905
==========
OPERATING LEASES
In May 1994, the Group entered into a noncancellable operating lease for
its primary office facility and its Denver, Colorado operations center with a
company which is owned by a former partner in CMSL. Total rent expense under the
related party lease was $102,510 for the year ended March 31, 1997. The Group
also rents certain other operations facilities under operating leases in
Colorado, Texas and Arizona. These leases, which expire at various dates through
fiscal 2000, are subject to adjustments for increases in certain operating costs
and/or changes in the consumer price index. The Group rents equipment under an
operating lease which expires in fiscal 1998. General and administrative
expenses include rent expense under all operating leases of $262,685 for the
year ended March 31, 1997.
Minimum payments required under operating leases having an initial or
remaining noncancelable lease term exceeding one year are as follows:
RELATED
PARTY OTHER TOTAL
---------- ---------- ----------
Years ending March 31:
1998............................ $ 93,900 $ 201,384 $ 295,284
1999............................ 93,900 194,220 288,120
2000............................ 15,650 152,264 167,914
2001............................ -- 80,377 80,377
Thereafter...................... -- 3,627 3,627
---------- ---------- ----------
Total...................... $ 203,450 $ 631,872 $ 835,322
========== ========== ==========
(6) EMPLOYEE BENEFIT PLANS
The Group participates in a multi-employer pension plan (the "Plan")
providing defined benefits to substantially all workers who are represented by a
related collective bargaining agreement. The amount contributed to the Plan by
the Group totaled $117,065 for the year ended March 31, 1997. Based on actuarial
information as of April 30, 1992 (the latest available), the Plan has an
unfunded vested liability;
F-151
<PAGE>
BENCHMARK GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
however, the Group has no intention of terminating its participation in the
Plan. Management of the Group cannot presently determine its portion of the
unfunded liability of the Plan should a termination occur.
On April 1, 1992, the Group adopted and made available to substantially all
employees not represented by a collective bargaining agreement, a retirement
plan and trust which qualifies under section 401(k) of the Internal Revenue
Code, as amended. Eligible employees may make pre-tax contributions of up to 15%
of their annual compensation. Each year, the Group will contribute a
discretionary matching amount as determined by the Board of Directors. The Group
contributed a total of $28,856 to the plan for the year ended March 31, 1997.
(7) COMMITMENTS AND CONTINGENCIES
The Group is exposed to asserted and unasserted legal claims encountered in
the normal course of business. Management believes that the ultimate resolution
of these matters will not have a material adverse effect on the operating
results or the financial position of the Group.
(8) SUBSEQUENT EVENTS
On April 16, 1997, the Group acquired the assets of Jack DePew Plumbing
Co., Inc. The total purchase price for all of the assets of $140,000 was paid in
the form of $70,000 in cash and two promissory notes totaling $70,000. The
promissory notes bear interest at 8% per annum with principal and interest
payments due monthly through May 2001.
In a transaction which closed on April 30, 1997, the business of CMSL was
acquired for cash by American Residential Services, Inc., ("ARS"). Management
of the Group expects CMSL to continue operations in its existing markets as a
wholly-owned subsidiary of ARS.
F-152
<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 ....................................................... 2
Risk Factors ............................................................. 5
The Company .............................................................. 10
Price Range of Common Stock .............................................. 12
Dividend Policy .......................................................... 12
Capitalization ........................................................... 13
Selected Financial Information ........................................... 14
Selected Supplemental Financial Information .............................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 17
Business ................................................................. 31
Management ............................................................... 42
Certain Transactions ..................................................... 47
Security Ownership of Certain Beneficial Owners and Management ........... 49
Description of the Convertible Debt Securities ........................... 50
Description of Capital Stock ............................................. 59
Shares Eligible for Future Sale .......................................... 63
Certain United States Federal Income Tax Consequences .................... 64
Plan of Distribution ..................................................... 67
Experts .................................................................. 68
Additional Information ................................................... 68
Index to Financial Statements ............................................ F-1
- --------------------------------------------------------------------------------
[LOGO -- ARS]
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
------------
PROSPECTUS
, 1997
------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of
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<PAGE>
an undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the corporation as authorized in Section 145. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter and provided further that the Company may,
but is not required to, indemnify such persons who are serving as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise at the written request of the
Company for the expenses incurred in a proceeding if such person is a party to
and is
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<PAGE>
successful, on the merits or otherwise, in such proceeding. The Bylaws further
provide that, in the event of any threatened, or pending action, suit or
proceeding in which any of the persons referred to above is a party or is
involved and that may give rise to a right of indemnification under the Bylaws,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Bylaws and (ii) satisfactory evidence as to the amount of such expenses.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.
INSURANCE
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*2.1 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which American
Residential Services, Inc. ("ARS") and Climatic Corporation of Vero Beach are parties
(Form S-1, Reg. No. 333-06195, Ex. 2.1).
*2.2 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.2).
*2.3 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Atlas
Services, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.3).
*2.4 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and DIAL ONE
Meridian and Hoosier, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.4).
*2.5 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Bullseye
Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.5).
*2.6 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Duct, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex.
2.6).
*2.7 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Service, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex.
2.7).
*2.8 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and General
Heating Engineering Company, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.8).
*2.9 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and
Enterprises Holding Company ("EHC") are parties (Form S-1, Reg. No. 333-06195, Ex. 2.9).
*2.10 -- Form of Uniform Provisions for the Acquisition of Founding Companies (Form S-1, Reg. No.
333-06195, Ex. 2.10).
*2.11 -- Agreement and Plan of Reorganization dated as of December 11, 1996 to which ARS and Metro
Heating and Air Conditioning, Inc. are parties (Form S-4, Reg. No. 333-18623, Ex. 2.11).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.1).
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Form S-1,
Reg. No. 333-06195, Ex. 3.3).
*4.1 -- Form of Certificate representing Common Stock (Form S-1, Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights Certificate as Exhibit B thereto (Form
S-8, Reg. No. 333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the stockholders listed on the signature pages
thereto (Form S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996 between ARS and Equus II
Incorporated (Form S-1, Reg. No. 333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March 19, 1996 between EHC and
NationsBank of Texas, N.A. ("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
*4.6 -- Revolving Loan Agreement dated March 3, 1997 among ARS, NationsBank and the other parties
designated therein (Form 10-K for 1996, File No. 1-11849, Ex. 4.6).
*4.7 -- First Amendment to Revolving Loan Agreement dated March 24, 1997, among ARS, NationsBank
and the other parties designated therein (Form 10-K for 1996, File No. 1-11849, Ex. 4.7).
*4.8 -- Indenture dated as of April 1, 1997 from ARS to U.S. Trust Company of Texas, N.A., as
Trustee (Form S-4, Reg. No. 333-18623, Ex. 4.8).
*4.9 -- Registration Rights Agreement dated as of April 1, 1997 between ARS and Smith Barney Inc.,
Goldman, Sachs & Co. and Montgomery Securities (Form S-4, Reg. No. 333-18623, Ex. 4.9).
4.10 -- Form of Indenture from ARS to U.S. Trust Company of Texas, N.A., as Trustee relating to
the Convertible Debt Securities.
ARS and certain of its subsidiaries are parties to certain debt instruments under which
the total amount of securities authorized does not exceed 10% of the total assets of ARS
and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item
601(b) of Regulation S-K, ARS agrees to furnish a copy of such instruments to the
Commission upon request.
5.1 -- Opinion of John D. Held, Esq.
*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195, Ex. 10.1).
*10.2 -- Employment Agreement dated as of November 1, 1995 between ARS and Howard S. Hoover, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.2).
*10.3 -- Employment Agreement dated as of November 1, 1995 between ARS and C. Clifford Wright, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.3).
*10.4 Amended and Restated Employment Agreement dated as of April 1, 1997 between ARS and Harry
O. Nicodemus, IV (Form S-4, Reg. No. 333-18623, Ex. 4.9).
*10.5 -- Employment Agreement dated as of March 6, 1996 between ARS and John D. Held, as amended
(Form S-1, Reg. No. 333-06195, Ex. 10.5).
*10.6 -- Employment Agreement dated as of March 6, 1996 between ARS and A. Jefferson Walker III
(Form S-1, Reg. No. 333-06195, Ex. 10.6).
*10.7 -- Employment Agreement dated as of April 15, 1996 between ARS and Michael Mamaux (Form S-1,
Reg. No. 333-06195, Ex. 10.7).
*10.8 -- Employment Agreement dated as of June 13, 1996 between ARS and Elliot Sokolow (Form S-1,
Reg. No. 333-06195, Ex. 10.8).
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*10.9 -- Employment Agreement dated as of June 13, 1996 between ARS and Gorden H. Timmons (Form
S-1, Reg. No. 333-06195, Ex. 10.10).
*10.10 -- Employment Agreement dated as of June 13, 1996 between ARS and Frank N. Menditch (Form
S-1, Reg. No. 333-06195, Ex. 10.12).
*10.11 -- Employment Agreement dated as of November 1, 1995 between ARS and William P. McCaughey, as
amended (Form S-1, Reg. No. 333-06195, Ex. 10.4).
*10.12 -- Employment Agreement dated as of November 1, 1996 between ARS and Ronald R. McCann (Form
S-1, Reg. No. 333-27785, Ex. 10.12).
*10.13 -- Employment Agreement dated as of November 18, 1996 between ARS and Joseph B. Lechtanski
(Form S-1, Reg. No. 333-27785, Ex. 10.13).
*10.14 -- Form of Indemnification Agreement between ARS and each of its directors and officers (Form
S-1, Reg. No. 333-06195, Ex. 10.15).
*10.15 -- Executive Supplemental Disability Plan of ARS (Form S-1, Reg. No. 333-06195, Ex. 10.16).
*10.16 -- Executive Supplemental Life Insurance Plan of ARS (Form S-1, Reg. No. 333-06195, Ex.
10.17).
*10.17 -- ARS Deferred Compensation Plan (Form S-1, Reg. No. 333-06195, Ex. 10.18).
21.1 -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP (Houston, Texas).
23.2 -- Consent of John D. Held, Esq. (contained in Exhibit 5.1).
24.1 -- Power of Attorney (included on the signature page hereof).
25.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939 of U.S. Trust Company of Texas, N.A., as Trustee under Exhibit 4.10.
</TABLE>
- ------------
* Incorporated by reference.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any
II-5
<PAGE>
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b), if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(7) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON JULY 22, 1997.
AMERICAN RESIDENTIAL SERVICES, INC.
BY: /S/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Each person whose signature appears below hereby appoints C. Clifford
Wright, Jr., John D. Held and Harry O. Nicodemus, IV, and all of them, any of
whom may act without the joinder of the others, as his true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement and any registration statement of the same offering filed pursuant to
Rule 462 under the Securities Act of 1933, and to file the same, with all
exhibits thereto and all other documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing appropriate or
necessary to be done, as fully and for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON JULY 22, 1997
IN THE CAPACITIES INDICATED.
/S/C. CLIFFORD WRIGHT, JR. /S/ROBERT J. CRUIKSHANK
C. CLIFFORD WRIGHT, JR. ROBERT J. CRUIKSHANK
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
/S/HARRY O. NICODEMUS, IV /S/RANDALL B. HALE
HARRY O. NICODEMUS, IV RANDALL B. HALE
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
CHIEF ACCOUNTING OFFICER
/S/HOWARD S. HOOVER, JR. /S/NOLAN LEHMANN
HOWARD S. HOOVER, JR. NOLAN LEHMANN
CHAIRMAN OF THE BOARD DIRECTOR
/S/GORDEN H. TIMMONS /S/THOMAS N. AMONETT
GORDEN H. TIMMONS THOMAS N. AMONETT
CHIEF OPERATING OFFICER AND DIRECTOR DIRECTOR
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<PAGE>
SIGNATURES -- (CONTINUED)
/S/DON D. SYKORA /S/WILLIAM P. MCCAUGHEY
DON D. SYKORA WILLIAM P. MCCAUGHEY
DIRECTOR DIRECTOR
/S/ELLIOT SOKOLOW /S/FRANK N. MENDITCH
ELLIOT SOKOLOW FRANK N. MENDITCH
DIRECTOR DIRECTOR
II-8
EXHIBIT 4.10
------------------------------------------------------------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
to
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
------------------
INDENTURE
Dated as of July 31, 1997
------------------
Convertible Subordinated Securities
------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I Definitions and Other Provisions ............................... 1
SECTION 1.01. Definitions .......................................... 1
SECTION 1.02. Compliance Certificates and Opinions ................. 8
SECTION 1.03. Form of Documents Delivered to Trustee ............... 9
SECTION 1.04. Acts of Holders; Record Dates ........................ 9
SECTION 1.05. Notices, etc., to Trustee and Company ................ 11
SECTION 1.06. Notice to Holders; Waiver ............................ 11
SECTION 1.07. Conflict with Trust Indenture Act .................... 12
SECTION 1.08. Effect of Headings and Table of Contents ............. 12
SECTION 1.09. Successors and Assigns ............................... 12
SECTION 1.10. Separability Clause .................................. 12
SECTION 1.11. Benefits of Indenture ................................ 12
SECTION 1.12. GOVERNING LAW ........................................ 12
SECTION 1.13. Legal Holidays ....................................... 12
SECTION 1.14. No Security Interest Created ......................... 13
SECTION 1.15. Limitation on Individual Liability ................... 13
ARTICLE II Security Forms ................................................ 13
SECTION 2.01. Forms Generally ...................................... 14
SECTION 2.02. Form of Trustee's Certificate of Authentification .... 14
ARTICLE III The Securities ............................................... 15
SECTION 3.01. Amount Unlimited; Issuable in Series ................. 15
SECTION 3.02. Denominations ........................................ 17
SECTION 3.03. Execution, Authentication, Delivery and Dating ....... 17
SECTION 3.04. Temporary Securities ................................. 19
SECTION 3.05. Registration, Registration of Transfer and Exchange .. 20
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities ..... 21
SECTION 3.07. Payment of Interest; Interest Rights Preserved ....... 21
SECTION 3.08. Persons Deemed Owners ................................ 23
SECTION 3.09. Cancellation ......................................... 23
SECTION 3.10. Computation of Interest .............................. 23
ARTICLE IV Satisfaction and Discharge .................................... 24
SECTION 4.01. Satisfaction and Discharge of Indenture .............. 24
SECTION 4.02. Application of Trust Money ........................... 25
SECTION 4.03. Reinstatement ........................................ 25
ARTICLE V Remedies ....................................................... 26
SECTION 5.01. Events of Default .................................... 26
SECTION 5.02. Acceleration of Maturity; Rescission and Annulment ... 28
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<PAGE>
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement
by Trustee ........................................... 29
SECTION 5.04. Trustee May File Proofs of Claim ..................... 30
SECTION 5.05. Trustee May Enforce Claims Without Possession of
Securities ........................................... 31
SECTION 5.06. Application of Money Collected ....................... 31
SECTION 5.07. Limitation on Suits .................................. 32
SECTION 5.08. Unconditional Right of Holders To Receive
Principal, Premium, Interest and To Convert .......... 32
SECTION 5.09. Restoration of Rights and Remedies ................... 33
SECTION 5.10. Rights and Remedies Cumulative ....................... 33
SECTION 5.11. Delay or Omission Not Waiver ......................... 33
SECTION 5.12. Control by Holders ................................... 33
SECTION 5.13. Waiver of Past Defaults .............................. 34
SECTION 5.14. Undertaking for Costs ................................ 34
ARTICLE VI The Trustee ................................................... 35
SECTION 6.01. Certain Duties and Responsibilities .................. 35
SECTION 6.02. Notice of Defaults ................................... 36
SECTION 6.03. Certain Rights of Trustee ............................ 36
SECTION 6.04. Not Responsible for Recitals or Issuance of
Securities ........................................... 37
SECTION 6.05. May Hold Securities .................................. 37
SECTION 6.06. Money Held in Trust .................................. 38
SECTION 6.07. Compensation and Reimbursement ....................... 38
SECTION 6.08. Disqualification; Conflicting Interests .............. 39
SECTION 6.09. Corporate Trustee Required; Eligibility .............. 40
SECTION 6.10. Resignation and Removal; Appointment of Successor .... 40
SECTION 6.11. Acceptance of Appointment by Successor ............... 41
SECTION 6.12. Merger, Conversion, Consolidation or Succession
to Business .......................................... 42
SECTION 6.13. Preferential Collection of Claims Against Company .... 43
SECTION 6.14. Appointment of Authenticating Agent .................. 43
ARTICLE VII Holders' Lists and Reports by Trustee and Company ............ 45
SECTION 7.01. Company To Furnish Trustee Names and Addresses
of Holders ........................................... 45
SECTION 7.02. Preservation of Information; Communication to
Holders .............................................. 46
SECTION 7.03. Reports by Trustee ................................... 46
SECTION 7.04. Reports by Company ................................... 46
ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease ........ 47
SECTION 8.01. Company May Consolidate, etc., Only on
Certain Terms ........................................ 47
SECTION 8.02. Successor Substituted ................................ 48
ARTICLE IX Supplemental Indentures ....................................... 48
SECTION 9.01. Supplemental Indentures Without Consent of Holders ... 48
SECTION 9.02. Supplemental Indentures With Consent of Holders ...... 49
SECTION 9.03. Execution of Supplemental Indentures ................. 51
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<PAGE>
SECTION 9.04. Effect of Supplemental Indentures .................... 51
SECTION 9.05. Conformity With Trust Indenture Act .................. 51
SECTION 9.06. Reference in Securities to Supplemental Indentures ... 51
SECTION 9.07. Notice of Supplemental Indenture ..................... 51
ARTICLE X Covenants ...................................................... 52
SECTION 10.01. Payment of Principal, Premium and Interest .......... 52
SECTION 10.02. Maintenance of Office or Agency ..................... 52
SECTION 10.03. Money for Security Payments To Be Held in Trust ..... 52
SECTION 10.04. Statement by Officers as to Default ................. 54
SECTION 10.05. Existence ........................................... 54
SECTION 10.06. Waiver of Certain Covenants ......................... 54
SECTION 10.07. Additional Amounts .................................. 54
ARTICLE XI Redemption of Securities ...................................... 55
SECTION 11.01. Applicability of Article ............................ 55
SECTION 11.02. Election To Redeem; Notice to Trustee ............... 55
SECTION 11.03. Selection by Trustee of Securities To Be Redeemed ... 56
SECTION 11.04. Notice of Redemption ................................ 56
SECTION 11.05. Deposit of Redemption Price ......................... 57
SECTION 11.06. Securities Payable on Redemption Date ............... 57
SECTION 11.07. Securities Redeemed in Part ......................... 58
ARTICLE XII Subordination of Securities .................................. 58
SECTION 12.01. Securities Subordinated to Senior Indebtedness ...... 58
SECTION 12.02. Payment Over of Proceeds Upon Dissolution, etc ...... 59
SECTION 12.03. Prior Payment to Senior Indebtedness On
Acceleration of Securities .......................... 60
SECTION 12.04. No Payment When Senior Indebtedness in Default ...... 61
SECTION 12.05. Payment Permitted If No Default ..................... 62
SECTION 12.06. Subrogation to Rights of Holders of Senior
Indebtedness ........................................ 63
SECTION 12.07. Provisions Solely To Define Relative Rights ......... 63
SECTION 12.08. Trustee To Effectuate Subordination ................. 63
SECTION 12.09. No Waiver of Subordination Provisions ............... 64
SECTION 12.10. Notice to Trustee ................................... 64
SECTION 12.11. Reliance on Judicial Order or Certificate of
Liquidating Agent ................................... 65
SECTION 12.12. Trustee Not Fiduciary for Holders of Senior
Indebtedness ........................................ 65
SECTION 12.13. Rights of Trustee as Holder of Senior
Indebtedness; Preservation of Trustee's Rights ...... 65
SECTION 12.14. Article Applicable to Paying Agents ................. 66
SECTION 12.15. Certain Conversions Deemed Payment .................. 66
SECTION 12.16. No Suspension of Remedies ........................... 66
ARTICLE XIII Conversion of Securities .................................... 67
SECTION 13.01. Conversion Privilege and Conversion Price ........... 67
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<PAGE>
SECTION 13.02. Exercise of Conversion Privilege .................... 67
SECTION 13.03. Fractions of Shares ................................. 68
SECTION 13.04. Adjustment of Conversion Price ...................... 68
SECTION 13.05. Notice of Adjustments of Conversion Price ........... 75
SECTION 13.06. Notice of Certain Corporate Action .................. 75
SECTION 13.07. Company To Reserve Common Stock ..................... 76
SECTION 13.08. Taxes on Conversions ................................ 76
SECTION 13.09. Covenant as to Common Stock ......................... 77
SECTION 13.10. Cancellation of Converted Securities ................ 77
SECTION 13.11. Provisions of Consolidation, Merger or Sale
of Assets ........................................... 77
SECTION 13.12. Trustee's Disclaimer ................................ 78
ARTICLE XIV Right To Require Repurchase .................................. 78
SECTION 14.01. Right To Require Repurchase ......................... 78
SECTION 14.02. Notice; Method of Exercising Repurchase Right ....... 78
SECTION 14.03. Deposit of Repurchase Price ......................... 79
SECTION 14.04. Securities Not Repurchased on Repurchase Date ....... 80
SECTION 14.05. Securities Repurchased in Part ...................... 80
SECTION 14.06. Certain Definitions ................................. 80
ARTICLE XV Meetings of Holders of Securities ............................. 81
SECTION 15.01. Purposes for Which Meetings May Be Called ........... 81
SECTION 15.02. Call, Notice and Place of Meetings .................. 81
SECTION 15.03. Persons Entitled To Vote at Meetings ................ 82
SECTION 15.04. Quorum; Action ...................................... 82
SECTION 15.05. Determination of Voting Rights; Conduct and
Adjournment of Meetings ............................. 83
SECTION 15.06. Counting Votes and Recording Action of Meetings ..... 84
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<PAGE>
Certain Sections of this Indenture relating to Sections 310
through 318 of the Trust Indenture Act of 1939:
Section 310(a)(1) 609
(a)(2) 609
(a)(3) Not Applicable
(a)(4) Not Applicable
(a)(5) 609
(b) 608
Section 311(a) 613
(b) 613
Section 312(a) 701
702(a)
(b) 702(b)
(c) 702(c)
Section 313(a) 703(a)
(b) 703(a)
(c) 703(a)
(d) 703(b)
Section 314(a) 704
(a)(4) 1004
(b) Not Applicable
(c)(1) 102
(c)(2) 102
(c)(3) Not Applicable
(d) Not Applicable
(e) 102
Section 315(a) 601
(b) 602
(c) 601
(d) 601
(e) 514
Section 316(a)(1)(A) 502
512
(a)(1)(B) 513
(a)(2) Not Applicable
(b) 508
(c) 104(c)
Section 317(a)(1) 503
(a)(2) 504
(b) 1003
Section 318(a) 107
- ------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
- v -
<PAGE>
INDENTURE, dated as of July 31, 1997, between AMERICAN RESIDENTIAL
SERVICES, INC., a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), and U.S. Trust Company of
Texas, N.A., a national banking association, as Trustee (herein called the
"Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured
convertible subordinated debentures, notes or other evidences of indebtedness
(herein called the "Securities"), to be issued in one or more series as in this
Indenture provided.
