AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1997
REGISTRATION NO. 333-18623
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 1711 76-0484996
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION CLASSIFICATION CODE NUMBER)
OR ORGANIZATION)
</TABLE>
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN D. HELD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
AMERICAN RESIDENTIAL SERVICES, INC.
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************
SUBJECT TO COMPLETION, DATED APRIL 8, 1997
PROSPECTUS
3,691,248 SHARES
[LOGO] -- ARS
COMMON STOCK
------------------------
American Residential Services, Inc. ("ARS"and, collectively with its
subsidiaries, the "Company") may offer and issue the shares of its common
stock, $.001 par value per share (the "Common Stock"), covered by this
Prospectus in business combination transactions involving its acquisition,
directly or indirectly, of businesses or other operating assets. It anticipates
these acquisitions will consist principally of businesses that provide (i)
maintenance, repair and replacement services for heating, ventilating and air
conditioning systems, including indoor air quality services, and plumbing,
electrical and other systems primarily in homes and commercial buildings and
(ii) new installation services of those systems in homes and small commercial
facilities under construction. ARS expects that (i) the terms of these
acquisitions will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and (ii) the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of the shares. It does not expect to pay any
underwriting discounts or commissions, but may pay finder's fees from time to
time with respect to specific acquisitions. Any person receiving any such fees
may be deemed to be an underwriter within the meaning of the Securities Act of
1933, as amended (the "Securities Act"). ARS will pay all expenses of this
offering.
As of March 31, 1997, 11,679,617 shares of Common Stock were issued and
outstanding, of which 6,097,442 are registered and available for unrestricted
trading in the public markets unless owned by affiliates of the Company. The
Common Stock is traded on the New York Stock Exchange (the "NYSE") under the
symbol "ARS." On March 31, 1997, the last reported sales price of the Common
Stock on the NYSE was $19.125 per share.
Persons receiving shares of the Common Stock offered hereby may be
contractually required to hold some portions of those shares for periods of up
to two years. In addition, pursuant to the provisions of Rule 145 under the
Securities Act, the volume limitations and certain other requirements of Rule
144 under the Securities Act will apply to resales of those shares by affiliates
of the businesses the Company acquires for a period of one year (or such shorter
period as the Securities and Exchange Commission (the "SEC") may prescribe).
SEE "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN RISK FACTORS THAT SHOULD BE CONSIDERED BEFORE ACQUIRING THE COMMON STOCK
OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURI
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is April , 1997.
<PAGE>
[graphics -- map of the United States with certain Company
locations, service vehicles, facilities and personnel]
ARS is the largest publicly held company in the United States engaged
principally in providing comprehensive maintenance, repair, replacement and new
equipment services for heating, ventilation, and air conditioning, plumbing,
electrical, indoor air quality systems and major home appliances.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, INFORMATION RESPECTING
THE COMPANY'S OPERATIONS GIVES EFFECT TO THE COMPANY'S ACQUISITIONS COMPLETED
THROUGH THE DATE OF THIS PROSPECTUS.
THE COMPANY
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for heating, ventilating and air
conditioning ("HVAC"), plumbing, electrical and indoor air quality systems and
major home appliances, primarily in homes and small commercial buildings,
including those under construction (collectively, "residential services"). ARS
was founded in October 1995 to create the leading national provider of these
services. To achieve this goal, the Company has embarked on an aggressive
acquisition program and is implementing a national operating strategy designed
to increase internal growth and capitalize on cost efficiencies.
On September 27, 1996, ARS acquired seven residential services businesses
(fcommon parent of two of those businesses, the "Founding
Companies") in separate transactions (the "Initial Acquisitions")
simultaneously with the closing of ARS's initial public offering of Common Stock
(the "IPO"). The Company acquired 13 additional residential services
businesses in the fourth quarter of 1996 (the "Fourth Quarter 1996
Acquisitions") and 10 additional residential services businesses in the first
quarter of 1997 (the "First Quarter 1997 Acquisitions" and, together with the
Founding Companies and the Fourth Quarter 1996 Acquisitions, the "Acquired
Businesses").
With the inclusion of the Fourth Quarter 1996 Acquisitions and the First
Quarter 1997 Acquisitions, management estimates maintenance, repair and
replacement services currently account for approximately 55% of the Company's
total revenues and new installation services currently account for approximately
45%. The Company believes the profitability of its maintenance, repair and
replacement business benefits from its installation services operations as a
result of (i) the significant volume of purchases of HVAC systems for its
high-volume installation services and (ii) the addition of new customer and
equipment information in the Company's marketing database. This database
provides the Company with valuable information 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 maintenance, repair and
replacement services for residential HVAC systems. Through leveraging these
benefits, acquiring new service companies and internal development, the Company
intends to emphasize the growth of its higher-margin maintenance, repair and
replacement services business.
The Company believes the HVAC, plumbing and electrical industries in the
United States represent an annual market in excess of $40 billion, of which
residential maintenance, repair and replacement services account for in excess
of $25 billion. 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 technicians and providing a full complement of
high-quality residential services in an industry that has often been
characterized by inconsistent quality, reliability and pricing. It also believes
the highly fragmented nature of the residential services industry will provide
it with significant opportunities to consolidate the capabilities and resources
of a large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to enhance its market position as a leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a
3
<PAGE>
national operating strategy that enhances internal revenue growth and
profitability and achieves cost efficiencies. In addition, through its recently
formed subsidiary, American Mechanical Services, Inc. ("AMS"), the Company
intends to become the leading provider of comprehensive maintenance, repair and
replacement services for HVAC, plumbing and electrical systems in existing large
commercial facilities such as office buildings, health care facilities,
educational institutions and large retail outlets (collectively, "commercial
maintenance services").
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, expanding within existing markets for
residential services and developing opportunities to expand into providing
commercial maintenance services. The Company believes it can leverage its
experience and success in developing a leading market position in the
residential services business to capitalize on consolidation opportunities in
the commercial maintenance services business.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential or commercial maintenance
services and having the critical mass necessary to be a core business
with which other residential or commercial maintenance services
operations can be consolidated. An important criterion for these
acquisition candidates is superior operational management personnel,
whom the Company generally seeks to retain.
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it generally seeks to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and the range of services it offers in that market. The
Company also pursues "tuck-in" acquisitions of smaller companies
whose operations can be incorporated into the Company's existing
operations without a significant increase in infrastructure.
IMPLEMENTATION OF A NATIONAL OPERATING STRATEGY. The Company has
implemented a national operating strategy employing "best practices" designed
to increase internal growth and profitability through enhanced operations and
the achievement of cost efficiencies.
o INTERNAL GROWTH. The Company reviews its operations at the local and
regional operating levels in order to identify certain "best
practices" that will be implemented throughout its operations. For
example, the Company is in the process of expanding its 24-hour
emergency service to substantially all its locations and its
monitoring of service call quality by attempting to contact each of
its service customers promptly following a service call. In addition,
the Company is developing a national training program to improve and
keep current the technical, selling and customer relations skills of
its service technicians. The Company is implementing specialized
computer and modern communications technology at each of its locations
to improve productivity, communications, vehicle dispatch and service
quality and responsiveness. Management believes these 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 and other equipment for resale, service vehicles,
parts and tools; vehicle and equipment maintenance; financing
arrangements; employee benefits; and insurance and bonding.
------------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
------------------------
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summary unaudited pro forma financial information is derived
from the unaudited pro forma financial statements of the Company included
elsewhere herein and gives effect to the acquisitions of all the Acquired
Businesses and the IPO assuming those transactions had occurred on January 1,
1996. See the Unaudited Pro Forma Combined Financial Statements and the notes
thereto included elsewhere herein. The following summary balance sheet
information presents (i) certain historical balance sheet data derived from the
audited consolidated financial statements of the Company included elsewhere
herein and (ii) that historical balance sheet data, on a pro forma combined
basis, to give effect to the First Quarter 1997 Acquisitions. The summary
financial information below should be read in conjunction with the historical
and pro forma financial statements and notes thereto included elsewhere herein.
YEAR ENDED
DECEMBER 31,
1996
-------------
STATEMENT OF OPERATIONS DATA
(PRO FORMA COMBINED(1)):
Revenues........................ $ 254,279
Gross profit.................... 76,588
Selling, general and
administrative expenses(2)..... 56,313
Goodwill amortization(3)........ 3,322
Income from operations.......... 16,953
Interest income and other
expense, net................... 1,008
Interest expense................ (3,933)
Net income from continuing
operations..................... $ 7,338
=============
Net income per share from
continuing operations.......... $ 0.62
=============
Shares used in computing pro
forma net income per share from
continuing operations.......... 11,783(4)
=============
DECEMBER 31, 1996
--------------------------
PRO FORMA
HISTORICAL COMBINED
------------- ---------
BALANCE SHEET DATA:
Working capital................. $ 15,509 $ 15,739
Total assets.................... 189,755 198,454
Total debt, including current
portion........................ 52,055 54,242
Stockholders' equity............ 110,549 112,716
- ------------
(1) The pro forma combined financial statement data presented (i) are not
necessarily indicative of the results the Company would have obtained had
these events actually occurred when assumed or of the Company's future
results, (ii) are based (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.
(2) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain 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
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS IN THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED COMBINED OPERATING HISTORY
ARS, incorporated in Delaware in October 1995, conducted no operations
prior to the closing 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 (the "Initial Acquisitions").
The Company acquired 13 additional residential services businesses in the fourth
quarter of 1996 (the "Fourth Quarter 1996 Acquisitions") and 10 additional
residential services businesses in the first quarter of 1997 (the "First
Quarter 1997 Acquisitions" and, together with the Founding Companies and the
Fourth Quarter 1996 Acquisitions, the "Acquired Businesses"). 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.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company's acquisition strategy presents risks that, singly or in any
combination, could materially adversely affect the Company's business and
financial performance. These risks include the possibility of the adverse effect
on existing operations of the Company from the diversion of management's
attention and resources to acquisitions, the possible loss of acquired customer
bases and key personnel, including service technicians, and the contingent and
latent risks associated with the past operations of and other unanticipated
problems arising in the acquired businesses. The success of the Company's
acquisition strategy will depend on the extent to which it is able to acquire,
successfully absorb and profitably manage additional businesses, and no
assurance can be given the Company's strategy will succeed. In this connection,
competition for acquisition candidates could cause the cost of acquiring
businesses to increase materially. In addition, acquisitions accounted for as
pooling-of-interests transactions will require restatements of the Company's
historical financial statements to include the results of the acquired
businesses, which could negatively impact those financial statements. See
"Business -- Acquisition Strategy."
FACTORS AFFECTING INTERNAL GROWTH
The factors affecting the Company's ability to generate internal growth
will include the extent to which it is able to expand the range of services
offered to customers, increase existing customer bases through the development
and implementation of cost-effective advertising and other marketing programs
and reduce operating and overhead costs of acquired businesses. Factors
affecting the ability of the Company to expand services will include the extent
to which it is able to attract and retain qualified operational management and
service and installation technicians in new areas of operation and leverage its
relationships with existing customers to provide them services they currently
obtain from others.
COMPETITION
The Company is engaged principally in providing comprehensive maintenance,
repair, replacement and new equipment installation services for heating,
ventilating and air conditioning ("HVAC"), plumbing, electrical and indoor air
quality systems and major home appliances, primarily in homes and small
commercial buildings, including those under construction (collectively,
"residential services"). In addition,
6
<PAGE>
the Company is expanding into providing comprehensive maintenance, repair and
replacement services for HVAC, plumbing and electrical systems in existing large
commercial facilities such as office buildings, health care facilities,
educational institutions and large retail outlets (collectively, "commercial
maintenance services"). The markets for residential 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
and commercial maintenance services industries are subject to rapid
consolidation on both a national and a regional scale. The Company believes
three other public companies currently are focused on providing residential
services in some of the service lines provided by the Company. 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, may 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."
RISKS OF EXPANSION INTO COMMERCIAL MAINTENANCE SERVICES BUSINESS
The Company intends to expand its operations into the commercial
maintenance services market through its recently formed subsidiary, American
Mechanical Services, Inc. ("AMS"). To date, Atlas Services, Inc. and Meridian
& Hoosier Heating and Air Conditioning Company (two of the Founding Companies)
and Keenan Mechanical Services, Inc. (one of the Fourth Quarter 1996
Acquisitions) are the only Acquired Businesses that have provided these
services. This element of the Company's growth strategy involves the usual risks
associated with growth through acquisitions (see "-- Dependence on Acquisitions
for Growth"), as well as the potential diversion of management's attention and
resources away from the continued development of opportunities for growth in the
residential services business. The Company may also experience initial operating
inefficiencies and other costs associated with entering a new line of business.
In addition, commercial maintenance services businesses tend to rely more
heavily on unionized work forces. The Company cannot predict how this will
affect its ability to acquire, integrate and operate such businesses. No
assurance can be given the Company's success to date in the residential services
market will translate into success for the Company's efforts to expand into the
commercial maintenance services business.
SEASONALITY
The Company's residential installation and maintenance, repair and
replacement operations are subject to different seasonal variations in the
different lines of service. Except in certain areas of the southern United
States, the demand for new 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
matters, including the timing of acquisitions. Accordingly, quarterly
comparisons of the Company's revenues and operating results should not be relied
on as an indication of future performance, and the results of any quarterly
period may not be indicative of results to be expected for a full year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
As of March 31, 1997, 11,679,617 shares of Common Stock were outstanding.
The following table shows the shares outstanding on that date which (i)
currently are freely tradable or eligible for sale pursuant
7
<PAGE>
to Rule 144 (as amended effective April 29, 1997, "Rule 144") under the
Securities Act (subject to its volume limitations and other requirements) and
(ii) will become eligible for sale in the future pursuant to Rule 144 (including
shares subjected to its volume and other requirements by Securities Act Rule
145) or pursuant to the lapse of contractual restrictions at the times
indicated.
WHEN FREELY TRADABLE NUMBER OF
OR ELIGIBLE FOR RULE 144 SALES SHARES
- ---------------------------------------- ------------
Currently............................... 6,097,442
May 1997................................ 794,786
June 1997............................... 15,175
July 1997............................... 487,652
September 1997.......................... 2,982,180
November 1997........................... 8,333
March 1998.............................. 11,139
1998 - Fourth Quarter................... 1,282,910
------------
Total.............................. 11,679,617
============
In addition to the shares currently outstanding, the Company has reserved
for issuance 2,156,862 shares issuable on conversion of the Company's 7 1/4%
Convertible Subordinated Notes due 2004 (the "7 1/4% Convertible Notes"),
which were issued on April 2, 1997 in an aggregate principal amount of $55
million and are convertible into Common Stock at a conversion price of $25.50
per share. In connection with the offering of the 7 1/4% Convertible Notes, the
Company agreed to register the resale of the 7 1/4% Convertible Notes and the
shares of Common Stock issuable on their conversion, pursuant to a shelf
registration statement to be filed on or before June 1, 1997. When that
registration becomes effective, those securities generally will be freely
tradable in the open market.
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 March 31, 1997, options to purchase up to 1,665,700 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 440,000 shares and the
warrant will be exercisable at March 31, 1997. The exercise prices of these
securities range from $8.00 to $25.75 per share. See "Management -- Option
Grants." ARS has registered the shares of Common Stock underlying the options
under the Securities Act.
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.
DEPENDENCE ON HOUSING STARTS
The extent to which the Company is able to maintain or increase revenues
from new installation services for homebuilders will depend on the levels of
housing starts from time to time in the markets in which it operates and likely
will reflect the cyclical nature of the homebuilding industry. Unless the
Company is able through implementation of its growth strategy to continue to
reduce the relative importance of new installation services to its overall
operating results or achieve geographic diversification, downturns in the levels
of housing starts in the areas in which the Company operates could have a
material adverse effect on its results of operations.
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
8
<PAGE>
Company could be affected adversely if any of these persons does not continue in
his or her management role after joining the Company and the Company is unable
to attract and retain qualified replacements. The success of the Company's
growth strategy, as well as the Company's current operations, will depend on the
extent to which the Company is able to retain, recruit and train qualified
service and installation technicians who meet the Company's standards of conduct
and service to its customers. See "Business -- Hiring, Training and Safety."
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 authorizes its Board of
Directors to cause ARS to issue, without stockholder approval, one or more
classes or series of its 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 may determine from time to time. See "Description of Capital
Stock -- Preferred Stock."
POTENTIAL ANTI-TAKEOVER EFFECTS
ARS has a stockholder rights plan in effect. This plan and provisions of
the Restated Certificate of Incorporation and Bylaws of ARS and the Delaware
General Corporation Law (the "DGCL") (under which ARS is organized) may have
the effect of delaying, discouraging, inhibiting, preventing or rendering more
difficult an attempt to obtain control of the Company by means of a tender
offer, business combination, proxy contest or otherwise. These provisions
include the charter authorization of "blank check" preferred stock and
classification of the Board of Directors, a charter restriction on the ability
of stockholders to take actions by written consent and a DGCL provision imposing
restrictions on business combinations with certain interested parties. 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 the Indenture relating to the 7 1/4% Convertible Notes)
occurs, each holder of 7 1/4% Convertible Notes will have the right, at the
holder's option, to require ARS to repurchase all or a portion of such holder's
7 1/4% Convertible Notes 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 and the 7 1/4% Convertible Notes could impede or prevent a
change of control or depress the price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- The Company" and "Description
of Capital Stock."
9
<PAGE>
THE COMPANY
ARS. The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and
indoor air quality systems and major home appliances. ARS was founded in October
1995 to create the leading national provider of residential services through the
implementation of both an aggressive acquisition program and a national
operating strategy. Concurrently with the closing of the IPO, ARS acquired the
seven Founding Companies in the transactions described in "Certain
Transactions -- Organization of the Company." ARS is a Delaware corporation.
Its executive offices are located at Post Oak Tower, Suite 725, 5051 Westheimer,
Houston, Texas 77056-5604, and its telephone number at that address is (713)
599-0100.
THE FOUNDING COMPANIES. The Founding Companies are General Heating & Air
Conditioning Company, Inc. ("General Heating"), Atlas Services, Inc.
("Atlas"), Service Enterprises, Inc., which does business as "Crown
Services"("Crown"), Florida Heating & Air Conditioning, Inc. (together with
its affiliated companies, "Florida HAC"), Meridian & Hoosier Heating and Air
Conditioning Company ("Meridian & Hoosier"), ADCOT, Inc., which does business
as "A-ABC Appliance"("A-ABC"), and Climatic Corporation of Vero Beach
("Climatic"). The Founding Companies have been in business an average of 32
years and provide various residential services in and around Houston (Crown and
A-ABC), the Washington-Baltimore metropolitan area and Richmond, Virginia
(General Heating), throughout South Carolina (Atlas), southeast Florida (Florida
HAC and Climatic) and central Indiana (primarily Indianapolis) (Meridian &
Hoosier). The aggregate unaudited annualized revenues of the Founding Companies
in 1996 were approximately $134.8 million.
General Heating is a leading installer of HVAC systems and equipment for
residential and light commercial construction markets in its region. It also
provides comprehensive HVAC maintenance, repair and replacement services to
those markets. Atlas is a leading provider of electric, HVAC and plumbing
installation services to residential and light commercial construction markets
throughout South Carolina. It also provides comprehensive plumbing, HVAC and
electrical maintenance, repair and replacement services. Crown is the largest
single provider of residential plumbing, HVAC and electrical maintenance, repair
and replacement services to the residential and light commercial markets in the
Houston metropolitan area, while A-ABC is among the leading providers of home
appliance, HVAC and plumbing maintenance, repair and replacement services to the
residential and light commercial markets in the greater Houston and surrounding
areas. Neither Crown nor A-ABC provides new installation services. Florida HAC
is a leading installer of HVAC systems and equipment for the residential
construction market, and a leading provider of HVAC maintenance, repair and
replacement services to the residential and light commercial markets, in
southeast Florida, including Broward, Dade and Palm Beach Counties, while
Climatic is a provider of HVAC maintenance, repair and replacement services
(including internal air quality ("IAQ") services) to the residential and light
commercial markets in the four-county area in Florida known as the Treasure
Coast region (Indian River, St. Lucie, Martin and Palm Beach Counties). Climatic
also installs HVAC systems and equipment for the residential and light
commercial construction markets. Meridian & Hoosier is a leading provider of
HVAC maintenance, repair and replacement services to the residential and light
commercial markets, and also installs HVAC systems and equipment for the
residential construction market, in central Indiana, including Indianapolis.
Meridian & Hoosier and Atlas are the only Founding Companies that currently
provide commercial maintenance services.
RECENT ACQUISITIONS. During the fourth quarter of 1996, the Company
acquired an additional 13 residential service businesses, with aggregate
unaudited annualized revenues in 1996 of approximately $84.6 million, for a
total consideration of $41.2 million in cash and short-term notes (which were
subsequently repaid with proceeds from borrowings under the Credit Facility) and
1,282,910 shares of Common Stock. The Fourth Quarter 1996 Acquisitions include
Metro Heating and Air Conditioning, Inc. ("Metro") and Sasso Air Conditioning,
Inc. ("Sasso"). Metro is the leading provider of HVAC installation,
maintenance, repair and replacement services in the Raleigh/Durham, North
Carolina area, while Sasso provides these services in the West Palm Beach,
Florida area and represents a major addition to the
10
<PAGE>
Company's Florida operations. The acquisition of a plumbing maintenance and
repair business in Ft. Lauderdale and an HVAC maintenance, repair and
installation business in Miami also have added to these operations. The Company
expanded its Indiana operations to include a provider of HVAC and plumbing
installation, maintenance, repair and replacement services, an additional
provider of HVAC installation, maintenance, repair and replacement services and
a plumbing company in Indianapolis and a provider of residential and light
commercial HVAC, electrical and plumbing maintenance, repair, replacement and
installation services in Fort Wayne. It has expanded its Houston operations with
two additional providers of HVAC maintenance, repair and replacement services
and entered the Chicago area through its acquisition of a provider of
residential and light commercial HVAC maintenance, repair and replacement
services. Atlas has expanded its HVAC services with a tuck-in acquisition, and
the Company has expanded its Washington-Baltimore metropolitan area HVAC
installation, maintenance, repair and replacement services through the addition
of a Virginia-based business, which also provides commercial maintenance
services.
During the first quarter of 1997, the Company acquired an additional 10
residential service businesses, with aggregate unaudited annualized revenues in
1996 of approximately $31.3 million, for a total consideration of $640,000 in
cash and 1,308,752 shares of Common Stock. The Company accounted for eight of
these acquisitions under the pooling-of-interests method of accounting. These
acquisitions include two that mark the Company's entry into southern California:
a provider of HVAC maintenance, repair, replacement and installation services in
the San Diego metropolitan area and a provider of HVAC and plumbing maintenance,
repair and replacement services in the greater Los Angeles area. In addition,
the Company entered into the Michigan and Oklahoma markets with the acquisition
of a company providing HVAC installation, maintenance, repair and replacement
services in the Grand Rapids metropolitan area and a company providing HVAC
maintenance, repair and replacement services in Oklahoma City. The Company also
added a provider of plumbing maintenance, repair and replacement services in
Jacksonville to its Florida operations, a tuck-in company providing HVAC
maintenance, repair and replacement services to its North Carolina operations,
three tuck-in companies providing plumbing installation, maintenance, repair and
replacement services to its South Carolina operations and one tuck-in company
providing HVAC installation, maintenance, repair and replacement services to its
South Carolina operations.
11
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded 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
The closing price of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on March 31, 1997 was $19.125. As of
March 31, 1997 there were approximately 140 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, the
restrictions the Credit Facility imposes and any restrictions the Company's
future credit facilities or debt instruments may impose. The Credit Facility
prohibits the payment of dividends (except for dividends payable in Common Stock
and certain preferred stock). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- The Company."
12
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization as of December 31, 1996 of (i) the Company on an
historical basis, (ii) the Company on a pro forma combined basis, giving effect
to the acquisition of the First Quarter 1997 Acquisitions and the financing and
payment of the related purchase prices (including the issuance of Common Stock)
and (iii) the Company on a pro forma combined, as adjusted basis giving effect
to the April 2, 1997 issuance and sale of $55,000,000 aggregate principal amount
of ARS's 7 1/4% Convertible Notes and the application of the net proceeds
therefrom as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- The
Company."
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
PRO FORMA COMBINED
HISTORICAL COMBINED AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)
Current maturities of long-term
obligations........................ $ 201 $ 1,074 $ 201
========== ========= ===========
Long-term obligations, less current
maturities......................... $ 51,854 $ 53,168 $ --
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;
10,370,865 shares issued and
outstanding; and 11,679,617
shares issued and outstanding,
pro forma(1).................. 10 11 11
Additional paid-in capital...... 120,735 123,230 123,230
Retained deficit................ (10,196) (10,525) (10,525)
---------- --------- -----------
Total stockholders'
equity.................. 110,549 112,716 112,716
---------- --------- -----------
Total
capitalization..... $ 162,403 $ 165,884 $ 167,716
========== ========= ===========
- ------------
(1) Excludes (i) an aggregate of 1,504,500 shares of Common Stock subject to
options outstanding under the ARS 1996 Incentive Plan (the "Incentive
Plan") and (ii) a warrant to purchase up to 100,000 shares of Common Stock
at a purchase price of $15.00 per share. See "Management -- Option Grants"
and "Certain Transactions -- Organization of the Company."
13
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
Initial Acquisitions. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas. As used in this
discussion, the "Company" means (i) Atlas prior to September 30, 1996 and (ii)
ARS and its consolidated subsidiaries on that date and thereafter. The following
selected historical financial information has been derived from the audited
consolidated financial statements of the Company included in this Prospectus 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 has been prepared on the
same basis as the audited financial statements and, in the opinion of the
Company, reflects all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of that information. The following selected
unaudited pro forma financial information is derived from the unaudited pro
forma combined financial statements of the Company included elsewhere herein and
gives effect to the acquisitions of all the Acquired Businesses and the IPO,
assuming those transactions had occurred on January 1, 1996. 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 balance sheet data derived from the consolidated financial statements
of the Company and (ii) the December 31, 1996 historical balance sheet data, on
a pro forma combined basis, to give effect to the First Quarter 1997
Acquisitions. The summary financial information below should be read in
conjunction with the historical and unaudited pro forma financial statements and
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues.............................. $ 9,508 $ 12,336 $ 19,183 $ 22,048 $ 64,229
Gross profit.......................... 1,977 2,349 3,134 4,237 16,239
Selling, general and administrative
expenses............................ 1,435 1,963 3,138 3,022 16,767
Income (loss) from operations......... 542 386 (4) 1,215 (528)
Interest income and other expense,
net................................. 2 (14) 171 37 350
Interest expense...................... (130) (155) (143) (134) (5,257)
Net income (loss) from continuing
operations.......................... $ 269 $ 142 $ 17 $ 684 $ (5,536)
========= ========= ========= ========= =========
</TABLE>
YEAR ENDED
DECEMBER 31,
1996
------------
PRO FORMA COMBINED(2):
Revenues............................ $254,279
Gross profit........................ 76,588
Selling, general and administrative
expenses(3)........................ 56,313
Goodwill amortization(4)............ 3,322
Income from operations.............. 16,953
Interest income and other expense,
net................................ 1,008
Interest expense.................... (3,933)
Net income from continuing
operations......................... $ 7,338
============
Net income per share from continuing
operations......................... $ 0.62
============
Shares used in computing pro forma
net income per share from
continuing operations.............. 11,783(5)
============
(TABLE CONTINUED ON FOLLOWING PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------
1996
-------------------------
PRO FORMA
1992 1993 1994 1995 HISTORICAL COMBINED
--------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (337) $ (145) $ (371) $ (289) $ 15,509 $ 15,739
Total assets..................... 4,124 4,897 6,647 7,092 189,755 198,454
Total debt, including current
portion........................ 2,525 2,542 2,716 2,371 52,055 54,242
Stockholders' equity............. 566 724 774 1,503 110,549 112,716
</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"). See Note 1 to the Company's historical financial statements.
(2) The pro forma combined financial statement data presented (i) are not
necessarily indicative of the results the Company would have obtained had
these events actually occurred when assumed or of the Company's future
results, (ii) are based (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 unaudited pro forma financial statements and notes
thereto included elsewhere herein.
(3) Gives effect to reductions in salary and benefits to certain owners of the
Acquired Businesses (to which they agreed prospectively), the distribution
of certain assets to and the costs of certain leases assumed by the owners
of certain of the Acquired Businesses and the effects of certain other
non-recurring expenses.
(4) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(5) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
15
<PAGE>
SELECTED SUPPLEMENTAL FINANCIAL INFORMATION
(IN THOUSANDS)
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. Consequently, the Company's historical financial
statements presented below 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. As
used in this discussion, the "Company" means (i) Atlas prior to September 30,
1996 (retroactively restated for all acquisitions accounted for under the
pooling-of-interests method) and (ii) ARS and its consolidated subsidiaries on
that date and thereafter retroactively restated for all acquisitions accounted
for under the pooling-of-interests method. The following selected historical
financial information has been derived from the audited supplemental
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 has been prepared on the same basis as the audited
financial statements and, in the opinion of the Company, reflects all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of that information. The following selected balance sheet
information presents certain historical balance sheet data derived from the
supplemental consolidated financial statements of the Company. The summary
financial information below should be read in conjunction with the supplemental
consolidated financial statements and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
HISTORICAL:
Revenues.............................. $ 22,388 $ 27,607 $ 41,151 $ 48,401 $ 95,518
Gross profit.......................... 5,847 6,801 9,565 12,446 27,374
Selling, general and administrative
expenses............................ 5,218 5,963 8,766 9,648 25,787
Income from continuing operations..... 629 838 799 2,798 1,587
Interest income and other expense,
net................................. 7 95 245 160 457
Interest expense...................... (247) (269) (254) (274) (5,392)
Net income (loss) from continuing
operations.......................... $ 185 $ 366 $ 469 $ 1,608 $ (4,305)(1)
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........ $ (621) $ (527) $ (568) $ (359) $ 16,256
Total assets..................... 6,488 8,209 10,814 12,980 196,857
Total debt, including current
portion........................ 3,792 3,925 3,769 3,474 53,913
Stockholders' equity............. 190 732 1,218 2,232 112,056
</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 historical financial statements.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes thereto and "Selected Financial Information"
appearing elsewhere in this Prospectus. Statements contained in this Prospectus
regarding future financial or operational performance and results of the Company
or other similar matters that are not historical facts constitute
forward-looking statements. These forward-looking statements are subject to
numerous risks and uncertainties, including but not limited to the availability
of attractive acquisition opportunities, the successful integration and
profitable management of businesses acquired, the improvement of operating
efficiencies, the availability of working capital and funding for future
acquisitions, the ability to grow internally through expansion of services and
customer bases and reduction of overhead, the cyclical nature of the
homebuilding industry, and the level and nature of competition from other
residential and commercial maintenance services providers and other factors
discussed in this Prospectus.
INTRODUCTION
The Company's revenues are primarily derived from (i) owners and occupants
of homes and small commercial buildings and (ii) builders and developers of new
homes, residential developments and small commercial buildings. Cost of services
consists primarily of salaries and benefits of service and installation
technicians, parts and materials, subcontracted services, depreciation,
maintenance, fuel and equipment rentals. Selling, general and administrative
expenses consist primarily of compensation and related benefits for owners,
administrative salaries and benefits, advertising, office rent and utilities,
communications and professional fees.
Prior to their acquisition by the Company, the Acquired Businesses were
managed as independent private businesses, and their results of operations
reflect different tax structures (S corporations and C corporations), which have
influenced, among other things, their historical levels of owners' compensation.
Certain owners agreed to reductions in their compensation and benefits in
connection with the acquisition of their businesses by the Company.
ARS, which conducted no operations prior to September 27, 1996 other than
in connection with the IPO and the Initial Acquisitions, is in the process of
integrating the Acquired Businesses and their operations and administrative
functions. This integration process may present opportunities to reduce costs
through the elimination of duplicative functions and through economies of scale,
particularly in obtaining additional contracts through shared customer lists and
greater volume discounts from material suppliers, but will necessitate
additional costs and expenditures for corporate management and administration,
corporate expenses related to being a public company, systems integration and
facilities expansion. These various costs and possible cost-savings may make
comparison of historical operating results not comparable to, or indicative of,
future performance.
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. Consequently, the Company's historical financial
statements for periods ended on or before September 30, 1996 are the
consolidated historical financial statements of Atlas. As used in this
discussion, the "Company" means (i) Atlas prior to September 30, 1996 and (ii)
ARS and its consolidated subsidiaries on that date and thereafter.
17
<PAGE>
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 19,183 100.0% $ 22,048 100.0% $ 64,229 100.0%
Cost of services..................... 16,049 83.7 17,811 80.8 47,990 74.7
--------- --------- --------- --------- --------- ---------
Gross profit......................... 3,134 16.3 4,237 19.2 16,239 25.3
Selling, general and administrative
expenses........................... 3,138 16.3 3,022 13.7 16,767 26.1
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... (4) 0.0 1,215 5.5 (528) (0.8)
Interest income and other expense,
net................................ 171 0.9 37 0.2 350 0.5
Interest expense..................... (143) (0.7) (134) (0.6) (5,257) (8.2)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 24 0.2 1,118 5.1 (5,435) (8.5)
Income taxes......................... 7 0.1 434 2.0 101 0.1
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 17 0.1 $ 684 3.1 $ (5,536) (8.6)
========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES -- Revenues increased $42.2 million, or 191.8%, from $22.0 million
for the year ended December 31, 1995 to $64.2 million for the year ended
December 31, 1996. Approximately $31.2 million of the increase in revenues was
attributable to the acquisition of the Founding Companies on September 30, 1996
and the Fourth Quarter 1996 Acquisitions. The remaining increase was primarily
attributable to several large installation projects and the addition of $3.7
million of revenues resulting from the acquisition of three businesses by Atlas
in early 1996.
COST OF SERVICES -- Cost of services increased $30.2 million, or 169.7%,
from $17.8 million for the year ended December 31, 1995 to $48.0 million for the
year ended December 31, 1996. The increase in cost of services was consistent
with the increase in revenue. As a percentage of revenues, however, cost of
services decreased 6.1% from 80.8% in 1995 to 74.7% in 1996. This decrease
reflects the increase in the fourth quarter of revenues from higher-margin
maintenance, repair and replacement services as a result of higher profit
margins associated with certain businesses acquired in the Initial Acquisitions
and the Fourth Quarter 1996 Aquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $13.8 million, or 460.0%, from $3.0 million
for the year ended December 31, 1995 to $16.8 million for the year ended
December 31, 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 13.7% in 1995 to 26.1% in 1996. This
increase was primarily attributable to (i) the addition of $7.6 million in
expenses associated with the acquisition of Acquired Businesses in 1996 and the
formation of a corporate office and (ii) an adjustment of $3.4 million for non-
recurring, compensation expenses related to the acquisition of Enterprises
Holding Company ("EHC") in connection with the acquisition of EHC by the
Company and $0.6 million for the issuance of 39,987 shares of Common Stock to
certain employees, consultants and three officers of ARS and its affiliates.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.3 million during 1996. This increase was
attributable to (i) gains realized on the non-recurring sale of excess vehicles
and equipment acquired by ARS in connection with the Acquired Businesses and
(ii) rental income earned on owned property leased to third parties.
