PROSPECTUS
[LOGO] -- ARS
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
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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 28, 1997, 14,093,307 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 28, 1997, the last reported sales
price of the Common Stock on the NYSE was $22.688 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 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE SECURITIES
OFFERED HEREBY.
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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.
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The date of this Prospectus is July 29, 1997.
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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, industrial and institutional
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 resources of a
large number of existing residential services and commercial maintenance
services businesses.
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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 services 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.
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RISK FACTORS
The securities offered hereby involve a high degree of risk. See "Risk
Factors."
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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
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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
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Net income per share from
continuing operations......... $ 0.79 $ 0.11
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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
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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
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(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.
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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 statements 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,
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"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, industrial and institutional 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 28, 1997, 14,093,307 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
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requirements of Securities Act Rule 144 ("Rule 144"), as follows: (i)
currently and through September 30, 1997 -- 11,547,175; (ii) thereafter and
through December 31, 1997 -- 12,259,161; (iii) thereafter and through March 31,
1998 -- 12,295,415; (iv) thereafter and through June 30, 1998 -- 12,569,823; (v)
thereafter and through September 30, 1998 -- 12,612,919; (vi) thereafter and
through December 31, 1998 -- 13,990,765; (vii) thereafter and through March 31,
1999 -- 13,998,377; (viii) thereafter and through June 30, 1999 -- 14,035,591;
(ix) thereafter and through March 31, 2000 -- 14,061,183; and (x)
thereafter -- 14,093,307. 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 28, 1997, options to purchase up to an aggregate of 2,350,750
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
465,000 shares and the warrant were exercisable at July 28, 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
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therefor. Their ability to pay dividends or make other payments or advances to
ARS will depend on their 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."
9
<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."
10
<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, industrial and institutional
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. 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
11
<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., 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 11 states and the District of Columbia and new
residential installation services in 12 states and the District of Columbia.
12
<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
28)............................ 24.000 21.688
The closing price of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on July 28, 1997 was $22.688. As of
July 28, 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."
13
<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.
14
<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)
15
<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.
16
<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.
17
<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.
18
<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
provide the cash the Company paid in connection with its acquisition of certain
Acquired Businesses 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.
19
<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
provide the cash the Company paid in connection with its acquisition of Acquired
Businesses 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
20
<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
provide the cash the Company paid in connection with its acquisition of certain
Acquired Businesses from October 31, 1996 through March 31, 1997.
21
<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
provide the cash the Company paid in connection with its acquisition of Acquired
Businesses 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
22
<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 28, 1997, the Company had outstanding borrowings under the
Credit Facility in the amount of $42.7 million, bearing interest at a weighted
average rate of 7.25%.
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.
23
<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.
24
<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.
25
<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
26
<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>
27
<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.
28
<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.
29
<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.
30
<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.
31
<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, industrial and institutional
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 HVAC
systems and outsourcing repair and maintenance work traditionally performed by
building engineers and their crews.
32
<PAGE>
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 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 services 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
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
33
<PAGE>
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.
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
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<PAGE>
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 HVAC systems and a variety of HVAC, plumbing
and electrical parts and system components. As a subcontractor to builders, it
installs complete central HVAC systems, electrical systems, plumbing systems and
other systems in newly constructed homes and small commercial buildings.
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<PAGE>
The following table shows, by region, the range of residential maintenance
services and new residential installation services the Company provided as of
July 18, 1997.
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
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
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, industrial and institutional 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 July 18, 1997, has
acquired seven businesses providing commercial maintenance
36
<PAGE>
services exclusively and eight businesses providing both commercial maintenance
services 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, refrigerant retrofit capabilities,
building automation services, remote monitoring, lighting services and the
design and building of 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 personnel 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 provides its new residential installation services generally 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 required. The Company's new
residential installation personnel analyze the plans to determine the labor,
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<PAGE>
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 its 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 it releases any mechanics' and materialmen's liens securing the
rights to those payments. 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 services 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 businesses 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 businesses 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. In addition, the Company applies labels with its name and phone
number to newly installed equipment and
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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
personnel 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, HVAC service personnel 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.
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 Company has not experienced any
strikes or work stoppages and believes its relationship with its employees is
good.
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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.
Residential services and the commercial maintenance services operations are
characterized by, among other things, high turnover rates among service
personnel. A substantial majority of the service personnel turnover experienced
by the Company 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 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 sectors of its 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
service lines on which the Company intends to focus, but certain HVAC OEMs
provide commercial maintenance services as a complement to their manufacturing
and distribution businesses. In the future, competition in both the residential
services and commercial maintenance services sectors 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
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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 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.
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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.
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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.
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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.
44
<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.
45
<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 amounts of $823 for Mr. Wright, $498 for Mr. Hoover, $455 for
Mr. McCaughey and $378 for Mr. Held.
46
<PAGE>
(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.
47
<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
48
<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.
49
<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.
50
<PAGE>
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
51
<PAGE>
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 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.
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 Expiration Time (determined using all then tendered
shares) and (2) the Company's consolidated retained earnings at the Expiration
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 secured 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 -- Liquidity and Capital Resources -- The Company." 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 secured 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 -- Liquidity and Capital
Resources -- The Company."
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
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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.
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 acts as 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 28, 1997, 14,093,307
shares of Common Stock were issued and outstanding and no shares of Preferred
Stock had been issued. 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 and
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 28, 1997, 14,093,307 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 -- 11,547,175; (ii)
thereafter and through December 31, 1997 -- 12,259,161; (iii) thereafter and
through March 31, 1998 -- 12,295,415; (iv) thereafter and through June 30,
1998 -- 12,569,823; (v) thereafter and through September 30, 1998 -- 12,612,919;
(vi) thereafter and through December 31, 1998 -- 13,990,765; (vii) thereafter
and through March 31, 1999 -- 13,998,377; (viii) thereafter and through June 30,
1999 -- 14,035,591; (ix) thereafter and through March 31, 2000 -- 14,061,183;
and (x) thereafter -- 14,093,307. 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 28, 1997, options to purchase up to an aggregate of 2,350,750
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
465,000 shares and the warrant were exercisable at July 28, 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 Transaction") and
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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 the sale or exchange of the
property in exchange for which the Installment Method Convertible Security was
received.
66
<PAGE>
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 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
67
<PAGE>
"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 aggregate principal amount 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 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
68
<PAGE>
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.
69
<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 Consolidated Statement 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:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============
</TABLE>
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 FROM DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-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 X
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:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
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
============ ============
</TABLE>
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................... 3
Risk Factors......................... 6
The Company.......................... 11
Price Range of Common Stock.......... 13
Dividend Policy...................... 13
Capitalization....................... 14
Selected Financial Information....... 15
Selected Supplemental Financial
Information........................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 18
Business............................. 32
Management........................... 43
Certain Transactions................. 48
Security Ownership of Certain
Beneficial Owners and Management... 50
Description of the Convertible Debt
Securities......................... 51
Description of Capital Stock......... 60
Shares Eligible for Future Sale...... 64
Certain United States Federal Income
Tax Consequences................... 65
Plan of Distribution................. 68
Experts.............................. 69
Additional Information............... 69
Index to Financial Statements........ F-1
[LOGO -- ARS]
COMMON STOCK
CONVERTIBLE SUBORDINATED DEBT SECURITIES
------------
PROSPECTUS
JULY 29, 1997
------------