This Indenture is subject to the provisions of the Trust Indenture
Act and the rules and regulations of the Commission promulgated thereunder which
are required to be part of this Indenture and, to the extent applicable, shall
be governed by such provisions.
All things necessary to make this Indenture a valid agreement of the
Company in accordance with its terms have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article I and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
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<PAGE>
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required and permitted hereunder shall mean such accounting principles as
are generally accepted and adopted by the Company at the date of this
Indenture; and
(d) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision; and references herein to
"Articles" and "Sections" are to Articles and Sections of this Indenture
unless otherwise specified.
Certain terms used in Articles V, XII, XIII and XIV are defined in
those Articles.
"Act," when used with respect to any Holder, has the meaning
specified in Section 1.04.
"Additional Amounts" means any additional amounts that are required
by the express terms of a Security or by or pursuant to a Board Resolution,
under circumstances specified therein or pursuant thereto, to be paid by the
Company with respect to certain taxes, assessments or other governmental charges
imposed on certain Holders and that are owing to those Holders.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with the specified Person. For purposes of this definition, "control"
when used with respect to any specified Person means the power to direct the
management and policies of the specified Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative to the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in Houston, Texas or New
York, New York are authorized or obligated to close by law or executive order.
"Change in Control" has the meaning specified in Section 14.06.
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<PAGE>
"Commission" means the Securities and Exchange Commission as from
time to time constituted, created under the Exchange Act, or, if at any time
after the execution of this Instrument that Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing those duties at such time.
"Common Stock" includes any stock of any class of the Company which
has no preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding-up of the
Company and which is not subject to redemption by the Company. However, subject
to the provisions of Section 13.11, shares issuable on conversion of Securities
shall include only shares of the class designated as Common Stock of the Company
at the date of this Indenture or shares of any class or classes resulting from
any reclassification or reclassifications thereof and which have no preference
in respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; PROVIDED, that if at any time there
shall be more than one such resulting class, the shares of each such class then
so issuable shall be substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean that successor Person.
"Company Request" or "Company Order" means a written request or
order signed in the name of the Company by its Chairman of the Board, its
President or a Vice President, and by its Chief Financial Officer, Controller,
its Treasurer or an Assistant Treasurer, or its Secretary or an Assistant
Secretary, and delivered to the Trustee.
"Consolidated Subsidiary" means a Subsidiary whose financial
statements are included in the most recent annual consolidated financial
statements of the Company and its Subsidiaries.
"Convertibility Commencement Date," when used with respect to any
Security, means the date fixed by or pursuant to this Indenture as the first
date on which that Security can be converted pursuant to Article XIII.
"Corporate Trust Office" means the office of the Trustee in New
York, New York at which at any particular time its corporate trust business
shall principally be administered.
"corporation" means a corporation, association, company, joint-stock
company or business trust.
"Credit Facility" means, in each case as amended, restated,
modified, renewed, extended, increased, refunded, replaced or refinanced in
whole or in part from time to time: (a) the
- 3 -
<PAGE>
Revolving Loan Agreement dated March 3, 1997, between the Company and
NationsBank of Texas as Agent and Issuing Lender, and the lenders party thereto
from time to time and (b) one or more debt facilities with banks or other
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit.
"Current Market Price" has the meaning specified in Section 13.04.
"Defaulted Interest" has the meaning specified in Section 3.07.
"Designated Senior Indebtedness" means (a) the Credit Facility and
(b) any other Senior Indebtedness of the Company the principal amount of which
is $25 million or more and that has been designated by the Company as
"Designated Senior Indebtedness."
"Dollar" or "$" means at any time a dollar or other equivalent unit
in such coin or currency of the United States as at that time shall be legal
tender for the payment of public and private debts.
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Holder" means a Person in whose name a Security is registered in
the Security Register.
"Indenture" means this instrument as originally executed or as it
may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including the terms of one or more series of Securities established as
contemplated by Section 3.01 and, for all purposes of this instrument and any
such supplemental indenture, the provisions of the Trust Indenture Act that are
deemed to be a part of and to govern this instrument and any such supplemental
indenture, respectively.
"Initial Conversion Price," when used with respect to any Security
to be converted, means the initial price per share of Common Stock which is
fixed for the conversion of that Security by or pursuant to this Indenture,
subject to adjustment after this issuance (or the earliest issuance of any of
its Predecessor Securities) pursuant to Article XIII.
"Interest Payment Date," when used with respect to any Security,
means the Stated Maturity of an installment of interest on that Security.
"Maturity," when used with respect to any Security, means the date
on which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.
- 4 -
<PAGE>
"Obligations" in respect of Senior Indebtedness means any principal,
interest, premiums, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documents governing any such indebtedness.
"Officers' Certificate" means a certificate, in form reasonably
satisfactory to the Trustee, signed by the Chairman of the Board, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, Controller, the Treasurer or an Assistant Treasurer, the Secretary or
an Assistant Secretary, of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion, in form and substance
reasonably satisfactory to the Trustee, of counsel, who may be counsel for or an
employee of the Company, and who shall be reasonably acceptable to the Trustee.
"Original Issue Discount Security" means any Security that provides
for an amount less than the principal amount thereof to be due and payable on a
declaration of acceleration of the Maturity thereof pursuant to Section 5.02.
"Outstanding," when used with respect to Securities, means, as of
the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(a) Securities theretofore canceled by the Trustee or delivered to
the Trustee for cancellation;
(b) Securities, or portions thereof, for the payment or redemption
of which moneys in the necessary amount have been theretofore deposited
with the Trustee or any Paying Agent (other than the Company) in trust or
set aside and segregated in trust by the Company (if the Company shall act
as its own Paying Agent) for the Holders of those Securities; PROVIDED,
that if those Securities, or portions thereof, are to be redeemed, notice
of that redemption has been duly given pursuant to this Indenture or
provision therefor satisfactory to the Trustee has been made; and
(c) Securities that have been paid pursuant to Section 3.06 or in
exchange for or in lieu of which other Securities have been authenticated
and delivered pursuant to this Indenture, other than any such Securities
in respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser
in whose hands such Securities are valid obligations of the Company;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor on the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying on any such request, demand, authorization, direction, notice,
consent or waiver, only Securities that the Trustee
- 5 -
<PAGE>
knows to be so owned shall be so disregarded. Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor on the Securities or any Affiliate of the Company or of such other
obligor.
"Paying Agent" means any Person, which may include the Company,
authorized by the Company to pay the principal of and premium, if any, or
interest on any one or more series of Securities on behalf of the Company.
"Person" means any individual, corporation, limited liability
company, partnership, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment," when used with respect to the Securities of any
series, means the place or places where the principal of (and premium, if any)
and interest on the Securities of that series are payable as specified in
accordance with Section 3.01, subject to the provisions of Section 10.02.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by that particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"Record Date" means either a Regular Record Date or a Special Record
Date, as applicable.
"Redemption Date," when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price," when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture on the applicable Redemption Date.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the date specified for that purpose as contemplated by
Section 3.01, or, if not so specified, the last day of the calendar month
preceding that Interest Payment Date if that Interest Payment Date is the 15th
day of the calendar month or the 15th day of the calendar month preceding that
Interest Payment Date if that Interest Payment Date is the first day of a
calendar month, whether or not that day is a Business Day.
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Indebtedness.
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<PAGE>
"Repurchase Date" has the meaning specified in Section 14.01.
"Repurchase Event" has the meaning specified in Section 14.06.
"Repurchase Price" has the meaning specified in Section 14.01.
"Responsible Officer" means, when used with respect to the Trustee,
the chairman of the Board of Directors, any vice chairman of the Board of
Directors, the chairman of the trust committee, the chairman of the executive
committee, any vice chairman of the executive committee, the president, any vice
president (whether or not designated by numbers or words added before or after
the title "vice president"), the cashier, the secretary, the treasurer, any
trust officer, any assistant trust officer, any assistant cashier, any assistant
secretary, any assistant treasurer, or any other officer or assistant officer of
the Trustee customarily performing functions similar to those performed by the
Persons who at the time shall be such officers, respectively, or to whom any
corporate trust matter is referred because of his or her knowledge of and
familiarity with the particular subject.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.05.
"Senior Indebtedness" means the principal of and premium, if any,
and interest on (a) all secured indebtedness of the Company for money borrowed
under any Credit Facility, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred or assumed, and (b) all secured
indebtedness of the Company for money borrowed, whether outstanding on the date
of execution of the Indenture or thereafter created, incurred or assumed, and
any amendments, renewals, extensions, modifications, refinancings, replacements,
and refundings of any or all thereof. For the purposes of this definition,
"indebtedness for money borrowed" when used with respect to the Company means
(a) any obligation of, or any obligation guaranteed by, the Company for the
repayment of borrowed money (including without limitation fees, penalties or
other obligations in respect thereof), whether or not evidenced by bonds,
debentures, notes or other written instruments, (b) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument, and (c) any obligation of, or any such obligation guaranteed by, the
Company for the payment of rent or other amounts under a lease of property or
assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.
"Significant Subsidiary" means at any time a Subsidiary that is at
that time a "significant subsidiary" of the Company within the meaning of Rule
1.02(w) of Regulation S-X under the Securities Act of 1933, as amended and in
effect on the date of this Indenture.
"Special Record Date" for the payment of any Defaulted Interest on
the Securities of any series means a date fixed by the Trustee pursuant to
Section 3.07.
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<PAGE>
"Stated Maturity," when used with respect to any Security or any
installment of interest thereon, means the date specified in that Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding
voting stock of which is owned, directly or indirectly, by the Company or by one
or more other Subsidiaries or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock that ordinarily
has voting power in the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
"Termination of Trading" has the meaning specified in Section 14.06.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in
force at the date as of which this Indenture was executed; PROVIDED, HOWEVER,
that in the event the Trust Indenture Act of 1939 is amended after that date,
"Trust Indenture Act" means, to the extent required by any such amendment, the
Trust Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Vice President," when used with respect to the Company, means any
vice president, whether or not designated by a number or a word or words added
before or after the title "vice president."
"Yield to Maturity," when used with respect to any Original Issue
Discount Security, means the yield to maturity, if any, set forth on the face
thereof.
SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS.
On any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by officers of the Company, or an Opinion
of Counsel, if to be given by counsel, and shall comply with the requirements of
the Trust Indenture Act and any other requirement set forth in this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(a) a statement that each individual or firm signing such
certificate or opinion has read such covenant or condition and the
definitions herein relating thereto;
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<PAGE>
(b) a brief statement as to the nature and scope of the examination
or investigation on which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of each such individual or such
firm, he has or they have made such examination or investigation as is
necessary to enable him or them to express an informed opinion as to
whether or not such covenant or condition has been complied with; and
(d) a statement as to whether, in the opinion of each such
individual or such firm, such condition or covenant has been complied
with.
SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by,
or covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any Person may certify or
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, on a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters on which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, on a certificate of public officials or on a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04. ACTS OF HOLDERS; RECORD DATES.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
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<PAGE>
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section. The record of any
meeting of Holders shall be proved in the manner provided in Section 15.06.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining the
Holders entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action, or to vote on any action, authorized or
permitted to be given or taken by Holders. If not set by the Company prior to
the first solicitation of a Holder made by any Person in respect of any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section 7.01)
prior to such first solicitation or vote, as the case may be. With regard to any
record date, only the Holders on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.
Notwithstanding the foregoing, the Company shall not set a record date for, and
the provisions of this paragraph shall not apply with respect to, any Act by the
Holders pursuant to Section 5.01, 5.02 or 5.12.
(d) The ownership of Securities shall be proved by the Security
Register.
(e) Any Act of the Holder of any Security shall bind every future
Holder of the same Security and the Holder of every Security issued on the
registration of transfer therefor or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.
(f) Without limiting the foregoing, a Holder entitled hereunder to
give or take any action hereunder with regard to any particular Security may do
so with regard to all or any part of the principal amount of such Security or by
one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any different part of such principal amount.
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<PAGE>
SECTION 1.05. NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any Act of Holders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(a) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, ________________,
New York, New York __________, Attention: Corporate Trust Administration,
or at superseding other addresses has been previously furnished in writing
to the Holders and the Company by the Trustee; or
(b) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided)
if in writing and mailed, first-class postage prepaid, to the Company,
addressed to it at Post Oak Tower, Suite 725, 5051 Westheimer Road,
Houston, Texas 77506-5604 or at such superseding address as has been
previously furnished in writing to the Trustee by the Company.
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, registered or certified with postage prepaid, if
mailed; when answered back if telexed; when receipt acknowledged, if telecopied;
and the next Business Day after timely delivery to the courier, if sent by
nationally recognized overnight air courier guaranteeing next day delivery.
SECTION 1.06. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any event,
such notice shall be sufficiently given (unless otherwise herein expressly
provided) if made, given, furnished or filed in writing to each Holder affected
by such event, at his address as it appears in the Security Register, not later
than the latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. Where this Indenture provides for
notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver. All
such notices and communications shall be deemed to have been duly given: at the
time delivered by hand, if personally delivered; five Business Days after being
deposited in the mail, registered or certified with postage prepaid, if mailed;
when answered back if telexed; when receipt acknowledged, if telecopied; and the
next Business Day after timely delivery to the courier, if sent by nationally
recognized overnight air courier guaranteeing next day delivery.
In the case of any notice this Indenture provides shall be given by
mail, if, by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
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SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act or another provision that would be required
or deemed under such Act to be a part of and govern this Indenture if this
Indenture were subject thereto, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act that may be so modified or excluded, the latter provision shall be
deemed to apply to this Indenture as so modified or to be excluded, as the case
may be.
SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents
are for convenience only and shall not affect the construction hereof.
SECTION 1.09. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company and
the Trustee shall bind each of their respective successors and assigns, whether
so expressed or not.
SECTION 1.10. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Securities shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 1.11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder, the Holders of Securities and, with respect to Article Twelve, the
holders of Senior Indebtedness, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 1.12. GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK,
BUT WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
SECTION 1.13. LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date or
Stated Maturity of any Security or the last date on which a Holder has the right
to convert his Securities shall not be
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a Business Day, then (notwithstanding any other provision of this Indenture or
of the Securities) payment of interest or principal and premium, if any, or
conversion of the Securities need not be made on such date, but may be made on
the next succeeding Business Day with the same force and effect as if made on
the Interest Payment Date or Redemption Date, or at the Stated Maturity, or on
such last day for conversion; PROVIDED, that no interest shall accrue for the
period from and after such Interest Payment Date, Redemption Date or Stated
Maturity, as the case may be, to the next succeeding Business Day.
SECTION 1.14. NO SECURITY INTEREST CREATED.
Nothing in this Indenture or in the Securities, express or implied, shall
be construed to constitute a security interest under the Uniform Commercial Code
or similar legislation, as now or hereafter enacted and in effect in any
jurisdiction where property of the Company or its Subsidiaries is or may be
located.
SECTION 1.15. LIMITATION ON INDIVIDUAL LIABILITY.
No recourse under or on any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, either directly or through the Company,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever shall attach
to, or is or shall be incurred by, the incorporators, shareholders, officers or
directors, as such, of the Company or any successor Person, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Indenture
or in any Security or implied therefrom; and that any and all such personal
liability of every name and nature, either at common law or in equity or by
constitution or statute, of, and any and all such rights and claims against,
every such incorporator, shareholder, officer or director, as such, because of
the creation of the indebtedness hereby authorized, or under or by reason of the
obligations, covenants or agreements contained in this Indenture or in any
Security or implied therefrom, are hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issuance of such Security.
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ARTICLE II
SECURITY FORMS
SECTION 2.01. FORMS GENERALLY.
The Securities of each series shall be in substantially such form or
forms as shall be established by or pursuant to a Board Resolution or in one or
more indentures supplemental hereto, in each case with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of the Securities. A copy of the Board
Resolution establishing the form or forms of Securities or of any series of
Securities shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the Company
Order contemplated by Section 3.03 for the authentication and delivery of those
Securities.
The definitive Securities shall be printed, lithographed or engraved
on steel engraved borders or may be produced in any other manner, all as
determined by the officers executing those Securities, as evidenced by their
execution thereof.
SECTION 2.02. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTIFICATION.
The Trustee's certificate of authentification shall be in
substantially the following form:
"This is one of the Securities of the series designated, described
or provided for in the within-mentioned Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By ___________________________
AUTHORIZED SIGNATORY".
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ARTICLE III
THE SECURITIES
SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES.
The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto, prior
to the issuance of Securities of any series,
(a) the title of the Securities of the series (which shall
distinguish the Securities of the series from all other Securities);
(b) any limit on the aggregate principal amount of the Securities of
the series which may be authenticated and delivered under this Indenture
(except for Securities authenticated and delivered on registration of
transfer of, or in exchange for, or in lieu of, other Securities of the
series pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.07, 13.02 or 14.05);
(c) the date or dates on which the principal of and any premium on
the Securities of the series is payable or the method of determination
thereof;
(d) the rate or rates, or the method of determination thereof, at
which the Securities of the series shall bear interest, if any, whether
and under what circumstances Additional Amounts with respect to such
Securities shall be payable, the date or dates from which such interest
shall accrue, the Interest Payment Dates on which such interest shall be
payable and, if other than as set forth in Section 1.01, the Regular
Record Date for the interest payable on any Registered Securities on any
Interest Payment Date;
(e) the place or places where, subject to the provisions of Section
10.02, the principal of, any premium or interest on and any Additional
Amounts with respect to the Securities of the series shall be payable;
(f) the period or periods within which, the price or prices (whether
denominated in cash, securities or otherwise) at which and the terms and
conditions on which Securities of the series may be redeemed, in whole or
in part, at the option of the Company, if the
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Company is to have that option, and the manner in which the Company must
exercise any such option;
(g) the obligation, if any, of the Company to redeem or purchase
Securities of the series pursuant to any sinking fund or analogous
provisions or at the option of a Holder thereof and the period or periods
within which, the price or prices (whether denominated in cash, securities
or otherwise) at which and the terms and conditions on which, Securities
of the series shall be redeemed or purchased in whole or in part pursuant
to such obligation;
(h) the denomination in which any Securities of that series shall be
issuable, if other than denominations of $1,000 and any integral multiple
thereof;
(i) the currency or currencies (including composite currencies) in
which payment of the principal of, any premium or interest on and any
Additional Amounts with respect to the Securities of the series shall be
payable if other than Dollars;
(j) if the principal of, any premium or interest on or any
Additional Amounts with respect to the Securities of the series are to be
payable, at the election of the Company or a Holder thereof, in a currency
or currencies (including composite currencies) other than that in which
the Securities are stated to be payable, the currency or currencies
(including composite currencies) in which payment of the principal of or
any premium or interest on or any Additional Amounts with respect to
Securities of the series as to which such election is made shall be
payable, and the periods within which and the terms and conditions on
which such election is to be made;
(k) if the amount of payments of principal of, any premium or
interest on or any Additional Amounts with respect to the Securities of
the series may be determined with reference to any commodities, currencies
or indices, or values, rates or prices, the manner in which those amounts
shall be determined;
(l) if other than the entire principal amount thereof, the portion
of the principal amount of Securities of the series which shall be payable
on declaration of acceleration of the Maturity thereof pursuant to Section
5.02;
(m) any additional means of satisfaction and discharge of this
Indenture with respect to Securities of the series pursuant to Section
4.01 and any additional conditions to discharge pursuant to Section 4.01;
(n) any deletions or modifications of or additions to the Events of
Default set forth in Section 5.01 or covenants of the Company set forth in
Article X pertaining to the Securities of the series;
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(o) if the Securities are to be subordinated pursuant to Article XII
to unsecured indebtedness or other liabilities, the modification for
purposes only of the series of the definition of "Senior Indebtedness"
herein; and
(p) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture).
All Securities of any one series shall be substantially identical,
except as to denomination and except as may otherwise be provided in or pursuant
to the Board Resolution referred to above and (subject to Section 3.03) set
forth, or determined in the manner provided, in the Officers' Certificate
referred to above or in any such indenture supplemental hereto.
At the option of the Company, interest on the Securities of any
series that bears interest may be paid by mailing a check to the address of any
Holder as such address shall appear in the Security Register.
If any of the terms of the series are established by action taken
pursuant to a Board Resolution, a copy of an appropriate record of that action
together with that Board Resolution shall be certified by the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Officers' Certificate setting forth the terms of the series.
SECTION 3.02. DENOMINATIONS.
The Securities of each series shall be issuable in such
denominations as shall be specified as contemplated by Section 3.01. In the
absence of any such provisions with respect to the Securities of any series, the
Securities of that series denominated in Dollars shall be issuable in
denominations of $1,000 and any integral multiple thereof. Unless otherwise
provided as contemplated by Section 3.01 with respect to any series of
Securities, any Securities of a series denominated in a currency other than
Dollars shall be issuable in denominations that are the equivalent, as
determined by the Company by reference to the noon buying rate in The City of
New York for cable transfers for such currency, as such rate is reported or
otherwise made available by the Federal Reserve Bank of New York, on the
applicable issue date for such Securities, of $1,000 and any integral multiple
thereof.
SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President, its Chief
Financial Officer or one of its Vice Presidents, under its corporate seal or a
facsimile thereof reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
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Securities bearing the manual or facsimile signatures of individuals
who were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery
of this Indenture, the Company may deliver Securities of any series executed by
the Company to the Trustee for authentication, together with a Company Order for
the authentication and delivery of those Securities; and the Trustee in
accordance with such Company Order shall either at one time or from time to time
pursuant to such instructions as may be described therein authenticate and
deliver such Securities as in this Indenture provided and not otherwise. Such
Company Order shall specify the amount of Securities to be authenticated and the
date on which the original issue of Securities is to be authenticated, and shall
certify that all conditions precedent to the issuance of such Securities
contained in this Indenture have been complied with.
If the form or terms of the Securities of any series have been
established in or pursuant to one or more Board Resolutions as permitted by
Sections 2.01 and 3.01, in authenticating those Securities, and accepting the
additional responsibilities under this Indenture in relation to those
Securities, the Trustee shall be entitled to receive, and (subject to Section
6.01) shall be fully protected in relying on, an Opinion of Counsel stating:
(a) if the form of those Securities has been established by or
pursuant to Board Resolution as permitted by Section 2.01, that such form
has been established in conformity with the provisions of this Indenture;
(b) if the terms of those Securities have been established by or
pursuant to Board Resolution as permitted by Section 3.01, that such terms
have been established in conformity with the provisions of this Indenture;
and
(c) that those Securities, when authenticated and delivered by the
Trustee and issued by the Company in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute legal,
valid and binding obligations of the Company, enforceable in accordance
with their terms, except as such enforcement is subject to the effect of
(i) bankruptcy, insolvency, fraudulent conveyance, reorganization or other
laws relating to or affecting creditors' rights generally, (ii) general
principles of equity (regardless of whether such enforcement is considered
in a proceeding in equity or at law) and (iii) any implied covenants of
good faith or fair dealing.
If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.