INTEREST EXPENSE -- Interest expense increased from $0.1 million for the
year ended December 31, 1995 to $5.3 million for the year ended December 31,
1996. This increase was attributable to (i) non-recurring financing charges of
$4.8 million paid to the holder of EHC preferred stock in connection with the
acquisition of EHC and (ii) the use of debt financing to fund the cash portion
of the purchase prices of the Fourth Quarter 1996 Acquisitions.
18
<PAGE>
INCOME TAXES -- For the year ended December 31, 1996, the Company recorded
a provision for income taxes of $0.1 million. See Note 10 of the Notes to
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 $2.8 million, or 14.6%, from $19.2 million
in 1994 to $22.0 million in 1995. Part of this increase was attributable to the
new operating facility in Hilton Head, South Carolina (opened in April 1994).
The addition of several large new home builder customers accounted for the
majority of the remaining increase.
COST OF SERVICES -- Cost of services increased $1.8 million, or 11.3%, from
$16.0 million in 1994 to $17.8 million in 1995. The increase in cost of services
was consistent with the increase in revenue, and as a percentage of revenues,
cost of services declined 2.9% from 83.7% to 80.8%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were virtually unchanged at $3.1 million and $3.0
million in 1994 and 1995, respectively.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net decreased $0.1 million from $0.2 million in 1994 to $0.1 million in
1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.1
million in both 1994 and 1995.
RESULTS OF OPERATIONS -- THE COMPANY -- SUPPLEMENTAL
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 all acquisitions accounted for
under the pooling-of-interests method. As used in this discussion, the "Company"
means (i) Atlas prior to September 30, 1996, as retroactively restated for all
acquisitions accounted for under the pooling-of-interests method of accounting
and (ii) ARS and its consolidated subsidiaries on that date and thereafter, as
retroactively restated for all acquisitions accounted for under the
pooling-of-interests method of accounting.
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 41,151 100.0% $ 48,401 100.0% $ 95,518 100.0%
Cost of services..................... 31,586 76.8 35,955 74.3 68,144 71.3
--------- --------- --------- --------- --------- ---------
Gross profit......................... 9,565 23.2 12,446 25.7 27,374 28.7
Selling, general and administrative
expenses........................... 8,766 21.3 9,648 19.9 25,787 27.0
--------- --------- --------- --------- --------- ---------
Income from continuing operations.... 799 1.9 2,798 5.8 1,587 1.7
Interest income and other expense,
net................................ 245 0.6 160 0.3 457 0.5
Interest expense..................... (254) (0.6) (274) (0.6) (5,392) (5.6)
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 790 1.9 2,684 5.5 (3,348) (3.4)
Income taxes......................... 321 0.8 1,076 2.2 957 1.0
--------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 469 1.1 $ 1,608 3.3 $ (4,305) (4.4)
========= ========= ========= ========= ========= =========
</TABLE>
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 the year ended December 31, 1995 to $95.5 million for the year ended
December 31, 1996. Approximately $31.2 million of the increase in revenues was
attributable to the acquisition of the Founding Companies on September 30, 1996
and the Fourth Quarter 1996 Acquisitions, the 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 the year ended December 31, 1995 to $68.1 million for the
year ended December 31, 1996. The increase in cost of services was consistent
with the increase in revenue. As a percentage of revenues, however, cost of
services decreased 3.0% from 74.3% in 1995 to 71.3% in 1996. This decrease
resulted primarily from the addition of higher-margin maintenance, repair and
replacement services associated with certain businesses acquired in the Initial
Acquisitions and the Fourth Quarter 1996 Aquisitions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $16.2 million, or 168.8%, from $9.6 million
for the year ended December 31, 1995 to $25.8 million for the year ended
December 31, 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 acquisition of Acquired Businesses in 1996 and the
formation of a corporate office and (ii) an adjustment of $3.4 million for non-
recurring, compensation expenses related to the acquisition of Enterprises
Holding Company ("EHC") in connection with the acquisition of EHC by the
Company and $0.6 million for the issuance of 39,987 shares of Common Stock to
certain employees, consultants and three officers of ARS and its affiliates.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net, increased by $0.3 million during 1996. This increase was
attributable to (i) gains realized on the non-recurring sale of excess vehicles
and equipment acquired by ARS in connection with the Acquired Businesses and
(ii) rental income earned on owned property leased to third parties.
INTEREST EXPENSE -- Interest expense increased from $0.3 million for the
year ended December 31, 1995 to $5.4 million for the year ended December 31,
1996. This increase was attributable to (i) non-recurring financing charges of
$4.8 million paid to the holder of EHC preferred stock in connection with the
acquisition of EHC and (ii) the use of debt financing to fund the cash portion
of the purchase prices of the Fourth Quarter 1996 Acquisitions.
INCOME TAXES -- For the year ended December 31, 1996, the Company recorded
a provision for income taxes of $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
in 1994 to $48.4 million in 1995. Part of this increase was attributable to the
new operating facility in Hilton Head, South Carolina (opened in April 1994).
The addition of several large 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 in 1994 to $36.0 million in 1995. The increase in cost of services
was consistent with the increase in revenue, and as a percentage of revenues,
cost of services declined 2.5% 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 in 1994
to $9.6 million in 1995.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net decreased $0.1 million from $0.2 million in 1994 to $0.1 million in
1995.
INTEREST EXPENSE -- Interest expense was virtually unchanged at $0.3
million in both 1994 and 1995.
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the year ended December 31, 1996, net cash used in operating
activities was $1.0 million, capital expenditures totaled $2.5 million and net
repayment of debt amounted to $0.4 million. The Company anticipates capital
expenditures (exclusive of acquisitions) of approximately $7.1 million during
1997, primarily for computer equipment, leasehold improvements and furniture and
fixtures.
20
<PAGE>
On September 27, 1996, ARS completed the IPO, which involved the issuance
of 4,200,000 shares of Common Stock at a price of $15.00 per share (before
deducting underwriting discounts and commissions). On October 7, 1996, ARS sold
an additional 630,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions) pursuant to the
underwriters' overallotment option ARS granted in connection with the IPO. The
proceeds from these transactions, net of underwriting discounts and commissions
of $1.05 per share and after deducting the expenses of the IPO, were
approximately $60.6 million. Of this amount, $34.8 million was used to fund the
cash portion of the purchase prices relating to the acquisitions of the Founding
Companies. The Company made additional aggregate payments to the former owners
of the Founding Companies of $4.7 million, representing working capital
adjustments based on the September 30, 1996 balance sheets of the Founding
Companies, pursuant to the agreements relating to the acquisitions.
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks, including NationsBank as agent. On March
3, 1997, the Company increased the size of the Credit Facility from $55 million,
which was in place at December 31, 1996, to $100 million. Borrowings under the
Credit Facility may be used for general corporate purposes, including the
funding of any cash that may be paid in connection with acquisitions, the
refinancing of indebtedness of businesses acquired, capital expenditures and
working capital. Loans under the Credit Facility bear interest at a designated
variable base rate plus margins ranging from 0 to 50 basis points, depending on
the ratio of the Company's interest-bearing debt to its trailing earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 100 to 200 basis points, depending on the same ratio.
The margin is reset on a quarterly basis and also may be reset upon the closing
of an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), will not permit the Company to incur or
assume other indebtedness in excess of any amount equal to 5% of its
consolidated net worth and will require the Company to comply with certain
financial covenants. The Credit Facility will terminate and all amounts
outstanding, if any, thereunder will be due and payable in September 1999. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the Credit Facility and the Company has pledged the stock of its operating
subsidiaries as collateral for its obligations under the Credit Facility. As of
the date of this Prospectus, the Company did not have any outstanding borrowings
under the Credit Facility.
On April 2, 1997, the Company issued $55 million aggregate principal amount
of its 7 1/4% Convertible Notes. These notes are unsecured obligations of ARS
and are convertible into an aggregate of 2,156,862 shares of Common Stock. The
Company used substantially all the net proceeds of the offering of the 7 1/4%
Convertible Notes to repay indebtedness outstanding under the Credit Facility.
In January 1997, the Company registered 5,000,000 shares of its Common
Stock pursuant to a shelf registration statement on Form S-4 (the "Shelf
Registration Statement") for issuance from time to time for future
acquisitions. As of the date of this Prospectus, 3,691,248 shares remain
available for issuance under the Shelf Registration Statement.
During the fourth quarter of 1996, the Company acquired 13 residential
services businesses for an aggregate of approximately $41.2 million in cash and
short-term notes and 1,282,910 shares of Common Stock. In the first quarter of
1997, the Company acquired an additional ten residential services businesses for
an aggregate of 1,308,752 shares of Common Stock, all of which represented
registered shares under the Shelf Registration Statement, and $640,000 in cash.
See "The Company -- Recent Acquisitions." Funding of the cash portion of the
purchase prices (including the repayment of the short-term notes issued in
connection with two of the Fourth Quarter 1996 Acquisitions) and repayment of
indebtedness assumed in connection with the acquisitions were provided by
borrowings under the Credit Facility. The Company
21
<PAGE>
believes its cash flow from operations and the borrowings available under the
Credit Facility are sufficient to support its ongoing operations and anticipated
capital expenditures for 1997.
The Company intends to continue pursuing attractive acquisition
opportunities of both residential and commercial maintenance services
businesses. The timing, size or success of any acquisition effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings, including the unborrowed portion of
the Credit Facility and the possible public or private sale of additional debt
securities, as well as issuances of additional equity, including shares under
the Shelf Registration Statement. See "Business -- Acquisition Strategy."
INFLATION
Due to the relatively low levels of inflation experienced in 1994, 1995 and
1996, inflation did not have a significant effect on the results of the Company
in those periods.
SEASONALITY
The Company has experienced, and expects that it will in the future
experience, quarterly fluctuations in revenues, operating income and cash flows
as a result of changes in weather conditions. Except for certain areas of the
southern United States, the demand for new residential installations is lower in
the winter months because new construction activity is lower as a result of
colder weather (although the Company expects that such reduction in demand 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 matters, including the timing of acquisitions. Accordingly,
quarterly comparisons of the Company's revenues and operating results should not
be relied on as an indication of future performance, and the results of any
quarterly period may not be indicative of the results to be expected for a full
year.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
for the fiscal years of the individual Founding Companies (excluding Atlas,
which is presented above) is derived from the respective audited financial
statements of the individual Founding Companies included elsewhere herein. The
selected historical financial information presented in the tables below for the
quarterly periods of the Founding Companies is derived from the respective
unaudited interim financial statements of the Founding Companies, which include
all adjustments the Company considers necessary for a fair presentation of the
results of operations and cash flows of those companies for those periods. The
following discussion should be read in conjunction with the separate company
financial statements and related notes thereto appearing elsewhere in this
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 1996
----------------- ----------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ......... $34,642 100.0% $36,334 100.0% $35,159 100.0% $25,534 100.0% $27,054 100.0%
Cost of services . 27,393 79.1 29,928 82.4 28,866 82.1 20,965 82.1 21,814 80.6
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit ..... 7,249 20.9 6,406 17.6 6,293 17.9 4,569 17.9 5,240 19.4
Selling, general
and administrative
expenses ....... 5,011 14.5 5,245 14.4 5,280 15.0 3,902 15.3 4,512 16.7
------- ------- ------- ------- ------- ------- ------- ----- ------- -------
Income (loss)
from operations .. $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 667 2.6 $ 728 2.7
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.6 million, or 6.3%, from $25.5 million
for the nine months ended September 30, 1995, to $27.1 million for the nine
months ended September 30, 1996. This increase was attributable to a $0.6
million increase in new installation revenues, a $0.6 million increase in HVAC
replacement revenues and a $0.4 million increase in other revenues.
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) a $0.5 million adjustment to write off
certain obsolete inventory; (ii) increased depreciation on replacement of fully
depreciated trucks; (iii) an increase in payroll and related employee benefits;
and (iv) an increase in the cost of delivery of parts and materials, as the
Company's operations were spread over a larger geographic region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 4.0%, from $5.0 million in
1993 to $5.2 million in 1994. This increase was consistent with the percentage
increase in revenues and was attributable to increases in payroll and related
employee benefits.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL HEATING
The following table sets forth selected information from General Heating
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 0.9 $ 2.1 $ 2.9 $ 1.4 $ (0.5)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) (1.2) 1.9
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.6) (4.3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ (0.4) $ (2.9)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, General Heating
generated $5.4 million in cash from operating activities and used $2.6 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $8.0 million.
Cash used in investment activities was primarily attributable to the
purchase and replacement of trucks in General Heating's fleet. In addition, in
1994, General Heating invested approximately $2.5 million in short-term
investment securities.
Cash used in financing activities consists primarily of S corporation
distributions to General Heating's stockholders.
Prior to the closing of the Initial Acquisitions, General Heating made
distributions to its stockholders in respect of its estimated S corporation
accumulated adjustment account as of the date of the closing. These
distributions (approximately $10.9 million as of September 30, 1996) were funded
primarily through working capital, cash provided by General Heating's operating
activities and short-term debt.
General Heating had working capital of $1.8 million as of September 30,
1996. It historically funded its operations with cash flows from operations.
RESULTS OF OPERATIONS -- CROWN
The following table sets forth certain historical selected financial data
of Crown and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
----------------- ----------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............. $16,268 100.0% $16,844 100.0% $19,124 100.0% $14,420 100.0% $15,556 100.0%
Cost of services ..... 10,332 63.5 10,314 61.2 11,333 59.3 8,603 59.7 9,636 61.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit ......... 5,936 36.5 6,530 38.8 7,791 40.7 5,817 40.3 5,920 38.1
Selling, general
and administrative
expenses ........... 5,698 35.0 5,837 34.7 6,165 32.2 4,574 31.7 4,335 27.9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from operations $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 1,243 8.6 $ 1,585 10.2
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 8.3%, from $14.4 million
for the nine months ended September 30, 1995 to $15.6 million for the nine
months ended September 30, 1996. This increase was attributable to increases of
$0.6 million each in plumbing and HVAC revenues.
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%
24
<PAGE>
in the nine months ended September 30, 1996. The increase in cost of services as
a percentage of revenue was primarily attributable to a reduction in the pricing
of services in order to increase market share.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.3 million, or 6.5%, from $4.6 million for
the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996, but declined as a percentage of revenues from 31.7% in
the nine months ended September 30, 1995 to 27.9% in the nine months ended
September 30, 1996. This percentage reduction was primarily attributable to a
$0.3 million reduction in owner compensation.
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.3 million, or 13.7%, from $16.8 million
in 1994 to $19.1 million in 1995. The increase in revenues was primarily
attributable to increases of $1.3 million and $0.9 million in HVAC revenues and
plumbing revenues, respectively.
COST OF SERVICES -- Cost of services increased $1.0 million, or 9.7%, from
$10.3 million in 1994 to $11.3 million in 1995, but decreased as a percentage of
revenues from 61.2% in 1994 to 59.3% in 1995. The percentage decrease was
attributable to a change in the mix of services provided from lower-margin
services to higher-margin services and an increase in the use of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ 0.0 $1.0 $ 1.0 $ (0.3) $ (1.8)
========= ==== ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
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.
25
<PAGE>
Crown had working capital of $0.6 million as of September 30, 1996. It
historically funded its operations with cash flows from operations and
borrowings from lenders and its sole shareholder.
RESULTS OF OPERATIONS -- FLORIDA HAC
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1994 1995 1995 1995 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 15,845 100.0% $ 14,510 100.0% $ 11,057 100.0% $ 11,267 100.0%
Cost of services..................... 12,079 76.2 10,541 72.6 8,248 74.6 8,438 74.9
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 3,766 23.8 3,969 27.4 2,809 25.4 2,829 25.1
Selling, general and administrative
expenses........................... 3,321 21.0 3,738 25.8 2,697 24.4 2,839 25.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 445 2.8 $ 231 1.6 $ 112 1.0 $ (10) (0.1)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $.2 million, or 1.8%, from $11.1 million for
the nine months ended September 30, 1995 to $11.3 million for the nine months
ended September 30, 1996.
COST OF SERVICES -- Cost of services increased $.2 million, or 2.4%, from
$8.2 million for the nine months ended September 30, 1995 to $8.4 million for
the nine months ended September 30, 1996 and increased 0.3% as a percentage of
revenues from 74.6% for the nine months ended September 30, 1995 to 74.9% for
the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 3.7%, from $2.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.3 million, or 8.2%, from $15.8 million in
1994 to $14.5 million in 1995. The decrease in revenues was primarily
attributable to a decrease in apartment complex installations.
COST OF SERVICES -- Cost of services decreased $1.6 million, or 13.2%, from
$12.1 million in 1994 to $10.5 million in 1995 and decreased 3.6% as a
percentage of revenues from 76.2% for 1994 to 72.6% for 1995. These decreases
were primarily attributable to a change in the mix of services from lower margin
apartment complexes to higher margin residential homes and improvements in
vendor pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 12.1%, from $3.3 million in
1994 to $3.7 million in 1995. This increase resulted primarily from increases in
compensation paid to shareholders.
LIQUIDITY AND CAPITAL RESOURCES -- FLORIDA HAC
The following table sets forth selected information from Florida HAC's
statements of cash flows (dollars in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.6 $ 0.5 $ 0.5 $ 0.1
Net cash used in investing
activities........................ (0.2) (0.2) (0.2) (0.1)
Net cash provided by (used in)
financing activities.............. (0.1) 0.0 (0.5) (0.6)
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. $ 0.3 $ 0.3 $ (0.2) $ (0.6)
========= ========= ========= =========
26
<PAGE>
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment. Net cash provided
by (used in) financing activities resulted from borrowing and repayments of
long-term obligations and capital lease obligations and advances to/from the
shareholders of the Company.
Florida HAC had working capital of $0.3 million as of September 30, 1996.
Florida HAC historically funded its operations with cash flows from operations
and borrowings from lenders and its stockholders.
RESULTS OF OPERATIONS -- MERIDIAN & HOOSIER
The following table sets forth certain historical selected financial data
of Meridian & Hoosier and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,066 100.0% $ 10,133 100.0% $ 7,499 100.0% $ 11,508 100.0%
Cost of services..................... 5,797 71.9 7,281 71.9 5,357 71.4 7,795 67.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,269 28.1 2,852 28.1 2,142 28.6 3,713 32.3
Selling, general and administrative
expenses........................... 1,988 24.6 2,350 23.2 1,660 22.1 2,785 24.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 281 3.5 $ 502 4.9 $ 482 6.5 $ 928 8.1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $4.0 million, or 53.3%, from $7.5 million
for the nine months ended September 30, 1995 to $11.5 million for the nine
months ended September 30, 1996. Approximately $1.5 million of this increase was
attributable to the purchase of Sagamore Heating & Cooling ("Sagamore") on
January 1, 1996, and a majority of the remaining increase was due to increased
sales of residential replacement services.
COST OF SERVICES -- Cost of services increased $2.4 million, or 44.4%, from
$5.4 million for the nine months ended September 30, 1995 to $7.8 million for
the nine months ended September 30, 1996, but declined 3.7% as a percentage of
revenues from 71.4% for the nine months ended September 30, 1995 to 67.7% for
the nine months ended September 30, 1996. The dollar increase in cost of
services was primarily attributable to the increased sales for the nine months
ended September 30, 1996. The decrease as a percentage of revenues was primarily
attributable to improvements in equipment purchasing resulting from the Sagamore
acquisition and changes in the mix of services provided.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $1.1 million, or 64.7%, from $1.7 million for
the nine months ended September 30, 1995 to $2.8 million for the nine months
ended September 30, 1996. This increase was primarily attributable to added
administrative staff resulting from the acquisition of Sagamore and increased
marketing and selling expenses.
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.
27
<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):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
(UNAUDITED)
Net cash provided by operating
activities........................ $ 0.4 $ 0.7 $ 0.3 $ 0.9
Net cash used in investing
activities........................ (0.5) (0.2) (0.1) (1.1)
Net cash provided by (used in)
financing activities.............. 0.3 (0.1) (0.1) 0.8
--------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents.................. $ 0.2 $ 0.4 $ 0.1 $ 0.6
========= ========= ========= =========
Net cash provided by operating activities consisted primarily of net income
plus depreciation and amortization. Net cash used in investing activities
consisted of capital expenditures for property and equipment and the acquisition
in 1996 of Sagamore. Net cash provided by (used in) financing activities
resulted from borrowing and repayments of long-term obligations and capital
lease obligations.
Meridian & Hoosier had working capital of $0.6 million as of September 30,
1996. It historically funded its operations with cash flows from operations and
borrowings from lenders and its sole stockholder.
RESULTS OF OPERATIONS -- A-ABC
The following table sets forth certain historical selected financial data
of A-ABC and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- ------------------------------------------
1993 1994 1995 1995 1996
-------------------- -------------------- -------------------- -------------------- --------------------
(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>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.4 million, or 6.1%, from $6.5 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily attributable to
a $0.2 increase in HVAC installations and a $0.1 million increase in appliance
service.
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees,
resulting in reduced labor costs as a percentage of sales.
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.
28
<PAGE>
COST OF SERVICES -- Cost of services increased $0.1 million, or 1.8%, from
$5.6 million in 1994 to $5.7 million in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to
decreases of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million in 1993 to $5.6 million in 1994 and was consistent as a percentage
of revenue with the reduction in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.4 million, or 14.3%, from $2.8 million in
1993 to $2.4 million in 1994. This decrease resulted from a $0.4 million
reduction in advertising expense.
LOSS FROM DISCONTINUED OPERATIONS -- Loss from discontinued operations
decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993 to a $0.1
million loss for 1994. The decrease in the loss was primarily attributable to
reductions of $0.6 million, $0.1 million and $0.3 million in salary and benefit
cost, rent and property tax expense and advertising expense, respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
Net cash provided by operating
activities....................... $0.8 $0.3 $0.6 $ 0.1 $ 0.5
Net cash provided by (used in)
investing activities............. (1.2) 0.2 (0.4) (0.2) (0.6)
Net cash used in financing
activities....................... 0.4 (0.4) (0.1) 0.0 (0.1)
---- ---- ---- ----- -----
Net increase (decrease) in cash and
cash equivalents................. $0.0 $0.1 $0.1 $(0.1) $(0.2)
==== ==== ==== ===== =====
From 1993 through the nine months ended September 30, 1996, A-ABC generated
$2.2 million in net cash from operating activities.
Cash used in investment activities was primarily attributable to purchasing
additional trucks and the net change in the cash provided by (used in)
discontinued operations.
Cash used in financing activities consisted primarily of S corporation
distributions to the Company's sole shareholder and net borrowings and
repayments of long-term obligations.
A-ABC had a working capital deficit of $1.2 million at September 30, 1996.
It historically funded its operations with cash flows from operations and
borrowings from lenders and its shareholder.
29
<PAGE>
BUSINESS
GENERAL
The Company is the largest publicly held company in the United States
engaged principally in providing comprehensive maintenance, repair, replacement
and new equipment installation services for HVAC, plumbing, electrical and IAQ
systems and major home appliances, primarily in homes and small commercial
buildings, including those under construction. ARS was founded in October 1995
to create the leading national provider of these services. To achieve this goal,
the Company has embarked on an aggressive acquisition program and has
implemented a national operating strategy to increase internal growth and
capitalize on cost efficiencies.
With the inclusion of the Fourth Quarter 1996 Acquisitions and the First
Quarter 1997 Acquisitions, management estimates maintenance, repair and
replacement services currently account for approximately 55% of the Company's
total revenues and new installation services currently account for approximately
45%. The Company believes the profitability of its maintenance, repair and
replacement business benefits from its installation services operations as a
result of (i) the significant volume of purchases of HVAC systems for its
high-volume installation services and (ii) the addition of new customer and
equipment information in the Company's marketing database. This database
provides the Company with valuable information 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 maintenance, repair and
replacement services for residential HVAC systems. Through leveraging these
benefits, acquiring new service companies and internal development, the Company
intends to emphasize the growth of its higher-margin maintenance, repair and
replacement services business.
INDUSTRY OVERVIEW
The Company believes the HVAC, plumbing and electrical industries in the
United States represent an annual market in excess of $40 billion, of which
residential maintenance, repair and replacement services account for in excess
of $25 billion. 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 significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service technicians and providing a full complement of
high-quality residential services in an industry that has often been
characterized by inconsistent quality, reliability and pricing. It also believes
the highly fragmented nature of the residential services industry will provide
it with significant opportunities to consolidate the capabilities and resources
of a large number of existing residential services businesses.
BUSINESS STRATEGY
The Company plans to enhance its market position as a leading national
provider of professional, high-quality residential services by emphasizing
growth through acquisitions and by continuing to implement a national operating
strategy that enhances internal revenue growth and profitability and achieves
cost efficiencies. In addition, through its recently formed AMS subsidiary, the
Company intends to become the leading provider of comprehensive maintenance,
repair and replacement services for HVAC, plumbing and electrical systems in
existing large commercial facilities such as office buildings, health care
facilities, educational institutions and large retail outlets.
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, expanding within existing markets for
residential services and developing opportunities to expand into providing
commercial maintenance services. The Company believes it can leverage its
experience and success in developing a leading market
30
<PAGE>
position in the residential services business to capitalize on consolidation
opportunities in the commercial maintenance services business.
o ENTERING NEW GEOGRAPHIC MARKETS. In each new market, the Company
initially targets for acquisition one or more leading local or
regional companies providing residential or commercial maintenance
services and having the critical mass necessary to be a core business
with which other residential or commercial maintenance services
operations can be consolidated. An important criterion for these
acquisition candidates is superior operational management personnel,
whom the Company generally seeks to retain.
o EXPANDING WITHIN EXISTING MARKETS. Once the Company has entered a
market, it generally seeks to acquire other well-established service
companies operating within that region, in order to expand its market
penetration and the range of services it offers in that market. The
Company also pursues "tuck-in" acquisitions of smaller companies
whose operations can be incorporated into the Company's existing
operations without 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 technicians. The Company is implementing specialized
computer and modern communications technology at each of its locations
to improve productivity, communications, vehicle dispatch and service
quality and responsiveness. Management believes these 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 equipment for resale, service vehicles, parts and
tools; vehicle and equipment maintenance; financing arrangements;
employee benefits; and insurance and bonding.
ACQUISITION STRATEGY
Given the large size and fragmentation of the residential and commercial
maintenance services industries, the Company believes there are numerous
potential acquisition candidates both within the markets currently served by the
Company and in other 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 or commercial maintenance services companies.
Generally, these companies are run by successful entrepreneurs whom the Company
endeavors to retain and are of sufficient size to provide the basis for future
Company expansion within a given market. Through implementation of its national
operating strategy, the Company seeks to aid the acquired companies (operating
on a decentralized basis) in increasing their revenues and improving their
profitability. Once the Company has entered a market, it seeks to acquire other
residential services providers in order to expand its share of that market and
increase the range of services offered in that market. Some of the acquisitions
within existing markets are large enough
31
<PAGE>
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 whereby these companies can benefit from regional operating
efficiencies such as shared dispatching from regional call centers, marketing
efforts, centralized maintenance, local purchasing power, expanded service line
management expertise and other economies of scale.
Each acquisition candidate is expected to demonstrate potential for revenue
growth and profitability. The Company also evaluates certain qualitative
characteristics of acquisition candidates, including their reputations in their
respective geographic regions, the size and other characteristics of customer
bases, the quality and experience levels of operating management and service
technicians, the amount, type and condition of their equipment and facilities
and their operating histories. For example, the Company has acquired each of the
winners of CONTRACTING BUSINESS magazine's Residential Contractor of the Year
Award for 1995, 1996 and 1997. The Company believes there are numerous
acquisition candidates that meet the Company's acquisition criteria.
The Company believes it is regarded by many owners of residential services
businesses as an attractive acquiror because of: (i) the Company's strategy for
creating a large, professionally managed company with national name recognition
and a reputation for quality service and customer satisfaction; (ii)
management's experience in consolidations; (iii) the Company's decentralized
operating strategy; (iv) the Company's increased visibility and access to
financial resources as a public company; (v) the potential for increased
profitability due to centralized administrative functions, enhanced systems
capabilities and access to increased marketing resources; and (vi) depending on
the size of the acquisition, the ability of the business being acquired to
participate in the Company's growth and expansion, while realizing liquidity.
The Company has analyzed various data on the residential services industry
and individual businesses within the industry and believes it is well-positioned
to implement its acquisition program. On the basis of the Company's experience
in connection with the acquisitions of the Acquired Businesses, the Company
believes its operating management will be instrumental in identifying and
completing future acquisitions. Several of these executives have had leadership
roles in both national and regional residential services trade associations,
which have allowed these principals to become personally acquainted with other
owners of residential services businesses across the country. The Company
believes that the visibility of these individuals within these associations will
increase the industry's awareness of the Company and its acquisition program,
thereby attracting interest from owners of other residential services companies.
In addition, several members of the Company's executive management team have
worked together for a number of years and have significant experience in
negotiating, closing and integrating acquisitions in various industries. The
timing, size and success of the Company's acquisition efforts and the associated
potential capital commitments cannot be readily predicted.
As consideration for future acquisitions, the Company intends to use
various combinations of its Common Stock, cash and notes. The consideration for
each future acquisition will vary on a case-by-case basis, with the major
factors being historical operating results, the future prospects of the business
to be acquired and the ability of that business to complement the services
offered by the Company. See "Risk Factors -- Dependence on Acquisitions for
Growth" 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 and other systems in homes and small
commercial buildings. It also installs such operating systems in new homes and
small commercial buildings under construction. The Company's maintenance, repair
and replacement services include: checkups, cleaning, repair and replacement of
HVAC systems and associated parts; maintenance, repair and replacement of
electrical switches, outlets, lines, panels and fixtures; repair and replacement
of bathroom fixtures, water filters and water heaters; cleaning, repair and
replacement of pipes, sewer lines and residential sanitary systems; and
maintenance, repair and
32
<PAGE>
replacement of other residential systems, including home appliances. In
connection with its repair and replacement services, the Company sells on a
retail basis a wide range of HVAC, plumbing, electrical and other equipment,
including complete heating and air conditioning systems and a variety of HVAC,
plumbing and electrical parts and system components. As a subcontractor to
builders, it installs complete central heating and air conditioning systems,
electrical systems, plumbing systems and other systems in newly constructed
homes and small commercial buildings.
The following table shows, by region, the range of residential maintenance,
repair and replacement services and new installation services provided by the
various Acquired Businesses acquired through the first quarter of 1997.
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
MAINTENANCE, REPAIR AND REPLACEMENT
SERVICES:
California........................... X X
Florida.............................. X X
Illinois............................. X
Indiana.............................. X X X
Michigan............................. X
North Carolina....................... X
Oklahoma............................. X
South Carolina....................... X X X
Texas................................ X X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X
NEW INSTALLATION SERVICES:
California........................... X
Florida.............................. X
Indiana.............................. X X X
Michigan............................. X
North Carolina X
South Carolina....................... X X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X X
An important element of the Company's growth strategy is to increase the
range of residential services, particularly the maintenance, repair and
replacement services it provides, in each of its regions through acquisitions
and internally generated growth. Accordingly, the mix of services reflected in
the foregoing table is expected to change over time as the Company implements
its growth strategy. In addition, the Company intends to provide a full range of
these services in new geographic areas into which it will expand, principally by
acquisitions. See " -- Business Strategy."
One strategy by which the Company will attempt to increase the reach of its
residential services is through the utilization of its ARS Energy Services
Company ("ARS Energy") subsidiary. This subsidiary has been organized for the
purpose of formulating and implementing strategic alliances with major national
and regional companies that may be able to integrate the Company's residential
services with their own products or services and thereby make the Company's
services available to their customers. These participants may include utilities,
equipment manufacturers, home remodeling companies, home supply distributors,
realtors, insurance companies, restaurant chains and other multi-location
retailers.
COMMERCIAL MAINTENANCE SERVICES
Another important element of the Company's growth strategy is expansion
into the commercial maintenance services market to provide services for existing
large commercial, industrial and institutional facilities such as office
buildings, health care facilities, educational institutions and large retail
outlets.
33
<PAGE>
Currently, Atlas and Meridian & Hoosier (two of the Founding Companies) and
Keenan Mechanical Services, Inc. (one of the Fourth Quarter 1996 Acquisitions)
are the only Acquired Businesses that provide commercial maintenance services.
Through AMS, the Company intends to acquire additional businesses in this market
and enter into long-term maintenance agreements for the types of facilities
described above. The Company is actively pursuing acquisitions of commercial
maintenance services businesses, but currently has no binding agreements to
acquire any commercial maintenance services business. The Company intends to
offer true single-source commercial maintenance service capabilities, including
internal air quality services, CFC retrofit capabilities, building automation
services, remote monitoring, lighting services and design and build retrofit
capabilities for major facility expansion or renovation projects. See "Risk
Factors -- Risks of Expansion into Commercial Maintenance Services Business."
OPERATIONS
The Company operates on a decentralized basis, with the management of each
operating location responsible for its day-to-day operations, profitability and
growth. Local management is provided support through the Company's marketing and
advertising strategies and programs and in developing optimal pricing
strategies. Financial resources for improved systems and expansion of services,
training programs, financial controls, purchasing information and operating
expertise is shared among locations to improve productivity, lower operating
costs and improve customer satisfaction to stimulate internal growth. While the
local management operates with a high degree of autonomy and is empowered to
make the necessary operating decisions, adherence to Company training, safety,
customer satisfaction, accounting and internal control policies is required.
Frequent communication with the Company's executive management team is integral
to the Company's achieving the benefits that are anticipated by the
consolidation of these businesses into a single company.
The Company's residential service operations are coordinated by local
operations centers, which are staffed by order entry and customer service
personnel, operations or service coordinators, and inventory, vehicle
maintenance and office personnel. These centers use specialized computer and
communications technology to process orders, arrange service calls, ensure
timely delivery of required repair parts or new equipment, communicate with
customers and service technicians and invoice customers. A typical maintenance,
repair or replacement service call begins with either the customer telephoning a
local operations center and requesting an estimate or placing an order for
repair service or the Company calling the customer to make an appointment for
periodic service agreement maintenance. Coordination and deployment of service
technicians are managed by the operations center through communications systems
linked to the center's computer system, cellular telephone, pager or radio.
Service personnel work out of service vehicles, which are equipped with an
inventory of equipment and commonly required tools, parts and supplies needed to
complete a variety of jobs. The service technician assigned to a service call is
generally responsible for driving to the service location, initiating the
customer contact, analyzing the problem and job requirements, providing the
price quotation, overseeing the work and collecting payment for the service.
Payment for maintenance, repair and replacement services not covered by a
service contract is generally made in cash or by check or credit card at the job
site, except for certain well-established customers.
The Company's service technicians respond to three general types of
maintenance, repair and replacement service calls: requests for services under
the Company's monitoring service contracts, requests for service under the
Company's warranty service contracts and requests for emergency or other
services not under contract. A substantial majority of these service calls are
for emergency or other services not under contract. Service calls cover a wide
variety of services, including the replacement of entire HVAC systems. Service
histories on past customers are generally available to the customer service
representatives in a continuously updated computer database matched to addresses
in the local service area.