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Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature, and such certificate on any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder and is entitled to the
benefits of the Indenture. Notwithstanding the foregoing, if any Security shall
have been authenticated and delivered hereunder but never issued and sold by the
Company, and the Company shall deliver such Security to the Trustee for
cancellation as provided in Section 3.09 together with a written statement
(which need not comply with Section 1.03 and need not be accompanied by an
Opinion of Counsel) stating that such Security has never been issued and sold by
the Company, for all purposes of this Indenture such Security shall be deemed
never to have been authenticated and delivered hereunder and shall never be
entitled to the benefits of this Indenture.
The Trustee may appoint an Authenticating Agent pursuant to the
terms of Section 6.14.
SECTION 3.04. TEMPORARY SECURITIES.
Pending the preparation of definitive Securities of any series, the
Company may execute, and on Company Order the Trustee shall authenticate and
deliver, temporary Securities of that series which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the officers executing those Securities may determine, as
evidenced by their execution of those Securities. Every such temporary Security
shall be executed by the Company and shall be authenticated and delivered by the
Trustee on the same conditions and in substantially the same manner, and with
the same effect, as the definitive Security or Securities in lieu of which it is
issued.
If temporary Securities of any series are issued, the Company will
cause definitive Securities of that series to be prepared without unreasonable
delay. After the preparation of definitive Securities of any series, the
temporary Securities of that series shall be exchangeable for those definitive
Securities on surrender of the temporary Securities at any office or agency of
the Company designated pursuant to Section 10.02, without charge to the Holder.
On surrender for cancellation of any one or more temporary Securities of any
series, the Company shall execute and the Trustee shall authenticate and deliver
in exchange therefor one or more definitive Securities of the same series and of
like tenor, of any authorized denominations and of a like aggregate principal
amount. Until so exchanged the temporary Securities of any series shall in all
respects be entitled to the same benefits under this Indenture as definitive
Securities of that series.
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SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Company shall cause to be kept for each series of Securities
at one of the offices or agencies maintained pursuant to Section 10.02 a
register (the register maintained in such office and in any other office or
agency of the Company in a Place of Payment being herein sometimes collectively
referred to as the "Security Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Securities and of transfers of Securities of that series. The Trustee is
hereby initially appointed "Security Registrar" for the purpose of registering
Securities and transfers of Securities as herein provided.
(b) On surrender for registration of transfer of any Security of any
series at the office or agency in a Place of Payment for that series, the
Company shall execute, and the Trustee shall authenticate and deliver, in the
name of the designated transferee or transferees, one or more new Securities of
the same series and of like tenor, of any authorized denominations and of a like
aggregate principal amount.
At the option of the Holder, Securities of any series may be
exchanged for other Securities of the same series and of like tenor, of any
authorized denominations and of a like aggregate principal amount, on surrender
of the Securities to be exchanged at such office or agency. Whenever any
Securities are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Securities that the Holder making
the exchange is entitled to receive.
(c) All Securities issued on any registration of transfer or
exchange of Securities shall be the valid obligations of the Company, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered on such registration of transfer or exchange.
(d) Every Security presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Trustee) be
duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
(e) No service charge shall be made for any registration of transfer
or exchange of Securities, except as provided in Section 3.06. The Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection with any registration of transfer or
exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06,
11.07, 13.02 or 14.05 not involving any transfer.
(f) The Company shall not be required (i) to issue, register the
transfer of or exchange Securities of any series during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption of Securities of that series selected for redemption and ending at
the close of business on the day of the mailing of the relevant notice of
redemption or
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(ii) to register the transfer of or exchange any Security so selected for
redemption in whole or in part, except the unredeemed portion of any Security
being redeemed in part.
SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If any mutilated Security of any series is surrendered to the
Trustee, the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor a new Security of the same series and of like tenor
and principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (a)
evidence to their satisfaction of the destruction, loss or theft of any Security
and (b) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of the same series and of like tenor and principal amount and bearing a number
not contemporaneously outstanding. The Trustee may charge the Company for the
Trustee's expenses in replacing such Security.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
On the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this Section
3.06 in lieu of any destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Company, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued
hereunder.
The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such
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interest. Unless otherwise provided with respect to the Securities of any
series, payment of interest may be made at the option of the Company by check
mailed or delivered to the address of any Person entitled thereto as such
address shall appear in the Securities Register.
Any interest on any Security of any series which is payable, but is
not punctually paid or duly provided for, on any Interest Payment Date (herein
called "Defaulted Interest") shall forthwith cease to be payable to the Holder
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Securities (or their respective
Predecessor Securities) of that series are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest proposed
to be paid on each Security and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit prior to the date of the proposed payment, such money
when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this clause provided. Thereupon the
Trustee shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days and not less than 10 days
prior to the date of the proposed payment and not less than 10 days after
the receipt by the Trustee of the notice of the proposed payment. The
Trustee shall promptly notify the Company of such Special Record Date and,
in the name and at the expense of the Company, shall cause notice of the
proposed payment of such Defaulted Interest and the Special Record Date
therefor to be mailed, first-class postage prepaid, to each Holder of
Securities of that series at his address as it appears in the Security
Register, not less than 10 days prior to such Special Record Date. Notice
of the proposed payment of such Defaulted Interest and the Special Record
Date therefor having been so mailed, such Defaulted Interest shall be paid
to the Persons in whose names the Securities (or their respective
Predecessor Securities) of that series are registered at the close of
business on such Special Record Date and shall no longer be payable
pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest on the
Securities of any series in any other lawful manner not inconsistent with
the requirements of any securities exchange on which those Securities may
be listed, and upon such notice as may be required by such exchange, if,
after notice given by the Company to the Trustee of the proposed payment
pursuant to this clause (b), such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section 3.07, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall
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carry the rights to interest accrued and unpaid, and to accrue, which were
carried by such other Security.
In the case of any Security of any series which is converted after
any Regular Record Date and on or prior to the next succeeding Interest Payment
Date (other than any Security whose Maturity is prior to such Interest Payment
Date), interest on that Security whose Stated Maturity is on such Interest
Payment Date shall be payable on such Interest Payment Date notwithstanding such
conversion, and such interest (whether or not punctually paid or duly provided
for) shall be paid to the Person in whose name that Security (or one or more of
its Predecessor Securities) is registered at the close of business on such
Regular Record Date, PROVIDED, HOWEVER, that Securities of any series so
surrendered for conversion shall (except in the case of those Securities or
portions thereof called for redemption) be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Company of an amount equal
to the interest payable on such Interest Payment Date on the principal amount
being surrendered for conversion. Except as otherwise expressly provided in the
immediately preceding sentence, in the case of any Security of any series which
is converted, interest whose Stated Maturity is after the date of conversion of
that Security shall not be payable.
SECTION 3.08. PERSONS DEEMED OWNERS.
Prior to due presentment of a Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name that Security is registered as the owner of that
Security for the purpose of receiving payment of principal of and premium, if
any, and (subject to Section 3.07) interest on that Security and for all other
purposes whatsoever, whether or not that Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 3.09. CANCELLATION.
All Securities surrendered for payment, redemption, registration of
transfer, exchange or conversion shall, if surrendered to any Person other than
the Trustee, be delivered to the Trustee and shall be promptly canceled by it.
The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly canceled by the Trustee. No Securities shall be authenticated
in lieu of or in exchange for any Securities canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
SECTION 3.10. COMPUTATION OF INTEREST.
Except as otherwise specified as contemplated by Section 3.01 for
Securities of any series, interest on the Securities of each series shall be
computed on the basis of a 360-day year of twelve 30-day months.
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ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall on Company Request cease to be of further
effect (except as expressly provided for in this Article IV), and the Trustee,
at the expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(a) either
(i) all Securities theretofore authenticated and delivered
(other than (A) Securities that have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 3.06 and
(B) Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company
and thereafter repaid to the Company or discharged from such trust,
as provided in Section 10.03) have been delivered to the Trustee for
cancellation; or
(ii) all those Securities not theretofore delivered to the
Trustee for cancellation
(A) have become due and payable, or
(B) will become due and payable at their Stated Maturity
within one year, or
(C) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name, and at the
expense, of the Company, or
(D) are delivered to the Trustee for conversion in
accordance with Article XIII,
and the Company, in the case of (A), (B), (C) or (D) above, has
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for the purpose of paying an amount in cash sufficient
(without consideration of any investment of such cash) to pay and
discharge the entire indebtedness on those Securities not theretofore
delivered to the Trustee for cancellation for principal and premium, if
any, and interest and Additional Amounts, if any, to the date of such
deposit (in the case of Securities that have become due and payable) or to
the Stated Maturity or Redemption Date, as the case may be; PROVIDED that
the Trustee is irrevocably instructed to apply such amount to said
payments with respect to those Securities;
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(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge
of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture,
the following rights or obligations under the Securities and this Indenture
shall survive until otherwise terminated or discharged hereunder: (a) Article
XIII, Article XIV and the Company's obligations under Sections 3.04, 3.05, 3.06,
10.02 and 10.03, in each case with respect to any Securities described in
subclause (ii) of clause (a) of this Section 4.01, (b) this Article IV, (c) the
rights, powers, trusts, duties and immunities of the Trustee hereunder,
including the obligations of the Company to the Trustee under Section 6.07, and
the obligations of the Trustee or the Company to any Authenticating Agent under
Section 6.14 and (d) if money shall have been deposited with the Trustee
pursuant to subclause (ii) of clause (a) of this Section 4.01, the rights of
Holders of any Securities described in that subclause (ii) to receive, solely
from the trust fund described in that subclause (ii), payments in respect of the
principal of, and premium (if any) and interest on and Additional Amounts (if
any) with respect to, those Securities when such payments are due.
SECTION 4.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.03,
all money deposited with the Trustee pursuant to Section 4.01 shall be held in
trust and applied by it, in accordance with the provisions of the Securities and
this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal, premium, if any,
interest and Additional Amounts, if any, for whose payment such money has been
deposited with the Trustee. All moneys deposited with the Trustee pursuant to
Section 4.01 (and held by it or any Paying Agent) for the payment of Securities
subsequently converted shall be returned to the Company on Company Request.
SECTION 4.03. REINSTATEMENT.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article IV by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article IV until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust with respect to the Securities;
PROVIDED, HOWEVER, that if the Company makes any payment of principal of, any
premium or interest on or any Additional Amounts with respect to any Security
following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of the Securities to receive such payment from the
money so held in trust.
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ARTICLE V
REMEDIES
SECTION 5.01. EVENTS OF DEFAULT.
"Event of Default," wherever used herein with respect to Securities
of any series, means any one of the following events (whatever the reason for
that Event of Default and whether it shall be occasioned by the provisions of
Article XII or be voluntary or involuntary or be effected by operation of law or
pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body), unless it either is
inapplicable to a particular series of Securities or is specifically deleted or
modified in or pursuant to the supplemental indenture or Board Resolution
establishing that series or in the form of the Security for that series;
(a) default in the payment of the principal of or premium, if any,
on any Security of that series at its Maturity, whether or not such
payment is prohibited by the provisions of Article XII; or
(b) default in the payment of any interest on or any Additional
Amounts with respect to any Security of that series when it becomes due
and payable, whether or not such payment is prohibited by the provisions
of Article XII, and continuance of such default for a period of 30 days;
or
(c) failure to provide timely notice of a Repurchase Event in
accordance with the provisions of Article XIV; or
(d) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section 5.01 specifically dealt with or which has been expressly
included in this Indenture solely for the benefit of one or more series of
Securities other than that series), and continuance of such default or
breach for a period of 60 days after there has been given, by registered
or certified mail, to the Company by the Trustee or to the Company and the
Trustee by the Holders of at least 25% in principal amount of the
Outstanding Securities of that series a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(e) default under one or more bonds, notes, debentures or other
evidences of indebtedness for money borrowed by the Company or any
Consolidated Subsidiary or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company or
any Consolidated Subsidiary, whether such indebtedness now exists or shall
hereafter be created, which default individually or in the aggregate shall
constitute a failure
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to pay the principal of indebtedness in excess of $10,000,000 when due and
payable after the expiration of any applicable grace period with respect
thereto or shall have resulted in the principal of indebtedness in excess
of $10,000,000 becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable, without such
indebtedness having been discharged, or such acceleration having been
rescinded or annulled, within a period of 30 days after there shall have
been given, by registered or certified mail, to the Company by the Trustee
or to the Company and the Trustee by the Holders of at least 25% in
principal amount of the Outstanding Securities of that series a written
notice specifying such default and requiring the Company to cause such
indebtedness to be discharged or cause such acceleration to be rescinded
or annulled and stating that such notice is a "Notice of Default"
hereunder; or
(f) the filing or commencement of an involuntary case or other
proceeding against the Company or any Significant Subsidiary of the
Company seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law
now or thereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 90 days;
or an order for relief shall be entered against the Company or any
Significant Subsidiary of the Company under the federal bankruptcy laws as
now or hereafter in effect; or
(g) the filing or commencement by the Company or any Significant
Subsidiary of the Company of a voluntary case or other proceeding seeking
liquidation, reorganization or other similar relief with respect to itself
or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, or the Company or any Significant Subsidiary of the
Company shall consent to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it or shall make a general assignment for the
benefit of creditors; or
(h) any other Event of Default provided with respect to Securities
of that series as contemplated by Section 3.01.
Notwithstanding the foregoing provisions of this Section 5.01, if
the principal of, any premium or any interest on or any Additional Amounts with
respect to the Securities of any series is payable in a currency or currencies
(including a composite currency) other than Dollars and such currency (or
currencies) is (or are) not available to the Company for making payment thereof
because of the imposition of exchange controls or other circumstances beyond the
control of the Company (a "Conversion Event"), the Company will be entitled to
satisfy its obligations to Holders of the Securities of that series by making
such payment in Dollars in an amount equal to the Dollar equivalent of the
amount payable in such other currency currencies, as determined by the Company
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by reference to the noon buying rate in The City of New York for cable transfers
for such currency ("Exchange Rate"), as such Exchange Rate is certified for
customs purposes by the Federal Reserve Bank of New York on the date of such
payment, or, if such rate is not then available, on the basis of the most
recently available Exchange Rate. Notwithstanding the foregoing provisions of
this Section 5.01, any payment made under such circumstances in Dollars where
the required payment is in a currency or currencies other than Dollars will not
constitute an Event of Default under this Indenture.
Promptly after the occurrence of a Conversion Event respecting
Securities of any series, the Company shall give written notice thereof to the
Trustee; and the Trustee, promptly after receipt of such notice, shall give
notice thereof in the manner provided in Section 1.06 to the Holders of those
Securities. Promptly after the making of any payment in Dollars as a result of a
Conversion Event respecting Securities of any series, the Company shall give
notice in the manner provided in Section 1.06 to the Holders of those
Securities, setting forth the applicable Exchange Rate and describing the
calculation of such payments.
SECTION 5.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default with respect to any Outstanding Securities of
any series occurs and is continuing, then in every such case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Securities
of (a) the series affected by such default (in the case of an Event of Default
described in clause (a), (b), or (h) of Section 5.01) or (b) all series of
Securities (subject to the immediately following sentence, in the case of other
Events of Default) may declare the principal amount (or, if any such Securities
are Original Issue Discount Securities, such portion of the principal amount as
may be specified in the terms of that series) of all the Securities of the
series affected by such default or all series, as the case may be, to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by Holders), and on any such declaration such principal amount (or
specified amount) shall become immediately due and payable. If an Event of
Default described in clause (f) or (g) of Section 5.01 shall occur, the
principal amount of the Outstanding Securities of all series IPSO FACTO shall
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder.
At any time after such a declaration of acceleration with respect to
Securities of any series (or of all series, as the case may be) has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as hereinafter in this Article V provided, the Holders of a
majority in principal amount of the Outstanding Securities of that series (or of
all series, as the case may be), by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(i) all overdue interest on, and any Additional Amounts with
respect to, all Securities of that series (or of all series, as the
case may be),
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(ii) the principal of (and premium, if any, on) any Securities
of that series (or of all series, as the case may be) which have
become due otherwise than by such declaration of acceleration and
interest thereon at the rate or rates prescribed therefor in such
Securities (in the case of Original Issue Discount Securities, the
Securities' Yield to Maturity),
(iii) to the extent that payment of such interest is lawful,
interest on overdue interest and any Additional Amounts at the rate
or rates prescribed therefor in such Securities (in the case of
Original Issue Discount Securities, the Securities' Yield to
Maturity) and
(iv) all sums paid or advanced by the Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel;
and
(b) all Events of Default with respect to Securities of that series
(or of all series, as the case may be), other than the non-payment of the
principal of Securities of that series (or of all series, as the case may
be) which have become due solely by such declaration of acceleration, have
been cured or waived as provided in Section 5.13.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 5.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
(a) default is made in the payment of any interest on or any
Additional Amounts with respect to any Security of any series when such
interest or Additional Amounts shall have become due and payable and such
default continues for a period of 30 days, or
(b) default is made in the payment of the principal of or premium,
if any, on any Security of any series at the Maturity thereof,
the Company will, on demand of the Trustee, pay to it, for the benefit of the
Holders of the Securities of that series, the whole amount then due and payable
on those Securities for principal and premium, if any, and interest and any
Additional Amounts, and, to the extent that payment of such interest shall be
legally enforceable, interest on any overdue principal and premium, if any, and
on any overdue interest and Additional Amounts, at the rate borne by those
Securities (or in the case of Original Issue Discount Securities, the Yield to
Maturity of those Securities), and, in addition thereto, such further amount as
shall be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee and
each predecessor Trustee,
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their respective agents and counsel, and any other amounts due the Trustee or
any predecessor Trustee under Section 6.07.
If the Company fails to pay such amounts forthwith on such demand,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid and may
prosecute any such proceeding to judgment or final decree, and may enforce the
same against the Company (or any other obligor on those Securities) and collect
the moneys adjudged or decreed to be payable in the manner provided by law out
of the property of the Company (or any other obligor on those Securities),
wherever situated.
If an Event of Default with respect to Securities of any series
occurs and is continuing, the Trustee may in its discretion proceed to protect
and enforce its rights and the rights of the Holders of those Securities by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any such rights, whether for the specific enforcement of any
covenant or agreement in this Indenture or in aid of the exercise of any power
granted herein, or to enforce any other proper remedy.
SECTION 5.04. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of any judicial proceeding relative to the Company (or any
other obligor on the Securities of any series), its property or its creditors,
the Trustee shall be entitled and empowered, by intervention in such proceeding
or otherwise, to take any and all actions authorized under the Trust Indenture
Act in order to have the claims of the applicable Holders and the Trustee
allowed in any such proceeding. In particular, the Trustee shall be authorized
to collect and receive any moneys or other property payable or deliverable on
any such claims and to distribute the same; and any custodian, receiver,
assignee, trustee, liquidator, sequestrator or other similar official in any
such judicial proceeding is hereby authorized by each applicable Holder to make
such payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the applicable Holders, to pay to the
Trustee any amount due it and each predecessor Trustee for the reasonable
compensation, expenses, disbursements and advances of the Trustee and each
predecessor Trustee and their respective agents and counsel, and any other
amounts due the Trustee under Section 6.07.
No provision of this Indenture shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder of
Securities of any series any plan of reorganization, arrangement, adjustment or
composition affecting those Securities or the rights of any Holder thereof or to
authorize the Trustee to vote in respect of the claim of that Holder in any such
proceeding; PROVIDED, HOWEVER, that the Trustee may, on behalf of the Holders of
those Securities, vote for the election of a trustee in bankruptcy or similar
official and may be a member of the Creditors' Committee.
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SECTION 5.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.
All rights of action and claims under this Indenture or the
Securities of any series may be prosecuted and enforced by the Trustee without
the possession of any of those Securities or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee and each
predecessor Trustee and their respective agents and counsel, be for the ratable
benefit of the Holders of the Securities in respect of which such judgment has
been recovered.
SECTION 5.06. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article V shall
be applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities of any series, on presentation of those Securities and the notation
thereon of the payment if only partially paid and on surrender thereof if fully
paid:
FIRST: Subject to Article XII, to the holders of Senior
Indebtedness;
SECOND: To payment of all amounts due the Trustee under Section
6.07;
THIRD: To the payment of the amounts then due and unpaid for
principal of, premium, if any, and interest on and any Additional Amounts
with respect to the Securities in respect of which or for the benefit of
which such money has been collected, ratably, without preference or
priority of any kind, according to the amounts due and payable on those
Securities for principal, premium, if any, interest and Additional
Amounts, respectively; and
FOURTH: The balance, if any, to the Company or any other Person or
Persons determined to be entitled thereto.
To the fullest extent allowed under applicable law, if for the
purpose of obtaining judgment against the Company in any court it is necessary
to convert the sum due in respect of the principal of or any premium or interest
on or any Additional Amounts with respect to the Securities of any series (the
"Required Currency") into a currency in which a judgment will be rendered (the
"Judgment Currency"), the rate of exchange used will be the rate at which in
accordance with normal banking procedures the Trustee could purchase in The City
of New York the Required Currency with the Judgment Currency on the New York
Business Day next preceding that on which final judgment is given. Neither the
Company nor the Trustee will be liable for any shortfall nor will either the
Company or the Trustee it benefit from any windfall in payments to Holders of
Securities under this Section 5.06 caused by a change in exchange rates between
the time the amount of a judgment against the Company is calculated as above and
the time the Trustee converts the Judgment Currency into
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the Required Currency to make payments under this Section 5.06 to Holders of
Securities, but payment of that judgment will discharge all amounts owed by the
Company on the claim or claims underlying that judgment.
SECTION 5.07. LIMITATION ON SUITS.
No Holder of any Security of any series will have any right to
institute any proceeding, judicial or otherwise, with respect to this Indenture,
or for the appointment of a receiver or trustee, or for any other remedy
hereunder, unless
(a) an Event of Default with respect to Securities of that series
has occurred and is continuing and that Holder has previously given
written notice to the Trustee of that continuing Event of Default;
(b) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default
in its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities
to be incurred in compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(e) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of those Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
those Holders, or to obtain or to seek to obtain priority or preference over any
other of those Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all those
Holders.
SECTION 5.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM,
INTEREST AND TO CONVERT.
Notwithstanding any other provision in this Indenture, the Holder of
any Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of and premium, if any, and (subject to Section
3.07) interest on and any Additional Amounts with respect to such Security on
the respective Stated Maturities expressed in that Security (or, in the case of
redemption, on the Redemption Date or, in the case of a repurchase pursuant to
Article XIV, on the
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Repurchase Date) and to convert such Security in accordance with Article XIII
and to institute suit for the enforcement of any such payment and right to
convert, and such rights shall not be impaired without the consent of that
Holder.
SECTION 5.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder of Securities of any series has
instituted any proceeding to enforce any right or remedy under this Indenture
and that proceeding has been discontinued or abandoned for any reason, or has
been determined adversely to the Trustee or to that Holder, then and in every
such case, subject to any determination in that proceeding, the Company, the
Trustee and the Holders of Securities of that series shall be restored severally
and respectively to their former positions hereunder and thereafter all rights
and remedies of the Trustee and those Holders shall continue as though no such
proceeding had been instituted.
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities in Section 3.06, no
right or remedy herein conferred on or reserved to the Trustee or to the Holders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Security
to exercise any right or remedy accruing on any Event of Default with respect to
that Security shall impair any such right or remedy or constitute a waiver of
any such Event of Default or an acquiescence therein. Every right and remedy
given by this Article V or by law to the Trustee or to the Holders may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
SECTION 5.12. CONTROL BY HOLDERS.
With respect to Securities of any series, the Holders of a majority
in principal amount of the Outstanding Securities of that series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee relating to or arising under an Event of Default described in clause
(a), (b) or (h) of Section 5.01, and with respect to all Securities the Holders
of a majority in principal amount of all Outstanding Securities shall have the
right to direct the time, method and place of conducting any remedy available to
the Trustee, or exercising any trust or power conferred on the Trustee, not
relating to or arising under such an Event of Default; PROVIDED, that:
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(a) such direction shall not be in conflict with any rule of law or
with this Indenture;
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and
(c) subject to the provisions of Section 6.01, the Trustee shall
have the right to decline to follow any such direction if the Trustee in
good faith shall determine that the action so directed would involve the
Trustee in personal liability or would be unduly prejudicial to Holders
not joining in such direction.
SECTION 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of that series waive any past default hereunder with respect to that
series and its consequences, and the Holders of a majority in principal amount
of all Outstanding Securities may on behalf of the Holders of all Securities
waive any other past default hereunder and its consequences, except in each case
a default
(a) in the payment of the principal of or premium, if any, or
interest on or any Additional Amounts with respect to any Security, or
(b) in respect of a covenant or provision hereof which under Article
IX cannot be modified or amended without the consent of the Holder of each
Outstanding Security affected.
On any such waiver, the waived default shall cease to exist, and any
Event of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of an
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 5.14 shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the Outstanding Securities of any series, or to any suit instituted by
any Holder for the enforcement of the payment of the principal of, or premium,
if any, or interest on or
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any Additional Amounts with respect to any Security on or after the Stated
Maturity or Maturities expressed in such Security (or, in the case of
redemption, on or after the Redemption Date).
ARTICLE VI
THE TRUSTEE
SECTION 6.01. CERTAIN DUTIES AND RESPONSIBILITIES.
The duties and responsibilities of the Trustee shall be as provided
by this Indenture and the Trust Indenture Act for securities issued pursuant to
indentures qualified thereunder. Except as otherwise provided herein,
notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability or risk in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity satisfactory to it
against such risk or liability is not reasonably assured to it. Whether or not
therein expressly so provided, every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this Section 6.01. The Trustee shall not
be liable (a) for any error of judgment made in good faith by a Responsible
Officer or Responsible Officers of the Trustee, unless it shall be proved that
the Trustee was negligent in ascertaining the pertinent facts or (b) with
respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a majority in
aggregate principal amount of the then Outstanding Securities of any series or
all series, determined as provided in Section 5.12, relating to the time, method
and place of conducting any proceeding or any remedy available to the Trustee,
or exercising any trust or power conferred on the Trustee, under this Indenture
with respect to those Securities. Prior to the occurrence of an Event of Default
with respect to Securities of any series and after the curing or waiving of all
Events of Default with respect to all series which may have occurred: (a) the
duties and obligations of the Trustee shall be determined solely by the express
provisions of this Indenture and in the Trust Indenture Act, and the Trustee
shall not be liable except for the performance of such duties and obligations as
are specifically set forth in this Indenture and in the Trust Indenture Act, and
no implied covenants or obligations shall be read in to this Indenture against
the Trustee; and (b) in the absence of bad faith on the part of the Trustee, the
Trustee may conclusively rely, as to the truth of the statements and the
correctness of the opinions therein, on any statements, certificates or opinions
furnished to the Trustee and conforming to the requirements of this Indenture
and believed by the Trustee to be genuine and to have been signed or presented
by the proper party or parties; but in the case of any such statements,
certificates or options which by any provisions hereof are specifically required
to be furnished to the Trustee, the Trustee shall be under a duty to examine the
same to determine whether or not they conform on their face to the requirements
of this Indenture. If a default or an Event of Default with respect to
Securities of any series has occurred and is continuing, the Trustee shall
exercise the rights and powers vested in it by this Indenture and use the same
degree of care and skill in its exercise
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thereof as a prudent person would exercise or use under the circumstances in the
conduct of his own affairs.
SECTION 6.02. NOTICE OF DEFAULTS.
The Trustee shall give the Holders of Securities of each series
notice of any default hereunder with respect to the Securities of that series
known to it as and to the extent provided by the Trust Indenture Act; PROVIDED,
HOWEVER, that in the case of any default with respect to the Securities of that
series of the character specified in Section 5.01(d), no such notice to those
Holders shall be given until at least 30 days after the occurrence thereof; and
PROVIDED, FURTHER, that, except in the case of a default in payment of principal
of, premium, if any, or interest on or any Additional Amounts with respect to
any Securities of any series, the Trustee may withhold notice to the Holders of
those Securities if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of those
Holders. For the purpose of this Section 6.02, the term "default" with respect
to the Securities of any series means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to those
Securities.
SECTION 6.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of Section 6.01:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting on any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(b) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely on an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or
direction of any of the Holders pursuant to this Indenture, unless such
Holders shall have offered to the Trustee reasonable security or
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indemnity satisfactory to it against the costs, expenses and liabilities
which might be incurred by it in compliance with such request or
direction;
(f) before the Trustee acts or refrains from acting with respect to
any matter contemplated by this Indenture, it may require an Officers'
Certificate or an Opinion of Counsel, which shall conform to the
provisions of Section 1.02, and the Trustee shall be protected and shall
not be liable for any action it takes or omits to take in good faith and
without gross negligence in reliance on such certificate or opinion;
(g) the Trustee shall not be required to give any bond or surety in
respect of the performance of its power and duties hereunder;
(h) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and
premises of the Company, personally or by agent or attorney; and
(i) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
SECTION 6.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The statements and recitals contained herein and in the Securities
and in any other document in connection with the sale of the Securities, except
the Trustee's certificate of authentication, shall be taken as the statements of
the Company, and the Trustee and any Authenticating Agent assume no
responsibility for their correctness. The Trustee makes no representations as to
the validity or sufficiency of this Indenture or of the Securities. The Trustee
and any Authenticating Agent shall not be accountable for the use or application
by the Company of Securities or the proceeds thereof.
SECTION 6.05. MAY HOLD SECURITIES.
The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Company, in its individual or any
other capacity, may become the owner or pledgee of Securities and, subject to
Sections 6.08 and 6.13, may otherwise deal with the Company or any Affiliate of
the Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.
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SECTION 6.06. MONEY HELD IN TRUST.
Money held by the Trustee or any Paying Agent in trust hereunder
need not be segregated from other funds except to the extent required by law.
The Trustee or any Paying Agent shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company.
SECTION 6.07. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(a) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (including its services as
Security Registrar or Paying Agent, if so appointed by the Company) as may
be mutually agreed on in writing by the Company and the Trustee (which
compensation shall not be limited by any provision of law in regard to the
compensation of a trustee of an express trust);
(b) except as otherwise expressly provided herein, to reimburse the
Trustee and each predecessor Trustee promptly on its request for all
reasonable expenses, disbursements and advances incurred or made by or on
behalf of it in connection with the performance of its duties under any
provision of this Indenture (including the reasonable compensation and the
expenses and disbursements of its agents and counsel and all other persons
not regularly in its employ) except to the extent any such expense,
disbursement or advance may be attributable to its negligence or bad
faith; and
(c) to indemnify the Trustee and each predecessor Trustee (each, an
"indemnitee") for, and to hold the indemnitee harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of
this Indenture or the trusts hereunder and its duties hereunder (including
its services as Security Registrar or Paying Agent, if so appointed by the
Company), including enforcement of this Indenture (including this Section
6.07) and including the costs and expenses of defending itself against or
investigating any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder. The Company shall
defend any claim or threatened claim asserted against an indemnitee for
which it may seek indemnity, and the indemnitee shall cooperate in the
defense unless, in the reasonable opinion of the indemnitee's counsel, the
indemnitee has an interest adverse to the Company or a potential conflict
of interest exists between the indemnitee and the Company, in which case
the indemnitee may have separate counsel and the Company shall pay the
reasonable fees and expenses of such counsel; PROVIDED that the Company
shall only be responsible for the reasonable fees and expenses of one law
firm (in addition to local counsel) in any one action or separate
substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, such law firm to be designated
by the indemnitee.
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As security for the performance of the obligations of the Company
under this Section 6.07, the Trustee shall have a lien prior to the Securities
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the benefit of the Holders of particular Securities, and
the Securities are hereby subordinated to such prior lien. The obligations of
the Company under this Section to compensate and indemnify the Trustee and any
predecessor Trustee and to pay or reimburse the Trustee and any predecessor
Trustee for expenses, disbursements and advances, and any other amounts due the
Trustee or any predecessor Trustee under this Section 6.07, shall constitute an
additional obligation hereunder and shall survive the satisfaction and discharge
of this Indenture.
When the Trustee or any predecessor Trustee incurs expenses or
renders services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default specified in Section 5.01(f) or (g)
occurs, those expenses and the compensation for those services are intended to
constitute expenses of administration under any applicable bankruptcy,
insolvency or other similar federal or state law to the extent provided in
Section 503(b)(5) of Title 11 of the United States Code, as now or hereafter in
effect.
SECTION 6.08. DISQUALIFICATION; CONFLICTING INTERESTS.
(a) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section 6.08, with respect to the Securities of any series, it
shall, within 90 days after ascertaining that it has such conflicting interest,
either eliminate that conflicting interest or resign with respect to the
Securities of that series in the manner and with the effect hereinafter
specified in this Article VI.
(b) In the event that the Trustee shall fail to comply with the
provisions of paragraph (a) of this Section 6.08 with respect to the Securities
of any series, the Trustee shall, within 10 days after the expiration of the
90-day period referred to in that paragraph (a), transmit by mail to all Holders
of Securities of that series, as their names and addresses appear in the
Security Register for that series, notice of that failure.
(c) For the purposes of this Section, the term "conflicting
interest" shall have the meaning specified in Section 310(b) of the Trust
Indenture Act and the Trustee shall comply with Section 310(b) of the Trust
Indenture Act; PROVIDED, that there shall be excluded from the operation of
Section 310(b)(1) of the Trust Indenture Act with respect to the Securities of
any series any indenture or indentures under which other securities, or
certificates of interest or participation in other securities, of the Company
are outstanding, if the requirements for such exclusion set forth in Section
310(b)(1) of the Trust Indenture Act are met. For purposes of the preceding
sentence, the optional provision permitted by the second sentence of Section
310(b)(9) of the Trust Indenture Act shall be applicable.
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SECTION 6.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be a
Person that (i) is eligible pursuant to the Trust Indenture Act to act as such,
(ii) has (or, in the case of a corporation included in a bank holding company
system, whose related bank holding company has) a combined capital and surplus
of at least $50,000,000 and (iii) has a Corporate Trust Office in the Borough of
Manhattan, The City of New York, or a designated agent. If such Person publishes
reports of conditions at least annually, pursuant to law or to the requirements
of a Federal or state supervising or examining authority, then for the purposes
of this Section 6.09, the combined capital and surplus of such Person shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section 6.09, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article VI.
SECTION 6.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article VI shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.11.
(b) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If the instrument of acceptance by a successor Trustee for those
Securities which is required by Section 6.11 shall not have been delivered to
the resigning Trustee within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee for those Securities.
(c) The Trustee may be removed at any time with respect to the
Securities of any series by an Act of the Holders of a majority in principal
amount of the Outstanding Securities of that series delivered to the Trustee and
to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 6.08 with
respect to the Securities of any series after written request therefor by
the Company or by any Holder who has been a bona fide Holder of a Security
of that series for the last six months, or
(ii) the Trustee shall cease to be eligible under Section 6.09
with respect to the Securities of any series and shall fail to resign
after written request therefor by the Company or by any Holder who has
been a bona fide Holder of a Security of that series for the last six
months, or
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(iii) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Securities of all series, or (ii) subject to Section
5.14, any Holder who has been a bona fide Holder of a Security for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause with
respect to the Securities of one or more series, the Company, by a Board
Resolution, shall promptly appoint a successor Trustee or Trustees with respect
to those Securities (it being agreed that any such successor Trustee may be
appointed with respect to the Securities of one or more or all of those series
and that at any time there shall be only one Trustee with respect to the
Securities of any particular series) and such successor Trustee or Trustees
shall comply with the applicable requirements of Section 6.11. If no successor
Trustee with respect to the Securities of any series shall have been so
appointed by the Company and accepted appointment in the manner required by
Section 6.11, any Holder who has been a bona fide Holder of a Security of that
series for at least six months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee with respect to the Securities of that
series.
(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any series
to all Holders of the Securities of that series in the manner provided in
Section 1.06. Each notice shall include the name of the successor Trustee and
the address of its Corporate Trust Office.
SECTION 6.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on request of
the Company or the successor Trustee, such retiring Trustee shall, on payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder.
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(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each such successor Trustee so appointed shall execute and
deliver an indenture supplemental hereto wherein each such successor Trustee
shall accept such appointment and which (i) shall contain such provisions as
shall be necessary or desirable to transfer and confirm to, and to vest in, each
such successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates, (ii) if the retiring Trustee is
not retiring with respect to all Securities, shall contain such provisions as
shall be deemed necessary or desirable to confirm that all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or those series as to which the retiring Trustee is not retiring shall continue
to be vested in the retiring Trustee and (iii) shall add to or change any of the
provisions of this Indenture as shall be necessary to provide for or facilitate
the administration of the trusts hereunder by more than one Trustee, it being
understood that nothing herein or in such supplemental indenture shall
constitute such Trustees co-trustees of the same trust and that each such
Trustee shall be trustee of a trust or trusts hereunder separate and apart from
any trust or trusts hereunder administered by any other such Trustee; and on the
execution and delivery of such supplemental indenture, the resignation or
removal of the retiring Trustee shall become effective to the extent provided
therein and each such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of that or those series
to which the appointment of such successor Trustee relates; but, on request of
the Company or any such successor Trustee, such retiring Trustee shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder with respect to the Securities of that
or those series to which the appointment of such successor Trustee relates.
(c) On request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts referred
to in paragraph (a) or (b) of this Section 6.11, as the case may be.
(d) No successor Trustee shall accept its appointment unless, at the
time of that acceptance, that successor Trustee shall be qualified and eligible
under this Article VI.
SECTION 6.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article VI,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication
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and deliver the Securities so authenticated with the same effect as if such
successor Trustee had itself authenticated those Securities.
SECTION 6.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee shall be or become a creditor of the Company
(or any other obligor on the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 6.14. APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint an Authenticating Agent or Agents acceptable
to and at the expense of the Company which shall be authorized to act on behalf
of the Trustee to authenticate Securities issued on original issue and on
exchange, registration of transfer, partial conversion or partial redemption or
pursuant to Section 3.06, and Securities so authenticated shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having (or, in the case of a corporation included in a bank holding
company system, whose related bank holding company has) a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by Federal or State authority. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section 6.14,
the combined capital and surplus of such Authenticating Agent shall be deemed to
be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to be
eligible in accordance with the provisions of this Section 6.14, such
Authenticating Agent shall resign immediately in the manner and with the effect
specified in this Section 6.14.
Any Person into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Person resulting from any
merger, conversion or consolidation to which such Authenticating Agent shall be
a party, or any Person succeeding to the corporate agency or corporate trust
business of an Authenticating Agent, shall continue to be an Authenticating
Agent, provided such Person shall be otherwise eligible under this Section 6.14,
without the execution or filing of any paper or any further act on the part of
the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written
notice thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the
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Company. On receiving such a notice of resignation or on such a termination, or
in case at any time such Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section 6.14, the Trustee may appoint a
successor Authenticating Agent acceptable to the Company and shall mail notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Securities for which such successor Authenticating Agent has been appointed as
their names and addresses appear in the Security Register. Any successor
Authenticating Agent on acceptance of its appointment under this Section 6.14
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible to act as
such under the provisions of this Section 6.14.
Any Authenticating Agent by the acceptance of its appointment shall
be deemed to have represented to the Trustee that it is eligible for appointment
as Authenticating Agent under this Section 6.14 and to have agreed with the
Trustee that: it will perform and carry out the duties of an Authenticating
Agent as herein set forth, including, among other duties, the duties to
authenticate Securities when presented to it in connection with the original
issuance and with exchanges, registrations of transfer or redemptions or
conversions thereof or pursuant to Section 3.06; it will keep and maintain, and
furnish to the Trustee from time to time as requested by the Trustee,
appropriate records of all transactions carried out by it as Authenticating
Agent and will furnish the Trustee such other information and reports as the
Trustee may reasonably require; and it will notify the Trustee promptly if it
shall cease to be eligible to act as Authenticating Agent in accordance with the
provisions of this Section 6.14. Any Authenticating Agent by the acceptance of
its appointment shall be deemed to have agreed with the Trustee to indemnify the
Trustee against any loss, liability or expense incurred by the Trustee and to
defend any claim asserted against the Trustee by reason of any acts or failures
to act of such Authenticating Agent, but such Authenticating Agent shall have no
liability for any action taken by it in accordance with the specific written
direction of the Trustee.
The Trustee shall not be liable for any act or any failure of the
Authenticating Agent to perform any duty either required herein or authorized
herein to be performed by such person in accordance with this Indenture.
The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation for its services under this Section.
If an appointment is made pursuant to this Section, the Securities
may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
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"This is one of the Securities of the series designated, described
or provided for in the within-mentioned Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
AS TRUSTEE
By ______________________________
AS AUTHENTICATING AGENT
By ______________________________
AUTHORIZED SIGNATORY"
Notwithstanding any provision of this Section 6.14 to the contrary,
if at any time any Authenticating Agent appointed hereunder with respect to any
series of Securities shall not also be acting as the Security Registrar
hereunder with respect to that series of Securities, then, in addition to all
other duties of an Authenticating Agent hereunder, such Authenticating Agent
shall also be obligated: (a) to furnish to the Security Registrar for that
series of Securities promptly all information necessary to enable that Security
Registrar to maintain at all times an accurate and current Security Register for
that series of Securities; and (b) prior to authenticating any Security of that
series denominated in a foreign currency, to ascertain from the Company the
units of such foreign currency that are required to be determined by the Company
pursuant to Section 3.02.
ARTICLE VII
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.01. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the Trustee
with respect to each series of Securities:
(a) semi-annually, not more than 15 days after each Regular Record
Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders of the Securities of that series as of
such Regular Record Date and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days prior
to the time such list is furnished.
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Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
no such list shall be required to be furnished.
SECTION 7.02. PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders of Securities of each
series contained in the most recent list furnished to the Trustee as provided in
Section 7.01 and the names and addresses of Holders of those Securities received
by the Trustee in its capacity as Security Registrar. The Trustee may destroy
any list furnished to it as provided in Section 7.01 on receipt of a new list so
furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company nor the Trustee
nor any agent of either of them shall be held accountable by reason of any
disclosure of information as to names and addresses of Holders made pursuant to
the Trust Indenture Act or otherwise in accordance with this Indenture.
SECTION 7.03. REPORTS BY TRUSTEE.
(a) Not later than 60 days following each May 15, the Trustee shall
transmit to Holders such reports concerning the Trustee and its actions under
this Indenture as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange on
which the Securities of any series are listed, with the Commission and with the
Company. The Company will notify the Trustee when the Securities are listed on
any stock exchange.
SECTION 7.04. REPORTS BY COMPANY.
The Company shall file with the Trustee and the Commission, and
transmit to Holders, such information, documents and other reports, and such
summaries thereof, as may be required pursuant to the Trust Indenture Act at the
times and in the manner provided pursuant to the Trust Indenture Act; PROVIDED,
that any such information, documents or reports required to be filed with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed
with the Trustee within 15 days after the same is so required to be filed with
the Commission.
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ARTICLE VIII
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 8.01. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person in one transaction or a series of related
transactions, and the Company shall not permit any Person to consolidate with or
merge into the Company, unless:
(a) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person in one transaction or a series
of related transactions, the Person formed by such consolidation or into
which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, the properties and assets of the Company
substantially as an entirety shall be a corporation, partnership, limited
liability company or trust, shall be organized and validly existing under
the laws of the United States of America, any State thereof or the
District of Columbia and shall expressly assume, by an indenture
supplemental hereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, the due and punctual payment of the principal
of, premium, if any, and interest on and any Additional Amounts with
respect to all the Securities and the performance or observance of every
covenant of this Indenture on the part of the Company to be performed or
observed and shall have provided for conversion rights in accordance with
Section 13.11;
(b) immediately after giving effect to such transaction, no Event of
Default with respect to Securities of any series, and no event which,
after notice or lapse of time or both, would become an Event of Default
with respect to Securities of any series, shall have occurred and be
continuing;
(c) such consolidation, merger, conveyance, transfer or lease does
not adversely affect the validity or enforceability of the Securities of
any series; and
(d) the Company or the successor Person has delivered to the Trustee
an Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article VIII and that all
conditions precedent herein provided for relating to such transaction have
been complied with.
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SECTION 8.02. SUCCESSOR SUBSTITUTED.
On any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease the properties and
assets of the Company substantially as an entirety to any Person in one
transaction or a series of related transactions in accordance with Section 8.01,
the successor Person formed by such consolidation or into which the Company is
merged or to which such conveyance, transfer or lease is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor Person had been
named as the Company herein, and thereafter, except in the case of a transfer by
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Indenture and the Securities.
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.01. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by
a Board Resolution, and the Trustee, at any time and from time to time, may
enter into one or more indentures supplemental hereto, in form satisfactory to
the Trustee, for any of the following purposes:
(a) to set forth the terms of the Securities of any unissued series,
including the additional indebtedness or other liabilities to which the
Securities of that series will be subordinated as contemplated by Section
3.01; or
(b) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
herein and in the Securities; or
(c) for the benefit of the Holders of Securities of any or all
series, to add to the covenants of the Company, add an additional Event of
Default or surrender any right or power conferred herein or in the
Securities of any series on the Company (and if any such covenant, Event
of Default or surrender is to be for the benefit of Holders of Securities
of less than all series, stating that such covenants, Event of Default or
surrender is or are being included solely for the benefit of the Holders
of Securities of those series referred to in the supplemental indenture);
or
(d) to secure the Securities of any or all series; or
(e) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 13.11; or
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(f) to change or eliminate any of the provisions of this Indenture,
PROVIDED that any such change or elimination shall become effective only
when there is no Security Outstanding of any series created prior to the
execution of such supplemental indenture which is adversely affected by
such change in or elimination of such provision; or
(g) to supplement any of the provisions of this Indenture to such
extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Section 4.01; PROVIDED,
HOWEVER, that any such action shall not adversely affect the interest of
the Holders of Securities of such series or any other series of Securities
in any material respect; or
(h) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee, pursuant
to the requirements of Section 6.11(b); or
(i) to cure any ambiguity or omission, to correct or supplement any
provision herein or in the Securities of any or all series which may be
defective or inconsistent with any other provision herein or in the
Securities of any or all series, or to make any other provisions with
respect to matters or questions arising under this Indenture which shall
not be inconsistent with the provisions of this Indenture; PROVIDED, that
such action pursuant to this clause (i) shall not adversely affect the
interests of the Holders of Securities of any series in any material
respect and the Trustee may rely on an Opinion of Counsel to that effect.