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. Typically, new installation
service begins with the customer providing the architectural plans or mechanical
drawings for the particular home or an entire tract of homes or other facility
to be
34
<PAGE>
constructed and either requesting a bid or entering into direct negotiation for
the work required. The Company's new installation personnel analyze the plans to
determine the labor, materials and equipment type and size required for the
installation of the system specified, price the job and either bid for or
negotiate the written contract for the job. In HVAC installations, most of the
required air ducts are fabricated and, together with the other equipment to be
installed, partially pre-assembled in the Company's facilities and readied for
delivery to the job site. The equipment and supplies necessary for the
particular job are ordered from the suppliers or manufacturers, and delivery
generally is timed according to the builder's schedule. The installation work is
coordinated with the builder's construction supervisors. Scheduled draw payments
for these services generally are obtained within 30 days of completing the
installation, at which time any mechanics' and materialmen's liens securing the
rights to such payments are released. Interim payments are often obtained to
cover the Company's labor and materials costs on large installation projects.
Except for the air ducts fabricated by the Company for use in its
installation services operations, substantially all the equipment and component
parts the Company sells or installs are purchased from manufacturers and other
outside suppliers. As a result of the implementation of its operating
strategies, the Company has begun to consolidate the number of manufacturers and
other outside suppliers from which it obtains equipment and other items. The
Company is not, however, materially dependent on any of these outside sources.
See " -- Sources of Supply."
SALES AND MARKETING
The Company believes that, in most of its current geographic markets, it
has well-known and established businesses that are leading providers of one or
more residential services in their markets. The Company intends to build on this
foundation through the use of advertising to expand name recognition and the
adoption of best practices to increase the quality of services provided. For
example, the Company is implementing the uniform practice whereby the Company's
customers receive prompt follow-up inquiries to determine customer satisfaction
levels and to arrange for follow-up service calls if necessary. The Company
believes this practice can be uniformly implemented at each of its service
locations without material cost to the Company.
In each of the market areas in which the Company provides residential
maintenance, repair and replacement services, vigorous advertising campaigns
traditionally have been emphasized by the Acquired Businesses. These campaigns
have used mailouts, yellow pages, newspapers, radio and television to promote
the services offered under their particular trade names or service marks. These
advertising campaigns have been effective in creating name recognition and
customer identification with these companies for the quality of the services
they offer in their local areas. The Company expects for the foreseeable future
to retain the trade names and service marks of these companies in its
advertising and promotional materials in their local areas, but intends over
time to promote and establish the Company's name and service marks nationally.
See " -- Intellectual Property."
The Company also views its existing service contracts as an important way
of retaining its customer base. The Company has several general types of service
contracts: "maintenance and repair" contracts whereby the Company maintains
and repairs selected residential HVAC, plumbing, electrical and other systems
for a period of time for a fixed fee and "maintenance only" or "repair only"
contracts whereby the Company makes periodic inspections of a residential system
and provides certain preventative maintenance for a period of time for a fixed
fee. The Company believes that such service contracts provide the Company with
flexibility in determining the timing for delivery of its services, thereby
generating greater stability in the level of demand for services throughout
different seasons of the year. See " -- Seasonality." Certain states regulate
the provision of service under residential services warranty contracts. See
" -- Governmental Regulation and Environmental Matters."
With respect to its new installation business, the Company's marketing
strategy focuses on cultivating long-term relationships with its national,
regional and local home builder and general contractor customers. The Company's
marketing efforts with these customers primarily involve direct sales contacts
emphasizing the Company's quality of services and reliability. In addition,
labels with the Company's name and phone
35
<PAGE>
number are applied to newly installed equipment, and direct telemarketing sales
efforts for service contracts are timed to closely coincide with the expiration
of manufacturer warranties on Company installed equipment. The Company believes
these measures in connection with its new installation business will lead to
maintenance, repair and replacement business.
The Company has numerous customers. No single customer accounted for more
than 10% of the Company's revenues during 1996.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all service technicians it uses meet safety standards
established by the Company, its insurance carriers and federal, state and local
laws and regulations. The Company reviews prospective permanent service
technicians to ensure they are trained thoroughly in their trades, the Company's
procedures and customer satisfaction standards, possess the required trade
licenses and have acceptable driving records.
The Company has developed continuous training programs to provide initial,
refresher and upgrade training programs to trainees, apprentices and service and
installation technicians. These programs typically are presented by the
Company's senior master plumbers, electricians, heating and air conditioning
service technicians and safety supervisors. For example, in Houston, the Company
operates a large classroom and training facility incorporating "hands on"
training stations where service personnel, apprentices and new trainees can work
on functioning HVAC, plumbing, electrical and other systems under the
supervision of skilled tradesmen. A safety supervisor at this facility conducts
both initial and continuous comprehensive training classes for all personnel and
works with operating management to observe and evaluate safety procedures in an
effort to constantly improve the effectiveness of the Company's safety programs.
VEHICLES AND FACILITIES
The Company operates a fleet of owned or leased service trucks, vans and
support vehicles in its operations. It believes these vehicles generally are
well-maintained, ordinary wear and tear excepted, and adequate for the Company's
current operations.
The Company owns certain of its facilities and leases the remainder of its
facilities under leases with remaining terms ranging from month-to-month
(generally in the case of facilities being consolidated with others) to 10 years
on terms the Company believes to be commercially reasonable. Some of these
leases are with officers and directors of the Company who became associated with
the Company in connection with the Acquired Businesses. See "Certain
Transactions -- Real Estate and Other Transactions." Total combined rental
expense for the facilities leases of the Founding Companies in 1996 (excluding
certain discontinued retail appliance operations) was approximately $2.0
million.
The Company's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company's principal operating
facilities include (i) a 60,000 square foot facility owned by the Company and
located in Houston, Texas, which is the primary base for the Company's Houston
operations, (ii) a 36,000 square foot leased facility in Manassas, Virginia,
which serves as the principal fabrication and production facility for General
Heating, (iii) a 36,000 square foot leased facility in Savage, Maryland, which
serves as a distribution, fabrication, production and administrative facility
for General Heating, (iv) a 68,000 square foot leased facility in Raleigh, North
Carolina, which is the principal operating base for Metro, (v) a 62,500 square
foot leased facility in Charleston, South Carolina, which is the headquarters
for Atlas, (vi) a 29,000 square foot leased facility in Margate, Florida, which
serves as the principal office and fabrication facility for Florida HAC and
(vii) a 20,000 square foot leased facility in the West Palm Beach, Florida area,
which is the operational base for Sasso. The Company believes its facilities are
well-maintained and adequate for the Company's existing and planned operations
at each operating location.
The Company leases its principal executive and administrative offices in
Houston, Texas.
36
<PAGE>
INTELLECTUAL PROPERTY
The Company owns various trademarks, service marks and trade names, which
it uses in its local operations, advertising and promotions. It is expected
that, for the foreseeable future, the Acquired Businesses and most other
additional businesses subsequently acquired by the Company will continue to use
their respective trade names and service marks in their local areas, although
the Company intends over time to have its operations identified by the Company's
name and logos. The Company is implementing certain uniform service names and
markings for use on its vehicles and in its advertising and promotional
materials. See "-- Sales and Marketing."
EMPLOYEES
As of March 31, 1997, the Company had approximately 2,500 employees. As it
implements its internal growth and acquisition strategies, the Company expects
that the number of employees will increase. The Company currently is not a party
to any collective bargaining agreements. The Company has not experienced any
strikes or work stoppages and believes its relationship with its employees is
good.
The residential services business is characterized by, among other things,
high turnover rates among service technicians. A substantial majority of the
service technician turnover experienced by the Acquired Businesses in recent
years has been during the extended screening period in the first year of
employment. The Company's future success will depend, in part, on its ability to
continue to attract, retain and motivate qualified service technicians and
operational management personnel. One way by which the Company hopes to attract,
retain and motivate such personnel is by offering them a more comprehensive
benefits package at less cost to the employee than is typical in the industry.
The Company is able to offer such a package in a cost effective manner because
of the large number of persons it employs.
SOURCES OF SUPPLY
The raw materials used in the Company's operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain equipment and raw materials
through volume purchases. The Company has not experienced any significant
difficulty in obtaining adequate supplies to conduct its operations.
COMPETITION
The markets for residential services and commercial maintenance services
are highly competitive. The Company believes that the principal competitive
factors in these segments of the industry are (i) timeliness, reliability and
quality of services provided, (ii) range of services provided, (iii) market
share and visibility and (iv) price. The Company believes its strategy of
creating a leading national provider of comprehensive residential services and
commercial maintenance services directly addresses these factors. The ability of
the Company to recruit, train and retain highly motivated service technicians to
provide quality services should be enhanced by its ability to utilize
professionally managed recruiting and training programs. In addition, the
Company offers compensation, health and savings benefits that are more
comprehensive than most offered in the industry. See "-- Hiring, Training and
Safety" and " -- Employees." Quality of service should be enhanced by the
implementation and continuous reinforcement of customer satisfaction policies,
retraining and follow-up with the customer. Competitive pricing is possible
through the implementation of the cost-saving opportunities that exist across
each of the service lines offered and from productivity improvements.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a single local geographic area. Certain of these smaller
competitors may have lower overhead cost structures and, consequently, may be
able to provide their services at lower rates. Moreover, in the residential
services market many homeowners have traditionally relied on individual persons
or small repair service firms with whom they have long-established relationships
for a variety of home repairs. The Company believes there are currently only
three public companies, Chemed Corporation (through a subsidiary, Roto-Rooter,
Inc.), Service Experts, Inc. and Baltimore Gas & Electric Company (through a
subsidiary), focused on providing
37
<PAGE>
residential services in some of the same services lines provided by the Company.
There are a number of national chains, such as Home Depot, Sears and Builders
Square, that sell a variety of plumbing fixtures and equipment, and heating and
air conditioning equipment for residential use and offer, either directly or
through various subcontractors, installation, warranty and repair services.
Other companies or trade groups engage in franchising their names and marketing
programs in some residential services lines. In the 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 original
equipment manufacturers provide commercial maintenance services as a complement
to their manufacturing and distribution businesses. In the future, competition
in both the residential and commercial maintenance service lines may be
encountered from, among others, other newly formed or existing public or private
service companies with aggressive acquisition programs, the unregulated business
segments of regulated gas and electric utilities or from newly deregulated
utilities in those industries entering into various service areas. Certain of
the Company's competitors and potential competitors have greater financial
resources than the Company to finance acquisition and development opportunities,
to pay higher prices for the same opportunities or to develop and support their
own residential or commercial maintenance services operations if they decide to
enter the business.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Many aspects of the Company's operations are subject to various federal,
state and local laws and regulations, including, among others, (i) permitting
and licensing requirements applicable to service technicians in their respective
trades, (ii) building, HVAC, plumbing and electrical codes and zoning
ordinances, (iii) laws and regulations relating to consumer protection,
including laws and regulations governing service contracts for residential
services, and (iv) laws and regulations relating to worker safety and protection
of the environment.
The Company believes it has all required permits and licenses to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential and
commercial maintenance services trades require various permits and licenses to
be held by individuals. In some cases, a required permit or license held by a
single individual may be sufficient to authorize specified activities for all
the Company's service technicians who work in the geographic area covered by the
permit or license. The Company has implemented a policy to ensure that, where
allowed, any such permits or licenses that may be material to the Company's
operations in a particular geographic region are held by at least two persons
within that region.
The Company's operations are affected by numerous federal, state and local
environmental laws and regulations, including those governing vehicle emissions
and the use and handling of refrigerants. The technical requirements of these
laws and regulations are becoming increasingly expensive, complex and stringent.
Federal and state environmental laws include statutes intended to allocate the
cost of remedying contamination among specifically identified parties. The
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA" or "Superfund") imposes strict, joint and several liability on
owners or operators of facilities at, from, or to which a release of hazardous
substances has occurred, on parties who generated hazardous substances that were
released at such facilities, and on parties who arranged for the transportation
of hazardous substances to such facilities. A majority of states have adopted
"Superfund" statutes comparable to and, in some cases, more stringent than
CERCLA. If the Company were to be found to be a responsible party under CERCLA
or a similar state statute, the Company could be held liable for all
investigative and remedial costs associated with addressing such contamination.
In addition, claims alleging personal injury or property damage may be brought
against the Company as a result of alleged exposure to hazardous substances
resulting from the Company's operations. The Company has not been notified that
it is a potentially responsible party under CERCLA or any similar state statute.
38
<PAGE>
The Company's operations are subject to the federal Clean Air Act, as
amended (the "Clean Air Act"), which governs air emissions and imposes
specific requirements on the use and handling of chlorofluorocarbons and certain
other refrigerants ("CFCs"). Clean Air Act regulations require the
certification of service technicians involved in the service or repair of
systems, equipment and appliances containing these refrigerants and also
regulate the containment and recycling of these refrigerants. These requirements
have increased the Company's training expenses and expenditures for containment
and recycling equipment. The Clean Air Act is intended to ultimately eliminate
the use of CFCs in the United States and require alternative refrigerants to be
used in replacement HVAC systems. The implementation of the Clean Air Act
restrictions has also increased the cost of CFCs in recent years and is expected
to continue to increase such costs in the future. As a result, the number of
conversions of existing HVAC systems which use CFCs to systems using alternative
refrigerants is expected to increase.
The Company's operations in certain geographic regions are subject to laws
that will, over the next few years, require specified percentages of vehicles in
large vehicle fleets to use "alternative fuels," such as compressed natural
gas ("CNG") or propane, and to meet reduced emissions standards. The Company
does not anticipate that the cost of fleet conversion that may be required under
current laws will be material. Future costs of compliance with these laws will
be dependent upon the number of vehicles purchased in the future for use in the
covered geographic regions, as well as the number and size of future business
acquisitions by the Company in these regions. The Company cannot determine to
what extent its future operations and earnings may be affected by new
regulations or changes in existing regulations relating to vehicle emissions.
Prior to entering into the agreements relating to the Acquired Businesses,
the Company evaluated the properties to be acquired and property leases to be
assumed in the Acquired Businesses, and engaged an independent environmental
consulting firm to conduct or review assessments of environmental conditions at
certain properties owned or operated by the Acquired Businesses. No material
environmental problems were discovered in these reviews, and the Company is not
otherwise aware of any actual or potential environmental liabilities of the
Acquired Businesses that would be material to the Company. The Company is in the
process of implementing various programs to promote compliance with applicable
health and worker safety regulations and to increase employee safety awareness.
Capital expenditures for property, plant and equipment for environmental
control facilities during fiscal 1996 were not material. The Company does not
currently anticipate any material adverse effect on its business or consolidated
financial position as a result of future compliance with existing environmental
laws and regulations controlling the discharge of materials into the
environment. Future events, however, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies or stricter or different interpretations of existing laws
and regulations may require additional expenditures by the Company which may be
material.
LITIGATION AND INSURANCE
The Company is, from time to time, a party to litigation arising in the
normal course of its business, most of which involves claims for personal injury
and property damage incurred in connection with its operations. The Company is
not currently involved in any litigation the Company believes will have a
material adverse effect on its financial condition or results of operations.
The Company maintains various worker safety and quality control programs in
an attempt to reduce the risk of potential damage to persons and property. In
addition, the Company maintains insurance in such amounts and against such risks
as it deems prudent. No assurance can be given such insurance will be sufficient
under all circumstances to protect the Company against significant claims for
damages. The occurrence of a significant event not fully insured against could
materially and adversely affect the Company's financial condition and results of
operations. Moreover, no assurance can be given the Company will be able to
maintain adequate insurance in the future at commercially reasonable rates or on
acceptable terms.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer (ages are as of March 31, 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................... 47 Director(1) and Chief Operating Officer III
John D. Held........................ 34 Senior Vice President, General Counsel
and Secretary
Harry O. Nicodemus, IV.............. 49 Vice President, Chief Financial Officer
and Chief Accounting Officer
Frank N. Menditch................... 45 Director(3); Director of Northeast II
Operations
Elliot Sokolow...................... 54 Director(3); Director of Southeast I
Operations
A. Jefferson Walker III............. 34 Treasurer
Michael Mamaux...................... 31 Controller
Thomas N. Amonett................... 54 Director(4)(5) I
Robert J. Cruikshank................ 66 Director(2)(4) II
Randall B. Hale..................... 34 Director(4) II
Nolan Lehmann....................... 52 Director(5) III
William P. McCaughey................ 38 Director(2) III
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.
C. CLIFFORD WRIGHT, JR. has been President and Chief Executive Officer and
a director since November 1995. From 1991 to 1995, Mr. Wright was Vice President
and Chief Financial Officer of American Ecology Corporation. From 1990 to 1991,
Mr. Wright was a Director of Corporate Finance with KPMG Peat Marwick. Prior
thereto, he was a divisional vice president in finance and planning of
Browning-Ferris Industries, Inc. ("BFI"). Mr. Wright is a Certified Public
Accountant.
HOWARD S. HOOVER, JR. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by BFI and served during his
tenure as a director and in various management capacities as a member of the
Senior Management Committee, Senior Vice President, General Counsel and
Secretary. From 1992 until 1995, Mr. Hoover was engaged in various business
development and consulting activities.
GORDEN H. TIMMONS has served as Chief Operating Officer and a director
since September 1996. He founded Atlas in 1976 and served as its President until
September 1996. Mr. Timmons was a founder of the Charleston Chapter of the Air
Conditioning Contractors of America ("ACCA") and is a past President of that
Chapter. Mr. Timmons has been active in computer systems development for HVAC
companies and is a frequent speaker at national industry conventions.
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
since March 1996. From October 1995 to March 1996, he was an associate at the
law firm of Liddell, Sapp, Zivley, Hill and LaBoon, LLP. Mr. Held was Associate
General Counsel of American Ecology Corporation from 1994 to 1995 and was an
associate at the law firm of Baker & Botts, L.L.P. prior thereto.
40
<PAGE>
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 Corporation since February 1993. From January 1991 to January 1993, he
was Divisional Vice President and Assistant Controller of BFI.
FRANK N. MENDITCH has been a director since September 1996 and Director of
the Company's Northeast operations since November 1996. 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 Director of the
Company's Southeast operations since November 1996. He was a founder of Florida
HAC in 1970 and has served as its president since 1977. Mr. Sokolow served as
national President of ACCA in 1992 and 1993 and is the President-Elect of the
Florida Air Conditioning Contractors Association.
A. JEFFERSON WALKER III joined the Company in April 1996 as Treasurer and
was a consultant to the Company from January 1996 to March 1996. From 1993 to
January 1996, he was employed by American Ecology Corporation as a
Manager-Financial Analysis and Assistant Treasurer. From 1990 to 1993, Mr.
Walker served as a Senior Financial Analyst and Assistant Banking Officer of
Mellon Bank Corporation in Houston, Texas. Mr. Walker was a financial analyst at
BFI from 1988 to 1989.
MICHAEL MAMAUX joined the Company in April 1996 as Controller. From 1995
until April 1996, Mr. Mamaux was an assistant corporate controller at U.S.
Delivery Systems, Inc. Prior thereto, he was a Senior Auditor at Arthur Andersen
LLP. Mr. Mamaux is a Certified Public Accountant.
THOMAS N. AMONETT has been a director since September 1996. He has served
as interim President and Chief Executive Officer of Weatherford Enterra, Inc.
since July 1996. 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.
ROBERT J. CRUIKSHANK has been a director since September 1996. He is
primarily engaged in managing his personal investments in Houston. Prior to his
retirement in 1993, he was a Senior Partner in the accounting firm of Deloitte &
Touche. Mr. Cruikshank serves as a director of Houston Industries Incorporated,
MAXXAM Inc., Kaiser Aluminum Corporation, Compass Bank-Houston and Texas
Biotechnology Corporation.
RANDALL B. HALE has been a director since September 1996. He has been a
Vice President of Equus Capital Management Corporation ("ECMC") and Equus II
Incorporated ("Equus II") (see "Certain Transactions -- 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. From
1985 to 1992, he was employed by Arthur Andersen LLP. Mr. Hale is a Certified
Public Accountant. Mr. Hale was appointed to the Board of Directors pursuant to
the funding agreement between ARS and Equus II (the "Equus Funding
Agreement"), which terminated pursuant to its terms on completion of the IPO.
See "Certain Transactions -- Organization of the Company."
NOLAN LEHMANN has been a director since September 1996. He has been the
President of ECMC since its formation in 1983 and of Equus II since its
formation in 1991 (see "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"). Prior thereto, Mr. Lehmann was
employed by Service Corporation International, where he held various positions,
including vice president -- regional manager and vice president -- corporate
development. Mr. Lehmann currently serves as a director of a number of public
and private companies, including Allied Waste Industries, Inc., Brazos
Sportswear,
41
<PAGE>
Inc., Drypers Corporation and Garden Ridge Corporation. Mr. Lehmann is a
Certified Public Accountant. Mr. Lehmann was appointed to the Board of Directors
pursuant to the Equus Funding Agreement.
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 Corporation.
From 1991 to 1992, he was President of Environmental Financial Services, Inc., a
research and consulting firm. He served as Vice President and Corporate
Treasurer of Republic Waste Industries, Inc. from 1990 to 1991 and, prior
thereto, was employed by BFI in several financial positions from 1982 to 1990.
Mr. McCaughey is a Chartered Financial Analyst.
DON D. SYKORA has been a director since September 1996. He is currently a
consultant to Houston Industries Incorporated ("HII"). He served as President
and Chief Operating Officer of HII from 1993 until his retirement in 1995. From
1990 to 1993, Mr. Sykora was President and Chief Operating Officer of HII's
principal operating subsidiary, Houston Lighting & Power Company. Mr. Sykora is
currently serving as a director of Powell Industries, Inc., Pool Oilfield
Services, Inc. and TransTexas Gas Corp.
The Board of Directors is divided into three classes, each of which,
following a transitional period, will serve for three years, with one class
being elected each year at the annual stockholders' meeting. The term of the
Class I directors will expire at the 1997 meeting. The term of the Class II
directors will expire at the 1998 meeting. The term of the Class III directors
will expire at the 1999 meeting.
DIRECTOR COMPENSATION
Directors who are employees of the Company do not receive additional
compensation for serving as directors. Each director who is not an employee of
the Company (a "Nonemployee Director") receives a fee of $1,500 for each Board
meeting attended and $1,000 for each Board committee meeting attended (unless
held on the same day as a Board meeting) and will be periodically granted
options to purchase Common Stock pursuant to the Incentive Plan. All directors
are reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board or Board committees and for other expenses incurred in their capacity as
directors.
On the closing of the IPO, each Nonemployee Director was granted an option
to purchase up to 10,000 shares of Common Stock. These options will become
exercisable at $15.00 per share (the IPO price to the public) in 33 1/3% annual
increments beginning in September 1997 and expire in June 2006. On the first
business day of the month following the date on which each annual meeting of the
Company's stockholders is held, each Nonemployee Director also will
automatically be granted an option to purchase up to 5,000 shares of Common
Stock. Such options will have a ten-year term, will have an exercise price per
share equal to the fair market value of a share of Common Stock on the date of
grant and will become exercisable in 33 1/3% annual increments beginning on the
first anniversary of the date of grant.
42
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding aggregate cash
compensation, restricted stock and stock option awards and other compensation
earned by the Company's Chief Executive Officer and its four other most highly
compensated executive officers for services rendered to the Company during 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
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) $20,220 $ 80,000(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) Represents a bonus award paid as described under "-- Bonus Awards."
(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.
(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) As of December 31, 1996, 5,333 shares of Common Stock were held by Mr. Held
pursuant to the Incentive Plan, with an aggregate value of $144,658, based
on the closing price of the Common Stock as reported on the New York Stock
Exchange on December 31, 1996.
(6) Salary earned since the date of commencement of Mr. Timmons' employment with
ARS in September 1996.
43
<PAGE>
OPTION GRANTS
Options to purchase a total of 1,504,500 shares of Common Stock were
granted during 1996 and were outstanding under the Incentive Plan as of December
31, 1996. All these options have 10-year terms and are exercisable at prices
ranging from $8.00 to $23.75 per share. Of the options granted during 1996,
87,500 options are incentive stock options (50,000 of which were granted to the
executive officers named in the Summary Compensation Table). The following table
sets forth information regarding the options granted to the executive officers
named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
OF SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE --------------------------
NAME GRANTED IN 1996 PRICE(1) EXPIRATION DATE 5% 10%
- ------------------------------------- ---------- ---------- -------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... 200,000 13.3% $ 8.00 January 31, 2006 $ 1,006,000 $ 2,550,000
Howard S. Hoover, Jr................. 150,000 10.0% $ 8.00 January 31, 2006 $ 754,500 $ 1,912,500
William P. McCaughey................. 120,000 8.0% $ 8.00 January 31, 2006 $ 603,600 $ 1,530,000
John D. Held......................... 75,000 5.0% $ 9.60 March 6, 2006 $ 453,000 $ 1,147,500
Gorden H. Timmons.................... 150,000 10.0% $ 15.00 June 12, 2006 $ 1,414,500 $ 3,586,500
</TABLE>
- ------------
(1) All options shown in this table were granted prior to the closing of the
Initial Acquisitions and the IPO, and the ARS Board of Directors determined
that, as of the respective grant dates of these options, their per-share
exercise prices exceeded the then fair market value of a share of Common
Stock. This presentation assumes the exercise price of each of these options
equaled that fair market value on the grant date.
(2) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the assumed fair market value
on the grant date, from the grant date to the end of the option term.
The options granted to Messrs. Wright, Hoover, McCaughey, Held and one
other executive officer are exercisable in 50% increments on March 27, 1997 and
March 27, 1998, respectively. The other outstanding options granted to employees
of the Company during 1996 generally will become exercisable in 20% annual
increments beginning in 1997.
AGGREGATE OPTION HOLDINGS AND YEAR-END VALUES
No options were exercised during 1996. The following table presents
information regarding the value of options outstanding at December 31, 1996 for
each of the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
C. Clifford Wright, Jr............... -- 200,000 -- $ 3,825,000
Howard S. Hoover, Jr................. -- 150,000 -- $ 2,868,750
William P. McCaughey................. -- 120,000 -- $ 2,295,000
John D. Held......................... -- 75,000 -- $ 1,314,375
Gorden H. Timmons.................... -- 150,000 -- $ 1,818,750
</TABLE>
- ------------
(1) The closing price for the Common Stock as listed on the New York Stock
Exchange on December 31, 1996 was $27.125. Value is calculated on the basis
of the difference between the option exercise price and $27.125, multiplied
by the number of shares of Common Stock underlying the options.
44
<PAGE>
BONUS AWARDS
In June 1996, the Board of Directors granted Messrs. Wright, Hoover,
McCaughey and Held incentive cash bonus awards for 1996 which are based, subject
to the overall performance of the Company, on the performance of the Common
Stock after the IPO as compared to the performance of each of the stocks
included in the Standard & Poor's 500 Stock Index (the "S&P 500"). The amount
of each award was determined by multiplying the officer's salary earned from
September 27, 1996 through December 31, 1996 by a percentage determined by
ranking the Common Stock's price performance including reinvested dividends, if
any ("Total Stockholder Return"), among Total Stockholder Returns of all the
stocks in the S&P 500, as follows:
PERCENTILE RANKING OF PERCENTAGE OF BASE
COMPANY'S TOTAL SALARY AS
STOCKHOLDER RETURN BONUS AWARD
- ------------------------------------- ------------------
50% or less.......................... 0%
51% - 65%............................ 50%
66% - 74%............................ 100%
75% - 89%............................ 150%
90% - 95%............................ 200%
96% - 100%........................... 250%
For 1996, the incentive bonus award calculation was made from September 27,
1996 through December 31, 1996. The officers granted these awards were not
eligible to participate in any other Company cash bonus award program in 1996.
The 1996 bonus for Mr. Timmons was determined by the Compensation Committee in
accordance with the above formula. Because the Company's Total Stockholder
Return placed it in the top 1% of the above percentile rankings, each
participant was eligible to receive a cash bonus of 2.5 times his base salary
for the relevant period. The Compensation Committee elected to pay 25% of the
award in January 1997.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Wright, Hoover, Timmons,
Menditch, Sokolow and Held, copies of which are included as exhibits to the
Registration Statement of which this Prospectus is a part. Each of these
agreements (i) provides for an annual minimum base salary, (ii) entitles the
employee to participate in all the Company's compensation plans (as defined) in
which executive officers of ARS participate and (iii) has a continuous
three-year term subject to the right of either party to terminate the employee's
employment at any time. If the employee's employment is terminated by the
Company without cause (as defined) or by the employee with good reason (as
defined), the employee will be entitled, during each of the years in the
three-year period beginning on the termination date, to (i) periodic payments
equal to his average annual cash compensation (as defined) from the Company,
including bonuses, if any, during the two years (or such shorter period of
employment) preceding the termination date and (ii) continued participation in
all the Company's compensation plans (other than the granting of new awards
under the Incentive Plan or any other performance-based plan). Except in the
case of a termination for cause, any stock options previously granted to the
employee under the Incentive Plan that have not been exercised and are
outstanding as of the time immediately prior to the date of his termination will
remain outstanding (and continue to become exercisable pursuant to their
respective terms) until exercised or the expiration of their term, whichever is
earlier. If a change of control (as defined) of the Company occurs, the employee
may terminate his employment at any time during the 365-day period following
that event and receive a lump-sum payment equal to three times his highest
annual base salary under the agreement (plus such amounts as may be necessary to
hold the employee harmless from the consequences of any resulting excise or
other similar purpose tax relating to "parachute payments" under the Internal
Revenue Code of 1986, as amended. Each employment agreement contains a covenant
limiting competition with the Company for a period of one year following
termination of employment.
45
<PAGE>
ARS also has employment agreements with Messrs. Nicodemus, Walker and
Mamaux and with certain managers of the Company's principal operating
facilities.
1996 INCENTIVE PLAN
The objectives of the Incentive Plan, which was approved by the Board of
Directors and stockholders of ARS and generally is administered by the
Compensation Committee of the Board of Directors, are to (i) attract and retain
the services of key employees, qualified independent directors and qualified
consultants and other independent contractors and (ii) encourage the sense of
proprietorship in and stimulate the active interest of those persons in the
development and financial success of the Company by making awards ("Awards")
designed to provide participants in the Incentive Plan with a proprietary
interest in the growth and performance of the Company.
The Company currently has reserved 1,751,942 shares of Common Stock for use
in connection with the Incentive Plan. During each fiscal quarter, the number of
shares available for use in connection with the Incentive Plan will be the
greater of 1,550,000 or 15% of the number of shares of Common Stock outstanding
on the last day of the preceding calendar quarter. Shares subject to Awards that
are forfeited or terminated, exchanged for Awards that do not involve Common
Stock or expire unexercised, or are settled in cash in lieu of Common Stock or
otherwise such that the shares covered thereby are not issued, again become
available for Awards.
Persons available for Awards are (i) employees holding positions of
responsibility with the Company or any of its subsidiaries and whose performance
can have a significant effect on the success of the Company as well as
individuals who have agreed to become employees within six months of the date of
grant, (ii) Nonemployee Directors and (iii) nonemployee consultants and other
independent contractors providing, or who will provide, services to the Company
or any of its subsidiaries.
Awards may be in the form of (i) options to purchase a specified number of
shares of Common Stock at a specified price, which may be denominated in one or
both of Common Stock or units denominated in Common Stock, (ii) rights to
receive a payment, in cash or Common Stock, equal to the fair market value or
other specified value of a number of shares of Common Stock on the rights'
exercise date over a specified exercise price, (iii) restricted or unrestricted
grants of Common Stock or units denominated in Common Stock, (iv) grants
denominated in cash and (v) grants denominated in cash, Common Stock, units
denominated in Common Stock or any other property which are made subject to the
attainment of one or more performance goals.
OTHER PLANS
The Company has adopted deferred compensation, supplemental disability,
supplemental life and retirement or other benefit or welfare plans, including a
Section 401(k) plan, in which executive officers of the Company are eligible to
participate.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
ARS was initially capitalized in October 1995 with $1,000 provided by
Messrs. Wright, Hoover and McCaughey. As a result of stock splits, the 1,000
shares initially issued by ARS to its founders total 422,480 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 the Company and effect the IPO. On the closing of the
IPO, $0.5 million of this note was converted into 844,962 shares of Common
Stock, and ARS repaid the balance of the note with proceeds from the IPO. As a
part of its funding arrangements with Equus II, ARS issued a warrant to Equus II
in March 1996 to purchase up to 100,000 shares of Common Stock at $15 per share.
That warrant will expire in 2001 to the extent not exercised.
The aggregate consideration paid by ARS to acquire the Founding Companies
consisted of (i) approximately $39.5 million in cash (including approximately
$4.7 million paid as a result of working
46
<PAGE>
capital adjustments) and (ii) 2,942,193 shares of Common Stock. In addition, the
Company also assumed and thereafter paid all the indebtedness and preferred
stock payment obligations of the Founding Companies (approximately $22.3
million).
All stockholders of each of the Founding Companies (other than Equus II and
the minority interest owners in Atlas) have agreed not to compete with the
Company prior to September 24, 2000.
In connection with the Initial Acquisitions and as consideration for their
interests in the Founding Companies, certain directors of ARS, together with a
family trust in one case, received cash and shares of Common Stock, as follows:
Mr. Menditch -- $5.24 million and 222,222 shares; Mr. Timmons -- $5.83 million
and 820,027 shares; and Mr. Sokolow -- $6.68 million and 266,666 shares. In
addition, the following, together with family trusts in one case, received as
consideration for their interests in EHC, the following: Mr. Wright -- 52,300
shares and $237,000; Mr. Hoover -- 34,866 shares and $158,000; Mr.
McCaughey -- 52,300 shares and $237,000; and Equus II -- 376,073 shares and
$1.27 million. The consideration paid by ARS for EHC also included the repayment
or assumption of $13.2 million of indebtedness and other obligations EHC had
incurred to purchase Crown in March 1996 and A-ABC in May 1996. In addition, ARS
issued a warrant (since exercised) to purchase 8,333 shares of Common Stock at a
total purchase price of $83.33 in exchange for a warrant previously issued by
EHC to NationsBank (which, together with Equus II, had financed EHC's purchases
of Crown and A-ABC). EHC had paid $17.5 million in cash to purchase Crown and
certain real estate used in its business and $2.0 million in cash to purchase
A-ABC. For purposes of purchasing EHC, ARS valued EHC on a basis consistent with
the other Initial Acquisitions, using the same multiple of cash flow, as
adjusted for owners' compensation and other nonrecurring items and for working
capital and the fair market value of real estate, if any, being acquired.
On the closing of the IPO, the Company issued 39,987 shares of Common Stock
pursuant to the Company's Incentive Plan to employees, three officers (other
than Messrs. Wright, Hoover and McCaughey) and consultants of ARS and its
affiliates and recognized $600,000 of compensation expense.
REAL ESTATE AND OTHER TRANSACTIONS
Atlas leases office and warehouse space at two locations from a company in
which Mr. Timmons has a 50% ownership interest. Rentals under these leases,
which extend to May 2005 and May 2006, respectively, currently total $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. Office space at another location is leased by Atlas from a partnership
in which Mr. Timmons owns a 90% interest. The lease commenced in November 1996
for a three-year term, with initial annual rentals of $25,600. Atlas had a
receivable from Mr. Timmons of approximately $195,000 as of December 31, 1995,
which he subsequently paid in full.
General Heating leases office and warehouse space under four leases from a
limited partnership owned by Mr. Menditch, his brothers and trusts for the
benefit of their children. Annual rentals under the leases, which expire at the
end of 2005, currently total $511,027 and will increase a minimum of 4% each
year. General Heating had receivables from Mr. Menditch of approximately
$308,139 as of December 31, 1995, which he subsequently paid in full.
Florida HAC leases its principal office and warehouse space from a limited
partnership 80% owned by Mr. Sokolow. The annual rental under the lease, which
is scheduled to expire May 31, 2005, currently is $236,099 and will increase 5%
each year. Florida HAC had borrowings outstanding from Mr. Sokolow of
approximately $641,804 as of December 31, 1995. Florida HAC subsequently repaid
this amount.
The Company believes the rentals provided under the leases described above
are fair market rentals.
47
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 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 11.3%
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Gorden H. Timmons(3)................. 850,029 7.3%
Chancellor LGT Asset Management,
Inc.(4)............................ 583,700 5.0%
Fifty California Street, 27th
Floor
San Francisco, California
94111-4624
C. Clifford Wright, Jr............... 310,730 2.7%
Elliot Sokolow....................... 276,666 2.4%
William P. McCaughey................. 270,731 2.3%
Frank N. Menditch.................... 232,222 2.0%
Howard S. Hoover, Jr................. 215,724 1.8%
John D. Held......................... 42,833 *
Harry O. Nicodemus, IV............... 0 *
A. Jefferson Walker III.............. 15,666 *
Michael Mamaux....................... 8,000 *
Nolan Lehmann........................ 2,000 *
Robert J. Cruikshank................. 2,000 *
Randall B. Hale...................... 1,000 *
Thomas N. Amonett.................... 1,000 *
Don D. Sykora........................ 1,000 *
All executive officers and directors
as a group (15 persons)(3)......... 2,229,600 19.1%
- ------------
* Less than 1%.
(1) Shares shown do not include shares held through the ARS 401(k) plan. The
shares beneficially owned include options exercisable within 60 days of
March 31, 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.
Hoover -- 75,000 shares; Mr. Held -- 37,500 shares; Mr. Walker -- 12,500
shares; Mr. Mamaux -- 5,000 shares; and all officers as a group 340,000
shares.
(2) Based on a Schedule 13G filed 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 $15.00 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. Nolan
Lehmann, a director of ARS, is the President of Equus II and thus may be
deemed to be the beneficial owner of shares held by Equus II. Mr. Lehmann
disclaims beneficial ownership of all those shares.
(3) Includes shares held by a trust of which Mr. Timmons is the trustee and
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.
(4) Based on a Schedule 13G dated February 7, 1997. That Schedule 13G also
discloses as reporting persons Chancellor LGT Trust Company, a wholly owned
subsidiary of Chancellor LGT Asset Management, Inc. and LGT Asset
Management, Inc., the holding company for Chancellor LGT Asset Management,
Inc. The Schedule 13G indicates that the reporting persons have sole voting
power and sole dispositive power with respect to all 583,700 shares.
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.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1997, 11,679,617 shares of Common Stock were outstanding.
The following table shows the shares outstanding on that date (in thousands)
which (i) currently are freely tradable or eligible for sale pursuant to Rule
144 under the Securities Act (subject to its volume limitations and other
requirements) and (ii) will become eligible for sale in the future pursuant to
Rule 144 (including shares subject to its volume and other requirements by
Securities Act Rule 145) or pursuant to the lapse of contractual restrictions at
the times indicated.
WHEN FREELY TRADABLE NUMBER OF
OR ELIGIBLE FOR RULE 144 SALES SHARES
- ---------------------------------------- ------------
Currently............................... 6,097,442
May 1997................................ 794,786
June 1997............................... 15,175
July 1997............................... 487,652
September 1997.......................... 2,982,180
November 1997........................... 8,333
March 1998.............................. 11,139
1998 - Fourth Quarter................... 1,282,910
------------
Total.............................. 11,679,617
============
In addition to the shares currently outstanding, the Company has reserved
for issuance 2,156,862 shares issuable on conversion of the 7 1/4% Convertible
Notes, which were issued on April 2, 1997 in an aggregate principal amount of
$55 million and are convertible into Common Stock at a conversion price of
$25.50 per share. In connection with the offering of the 7 1/4% Convertible
Notes, the Company agreed to register the resale of the 7 1/4% Convertible Notes
and the shares of Common Stock issuable on their conversion, pursuant to a shelf
registration statement to be filed on or before June 1, 1997. When that
registration statement becomes effective, those securities generally will be
freely tradable in the open market.
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 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.
49
<PAGE>
At March 26, 1997, options to purchase up to 1,665,700 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 440,000 shares and the
warrant will be exercisable at March 31, 1997. The exercise prices of these
securities range from $8.00 to $25.75 per share. See "Management -- Option
Grants." ARS has registered the shares of Common Stock underlying the options
under the Securities Act.
In connection with the offering of the 7 1/4% Convertible Notes, ARS and
each of its executive officers and directors and Equus II have agreed that, for
a period of 90 days extending through June 25, 1997 (the "Lock-Up Period"),
they will not, without the prior written consent of Smith Barney Inc., sell,
offer to sell, contract to sell, pledge or otherwise dispose of any shares of
Common Stock or any securities convertible into or exchangeable for any shares
of Common Stock except that during the Lock-Up Period ARS may (i) issue shares
in acquisitions under its Acquisition Shelf Registration Statement (provided
that any such shares issued in acquisitions accounted for under the purchase
method of accounting are contractually restricted from resale for at least the
duration of the Lock-Up Period) and (ii) grant options or other awards under the
Incentive Plan.
The Company has entered into a registration rights agreement with most of
the former owners of the businesses acquired in the Initial Acquisitions and the
Fourth Quarter 1996 Acquisitions (the "Registration Rights Agreement"), which
provides certain registration rights with respect to the Common Stock issued to
such stockholders in connection with the acquisitions of those businesses. The
Registration Rights Agreement provides for a single demand registration right,
exercisable by the holders of a majority of the shares of Common Stock subject
to the agreement, pursuant to which the Company will file a registration
statement under the Securities Act to register the sale of shares by those
requesting stockholders and any other holders of Common Stock subject to the
agreement who desire to sell pursuant to such registration statement. The demand
request may not be made until 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 the Company of its equity securities in
underwritten offerings. The registration rights conferred by the Registration
Rights Agreement will terminate on December 31, 2000. In addition, pursuant to
separate registration rights agreements with Equus II and NationsBank, both
Equus II and NationsBank have the right, in the event the Company proposes to
register under the Securities Act any Common Stock for its own account or for
the account of others, subject to certain exceptions, to require the Company to
include shares owned by them in the registration.
In the case of each registration rights agreement described above, the
Company is generally required to pay the costs associated with such an offering
other than underwriting discounts and commissions and transfer taxes
attributable to the shares sold on behalf of the selling stockholders. In
addition, in the case of the separate registration rights agreements with Equus
II and NationsBank, the Company is obligated to pay the fees and expenses of
legal counsel for the selling stockholders thereunder. Each registration rights
agreement provides that the number of shares of Common Stock that must be
registered on behalf of the selling stockholders is subject to limitation if the
managing underwriter determines that market conditions require such a
limitation. Under each agreement, the Company will indemnify the selling
stockholders thereunder, and such stockholders will indemnify the Company,
against certain liabilities in respect of any registration statement or offering
covered by the registration rights agreement.
Pursuant to Rule 145 under the Securities Act, the volume limitations and
certain other requirements of Rule 144 will apply to resales of the Common Stock
covered hereby by affiliates of the businesses the Company acquires for a period
of one year (or such shorter period as the SEC may prescribe). In addition,
persons receiving shares of Common Stock offered hereby in connection with an
acquisition will ordinarily be required to agree to hold portions of such shares
for periods of up to two years after the date of such acquisition. These
agreements may be modified by the Company in connection with any particular
business combination.
50
<PAGE>
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.
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 March 31, 1997, 11,679,617
shares of Common Stock were issued and outstanding. The following summary is
qualified in its entirety by reference to the Restated Certificate of
Incorporation of ARS (the "Certificate of Incorporation"), which is included
as an exhibit to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
The Common Stock possesses ordinary voting rights for the election of
directors and in respect of other corporate matters, and each share has one
vote. The Common Stock affords no cumulative voting rights, and the holders of a
majority of the shares voting for the election of directors can elect all the
directors if they choose to do so. The Common Stock carries no preemptive
rights, is not convertible, redeemable, assessable or entitled to the benefits
of any sinking fund. The holders of Common Stock are entitled to dividends in
such amounts and at such times as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy" for information
regarding the Company's dividend policy.
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Certificate of Incorporation and limitations prescribed by law, the Board
of Directors is expressly authorized to adopt resolutions to issue the shares,
to fix the number of shares and to change the number of shares constituting any
series and to provide for or change the voting powers, designations, preferences
and relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the holders
of Common Stock.
Although ARS has no present intention to issue shares of Preferred Stock,
the issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For example, the issuance of a series of Preferred Stock might impede a business
combination by including class voting rights that would enable the holders to
block such a transaction; or such issuance might facilitate a business
combination by including voting rights that would provide a required percentage
vote of the stockholders. In addition, under certain circumstances, the issuance
of Preferred Stock could adversely affect the voting power of the holders of the
Common Stock. Although the Board of Directors is required to make any
determination to issue such stock based on its judgment as to the best interests
of the stockholders of ARS, the Board of Directors could act in a manner that
would discourage an acquisition attempt or other transaction that some or a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then-market
price of such stock. The Board of Directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which the securities of
ARS are traded.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from ARS a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating
51
<PAGE>
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"),
at a purchase price of $40.00 per Fractional Share, subject to adjustment in
certain events (the "Purchase Price"). The following summary description of
the Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement between ARS and a Rights Agent (the "Rights
Agreement"), the form of which is included as an exhibit to the Registration
Statement of which this Prospectus is a part.
Initially, the Rights will attach to all certificates representing
outstanding shares of Common Stock, including the shares of Common Stock offered
hereby, and no separate certificates for the Rights ("Rights Certificates")
will be distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur upon the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of Common Stock (the date of the announcement being the "Stock Acquisition
Date") or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person's becoming an Acquiring Person.
Notwithstanding the foregoing, so long as Equus II, together with all affiliates
and associates thereof, remains the beneficial owner of 15% or more of the
outstanding shares of Common Stock, Equus II shall not be or become an Acquiring
Person unless and until it, together with all affiliates and associates thereof,
becomes the beneficial owner of additional shares of Common Stock constituting
1% or more of the then-outstanding shares of Common Stock or any other person
who is the beneficial owner of at least 1% of the then outstanding shares of
Common Stock shall become an affiliate or associate of Equus II. In certain
circumstances the Distribution Date may be deferred by the Board of Directors.
Certain inadvertent acquisitions will not result in a person's becoming an
Acquiring Person if the person promptly divests itself of sufficient Common
Stock. Until the Distribution Date, (a) the Rights will be evidenced by the
Common Stock certificates and will be transferred with and only with those
certificates, (b) Common Stock certificates will contain a notation
incorporating the Rights Agreement by reference and (c) the surrender for
transfer of any certificate for Common Stock also will constitute the transfer
of the Rights associated with the stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire
at the close of business on June 30, 2006, unless earlier redeemed or exchanged
by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of Common Stock as of the close of business
on the Distribution Date and, from and after the 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
52
<PAGE>
power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as set forth above) shall thereafter have the right
to receive, on exercise of such Right, a number of shares of common stock of the
acquiring company having a Current Market Price equal to two times the exercise
price of the Right. Flip-In Events and Flip-Over Events are collectively
referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, and/or other equity securities
deemed to have the same value as one share of Common Stock, per Right, subject
to adjustment.
Other than the redemption price, any of the provisions of the Rights
Agreement may be amended by the Board of Directors as long as the Rights are
redeemable. Thereafter, the provisions of the Rights Agreement other than the
redemption price may be amended by the Board of Directors only in order to cure
any ambiguity, defect or inconsistency, to make changes that do not materially
adversely affect the interests of holders of Rights (excluding the interests of
any Acquiring Person), or to shorten or lengthen any time period under the
Rights Agreement; provided, however, that no amendment to lengthen the time
period governing redemption shall be made at such time as the Rights are not
redeemable. Until a Right is exercised, the holder thereof, as such, will have
no rights to vote or to receive dividends or any other rights as a stockholder
of the Company.
The Rights will have certain 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.
53
<PAGE>
STATUTORY BUSINESS COMBINATION PROVISION
ARS is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination"(as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Certificate of Incorporation
limits the liability of directors of ARS to ARS or its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of ARS will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to ARS or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the DGCL or (iv) for
any transaction from which the director derived an improper personal benefit.
The inclusion of this provision in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited ARS and its stockholders.
The Bylaws of ARS provide indemnification to its officers and directors and
certain other persons with respect to certain matters, and ARS has entered into
agreements with each of its directors and executive officers providing for
indemnification with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board, the President or a majority of the Board of
Directors.
54
<PAGE>
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. The
classified board provision could prevent a party who acquires control of a
majority of the outstanding voting stock of ARS from obtaining control of the
Board of Directors until the second annual stockholders meeting following the
date the acquiror obtains the controlling interest. See
"Management -- Directors and Executive Officers."
The Certificate of Incorporation provides that the number of directors
shall be as determined by the Board of Directors from time to time, but shall
not be less than three. It also provides that directors may be removed only for
cause, and then only by the affirmative vote of the holders of at least a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of the Certificate of Incorporation authorizing
the Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain provisions (i) requiring that advance notice be
delivered to ARS of any business to be brought by a stockholder before an annual
meeting of stockholders and (ii) establishing certain procedures to be followed
by stockholders in nominating persons for election to the Board of Directors.
Generally, such advance notice provisions provide that written notice must be
given to the Secretary of ARS by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting, not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders (with certain exceptions if the date of the annual meeting is
different by more than specified amounts from the anniversary date), and (ii) in
the event of nominations of persons for election to the Board of Directors by
any stockholder, (a) with respect to an election to be held at the annual
meeting of stockholders, not less than 90 days prior to the anniversary date of
the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than specified
amounts from the anniversary date), and (b) with respect to an election to be
held at a special meeting of stockholders for the election of directors, not
later than the close of business on the 10th day following the day on which
notice of the date of the special meeting was mailed to stockholders or public
disclosure of the date of the special meeting was made, whichever first occurs.
Such notice must set forth specific information regarding such stockholder and
such business or director nominee, as described in the Bylaws. The foregoing
summary is qualified in its entirety by reference to the Bylaws, which are
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 3,691,248 shares of
Common Stock, which ARS may issue from time to time in connection with future
direct and indirect acquisitions of other businesses, properties or securities
in business combination transactions.
ARS expects that the terms on which it may issue the shares of Common Stock
covered hereby will be determined by direct negotiations with the owners or
controlling persons of the businesses or assets to be acquired and that the
shares of Common Stock issued will be valued at prices reasonably related to
market prices prevailing either at the time an acquisition agreement is executed
or at or about the time of delivery of shares.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by John D. Held, Esq., Senior Vice President, General
Counsel and Secretary of the Company. Mr. Held owns 5,333 shares of Common Stock
and Incentive Plan options to purchase 75,000 shares of Common Stock.
55
<PAGE>
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
ARS is subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the SEC. These reports,
proxy statements and other information, once filed, may be inspected, without
charge, at the public reference facilities of the SEC at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and
its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any portion of these documents can be obtained at
prescribed rates from the Public Reference Section of the SEC at its principal
office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The SEC maintains an Internet web site that contains such reports, proxy
statements and other information regarding issuers (including ARS) filed
electronically with the SEC. The address of that site is http://www.sec.gov.
ARS has filed a Registration Statement on Form S-4 under the Securities Act
with the SEC with respect to this offering. This Prospectus, filed as a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, or the exhibits and schedules thereto, in accordance
with the rules and regulations of the SEC, and reference hereby is made to that
omitted information. The statements made in this Prospectus concerning documents
filed or incorporated by reference as exhibits to the Registration Statement
accurately describe the material provisions of those documents and are qualified
in their entirety by reference to those exhibits for complete statements of
their provisions. The Registration Statement and the exhibits and schedules
thereto may be inspected and copied at the principal office of the SEC in
Washington, D.C., as described above, and are also available at the SEC's
Internet web site described above.
The Common Stock is listed on the NYSE. Proxy statements, reports and other
information concerning the Company that are filed under the Exchange Act can be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York 10005.
56
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Unaudited Pro Forma Combined
Financial Statements -- American
Residential
Services, Inc. and Subsidiaries
Basis of Presentation........... F-3
Pro Forma Combined Balance Sheet
as of December 31, 1996
(unaudited).................... F-4
Pro Forma Combined Statement of
Operations for the Year Ended
December 31, 1996
(unaudited).................... F-5
Notes to Unaudited Pro Forma
Combined Financial
Statements..................... F-6
Historical Financial Statements
American Residential Services,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-8
Consolidated Balance
Sheets..................... F-9
Consolidated Statements of
Operations................. F-10
Consolidated Statements of
Stockholders' Equity....... F-11
Consolidated Statements of
Cash Flows................. F-12
Notes to Consolidated
Financial Statements....... F-13
American Residential Services,
Inc. and Subsidiaries
Report of Independent
Public Accountants......... F-25
Supplemental Consolidated
Balance Sheets............. F-26
Supplemental Consolidated
Statements of Operations... F-27
Supplemental Consolidated
Statments of Stockholders'
Equity..................... F-28
Supplemental Consolidated
Statements of Cash Flows... F-29
Notes to Supplemental
Consolidated Financial
Statements................. F-30
American Residential Services,
Inc.
Report of Independent
Public Accountants......... F-42
Balance Sheets............. F-43
Statements of Operations... F-44
Statements of Shareholders'
Deficit.................... F-45
Statements of Cash Flows... F-46
Notes to Financial
Statements................. F-47
General Heating Engineering
Company, Inc.
Report of Independent
Public Accountants......... F-52
Balance Sheets............. F-53
Statements of Operations... F-54
Statements of Shareholders'
Equity..................... F-55
Statements of Cash Flows... F-56
Notes to Financial
Statements................. F-57
Atlas Services, Inc., and
Subsidiary
Report of Independent
Public Accountants......... F-62
Consolidated Balance
Sheets..................... F-63
Consolidated Statements of
Operations................. F-64
Consolidated Statements of
Shareholders' Equity....... F-65
Consolidated Statements of
Cash Flows................. F-66
Notes to Consolidated
Financial Statements....... F-67
F-1
<PAGE>
Enterprises Holding Company and
Subsidiaries
Consolidated Balance
Sheet...................... F-75
Consolidated Statement of
Operations................. F-76
Consolidated Statement of
Shareholders' Equity....... F-77
Consolidated Statement of
Cash Flows................. F-78
Notes to Consolidated
Financial Statements....... F-79
Service Enterprises, Inc., and
Subsidiaries
Report of Independent
Public Accountants......... F-87
Consolidated Balance
Sheets..................... F-88
Consolidated Statements of
Operations................. F-89
Consolidated Statements of
Shareholder's Equity....... F-90
Consolidated Statements of
Cash Flows................. F-91
Notes to Consolidated
Financial Statements....... F-92
Florida Heating and Air
Conditioning, Inc., and Related
Companies
Report of Independent
Public Accountants......... F-99
Combined Balance Sheets.... F-100
Combined Statements of
Operations................. F-101
Combined Statements of
Shareholders' Equity....... F-102
Combined Statements of Cash
Flows...................... F-103
Notes to Combined Financial
Statements................. F-104
DIAL ONE Meridian and Hoosier,
Inc.
Report of Independent
Public Accountants......... F-110
Balance Sheets............. F-111
Statements of Operations... F-112
Statements of Shareholder's
Equity..................... F-113
Statements of Cash Flows... F-114
Notes to Financial
Statements................. F-115
ADCOT, Inc.
Report of Independent
Public Accountants......... F-122
Balance Sheets............. F-123
Statements of Operations... F-124
Statements of Shareholder's
Deficit.................... F-125
Statements of Cash Flows... F-126
Notes to Financial
Statements................. F-127
Metro Heating and Air
Conditioning, Inc.
Report of Independent
Public Accountants......... F-131
Balance Sheets............. F-132
Statements of Operations... F-133
Statements of Shareholders'
Equity..................... F-134
Statements of Cash Flows... F-135
Notes to Financial
Statements................. F-136
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 give effect
to the acquisitions by American Residential Services, Inc. ("ARS"), of
substantially all of the net assets of seven residential services businesses
(together with the common parent of two of those businesses, the "Founding
Companies") in separate transactions (the "Initial Acquisitions")
simultaneously with the closing of ARS's initial public offering of its Common
Stock (the "Offering") on September 27, 1996. The acquisitions were accounted
for using the purchase method of accounting. During the fourth quarter of 1996,
ARS acquired an additional 13 residential service businesses (the "Fourth
Quarter 1996 Acquisitions") which also were accounted for using the purchase
method of accounting. During the first quarter of 1997, ARS acquired an
additional ten residential service businesses (the "First Quarter 1997
Acquisitions") of which eight were accounted for using the pooling-of-interests
method of accounting and two were accounted for using the purchase method of
accounting. All acquisitions are herein referred to as "Acquired Businesses."
The unaudited pro forma combined balance sheet as of December 31, 1996 is
based on the audited supplemental consolidated balance sheet of ARS for the year
ended December 31, 1996 and reflects (i) the two First Quarter 1997 Acquisitions
accounted for using the purchase method of accounting and (ii) the sale of
7 1/4% Convertible Subordinated Notes and the application of the proceeds
therefrom as if each had occurred on December 31, 1996. The allocation of
purchase prices to the assets acquired and liabilities assumed related to the
Founding Companies, the Fourth Quarter 1996 Acquisitions and the First Quarter
1997 Acquisitions 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
statements of operations give effect to the (i) Acquired Businesses and (ii) the
sale of Convertible Subordinated Notes and the application of the proceeds
therefrom as if each had occurred at the beginning of the period presented.
The unaudited pro forma combined financial information presented herein
does not purport to represent what the Company's financial position or results
of operations would have actually been had such events occurred at the beginning
of the periods presented, as assumed, or to project the Company's financial
position or results of operations for any future period or the future results of
the Acquired Businesses. The unaudited pro forma combined financial statements
should be read in conjunction with the other financial statements and notes
thereto included elsewhere herein. Also see "Risk Factors" included elsewhere
herein.
F-3
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUPPLEMENTAL
FINANCIAL ACQUISITIONS PRO FORMA AS
STATEMENTS 1997(1) ADJUSTMENTS COMBINED OFFERING ADJUSTED
------------ ------------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 7,860 $ 5 $ (640)(a) $ 7,225 $(1,091 )(b) $ 6,134
Accounts receivable --
Trade, net of allowance...... 22,001 609 -- 22,610 -- 22,610
Other........................ 1,658 17 -- 1,675 -- 1,675
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 853 -- -- 853 -- 853
Inventories...................... 10,488 175 -- 10,663 -- 10,663
Prepaid expenses and other
current assets................. 1,903 17 -- 1,920 -- 1,920
Net assets of discontinued
operations..................... 338 -- -- 338 -- 338
------------ ------------- ----------- --------- -------- --------
Total current assets..... 45,101 823 (640) 45,284 (1,091 ) 44,193
PROPERTY AND EQUIPMENT, net.......... 19,223 274 -- 19,497 -- 19,497
GOODWILL, net........................ 131,193 -- 1,100(a) 132,293 -- 132,293
OTHER NONCURRENT ASSETS.............. 1,340 40 -- 1,380 2,050 (b) 3,430
------------ ------------- ----------- --------- -------- --------
Total assets............. $196,857 $ 1,137 $ 460 $198,454 $ 959 $199,413
============ ============= =========== ========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 982 $ 92 $-- $ 1,074 $ (873 )(b) $ 201
Accounts payable and accrued
expenses....................... 22,466 556 -- 23,022 -- 23,022
Unearned revenue on service and
warranty contracts............. 3,850 52 -- 3,902 -- 3,902
Billings in excess of cost and
estimated earnings on
uncompleted contracts.......... 1,547 -- -- 1,547 -- 1,547
------------ ------------- ----------- --------- -------- --------
Total current
liabilities............ 28,845 700 -- 29,545 (873 ) 28,672
LONG-TERM DEBT, net of current
maturities......................... 52,931 237 -- 53,168 (53,168 )(b) --
CONVERTIBLE SUBORDINATED NOTES....... -- -- -- -- 55,000 (b) 55,000
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS.......................... 633 -- -- 633 -- 633
DEFERRED INCOME TAXES................ 2,392 -- -- 2,392 -- 2,392
STOCKHOLDERS' EQUITY
Common stock..................... 11 123 (123)(a) 11 -- 11
Additional paid-in capital....... 122,570 -- 660(a) 123,230 -- 123,230
Retained earnings (deficit)...... (10,525) 77 (77)(a) (10,525 ) -- (10,525 )
------------ ------------- ----------- --------- -------- --------
Total stockholders'
equity................. 112,056 200 460 112,716 -- 112,716
------------ ------------- ----------- --------- -------- --------
Total liabilities and
stockholders' equity... $196,857 $ 1,137 $ 460 $198,454 $ 959 $199,413
============ ============= =========== ========= ======== ========
</TABLE>
- ------------
(1) Includes only first quarter 1997 acquisitions 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 DATA)
<TABLE>
<CAPTION>
SUPPLEMENTAL ACQUISITIONS
FINANCIAL -------------------- PRO FORMA
STATEMENTS 1996 1997(1) ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
------------ --------- --------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 95,518 $ 155,177 $ 3,584 $-- $254,279 $ -- $ 254,279
COST OF SERVICES..................... 68,144 107,191 2,356 -- 177,691 -- 177,691
------------ --------- --------- ----------- --------- -------- -----------
Gross Profit..................... 27,374 47,986 1,228 -- 76,588 -- 76,588
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 21,936 40,063 1,048 (4,902) (a) 56,313 -- 56,313
(1,310) (b)
(522) (c)
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC.................... 3,356 -- -- (3,356)(d) -- -- --
GOODWILL AMORTIZATION................ 495 -- -- 2,827(e) 3,322 -- 3,322
------------ --------- --------- ----------- --------- -------- -----------
INCOME FROM OPERATIONS............... 1,587 7,923 180 7,263 16,953 -- 16,953
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC................ (4,818) -- -- 4,818(f) -- -- --
Interest Expense................. (574) (1,234) (41) (2,084) (f) (3,933 ) (348 ) (i) (4,281)
Interest Income.................. 44 270 17 -- 331 -- 331
Other............................ 413 264 -- -- 677 -- 677
------------ --------- --------- ----------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (3,348) 7,223 156 9,997 14,028 (348 ) 13,680
PROVISION FOR INCOME TAXES........... 957 2,080 62 3,591(g) 6,690 (139 ) (g) 6,551
------------ --------- --------- ----------- --------- -------- -----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ (4,305) $ 5,143 $ 94 $ 6,406 $ 7,338 $ (209 ) $ 7,129
============ ========= ========= =========== ========= ======== ===========
SHARES USED IN COMPUTING INCOME PER
SHARE FROM CONTINUING OPERATIONS... 4,541 7,242(h) 11,783 11,783
============ =========== ========= ===========
NET INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... $ (.95) $ 0.62 $ 0.61
============ ========= ===========
</TABLE>
- ------------
(1) Includes only First Quarter 1997 Acquisitions 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
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. AMERICAN RESIDENTIAL SERVICES, INC. BACKGROUND:
American Residential Services, Inc. ("ARS" and, together with its
subsidiaries, the "Company") was formed to create a leading national provider
of (i) comprehensive maintenance, repair and replacement services for heating,
ventilating and air conditioning, plumbing, electrical and other systems in
homes and commercial buildings and (ii) new installation services of those
systems in homes and commercial facilities under construction. On September 27,
1996, ARS acquired seven residential services businesses (together with the
common parent of two of those businesses, the "Founding Companies") in
separate transactions (the "Initial Acquisitions") simultaneously with the
closing of ARS's initial public offering (the "Offering") of its common stock
("Common Stock"). During the fourth quarter of 1996, ARS acquired an
additional 13 residential services businesses (the "Fourth Quarter 1996
Acquisitions") and during the first quarter of 1997 acquired an additional ten
residential service businesses (the "First Quarter 1997 Acquisitions" and,
together with the Founding Companies and the Fourth Quarter 1996 Acquisitions,
the "Acquired Businesses").
Eight of the First Quarter 1997 Acquisitions were accounted for using the
pooling-of-interests method of accounting with the effect thereof retroactively
restated.
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 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. The amount allocated to goodwill is $132.3 million.
Management of ARS has not identified any other material tangible or identifiable
intangible assets of the Acquired Businesses to which a portion of the purchase
prices could reasonably be allocated.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) To record the disbursement of $640,000 of cash and the issuance of
26,314 shares of Common Stock and record the preliminary allocation of
total consideration in connection with the two First Quarter 1997
Acquisitions accounted for under the purchase method of accounting.
(b) To record (i) 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-6
<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 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) To adjust for nonrecurring charges relating to shares of Common
Stock issued to the shareholders of Enterprises Holding Company ("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 are
computed as follows (in thousands):
Shares outstanding at December 31,
1996.................................. 11,653
Shares issued for First Quarter 1997
Acquisitions accounted for under the
purchase method of accounting......... 26
Stock options and warrant, net of
assumed repurchases of common shares
as treasury stock..................... 104
---------
11,783
=========
(i) To record 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-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Residential Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Residential Services, Inc., and subsidiaries as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with Atlas Services, Inc. as the
accounting acquiror.
ARTHUR ANDERSEN LLP
Houston, Texas
March 14, 1997
F-8
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
---------------------
1995 1996
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 241 $ 6,641
Accounts receivable --
Trade, net of allowance of
$40 and $729............. 2,164 20,167
Other...................... 212 872
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 254 792
Inventories..................... 532 9,652
Prepaid expenses and other
current assets................. 146 1,493
Net assets of discontinued
operations..................... -- 338
--------- ----------
Total current
assets................. 3,549 39,955
PROPERTY AND EQUIPMENT, net.......... 3,137 17,450
GOODWILL, net........................ -- 131,193
OTHER NONCURRENT ASSETS.............. 406 1,157
--------- ----------
Total assets.......... $ 7,092 $ 189,755
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 597 $ 201
Short-term debt................. 210 --
Accounts payable and accrued
expenses....................... 2,392 19,292
Unearned revenue on service and
warranty contracts............. 163 3,411
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 476 1,542
--------- ----------
Total current
liabilities............ 3,838 24,446
LONG-TERM DEBT, net of current
maturities......................... 1,564 51,854
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633
DEFERRED INCOME TAXES................ 187 2,273
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized;
none issued and outstanding... -- --
Common stock, $.001 par value,
50,000,000 shares authorized;
1,066,656 and 10,370,865
shares issued and
outstanding.................... 1 10
Additional paid-in-capital...... 128 120,735
Retained earnings (deficit)..... 1,374 (10,196)
--------- ----------
Total stockholders'
equity................. 1,503 110,549
--------- ----------
Total liabilities and
stockholders' equity... $ 7,092 $ 189,755
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES............................. $ 19,183 $ 22,048 $ 64,229
COST OF SERVICES..................... 16,049 17,811 47,990
--------- --------- ---------
Gross Profit.................... 3,134 4,237 16,239
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 3,138 3,022 13,411
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS........ (4) 1,215 (528)
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818)
Interest Expense................ (143) (134) (439)
Interest Income................. 13 17 12
Other........................... 158 20 338
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 24 1,118 (5,435)
PROVISION FOR INCOME TAXES........... 7 434 101
--------- --------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 17 684 (5,536)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3)
--------- --------- ---------
NET INCOME (LOSS).................... $ 17 $ 684 $ (5,539)
========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 1,067 1,067 3,259
========= ========= =========
EARNINGS PER SHARE:
Continuing Operations........... $ 0.02 $ 0.64 $ (1.70)
Discontinued Operations......... -- -- --
--------- --------- ---------
Total...................... $ 0.02 $ 0.64 $ (1.70)
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.............. 1,067 $ 1 $ 128 $ 673 $ 802
Net income......................... -- -- -- 17 17
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1994.............. 1,067 1 128 690 819
Net income......................... -- -- -- 684 684
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1995.............. 1,067 1 128 1,374 1,503
Public Offering, net of Offering
Costs............................ 4,830 5 60,626 -- 60,631
Purchase of Founding Companies..... 3,184 3 29,231 -- 29,234
Purchase of Purchased Companies.... 1,282 1 30,625 -- 30,626
Exercise of Warrant................ 8 -- 125 -- 125
Cash Distributions to Founding
Companies stockholders........... -- -- -- (6,031) (6,031)
Net loss........................... -- -- -- (5,539) (5,539)
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1996.............. 10,371 $ 10 $ 120,735 $ (10,196) $ 110,549
========= ====== ========== ========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 17 $ 684 $ (5,539)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........ 369 491 1,649
Stock portion of compensation and
financing fees related to
purchase of EHC.................. -- -- 6,276
Deferred income taxes (benefit)...... (135) (51) (20)
Gain on sale of property and
equipment........................ -- -- (59)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (655) (505) (222)
Costs and estimated
earnings in excess of
billings on
uncompleted
contracts............. (456) 539 (62)
Inventories............... (75) (139) 44
Prepaid expenses and other
current assets........ 4 7 (755)
Other noncurrent assets... (96) (67) (94)
Increase (decrease) in --
Accounts payable and
accrued expenses...... 1,454 (219) (1,749)
Unearned revenue on
service and warranty
contracts............. 111 (10) 56
Billings in excess of
costs and estimated
earnings on
uncompleted
contracts............. 23 52 (177)
--------- --------- ----------
Net cash provided by (used
in) operating
activities............ 561 782 (652)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................ 50 -- 239
Additions to property and equipment....... (949) (258) (1,691)
Cash paid for acquisitions, net of cash
acquired................................. -- -- (44,458)
--------- --------- ----------
Net cash used in investing
activities............... (899) (258) (45,910)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 1,166 442 39,328
Principal payments of short- and long-term
debt..................................... (992) (843) (40,495)
Issuances of Common Stock, net of offering
costs.................................... -- 45 60,631
Distributions to Founding Companies
stockholders............................. -- -- (6,031)
Other, net................................ -- -- (471)
--------- --------- ----------
Net cash provided by (used
in) financing
activities............... 174 (356) 52,962
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (164) 168 6,400
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 237 73 241
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period....... $ 73 $ 241 $ 6,641
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 218 $ 177 $ 656
Income taxes.............................. 226 252 184
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions seven residential service businesses
(together with Enterprises Holding Company ("EHC"), which is the common parent
of two of the businesses), (the "Founding Companies") in exchange for
consideration consisting of a combination of cash and shares of its common
stock, par value $.001 per share (the "Common Stock"). The Company's initial
public offering (the "Offering") of ARS's Common Stock closed simultaneously
with the closing of the acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the
accounting acquiror. The acquisition of the remaining Founding Companies was
accounted for using the purchase method of accounting, with the results of
operations included from September 30, 1996, the effective closing date of the
acquisitions for accounting purposes. The allocation of purchase price to the
assets acquired and liabilities assumed has been initially assigned and recorded
based on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available. The accompanying consolidated financial statements reflect the
Company on a historical basis with Atlas as the accounting acquiror.
During the fourth quarter of 1996, ARS acquired an additional 13
residential service businesses (the "Purchased Companies") which were also
accounted for using the purchase method of accounting. The Founding Companies
and Purchased Companies are referred to herein collectively as the "Acquired
Businesses."
In connection with the purchase of EHC, the purchase price paid to the
shareholders of EHC in excess of the purchase price paid by EHC for its previous
acquisition of Service Enterprises, Inc. and Adcot, Inc. is recorded as
nonrecurring compensation expense of $3,356,000 and financing fees of $4,818,000
in the accompanying statements of operations for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ARS and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using
principally a weighted-average method.