SECTION 9.02. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities, by Act of said Holders delivered
to the Company and the Trustee, or, if the rights of one or more, but less than
all, series of Outstanding Securities are to be affected, then with the consent
of the Holders of not less than a majority in principal amount of all the series
of Outstanding Securities so to be affected, by Act of said Holders (acting as
one class) delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any manner the rights of the Holders under this Indenture;
PROVIDED, HOWEVER, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby,
(a) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Security, or reduce the
principal amount thereof or the rate of interest thereon, any Additional
Amounts with respect thereto or any premium payable on the redemption
thereof, or reduce the amount of the principal of any Original Issue
Discount
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Security that would be due and payable on a declaration of acceleration of
the Maturity thereof pursuant to Section 5.02, or change any Place of
Payment where, or the coin or currency or currencies (including composite
currencies) in which, any Security or any premium or any interest thereon
or Additional Amount with respect thereto is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), or adversely affect the right to convert any Security as
provided in Article XIII (except as permitted by Section 9.01(e)), or
modify the provisions of Article XIV, or the provisions of this Indenture
with respect to the subordination of the Securities (except as
contemplated by Section 3.01 and permitted by Section 9.01(a)), in a
matter adverse to the Holders; or
(b) reduce the percentage in principal amount of Outstanding
Securities the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture; or
(c) modify any of the provisions of this Section 9.02, Section 5.13
or Section 10.06, except to increase any percentage provided herein or
therein or to provide with respect to any particular series the right to
condition the effectiveness of any supplemental indenture as to that
series on the consent of the Holders of a specified percentage of the
aggregate principal amount of Outstanding Securities of that series (which
provision may be made pursuant to Section 3.01 without the consent of any
Holder) or to provide that certain other provisions of this Indenture
cannot be modified or waived without the consent of the Holder of each
Outstanding Security affected thereby, PROVIDED, HOWEVER, that this clause
(c) shall not be deemed to require the consent of any Holder with respect
to changes in the references to "the Trustee" and concomitant changes in
this Section 9.02 and Section 10.06, or the deletion of this proviso, in
accordance with the requirements of Sections 6.11(b) and 9.01(g).
A supplemental indenture that changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this Section
9.02 to approve the particular form of any proposed supplemental indenture, but
it shall be sufficient if that Act approves the substance thereof.
The determination of the Trustee as to the series of Securities the
rights of which are to be affected pursuant to this Section 9.02 shall be
conclusive, and the Trustee in making that determination shall be protected in
relying on an Opinion of Counsel.
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SECTION 9.03. EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article IX or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 6.01) shall be fully protected in relying on,
an Officers' Certificate and an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture that adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise.
SECTION 9.04. EFFECT OF SUPPLEMENTAL INDENTURES.
On the execution of any supplemental indenture under this Article
IX, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 9.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article IX
shall conform to the requirements of the Trust Indenture Act.
SECTION 9.06. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article IX may, and
shall if required by the Trustee, bear a notation in form approved by the
Trustee as to any matter provided for in such supplemental indenture. If the
Company shall so determine, new Securities of any series so modified as to
conform, in the opinion of the Trustee and the Company, to any such supplemental
indenture may be prepared and executed by the Company and (at the specific
direction of the Company) authenticated and delivered by the Trustee in exchange
for Outstanding Securities of that series.
SECTION 9.07. NOTICE OF SUPPLEMENTAL INDENTURE.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 9.02, the Company shall transmit to
the Holders of Securities of all series affected thereby a notice setting forth
the substance of that supplemental indenture.
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ARTICLE X
COVENANTS
SECTION 10.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company covenants and agrees for the benefit of each series of
Securities that it will duly and punctually pay the principal of, premium, if
any, and interest on and any Additional Amounts with respect to the Securities
of that series in accordance with the terms of those Securities and this
Indenture.
SECTION 10.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in each Place of Payment for each series
of Securities an office or agency where Securities of that series may be
presented or surrendered for payment, where Securities of that series may be
surrendered for registration of transfer, where Securities of that series may be
surrendered for exchange or conversion and where notices and demands to or on
the Company in respect of the Securities of that series and this Indenture may
be served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of any such office or agency. If at
any time the Company shall fail to maintain any such required office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities of one or more series may be presented
or surrendered for any or all such purposes and may from time to time rescind
such designations; PROVIDED, HOWEVER, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in each Place of Payment for Securities of any series for such
purposes. The Company will give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
SECTION 10.03. MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent with
respect to any series of Securities, it will, on or before each due date of the
principal of, premium, if any, or interest on or any Additional Amounts with
respect to any of the Securities of that series, segregate and hold in trust for
the benefit of the Persons entitled thereto a sum sufficient to pay the entire
amount so becoming due until such sum shall be paid to such Persons or otherwise
disposed of as herein provided and will promptly notify the Trustee of its
action or failure so to act.
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Whenever the Company shall have one or more Paying Agents for any
series of Securities, it will, on or prior to each due date of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to any
Securities of that series, deposit with a Paying Agent a sum sufficient to pay
the entire amount so becoming due, such sum to be held as provided by the Trust
Indenture Act, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of its action or failure so to act.
The Company will cause each Paying Agent other than the Trustee or
the Company for each series of Securities to execute and deliver to the Trustee
an instrument in which such Paying Agent shall agree with the Trustee, subject
to the provisions of this Section 10.03, that such Paying Agent will: (a) comply
with the provisions of the Trust Indenture Act and this Indenture applicable to
it as a Paying Agent and hold all sums held by it for the payment of principal
of or any premium or interest on or any Additional Amounts with respect to the
Securities of that series in trust for the benefit of the Persons entitled
thereto until such sums shall be paid to those Persons or otherwise disposed of
as herein provided; (b) give the Trustee notice of any default by the Company
(or any other obligor on the Securities) in the making of any payment in respect
of the Securities of that series; and (c) at any time during the continuance of
any default by the Company (or any other obligor on the Securities of that
series) in the making of any payment in respect of the Securities of that
series, on the written request of the Trustee, forthwith pay to the Trustee all
sums held in trust by such Paying Agent for payment in respect of the Securities
of that series, and account for any funds disbursed.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
on the same trusts as those on which such sums were held by the Company or such
Paying Agent; and, on such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on or any Additional Amounts with respect to any Security of
any series and remaining unclaimed for two years after that principal, premium,
if any, interest or Additional Amounts, if any, has become due and payable shall
be paid to the Company on Company Request, or (if then held by the Company)
shall be discharged from such trust; and the Holder of that Security shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereon cease; PROVIDED, HOWEVER, that the Trustee or such Paying
Agent, before being required to make any such repayment, may at the expense of
the Company cause to be published once, in a newspaper published in the English
language, customarily published on each Business Day and of general circulation
in New York, New York, notice that such money remains unclaimed and that, after
a date specified therein, which shall not be less than 30 days from the date of
such publication, any unclaimed balance of such money then remaining will be
repaid to the Company.
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SECTION 10.04. STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 120 days after the
end of each fiscal year of the Company ending after the date hereof, an
Officers' Certificate stating whether or not to the best knowledge of the
signers thereof the Company is in default in the performance and observance of
any of the terms, provisions and conditions of this Indenture (without regard to
any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.
SECTION 10.05. EXISTENCE.
Subject to Article VIII, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises and the existence, rights (charter
and statutory) and franchises of each Subsidiary; PROVIDED, HOWEVER, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders of
Securities of any series.
SECTION 10.06. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Section 10.05, or any covenant added for the
benefit of any series of Securities as contemplated by Section 3.01 (unless
otherwise specified pursuant to Section 3.01) if before or after the time for
such compliance the Holders of a majority in principal amount of the Outstanding
Securities of all series affected by that omission (acting as one class) shall,
by Act of such Holders, either waive such compliance in such instance or
generally waive compliance with such covenant or condition, but no such waiver
shall extend to or affect such covenant or condition except to the extent so
expressly waived, and, until such waiver shall become effective, the obligations
of the Company and the duties of the Trustee in respect of any such covenant or
condition shall remain in full force and effect.
SECTION 10.07. ADDITIONAL AMOUNTS.
If the Securities of a series expressly provide for the payment of
Additional Amounts, the Company will pay to the Holder of any Security of that
series Additional Amounts as expressly provided therein. Whenever in this
Indenture there is mentioned, in any context, the payment of the principal of or
any premium or interest on, or in respect of, any Security of any series or the
net proceeds received on the sale or exchange of any Security of any series,
such mention shall be deemed to include mention of the payment of Additional
Amounts provided for in this Section 10.07 to the extent that, in such context,
Additional Amounts are, were or would be payable in respect thereof pursuant to
the provisions of this Section 10.07 and express mention of the payment of
Additional
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Amounts (if applicable) in any provisions hereof shall not be construed as
excluding Additional Amounts in those provisions hereof where such express
mention is not made.
If the Securities of a series provide for the payment of Additional
Amounts, at least 10 days prior to the first Interest Payment Date with respect
to that series of Securities (or if the Securities of that series will not bear
interest prior to Maturity, the first day on which a payment of principal and
any premium is made), and at least 10 days prior to each date of payment of
principal and any premium or interest if there has been any change with respect
to the matters set forth in the below-mentioned Officers' Certificate, the
Company shall furnish the Trustee and the Company's principal Paying Agent or
Paying Agents, if other than the Trustee, with an Officers' Certificate
instructing the Trustee and such Paying Agent or Paying Agents whether such
payment of principal of and any premium or interest on the Securities of that
series shall be made to Holders of Securities of that series who are United
States Aliens without withholding for or on account of any tax, assessment or
other governmental charge described in the Securities of that series. If any
such withholding shall be required, then such Officers' Certificate shall
specify by country the amount, if any, required to be withheld on such payments
to such Holders of Securities and the Company will pay to such Paying Agent the
Additional Amounts required by this Section. The Company covenants to indemnify
the Trustee and any Paying Agent for, and to hold them harmless against any
loss, liability or expense reasonably incurred without negligence or bad faith
on their part arising out of or in connection with actions taken or omitted by
any of them in reliance on any Officers' Certificate furnished pursuant to this
Section 10.07.
ARTICLE XI
REDEMPTION OF SECURITIES
SECTION 11.01. APPLICABILITY OF ARTICLE.
Securities of any series which are redeemable before their Stated
Maturity shall be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 3.01 for Securities of any
series) in accordance with this Article XI.
SECTION 11.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Securities shall be
evidenced by a Board Resolution. In case of any redemption at the election of
the Company of less than all the Securities of any series, the Company shall, at
least 60 days prior to the Redemption Date fixed by the Company (unless a
shorter period shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Securities of that series to be
redeemed. In case of any redemption at the election of the Company of all the
Securities of any series, the Company shall, at least 45 days prior to the
Redemption Date fixed by the Company (unless a shorter period shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date.
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SECTION 11.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities of any series are to be redeemed,
the particular Securities of that series to be redeemed shall be selected not
more than 60 days prior to the Redemption Date by the Trustee, from the
Outstanding Securities of that series not previously called for redemption, by
lot or pro rata or by such other method as the Trustee shall deem fair and
appropriate and which may provide for the selection for redemption of portions
(equal to the minimum authorized denomination for Securities of that series or
any integral multiple thereof) of the principal amount of Securities of that
series of a denomination larger than the minimum authorized denomination for
Securities of that series.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities of any
series which have been converted during a selection of Securities of that series
to be redeemed shall be treated by the Trustee as Outstanding for the purpose of
such selection. In any case where more than one Security of the same series is
registered in the same name, the Trustee in its discretion may treat the
aggregate principal amount so registered as if it were represented by one
Security of that series.
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
SECTION 11.04. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption
Date, to the Trustee and to each Holder of Securities to be redeemed, at his
address appearing in the Security Register.
All notices of redemption shall state:
(a) the Redemption Date,
(b) the Redemption Price,
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(c) if less than all the Outstanding Securities of any series are to
be redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to be
redeemed,
(d) that on the Redemption Date the Redemption Price will become due
and payable on each such Security to be redeemed and that (unless the
Company shall default in payment of the Redemption Price) interest thereon
will cease to accrue on and after said date,
(e) that the redemption is for a sinking fund, if that is the case,
(f) the conversion price, the date on which the right to convert the
Securities to be redeemed will terminate and the place or places where
such Securities may be surrendered for conversion, and
(g) the place or places where such Securities are to be surrendered
for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request received
by the Trustee at least 25 days prior to the Redemption Date, by the Trustee in
the name and at the expense of the Company.
SECTION 11.05. DEPOSIT OF REDEMPTION PRICE.
At or prior to 10:00 a.m. (Houston, Texas time) on any Redemption
Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if
the Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.03) an amount of money sufficient to pay the Redemption
Price of, and (except if the Redemption Date shall be an Interest Payment Date)
accrued interest on, and any Additional Amounts with respect to, all the
Securities or portions thereof which are to be redeemed on that date other than
any Securities called for redemption on that date which have been converted
prior to the date of such deposit.
If any Security called for redemption is converted, any money
deposited with the Trustee or with any Paying Agent or so segregated and held in
trust for the redemption of such Security shall (subject to any right of the
Holder of such Security or any Predecessor Security to receive interest as
provided in the last paragraph of Section 3.07) be paid to the Company on
Company Request or, if then held by the Company, shall be discharged from such
trust.
SECTION 11.06. SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities
so to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest and any Additional Amounts) such Securities shall cease to bear
interest
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or be entitled to any Additional Amounts. On surrender of any such Security for
redemption in accordance with said notice, such Security shall be paid by the
Company at the Redemption Price, together with accrued interest and any
Additional Amounts to the Redemption Date; PROVIDED, HOWEVER, that installments
of interest whose Maturity is on or prior to the Redemption Date shall be
payable to the Holders of such Securities, or one or more Predecessor
Securities, registered as such at the close of business on the relevant Record
Dates according to their terms and the provisions of Section 3.07.
If any Security called for redemption shall not be so paid on
surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.
SECTION 11.07. SECURITIES REDEEMED IN PART.
Any Security which is to be redeemed only in part shall be
surrendered at an office or agency of the Company maintained for that purpose
pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities of the same series, of any authorized
denomination as requested by such Holder, in an aggregate principal amount equal
to and in exchange for the unredeemed portion of the principal of the Security
so surrendered.
ARTICLE XII
SUBORDINATION OF SECURITIES
SECTION 12.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company covenants and agrees, and each Holder of a Security, by
his acceptance thereof, likewise covenants and agrees, that, at all times and in
all respects, the indebtedness represented by the Securities and the payment of
the principal of, premium, if any, and interest on and any Additional Amounts
with respect to each and all of the Securities are hereby expressly made
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness. Obligations in respect of Senior Indebtedness will not be
deemed to have been paid in full unless the holders thereof shall have received
payment in full in cash or cash equivalents with respect thereto.
Each Holder of the Securities by its acceptance thereof acknowledges
and agrees that the subordination provisions included herein are, and are
intended to be, an inducement and a consideration to each holder of any Senior
Indebtedness, whether such Senior Indebtedness was created or acquired before or
after the issuance of Securities, to acquire and/or continue to hold such Senior
Indebtedness, and such holder of Senior Indebtedness shall be deemed
conclusively to have
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relied on such subordination provisions in acquiring and/or continuing to hold
such Senior Indebtedness.
SECTION 12.02. PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding,
or any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Company or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefit of creditors or any other marshaling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations due
or to become due on or in respect of all Senior Indebtedness before the Holders
of the Securities are entitled to receive any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, and to that end the holders of Senior Indebtedness
shall be entitled to receive, for application to the payment thereof, any
payment or distribution of any kind or character, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, which may be payable or deliverable in respect of the Securities in
any such case, proceeding, dissolution, liquidation or other winding up or
event. In furtherance of the foregoing, but not by way of limitation thereof, in
the event of any case or proceeding described in clause (a) above in or as a
result of which the Company is excused from the obligation to pay all or any
part of the interest otherwise payable in respect of any Senior Indebtedness
during the period subsequent to the commencement of any such case or proceeding,
all or such part, as the case may be, of such interest shall be payable out of,
and to that extent shall diminish and be at the expense of, reorganization
dividends or other distributions in respect of the Securities.
In the event that, notwithstanding the foregoing provisions of this
Section 12.02, the Trustee or the Holder of any Security shall have received any
payment or distribution of any kind or character in respect of the Securities,
whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, before all Senior Indebtedness is paid in full, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is prohibited by this Section 12.02) or by such
Holder (in trust) for the holders of Senior Indebtedness, and shall be paid
forthwith over and delivered to, the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
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To the extent any payment of or distribution in respect of Senior
Indebtedness (whether by or on behalf of the Company, as proceeds of security or
enforcement of any right of set off or otherwise) is declared to be fraudulent
or preferential, set aside or required to be paid to any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
if such payment or distribution is recovered by, or paid over to, such receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person, the
Senior Indebtedness or part thereof originally intended to be satisfied shall be
deemed to be reinstated and outstanding as if such payment has not occurred.
For purposes of this Article XII only, (a) a "distribution" may
consist of cash, securities or other property, by set-off or otherwise and (b)
the words "cash, property or securities" shall not be deemed to include
securities of the Company as reorganized or readjusted or securities of the
Company or any other corporation provided for by a plan of reorganization or
readjustment, which securities are subordinated in right of payment to all
Senior Indebtedness which may at the time be outstanding to substantially the
same extent as, or to a greater extent than, the Securities are so subordinated
as provided in this Article XII. The consolidation of the Company with, or the
merger of the Company into, another Person or the liquidation or dissolution of
the Company following the conveyance or transfer of its properties and assets
substantially as an entirety to another Person on the terms and conditions set
forth in Article VIII shall not be deemed a dissolution, winding up,
liquidation, reorganization, general assignment for the benefit of creditors or
marshaling of assets and liabilities of the Company for the purposes of this
Section 12.02 if the Person formed by such consolidation or into which the
Company is merged or which acquires by conveyance or transfer such properties
and assets substantially as an entirety, as the case may be, shall, as a part of
such consolidation, merger, conveyance or transfer, comply with the conditions
set forth in Article VIII.
SECTION 12.03. PRIOR PAYMENT TO SENIOR INDEBTEDNESS ON ACCELERATION OF
SECURITIES.
If any Securities are declared due and payable before their Stated
Maturity, the Company shall promptly notify all holders of Senior Indebtedness
of such event. In the event that any Securities are declared due and payable
before their Stated Maturity, then and in such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations in
respect of Senior Indebtedness before the Holders of the Securities are entitled
to receive any payment or other distribution (including any payment which may be
payable by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities) on account of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities or on account of the purchase or other acquisition of Securities, and
on any such event the Holders of the Securities shall, to the extent permitted
by law, be prohibited for a period of 180 days thereafter from making any
bankruptcy filing with respect to the Company or from filing suit to enforce
their rights under this Indenture (PROVIDED, HOWEVER, that if the acceleration
of Securities is rescinded or annulled prior to the expiration of such 180-day
period, such prohibition shall terminate on such earlier date as the
acceleration of such Securities is rescinded or annulled), subject to the
rights, if any, under this Article XII of the holders, from time to time, of
Senior Indebtedness to receive the cash, property or securities receivable on
the exercise of such rights.
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In the event that, notwithstanding the foregoing, the Company shall
make any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section 12.03, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case, for application to the
payment of all Obligations with respect to Senior Indebtedness remaining unpaid
to the extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
The provisions of this Section 12.03 shall not apply to any payment
with respect to which Section 12.02 would be applicable.
SECTION 12.04. NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.
The Company may not make any payment (whether by redemption,
purchase, retirement, defeasance or otherwise) to the Trustee or any Holder on
account of the principal of, premium, if any, or interest on or any Additional
Amounts with respect to the Securities and may not acquire from the Trustee or
any Holder any Securities (other than payments and other distributions made from
any defeasance trust created pursuant to Section 4.01 if the applicable deposit
does not violate Article IV or this Article XII) until all principal and other
Obligations with respect to the Senior Indebtedness of the Company have been
paid in full if:
(a) a default in the payment of any principal of, premium, if any,
or interest on Designated Senior Indebtedness occurs; or
(b) a default, other than a payment default, on Designated Senior
Indebtedness occurs and is continuing that then permits holders of the
Designated Senior Indebtedness as to which such default relates to
accelerate its maturity and the Trustee receives a notice of the default
(a "Payment Blockage Notice") from a Person who is a Representative of the
holders of such Designated Senior Indebtedness, PROVIDED, that if such
Designated Senior Indebtedness is of the type referred to in clause (b) of
the definition thereof, the Payment Blockage Notice shall be given by a
Representative of the holders of at least 20% of such Designated Senior
Indebtedness. If the Trustee receives any such Payment Blockage Notice, no
subsequent Payment Blockage Notice shall be effective for purposes of this
Section 12.04 unless and until 360 days shall have elapsed since the date
of commencement of the payment blockage period resulting from the
immediately prior Payment Blockage Notice. No nonpayment default in
respect of any Designated Senior Indebtedness that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for subsequent Payment Blockage
Notices.
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The Company shall resume payments on and distributions in respect of
the Securities and may acquire Securities on:
(a) in the case of a default referred to in subparagraph (a) of the
preceding paragraph, the date on which the default is cured or waived, or
(b) in the case of a default referred to in subparagraph (b) of the
preceding paragraph, the earliest of (i) the date on which such nonpayment
default is cured or waived, (ii) the date the applicable Payment Blockage
Notice is retracted by written notice to the Trustee from the Person who
is a Representative of the holders of the relevant Designated Senior
Indebtedness and (iii) 179 days after the date on which the applicable
Payment Blockage Notice is received unless (A) any of the events described
in subparagraph (a) of the preceding paragraph has occurred and is
continuing or (B) a Default or Event of Default under clause (f) or (g) of
Section 5.01 has occurred,
if this Article XII otherwise permits the payment, distribution or acquisition
at the time of such payment or acquisition.
In the event that, notwithstanding the foregoing, the Company shall
make any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section 12.04, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case for application to the payment
of all Obligations with respect to Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
The provisions of this Section 12.04 shall not apply to any payment
with respect to which Section 12.02 would be applicable.
SECTION 12.05. PAYMENT PERMITTED IF NO DEFAULT.
Nothing contained in this Article XII or elsewhere in this Indenture
or in any of the Securities shall prevent (a) the Company, at any time except
under the circumstances referred to in Section 12.02 or under the conditions
described in Section 12.03 or 12.04, from making payments at any time of
principal of, premium, if any, or interest on or any Additional Amounts with
respect to the Securities, or (b) the application by the Trustee of any money
deposited with it hereunder to the payment of or on account of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to the
Securities if, at the time of such application by the Trustee, it did not have
knowledge within the meaning of Section 12.10 that such payment would have been
prohibited by the provisions of this Article XII.
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SECTION 12.06. SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full of all Obligations in respect of
Senior Indebtedness, the Holders of the Securities shall be subrogated to the
extent of the payments or distributions made to the holders of Senior
Indebtedness pursuant to the provisions of this Article XII (equally and ratably
with the holders of all indebtedness of the Company which by its express terms
is subordinated to other indebtedness of the Company to substantially the same
extent as the Securities are subordinated and is entitled to like rights of
subrogation) to the rights of the holders of Senior Indebtedness to receive
payments and distributions applicable to the Senior Indebtedness until the
principal of, premium, if any, and interest on and any Additional Amounts with
respect to the Securities shall be paid in full. For purposes of such
subrogation, no payments or distributions to the holders of the Senior
Indebtedness to which the Holders of the Securities or the Trustee would be
entitled except for the provisions of this Article XII, and no payments over
pursuant to the provisions of this Article XII to the holders of Senior
Indebtedness by Holders of the Securities or the Trustee, shall, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Securities, be deemed to be a payment or distribution by the Company to
or on account of the Senior Indebtedness.