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.
F-13
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions are
determined.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. This statement encourages entities to account for employee
stock option or similar equity instruments using a fair value approach for all
such plans. However, it also allows an entity to continue to measure
compensation costs for those plans using the method prescribed by
F-14
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
APB Opinion No. 25, "Accounting for Stock Issued to Employees". Those entities
which elect to remain with the accounting in APB No. 25 are required to include
pro forma disclosures of net income and earnings per share as if the fair
value-based method of accounting had been applied. The Company has elected to
account for such plans under the provisions of APB No. 25. Therefore, there is
no effect on the Company's financial position and results of operations as a
result of this pronouncement. Reference is made to Note 8 for the SFAS No.123
disclosures.
INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective date of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition date.
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-15
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in the formation of
ARS................................ -- -- 318
Weighted average portion of shares
issued to the remaining
stockholders of the Founding
Companies.......................... -- -- 472
Weighted average portion of shares
sold in the Offering............... -- -- 1,204
Weighted average portion of shares
awarded to certain employees and
consultants........................ -- -- 10
Weighted average portion of shares
issued for the acquisition of the
Purchased Companies................ -- -- 84
Stock options and warrant, net of
assumed repurchases of common
shares as treasury stock........... -- -- 104
--------- --------- ---------
Weighted average shares
outstanding........................ 1,067 1,067 3,259
========= ========= =========
3. BUSINESS COMBINATIONS:
In addition to the acquisitions of the Founding Companies, during the
fourth quarter of 1996, the Company acquired the Purchased Companies for an
aggregate of approximately $41.2 million in cash and short-term notes and
1,282,910 shares of Common Stock. Funding of the cash portion of the purchase
prices and repayment of indebtedness assumed in connection with the acquisitions
was provided by borrowings under the Company's Credit Facility. The accompanying
consolidated balance sheet includes preliminary allocations of the respective
purchase price which are subject to final adjustment. Also, the purchase price
is based on preliminary estimates of value assigned to the Company's Common
Stock issued in all acquisitions accounted for under the purchase method of
accounting which carry certain restrictions regarding disposition by the
holders, and such value may be revised as additional information becomes
available. Set forth below are unaudited pro forma combined revenues and income
data reflecting the pro forma effect of these acquisitions on the Company's
results from continuing operations for the years ended December 31, 1995 and
1996. The unaudited pro forma data presented below consists of the income
statement data from continuing operations as presented in these consolidated
financial statements plus (i) the Founding Companies for the year ended December
31, 1995 and the nine months ended September 30, 1996 and (ii) all fourth
quarter acquisitions as if the acquisitions were effective on the first day of
the year being reported through the respective dates of acquisition (in
thousands, except per share amounts) (unaudited).
1995 1996
---------- ----------
Revenues................................ $ 184,774 $ 219,406
========== ==========
Net income from continuing operations... $ 4,058 $ 5,653
========== ==========
Net income per share from continuing
operations............................ $ 0.39 $ 0.54
========== ==========
Pro forma adjustments included in the amounts above primarily relate to:
(a) compensation differential, (b) adjustment for nonrecurring compensation
expense of $3,356,000 and financing fees of $4,818,000 related to the purchase
of EHC, (c) adjustment for rent expense on certain leased facilities, (d)
adjustment for the effects of assets distributed to and costs of certain leases
assumed by owners of certain of the Acquired Businesses, (e) adjustment for pro
forma goodwill amortization expense using a 40-year estimated life, (f)
elimination of historical interest expense related to certain obligations which
were repaid or not
F-16
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed by the Company reduced by interest expense on borrowed funds used to pay
the cash portion of the purchase price for Acquired Businesses, and (g)
adjustment to the federal and state income tax provisions based on pro forma
operating results. Net income per share for 1995 and 1996 assumes all shares
issued for the acquisitions of the Acquired Businesses had been outstanding for
the periods presented.
The following unaudited pro forma financial information presented below
consists of income statement data from continuing operations as presented in
these consolidated financial statements plus (i) the acquisition of the Founding
Companies, assuming those acquisitions had occurred on January 1, 1996 and (ii)
the acquisition of the Purchased Companies from their respective dates of
acquisition for accounting purposes (in thousands, except per share amounts):
DECEMBER 31,
1996
------------
(UNAUDITED)
Revenue................................. $139,164
Cost of services........................ 101,433
------------
Gross profit............................ 37,731
Selling, general and administrative
expenses.............................. 30,642
------------
Income from operations.................. 7,089
Interest expense........................ 399
Interest and other income............... 556
------------
Pretax income from continuing
operations............................ 7,246
Provision for income taxes.............. 3,362
------------
Net income from continuing operations... $ 3,884
============
Weighted average shares outstanding..... 9,267
============
Earnings per share from continuing
operations............................ $ 0.42
============
This unaudited pro forma financial information contains the same type of
pro forma adjustments described above.
The pro forma results presented are not necessarily indicative of actual
results which might have occurred had the operations and management teams of the
Company and the Acquired Businesses been combined at the beginning of the
periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED USEFUL ---------------------
LIVES IN YEARS 1995 1996
---------------- --------- ----------
<S> <C> <C> <C>
Land and land improvements.............. -- $ 508 $ 2,697
Buildings and leasehold improvements.... 5-40 1,388 5,319
Transportation equipment................ 5 2,069 8,500
Machinery and equipment................. 5-7 738 1,495
Furniture and fixtures.................. 5-10 313 1,946
--------- ----------
5,016 19,957
Less -- Accumulated depreciation........ 1,879 2,507
--------- ----------
Property and equipment, net........ $ 3,137 $ 17,450
========= ==========
</TABLE>
F-17
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Balance at beginning of year............ $ 30 $ 40
Additions charged to costs and
expenses......................... 40 164
Deductions for uncollectible
receivables written off.......... (30) (63)
Allowance for doubtful accounts at
acquisition dates................ -- 588
--------- ----------
Balance at end of year.................. $ 40 $ 729
========= ==========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Accounts payable, trade................. $ 1,601 $ 9,033
Accrued compensation and benefits....... 225 5,685
Accrued insurance....................... 269 1,648
Accrued warranty expense................ -- 707
Federal and state income taxes
payable............................... -- 509
Other accrued expenses.................. 297 1,710
--------- ----------
$ 2,392 $ 19,292
========= ==========
Installation contracts in progress are as follows (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Costs incurred on contracts in
progress.............................. $ 2,411 $ 11,162
Estimated earnings, net of losses....... 1,078 5,186
--------- ----------
3,489 16,348
Less -- Billings to date................ 3,711 17,098
--------- ----------
$ (222) $ (750)
========= ==========
The following are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
---------------------
1995 1996
--------- ----------
Costs and estimated earnings in excess
of billings
on uncompleted contracts.............. $ 254 $ 792
Billings in excess of costs and
estimated earnings
on uncompleted contracts.............. (476) (1,542)
--------- ----------
$ (222) $ (750)
========= ==========
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division subsequent to
September 30, 1996 is included in the statements of operations under
discontinued operations
F-18
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and therefore revenues, costs of sales, selling, general and administrative
expenses, other income and expense, and income taxes exclude amounts associated
with the discontinued division. Revenues from this division were approximately
$2.9 million from the date of acquisition by ARS through December 31, 1996.
Certain expenses have been allocated to discontinued operations, which were
allocated based upon estimated divisional usage. All assets of the operations
are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from
the Company's Credit Facility...... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain Purchased Companies
repaid in January 1997 from
borrowing under Credit Facility.... -- 24,613
Other................................ 126 242
--------- ---------
2,161 52,055
Less -- Current maturities........... 597 201
--------- ---------
$ 1,564 $ 51,854
========= =========
On March 3, 1997, the Company increased the total commitment of its credit
facility (the "Credit Facility") from $55 million, which was in place at
December 31, 1996, to $100 million. The Credit Facility provides the Company
with a revolving line of credit up to $100 million, which may be used for
general corporate purposes, including the funding of any cash that may be paid
in connection with acquisitions, the refinancing of indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest, at the Company's option, at the designated variable base
rate plus margins ranging from 0 to 50 basis points, or at a designated London
interbank offering rate (LIBOR) plus a margin ranging from 100 to 200 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. The
margin is reset on a quarterly basis and also may be reset upon the closing of
an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), does not permit the
F-19
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company to incur or assume other indebtedness in excess of 5% of consolidated
net worth and will require the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding, if
any, thereunder will be due and payable in September 1999. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. ARS has also pledged the stock of its subsidiaries to guarantee
repayment of the indebtedness under the Credit Facility. As of December 31,
1996, the Company had $27.2 million in outstanding borrowings under the Credit
Facility, bearing interest at a weighted average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows and reflect the January 1997 repayment of amounts due to sellers of
certain Purchased Companies with borrowings under the Credit Facility (in
thousands):
Year ending December 31 --
1997............................ $ 201
1998............................ 41
1999............................ 51,813
---------
$ 52,055
=========
Management estimates that the fair value of its debt obligations
approximates the historical value of $52.1 million at December 31, 1996.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has approved a 1996 Incentive Plan (the Plan), which amended
and restated a prior stock option plan and provides for the granting or awarding
of stock options and stock appreciation rights to non-employee directors,
officers and other key employees and independent contractors. The Company
accounts for this Plan under APB Opinion No. 25, and no compensation expense has
been recognized. The number of shares authorized and reserved for issuance under
the Plan is limited to the greater of 1,550,000 shares or 15 percent of the
number of shares of Common Stock outstanding on the last day of the preceding
calendar quarter (1,550,000 shares at December 31, 1996). In general, the terms
of the option awards (including vesting schedules) will be established by the
Compensation Committee of the Company's Board of Directors. As of December 31,
1996, the Company has granted 10 year options covering an aggregate of 1,504,500
shares of Common Stock.
The following table summarizes activity under the Plan for the year ended
December 31, 1996:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Outstanding at December 31, 1995..... -- -- --
Granted......................... 1,554,500 $8.00 - $23.75 $13.09
Exercised....................... -- -- --
Forfeited and canceled.......... (50,000) $15.00 $15.00
---------
Outstanding at December 31, 1996..... 1,504,500 $12.59
=========
Weighted average fair value of
options granted during 1996........ $ 6.18
Weighted average remaining
contractual life................... 9.35 years
F-20
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share would have been increased by the
following pro forma amounts (in thousands, except per share data):
YEAR ENDED
DECEMBER 31, 1996
Net Loss:
As Reported..................... $(5,539)
Pro forma....................... $(6,514)
Loss Per Share:
As Reported..................... $ (1.70)
Pro forma....................... $ (2.00)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 32.19%; risk-free interest rate of 6.72%; and expected lives of 10 years.
STOCK WARRANT
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
Year ending December 31 --
1997............................... $ 3,486
1998............................... 3,044
1999............................... 2,836
2000............................... 2,554
2001............................... 1,912
Thereafter......................... 7,005
---------
$ 20,837
=========
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $88,000, $174,000, and $896,000, respectively. Included in these
amounts are rent expenses and commissions paid to related parties of
approximately $25,000, $82,000, and $330,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-21
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31
---------------------------------
1994 1995 1996
----------- --------- ---------
Federal --
Current............................ $ 6 $ 420 $ 108
Deferred........................... -- (44) (4)
State --
Current............................ 1 65 13
Deferred........................... -- (7) (16)
--- --------- ---------
$ 7 $ 434 $ 101
=== ========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows (in thousands):
YEAR ENDED DECEMBER 31
---------------------------------
1994 1995 1996
----------- --------- ---------
Tax provision at the statutory rate..... $ 8 $ 380 $ (1,902)
Increase (decrease) resulting from --
State income taxes................. -- 38 13
Nondeductible expenses............. -- 29 145
Nondeductible costs related to
purchase of EHC.................. -- -- 1,740
Other.............................. (1) (13) 105
--- --------- ---------
$ 7 $ 434 $ 101
=== ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred tax assets and liabilities result principally from the following (in
thousands):
YEAR ENDED DECEMBER
31
--------------------
1995 1996
--------- ---------
Accruals and reserves not deductible
until paid............................ $ (180) $ (401)
Net changes in accounting methods for
Acquired Businesses................... -- 2,170
Depreciation and amortization........... 196 99
Prepaids not deductible until paid...... -- 304
Other................................... 45 176
--------- ---------
Total deferred income tax liabilities... $ 61 $ 2,348
========= =========
F-22
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Deferred tax assets --
Current......................... $ (235) $ (821)
Long-term....................... (7) (609)
--------- ---------
Total...................... (242) (1,430)
--------- ---------
Deferred tax liabilities --
Current......................... 109 896
Long-term....................... 194 2,882
--------- ---------
Total...................... 303 3,778
--------- ---------
Net deferred income tax
liabilities............. $ 61 $ 2,348
========= =========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. During the fourth quarter of 1996, the Company
established a self-insurance retention program for a portion of its medical
claims. The Company is now responsible for the first $75,000 per employee of
medical claims filed under its medical insurance policy. In addition, the
Company established a self-insurance retention program for damages to
Company-owned vehicles. The accrued insurance claims payable represents
management's estimate of the Company's potential claims costs in satisfying the
self-insurance retention for claims occurring through December 31, 1996. The
accrual is based on known facts and historical trends, and management believes
such accrual to be adequate.
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) account. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
F-23
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS (UNAUDITED):
ACQUISITIONS SUBSEQUENT TO DECEMBER 31, 1996
In the first quarter of 1997, the Company acquired all the outstanding
stock or assets of ten companies in exchange for 1,308,752 shares of Common
Stock and $640,000 in cash. These companies provide installation and
maintenance, repair and replacement of plumbing, air conditioning and heating
and electrical systems. Eight of these acquisitions will be accounted for as
poolings-of-interests.
The following table summarizes the unaudited restated consolidated
revenues, net income (loss) and per share data from continuing operations of the
Company after giving effect to these transactions (in thousands, except per
share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31 (UNAUDITED)
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ----------------------
NET NET NET INCOME
REVENUES INCOME REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income (loss):
As presently reported.............. $19,183 $ 17 $22,048 $ 684 $64,229 $ (5,536)
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>
CONVERTIBLE SUBORDINATED NOTES OFFERING
On March 27, 1997, the Company commenced a Rule 144A offering of 7 1/4%
convertible subordinated notes due 2004 (the "Notes") in the aggregate
principal amount of $55 million, prior to exercise of any over-allotment option.
Upon issuance, the Notes will be unsecured obligations and will be convertible
into Common Stock of the Company based on certain conditions. The Company
intends to use the net proceeds of the offering of the Notes to repay certain
indebtedness under its existing Credit Facility and for general corporate
purposes. The Company anticipates that the closing of the offering will occur on
April 2, 1997.
F-24
<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 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, 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
pooling-of-interests transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 1997
F-25
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
---------------------
1995 1996
--------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,120 $ 7,860
Accounts receivable --
Trade, net of allowance of
$200 and $964........... 4,039 22,001
Other...................... 604 1,658
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 289 853
Inventories..................... 1,369 10,488
Prepaid expenses and other
current assets................. 326 1,903
Net assets of discontinued
operations..................... -- 338
--------- ----------
Total current
assets................ 7,747 45,101
PROPERTY AND EQUIPMENT, net.......... 4,640 19,223
GOODWILL, net........................ -- 131,193
OTHER NONCURRENT ASSETS.............. 593 1,340
--------- ----------
Total assets.......... $ 12,980 $ 196,857
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 920 $ 982
Short-term debt................. 210 --
Accounts payable and accrued
expenses....................... 5,876 22,466
Unearned revenue on service and
warranty contracts............. 583 3,850
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 517 1,547
--------- ----------
Total current
liabilities........... 8,106 28,845
LONG-TERM DEBT, net of current
maturities......................... 2,344 52,931
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633
DEFERRED INCOME TAXES................ 298 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 and 11,653,303
shares issued and
outstanding.................... 2 11
Additional paid-in-capital...... 1,180 122,570
Retained earnings (deficit)..... 1,050 (10,525)
--------- ----------
Total stockholders'
equity................ 2,232 112,056
--------- ----------
Total liabilities and
stockholders'
equity................ $ 12,980 $ 196,857
========= ==========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-26
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
REVENUES............................. $ 41,151 $ 48,401 $ 95,518
COST OF SERVICES..................... 31,586 35,955 68,144
--------- --------- ---------
Gross Profit.................... 9,565 12,446 27,374
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,766 9,648 22,431
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356
--------- --------- ---------
INCOME FROM OPERATIONS............... 799 2,798 1,587
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818)
Interest Expense................ (254) (274) (574)
Interest Income................. 32 42 44
Other........................... 213 118 413
--------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 790 2,684 (3,348)
PROVISION FOR INCOME TAXES........... 321 1,076 957
--------- --------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 469 1,608 (4,305)
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3)
--------- --------- ---------
NET INCOME (LOSS).................... $ 469 $ 1,608 $ (4,308)
========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 2,349 2,349 4,541
========= ========= =========
EARNINGS PER SHARE:
Continuing Operations........... $ 0.20 $ 0.68 $ (0.95)
Discontinued Operations......... -- -- --
--------- --------- ---------
Total...................... $ 0.20 $ 0.68 $ (0.95)
========= ========= =========
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-27
<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.............. 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 1 30,625 -- 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 $ 11 $ 122,570 $ (10,525) $ 112,056
========= ====== ========== ========= =============
</TABLE>
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 CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 469 $ 1,608 $ (4,308)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities --
Depreciation and amortization........ 769 988 2,523
Taxes on acquired S Corporations..... 352 283 800
Stock portion of compensation and
financing fees related to purchase
of EHC............................ -- -- 6,276
Deferred income taxes (benefit)...... (46) 94 (411)
(Gain) loss on sale of property and
equipment......................... 11 9 (77)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (987) (1,177) (989)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (456) 504 14
Inventories............... (213) (309) 28
Prepaid expenses and other
current assets.......... 47 (45) (749)
Other noncurrent assets... (97) (155) (89)
Increase (decrease) in --
Accounts payable and
accrued expenses........ 1,505 858 (1,849)
Unearned revenue on
service and warranty
contracts............... 163 86 93
Billings in excess of
costs and estimated
earnings on uncompleted
contracts............... 23 93 (241)
Other..................... (91) (51) (37)
--------- --------- ----------
Net cash provided by
operating activities.... 1,449 2,786 984
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 122 87 328
Additions to property and equipment....... (1,562) (938) (2,487)
Cash paid for acquisitions, net of cash
acquired................................ -- -- (44,458)
--------- --------- ----------
Net cash used in investing
activities................ (1,440) (851) (46,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 1,804 855 40,458
Principal payments of short- and long-term
debt.................................... (1,510) (1,265) (40,885)
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)
Other, net................................ -- -- (598)
--------- --------- ----------
Net cash provided by (used
in) financing
activities................ (41) (1,245) 52,373
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (32) 690 6,740
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 462 430 1,120
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period....... $ 430 $ 1,120 $ 7,860
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 339 $ 316 $ 790
Income taxes.............................. 226 252 184
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-29
<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 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 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 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 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.
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.
F-30
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions are
determined.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
F-31
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. This statement encourages entities to account for employee
stock option or similar equity instruments using a fair value approach for all
such plans. However, it also allows an entity to continue to measure
compensation costs for those plans using the method prescribed by APB Opinion
No. 25, "Accounting for Stock Issued to Employees". Those entities which elect
to remain with the accounting in APB No. 25 are required to include pro forma
disclosures of net income and earnings per share as if the fair value-based
method of accounting had been applied. The Company has elected to account for
such plans under the provisions of APB No. 25. Therefore, there is no effect on
the Company's financial position and results of operations as a result of this
pronouncement. Reference is made to Note 8 for the SFAS No.123 disclosures.
INCOME TAXES
The Company files a consolidated federal income tax return, which includes
the operations of all acquired businesses for periods subsequent to the
respective date of acquisition. Acquired companies each file a "short period"
federal income tax return through their respective acquisition date.
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
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 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-32
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in 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
Purchased Companies................ -- -- 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
========= ========= =========
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.
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
F-33
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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................................ $ 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 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.............. -- $ 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
========= =========
F-34
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Balance at beginning of year............ $ 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
========= =========
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
F-35
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and therefore revenues, costs of sales, selling, general and administrative
expenses, other income and expense, and income taxes exclude amounts associated
with the discontinued division. Revenues from this division were approximately
$2.9 million from the date of acquisition by ARS through December 31, 1996.
Certain expenses have been allocated to discontinued operations, which were
allocated based upon estimated divisional usage. All assets of the operations
are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
supplemental consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from
the Company's Credit Facility...... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain 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
F-36
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company to incur or assume other indebtedness in excess of 5% of consolidated
net worth and will require the Company to comply with certain financial
covenants. The Credit Facility will terminate and all amounts outstanding, if
any, thereunder will be due and payable in September 1999. The Company's
subsidiaries have guaranteed the repayment of all amounts due under the Credit
Facility. ARS has also pledged the stock of its subsidiaries to guarantee
repayment of the indebtedness under the Credit Facility. As of December 31,
1996, the Company had $27.2 million in outstanding borrowings under the Credit
Facility, bearing interest at a weighted average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows (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.
F-37
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-38
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
========= ========= =========
F-39
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
========= =========
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.
F-40
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
These acquisitions are not reflected in the pro forma disclosures included in
Note 3, as the impact of such acquisitions was deemed immaterial.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying balance sheets of American Residential
Services, Inc. (a Delaware corporation), as of December 31, 1995 and June 30,
1996, and the related statements of operations, shareholders' deficit and cash
flows from Inception (October 24, 1995) through December 31, 1995 and for the
six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Residential
Services, Inc. as of December 31, 1995 and June 30, 1996 and the results of its
operations and its cash flows from Inception through December 31, 1995 and for
the six months ended June 30, 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
August 21, 1996 (except with respect
to the matter discussed in Note 7,
as to which the date is September 9, 1996)
F-42
<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-43
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
INCEPTION SIX
(OCTOBER 24, 1995) MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ ------------
REVENUES............................. $ -- $ --
COST OF SERVICES..................... -- --
------------------ ------------
Gross profit.................... -- --
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 159,641 833,997
OPERATING LOSS....................... (159,641) (833,997)
------------------ ------------
INTEREST EXPENSE..................... -- (19,812)
------------------ ------------
NET LOSS............................. $ (159,641) $ (853,809)
================== ============
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
--------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, Inception,
October 24, 1995................... -- $ -- $-- $ -- $ --
Stock Issuance.................. 449,471 449 551 -- 1,000
Net loss........................ -- -- -- (159,641) (159,641)
--------- ------- ----------- -------------- -------------
BALANCE, December 31, 1995........... 449,471 449 551 (159,641) (158,641)
Net loss........................ -- -- -- (853,809) (853,809)
--------- ------- ----------- -------------- -------------
BALANCE, June 30, 1996............... 449,471 $ 449 $ 551 $ (1,013,450) $ (1,012,450)
========= ======= =========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
INCEPTION
(OCTOBER 24, 1995) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................ $ (159,641) $ (853,809)
Adjustments to reconcile net loss to
net cash used in operating
activities --
Depreciation and amortization... -- 2,606
Changes in operating assets and
liabilities --
Increase in --
Prepaid expenses and other
current assets.......... (3,327) (43,630)
Other noncurrent assets.... (19,325) (3,278,373)
Increase in --
Accounts payable and
accrued expenses........ 141,077 3,296,257
------------------ -----------
Net cash used in operating
activities.................... (41,216) (876,949)
------------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and
equipment..................... -- (47,747)
------------------ -----------
Net cash used in investing
activities.................... -- (47,747)
------------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt... 50,000 1,150,000
Proceeds from issuance of common
stock......................... 1,000 --
------------------ -----------
Net cash provided by
financing activities.... 51,000 1,150,000
------------------ -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 9,784 225,304
CASH AND CASH EQUIVALENTS, beginning
of period.......................... -- 9,784
------------------ -----------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 9,784 $ 235,088
================== ===========
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
American Residential Services, Inc. (ARS or the Company), was founded on
October 24, 1995 to create a leading national provider of (i) comprehensive
maintenance, repair and replacement services for heating, ventilating and air
conditioning, plumbing, electrical, and other systems in homes and commercial
buildings and (ii) new installation services of those systems in homes and
commercial facilities under construction. ARS intends to acquire seven local and
regional residential services companies (the Acquisitions), complete an initial
public offering (the Offering) of its common stock and, subsequent to the
Offering, continue to acquire, through merger or purchase, similar companies to
expand its national and regional operations. In June 1996, ARS filed a
registration on Form S-1 for the sale of its common stock.
ARS's primary assets at December 31, 1995 and June 30, 1996 are cash and
deferred offering costs. ARS has not conducted any operations, and all
activities to date have related to the Acquisitions and the Offering. Cash of
$1,000 was generated from the initial capitalization of the Company (see Note
4). There is no assurance that the Acquisitions discussed below will be
completed and that ARS will be able to generate future operating revenues.
Funding for the deferred offering costs has been provided by Equus II
Incorporated (Equus II). ARS is dependent upon the Offering to fund the amounts
due to Equus II, the pending acquisitions and future operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
The Company has recorded a full valuation allowance against all deferred
tax assets due to the uncertainty of ultimate realizability. Accordingly, no
income tax benefit has been recorded for current year losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
F-47
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future cash flows associated with the asset is compared to the
asset's carrying amount to determine if a write-down to market value or
discounted cash flow value was necessary. Adoption of this standard did not have
a material effect on the financial position or results of operations of the
Company.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will be effective for the Company. SFAS No. 123 permits, but
does not require, a fair value-based method of accounting for employee stock
option plans which results in compensation expense recognition when stock
options are granted. As permitted by SFAS No. 123, the Company will provide pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated financial statements.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Prepaid expenses and other current assets consists of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Prepaid insurance.................... $-- $ 39,291
Other................................ 3,327 7,666
------------- ----------
$ 3,327 $ 46,957
============= ==========
Other noncurrent assets consists of
the following:
DECEMBER 31, JUNE 30,
1995 1996
------------- ----------
Deferred offering costs.............. $19,325 $3,225,040
Other................................ -- 72,658
------------- ----------
$19,325 $3,297,698
============= ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
Accrued accounting and legal
expense............................ $ -- $ 3,134,310
Accrued compensation and benefits.... 79,167 249,643
Other accrued expenses............... 61,910 53,381
------------ ------------
$141,077 $ 3,437,334
============ ============
SHORT-TERM DEBT:
The Company had borrowings from Equus II under a $2.6 million credit
facility totaling $50,000 and $1,200,000 at December 31, 1995 and June 30, 1996,
respectively. The borrowings are unsecured, bear interest at prime plus .25
percent (8.5 percent at June 30, 1996) and mature December 31, 1996. A portion
of this facility is convertible into 10 percent of the outstanding common stock
of ARS prior to completion of the Offering.
F-48
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' DEFICIT:
In connection with the organization and initial capitalization of ARS, the
Company issued 1,000 shares of common stock for $1,000 (see Note 7).
5. COMMITMENTS AND CONTINGENCIES:
BONUS AWARDS
In June 1996, the Board of Directors granted certain key employees
incentive cash bonus awards for 1996 which are based, subject to the overall
performance of the Company, on the performance of the Common Stock after the
Offering as compared to the performance of each of the stocks included in the
Standard & Poor's 500 Stock Index (the S&P 500). The amount of each award will
be determined by multiplying the officer's annual base salary by a percentage
determined by ranking the Common Stock's price performance, including reinvested
dividends, if any (Total Stockholder Return), among Total Stockholder Returns of
all the stocks in the S&P 500.
6. RELATED PARTY TRANSACTION:
The Company has signed a definitive agreement to acquire Enterprises
Holding Company (EHC), a related company through common ownership, to be
effective with the Offering. EHC will be acquired for a total consideration,
subject to a working capital adjustment, consisting of 378,400 shares of Common
Stock and the assumption and/or repayment of approximately $17.3 million of
indebtedness and other obligations (including $2.6 million of EHC preferred
stock being converted into 137,139 shares of Common Stock and $0.5 million
cash), approximately $14.3 million of which will be repaid either out of a
portion of the net proceeds of the Offering or through bank borrowings.
7. CAPITAL STOCK, STOCK OPTIONS AND WARRANTS:
ARS effected a 333-for-one-stock split on February 2, 1996, and an
approximately 1.35 for-one-stock split on June 14, 1996 of its common stock for
each share of common stock then outstanding. In addition, on February 2, 1996,
authorized shares were increased from 1,000 to 50,000,000. The effects of the
common stock dividends have been retroactively reflected on the balance sheet
and in the accompanying notes.
F-49
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has approved the 1996 Incentive Plan (the Plan), which amends
and restates the 1996 Stock Option Plan and provides for the granting or
awarding of stock options and stock appreciation rights to nonemployee
directors, officers and other key employees (including officers of the Founding
Companies) and independent contractors. The number of shares authorized and
reserved for issuance under the Plan is limited to the greater of 1,550,000
shares or 15 percent of the number of shares of Common Stock outstanding on the
last day of the preceding calendar quarter. In general, the terms of the option
awards (including vesting schedules) will be established by the Compensation
Committee of the Company's Board of Directors. As of September 9, 1996, the
Company has granted 10 year options covering an aggregate of 1,445,000 shares of
common stock. Management believes the option price of the options granted is
equal to or in excess of the market value of the stock at the date of grant.
OPTIONS OPTION
DATE OF GRANT GRANTED PRICE
- ------------------------------------- --------- --------------
January 31, 1996..................... 495,000 $ 8.00
March 6, 1996........................ 75,000 9.60
March 29, 1996....................... 25,000 10.20
April 30, 1996....................... 50,000 10.80
June 12, 1996........................ 655,000 Offering Price
July 15, 1996........................ 85,000 Offering Price
August 30, 1996...................... 15,000 Offering Price
September 9, 1996.................... 45,000 Offering Price
---------
1,445,000
=========
ARS and separate wholly owned subsidiaries have signed definitive
agreements to acquire by merger seven companies (the Founding Companies) to be
effective with the Offering. The Founding Companies are General Heating
Engineering Company, Inc.; Atlas Services, Inc., and Subsidiary; Service
Enterprises, Inc. and subsidiaries (Crown); Florida Heating and Air
Conditioning, Inc., and Related Companies; DIAL ONE Meridian and Hoosier, Inc.;
ADCOT, Inc. (A-ABC); and Climatic Corporation of Vero Beach. Crown and A-ABC
will be acquired indirectly through the direct acquisition of their parent
corporation, EHC. The aggregate consideration that will be paid by ARS to
acquire the Founding Companies is, subject to working capital adjustments,
approximately $34.8 million in cash and 2,805,065 shares of ARS common stock
(based on an assumed initial public offering price of $15 per share, the
midpoint of the estimated initial public offering price range).
On March 19, 1996, the Company issued to Equus II a warrant to purchase
100,000 shares of Common Stock exercisable at the Offering price. The warrants
are exercisable at any time after the closing of the Offering of the Company
until five years from such date. The number of shares represented by the warrant
is subject to adjustment for stock dividends and stock splits.
Subsequent to December 31, 1995, the Company has incurred additional costs,
including professional fees and travel, associated with the acquisition of the
Founding Companies and the Offering. Accordingly, accrued liabilities and
amounts due to Equus II have increased to approximately $1.2 million as of June
30, 1996. A portion of this note will be converted into 844,965 shares of ARS
Common Stock in connection with the Offering.
8. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On September 27, 1996, ARS completed the Offering, which involved the
issuance of 4,200,000 shares of Common Stock at a price of $15.00 per share
(before deducting underwriting discounts and commissions). On October 7, 1996,
ARS sold an additional 630,000 shares of Common Stock at a price of $15.00 per
share (before deducting underwriting discounts and commissions) pursuant to an
overallotment option
F-50
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
granted by the Company in connection with the Offering. The proceeds from these
transactions, net of underwriting discounts and commissions of $1.05 per share
and after deducting estimated expenses of the Offering, were approximately $61.0
million. Of this amount, $34.8 million was used to fund the cash portion of the
purchase prices relating to the acquisitions of the Founding Companies. The
Company also has paid to the former owners approximately $4.7 million as working
capital adjustments of which approximately $1.8 million was paid in the fourth
quarter of 1996. In addition, a portion of the Equus II note was converted to
844,965 shares of ARS Common Stock.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To General Heating Engineering Company, Inc.:
We have audited the accompanying balance sheets of General Heating
Engineering Company, Inc. (a Delaware corporation), as of December 31, 1994 and
1995, and the related statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of General Heating Engineering
Company, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-52
<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-53
<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-54
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL TREASURY STOCK SHAREHOLD-
----------------- PAID-IN RETAINED --------------------- ERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------- ----------- ------------ ------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,752 $55,040 $ 648,912 $ 9,811,451 (2,290) $ (1,592,744) $ 8,922,659
Dividend......................... -- -- -- (1,744,798) -- -- (1,744,798)
Net income....................... -- -- -- 2,434,813 -- -- 2,434,813
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1993........... 2,752 55,040 648,912 10,501,466 (2,290) (1,592,744) 9,612,674
Capital contributions............ -- -- 18,001 -- -- -- 18,001
Dividends........................ -- -- -- (1,095,044) -- -- (1,095,044)
Net income....................... -- -- -- 1,405,572 -- -- 1,405,572
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1994........... 2,752 55,040 666,913 10,811,994 (2,290) (1,592,744) 9,941,203
Dividends........................ -- -- -- (1,276,000) -- -- (1,276,000)
Net income....................... -- -- -- 1,370,413 -- -- 1,370,413
------ ------- ----------- ------------ ------ ------------ ------------
BALANCE, December 31, 1995........... 2,752 $55,040 $ 666,913 $ 10,906,407 (2,290) $ (1,592,744) $ 10,035,616
====== ======= =========== ============ ====== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-55
<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-56
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
General Heating Engineering Company, Inc. (a Delaware corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of air conditioning, heating and fireplace systems in new and
preexisting residential and commercial buildings in Washington, D.C. and the
surrounding area.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are valued at the lower of cost or market using the average cost
method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues from the sale of
residential and commercial service and maintenance contracts are recognized over
the life of the contract on a straight-line basis.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-57
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. A reserve for warranty costs is recorded upon
completion of installation or service.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, each shareholder reports his share of the
Company's taxable earnings or losses in his personal federal and state tax
returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............. 7 $ 3,258,907 $ 3,376,461
Furniture and fixtures............... 7 159,227 169,453
Leasehold improvements............... 20 800,370 879,938
Machinery and equipment.............. 10 858,033 919,393
Computer and telephone equipment..... 5 442,853 467,219
------------ ------------
5,519,390 5,812,464
Less -- Accumulated depreciation and
amortization....................... 3,578,314 3,711,826
------------ ------------
Property and equipment,
net........................ $ 1,941,076 $ 2,100,638
============ ============
F-58
<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-59
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
make additional discretionary contributions. Total contributions by the Company
under this plan to provide contributions and pay expenses were approximately
$42,000, $67,000 and $78,000 during 1993, 1994 and 1995, respectively. Amounts
due to this plan were approximately $50,000 and $30,000 for the years ended
December 31, 1994 and 1995, respectively.
The Company has also adopted a cafeteria plan pursuant to Section 125 of
the Internal Revenue Code that covers all employees from 90 days after the
commencement of employment. Under this plan, the employees may reduce their
compensation to fund medical or life insurance, dental and short-term disability
benefits. The funds withheld are used to pay actual claims, administrative
expenses and stop-loss insurance protection premiums. Such stop-loss insurance
covers claims to a maximum aggregate liability of $1,000,000 and $35,000 per
participant. For the years ended December 31, 1993, 1994 and 1995, the Company
contributed approximately $57,000, $91,000 and $129,000, respectively, to this
plan in addition to amounts withheld from employees. Contributions due to this
plan were approximately $91,000 and $216,000 for the years ended December 31,
1994 and 1995, respectively.
6. LEASES:
The Company conducts a portion of its operations in leased facilities under
operating lease agreements with a company primarily owned by the shareholders.
Total amounts paid under these related-party leases were approximately $261,000,
$387,000 and $384,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. In January 1996, the Company extended each of these leases,
commencing January 1, 1996, for 10 years. The following schedule shows the
future minimum rentals to be made under these leases:
Year ending December 31 --
1996.......................... $ 517,281
1997.......................... 517,505
1998.......................... 531,468
1999.......................... 552,728
2000.......................... 574,837
Thereafter.................... 3,367,564
------------
$ 6,061,383
============
7. RELATED-PARTY TRANSACTIONS:
The Company has notes receivable from its shareholders in the amounts of
$92,500 and $308,139 as of December 31, 1994 and 1995, respectively. These notes
are unsecured, bear interest at 7 percent per annum and are due upon demand.
Interest income recognized by the Company on these notes during the years ended
December 31, 1994 and 1995, was approximately $1,000 and $12,000, respectively.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in various legal actions arising in the ordinary
course of business. Management does not believe that the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-60
<PAGE>
GENERAL HEATING ENGINEERING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LETTER OF CREDIT
At December 31, 1995, the Company had an outstanding letter of credit of
$75,000 to secure the purchase of certain inventories.
9. SALES TO SIGNIFICANT CUSTOMERS:
During 1993, 1994 and 1995, one customer accounted for approximately 13
percent, 16 percent and 21 percent, respectively, of the Company's revenue.
10. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
In connection with the acquisition, the Company distributed certain assets
to the shareholders, consisting of the cash surrender value of life insurance,
with a total carrying value of approximately $387,000. In addition, the Company
made distributions in respect of the Company's estimated S Corporation
accumulated adjustment account of approximately $8,488,000 at the time of
closing. As of September 30, 1996, additional distributions in the aggregate
amount of $2,642,000 had been accrued but had not yet been distributed.
F-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<PAGE>
ATLAS SERVICES, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
F-74
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30,
1996
------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 324,283
Accounts receivable --
Trade, net of allowance of
$58,675................... 500,795
Other receivables.......... 322,311
Inventories..................... 1,472,638
Prepaid expenses and other
current assets................. 263,547
------------
Total current
assets............... 2,883,574
PROPERTY AND EQUIPMENT, net.......... 5,055,957
GOODWILL, net........................ 12,636,127
OTHER NONCURRENT ASSETS.............. 322,372
------------
Total assets.......... $ 20,898,030
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... 1,832,231
Accounts payable and accrued
expenses....................... 2,184,207
Unearned revenue on extended
warranty contracts, current.... 304,745
------------
Total current
liabilities.......... 4,321,183
LONG-TERM DEBT, net of current
maturities......................... 12,947,631
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS, noncurrent.............. 612,942
DEFERRED INCOME TAXES................ 114,133
NET LIABILITIES OF DISCONTINUED
OPERATIONS......................... 92,060
COMMITMENTS AND CONTINGENCIES
SERIES A PREFERRED STOCK $100 par;
49,810 shares authorized, 25,381
issued and outstanding............. 2,538,100
SERIES B PREFERRED STOCK, $100 par;
190 shares authorized, issued and
outstanding........................ 19,000
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value;
1,000,000 shares authorized,
1,000 issued and outstanding... 1,000
Retained earnings............... 251,981
------------
Total shareholders'
equity............... 252,981
------------
Total liabilities and
shareholders'
equity............... $ 20,898,030
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
---------------------
(UNAUDITED)
REVENUES............................. $22,410,865
COST OF SERVICES..................... 13,369,713
---------------------
Gross profit.................... 9,041,152
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 6,629,887
---------------------
Income from operations.......... 2,411,265
OTHER INCOME (EXPENSE):
Interest income................. 28,652
Interest expense................ (776,957)
Other........................... 19,477
---------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES................ 1,682,437
PROVISION FOR INCOME TAXES........... 537,034
---------------------
NET INCOME FROM CONTINUING
OPERATIONS......................... 1,145,403
INCOME FROM DISCONTINUED OPERATIONS,
net of tax......................... (270,855)
---------------------
NET INCOME........................... $ 874,548
=====================
The accompanying notes are an integral part of these consolidated financial
statements.
F-76
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ ----------------- -------------
<S> <C> <C> <C> <C>
Balance, Inception, February 16, 1996
(unaudited)........................ -- $ -- $ -- $ --
Stock issuance (unaudited)...... 1,000 1,000 -- 1,000
Preferred stock dividends
(unaudited)................... -- -- (57,100) (57,100)
Net income (unaudited).......... -- -- 309,081 309,081
------ ------ ----------------- -------------
Balance, June 30, 1996 (unaudited)... 1,000 $1,000 $ 251,981 $ 252,981
====== ====== ================= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-77
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
SEPTEMBER 30, 1996
--------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 758,327
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and amortization... 304,146
Gain on sale of property and
equipment...................... (16,672)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........ (50,763)
Inventories................ 268,404
Prepaid expenses and other
current assets............... 85,495
Other noncurrent assets.... 254,755
Increase (decrease) in --
Accounts payable and
accrued expenses......... (525,250)
Unearned revenue on
extended warranty
contracts................ (61,675)
--------------------
Net cash provided by
operating
activities.......... 1,016,767
--------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property
and equipment.................. 16,672
Additions of property and
equipment...................... (74,464)
Cash paid for acquisitions, net
of cash acquired............... (17,367,498)
--------------------
Net cash used in
investing
activities.......... (17,425,290)
--------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.... 16,047,000
Principal payments of long-term
debt........................... (1,782,403)
Dividends....................... (108,102)
Proceeds from stock issuance.... 2,558,100
--------------------
Net cash provided by
financing
activities.......... 16,714,595
--------------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS........................ 306,072
CASH AND CASH EQUIVALENTS, beginning
of period.......................... --
--------------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 306,072
====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................... $ 756,197
Income taxes............... $ 349,735
The accompanying notes are an integral part of these consolidated financial
statements.
F-78
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Enterprises Holding Company (EHC or "the Company") (a Texas corporation),
and subsidiaries was formed February 16, 1996 solely for the purpose of
acquiring the operations of Service Enterprises, Inc. (SEI) and subsidiaries.
On March 19, 1996, EHC acquired all of the outstanding stock of SEI and
certain real estate owned by the former shareholder of SEI for $17,500,000. (See
SEI's financial statements elsewhere herein.) SEI is primarily engaged in the
maintenance, repair and replacement service-related activities of plumbing, air
conditioning, electrical repair and other home improvement services in Houston
and the surrounding areas.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. (ADCOT) for $2,000,000. (See ADCOT's financial statements included
elsewhere herein.)
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS.
All outstanding shares of EHC's common stock and preferred stock will be
exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Enterprises Holding Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the period from
inception, February 16, 1996, through September 30, 1996 are unaudited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the consolidated interim financial
statements, have been included. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
INVENTORIES
Inventories consist of parts and service related supplies held for use in
the ordinary course of business and are valued at the lower of cost or market
using the first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-79
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
EXCESS OF PURCHASE PRICE OVER FAIR VALUE OF NET ASSET ACQUIRED
The excess of the aggregate purchase price paid by the Company in the
acquisition of businesses, accounted for as a purchase, over the fair market
value of the net assets acquired is amortized on a straight-line basis over 40
years. As of June 30, 1996, accumulated amortization was approximately $87,000.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value is necessary. Adoption of this standard did
not have a material effect on the financial position or consolidated results of
operations of the Company.
F-80
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED
USEFUL LIVES JUNE 30,
IN YEARS 1996
------------- --------------
Land................................. -- $1,433,246
Building and improvements............ 20 1,756,260
Leasehold improvements............... 5 - 10 405,580
Equipment............................ 3 - 7 3,652,650
Furniture and fixtures............... 3 - 7 1,160,701
--------------
8,408,437
Less -- Accumulated depreciation and
amortization....................... 3,352,480
--------------
Property and equipment,
net..................... $5,055,957
==============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
1996
----------
Balance at inception, February 16,
1996.................................. $ 0
Balance acquired at acquisition date.... 53,495
Additions charged to costs and
expenses.............................. 10,273
Deductions for uncollectible receivables
written off........................... (5,093)
----------
$ 58,675
==========
Prepaid expenses and other current assets consist of the following:
JUNE 30,
1996
----------
Prepaid insurance....................... $ 174,800
Deferred income taxes................... 39,068
Other prepaid assets.................... 49,679
----------
$ 263,547
==========
Accounts payable and accrued expenses consist of the following:
JUNE 30,
1996
------------
Accounts payable, trade................. $ 971,331
Accrued compensation and benefits....... 282,453
Other accrued expenses.................. 930,423
------------
$ 2,184,207
============
5. DISCONTINUED OPERATIONS:
Subsequent to the purchase of ADCOT by SEI, the board of directors of EHC
approved the disposition of ADCOT's retail appliance sales division. The
allocation of purchase price to the fair market value of the net assets of ADCOT
acquired by SEI will be based on preliminary estimates of fair value and may be
F-81
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
revised when additional information concerning asset and liability valuations is
obtained. Accordingly, any gain or loss on the sale of the appliance sales
division will be considered an adjustment of purchase price.
6. INVENTORY FLOOR PLAN LIABILITY:
The Company maintains certain inventories on a floor plan financing method
with General Electric Capital Corporation (GECC) in connection with its
discontinued retail appliance sales division. The terms of the floor plan allow
an interest-free period of 90 days after purchase followed by interest accruing
at a rate of prime plus 2.5 percent on the remaining unpaid balance. Payment is
due as the inventory is sold.
7. LONG-TERM DEBT:
Long-term debt consists of the following:
Note payable to Equus II Incorporated,
with quarterly installments of
$187,500 beginning June 19, 1999,
bearing interest at 12% payable
quarterly, due March 19, 2003,
unsecured and subordinated to notes
payable to a bank..................... $ 4,800,000
Revolving credit facility of $5,000,000,
bearing interest at prime plus 1%
(9.25% at June 30, 1996) due June 15,
1999, secured by equipment, inventory
and accounts receivable............... 4,372,500
Note payable to a bank, with quarterly
installments of $34,208 beginning
January 15, 1997, bearing interest at
8.34% payable quarterly, due June 15,
1999, secured by real estate.......... 2,025,500
Notes payable to former shareholder of
Crown, with quarterly installments of
$100,000, bearing interest at prime
(8.25% at June 30, 1996), due March
19, 1999, unsecured................... 1,000,000
Note payable to a bank with quarterly
installments of $46,688, beginning
January 15, 1997, bearing interest at
prime plus 1%, due June 1999, secured
by accounts receivable inventory and
property.............................. 747,000
Note payable to a bank, with quarterly
installments of $17,571 beginning
January 15, 1997, bearing interest at
prime plus 1% payable quarterly, due
June 15, 1999, secured by real
estate................................ 474,500
Note payable to a bank, bearing interest
at prime plus 1%, due October 15, 1996
secured by accounts receivable,
inventory and equipment............... 1,000,000
Various notes payable, bearing interest
at rates ranging from 8.0% to 9.0%,
due from February 1998 to August 1999,
secured by equipment.................. 360,362
--------------
Total.................... 14,779,862
Less -- Current maturities.............. (1,832,231)
--------------
Long-term debt, net of
current maturities.... $ 12,947,631
==============
F-82
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The aggregate maturities of long-term debt as of June 30, 1996, are as
follows:
December 31,
1997............................... $ 1,832,231
1998............................... 1,659,731
1999............................... 7,050,400
2000............................... 750,000
2001............................... 750,000
Thereafter......................... 2,737,500
--------------
$ 14,779,862
==============
Management estimates that the fair value of its debt obligations
approximates the historical value of $14,779,862 at June 30, 1996.
8. SHAREHOLDERS' EQUITY
In connection with the organization and initial capitalization of EHC, the
Company issued 1,000 shares of common stock for a total of $1,000 in February
1996.
As an amendment to the Company's certificate of incorporation, on March 19,
1996, the Company created an additional series of preferred stock designated as
Series B Preferred Stock and increased the total number of authorized shares to
1,050,000 shares, consisting of 1,000,000 shares of common stock, par value $.01
per share, and 50,000 shares of preferred stock, par value $100 per share. The
first series of preferred stock is the Series A Preferred Stock with authorized
shares of 49,810 and the second series of preferred stock is the Series B
Preferred Stock with authorized shares of 190.
SERIES A PREFERRED STOCK
On March 19, 1996, the Company issued 24,810 shares of voting, Series A
Preferred Stock, par value $100 per share, (Series A). The holder of the Series
A shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year, commencing June 30, 1996. On June 30, 1996, the
Company recorded a dividend of $56,700 payable in 567 shares of Series A
Preferred Stock.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
SERIES B PREFERRED STOCK
On March 19, 1996, the Company issued 190 shares of voting Series B
Preferred Stock, par value $100 per share, (Series B). The holder of the Series
B shares is entitled to receive cumulative, preferential dividends equal to an
annual rate of .08 of an additional share of Series A Preferred Stock, provided,
however, that upon a redemption of shares of Preferred Stock in the IPO,
dividends for the period from the last dividend payment date immediately
preceding such redemption date through such redemption date shall accrue and be
payable at the annual rate of $8 in cash per share of Preferred Stock. Dividends
are payable quarterly in arrears on the last day of each March, June, September
and December of each year,
F-83
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
commencing June 30, 1996. On June 30, 1996, the Company recorded a dividend of
$400 payable in 4 shares of Series A Preferred Stock.
The holder of Series B shares has the right and option to convert all of
the then outstanding shares of Series B Preferred Stock into an aggregate number
of shares of common stock equal to 95% of the number of shares of common stock
outstanding at the conversion date if the IPO date does not occur before March
1, 1997 or a default occurs before March 1, 1997.
The Company must redeem the Preferred Stock on the IPO date, subject to the
closing of the IPO, for the "Aggregate Redemption Price", as defined.
9. LEASES:
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized in the period from inception
(February 16, 1996) through June 30, 1996 was approximately $10,350.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
Six months ended 1996.............. $ 20,700
1997............................... 35,700
1998............................... 25,000
---------
$ 81,400
=========
10. INCOME TAXES:
Federal and state income taxes are as follows:
FOR THE
NINE MONTHS
ENDED
JUNE 30,
1995
-------------
Federal --
Current............................ $ 210,740
Deferred........................... --
State --
Current............................ 18,595
Deferred........................... --
-------------
$ 229,335
=============
F-84
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
INCEPTION
(FEBRUARY 16, 1996)
THROUGH
JUNE 30, 1996
-------------------
Provision (benefit) at the statutory
rate.................................. $ 181,136
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction............. 15,983
Nondeductible expenses............. 32,216
Other...................................
-------------------
$ 229,335
===================
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
JUNE 30,
1996
----------
Depreciation and amortization........... $ 36,213
Net operating loss carryforward......... (33,098)
Accruals and reserves not deductible
until paid............................ (40,685)
Other................................... 112,635
----------
Net deferred income tax
liabilities............ $ 75,065
==========
The net deferred tax assets and liabilities are comprised of the following:
JUNE 30,
1996
----------
Deferred tax assets --
Current............................ $ 39,068
Long-term.......................... 100,640
----------
Total.................... 139,708
Deferred tax liabilities, long-term..... 214,773
----------
Net deferred income tax
liabilities............ $ 75,065
==========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
F-85
<PAGE>
ENTERPRISES HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
GUARANTEES
SEI's former shareholder is required to make seven annual payments of
$75,000 each under a lawsuit settlement. SEI's former shareholder is also
required under this settlement to make four annual payments of $20,000 each,
beginning in 2003. The Company has guaranteed these settlement payments.
12. SUBSEQUENT EVENT:
The acquisition of the Company by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-86
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Service Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Service
Enterprises, Inc. (a Texas corporation), and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
shareholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Enterprises, Inc., and subsidiaries as of December 31, 1994 and 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-87
<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-88
<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-89
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- -------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 2,000,000 $ 20,000 $ 982,010 $2,650,056 $3,652,066
Net loss........................ -- -- -- (347,399) (347,399)
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1993........... 2,000,000 20,000 982,010 2,302,657 3,304,667
Capital contribution............ -- -- 223,750 -- 223,750
Dividend........................ -- -- -- (300,000) (300,000)
Net income...................... -- -- -- 215,276 215,276
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1994........... 2,000,000 20,000 1,205,760 2,217,933 3,443,693
Dividend........................ -- -- -- (100,000) (100,000)
Stock split (7 for 1)........... 12,000,000 120,000 (120,000) -- --
Net income...................... -- -- -- 1,046,842 1,046,842
---------- -------- ---------- ---------- --------------
BALANCE, December 31, 1995........... 14,000,000 140,000 1,085,760 3,164,775 4,390,535
========== ======== ========== ========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-90
<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-91
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Service Enterprises, Inc. (SEI) (a Texas corporation), and subsidiaries
(the Company) are primarily engaged in the maintenance, repair and replacement
service-related activities of plumbing, air conditioning, electrical repair and
other home improvement services in Houston and the surrounding areas.
On March 19, 1996, all of the outstanding stock of SEI and certain real
estate owned by the former shareholder of SEI was acquired by Enterprises
Holding Company (EHC) for $17,500,000. EHC was formed solely for the purpose of
acquiring the Company and has no other operations. The accompanying unaudited
financial statements of the Company for the quarter ended March 31, 1996, do not
reflect the effect of the purchase of the Company by EHC.
In April 1996, the Company entered into a stock purchase agreement with
ADCOT, Inc. (ADCOT), to purchase all of the outstanding common stock of ADCOT
for $2,000,000. (See ADCOT's financial statements included elsewhere herein.)
EHC intends to enter into a definitive agreement with American Residential
Services, Inc. (ARS), pursuant to which EHC will be acquired by ARS. All
outstanding shares of EHC's common stock and a portion of EHC's preferred stock
will be exchanged for cash and shares of ARS's common stock concurrent with the
consummation of the initial public offering of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts and results of
operations of Service Enterprises, Inc., and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1995 and March 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the results of operations and cash
flows with respect to the consolidated interim financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using the
first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
lease life or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-92
<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:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
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
============ ============
</TABLE>
F-93
<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-94
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
$850,000 demand line of credit with
bank; collateralized by
transportation equipment, accounts
receivable and inventory, interest
at prime plus 1% (9.5% at December
31, 1995), payable monthly,
principal due June 1996............ $ 200,000 $ 200,000
Demand note payable to bank;
cross-collateralized with the line
of credit, bearing interest at
prime plus 1%, principal of $25,000
plus interest, payable in monthly
installments through January
1996............................... 300,000 --
Demand note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, payable monthly, principal due
September 1996..................... 120,312 51,562
---------- ----------
$ 620,312 $ 251,562
========== ==========
Long-term debt consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable to bank;
cross-collateralized with the line
of credit, interest at prime plus
1%, interest only through June
1996, payable monthly, then
principal of $21,500, plus
interest, payable in monthly
installments through June 1998..... $ -- $ 495,451
Less -- Current portion......... -- 129,000
---------- ----------
$ -- $ 366,451
========== ==========
The aggregate maturities of long-term debt are as follows:
Year ending December 31 --
1996............................ $ 129,000
1997............................ 258,000
1998............................ 108,451
----------
$ 495,451
==========
In connection with the bank indebtedness, the Company has entered into an
agreement which provides for certain affirmative covenants and restrictions,
including certain required financial ratios and restrictions on retained
earnings. As of December 31, 1995, the Company was in compliance with these
covenants.
The notes payable have been personally guaranteed by the Company's
shareholder.
Management estimates that the fair value of its debt obligations
approximates the historical value of $747,013 at December 31, 1995.
8. LEASES:
The Company operates in leased facilities under an agreement with its
shareholder and affiliates. The amount paid under these leases was $291,600,
$291,600 and $301,600 in 1993, 1994 and 1995, respectively. These leases were
canceled concurrent with the purchase of the Company and the leased facilities
by EHC.
F-95
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1994, the Company renewed a parking lot lease agreement with an
affiliated company, which expired September 30, 1995. The Company continued its
lease on a month-to-month basis. Amounts paid under this lease in 1993, 1994 and
1995 totaled $22,500, $30,000 and $25,000, respectively.
The Company has entered into two operating sublease agreements with a
company at its facilities, and these agreements expire in June 1997 and November
1998, respectively. Rental income recognized during 1993, 1994 and 1995 was
approximately $13,650, $11,400 and $16,400, respectively.
Future minimum rental income under the sublease agreements is as follows:
Year ending December 31 --
1996............................ $ 41,400
1997............................ 35,700
1998............................ 25,000
----------
$ 102,100
==========
9. INCOME TAXES:
Federal and state income taxes are as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Federal --
Current......................... $ 18,602 $ 466,159 $ 553,973
Deferred........................ (205,440) 48,585 6,419
State --
Current......................... 203 67,764 68,371
Deferred........................ (28,471) 6,733 890
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1993 1994 1995
------------ ---------- ----------
Provision (benefit) at the statutory
rate............................... $ (191,252) $ 273,536 $ 570,008
Increase (decrease) resulting from --
State income tax, net of benefit
for federal deduction......... (18,657) 49,169 45,713
Nondeductible expenses.......... 6,553 184,418 18,743
Related-party gain on sale...... -- 76,075 --
Other................................ (11,750) 6,043 (4,811)
------------ ---------- ----------
$ (215,106) $ 589,241 $ 629,653
============ ========== ==========
F-96
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provision results from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 56,200 $ 36,213
Net operating loss carryforward...... (33,098) (33,098)
Accruals and reserves not deductible
until paid......................... (65,203) (40,685)
Other................................ 109,857 112,635
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 62,611 $ 39,068
Long-term....................... 103,598 100,640
---------- ----------
Total................. 166,209 139,708
Deferred tax liabilities,
long-term.......................... 233,965 214,773
---------- ----------
Net deferred income
tax liabilities.... $ 67,756 $ 75,065
========== ==========
10. RELATED-PARTY TRANSACTIONS:
The Company has receivables from its shareholder and from certain
affiliated entities related through common ownership and control in the amount
of $278,187 and $10,308 at December 31, 1994 and 1995, respectively. Receivables
from shareholder accrue interest at 5.5 percent. Interest income recognized
during 1993, 1994 and 1995 was approximately $147,800, $54,000 and $27,000,
respectively.
The Company acquired an investment in real estate held for sale from its
shareholder for $1,750,000 in January 1993. In January 1994, the investment was
sold for approximately $1,275,000, net of closing costs. At December 31, 1993,
the investment was written down to its net realizable value resulting in an
unrealized loss of approximately $475,000 included in other income (expense) on
the consolidated statement of operations.
In 1991, the Company received 250,000 shares of registered Exploration
Company of Louisiana (Exploration) common stock valued at $125,000 from its
shareholder in exchange for shares of stock in ANGP. During March 1994, the
Company sold the 250,000 shares of common stock of Exploration to its
shareholder for $348,750 resulting in a gain of $223,750 which has been
accounted for as additional paid-in capital.
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal action will
have a material adverse effect on the Company's financial position or results of
operations.
F-97
<PAGE>
SERVICE ENTERPRISES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
GUARANTEES
The Company's former shareholder is required to make seven annual payments
of $75,000 each under a lawsuit settlement. The Company's former shareholder is
also required under this settlement to make four annual payments of $20,000
each, beginning in 2003. The Company has guaranteed these settlement payments.
12. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On March 19, 1996, Enterprise Holding Company ("EHC") acquired all of the
outstanding stock of SEI and certain real estate owned by the former shareholder
of SEI for $17,500,000.
On May 28, 1996, SEI purchased all of the outstanding common stock of
ADCOT, Inc. for $2,000,000.
In June 1996, EHC entered into a definitive agreement with American
Residential Services, Inc. (ARS), pursuant to which EHC would be acquired by
ARS. The acquisition of EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-98
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Florida Heating and Air Conditioning, Inc.:
We have audited the accompanying combined balance sheets of Florida Heating
and Air Conditioning, Inc. (a Florida corporation), and related companies as of
December 31, 1994 and 1995, and the related combined statements of operations,
shareholders' equity and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Florida
Heating and Air Conditioning, Inc., and related companies as of December 31,
1994 and 1995, and the combined results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-99
<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-100
<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-101
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- --------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 2,600 $9,800 $4,000 $ 90,960 $104,760
Dividend........................ -- -- -- (55,060) (55,060)
Net income...................... -- -- -- 430,162 430,162
------ ------ ---------- --------- --------------
BALANCE, December 31, 1994........... 2,600 9,800 4,000 466,062 479,862
Dividend........................ -- -- -- (6,000) (6,000)
Net income...................... -- -- -- 197,133 197,133
------ ------ ---------- --------- --------------
BALANCE, December 31, 1995........... 2,600 $9,800 $4,000 $ 657,195 $670,995
====== ====== ========== ========= ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-102
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31 SEPTEMBER 30
-------------------------- --------------------------
1994 1995 1995 1996
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 430,162 $ 197,133 $ 87,481 $ (25,460)
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 183,860 195,662 144,785 135,500
Deferred income taxes........... 1,274 5,756 364,260 --
Gain on sale of property and
equipment..................... 25,241 (12,303) (12,303) (307)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........... (331,298) (45,342) (207,121) (191,897)
Inventories................... (33,374) (37,228) (549,819) (45,901)
Prepaid expenses and other
current assets............. 112,642 8,064 261,902 18,949
Other noncurrent assets....... (4,915) (10,613) (4,837) 27,024
Increase (decrease) in --
Accounts payable and accrued
expenses................... (15,654) 330,097 343,316 151,116
Billings in excess of costs
and estimated earnings on
uncompleted contracts...... 269,917 (140,690) 87,372 68,221
------------ ------------ ------------ ------------
Net cash provided by operating
activities.................... 637,855 490,536 515,036 137,245
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment....................... 38,190 16,704 16,704 28,778
Additions of property and
equipment....................... (199,281) (236,209) (222,551) (151,498)
------------ ------------ ------------ ------------
Net cash used in investing
activities.................... (161,091) (219,505) (205,847) (122,720)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in payable to
shareholders.................... -- 1,357 (547,643) (641,804)
Borrowings of long-term debt....... 276,291 185,511 185,511 (161,352)
Principal payments of long-term
debt............................ (346,573) (165,494) (133,392) 203,251
Dividends.......................... (55,060) (6,000) (6,000) (6,000)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities.......... (125,342) 15,374 (501,524) (605,905)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 351,422 286,405 (192,335) (591,380)
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 384,327 735,749 735,749 1,022,154
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 735,749 $ 1,022,154 $ 543,414 $ 430,774
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................ $ 25,931 $ 11,743 $ 5,871 $ 20,126
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-103
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC.,
AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Florida Heating and Air Conditioning, Inc. (a Florida corporation) and its
three affiliated companies (collectively, the Company), are primarily engaged in
the installation and maintenance, repair and replacement of air conditioning and
heating systems in new and preexisting residential and commercial buildings in
Southeast Florida.
The Company and its shareholders intend to enter into a definitive
agreement with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The combined financial statements include the accounts and results of
operations of Florida Heating and Air Conditioning, Inc., and its affiliated
companies (see Note 11) which are under common control and management of two
individuals. All significant intercompany transactions and balances have been
eliminated in combination.
INTERIM FINANCIAL INFORMATION
The interim combined financial statements for the nine months ended
September 30, 1995 and 1996 are unaudited and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim combined financial statements, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of duct materials, air conditioning equipment,
refrigeration supplies and accessories held for use in the ordinary course of
business and are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
F-104
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company warrants labor for the first year after installation on new air
conditioning and heating units. The Company generally warrants labor for 30 days
after servicing of existing air conditioning and heating units. A reserve for
warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the companies in the affiliated group have elected S Corporation
status as defined by the Internal Revenue Code, whereby the Company is not
subject to taxation for federal purposes. Under S Corporation status, the
shareholders report their share of the Company's taxable earnings or losses in
their personal tax returns.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
F-105
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Transportation equipment............ 5 $ 869,115 $ 1,051,880
Machinery and equipment............. 7 115,186 115,774
Computer and telephone equipment.... 5 - 7 343,166 354,674
Leasehold improvements.............. 7 57,151 57,151
Furniture and fixtures.............. 7 39,308 39,308
------------ ------------
1,423,926 1,618,787
Less -- Accumulated depreciation and
amortization...................... 964,962 1,123,677
------------ ------------
Property and
equipment, net.... $ 458,964 $ 495,110
============ ============
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 41,305 $ 41,305
Additions to costs and expenses...... 53,132 25,038
Deductions for uncollectible
receivables written off............ (53,132) (25,038)
---------- ----------
$ 41,305 $ 41,305
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Accounts payable, trade.............. $ 1,002,209 $ 1,283,034
Accrued compensation and benefits.... 150,638 198,175
Other accrued expenses............... 143,625 145,360
------------ ------------
$ 1,296,472 $ 1,626,569
============ ============
Installation contracts in progress are as follows:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Costs incurred on contracts in
progress........................... $ 1,680,864 $ 985,003
Estimated earnings, net of losses.... 575,928 351,711
------------ ------------
2,256,792 1,336,714
Less -- Billings to date............. 2,765,002 1,704,233
------------ ------------
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. $ (508,210) $ (367,519)
============ ============
F-106
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of installment notes payable for transportation
equipment. The debt is secured by the related transportation equipment. The
terms of the notes range from 24 months to 36 months with monthly payments of
principal and interest of approximately $10,500. The notes bear interest at
rates ranging from 7 percent to 9 percent.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 100,166
1997............................ 18,017
----------
$ 118,183
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $118,183 at December 31, 1995.
The Company has a $200,000 line of credit with a financial services
company. The line of credit expires August 31, 1996, and bears interest at prime
plus 1 percent per annum. The line of credit is secured by a lien on accounts
receivable and inventory and is guaranteed by the shareholders. There was no
balance outstanding under this line of credit at December 31, 1995.
6. LEASES:
The Company leases facilities from a company which is owned by the
shareholders. The lease expires in 2000 and provides for rents increasing at 5
percent per year. Total amounts paid under this related-party lease were
approximately $198,000 and $198,000 for the years ended December 31, 1994 and
1995, respectively. The Company also leases a facility from a third party, which
expires in 1997. The rent paid under this lease was approximately $15,000 per
year for the year ended December 31, 1994 and 1995. The leases provide for the
Company to pay taxes, maintenance, insurance and certain other operating costs
of the leased property. The leases contain renewal provisions.
The Company leases vehicles for a shareholder and affiliates. The lease
payments under these vehicle leases were approximately $31,000 and $45,000 for
the years ended December 31, 1994 and 1995, respectively.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 234,897
1997............................ 204,438
1998............................ 184,252
1999............................ 193,465
2000............................ 82,242
-----------
$ 899,294
===========
F-107
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
The S Corporation in the affiliated group will terminate its S Corporation
status concurrent with the effective date of the Offering. The Company is
subject to taxation in certain states based upon the jurisdiction in which
revenues are earned.
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
--------------------
1994 1995
--------- ---------
Federal --
Current......................... $ 2,098 $ 6,733
Deferred........................ 1,088 4,915
State --
Current......................... 460 1,477
Deferred........................ 186 841
--------- ---------
$ 3,832 $ 13,966
========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income taxes as follows:
YEAR ENDED DECEMBER 31
------------------------
1994 1995
------------ ----------
Provision at the statutory rate...... $ 147,558 $ 71,774
Increase (decrease) resulting from --
Income of S Corporation......... (143,878) (59,557)
State income tax, net of benefit
for federal deduction......... 370 1,398
Other........................... (218) 351
------------ ----------
$ 3,832 $ 13,966
============ ==========
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Loss from limited partnership
investment......................... $ 192,585 $ 230,844
Cash to accrual adjustment........... 189,614 136,674
Other................................ (58,162) (37,725)
---------- ----------
Net deferred income tax
liabilities.......................... $ 324,037 $ 329,793
========== ==========
F-108
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ 16,275 $ 11,972
Long-term....................... 27,975 25,998
---------- ----------
Total...................... 44,250 37,970
Deferred tax liabilities --
Current......................... 272,297 299,426
Long-term....................... 95,990 68,337
---------- ----------
Total...................... 368,287 367,763
---------- ----------
Net deferred income tax
liabilities............. $ 324,037 $ 329,793
========== ==========
8. RELATED-PARTY TRANSACTIONS:
One of the shareholders loans the Company funds as needed. The loans are
payable on demand and, under certain conditions, bear interest at prime plus 1
percent. The amount payable to the shareholder is $640,447 and $641,804 at
December 31, 1994 and 1995, respectively. No interest was incurred or paid
during the years ended December 31, 1994 and 1995, related to these loans.
9. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe the outcome of such legal action will have
a material adverse effect on the Company's financial position or combined
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
10. SALES TO SIGNIFICANT CUSTOMER:
During 1994 two customers accounted for approximately 22% of the Company's
sales. During 1995, one customer accounted for approximately 14% of the
Company's sales.
11. SHAREHOLDERS' EQUITY:
The common stock ownership of the corporate entities is as follows:
AS OF DECEMBER 31, 1995 AND 1994
------------------------------------
SHARES SHARES PAR
AUTHORIZED OUTSTANDING VALUE
----------- ----------- ------
Florida Heating and Air Conditioning,
Inc. .............................. 1,000 800 $10.00
Florida Heating and Air Conditioning
Service, Inc. ..................... 600 600 1.00
Florida Heating and Air Duct, Inc.... 10,000 600 1.00
Bullseye Air Conditioning, Inc. ..... 600 600 1.00
12. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS (UNAUDITED):
In June 1996, the Company and its shareholders entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company entered into agreements with
the shareholders to lease land and buildings used in the Company's operations
for a negotiated amount and term.
F-109
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To DIAL ONE Meridian and Hoosier, Inc.:
We have audited the accompanying balance sheets of DIAL ONE Meridian and
Hoosier, Inc. (an Indiana corporation), as of December 31, 1994 and 1995, and
the related statements of operations, shareholder's equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIAL ONE Meridian and
Hoosier, Inc., as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996
F-110
<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-111
<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-112
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........... 588 $7,201 $ 35,000 $ 798,208 $ (100) $ 840,309
------ ------ ---------- ---------- -------- --------------
Net income...................... -- -- -- 158,682 -- 158,682
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1994........... 588 7,201 35,000 956,890 (100) 998,991
Net income...................... -- -- -- 271,410 -- 271,410
------ ------ ---------- ---------- -------- --------------
BALANCE, December 31, 1995........... 588 $7,201 $ 35,000 $1,228,300 $ (100) $1,270,401
====== ====== ========== ========== ======== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-113
<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-114
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
DIAL ONE Meridian and Hoosier, Inc., (an Indiana corporation) (the
Company), is primarily engaged in the installation and maintenance, repair and
replacement of residential and commercial air conditioning and heating systems
in Indianapolis and the surrounding areas.