SECTION 12.07. PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.
The provisions of this Article XII are and are intended solely for
the purpose of defining the relative rights of the Holders of the Securities on
the one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall: (a) impair, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Securities, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Securities the principal of, premium, if any, and
interest on and any Additional Amounts with respect to the Securities as and
when the same shall become due and payable in accordance with their terms; (b)
affect the relative rights against the Company or the Holders of the Securities
and creditors of the Company other than the holders of Senior Indebtedness; or
(c) prevent the Trustee or the Holder of any Security from exercising all
remedies otherwise permitted by applicable law on default under this Indenture,
subject to the rights, if any, under this Article XII of the holders of Senior
Indebtedness to receive distributions otherwise payable or deliverable to the
Trustee or such Holder.
SECTION 12.08. TRUSTEE TO EFFECTUATE SUBORDINATION.
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article XII and
appoints the Trustee his attorney-in-fact for any and all such purposes.
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SECTION 12.09. NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future holder of any Senior Indebtedness
to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
Without in any way limiting the generality of the preceding
paragraph, the holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Trustee or the Holders of
the Securities and without impairing or releasing the subordination provided in
this Article XII or the obligations hereunder of the Trustee or the Holders of
the Securities to the holders of Senior Indebtedness, do any one or more of the
following: (a) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (c) release any Person liable in any
manner for the collection of Senior Indebtedness; and (d) exercise or refrain
from exercising any rights against the Company and any other Person.
SECTION 12.10. NOTICE TO TRUSTEE.
The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Securities. Notwithstanding the provisions of
this Article XII or any other provision of this Indenture, the Trustee shall not
be charged with knowledge of the existence of any facts that would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any Representative therefor;
and, prior to the receipt of any such written notice, the Trustee, subject to
the provisions of Section 6.01, shall be entitled in all respects to assume that
no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have
received the notice provided for in this Section 12.10 at least two Business
Days prior to the date on which by the terms hereof any money may become payable
for any purpose (including, without limitation, the payment of the principal of,
premium, if any, or interest on or any Additional Amounts with respect to any
Security), then, anything herein contained to the contrary notwithstanding, the
Trustee shall have full power and authority to receive such money and to apply
the same to the purpose for which such money was received and shall not be
affected by any notice to the contrary which may be received by it within two
Business Days prior to such date.
Subject to the provisions of Section 6.01, the Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself to be a holder of Senior Indebtedness (or a Representative
therefor) to establish that such notice has been given by a holder
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of Senior Indebtedness (or a Representative therefor). In the event that the
Trustee determines in good faith that further evidence is required with respect
to the right of any Person as a holder of Senior Indebtedness to participate in
any payment or distribution pursuant to this Article XII, the Trustee may
request such Person to furnish evidence to the reasonable satisfaction of the
Trustee as to the amount of Senior Indebtedness held by such Person, the extent
to which such Person is entitled to participate in such payment or distribution
and any other facts pertinent to the rights of such Person under this Article
XII, and if such evidence is not furnished, the Trustee may defer any payment to
such Person pending judicial determination as to the right of such Person to
receive such payment.
SECTION 12.11. RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING
AGENT.
On any payment or distribution in respect of the Securities or
Senior Indebtedness referred to in this Article XII, the Trustee, subject to the
provisions of Section 6.01, and, so long as the provisions of this Article XII
have been brought to the attention of the court, tribunal, trustee or other
Person making the payment or distribution, the Holders of the Securities shall
be entitled to rely on any order or decree entered by any court of competent
jurisdiction in which such insolvency, bankruptcy, receivership, liquidation,
reorganization, dissolution, winding up or similar case or proceeding is
pending, or a certificate of the trustee in bankruptcy, receiver, liquidating
trustee, custodian, assignee for the benefit of creditors, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders
of Securities, for the purpose of ascertaining the Persons entitled to
participate in such payment or distribution, the holders of the Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article XII.
SECTION 12.12. TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness and shall not be liable to any such holders if it
shall, absent gross negligence or wilful misconduct, mistakenly pay over or
distribute to Holders of Securities or to the Company or to any other Person
cash, property or securities to which holders of Senior Indebtedness shall be
entitled by virtue of this Article XII or otherwise. With respect to the holders
of Senior Indebtedness, the Trustee undertakes to perform or to observe only
such of its covenants and obligations as are specifically set forth in this
Article XII, and no implied covenants or obligations with respect to the holders
of Senior Indebtedness shall be read into this Article XII against the Trustee.
SECTION 12.13. RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS;
PRESERVATION OF TRUSTEE'S RIGHTS.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article XII with respect to any Senior Indebtedness
which may at any time be held by it, to the same
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extent as any other holder of Senior Indebtedness, and nothing in this Indenture
shall deprive the Trustee of any of its rights as such holder.
Nothing in this Article XII shall apply to claims of, or payments
to, the Trustee under or pursuant to Section 6.07.
SECTION 12.14. ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall
have been appointed by the Company and be then acting hereunder, the term
"Trustee" as used in this Article XII shall in such case (unless the context
otherwise requires) be construed as extending to and including such Paying Agent
within its meaning as fully for all intents and purposes as if such Paying Agent
were named in this Article XII in addition to or in place of the Trustee;
PROVIDED, HOWEVER, that Section 12.13 shall not apply to the Company or any
Affiliate of the Company if it or such Affiliate acts as Paying Agent.
SECTION 12.15. CERTAIN CONVERSIONS DEEMED PAYMENT.
For the purposes of this Article XII only, (a) the issuance and
delivery of junior securities on conversion of Securities in accordance with
Article XIII shall not be deemed to constitute a payment or distribution on
account of the principal of, premium, if any, or interest on or any Additional
Amounts with respect to Securities or on account of the purchase or other
acquisition of Securities, and (b) the payment, issuance or delivery of cash,
property or securities (other than junior securities) on conversion of a
Security shall be deemed to constitute payment on account of the principal of
such Security. For the purposes of this Section 12.15, the term "junior
securities" means (a) shares of any class of capital stock of the Company and
(b) securities of the Company which are subordinated in right of payment to all
Senior Indebtedness which may be outstanding at the time of issuance or delivery
of such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article XII.
Nothing contained in this Article XII or elsewhere in this Indenture or in the
Securities is intended to or shall impair, as among the Company, its creditors
other than holders of Senior Indebtedness and the Holders of the Securities, the
right, which is absolute and unconditional, of the Holder of any Security to
convert such Security in accordance with Article XIII.
SECTION 12.16. NO SUSPENSION OF REMEDIES.
Except as provided in Section 12.03, nothing contained in this
Article XII shall limit the right of the Trustee or the Holders of the
Securities of any series to take any action to accelerate the maturity of the
Securities of that series pursuant to the provisions described under Article V
and as set forth in this Indenture or to pursue any rights or remedies hereunder
or under applicable law, subject to the rights, if any, under this Article XII
of the holders, from time to time, of Senior Indebtedness to receive the cash,
property or securities receivable on the exercise of such rights or remedies.
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ARTICLE XIII
CONVERSION OF SECURITIES
SECTION 13.01. CONVERSION PRIVILEGE AND CONVERSION PRICE.
Subject to and on compliance with the provisions of this Article
XIII, at the option of the Holder thereof, any Security of any series or any
portion of the principal amount thereof which equals $1,000 or any integral
multiple thereof may be converted at any time on or following the Convertibility
Commencement Date for that Security at the principal amount thereof, or of such
portion thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock, at the conversion
price for that Security, determined as hereinafter provided, in effect at the
time of conversion. Such conversion right shall expire at the close of business
on the Stated Maturity of the final payment of principal of that Security. In
case a Security or portion thereof is called for redemption, such conversion
right in respect of the Security or portion so called shall expire at the close
of business on the second business day preceding the applicable Redemption Date,
unless the Company defaults in making the payment due on redemption.
The price at which shares of Common Stock shall be delivered on
conversion of any Security (herein called the "conversion price") shall be
initially the Initial Conversion Price per share of Common Stock which is fixed
for that Security by or pursuant to this Indenture. The conversion price shall
be adjusted in certain instances as provided in paragraphs (a), (b), (c), (d),
(e), (f) and (i) of Section 13.04.
SECTION 13.02. EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of any
Security of any series shall surrender that Security, duly endorsed or assigned
to the Company or in blank, at any office or agency of the Company maintained
pursuant to Section 10.02 for that series, accompanied by written notice to the
Company in the form provided in the Security (or such other notice as is
acceptable to the Company) at such office or agency that the Holder elects to
convert that Security or, if less than the entire principal amount thereof is to
be converted, the portion thereof to be converted. Securities surrendered for
conversion during the period from the opening of business on any Regular Record
Date for that Security next preceding any Interest Payment Date for that
Security to the close of business on that Interest Payment Date (except in the
case of Securities or portions thereof which have been called for redemption on
a Redemption Date, or which are repurchaseable on a Repurchase Date, occurring,
in either case, within such period) must be accompanied by payment in New York
Clearing House funds or other funds acceptable to the Company of an amount equal
to the interest payable on that Interest Payment Date on the principal amount of
Securities being surrendered for conversion. Except as provided in the
immediately preceding sentence and subject to the last paragraph of Section
3.07, no payment or adjustment shall be made on any conversion on account
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of any interest accrued on the Securities surrendered for conversion or on
account of any dividends on the Common Stock issued on conversion.
Securities shall be deemed to have been converted immediately prior
to the close of business on the day of their surrender for conversion in
accordance with the foregoing provisions, and at such time the rights of the
Holders of those Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable on conversion of those Securities
shall be treated for all purposes as having become the record holder or holders
of such Common Stock as and after such time. As promptly as practicable on or
after the conversion date, the Company shall issue and shall deliver at such
office or agency a certificate or certificates for the number of full shares of
Common Stock issuable on conversion, together with payment in lieu of any
fraction of a share, as provided in Section 13.03.
In the case of any Security of any series which is converted in part
only, on such conversion the Company shall execute and the Trustee shall
authenticate and deliver to the Holder thereof, at the expense of the Company, a
new Security or Securities of the same series and like tenor and of authorized
denominations in an aggregate principal amount equal to the unconverted portion
of the principal amount of such Security.
SECTION 13.03. FRACTIONS OF SHARES.
No fractional share of Common Stock shall be issued on conversion of
Securities of any series. If more than one Security of the same series shall be
surrendered for conversion at one time by the same Holder, the number of full
shares which shall be issuable on conversion thereof shall be computed on the
basis of the aggregate principal amount of the Securities (or specified portions
thereof) so surrendered. Instead of any fractional share of Common Stock which
would otherwise be issuable on conversion of any Security or Securities (or
specified portions thereof), the Company shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the Closing Price
(as hereinafter defined) at the close of business on the day of conversion (or,
if such day is not a Trading Day (as hereafter defined), on the Trading Day
immediately preceding such day).
SECTION 13.04. ADJUSTMENT OF CONVERSION PRICE.
(a) In case the Company shall pay or make a dividend or other
distribution on the Common Stock exclusively in Common Stock or shall pay or
make a dividend or other distribution on any other class of capital stock of the
Company which dividend or distribution includes Common Stock, each conversion
price in effect for the Securities of each series at the opening of business on
the day following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution shall be reduced by multiplying
that conversion price by a fraction of which the numerator shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective immediately after the opening
of business on the day following the date
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fixed for such determination. For the purpose of this paragraph (a), the number
of shares of Common Stock at any time outstanding shall not include shares held
in the treasury of the Company. The Company shall not pay any dividend or make
any distribution on shares of Common Stock held in the treasury of the Company.
(b) Subject to paragraph (g) of this Section 13.04, in case the
Company shall pay or make a dividend or other distribution on the Common Stock
consisting exclusively of, or shall otherwise issue to all holders of the Common
Stock, rights or warrants entitling the holders thereof to subscribe for or
purchase shares of Common Stock at a price per share less than the Current
Market Price (determined as provided in paragraph (h) of this Section 13.04) on
the date fixed for the determination of stockholders entitled to receive such
rights or warrants, each conversion price in effect for the Securities of each
series at the opening of business on the day following the date fixed for such
determination shall be reduced by multiplying that conversion price by a
fraction of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such determination
plus the number of shares of Common Stock which the aggregate of the offering
price of the total number of shares of Common Stock so offered for subscription
or purchase would purchase at such Current Market Price and the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination plus the number of shares of
Common Stock so offered for subscription or purchase, such reduction to become
effective immediately after the opening of business on the day following the
date fixed for such determination. For the purposes of this paragraph (b), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company shall not issue any
rights or warrants in respect of shares of Common Stock held in the treasury of
the Company.
(c) In case outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, each conversion price in effect
for the Securities of each series at the opening of business on the day
following the day on which such subdivision becomes effective shall be
proportionately reduced, and, conversely, in case outstanding shares of Common
Stock shall be combined into a smaller number of shares of Common Stock, each
conversion price in effect for the Securities of each series at the opening of
business on the day following the day on which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day on which subdivision or combination becomes effective.
(d) Subject to the last sentence of this paragraph (d) and to
paragraph (g) of this Section 13.04, in case the Company shall, by dividend or
otherwise, distribute to all holders of the Common Stock evidences of its
indebtedness, shares of any class of its capital stock, cash or other assets
(including securities, but excluding any rights or warrants referred to in
paragraph (b) of this Section 13.04, excluding any dividend or distribution paid
exclusively in cash and excluding any dividend or distribution referred to in
paragraph (a) of this Section 13.04), each conversion price for the Securities
of each series shall be reduced by multiplying that conversion price as it was
in effect immediately prior to the close of business on the date fixed for the
determination of stockholders
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entitled to such distribution by a fraction of which the numerator shall be the
Current Market Price (determined as provided in paragraph (h) of this Section
13.04) on such date less the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution) on such date of the portion of the evidences of indebtedness, shares
of capital stock, cash and other assets to be distributed applicable to one
share of Common Stock and the denominator shall be such Current Market Price,
such reduction to become effective immediately prior to the opening of business
on the day following such date. If the Board of Directors determines the fair
market value of any distribution for purposes of this paragraph (d) by reference
to the actual or when-issued trading market for any securities comprising part
or all of such distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market Price pursuant
to paragraph (h) of this Section 13.04, to the extent possible. For purposes of
this paragraph (d), any dividend or distribution that includes shares of Common
Stock, rights or warrants to subscribe for or purchase shares of Common Stock or
securities convertible into or exchangeable for shares of Common Stock shall be
deemed to be (i) a dividend or distribution of the evidences of indebtedness,
cash, assets or shares of capital stock other than such shares of Common Stock,
such rights or warrants or such convertible or exchangeable securities (making
any conversion price reduction required by this paragraph (d)) immediately
followed by (ii) in the case of such shares of Common Stock or such rights or
warrants, a dividend or distribution thereof (making any further conversion
price reduction required by paragraphs (a) and (b) of this Section 13.04, except
any shares of Common Stock included in such dividend or distribution shall not
be deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of paragraph (a) of this Section 13.04), or
(iii) in the case of such convertible or exchangeable securities, a dividend or
distribution of the number of shares of Common Stock as would then be issuable
on the conversion or exchange thereof, whether or not the conversion or exchange
of such securities is subject to any conditions (making any further conversion
price reduction required by paragraph (a) of this Section 13.04, except the
shares deemed to constitute such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such determination"
within the meaning of paragraph (a) of this Section 13.04).
(e) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of the Common Stock cash (excluding any cash that is
distributed as part of a distribution referred to in paragraph (d) of this
Section 13.04 or in connection with a transaction to which Section 13.11
applies) in an aggregate amount that, together with (i) the aggregate amount of
any other distributions to all holders of the Common Stock made exclusively in
cash within the 12 months preceding the date fixed for the determination of
stockholders entitled to such distribution and in respect of which no conversion
price adjustment pursuant to this paragraph (e) has been made previously and
(ii) the aggregate of any cash plus the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive and described in a
Board Resolution) as of such date of determination of any other consideration
payable in respect of any tender offer by the Company or a Subsidiary for all or
any portion of the Common Stock consummated within the 12 months preceding such
date of determination and in respect of which no conversion price adjustment
pursuant to paragraph (f) of this Section 13.04 has been made previously,
exceeds the greater of (A) 12.5% of the product of the Current Market Price
(determined as provided in paragraph (h) of this
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Section) on such date of determination times the number of shares of Common
Stock outstanding on such date or (B) the Company's consolidated retained
earnings on the date fixed for determining the stockholders entitled to such
distribution (determined without giving effect to such distribution), each
conversion price for the Securities of each series shall be reduced by
multiplying that conversion price as it was in effect immediately prior to the
close of business on such date of determination by a fraction of which the
numerator shall be the Current Market Price (determined as provided in paragraph
(h) of this Section 13.04) on such date less the amount of such cash previously
distributed or to be distributed at such time applicable to one share of Common
Stock and the denominator shall be such Current Market Price, such reduction to
become effective immediately prior to the opening of business on the day
following such date.
(f) In case a tender offer made by the Company or any Subsidiary for
all or any portion of the Common Stock shall be consummated and such tender
offer shall involve an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) as of the last time (the "Expiration Time")
that tenders may be made pursuant to such tender offer (as it shall have been
amended) that, together with (i) the aggregate of the cash plus the fair market
value (as determined by the Board of Directors, whose determination shall be
conclusive and described in a Board Resolution) as of the Expiration Time of the
other consideration paid in respect of any other tender offer by the Company or
a Subsidiary for all or any portion of the Common Stock consummated within the
12 months preceding the Expiration Time and in respect of which no conversion
price adjustment pursuant to this paragraph (f) has been made previously and
(ii) the aggregate amount of any distributions to all holders of the Common
Stock made exclusively in cash within the 12 months preceding the Expiration
Time and in respect of which no conversion price adjustment pursuant to
paragraph (e) of this Section 13.04 has been made previously, exceeds the
greater of (A) 12.5% of the product of the Current Market Price (determined as
provided in paragraph (h) of this Section 13.04) immediately prior to the
Expiration Time times the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time or (B) the Company's
consolidated retained earnings as of the Expiration Time (determined without
giving effect to the purchase of tendered shares), each conversion price for the
Securities of each series shall be reduced by multiplying that conversion price
as it was in effect immediately prior to the Expiration Time by a fraction of
which the numerator shall be (1) the product of the Current Market Price
(determined as provided in paragraph (h) of this Section 13.04) immediately
prior to the Expiration Time times the number of shares of Common Stock
outstanding (including any tendered shares at the Expiration Time) minus (2) the
fair market value (determined as aforesaid) of the aggregate consideration
payable to stockholders on consummation of such tender offer and the denominator
shall be the product of (1) such Current Market Price times (2) such number of
outstanding shares at the Expiration Time minus the number of shares accepted
for payment in such tender offer (the "Purchased Shares"), such reduction to
become effective immediately prior to the opening of business on the day
following the Expiration Time; PROVIDED, that if the number of Purchased Shares
or the aggregate consideration payable therefor has not been finally determined
by such opening of business, the adjustment required by this paragraph (f)
shall, pending such final determination, be made based on the preliminarily
announced results of such tender offer, and, after such final determination
shall
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have been made, the adjustment required by this paragraph (f) shall be made
based on the number of Purchased Shares and the aggregate consideration payable
therefor as so finally determined.
(g) The reclassification of Common Stock into securities that
include securities other than Common Stock (other than any reclassification on a
consolidation or merger to which Section 13.11 applies) shall be deemed to
involve (i) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall
be deemed to be "the date fixed for the determination of stockholders entitled
to such distribution" within the meaning of paragraph (d) of this Section
13.04), and (ii) a subdivision or combination, as the case may be, of the number
of shares of Common Stock outstanding immediately prior to such reclassification
into the number of shares of Common Stock outstanding immediately thereafter
(and the effective date of such reclassification shall be deemed to be "the day
on which such subdivision becomes effective" or "the day on which such
combination becomes effective", as the case may be, and "the day on which such
subdivision or combination becomes effective" within the meaning of paragraph
(c) of this Section 13.04).
Rights or warrants issued by the Company to all holders of the
Common Stock entitling the holders thereof to subscribe for or purchase shares
of Common Stock (either initially or under certain circumstances), which rights
or warrants (i) are deemed to be transferred with such shares of Common Stock,
(ii) are not exercisable and (iii) are also issued in respect of future
issuances of Common Stock, in each case in clauses (i) through (iii) until the
occurrence of a specified event or events ("Trigger Event"), shall for purposes
of this Section 13.04 not be deemed issued until the occurrence of the earliest
Trigger Event. If any such rights or warrants, including any such existing
rights or warrants distributed prior to the date of this Indenture, are subject
to subsequent events, on the occurrence of each of which such rights or warrants
shall become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event shall be
deemed to be such date of issuance and record date with respect to new rights or
warrants (and a termination or expiration of the existing rights or warrants
without exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of such rights or warrants, or any Trigger
Event with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to any conversion price under this
Section 13.04 was made, (i) in the case of any such rights or warrants that
shall all have been redeemed or repurchased without exercise by any holders
thereof, that conversion price shall be readjusted on such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (ii) in the case of such rights or warrants that shall have
expired or been terminated without exercise by any holders thereof, that
conversion price shall be readjusted as if such rights and warrants had not been
issued.
Notwithstanding any other provision of this Section 13.04 to the
contrary, rights, warrants, evidences of indebtedness, other securities, cash or
other assets (including, without
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limitation, any rights distributed pursuant to any stockholder rights plan)
shall be deemed not to have been distributed for purposes of this Section 13.04
if the Company makes proper provision so that each holder of Securities of each
series who converts a Security (or any portion thereof) of that series after the
date fixed for determination of stockholders entitled to receive such
distribution shall be entitled to receive on such conversion, in addition to the
shares of Common Stock issuable on such conversion, the amount and kind of such
distributions which that holder would have been entitled to receive if such
holder had, immediately prior to such determination date, converted that
Security into Common Stock.