The Company and its shareholder intend to enter into a definitive agreement
with American Residential Services, Inc. (ARS), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of ARS's common stock concurrent with the consummation of the initial
public offering (the Offering) of the common stock of ARS.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1995 and 1996 are unaudited and certain information and footnote disclosures,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been omitted. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the results of operations and cash flows with respect to the
interim financial statements, have been included. The results of operations for
the interim periods are not necessarily indicative of the results for the entire
fiscal year.
INVENTORIES
Inventories consist of parts and supplies for use in the ordinary course of
business and are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly.
Revenues from construction contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
total estimated costs for each contract. Provisions for the total estimated
losses on uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
F-115
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
WARRANTY COSTS
The Company warrants labor for one or five years after installation on new
air conditioning and heating units. The Company generally warrants labor for 30
days after servicing of existing air conditioning and heating units. A reserve
for warranty costs is recorded upon completion of installation or service.
INCOME TAXES
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are received or settled.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENT
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment, and intangible or other assets, may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flows associated with the asset is
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow value was necessary. Adoption of this standard did
not have a material effect on the financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Land and building................... 30 $ 145,920 $ 183,320
Leasehold improvements.............. 10 191,823 212,461
Transportation equipment............ 3 - 4 827,628 950,262
Machinery and equipment............. 7 162,243 165,367
Furniture and fixtures.............. 5 280,527 369,956
Telephone equipment................. 7 - 10 47,291 109,016
------------ ------------
1,655,432 1,990,382
Less -- Accumulated depreciation and
amortization........................ 826,116 1,071,144
------------ ------------
Property and equipment,
net.................... $ 829,316 $ 919,238
============ ============
F-116
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 13,609 $ 41,595
Additions charged to costs and
expenses........................... 43,451 32,071
Deductions for uncollectible
receivables written off............ (15,465) (19,616)
---------- ----------
$ 41,595 $ 54,050
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Accounts payable, trade.............. $ 128,155 $ 185,409
Accrued compensation and benefits.... 228,886 254,393
Warranty accrual..................... 60,754 79,102
Other accrued expenses............... 70,402 119,320
---------- ----------
$ 488,197 $ 638,224
========== ==========
Installation contracts in progress are as follows:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs incurred on contracts in
progress............................. $ 195,350 $ 243,727
Estimated earnings, net of losses.... 93,439 96,263
---------- ----------
288,789 339,990
Less -- Billings to date............. 324,121 355,296
---------- ----------
$ (35,332) $ (15,306)
========== ==========
The following are included in the accompanying balance sheets under the
following captions:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Costs and estimated earnings in
excess of billings on
uncompleted contracts.............. $ 42,717 $ 16,825
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. (78,049) (32,131)
---------- ----------
$ (35,332) $ (15,306)
========== ==========
F-117
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
5. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consists of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Note payable, due in monthly
installments of $4,167 plus
interest at prime plus 1.25% (9.75%
at December 31, 1995) and secured
by accounts receivable, inventory
and equipment, matures November 30,
1999............................... $ 245,837 $ 195,833
Land contract, maturing in November
2003, due in monthly installments
of $1,456 including interest at 8%,
collateralized with the related
property deed held in escrow....... 111,123 102,238
Note payable, due in monthly
installments of $2,500 plus
interest at prime plus 1.25% and
secured by accounts receivable,
inventory and equipment, matures
July 31, 1998...................... 107,500 77,500
Capital leases, maturing from 1996 to
2000, interest ranging from 8.94%
to 10%, secured by transportation
equipment.......................... 403,057 420,536
Other................................ 4,709 15,206
---------- ----------
872,226 811,313
Less -- Current maturities........... 262,046 266,830
---------- ----------
$ 610,180 $ 544,483
========== ==========
The Company has a $250,000 bank line of credit expiring July 31, 1996, with
interest payable monthly at prime plus .75 percent. As of December 31, 1995,
there were no borrowings on this agreement. In addition, the Company has a
$100,000 bank lease line of credit expiring January 2, 2000, with interest at
8.94 percent payable monthly. As of December 31, 1995, borrowings on the lease
line were $23,214 and are included in capital leases.
The notes payable contain covenants which require the Company to maintain
specified financial covenants. As of December 31, 1995, the Company was in
compliance with these covenants.
The aggregate maturities of long-term debt as of December 31, 1995, are as
follows:
Year ending December 31 --
1996............................ $ 93,071
1997............................ 94,220
1998............................ 83,015
1999............................ 61,867
2000............................ 13,263
Thereafter...................... 45,341
----------
$ 390,777
==========
F-118
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
The future minimum lease payments under capital leases are as follows:
Year ending December 31 --
1996............................ $ 219,291
1997............................ 159,026
1998............................ 95,352
1999............................ 23,855
2000............................ --
----------
Total minimum lease
payments................ 497,524
Less -- Amounts representing
interest............................. (76,988)
----------
Net minimum lease
payments................ 420,536
Less -- Current portion of
obligations under capital leases... 173,759
----------
Long-term portion of
obligations under
capital leases.......... $ 246,777
==========
Management estimates that the fair value of its debt obligations
approximates the historical value of $811,313 at December 31, 1995.
6. LEASES:
The Company leases a facility from its shareholder. The lease was renewed
on January 1, 1995, and expires on December 31, 1999. The lease requires monthly
payments of $7,500. The amount paid under this lease in 1994 and 1995 was
approximately $76,000 and $90,000, respectively.
7. INCOME TAX:
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31
----------------------
1994 1995
---------- ----------
Federal --
Current......................... $ -- $ 97,907
Deferred........................ 85,943 39,549
State --
Current......................... 2,062 35,278
Deferred........................ 22,360 5,753
---------- ----------
$ 110,365 $ 178,487
========== ==========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows:
Tax provision at the statutory
rate................................. $ 91,476 $ 152,965
Increase (decrease) resulting from --
State income taxes, net of
related tax effect............ 16,118 27,080
Nondeductible expenses.......... 3,080 321
Other........................... (309) (1,879)
---------- ----------
$ 110,365 $ 178,487
========== ==========
F-119
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Depreciation and amortization........ $ 4,675 $ 13,859
Accruals and reserves not deductible
until paid......................... (50,724) (43,433)
Other................................ (27,652) 1,175
---------- ----------
Total deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Deferred tax assets --
Current......................... $ (47,275) $ (41,708)
Long-term....................... (26,426) --
---------- ----------
Total...................... (73,701) (41,708)
Deferred tax liabilities,
long-term.......................... -- 13,309
---------- ----------
Net deferred income tax
assets.................. $ (73,701) $ (28,399)
========== ==========
8. FRANCHISE AGREEMENTS:
In October 1993, the Company renewed a four-year franchise agreement with
DIAL ONE of Central Indiana, Inc. (DIAL ONE), a company wholly owned by the
shareholder of the Company. The Company pays $15,000 annually plus a royalty fee
of 3 percent of gross sales in excess of a predefined base. Total amounts
incurred in 1994 and 1995 under this agreement were approximately $92,000 and
$56,000, respectively.
The Company pays the LINC Corporation for consulting services under a
franchise agreement through its commercial division. Fees are based on a royalty
fee on gross revenues with a minimum payment of $15,000 a year. In 1994 and
1995, the Company incurred approximately $58,000 and $61,000, respectively,
under the terms of the agreement.
9. EMPLOYEE BENEFIT PLANS:
The Company has adopted a retirement plan which qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for 50 percent matching
contributions by the Company for the first $200 of each participant's
contribution. The Company has the right to make additional discretionary
contributions. Total contributions by the Company under this plan were
approximately $64,000 and $86,000 for 1994 and 1995, respectively.
10. RELATED-PARTY TRANSACTIONS:
The Company is a DIAL ONE franchisee (see Note 8) under an agreement with
DIAL ONE. The Company also shares certain costs with DIAL ONE for personnel and
overhead, which are billed monthly to DIAL ONE, based on that company's pro rata
share of those expenses. In 1995, the Company received $24,000 in rental income
from DIAL ONE for space occupied in the building that the Company owns. At
December 31, 1994 and 1995, the Company had a balance due from DIAL ONE of
approximately $6,000 and $14,000, respectively.
F-120
<PAGE>
DIAL ONE MERIDIAN AND HOOSIER, INC.
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
12. SUBSEQUENT EVENT:
Effective January 1, 1996, the Company acquired 100 percent of the
outstanding shares of stock in Sagamore Heating & Cooling, Inc. (Sagamore) for
$281,000. Consideration paid by the Company included $100,000 in cash and a
$181,000 note payable to the former owner. The Company consolidated Sagamore
effective as of the date of acquisition.
13. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In June 1996, the Company and its shareholder entered into a definitive
agreement with ARS, providing for the acquisition of the Company by ARS. The
acquisition of the Company by ARS was completed on September 27, 1996 concurrent
with the initial public offering of ARS. Reference is made to Note 8 of American
Residential Services, Inc. financial statements as of and for the periods ended
December 31, 1995 and June 30, 1996 included elsewhere herein.
Concurrent with the acquisition, the Company changed its name to Meridian &
Hoosier Heating and Air Conditioning Company and entered into agreements with
the shareholder to lease land and buildings used in the Company's operations for
a negotiated amount and term.
F-121
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To ADCOT, Inc.:
We have audited the accompanying balance sheets of ADCOT, Inc. (a Texas
corporation), as of December 31, 1994 and 1995, and the related statements of
operations, shareholder's deficit and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ADCOT, Inc., as of December
31, 1994 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 24, 1996 (except with respect to
the matter discussed in Note 4, as to
which the date is June 5, 1996)
F-122
<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-123
<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-124
<PAGE>
ADCOT, INC.
STATEMENTS OF SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- SHAREHOLDER'S
SHARES AMOUNT DEFICIT DEFICIT
--------- ------- -------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1992........... 10,000 $10,000 $ (1,355,219) $ (1,345,219)
Net loss........................ -- -- (381,980) (381,980)
--------- ------- -------------- -------------
BALANCE, December 31, 1993........... 10,000 10,000 (1,737,199) (1,727,199)
Net income...................... -- -- 503,925 503,925
--------- ------- -------------- -------------
BALANCE, December 31, 1994........... 10,000 10,000 (1,233,274) (1,223,274)
Dividends....................... -- -- (223,088) (223,088)
Net income...................... -- -- 474,046 474,046
--------- ------- -------------- -------------
BALANCE, December 31, 1995........... 10,000 $10,000 $ (982,316) $ (972,316)
========= ======= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-125
<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-126
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
ADCOT, Inc. (a Texas corporation) (the Company) (d.b.a. A-ABC Appliance),
is primarily engaged in the sales of consumer appliances and the service-related
activities of plumbing, air conditioning, appliance and electrical repair and
other home improvement services in Houston and the surrounding areas.
In April 1996, the Company and its shareholder entered into a stock
purchase agreement with Service Enterprises, Inc. (SEI) to sell all of its
outstanding common stock for $2,000,000 to SEI.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements for the six months ended June 30, 1995 and
the five months ended May 31, 1996, are unaudited, and certain information and
footnote disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been omitted. In
the opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
INVENTORIES
Inventories consist of appliances and service-related parts and supplies
held for use in the ordinary course of business and are valued at the lower of
cost or market using the weighted-average cost method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
INCOME TAXES
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholder reports his share of the
Company's taxable earnings or losses in his personal tax return.
The Company is subject to Texas franchise tax which is an income-based tax.
Accordingly, the Company has recorded a provision for this tax in the
accompanying statement of operations for 1995. No provision for franchise taxes
was recorded in the 1993 or 1994 statement of operations as the Company's
franchise tax was offset by a business loss carryover.
REVENUE RECOGNITION
The Company recognizes service revenue and parts sales revenue when a
product is delivered or the services are performed. Revenues from sales of
extended warranties are recognized over the life of the contract on a
straight-line basis.
F-127
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment, and
intangible or other assets, may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset is compared to the asset's
carrying amount to determine if a write-down to market value or discounted cash
flow value was necessary. Adoption of this standard did not have a material
effect on the financial position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
Leasehold improvements............... 5 - 15 $ 221,120 $ 256,245
Transportation equipment............. 5 815,190 849,183
Computer and telephone equipment..... 5 - 7 351,383 --
Furniture and fixtures............... 5 - 7 1,053,293 1,109,215
------------ ------------
2,440,986 2,214,643
Less -- Accumulated depreciation and
amortization....................... 2,146,166 1,914,886
------------ ------------
Property and equipment,
net..................... $ 294,820 $ 299,757
============ ============
4. DISCONTINUED OPERATIONS:
Subsequent to the purchase of the Company by SEI, the board of directors of
SEI's parent company (Enterprises Holding Company) approved the disposition of
the Company's retail appliance sales division. The allocation of purchase price
to the fair market value of the net assets of the Company acquired by SEI will
be based on preliminary estimates of fair value and may be revised when
additional information concerning asset and liability valuations is obtained.
Accordingly, any gain or loss on the sale of the appliance sales division will
be considered an adjustment of purchase price.
The net losses of these operations prior to April 1, 1996, are included in
the statements of operations under discontinued operations. Revenues, cost of
sales, selling, general and administrative expenses, other income and expense,
and income taxes for fiscal years 1993, 1994 and 1995 exclude amounts associated
with the discontinued division. Revenues from such operations were approximately
$12,185,000, $12,101,000 and $11,915,000 for the years ended December 31, 1993,
1994 and 1995, respectively. Certain expenses have been allocated to
discontinued operations, which were allocated based upon estimated divisional
usage. All assets of the operations are expected to be sold in 1996.
F-128
<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-129
<PAGE>
ADCOT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LEASES:
OPERATING LEASES
The Company leases certain facilities from its sole shareholder and his
affiliates. The leases expire from 1997 through 2010. The rent paid under these
related-party leases was approximately $316,000, $305,000 and $370,000 in 1993,
1994 and 1995, respectively.
Other nonrelated-party leases for retail facilities expire in 1997. The
rent paid under nonrelated-party leases was approximately $198,000, $183,000 and
$162,000 in 1993, 1994 and 1995, respectively.
The lease terms generally range from five to 15 years. The leases generally
provide for the Company to pay taxes, maintenance, insurance and certain other
operating costs of the leased property. The leases on most of the properties
contain renewal provisions.
Future minimum lease payments for operating leases are as follows:
Year ending December 31 --
1996............................ $ 558,140
1997............................ 430,034
1998............................ 330,288
1999............................ 292,848
2000............................ 240,432
Thereafter...................... 725,820
------------
$ 2,577,562
============
9. RELATED-PARTY TRANSACTIONS:
The Company has payables to its sole shareholder and certain other related
parties in the amounts of $266,297 and $241,008 at December 31, 1994 and 1995,
respectively. Interest accrues on these payables at 8 percent per annum.
10. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. The Company has not incurred significant claims or
losses on any of its insurance policies.
11. EVENT SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
On May 28, 1996, Service Enterprises, Inc. ("SEI"), a subsidiary of
Enterprises Holding Company ("EHC") purchased all of the outstanding common
stock of ADCOT for $2,000,000.
The acquisition of the EHC by ARS was completed on September 27, 1996
concurrent with the initial public offering of ARS. Reference is made to Note 8
of American Residential Services, Inc. financial statements as of and for the
periods ended December 31, 1995 and June 30, 1996 included elsewhere herein.
F-130
<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-131
<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-132
<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-133
<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-134
<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-135
<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-136
<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-137
<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-138
<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-139
<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-140
<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.......................... 10
Price Range of Common Stock.......... 12
Dividend Policy...................... 12
Capitalization....................... 13
Selected Financial Information....... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 17
Business............................. 30
Management........................... 40
Certain Transactions................. 46
Security Ownership of Certain
Beneficial Owners and Management... 48
Shares Eligible for Future Sale...... 49
Description of Capital Stock......... 51
Plan of Distribution................. 55
Legal Matters........................ 55
Experts.............................. 56
Additional Information............... 56
Index to Financial Statements........ F-1
================================================================================
================================================================================
3,691,248 SHARES
[LOGO -- ARS]
COMMON STOCK
------------
PROSPECTUS
APRIL , 1997
------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DELAWARE GENERAL CORPORATION LAW
Section 145(a) of the Delaware General Corporation Law (the "DGCL")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgements, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the DGCL states that any indemnification under
subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of
II-1
<PAGE>
an undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the corporation as authorized in Section 145. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the board of directors deems appropriate.
Section 145(f) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent, and shall inure to the
benefit of the heirs, executors and administrators of such a person.
CERTIFICATE OF INCORPORATION
The Restated Certificate of Incorporation of the Company provides that a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. If the DGCL is amended to authorize the
further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Restated Certificate of Incorporation by the stockholders of
the Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
BYLAWS
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and against
all losses, liabilities, claims, damages, judgments, penalties, fines, amounts
paid in settlement and expenses (including attorneys' fees) whatsoever arising
out of any event or occurrence related to the fact that such person is or was a
director or officer of the Company and further provide that the Company may, but
is not required to, indemnify and hold harmless any employee or agent of the
Company or a director, officer, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise who
is or was serving in such capacity at the written request of the Company;
provided, however, that the Company is only required to indemnify persons
serving as directors, officers, employees or agents of the Company for the
expenses incurred in a proceeding if such person is a party to and is
successful, on the merits or otherwise, in such proceeding, or if unsuccessful
in the proceeding, but successful as to a matter in such proceeding, the
expenses attributable to such matter and provided further that the Company may,
but is not required to, indemnify such persons who are serving as a director,
officer, employee or agent of any other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise at the written request of the
Company for the expenses incurred in a proceeding if such person is a party to
and is
II-2
<PAGE>
successful, on the merits or otherwise, in such proceeding. The Bylaws further
provide that, in the event of any threatened, or pending action, suit or
proceeding in which any of the persons referred to above is a party or is
involved and that may give rise to a right of indemnification under the Bylaws,
following written request by such person, the Company will promptly pay to such
person amounts to cover expenses reasonably incurred by such person in such
proceeding in advance of its final disposition upon the receipt by the Company
of (i) a written undertaking executed by or on behalf of such person providing
that such person will repay the advance if it is ultimately determined that such
person is not entitled to be indemnified by the Company as provided in the
Bylaws and (ii) satisfactory evidence as to the amount of such expenses.
INDEMNIFICATION AGREEMENTS
The Company has entered into Indemnification Agreements with each of its
directors and executive officers. The Indemnification Agreements generally are
to the same effect as the Bylaw provisions described above.
INSURANCE
The Company maintains liability insurance for the benefit of its directors
and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<S> <C>
*2.1 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which American
Residential Services, Inc. ("ARS") and Climatic Corporation of Vero Beach are parties
(Form S-1, Reg. No. 333-06195, Ex. 2.1).
*2.2 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.2).
*2.3 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Atlas
Services, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.3).
*2.4 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and DIAL ONE
Meridian and Hoosier, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.4).
*2.5 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Bullseye
Air Conditioning, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.5).
*2.6 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Duct, Inc. are parties (Form S-1, No. 333-06195, Ex. 2.6).
*2.7 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and Florida
Heating and Air Conditioning Service, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex.
2.7).
*2.8 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and General
Heating Engineering Company, Inc. are parties (Form S-1, Reg. No. 333-06195, Ex. 2.8).
*2.9 -- Agreement and Plan of Reorganization dated as of June 13, 1996 to which ARS and
Enterprises Holding Company ("EHC") are parties (Form S-1, Reg. No. 333-06195, Ex. 2.9).
*2.10 -- Form of Uniform Provisions for the Acquisition of Founding Companies (Form S-1, Reg. No.
333-06195, Ex. 2.10).
`2.11 -- Agreement and Plan of Reorganization dated as of December 11, 1996 to which ARS and Metro
Heating and Air Conditioning, Inc. are parties.
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Form S-1,
Reg. No. 333-06195, Ex. 3.3).
*4.1 -- Form of Certificate representing Common Stock (Form S-1, Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights Certificate as Exhibit B thereto (Form
S-8, Reg. No. 333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the stockholders listed on the signature pages
thereto (Form S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996 between ARS and Equus II
Incorporated (Form S-1, Reg. No. 333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March 19, 1996 between EHC and
NationsBank of Texas, N.A. ("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
*4.6 -- Revolving Loan Agreement dated March 3, 1997 among ARS, NationsBank and the other parties
designated therein. (Form 10-K for 1996, File No. 1-11849, Ex. 4.6)
*4.7 -- First Amendment to Revolving Loan Agreement dated March 24, 1997, among ARS, NationsBank
and the other parties designated therein. (Form 10-K for 1996, File No. 1-11849, Ex. 4.7)
4.8 -- Indenture dated as of April 1, 1997 from ARS to U.S. Trust Company of Texas, N.A., as
Trustee.
4.9 -- Registration Rights Agreement dated as of April 1, 1997 between ARS and Smith Barney Inc.,
Goldman, Sachs & Co. and Montgomery Securities.
ARS and certain of its subsidiaries are parties to certain debt instruments under which
the total amount of securities authorized does not exceed 10% of the total assets of ARS
and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item
601(b) of Regulation S-K, ARS agrees to furnish a copy of such instruments to the
Commission upon request.
`5.1 -- Opinion of John D. Held, Esq.
*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195, Ex. 10.1).
*10.2 -- Employment Agreement dated as of November 1, 1995 between ARS and Howard S. Hoover, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.2).
*10.3 -- Employment Agreement dated as of November 1, 1995 between ARS and C. Clifford Wright, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.3).
10.4 Amended and Restated Employment Agreement dated as of April 1, 1997 between ARS and
Harry O. Nicodemus, IV.
*10.5 -- Employment Agreement dated as of March 6, 1996 between ARS and John D. Held, as amended
(Form S-1, Reg. No. 333-06195, Ex. 10.5).
*10.6 -- Employment Agreement dated as of March 6, 1996 between ARS and A. Jefferson Walker III
(Form S-1, Reg. No. 333-06195, Ex. 10.6).
*10.7 -- Employment Agreement dated as of April 15, 1996 between ARS and Michael Mamaux (Form S-1,
Reg. No. 333-06195, Ex. 10.7).
*10.8 -- Employment Agreement dated as of June 13, 1996 between ARS and Elliot Sokolow (Form S-1,
Reg. No. 333-06195, Ex. 10.8).
*10.9 -- Employment Agreement dated as of June 13, 1996 between ARS and Gorden H. Timmons (Form
S-1, Reg. No. 333-06195, Ex. 10.10).
*10.10 -- Employment Agreement dated as of June 13, 1996 between ARS and Frank N. Menditch (Form
S-1, Reg. No. 333-06195, Ex. 10.12).
*10.11 -- Employment Agreement dated as of November 1, 1995 between ARS and William P. McCaughey, as
amended (Form S-1, Reg. No. 333-06195, Ex. 10.4).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.12 -- Form of Indemnification Agreement between ARS and each of its directors and officers (Form
S-1, Reg. No. 333-06195, Ex. 10.15).
*10.13 -- Executive Supplemental Disability Plan of ARS (Form S-1, Reg. No. 333-06195, Ex. 10.16).
*10.14 -- Executive Supplemental Life Insurance Plan of ARS (Form S-1, Reg. No. 333-06195, Ex.
10.17).
*10.15 -- ARS Deferred Compensation Plan (Form S-1, Reg. No. 333-06195, Ex. 10.18).
*21.1 -- List of Subsidiaries (Form 10-K for 1996, File No. 1-11849, Ex. 21.1).
23.1 -- Consent of Arthur Andersen LLP.
`23.2 -- Consent of John D. Held, Esq. (contained in Exhibit 5.1)
`24.1 -- Power of Attorney.
</TABLE>
- ------------
* Incorporated by reference.
` Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
II-5
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(7) That every prospectus (i) that is filed pursuant to the paragraph
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF HOUSTON, STATE OF TEXAS, ON APRIL 8, 1997.
AMERICAN RESIDENTIAL SERVICES, INC.
BY: /s/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS ON APRIL 8, 1997 IN THE CAPACITIES INDICATED.
/s/C. CLIFFORD WRIGHT, JR. /s/ROBERT J. CRUIKSHANK*
C. CLIFFORD WRIGHT, JR. ROBERT J. CRUIKSHANK
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
/s/HARRY O. NICODEMUS, IV* /s/RANDALL B. HALE*
HARRY O. NICODEMUS, IV RANDALL B. HALE
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
CHIEF ACCOUNTING OFFICER
/s/HOWARD S. HOOVER, JR.* /s/NOLAN LEHMANN*
HOWARD S. HOOVER, JR. NOLAN LEHMANN
CHAIRMAN OF THE BOARD DIRECTOR
/s/GORDEN H. TIMMONS* /s/DON D. SYKORA*
GORDEN H. TIMMONS DON D. SYKORA
CHIEF OPERATING OFFICER AND DIRECTOR DIRECTOR
/s/THOMAS N. AMONETT* /s/ELLIOT SOKOLOW*
THOMAS N. AMONETT ELLIOT SOKOLOW
DIRECTOR DIRECTOR
/s/WILLIAM P. MCCAUGHEY* /s/FRANK N. MENDITCH*
WILLIAM P. MCCAUGHEY FRANK N. MENDITCH
DIRECTOR DIRECTOR
*BY:/s/C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
ATTORNEY-IN-FACT
II-7
EXHIBIT 4.8
- --------------------------------------------------------------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
and
U.S. TRUST COMPANY OF TEXAS, N.A.
as Indenture Trustee
----------------------
INDENTURE
Dated as of April 1, 1997
----------------------
$55,000,000*
7 1/4% Convertible Subordinated Notes due 2004
- --------------------------------------------------------------------------------
* Plus up to an additional $8,250,000 aggregate principal amount of 7 1/4%
Convertible Subordinated Notes issuable upon exercise of the over-allotment
option granted to the Initial Purchasers of the Notes.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I. Definitions and Other Provisions........................ 2
SECTION 1.01 Definitions............................................. 2
SECTION 1.02 Compliance Certificates and Opinions....................10
SECTION 1.03 Form of Documents Delivered to Trustee..................11
SECTION 1.04 Acts of Holders; Record Dates...........................11
SECTION 1.05 Notices, Etc., to Trustee and Company...................12
SECTION 1.06 Notice to Holders; Waiver...............................13
SECTION 1.07 Conflict with Trust Indenture Act.......................13
SECTION 1.08 Effect of Headings and Table of Contents................14
SECTION 1.09 Successors and Assigns..................................14
SECTION 1.10 Separability Clause.....................................14
SECTION 1.11 Benefits of Indenture...................................14
SECTION 1.12 Governing Law...........................................14
SECTION 1.13 Legal Holidays..........................................14
SECTION 1.14 No Security Interest Created............................15
SECTION 1.15 Limitation on Individual Liability......................15
ARTICLE II. Security Forms..........................................15
SECTION 2.01 Forms Generally.........................................15
SECTION 2.02 Form of Face of Security................................17
SECTION 2.03 Form of Reverse of Global Securities and Definitive
Security.........................................20
SECTION 2.04 Form of Trustee's Certificate of Authentication.........28
ARTICLE III. The Securities..........................................29
SECTION 3.01 Title and Terms.........................................29
SECTION 3.02 Denominations...........................................30
SECTION 3.03 Execution, Authentication, Delivery and Dating..........30
SECTION 3.04 Temporary Securities....................................31
SECTION 3.05 Registration, Registration of Transfer and Exchange.....31
SECTION 3.06 Mutilated, Destroyed, Lost and Stolen Securities........40
SECTION 3.07 Payment of Interest; Interest Rights Preserved..........41
SECTION 3.08 Persons Deemed Owners...................................42
SECTION 3.09 Cancellation............................................43
SECTION 3.10 Computation of Interest.................................43
ARTICLE IV. Satisfaction and Discharge..............................43
SECTION 4.01 Satisfaction and Discharge of Indenture.................43
SECTION 4.02 Application of Trust Money..............................45
SECTION 4.03 Reinstatement...........................................45
i
<PAGE>
ARTICLE V. Remedies................................................45
SECTION 5.01 Events of Default.......................................45
SECTION 5.02 Acceleration of Maturity; Rescission and Annulment......47
SECTION 5.03 Collection of Indebtedness and Suits for Enforcement
by Trustee.......................................48
SECTION 5.04 Trustee May File Proofs of Claim........................49
SECTION 5.05 Trustee May Enforce Claims Without Possession
of Securities....................................50
SECTION 5.06 Application of Money Collected..........................50
SECTION 5.07 Limitation on Suits.....................................50
SECTION 5.08 Unconditional Right of Holders to Receive Principal,
Premium and Interest and to Convert..............51
SECTION 5.09 Restoration of Rights and Remedies......................51
SECTION 5.10 Rights and Remedies Cumulative..........................52
SECTION 5.11 Delay or Omission Not Waiver............................52
SECTION 5.12 Control by Holders......................................52
SECTION 5.13 Waiver of Past Defaults.................................52
SECTION 5.14 Undertaking for Costs...................................53
ARTICLE VI. The Trustee.............................................53
SECTION 6.01 Certain Duties and Responsibilities.....................53
SECTION 6.02 Notice of Defaults......................................54
SECTION 6.03 Certain Rights of Trustee...............................54
SECTION 6.04 Not Responsible for Recitals or Issuance of
Securities.......................................56
SECTION 6.05 May Hold Securities.....................................56
SECTION 6.06 Money Held in Trust.....................................56
SECTION 6.07 Compensation and Reimbursement..........................56
SECTION 6.08 Disqualification; Conflicting Interests.................57
SECTION 6.09 Corporate Trustee Required; Eligibility.................58
SECTION 6.10 Resignation and Removal; Appointment of Successor.......58
SECTION 6.11 Acceptance of Appointment by Successor..................59
SECTION 6.12 Merger, Conversion, Consolidation or Succession to
Business.........................................60
SECTION 6.13 Preferential Collection of Claims Against Company.......60
SECTION 6.14 Appointment of Authenticating Agent.....................60
ARTICLE VII. Holders' Lists and Reports by Trustee and Company.......62
SECTION 7.01 Company to Furnish Trustee Names and Addresses
of Holders.......................................62
SECTION 7.02 Preservation of Information; Communication to Holders...63
SECTION 7.03 Reports by Trustee......................................63
SECTION 7.04 Reports by Company......................................63
SECTION 7.05 Rule 144A Information Requirement.......................63
ARTICLE VIII. Consolidation, Merger, Conveyance, Transfer or Lease....64
SECTION 8.01 Company May Consolidate, Etc., Only on Certain Terms....64
ii
<PAGE>
SECTION 8.02 Successor Substituted...................................65
ARTICLE IX. Supplemental Indentures.................................65
SECTION 9.01 Supplemental Indentures Without Consent of Holders......65
SECTION 9.02 Supplemental Indentures with Consent of Holders.........66
SECTION 9.03 Execution of Supplemental Indentures....................67
SECTION 9.04 Effect of Supplemental Indentures.......................67
SECTION 9.05 Conformity with Trust Indenture Act.....................67
SECTION 9.06 Reference in Securities to Supplemental Indentures......67
SECTION 9.07 Notice of Supplemental Indenture........................67
ARTICLE X. Covenants...............................................68
SECTION 10.01 Payment of Principal, Premium and Interest..............68
SECTION 10.02 Maintenance of Office or Agency.........................68
SECTION 10.03 Money for Security Payments to Be Held in Trust.........68
SECTION 10.04 Statement by Officers as to Default.....................70
SECTION 10.05 Existence...............................................70
SECTION 10.06 Waiver of Certain Covenants.............................70
ARTICLE XI. Redemption of Securities................................70
SECTION 11.01 Right of Redemption.....................................70
SECTION 11.02 Applicability of Article................................71
SECTION 11.03 Election to Redeem; Notice to Trustee...................71
SECTION 11.04 Selection by Trustee of Securities to be Redeemed.......71
SECTION 11.05 Notice of Redemption....................................72
SECTION 11.06 Deposit of Redemption Price.............................72
SECTION 11.07 Securities Payable on Redemption Date...................73
SECTION 11.08 Securities Redeemed in Part.............................73
ARTICLE XII. Subordination of Securities.............................74
SECTION 12.01 Securities Subordinated to Senior Indebtedness..........74
SECTION 12.02 Payment Over of Proceeds Upon Dissolution, Etc..........74
SECTION 12.03 Prior Payment to Senior Indebtedness upon
Acceleration of Securities.......................76
SECTION 12.04 No Payment When Senior Indebtedness in Default..........76
SECTION 12.05 Payment Permitted If No Default.........................78
SECTION 12.06 Subrogation to Rights of Holders of Senior
Indebtedness.....................................78
SECTION 12.07 Provisions Solely to Define Relative Rights.............79
SECTION 12.08 Trustee to Effectuate Subordination.....................79
SECTION 12.09 No Waiver of Subordination Provisions...................79
SECTION 12.10 Notice to Trustee.......................................80
SECTION 12.11 Reliance on Judicial Order or Certificate of
Liquidating Agent................................80
SECTION 12.12 Trustee Not Fiduciary for Holders of Senior
Indebtedness.....................................81
iii
<PAGE>
SECTION 12.13 Rights of Trustee as Holder of Senior Indebtedness;
Preservation of Trustee's Rights.................81
SECTION 12.14 Article Applicable to Paying Agents.....................81
SECTION 12.15 Certain Conversions Deemed Payment......................82
SECTION 12.16 No Suspension of Remedies...............................82
ARTICLE XIII. Conversion of Securities................................82
SECTION 13.01 Conversion Privilege and Conversion Price...............82
SECTION 13.02 Exercise of Conversion Privilege........................83
SECTION 13.03 Fractions of Shares.....................................84
SECTION 13.04 Adjustment of Conversion Price..........................84
SECTION 13.05 Notice of Adjustments of Conversion Price...............90
SECTION 13.06 Notice of Certain Corporate Action......................91
SECTION 13.07 Company to Reserve Common Stock.........................92
SECTION 13.08 Taxes on Conversions....................................92
SECTION 13.09 Covenant as to Common Stock.............................92
SECTION 13.10 Cancellation of Converted Securities....................92
SECTION 13.11 Provisions of Consolidation, Merger or Sale of Assets...93
SECTION 13.12 Trustee's Disclaimer....................................93
ARTICLE XIV. Right to Require Repurchase.............................94
SECTION 14.01 Right to Require Repurchase.............................94
SECTION 14.02 Notice; Method of Exercising Repurchase Right...........94
SECTION 14.03 Deposit of Repurchase Price.............................95
SECTION 14.04 Securities Not Repurchased on Repurchase Date...........95
SECTION 14.05 Securities Repurchased in Part..........................95
SECTION 14.06 Certain Definitions.....................................96
iv
<PAGE>
Certain Sections of this Indenture relating to Sections
310 through 318 of the Trust Indenture Act of 1939:
Section 310(a)(1) 609
(a)(2) 609
(a)(3) Not Applicable
(a)(4) Not Applicable
(a)(5) 609
(b) 608
Section 311(a) 613
(b) 613
Section 312(a) 701
702(a)
(b) 702(b)
(c) 702(c)
Section 313(a) 703(a)
(b) 703(a)
(c) 703(a)
(d) 703(b)
Section 314(a) 704
(a)(4) 1004
(b) Not Applicable
(c)(1) 102
(c)(2) 102
(c)(3) Not Applicable
(d) Not Applicable
(e) 102
Section 315(a) 601
(b) 602
(c) 601
(d) 601
(e) 514
Section 316(a)(1)(A) 502
512
(a)(1)(B) 513
(a)(2) Not Applicable
(b) 508
(c) 104(c)
v
<PAGE>
Section 317(a)(1) 503
(a)(2) 504
(b) 1003
Section 318(a) 107
- ------------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of the Indenture.
vi
<PAGE>
INDENTURE, dated as of April 1, 1997 between AMERICAN RESIDENTIAL
SERVICES, INC., a corporation duly organized and existing under the laws of the
State of Delaware (herein called the "Company"), having its principal executive
offices at 5051 Westheimer, Suite 725, Houston, Texas 77056-5604, and U.S. TRUST
COMPANY OF TEXAS, N.A., a national banking association, as Indenture Trustee
(herein called the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of its 7 1/4%
Convertible Subordinated Notes due 2004 (herein called the "Securities") of
substantially the tenor and amount hereinafter set forth, and to provide
therefor the Company has duly authorized the execution and delivery of this
Indenture.