(h) For the purpose of any computation under this paragraph (h) and
paragraphs (b), (d) and (e) of this Section 13.04, the current market price per
share of Common Stock (the "Current Market Price") on any date shall be deemed
to be the average of the daily Closing Prices for the five consecutive Trading
Days selected by the Company commencing not more than 20 Trading Days before,
and ending not later than, the date in question; PROVIDED, HOWEVER, that (i) if
the "ex" date for any event (other than the issuance or distribution requiring
such computation) that requires an adjustment to any conversion price pursuant
to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04 occurs on or
after the 20th Trading Day prior to the date in question and prior to the "ex"
date for the issuance or distribution requiring such computation, the Closing
Price for each Trading Day prior to the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the same fraction by which that
conversion price is so required to be adjusted as a result of such other event,
(ii) if the "ex" date for any event (other than the issuance or distribution
requiring such computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this Section 13.04
occurs on or after the "ex" date for the issuance or distribution requiring such
computation and on or prior to the date in question, the Closing Price for each
Trading Day on and after the "ex" date for such other event shall be adjusted by
multiplying such Closing Price by the reciprocal of the fraction by which that
conversion price is so required to be adjusted as a result of such other event,
and (iii) if the "ex" date for the issuance or distribution requiring such
computation is on or prior to the date in question, after taking into account
any adjustment required pursuant to clause (ii) of this proviso, the Closing
Price for each Trading Day on or after such "ex" date shall be adjusted by
adding thereto the amount of any cash and the fair market value on the date in
question (as determined by the Board of Directors in a manner consistent with
any determination of such value for purposes of paragraph (d) or (e) of this
Section 13.04, whose determination shall be conclusive and described in a Board
Resolution) of the evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock as of the close of
business on the day before such "ex" date. For the purpose of any computation
under paragraph (f) of this Section 13.04, the Current Market Price on any date
shall be deemed to be the average of the daily Closing Prices for the five
consecutive Trading Days selected by the Company commencing on or after the
latest (the "Commencement Date") of (i) the date 20 Trading Days before the date
in question, (ii) the date of commencement of the tender offer requiring such
computation and (iii) the date of the last amendment, if any, of such tender
offer involving a change in the maximum number of shares for which tenders are
sought or a change in the consideration offered, and ending not later than the
Expiration Time of such tender offer; PROVIDED, HOWEVER, that if the "ex" date
for any event (other than the tender offer requiring such computation) that
requires an adjustment to any
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conversion price pursuant to paragraph (a), (b), (c), (d), (e) or (f) of this
Section 13.04 occurs on or after the Commencement Date and prior to the
Expiration Time for the tender offer requiring such computation, the Closing
Price for each Trading Day prior to the "ex" date for such other event shall be
adjusted by multiplying such Closing Price by the same fraction by which the
conversion price is so required to be adjusted as a result of such other event.
The closing price for any Trading Day (the "Closing Price") shall be the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the average of the reported closing bid and asked prices regular
way, in either case on the New York Stock Exchange or, if the Common Stock is
not listed or admitted to trading on such exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange, on
the Nasdaq National Market or, if the Common Stock is not listed or admitted to
trading on any national securities exchange or quoted on the Nasdaq National
Market, the average of the closing bid and asked prices in the over-the-counter
market as furnished by any New York Stock Exchange member firm selected from
time to time by the Company for that purpose. For purposes of this paragraph,
the term "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday, other than any day on which securities are generally not traded on the
applicable securities exchange or in the applicable securities market and the
term "`ex' date," (i) when used with respect to any issuance or distribution,
means the first date on which the Common Stock trades regular way on the
relevant exchange or in the relevant market from which the Closing Prices were
obtained without the right to receive such issuance or distribution, (ii) when
used with respect to any subdivision or combination of shares of Common Stock,
means the first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
combination becomes effective and (iii) when used with respect to any tender
offer means the first date on which the Common Stock trades regular way on such
exchange or in such market after the last time that tenders may be made pursuant
to such tender offer (as it shall have been amended).
(i) The Company may make such reductions in any conversion price for
any Security, in addition to those required by paragraphs (a), (b), (c), (d),
(e) and (f) of this Section 13.04, as it considers to be advisable (as evidenced
by a Board Resolution) in order that any event treated for federal income tax
purposes as a dividend of stock or stock rights shall not be taxable to the
recipients or, if that is not possible, to diminish any income taxes that are
otherwise payable because of such event.
(j) No adjustment in any conversion price for any Security shall be
required unless such adjustment (plus any other adjustments not previously made
by reason of this paragraph (j)) would require an increase or decrease of at
least 1% in that conversion price; PROVIDED, HOWEVER, that any adjustments which
by reason of this paragraph (j) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment of that conversion
price.
(k) Notwithstanding any other provision of this Section 13.04, no
adjustment to any conversion price for any Security shall reduce that conversion
price below the then par value per share of the Common Stock, and any such
purported adjustment shall instead reduce that conversion
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price to that par value. The Company hereby covenants not to take any action to
increase the par value per share of the Common Stock.
SECTION 13.05. NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever any conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with Section 13.04 and shall prepare an Officers' Certificate
signed by the Treasurer of the Company setting forth the adjusted
conversion price and showing in reasonable detail the facts on which such
adjustment is based, and such certificate shall forthwith be filed (with a
copy to the Trustee) at each office or agency maintained pursuant to
Section 10.02 for the purpose of conversion of the Securities to which the
adjusted conversion price applies; and
(b) a notice stating that the conversion price has been adjusted and
setting forth the adjusted conversion price shall forthwith be prepared,
and as soon as practicable after it is prepared, such notice shall be
mailed by the Company to all Holders of Securities to which the adjusted
conversion price applies at their last addresses as they shall appear in
the Security Register.
SECTION 13.06. NOTICE OF CERTAIN CORPORATE ACTION.
In case:
(a) the Company shall declare a dividend (or any other distribution)
on the Common Stock payable (i) otherwise than exclusively in cash or (ii)
exclusively in cash in an amount that would require any conversion price
adjustment pursuant to paragraph (e) of Section 13.04; or
(b) the Company shall authorize the granting to the holders of the
Common Stock of rights or warrants to subscribe for or purchase any shares
of capital stock of any class or of any other rights (excluding shares of
capital stock or options for capital stock issued pursuant to a benefit
plan for employees, officers or directors of the Company); or
(c) of any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock), or
of any consolidation, merger or share exchange to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
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(e) the Company or any Subsidiary shall commence a tender offer for
all or a portion of the outstanding shares of Common Stock (or shall amend
any such tender offer to change the maximum number of shares being sought
or the amount or type of consideration being offered therefor);
then the Company shall cause to be filed at each office or agency maintained
pursuant to Section 10.02, and shall cause to be mailed to all Holders at their
last addresses as they shall appear in the Security Register, at least 21 days
(or 11 days in any case specified in clause (a), (b) or (e) above) prior to the
applicable record, effective or expiration date hereinafter specified, a notice
stating (i) the date on which a record is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record who will
be entitled to such dividend, distribution, rights or warrants are to be
determined, (ii) the date on which such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable on such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up, or (iii) the date on which such tender
offer commenced, the date on which such tender offer is scheduled to expire
unless extended, the consideration offered and the other material terms thereof
(or the material terms of any amendment thereto). Neither the failure to give
any such notice nor any defect therein shall affect the legality or validity of
any action described in clauses (a) through (e) of this Section 13.06.
SECTION 13.07. COMPANY TO RESERVE COMMON STOCK.
The Company shall at all times reserve and keep available, free from
preemptive and other rights, out of the authorized but unissued Common Stock or
out of the Common Stock held in the treasury of the Company, for the purpose of
effecting the conversion of Securities, the full number of shares of Common
Stock then issuable on the conversion of all outstanding Securities. Shares of
Common Stock issuable on conversion of outstanding Securities shall be issued
out of the Common Stock held in the treasury of the Company to the extent
available.
SECTION 13.08. TAXES ON CONVERSIONS.
The Company will pay any and all taxes that may be payable in
respect of the issue or delivery of shares of Common Stock on conversion of
Securities pursuant hereto. The Company shall not, however, be required to pay
any tax that may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
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SECTION 13.09. COVENANT AS TO COMMON STOCK.
The Company covenants that all shares of Common Stock which may be
issued on conversion of Securities will on issue be fully paid and nonassessable
and, except as provided in Section 13.08, the Company will pay all taxes, liens
and charges with respect to the issue thereof.
SECTION 13.10. CANCELLATION OF CONVERTED SECURITIES.
All Securities delivered for conversion shall be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 3.09.
SECTION 13.11. PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or any sale or
transfer of all or substantially all the assets of the Company (other than to a
wholly-owned Subsidiary), the Person formed by such consolidation or resulting
from such merger or which acquires such assets, as the case may be, shall
execute and deliver to the Trustee a supplemental indenture providing that the
Holder of each Security then Outstanding shall have the right thereafter, during
the period such Security shall be convertible as specified in or pursuant to
this Indenture, to convert such Security only into the kind and amount of
securities, cash and other property, if any, receivable on such consolidation,
merger, sale or transfer by a holder of the number of shares of Common Stock
into which such Security might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common Stock
(i) is not a Person with which the Company consolidated or into which the
Company merged or which merged into the Company or to which such sale or
transfer was made, as the case may be (a "Constituent Person"), or an Affiliate
of a Constituent Person and (ii) failed to exercise his rights of election, if
any, as to the kind or amount of securities, cash and other property receivable
on such consolidation, merger, sale or transfer (provided that if the kind or
amount of securities, cash and other property receivable on such consolidation,
merger, sale or transfer is not the same for each share of Common Stock held
immediately prior to such consolidation, merger, sale or transfer by other than
a Constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("nonelecting share"), then for the
purpose of this Section 13.11 the kind and amount of securities, cash and other
property receivable on such consolidation, merger, sale or transfer by each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Such supplemental indenture
shall provide for adjustments which, for events subsequent to the effective date
of such supplemental indenture, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article XIII. The above
provisions of this Section 13.11 shall similarly apply to successive
consolidations, mergers, sales or transfers.
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SECTION 13.12. TRUSTEE'S DISCLAIMER.
The Trustee has no duty to determine when an adjustment under this
Article XIII should be made, how it should be made or what such adjustment
should be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying on, the Officers' Certificate with
respect thereto which the Company is obligated to file with the Trustee pursuant
to Section 13.05. The Trustee makes no representation as to the validity or
value of any securities or assets issued on conversion of Securities, and the
Trustee shall not be responsible for the Company's failure to comply with any
provisions of this Article XIII.
The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 13.11, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying on, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 1.02 in connection with that supplemental indenture.
ARTICLE XIV
RIGHT TO REQUIRE REPURCHASE
SECTION 14.01. RIGHT TO REQUIRE REPURCHASE.
In the event that there shall occur a Repurchase Event (as defined
in Section 14.06), then each Holder of each then Outstanding Security shall have
the right, at such Holder's option, to require the Company to purchase, and on
the exercise of such right, the Company shall, subject to the provisions of
Section 12.03, purchase, all or any part of such Holder's then Outstanding
Securities on the date (the "Repurchase Date") that is 30 days after the date
the Company gives notice of the Repurchase Event as contemplated in Section
14.02(a) at a price (the "Repurchase Price") equal to 100% of the principal
amount thereof, together with accrued and unpaid interest to the Repurchase
Date.
SECTION 14.02. NOTICE; METHOD OF EXERCISING REPURCHASE RIGHT.
(a) On or before the 15th day after the occurrence of a Repurchase
Event, the Company, or at the request of the Company received by the Trustee at
least 40 days prior to the Repurchase Date, the Trustee (in the name and at the
expense of the Company), shall give notice of the occurrence of the Repurchase
Event and of the repurchase right set forth herein arising as a result thereof
by first-class mail, postage prepaid, to the Trustee and to each Holder of the
Securities that were Outstanding when the Repurchase Event occurred at such
Holder's address appearing in the Security Register. The Company shall also
deliver a copy of such notice of a repurchase right to the Trustee.
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Each notice of a repurchase right shall state:
(i) the event constituting the Repurchase Event and the date
thereof,
(ii) the Repurchase Date,
(iii) the date by which the repurchase right must be exercised,
(iv) the Repurchase Price and
(v) the instructions a Holder must follow to exercise a repurchase
right.
No failure of the Company to give the foregoing notice shall limit
any Holder's right to exercise a repurchase right. The Trustee shall have no
affirmative obligation to determine if there shall have occurred a Repurchase
Event.
(b) To exercise a repurchase right, a Holder shall deliver to the
Company (or an agent designated by the Company for such purpose in the notice
referred to in (a) above) and to the Trustee on or before the close of business
on the Repurchase Date (i) written notice of the Holder's exercise of such
right, which notice shall set forth the name of the Holder, the principal amount
of the Security or Securities (or portion of a Security) to be repurchased and a
statement that an election to exercise the repurchased right is being made
thereby, and, together with the written notice to the Trustee, (ii) the Security
or Securities with respect to which the repurchase right is being exercised,
duly endorsed for transfer to the Company. Such written notice shall be
irrevocable.
In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall on the Repurchase Date pay or cause to
be paid in cash to the Holder thereof the Repurchase Price of the Security or
Securities as to which the repurchase right has been exercised. In the event
that a repurchase right is exercised with respect to less than the entire
principal amount of a surrendered Security of any series, the Company shall
execute and deliver to the Trustee and the Trustee shall authenticate for
issuance in the name of the Holder a new Security or Securities of that series
in the aggregate principal amount of the unrepurchased portion of such
surrendered security.
SECTION 14.03. DEPOSIT OF REPURCHASE PRICE.
On or prior to the Repurchase Date, the Company shall deposit with
the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 10.03) an
amount of money sufficient to pay the Repurchase Price of the Securities which
are to be repaid on the Repurchase Date.
- 79 -
<PAGE>
SECTION 14.04. SECURITIES NOT REPURCHASED ON REPURCHASE DATE.
If the Repurchase Price of any Security surrendered for repurchase
shall not be paid on the Repurchase Date therefor, the principal shall, until
paid, bear interest to the extent permitted by applicable law from that
Repurchase Date at the rate per annum borne by that Security.
SECTION 14.05. SECURITIES REPURCHASED IN PART.
Any Security of any series which is to be repurchased only in part
shall be surrendered at any office or agency of the Company designated for that
purpose pursuant to Section 10.02 (with, if the Company or the Trustee so
requires, due endorsement by, or written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the Holder thereof
or his attorney duly authorized in writing), and the Company shall execute, and
the Trustee shall authenticate and deliver to the Holder of that Security
without service charge, a new Security or Securities of that series and of like
tenor and any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unrepurchased
portion of the principal of the Security so surrendered.
SECTION 14.06. CERTAIN DEFINITIONS.
For purposes of this Article:
(a) With respect to any Security, a "Repurchase Event" shall have
occurred on the occurrence of a Change in Control or a Termination of
Trading after the date that Security (or its earliest Predecessor
Security) is issued and on or prior to the Stated Maturity of the final
payment of principal of that Security.
(b) A "Change in Control" shall occur when:
(i) all or substantially all the assets of the Company or of the
Company and its subsidiaries, taken as a whole, are sold in one
transaction or any series of related transactions as an entirety to any
Person or related group of Persons;
(ii) there shall be consummated any consolidation or merger of the
Company (A) in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly owned
subsidiary of the Company in which all shares of Common Stock outstanding
immediately prior to the effectiveness thereof are changed into or
exchanged for the same consideration) or (B) pursuant to which the Common
Stock would be converted into cash, securities or other property, in each
case, other than a consolidation or merger of the Company in which the
holders of the Common Stock immediately prior to the consolidation or
merger have, directly or indirectly, at least a majority of the total
voting power of all classes of capital stock entitled to vote generally in
the election of directors of the continuing or surviving corporation
immediately after such consolidation or merger in
- 80 -
<PAGE>
substantially the same proportion as their ownership of Common Stock
immediately before such transaction;
(iii) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act (a
"Group"), together with any Affiliates thereof, shall beneficially own (as
defined in Rule 13d-3 under the Exchange Act) at least 50% of the total
voting power of all classes of capital stock of the Company entitled to
vote generally in the election of directors of the Company;
(iv) at any time during any consecutive two-year period, individuals
who at the beginning of such period constituted the Board of Directors of
the Company (together with any new directors whose election by such Board
of Directors or whose nomination for election by the stockholders of the
Company was approved by a vote of 66 % of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for
any reason to constitute a majority of the Board of Directors of the
Company then in office; or
(v) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
(c) A "Termination of Trading" shall occur if the Common Stock (or
other common stock into which the Securities are then convertible) is neither
listed for trading on a U.S. national securities exchange nor approved for
trading on an established automated over-the-counter trading market in the
United States.
ARTICLE XV
MEETINGS OF HOLDERS OF SECURITIES
SECTION 15.01. PURPOSES FOR WHICH MEETINGS MAY BE CALLED.
A meeting of Holders of Securities of any or all series may be
called at any time and from time to time pursuant to this Article to make, give
or take any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be made, given or taken by Holders
of Securities of such series.
SECTION 15.02. CALL, NOTICE AND PLACE OF MEETINGS.
(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 15.01, to be held
at such time and at such place in Houston, Texas, or in any other location, as
the Trustee shall determine. Notice of every meeting of Holders of Securities of
any series, setting forth the time and the place of such meeting and in general
- 81 -
<PAGE>
terms the action proposed to be taken at such meeting, shall be given, in the
manner provided in Section 1.06, not less than 20 nor more than 180 days prior
to the date fixed for the meeting.
(b) In case at any time the Company, pursuant to a Board Resolution,
or the Holders of at least 10% in aggregate principal amount of the Outstanding
Securities of any series, shall have requested the Trustee for that series to
call a meeting of the Holders of Securities of that series for any purpose
specified in Section 15.01, by written request setting forth in reasonable
detail the action proposed to be taken at the meeting, and the Trustee shall not
have made the first publication of the notice of that meeting within 30 days
after receipt of such request or shall not thereafter proceed to cause the
meeting to be held as provided herein, then the Company or the Holders of
Securities of that series in the amount above specified, as the case may be, may
determine the time and the place in Houston, Texas, for such meeting and may
call such meeting for such purposes by giving notice thereof as provided in
Subsection (a) of this Section 15.02.
SECTION 15.03. PERSONS ENTITLED TO VOTE AT MEETINGS.
To be entitled to vote at any meeting of Holders of Securities of
any series, a Person shall be (a) a Holder of one or more Outstanding Securities
of that series or (b) a Person appointed by an instrument in writing as proxy
for a Holder or Holders of one or more Outstanding Securities of that series by
such Holder or Holders. The only Persons who shall be entitled to be present or
to speak at any meeting of Holders of Securities of any series shall be the
Persons entitled to vote at such meeting and their counsel, any representatives
of the Trustee and its counsel and any representatives of the Company and its
counsel.
SECTION 15.04. QUORUM; ACTION.
The Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of a series shall constitute a quorum for a
meeting of Holders of Securities of that series. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of Securities of that series, be
dissolved. In any other case, the meeting may be adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such meeting. In the absence of a quorum at any such adjourned
meeting, such adjourned meeting may be further adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such adjourned meeting. Subject to Section 15.05(d), notice of
the reconvening of any adjourned meeting shall be given as provided in Section
15.02(a), except that such notice need be given only once not less than five
days prior to the date on which the meeting is scheduled to be reconvened.
Notice of the reconvening of an adjourned meeting shall state expressly that
Persons entitled to vote a majority in principal amount of the Outstanding
Securities of that series shall constitute a quorum.
Except as limited by the proviso to Section 9.02, any resolution
presented to a meeting or adjourned meeting duly reconvened at which a quorum is
present as aforesaid may be adopted by the affirmative vote of the Holders of a
majority in aggregate principal amount of the Outstanding
- 82 -
<PAGE>
Securities of that series; PROVIDED, HOWEVER, that, except as limited by the
proviso to Section 9.02, any resolution with respect to any request, demand,
authorization, direction, notice, consent or waiver which this Indenture
expressly provides may be made, given or taken by the Holders of a specified
percentage that is less than a majority in aggregate principal amount of the
Outstanding Securities of a series may be adopted at a meeting or an adjourned
meeting duly reconvened and at which a quorum is present as aforesaid by the
affirmative vote of the Holders of such specified percentage in aggregate
principal amount of the Outstanding Securities of that series.
Except as limited by the proviso to Section 9.02, any resolution
passed or decision taken at any meeting of Holders of Securities of any series
duly held in accordance with this Section shall be binding on all the Holders of
Securities of that series, whether or not present or represented at the meeting.
SECTION 15.05. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF
MEETINGS.
(a) The holding of Securities shall be proved in the manner
specified in Section 1.04 and the appointment of any proxy shall be proved in
the manner specified in Section 1.04 or by having the signature of the Person
executing the proxy witnessed or guaranteed by any trust company, bank or banker
deemed by the Trustee to be satisfactory. Such regulations may provide that
written instruments appointing proxies, regular on their face, may be presumed
valid and genuine without the proof specified in Section 1.04 or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by Holders of Securities as provided in Section 15.02(b), in
which case the Company or the Holders of Securities of the series calling the
meeting, as the case may be, shall appoint a temporary chairman. A permanent
chairman and a permanent secretary of the meeting shall be elected by vote of
the Persons entitled to vote a majority in aggregate principal amount of the
Outstanding Securities of all series represented at the meeting.
(c) At any meeting each Holder of a Security of each series
represented at the meeting and each proxy shall be entitled to one vote for each
$1,000 principal amount of the Outstanding Securities of such series held or
represented by him; PROVIDED, HOWEVER, that no vote shall be cast or counted at
any meeting in respect of any Security challenged as not Outstanding and ruled
by the chairman of the meeting to be not Outstanding. The chairman of the
meeting shall have no right to vote, except as a Holder of a Security of a
series represented at the meeting or as a proxy.
(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 15.02 at which a quorum is present may be adjourned from
time to time by Persons entitled to vote a majority in aggregate principal
amount of the Outstanding Securities of all series represented at the meeting;
and the meeting may be held as so adjourned without further notice.
- 83 -
<PAGE>
SECTION 15.06. COUNTING VOTES AND RECORDING ACTION OF MEETINGS.
The vote on any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of that series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of that series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record, at least in
duplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to such record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that such notice was given as provided in Section 15.02 and, if
applicable, Section 15.04. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
------------------------
This Indenture may be executed in any number of counterparts, each
of which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of the day and year first above written.
AMERICAN RESIDENTIAL SERVICES, INC.
By ______________________________
C. Clifford Wright, Jr.
President and Chief Executive Officer
Attest:
_______________________
John D. Held
Secretary
- 84 -
<PAGE>
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By ______________________________
William J. Barber
Vice President
Attest:
_______________________
Name:
Title:
- 85 -
<PAGE>
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
On the ___ day of ___________ 1997, before me personally came C. Clifford
Wright, Jr.,to me known, who, being by me duly sworn, did depose and say that he
is President and Chief Executive Officer of American Residential Services, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation; and that he signed his name thereto
by like authority.
-------------------------------
Notary Public
STATE OF ___________ )
) ss.:
COUNTY OF _________ )
On the __ day of _______, 1997, before me personally came William J.
Barber, to me known, who, being by me duly sworn, did depose and say that he is
a Vice President of U.S. Trust Company of Texas, N.A., a national banking
association, described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such seal; that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
---------------------------------
Notary Public
- 86 -
EXHIBIT 5.1
July 22, 1997
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056-5604
Gentlemen:
As set forth in the Registration Statement on Form S-4 filed with
the Securities and Exchange Commission (the "Commission") on July 22, 1997 (the
"Registration Statement") by American Residential Services, Inc., a Delaware
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Act"), relating to 11,352,788 shares of common stock, par value $.001 per
share, of the Company, including the rights associated therewith ("Common
Stock"), $100,000,000 of Convertible Subordinated Debt Securities ("Convertible
Debt Securities") and the shares of Common Stock issuable on conversion thereof
(the "Conversion Shares") to be issued and sold by the Company from time to time
pursuant to Rule 415 under the Act, certain legal matters in connection with the
aforementioned securities are being passed on for the Company by me.
In my capacity as General Counsel of the Company, I have examined
the Registration Statement, the Restated Certificate of Incorporation and Bylaws
of the Company, each as amended to date, the form of Indenture to be entered
into by the Company and U.S. Trust Company of Texas, N.A., as trustee (the
"Trustee"), relating to the Convertible Debt Securities and filed as an exhibit
to the Registration Statement (the "Form of Indenture"), and the originals, or
copies certified or otherwise identified, of corporate records of the Company,
certificates of public officials and of representatives of the Company, statutes
and other instruments and documents as a basis for the opinions hereafter
expressed.
In connection with this opinion, I have assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective; and (ii) the Convertible Debt
Securities and Common Stock will be sold in compliance with applicable federal
and state securities laws and in the manner stated in the Registration Statement
and any appropriate prospectus supplement.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is a corporation duly organized and validly existing
in good standing under the laws of the State of Delaware.
2. With respect to the shares of Common Stock, when (i) the Board of
Directors of the Company or, to the extent permitted by Section 141(c) of
the General Corporation Law of the State of Delaware, a duly constituted
and acting committee thereof (such Board of Directors or committee being
hereinafter referred to as the "Board"), has taken all
<PAGE>
American Residential Services, Inc. -2- July 22, 1997
necessary corporate action to approve the issuance of and the terms of the
offering of the shares of Common Stock and related matters and (ii)
certificates representing the shares of Common Stock have been duly
executed, countersigned, registered and delivered in accordance with the
applicable agreement and plan of reorganization or definitive purchase or
similar agreement approved by the Board on payment of the consideration
therefor (not less than the par value of the Common Stock) provided for
therein, the shares of Common Stock will be duly authorized, validly
issued, fully paid and nonassessable.
3. With respect to the Convertible Debt Securities of any series,
when (i) the Board has taken all necessary corporate action to approve the
execution and delivery of an indenture in substantially the form of the
Form of Indenture (an "Indenture") and the issuance of and the terms of
the offering of the Convertible Debt Securities of that series and related
matters, (ii) an Indenture has been duly executed and delivered by the
Company and the Trustee or a successor Trustee, (iii) the Trustee or a
successor trustee has been duly qualified under the Trust Indenture Act of
1939, as amended, and (iv) forms of securities complying with the
applicable terms of the Indenture and representing the Convertible Debt
Securities of that series have been duly executed and delivered by the
Company and authenticated by the Trustee or its duly appointed agent in
the form approved by the Board and in accordance with the Indenture and
the applicable agreement and plan of reorganization or definitive purchase
or similar agreement on payment of the consideration therefor provided for
therein, the Convertible Debt Securities of that series will be duly
authorized, validly issued, and constitute valid and binding obligations
of the Company entitled to the benefits of the Indenture and enforceable
against the Company in accordance with their terms, except as such
enforcement is subject to (a) any applicable bankruptcy, insolvency,
reorganization, moratorium or other laws relating to or affecting
creditors' rights generally, (b) general principles of equity (regardless
of whether that enforceability is considered in a proceeding in equity or
at law) and (c) any implied covenants of good faith and fair dealing.
4. The Conversion Shares have been duly authorized and reserved for
issuance on conversion of the Convertible Debt Securities of any series
and when (i) the Convertible Debt Securities of that series have been
issued in compliance with clauses (i) through (iv) of the preceding
paragraph and (ii) certificates representing the Conversion Shares have
been duly executed, countersigned, registered and delivered in accordance
with the terms of the Convertible Debt Securities of that series and the
Indenture on conversion of the Convertible Debt Securities of that series,
the Conversion Shares will be duly authorized, validly issued, fully paid
and non-assessable.
The opinion set forth above is limited in all respects to matters of
the laws of the State of Texas, the General Corporation Law of the State of
Delaware and the federal laws of the United States of America, to the extent
applicable. For the purpose of the opinion given in paragraph 4.1 have assumed
that the laws of the state of New York(which governs the indenture) are
identical to the laws of the state of Delaware.
<PAGE>
American Residential Services, Inc. -3- July 22, 1997
I hereby consent to the filing of this opinion of counsel as Exhibit
5 to the Registration Statement. I also consent to the reference to my name in
the prospectus forming a part of the Registration Statement.
Very truly yours,
John D. Held
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF JULY 18, 1997)
<TABLE>
<CAPTION>
State of
Subsidiary Name Incorporation
- --------------- -------------
<S> <C>
Air Control Heating and Air Conditioning, Inc. California
American Mechanical Services Company, LLC Delaware
American Mechanical Services of Arizona, Inc. (d/b/a Arizona Air Mechanix; Arizona
PRESCO; Phoenix Refrigeration and Energy Services Corp.)
American Mechanical Services of California, Inc. (d/b/a Charter Mechanical Systems) California
American Mechanical Services of Colorado, Inc. (d/b/a Continental Mechanical Systems; Trautman Colorado
& Shreve Service, Inc.; Colorado Chiller Maintenance, Inc.)
American Mechanical Services of Houston, Inc. Delaware
American Mechanical Services of Indiana, Inc. Indiana
American Mechanical Services of Michigan, Inc. Michigan
American Mechanical Services of Texas, Inc. (d/b/a Texas Mechanical Systems) Delaware
AMS American Mechanical Services of Maryland, Inc. (d/b/a Murray Service Company; Maryland
EMD Mechanical Specialists)
American Mechanical Services of Sacramento, Inc. (d/b/a Engineered Air Systems) California
American Residential Services of Colorado, Inc. (d/b/a Snake 'N' Rooter) Colorado
American Residential Services of Florida, Inc. (d/b/a Florida Heating & Air Conditioning, Inc.; Florida
De Moss Air Conditioning Services, Inc.;
Alvarez Taylor Plumbing & Air Conditioning;
Jim's Air Conditioning; Busby Heating and
Cooling; Climatic Corporation of Vero Beach;
Sasso Air Conditioning; Ted's Plumbing;
Bradley Air Conditioning; Bass Plumbing;
Larry Teague & Son's Plumbing)
Larry Teague & Sons Plumbing, Inc. Florida
Sasso Air Conditioning, Inc. Delaware
Ted's Plumbing, Inc. Florida
American Residential Services of Illinois, Inc. (d/b/a Ross Heating & Cooling Inc.; Kranz Illinois
Mechanical Corporation; Kranz Heating & Cooling, Inc.; Anderson
Heating & Cooling Company)
American Residential Services of Indiana, Inc. (d/b/a Dial One Meridian & Hoosier, Inc.; Indiana
Barclay-Holland)
Sagamore Heating & Cooling, Inc. Indiana
American Residential Services of Michigan, Inc. (d/b/a Energy Concepts, Inc.) Michigan
American Residential Services of Nebraska (d/b/a Aksarben Heating & Air Conditioning) Nebraska
American Residential Services of Nevada, Inc. (d/b/a Cool Valley Air; Racee Air Nevada
Conditioning & Heating Company; Economy Air Conditioning;
Lang; Southtown; Air West Air Conditioning-Heating)
American Residential Services of North Carolina, Inc. (d/b/a Metro Heating & Air Conditioning; North Carolina
Burrage Enterprises; Wood & Sons Heating & Air Conditioning)
American Residential Services of Pennsylvania, Inc. (d/b/a Automatic Controls Service) Pennsylvania
</TABLE>
<PAGE>
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF JULY 18, 1997)
<TABLE>
<CAPTION>
State of
Subsidiary Name Incorporation
- --------------- -------------
<S> <C>
American Residential Services of South Carolina, Inc. (d/b/a Atlas Services, Inc.; Dean Heating & Air South Carolina
Conditioning)
Doc Plumbing, Inc. South Carolina
Golden Triangle Mechanical, Inc. South Carolina
Kirby Heating & Air, Inc. South Carolina
R. F. Masters, Inc. South Carolina
Rooter Express Service, Inc. South Carolina
American Residential Services of Virginia, Inc. (d/b/a Keenan Heating & Cooling) Virginia
ARS American Residential Services of California, Inc. (d/b/a Southcoast Heating and Air California
Conditioning, Inc.; Torrey Pines Plumbing; Arrow Air Conditioning
Company; Condor Service Company; Anderson Air Conditioning)
A. K. Landan, Inc. (d/b/a Allied Plumbing-Heating-Air Conditioning) California
ARS American Residential Services of Oklahoma, Inc. (d/b/a Advanced AirCo & Heating, Inc.) Oklahoma
ARS American Residential Services of Texas, Inc. Delaware
McCannics, Inc. Delaware
Service Enterprise Holdings, LLC Texas
Adcot, Inc. (d/b/a A-ABC Appliances) Texas
Service Enterprises - Houston, Inc. (d/b/a Crown Services) Delaware
Trademark Enterprises, Inc. Delaware
ARS Energy Services Company Delaware
ARS Residential Holding Company Delaware
ARS Residential Management Company Delaware
AT Acquisition Inc. Florida
Cape Fear Heating & Air Conditioning of Wilmington, Inc. North Carolina
General Heating & Air Conditioning Company, Inc. Delaware
Godby Acquisition Inc. Indiana
Godby Brothers, Inc. Delaware
Godby Brothers LLC Delaware
Hession Plumbing Company, Inc. Indiana
Illinois Heating & Air Conditioning, Inc. Illinois
Keenan Mechanical Services, Inc. Virginia
Korte Electric, Inc. Delaware
Maio Marketing Systems, Inc. California
Maio Plumbing, Heating & Air, Inc. California
Pro-Formance, Inc. (d/b/a Pro-Heating) California
USA Heating & Air Conditioning, Inc. Delaware
West Houston Services, Inc. Delaware
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
July 18, 1997
EXHIBIT 25.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)
---------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification no.)
2001 Ross Avenue, Suite 2700 75201-2936
Dallas, Texas (Zip code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201-2936
(214) 754-1200
(Name, address and telephone number of agent for service)
---------------
American Residential Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 76-0484976
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056
(Address of principal executive offices) (Zip code)
---------------
Convertible Subordinated Securities
(Title of the indenture securities)
================================================================================
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities of
the Trustee:
As of July17, 1997
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
American Residential Services, Inc. 7 1/4% Convertible Subordinated Notes
Due 2004 There exists no conflict between the Indentures.
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Not Applicable
<PAGE>
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Not Applicable
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
Not Applicable
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Not Applicable
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Not Applicable
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Not Applicable
11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING
50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Not Applicable
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Not Applicable
13. DEFAULTS BY THE OBLIGOR.
Not Applicable
14. AFFILIATIONS WITH THE UNDERWRITERS.
Not Applicable
15. FOREIGN TRUSTEE.
Not Applicable
16. LIST OF EXHIBITS.
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
Texas, N.A.; incorporated herein by reference to Exhibit T-1.1 filed
with Form T-1 Statement, Registration No. 22-21897.
<PAGE>
16. (con't.)
T-1.2 - A copy of the certificate of authority of U.S. Trust Company of
Texas, N.A. to commence business; incorporated herein by reference
to Exhibit T-1.2 filed with Form T-1 Statement, Registration No.
22-21897.
T-1.3 - A copy of the authorization of U.S. Trust Company of Texas, N.A.
to exercise corporate trust powers; incorporated herein by reference
to Exhibit T-1.3 filed with Form T-1 Statement, Registration No.
22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as
amended to date; incorporated herein by reference to Exhibit T-1.4
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority.
NOTE
As of July 17, 1997 the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of July 17, 1997 U.S. T.L.P.O.
Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S.
Trust Corporation. U.S. Trust Corporation had outstanding 19,340,102 shares of
$1 par value Common Stock as of July 17, 1997.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of
all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10 and
11, the answers to said Items are based upon incomplete information. Items 2, 5,
6, 7, 9, 10 and 11 may, however, be considered correct unless amended by an
amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
---------------
<PAGE>
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized and
existing under the laws of the United States of America, has duly caused this
statement of eligibility and qualification to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Dallas, and State of
Texas on the 17th day of July, 1997.
U.S. Trust Company of Texas, N.A.,
Trustee
By: /s/BILL BARBER
Bill Barber
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of American Residential
Services, Inc. Convertible Subordinated Securities, we hereby consent that
reports of examination by Federal, State, Territorial or District authorities
may be furnished by such authorities to the Securities and Exchange Commission
upon request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/BILL BARBER
Bill Barber
Vice President
<PAGE>
EXHIBIT T-1.7
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
Federal Financial Institutions OMB Number: 1557-0081
Examination Council Expires March 31,1999
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Please Refer to Page i,
(1)
Table of Contents, for
the required disclosure
(LOGO) of estimated burden
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CONSOLIDATED REPORTS OF CONDITION AND
INCOME FOR A BANK WITH DOMESTIC OFFICES
ONLY AND TOTAL ASSETS OF LESS THAN $100
MILLION - - FFIEC 034 (970331)
--------
(RCRI 9999)
REPORT AT THE CLOSE OF BUSINESS March 31, 1997
This report form is to be filed by banks with domestic offices only.
This report is required by law: 12 U.S.C. Section Banks with branches and consolidated subsidiaries in U.S. territories
324 (State member banks); 12 U.S. c. Section 1817 and possessions, Edge or Agreement subsidiaries, foreign branches,
(State nonmember banks); and 12 U.S. C. Section consolidated foreign subsidiaries, or International Banking Facilities
161 (National banks). must file FFIEC 031.
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NOTE: The Reports of Condition and Income must be The reports of condition and income are to be prepared in
signed by an authorized officer and the Report of accordance with Federal regulatory authority instructions. NOTE:
Condition must be attested to by not less than two these instructions may in some cases differ from generally accepted
directors (trustees) for State nonmember banks and accounting principles.
three directors for State member and National Banks.
We, the undersigned directors (trustees), attest to the correctness
I, ALFRED B. CHILDS, SVP & CASHIER of this Report of Condition (including the supporting schedules) and
Name and Title of Officer Authorized to Sign Report declare that it has been examined by us and to the best of our
knowledge and belief has been prepared in conformance with the
of the named bank do hereby declare that these instructions issued by the appropriate Federal regulatory authority
Reports of Condition and Income and is true and correct.
(including the supporting schedules) have been
prepared in conformance with the instructions
issued by the appropriate Federal regulatory /S/ STUART M. PEARMAN
authority and are true to the best of my Director (Trustee)
knowledge and belief.
/S/ J. T. MOORE JR.
/S/ ALFRED B. CHILDS Director (Trustee)
Signature of Officer Authorized to Sign Report
/S/ PETER J. DENKER
APRIL 17,1997 Director (Trustee)
Date of Signature
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FOR BANKS SUBMITTING HARD COPY
REPORT FORMS:
STATE MEMBER BANKS: Return the original and NATIONAL BANKS: Return the original
one copy to the appropriate Federal Reserve only in the special return address envelope provided.
District Bank. If express mail is used is used in lieu of the
special return address envelope, return
STATE NONMEMBER BANKS: Return the original the original only to the
only in the special return address envelope provided. FDIC, c/o Quality Data Systems, 2127 Espey Court,
If express mail is used is used in lieu of the Suite 204, Crofton, MD 21114.
special return address envelope, return
the original only to the
FDIC, c/o Quality Data Systems, 2127 Espey Court,
Suite 204, Crofton, MD 21114.
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FDIC Certificate Number ____________ 12-31-96
(RCRI 9050) Banks should affix the address label in this space.
U. S. TRUST COMPANY OF TEXAS, NATIONAL ASSOCIATION
Legal Title of Bank (TEXT 9010)
2001 ROSS AVENUE, SUITE 2700
City (TEXT 9130)
DALLAS, TX 75201
State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency
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<PAGE>
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U.S. TRUST COMPANY OF TEXAS, N.A. CALL DATE: 03/31/97 STATE#: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 VENDOR ID: D CERT #: 33217 PAGE RC-2
DALLAS, TX 75201 TRANSIT #: 11101765
9
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CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31,1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
C100
DOLLAR AMOUNTS IN THOUSANDS
ASSETS
1. CASH AND BALANCES DUE FROM DEPOSITORY INSTITUTIONS: RCON
A. NONINTEREST-BEARING BALANCES AND CURRENCY AND COIN (1,2)__________________ 0081 1,255 1.A
B. INTEREST BEARING BALANCES (3)_____________________________________________ 0071 629 1.B
2. SECURITIES:
A. HELD-TO-MATURITY SECURITIES (FROM SCHEDULE RC-B, COLUMN ______ ______ 1754 0 2.A
A)_______________ _
B. AVAILABLE-FOR-SALE SECURITIES (FROM SCHEDULE RC-B, COLUMN D)_______________ 1773 105,76 2.B
4
3. FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
A. FEDERAL FUNDS SOLD (4)____________________________________________________ 0276 0 3.A
B. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (5)_______________________ 0277 0 3.B
4. LOANS AND LEASE FINANCING RECEIVABLES: RCON
A. LOANS AND LEASES, NET OF UNEARNED INCOME (FROM SCHEDULE RC-C) 2122 43,079 4.A
B. LESS: ALLOWANCE FOR LOAN AND LEASE LOSSES__________________ 3123 511 4.B
C. LESS: ALLOCATED TRANSFER RISK RESERVE______________________ 3128 0 4.C
D. LOANS AND LEASES, NET OF UNEARNED INCOME, ALLOWANCE, AND RESERVE RCON
(ITEM 4.A MINUS 4.B AND 4.C)_____________________________________________ 2125 42,568 4.D
5. TRADING ASSETS________________________________________________________________ 3545 0 5.
6. PREMISES AND FIXED ASSETS (INCLUDING CAPITALIZED LEASES)______________________ 2145 752 6.
7. OTHER REAL ESTATE OWNED (FROM SCHEDULE RC-M)__________________________________ 2150 0 7.
8. INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES AND ASSOCIATED COMPANIES
(FROM SCHEDULE RC-M)__________________________________________________________ 2130 0 8.
9. CUSTOMERS' LIABILITY TO THIS BANK ON ACCEPTANCES OUTSTANDING__________________ 2155 0 9.
10. INTANGIBLE ASSETS (FROM SCHEDULE RC-M)________________________________________ 2143 0 10.
11. OTHER ASSETS (FROM SCHEDULE RC-F)_____________________________________________ 2160 1,933 11.
12. A. TOTAL ASSETS (SUM OF ITEMS 1 THROUGH 11)__________________________________ 2170 152,90 12.A
1
B. LOSSES DEFERRED PURSUANT TO U.S.C. 1823(J)________________________________ 0306 0 12.B
C. TOTAL ASSETS AND LOSSES DEFERRED PURSUANT TO 12 U.S.C. 1823(J)
(SUM OF ITEMS 12.A AND 12.B)____________________________ _______________ 0307 152,90 12.C
1
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(1) Includes cash items in process of collection and unposed debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b.
(3) Includes time certificates of deposit not held for trading.
(4) Report 'term federal funds sold' in Schedule RC, item 4.a, 'Loans and
leases, net of unearned income,' and in Schedule RC-C, part 1.
(5) Report securities purchased under agreements to resell that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 3.a, 'Federal
funds sold.'
<PAGE>
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<S><C> <C>
U.S. TRUST COMPANY OF TEXAS, N.A. CALL DATE: 03/31/97 STATE#: 6797 FFIEC 034
2100 ROSS AVENUE, SUITE 2700 VENDOR ID: D CERT #: 33217 PAGE RC-2
DALLAS, TX 75201 TRANSIT #: 11101765
10
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SCHEDULE RC - CONTINUED
DOLLAR AMOUNTS IN THOUSANDS
LIABILITIES
13. DEPOSITS:
A. IN DOMESTIC OFFICES (SUM OF TOTALS OF RCON
COLUMNS A AND C FROM SCHEDULE RC-E)________________________ RCON 2200 124,978 13.A
(1) NONINTEREST-BEARING 6631 19,997 13.A.1
(1)_____________________________________________
(2) INTEREST-BEARING 6636 104,981
___________________________________________________
B. IN FOREIGN OFFICES, EDGE AND AGREEMENT SUBSIDIARIES, AND IBFS
(1) NONINTEREST-BEARING_______________________________________________
(2) INTEREST-BEARING__________________________________________________
14. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE: RCON
A. FEDERAL FUNDS PURCHASED (2)_______________________________________________ 0278 0 14.A
B. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (3) _______________________ 0279 0 14.B
15. A. DEMAND NOTES ISSUED TO THE U.S. TREASURY__________________________________ 2840 0 15.A
B. TRADING LIABILITIES_______________________________________________________ 3548 0 15.B
16. OTHER BORROWED MONEY:
A. WITH A REMAINING MATURITY OF ONE YEAR OR LESS_____________________________ 2332 1,000 16.A
B. WITH A REMAINING MATURITY OF MORE THAN ONE YEAR___________________________ 2333 5,000 16.B
17. MORTGAGE INDEBTEDNESS AND OBLIGATIONS UNDER CAPITALIZED LEASES________________ 2910 0 17.
18. BANK'S LIABILITY ON ACCEPTANCES EXECUTED AND OUTSTANDING______________________ 29200 0 18.
19. SUBORDINATED NOTES AND DEBENTURES_____________________________________________ 3200 0 19.
20. OTHER LIABILITIES (FROM SCHEDULE RC-G)________________________________________ 2930 1,468 20.
21. TOTAL LIABILITIES (SUM OF ITEMS 13 THROUGH 20)________________________________ 2948 132,446 21.
22. LIMITED-LIFE PREFERRED STOCK AND RELATED SURPLUS______________________________ 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus________________________________ 3838 7,000 23.
24. Common stock_________________________________________________________________ 3230 500 24.
25. Surplus (exclude all surplus related to preferred stock)_______________________ 2829 8,384 25.
26. a. Undivided profits and capital reserves___________________________________ 3632 4,711 26.a
b. Net unrealized holding gains (losses) on available-for-sale______
securities___________ 8434 (140) 26.b
27. Cumulative foreign currency translation adjustments__________________________ 3210
28. a. Total equity capital (sum of items 23 through 27)_________________________ 3210 20,455 28.a
b. Losses deferred pursuant to 12 U.S.C. 1823(j)____________________________ 0306 0 28.b
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 28.a and 28.b)___________________________________________ 3559 20,455 28.c
29. Total liabilities, limited-life preferred stock, equity capital, and losses
deferred pursuant to 12 U.S.C. 1823(j) (sum of items 21, 22, and 28.c)_________ 2257 152,901 29.
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION.
1. Indicate in the box at the right the number of the statement below that RCON
best describes the most comprehensive level of auditing work performed for
the bank by independent extenal auditors as of any date during 1995__________ 6724 1 M.1
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<PAGE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified
public accounting firm which submits a report on the consolidated holding
company (but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with
generally accepted auditing standards by a certified public accounting
firm (may be required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
(1) INCLUDES TOTAL DEMAND DEPOSITS AND NONINTEREST-BEARING TIME AND SAVINGS
DEPOSITS.
(2) REPORT "TERM FEDERAL FUNDS PURCHASED" IN SCHEDULE RC, ITEM 16, 'OTHER
BORROWED MONEY.'
(3) REPORT SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE THAT INVOLVE THE
RECEIPT OF IMMEDIATELY AVAILABLE FUNDS AND MATURE IN ONE BUSINESS DAY OR
ROLL OVER UNDER A CONTINUING CONTRACT IN SCHEDULE RC, ITEM 14.A, 'FEDERAL
FUNDS PURCHASED.'