All things necessary to make the Securities, when executed by the
Company and authenticated and delivered hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid agreement of the Company, in accordance with their and its terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually agreed, for the equal and
proportionate benefit of all Holders of the Securities, as follows:
ARTICLE I.
Definitions and Other Provisions
of General Application
SECTION 1.01 DEFINITIONS.
For all purposes of this Indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to them
in this Article and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(3) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and, except as otherwise
2
<PAGE>
herein expressly provided, the term "generally accepted accounting principles"
with respect to any computation required and permitted hereunder shall mean such
accounting principles as are generally accepted and accepted and adopted by the
Company at the date of this Indenture; and
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms used in Articles XII, XIII and XIV are defined in such
Articles.
"Act", when used with respect to any Holder, has the meaning specified
in Section 1.04.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.14 to act on behalf of the Trustee to authenticate
Securities.
The term "Beneficial Owner" is determined in accordance with Rule 13d-3,
promulgated by the Commission under the Exchange Act.
"Board of Directors" means either the board of directors of the Company
or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors or a duly authorized committee thereof and to be in full
force and effect on the date of such certification and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in New York, New York
are authorized or obligated to close by law or executive order.
"Cedel" means Cedel Bank societe anonyme.
"Change in Control" has the meaning specified in Section 14.06.
"Closing Date" means April 2, 1997.
3
<PAGE>
"Commission" means the Securities and Exchange Commission as from time
to time constituted, created under the Exchange Act, or, if at any time after
the execution of this instrument such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" includes any stock of any class of the Company which has
no preference in respect of dividends or of amounts payable in the event of any
voluntary or involuntary liquidation, dissolution or winding-up of the Company
and which is not subject to redemption by the Company. However, subject to the
provisions of Section 13.11, shares issuable on conversion of Securities shall
include only shares of the class designated as Common Stock of the Company at
the date of this Indenture or shares of any class or classes resulting from any
reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or
involuntary liquidation, dissolution or winding-up of the Company and which are
not subject to redemption by the Company; PROVIDED, that if at any time there
shall be more than one such resulting class, the shares of each such class then
so issuable shall be substantially in the proportion which the total number of
shares of such class resulting from all such reclassifications bears to the
total number of shares of all such classes resulting from all such
reclassifications.
"Company" means the Person named as the "Company" in the first paragraph
of this instrument until a successor Person shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman of the Board, its President or
a Vice President, and by its Chief Financial Officer, Controller, its Treasurer
or an Assistant Treasurer, or its Secretary or an Assistant Secretary, and
delivered to the Trustee.
"Consolidated Subsidiary" means a Subsidiary of the Company whose
financial statements are included in the most recent annual consolidated
financial statements of the Company and its Subsidiaries.
"Corporate Trust Office" means the office of the Trustee in Dallas,
Texas at which at any particular time its corporate trust business shall
principally be administered.
"Corporation" means a corporation, association, company, joint-stock
company or business trust.
"Credit Facility" means, in each case as amended, restated, modified,
renewed, increased, refunded, replaced or refinanced in whole or in part from
time to time: (i) the Revolving Loan Agreement dated March 3, 1997, between the
Company and NationsBank of Texas as Agent and Issuing Lender, and the lenders
party thereto from time to time and (ii) one or more debt facilities with banks
or other lenders providing for revolving credit loans, term loans, receivables
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financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit.
"Current Market Price" has the meaning specified in Section 13.04.
"DTC" has the meaning specified in Section 3.05.
"Defaulted Interest" has the meaning specified in Section 3.07.
"Definitive Security" or "Definitive Securities" means a Security or
Securities that are in the form of the Security set forth in Sections 2.02 and
2.03 hereof, containing the legend specified for a Definitive Security and not
including the additional language referred to in footnote 1 or the additional
schedule referred to in footnote 2.
"Depositary" has the meaning specified in Section 3.05.
"Designated Senior Indebtedness" means (a) the Credit Facility and (b)
any other Senior Indebtedness of the Company the principal amount of which is
$25 million or more and that has been designated by the Company as "Designated
Senior Indebtedness."
"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
office, as operator of the Euroclear System.
"Event of Default" has the meaning specified in Section 5.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Global Security or "Global Securities" means a Security or Securities
in the form of the Security set forth in Sections 2.02, 2.03 and 2.04 hereof
containing the legend specified for a Global Security, the additional language
referred to in footnote 1 and the additional schedule referred to in footnote 2.
"Holder" means a Person in whose name a Security is registered in the
Security Register.
"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and to govern this instrument and any such supplemental indenture,
respectively.
"Initial Purchasers" means Smith Barney Inc., Goldman, Sachs & Co. and
Montgomery Securities.
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"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Securities.
"Maturity," when used with respect to any Security, means the date on
which the principal of such Security becomes due and payable as therein or
herein provided, whether at the Stated Maturity thereof or by declaration of
acceleration, redemption or otherwise.
"Obligations" in respect of Senior Indebtedness means any principal,
interest, premiums, fees, indemnifications, reimbursements, damages and other
liabilities payable under the documentation governing any such indebtedness.
"Officers' Certificate" means a certificate, in form reasonably
satisfactory to the Trustee, signed by the Chairman of the Board, the Chief
Executive Officer, the President or a Vice President, and by the Chief Financial
Officer, Controller, the Treasurer or an Assistant Treasurer, the Secretary or
an Assistant Secretary, of the Company, and delivered to the Trustee.
One of the officers signing an Officers' Certificate given pursuant to
Section 10.04 shall be the principal executive, financial or accounting officer
of the Company.
"144A Global Security" has the meaning specified in Section 2.01.
"Opinion of Counsel" means a written opinion, in form and substance
reasonably satisfactory to the Trustee, of counsel, who may be counsel for or an
employee of the Company, and who shall be reasonably acceptable to the Trustee.
"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Securities, or portions thereof, for the payment or
redemption of which moneys in the necessary amount have been theretofore
deposited with the Trustee or any Paying Agent (other than the Company)
in trust or set aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the Holders of such
Securities; PROVIDED, that if such Securities, or portions thereof, are
to be redeemed, notice of such redemption has been duly given pursuant
to this Indenture or provision therefor satisfactory to the Trustee has
been made; and
(iii) Securities which have been paid pursuant to Section 3.06 or
in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been
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presented to the Trustee proof satisfactory to it that such Securities
are held by a bona fide purchaser in whose hands such Securities are
valid obligations of the Company;
PROVIDED, HOWEVER, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or of such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or of such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of and premium, if any, or interest on any Securities on behalf of the
Company.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 3.06 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Security.
"Purchase Agreement" means that certain Purchase Agreement dated March
27, 1997 between the Company and the Initial Purchasers.
"Record Date" means either a Regular Record Date or a Special Record
Date, as applicable.
"Redemption Date", when used with respect to any Security to be
redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"Redemption Price", when used with respect to any Security to be
redeemed, means the price at which it is to be redeemed pursuant to this
Indenture on the applicable Redemption Date.
"Registration Rights Agreement" means that certain Registration Rights
Agreement dated as of April 1, 1997 between the Company and the Initial
Purchasers.
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"Regular Record Date", for the interest payable on any Interest Payment
Date means the March 31 or September 30 (whether or not a Business Day), as the
case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act of 1933, as
amended.
"Regulation S Global Security" has the meaning specified in Section
2.01.
"Representative" means the indenture trustee or other trustee, agent or
representative for any Senior Indebtedness.
"Repurchase Date" has the meaning specified in Section 14.01.
"Repurchase Event" has the meaning specified in Section 14.06.
"Repurchase Price" has the meaning specified in Section 14.01.
"Resale Restriction Termination Date" means, with respect to any
Security, the date which is three years after the later of (i) the original
issue date of Securities under this Indenture (unless that Security (or its
predecessor Security) was sold to the Initial Purchasers by the Company upon
exercise of the over-allotment option granted pursuant to the Purchase
Agreement, in which event the date of that sale) and (ii) the last date on which
the Company or any Affiliate of the Company was the owner of such Security (or
any Predecessor Security).
"Responsible Officer" means, when used with respect to the Trustee, the
chairman of the Board of Directors, any vice chairman of the Board of Directors,
the chairman of the trust committee, the chairman of the executive committee,
any vice chairman of the executive committee, the president, any vice president
(whether or not designated by numbers or words added before or after the title
"vice president"), the cashier, the secretary, the treasurer, any trust officer,
any assistant trust officer, any assistant cashier, any assistant secretary, any
assistant treasurer, or any other officer or assistant officer of the Trustee
customarily performing functions similar to those performed by the Persons who
at the time shall be such officers, respectively, or to whom any corporate trust
matter is referred because of his or her knowledge of and familiarity with the
particular subject.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Custodian" means the Trustee, as custodian with respect to
the Securities in global form, or any successor entity thereto.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.05.
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"Senior Indebtedness" means the principal of and premium, if any, and
interest on (a) all indebtedness of the Company for money borrowed under the
Company's primary credit facility and any predecessor or successor credit
facilities thereto, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred or assumed, (b) all indebtedness of
the Company for money borrowed, whether outstanding on the date of execution of
the Indenture or thereafter created, incurred or assumed, except any such other
indebtedness that by the terms of the instrument or instruments by which such
indebtedness was created or incurred expressly provides that it (i) is junior in
right of payment to the Notes or (ii) ranks pari passu in right of payment with
the Notes, and (c) any amendments, renewals, extensions, modifications,
refinancings and refundings of the foregoing. For the purposes of this
definition, "indebtedness for money borrowed" when used with respect to the
Company means (i) any obligation of, or any obligation guaranteed by, the
Company for the repayment of borrowed money (including without limitation fees,
penalties or other obligations in respect thereof), whether or not evidenced by
bonds, debentures, notes or other written instruments, (ii) any deferred payment
obligation of, or any such obligation guaranteed by, the Company for the payment
of the purchase price of property or assets evidenced by a note or similar
instrument, and (iii) any obligation of, or any such obligation guaranteed by,
the Company for the payment of rent or other amounts under a lease of property
or assets which obligation is required to be classified and accounted for as a
capitalized lease on the balance sheet of the Company under generally accepted
accounting principles.
"Shelf Registration Statement" means the Registration Statement with
respect to the Securities and the Common Stock the Issuer is required to file
pursuant to the Registration Rights Agreement.
"Significant Subsidiary" means at any time a Subsidiary that is at that
time a "significant subsidiary" of the Company within the meaning of Rule
1.02(w) of Regulation S-X under the Securities Act as in effect on the date of
this Indenture.
"Special Record Date" for the payment of any Defaulted Interest means a
date fixed by the Trustee pursuant to Section 3.07.
"Stated Maturity", when used with respect to any Security or any
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.
"Subsidiary" means a corporation more than 50% of the outstanding voting
stock of which is owned, directly or indirectly, by the Company or by one or
more other Subsidiaries or by the Company and one or more other Subsidiaries.
For the purposes of this definition, "voting stock" means stock which ordinarily
has voting power for the election of directors, whether at all times or only so
long as no senior class of stock has such voting power by reason of any
contingency.
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"Termination of Trading" has the meaning specified in Section 14.06.
"Transfer Restricted Securities" means Securities that bear or are
required to bear the legend set forth in Section 3.05 hereof.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force
at the date as of which this instrument was executed; PROVIDED, HOWEVER, that in
the event the Trust Indenture Act of 1939 is amended after such date, "Trust
Indenture Act" means, to the extent required by any such amendment, the Trust
Indenture Act of 1939 as so amended.
"Trustee" means the Person named as the "Trustee" in the first paragraph
of this instrument until a successor Trustee shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Trustee" shall mean
such successor Trustee.
"Vice President", when used with respect to the Company, means any vice
president, whether or not designated by a number or a word or words added before
or after the title "vice president".
SECTION 1.02 COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officers' Certificate, if to be given by an officer of the Company, or an
Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirement set forth in
this Indenture.
Every certificate or opinion with respect to compliance with a condition
or covenant provided for in this Indenture shall include:
(1) a statement that each individual or firm signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual or such
firm, he has or they have made such examination or investigation as is necessary
to enable him or them to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such individual or
such firm, such condition or covenant has been complied with.
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SECTION 1.03 FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any Person may certify to
give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certification or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate of public officials or upon a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information with respect to such factual matters is in
the possession of the Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 1.04 ACTS OF HOLDERS; RECORD DATES.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
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capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
(c) The Company may, in the circumstances permitted by the Trust
Indenture Act, fix any day as the record date for the purpose of determining the
Holders entitled to give or take any request, demand, authorization, direction,
notice, consent, waiver or other action, or to vote on any action, authorized or
permitted to be given or taken by Holders. If not set by the Company prior to
the first solicitation of a Holder made by any Person in respect of any such
action, or, in the case of any such vote, prior to such vote, the record date
for any such action or vote shall be the 30th day (or, if later, the date of the
most recent list of Holders required to be provided pursuant to Section 7.01)
prior to such first solicitation or vote, as the case may be. With regard to any
record date, only the Holders on such date (or their duly designated proxies)
shall be entitled to give or take, or vote on, the relevant action.
Notwithstanding the foregoing, the Company shall not set a record date for, and
the provisions of this paragraph shall not apply with respect to, any Act by the
Holders pursuant to Section 5.01, 5.02 or 5.12.
(d) The ownership of Securities shall be proved by the Security
Register.
(e) Any Act of the Holder of any Security shall bind every future Holder
of the same Security and the Holder of every Security issued upon the
registration of transfer therefor or in exchange therefor or in lieu thereof in
respect of anything done, omitted or suffered to be done by the Trustee or the
Company in reliance thereon, whether or not notation of such action is made upon
such Security.
(f) Without limiting the foregoing, a Holder entitled hereunder to give
or take any action hereunder with regard to any particular Security may do so
with regard to all or any part of the principal amount of such Security or by
one or more duly appointed agents each of which may do so pursuant to such
appointment with regard to all or any different part of such principal amount.
SECTION 1.05 NOTICES, ETC., TO TRUSTEE AND COMPANY.
Any Act of Holders or other documents provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
2001 Ross Avenue, Dallas, TX 75201, Attention: Corporate Trust
Administration, or at any other address previously furnished in writing
to the Holders and the Company by the Trustee; or
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(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company, addressed to it at the address of its principal
executive offices specified in the first paragraph of this instrument or
at any other address previously furnished in writing to the Trustee by
the Company.
All such notices and communications shall be deemed to have been duly given: at
the time delivered by hand, if personally delivered; five Business Days after
being deposited in the mail, registered or certified with postage prepaid, if
mailed; when answered back if telexed; when receipt acknowledged, if telecopied;
and the next Business Day after timely delivery to the courier, if sent by
nationally recognized overnight air courier guaranteeing next day delivery.
SECTION 1.06 NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if made, given, furnished or filed in writing to each Holder affected by such
event, at his address as it appears in the Security Register, not later than the
latest date (if any), and not earlier than the earliest date (if any),
prescribed for the giving of such notice. Where this Indenture provides for
notice in any manner, such notice may be waived in writing by the Person
entitled to receive such notice, either before or after the event, and such
waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver. All
such notices and communications shall be deemed to have been duly given: at the
time delivered by hand, if personally delivered; five Business Days after being
deposited in the mail, registered or certified with postage prepaid, if mailed;
when answered back if telexed; when receipt acknowledged, if telecopied; and the
next Business Day after timely delivery to the courier, if sent by nationally
recognized overnight air courier guaranteeing next day delivery.
In the case of any notice this Indenture provides shall be given by
mail, if, by reason of the suspension of regular mail service or by reason of
any other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
SECTION 1.07 CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with a provision
of the Trust Indenture Act or another provision that would be required or deemed
under such Act to be a part of and govern this Indenture if this Indenture were
subject thereto, the latter provision shall control. If any provision of this
Indenture modifies or excludes any provision of the Trust Indenture Act that may
be so modified or excluded, the latter provision shall be deemed to apply to
this Indenture as so modified or to be excluded, as the case may be.
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SECTION 1.08 EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 1.09 SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company and the
Trustee shall bind each of their respective successors and assigns, whether so
expressed or not.
SECTION 1.10 SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 1.11 BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Securities, express or implied,
shall give to any Person, other than the parties hereto and their successors
hereunder, the Holders of Securities and, with respect to Article Twelve, the
holders of Senior Indebtedness, any benefit or any legal or equitable right,
remedy or claim under this Indenture.
SECTION 1.12 GOVERNING LAW.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO THE
PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
SECTION 1.13 LEGAL HOLIDAYS.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security or the last date on which a Holder has the right to
convert his Securities shall not be a Business Day, then (notwithstanding any
other provision of this Indenture or of the Securities) payment of interest or
principal and premium if any, or conversion of the Securities need not be made
on such date, but may be made on the next succeeding Business Day with the same
force and effect as if made on the Interest Payment Date or Redemption Date, or
at the Stated Maturity, or on such last day for conversion; provided, that no
interest shall accrue for the period from and after such Interest Payment Date,
Redemption Date or Stated Maturity, as the case may be, to the next succeeding
Business Day.
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SECTION 1.14 NO SECURITY INTEREST CREATED.
Nothing in this Indenture or in the Securities, express or implied,
shall be construed to constitute a security interest under the Uniform
Commercial Code or similar legislation, as now or hereafter enacted and in
effect in any jurisdiction where property of the Company or its Subsidiaries is
or may be located.
SECTION 1.15 LIMITATION ON INDIVIDUAL LIABILITY.
No recourse under or upon any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, shall be had against any incorporator,
shareholder, officer or director, as such, past, present or future, of the
Company or any successor corporation, either directly or through the Company,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise; it being expressly
understood that this Indenture and the obligations issued hereunder are solely
corporate obligations, and that no such personal liability whatever shall attach
to, or is or shall be incurred by, the incorporators, shareholders, officers or
directors, as such, of the Company or any successor Person, or any of them,
because of the creation of the indebtedness hereby authorized, or under or by
reason of the obligations, covenants or agreements contained in this Indenture
or in any Security or implied therefrom; and that any and all such personal
liability of every name and nature, either at common law or in equity or by
constitution or statute, of, and any and all such rights and claims against,
every such incorporator, shareholder, officer or director, as such, because of
the creation of the indebtedness hereby authorized, or under or by reason of the
obligations, covenants or agreements contained in this Indenture or in any
Security or implied therefrom, are hereby expressly waived and released as a
condition of, and as a consideration for, the execution of this Indenture and
the issuance of such Security.
ARTICLE II.
Security Forms
SECTION 2.01 FORMS GENERALLY.
The Securities and the Trustee's certificate of authentication shall be
in substantially the forms set forth in this Article, with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with any organizational document, any applicable law or with
the rules of any securities exchange on which the Securities are listed or as
may, consistently herewith, be determined by the officers executing such
Securities, as evidenced by their execution of the Securities.
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The Securities issued in definitive form shall be substantially in the
form set forth in Section 2.02 hereof.
Unless issued in definitive form, Securities issued and sold in reliance
on Rule 144A shall be issued in the form of one or more global securities (the
"144A Global Security"), the face of which shall be substantially in the form
set forth in Section 2.02 hereof and the reverse of which shall be substantially
in the form set forth in Section 2.03 hereof, which 144A Global Security shall
be deposited on behalf of the holders of the Securities represented thereby with
the Trustee, as custodian for the Depositary, and registered in the name of the
nominee of the Depositary, duly executed by the Company and authenticated as
provided for herein.
Securities offered and sold outside the United States in reliance on
Regulation S shall be issued in the form of one or more global securities (the
"Regulation S Global Security"), the face of which shall be substantially in the
form set forth in Section 2.02 hereof and the reverse of which shall be
substantially in the form set forth in Section 2.03 hereof, which Regulation S
Global Security shall be deposited on behalf of the holders of the Securities
represented thereby with the Trustee, as custodian for the Depositary, and
registered in the name of a nominee of the Depositary, duly executed by the
Company and authenticated as provided herein, for credit to the accounts of the
respective depositaries for Euroclear and Cedel (or such other accounts as they
may direct). Prior to or on the 40th day after the later of the commencement of
the offering of the Securities and the Closing Date (the "Restricted Period"),
beneficial interests in the Regulation S Global Security may only be held
through Chase Manhattan Bank or Citibank, N.A., as operators of Euroclear or
Cedel, respectively, or another agent member of Euroclear and Cedel acting for
and on behalf of them, unless delivery is made though the 144A Global Security
in accordance with the certification requirements hereof. During the Restricted
Period, interests in the Regulation S Global Security may be exchanged for
interests in the Rule 144A Global Security or for Definitive Securities only in
accordance with the certification requirements described in Section 3.05 below.
Each Global Security shall represent such of the outstanding Securities
as shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Securities from time to time endorsed thereon
and that the aggregate amount of outstanding Securities represented thereby may
from time to time be reduced or increased, as appropriate, to reflect exchanges
and redemptions. Any endorsement of a Global Security to reflect the amount of
any increase or decrease in the amount of outstanding Securities represented
thereby shall be made by the Trustee or the Securities Custodian, at the
direction of the Trustee, in accordance with instructions given by the Holder
thereof.
The Definitive Securities shall be printed, lithographed or engraved or
produced by any combination of these methods on steel engraved borders or may be
produced in any other manner permitted by the rules of any securities exchange
on which the Securities may be listed, all as determined by the officers
executing such Securities, as evidenced by their execution of such Securities.
16
<PAGE>
SECTION 2.02 FORM OF FACE OF SECURITY.
LEGENDS FOR GLOBAL SECURITY:
UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR SECURITIES IN
DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE
DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO
THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY
SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR
DEPOSITARY. UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME
AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO
CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO.,
HAS AN INTEREST HEREIN.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF
___________, 1997 AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED
PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH
SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A) TO THE COMPANY OR ANY
OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO SECURITIES ACT RULE 144A, TO A PERSON THE
HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT
17
<PAGE>
THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS
WHICH OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER
THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE
COMPANY, U.S. TRUST COMPANY OF TEXAS, N.A. AND CHASEMELLON SHAREHOLDER SERVICES,
L.L.C. PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D) OR
(E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES
PROVIDED THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS SECURITY
IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO U.S. TRUST COMPANY OF TEXAS,
N.A. AND CHASEMELLON SHAREHOLDER SERVICES, L.L.C. AND SUBJECT TO ANY APPLICABLE
STATE SECURITIES LAWS. THIS LEGEND WILL BE REMOVED ON THE REQUEST OF THE THEN
HOLDER OF THIS SECURITY AFTER THE RESALE RESTRICTION TERMINATION DATE.
LEGENDS FOR DEFINITIVE SECURITY:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATED PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF SUCH SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A)
TO THE COMPANY OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO
LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A
PERSON THE HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A UNDER THE
18
<PAGE>
SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A
QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING
MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR
OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE
SECURITIES ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (C), (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH
OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THIS
SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE AND SUBJECT
TO ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF THE THEN HOLDER OF THIS SECURITY AFTER THE RESALE RESTRICTION
TERMINATION DATE.
AMERICAN RESIDENTIAL SERVICES, INC.
7 1/4% Convertible Subordinated Notes due 2004
No. ________ $___________
American Residential Services, Inc., a corporation duly organized and
existing under the laws of the State of Delaware (herein called the "Company",
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to ___________________,
or registered assigns, the principal sum of ________________ Dollars [OR SUCH
GREATER OR LESSER AMOUNT AS INDICATED ON THE SCHEDULE OF EXCHANGES OF SECURITIES
ON THE REVERSE HEREOF]1 on April 15, 2004, and to pay interest thereon from the
date of original issuance of Securities pursuant to the Indenture or from and
including the most recent Interest Payment Date to which interest has been paid
or duly provided for, semi-annually on April 15 and October 15 in each year,
commencing October 15, 1997 at the rate of 7 1/4% per annum, until the principal
hereof is paid or made available for payment and promises to pay any liquidated
damages which may be payable pursuant to Section 4 of the Registration Rights
Agreement on the Interest Payment Dates. The interest so payable, and punctually
paid or duly provided for, on any Interest Payment Date will, as provided in
such Indenture, be paid to the Person in whose name this Security (or one or
more Predecessor Securities) is registered at the close of business on the
Regular Record Date for such interest, which shall be the March 31 or September
30 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Any such
- --------
1 This phrase should be included only if the Security is issued in global
form.
19
<PAGE>
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee or be paid at any time in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed and upon such notice as may be
required by such exchange, all as more fully provided in said Indenture. Notice
of a Special Record Date shall be given to Holders of Securities not less than
10 days prior to such Special Record Date. Payment of the principal of and
premium, if any, and interest on this Security will be made (i) in respect of
Securities held of record by the Depositary or its nominee in same day funds on
or prior to the respective payment dates and (ii) in respect of Securities held
of record by Holders other than the Depositary or its nominee at the office or
agency of the Company maintained for that purpose pursuant to Section 10.02 of
the Indenture, in each case in such coin or currency of the United States of
America as of the time of payment is legal tender for payment of public and
private debts; PROVIDED, HOWEVER, that at the option of the Company payment of
interest in respect of Securities held of record by Holders other than the
Depositary or its nominee may be made by check mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: _________________ AMERICAN RESIDENTIAL SERVICES, INC.
By _________________________
Attest:
- ------------------------
SECTION 2.03 FORM OF REVERSE OF GLOBAL SECURITIES AND DEFINITIVE SECURITY.
This Security is one of a duly authorized issue of Securities of the
Company designated as its 7 1/4% Convertible Subordinated Notes due 2004 (herein
called the "Securities"), limited in
20
<PAGE>
aggregate principal amount to $63,250,000 (including Securities issuable
pursuant to the Initial Purchasers' over-allotment option, as provided for in
the Purchase Agreement dated March 27, 1997 between the Company and the Initial
Purchasers), issued and to be issued under an Indenture, dated as of April 1,
1997 (herein called the "Indenture"), between the Company and U.S. Trust Company
of Texas, N.A., as Indenture Trustee (herein called the "Trustee", which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee, the holders of Senior Indebtedness and the Holders of
the Securities and of the terms upon which the Securities are, and are to be,
authenticated and delivered.
Subject to and upon compliance with the provisions of the Indenture, the
Holder of this Security is entitled, at his option, at any time following the
date of original issuance of Securities pursuant to the Indenture and on or
before the close of business on April 15, 2004 or in case this Security or a
portion hereof is called for redemption, then in respect of this Security or
such portion hereof until and including, but (unless the Company defaults in
making the payment due upon redemption) not after, the close of business on the
second business day preceding the Redemption Date, to convert this Security (or
any portion of the principal amount hereof which is $1,000 or an integral
multiple thereof), at the principal amount hereof, or of such portion, into
fully paid and non-assessable shares (calculated as to each conversion to the
nearest 1/100th of a share) of Common Stock at a conversion price equal to
$25.50 principal amount for each share of Common Stock (or at the current
adjusted conversion price if an adjustment has been made as provided in the
Indenture) by surrender of this Security, duly endorsed or assigned to the
Company or in blank, to the Company at its office or agency maintained for that
purpose pursuant to Section 10.02 of the Indenture, accompanied by written
notice to the Company in the form provided in this Security (or such other
notice as is acceptable to the Company) that the Holder hereof elects to convert
this Security, or if less than the entire principal amount hereof is to be
converted, the portion hereof to be converted, and, in case such surrender shall
be made during the period from the opening of business on any Regular Record
Date next preceding any Interest Payment Date to the close of business on such
Interest Payment Date (unless this Security or the portion thereof being
converted has been called for redemption on a Redemption Date, or is
repurchaseable on a Repurchase Date occurring, in either case, within such
period), also accompanied by payment in New York Clearing House funds, or other
funds acceptable to the Company of an amount equal to the interest payable on
such Interest Payment Date on the principal amount of this Security then being
converted. Subject to the aforesaid requirement for payment and, in the case of
a conversion after the Regular Record Date next preceding any Interest Payment
Date and on or before such Interest Payment Date, to the right of the Holder of
this Security (or any Predecessor Security) of record at such Regular Record
Date to receive an installment of interest (with certain exceptions provided in
the Indenture), no payment or adjustment is to be made upon conversion on
account of any interest accrued hereon or on account of any dividends on the
Common Stock issued upon conversion. No fractional shares or scrip representing
fractions of shares will be issued on conversion, but instead of any fractional
share the Company shall pay a cash adjustment as provided in the Indenture. The
conversion
21
<PAGE>
price is subject to adjustment as provided in the Indenture. In addition, the
Indenture provides that in case of certain consolidations or mergers to which
the Company is a party or the sale or transfer of the properties and assets
substantially as an entirety of the Company in one transaction or a series of
related transactions, the Indenture shall be amended, without the consent of any
Holders of Securities, so that this Security, if then outstanding, will be
convertible thereafter, during the period this Security shall be convertible as
specified above, only into the kind and amount of securities, cash and other
property receivable upon the consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock into which this Security might have been
converted immediately prior to such consolidation, merger, sale or transfer
(assuming such holder of Common Stock failed to exercise any rights of election
and received per share the kind and amount received per share by a plurality of
non-electing shares).
The Securities are subject to redemption upon not less than 15 and not
more than 60 days' notice by mail, at any time on or after April 20, 2000, as a
whole or in part, at the election of the Company, at the Redemption Prices set
forth below (expressed as percentages of the principal amount), plus accrued
interest to the Redemption Date (subject to the right of Holders of record on
the relevant Regular Record Date to receive interest due on an Interest Payment
Date that is on or prior to the Redemption Date).
If redeemed during the 12-month period beginning April 15, in the year
indicated (April 20, in the case of 2000), the redemption price shall be:
Redemption
Year Price
---- ----------
2000 104.14%
2001 103.11%
2002 102.07%
2003 101.04%
In certain circumstances involving the occurrence of a Repurchase Event
(as defined in the Indenture), the Holder hereof shall have the right to require
the Company to repurchase this Security at 100% of the principal amount hereof,
together with accrued interest to the Repurchase Date, but interest installments
whose Stated Maturity is on or prior to such Repurchase Date will be payable to
the Holders of such Securities, or one or more Predecessor Securities, of record
at the close of business on the relevant Record Dates referred to on the face
hereof, all as provided in the Indenture.
In the event of redemption or conversion of this Security in part only,
a new Security or Securities for the unredeemed or unconverted portion hereof
will be issued in the name of the Holder hereof upon the cancellation hereof.
22
<PAGE>
The indebtedness evidenced by this Security is, in all respects,
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness, and this Security is issued subject to the provisions of
the Indenture with respect thereto. Each Holder of this Security, by accepting
the same, (a) agrees to and shall be bound by such provisions, (b) authorizes
and directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination so provided, and (c) appoints the
Trustee his attorney-in-fact for any and all such purposes.
If an Event of Default shall occur and be continuing, the principal of
all the Securities may be declared due and payable in the manner and with the
effect provided in the Indenture.
The Indenture provides that no Holder of any Securities may enforce any
remedy under the Indenture except in the case of failure of the Trustee to act
after notice of default and after request of the Holders of 25% in principal
amount of Outstanding Securities and the offer to the Trustee of indemnity
satisfactory to it; provided, however, that such provision shall not prevent the
Holder hereof from enforcing payment of the principal of and premium, if any,
and interest on this Security after the same shall have become due.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities under the Indenture at
any time by the Company and the Trustee with the consent of the Holders of not
less than a majority in aggregate principal amount of the Securities at the time
Outstanding, and, under certain limited circumstances, by the Company and the
Trustee without the consent of the Holders. The Indenture also contains
provisions permitting the Holders of specified percentages in aggregate
principal amount of the Securities at the time Outstanding, on behalf of the
Holders of all the Securities, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by the Holder of this Security
shall be conclusive and binding upon such Holder and upon all future Holders of
this Security and of any Security issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Security.
No reference herein to the Indenture and no provision of this Security
or of the Indenture shall alter or impair the obligation of the Company, which
is absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed or to convert this Security as provided in the
Indenture.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Security
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company in any place where the principal of and any
premium and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security
23
<PAGE>
Registrar duly executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities, of authorized denominations
and for the same aggregate principal amount, will be issued to the designated
transferee or transferees.
The Securities are issuable only in fully registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities are exchangeable for a like aggregate principal amount of Securities
of a different authorized denomination, as requested by the Holder surrendering
the same.
No service charge shall be made for any such registration of transfer or
exchange except as provided in the Indenture, and the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, except as provided in this Security, whether or not this Security be
overdue, and neither the Company, the Trustee nor any such agent shall be
affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture. The Company will furnish to
any Holder upon written request and without charge a copy of the Indenture
and/or the Registration Rights Agreement.
[FORM OF CONVERSION NOTICE]
TO AMERICAN RESIDENTIAL SERVICES, INC.
The undersigned registered owner of this Security hereby
irrevocably exercises the option to convert this Security, or the
portion hereof (which is $1,000 or a multiple thereof) designated below,
into shares of Common Stock in accordance with the terms of the
Indenture referred to in this Security, and directs that the shares
issuable and deliverable upon the conversion, together with any check in
payment for a fractional share and any Security representing any
unconverted principal amount hereof, be issued and delivered to the
registered owner hereof unless a different name has been provided below.
If this Notice is being delivered on a date after the close of business
on a Regular Record Date and prior to the close of business on the
related Interest Payment Date, this Notice is accompanied by payment in
New York Clearing House funds, or other funds acceptable to the Company,
of an amount equal to the interest payable on such Interest Payment Date
on the principal of this Security to be converted (unless this Security
has been called for redemption). If shares or any portion of this
24
<PAGE>
Security not converted are to be issued in the name of a person other
than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto. Any amount required to be paid by the
undersigned on account of interest accompanies this Security.
Dated: _________________________
-------------------------
Signature(s)
Signature(s) must be guaranteed by a commercial bank or trust company or a
member firm of a national stock exchange if shares of Common Stock are to be
delivered, or Securities to be issued, other than to and in the name of the
registered owner.
- ---------------------------------
Signature Guarantee
Fill in for registration of shares of Common Stock if they are to be delivered,
or Securities if they are to be issued, other than to and in the name of the
registered owner:
- ------------------------------
(Name)
- ------------------------------
(Street Address)
- ------------------------------
(City, State and zip code)
(Please print name and address)
Register: _____ Common Stock
_____ Securities
(Check appropriate line(s)).
25
<PAGE>
Principal amount to be converted (if less than
all):
$__________,000
-----------------------------
Social Security or other Taxpayer
Identification Number of owner
[ASSIGNMENT FORM]
If you the holder want to assign this Security, fill in the form below and have
your signature guaranteed:
I or we assign and transfer this Security to
- ----------------------------------------------------------------------------
(Insert assignee's social security or tax ID number)____________________________
- ----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably appoint
----------------------------------------------------------------------------
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
----------------------------------------------------------------------------
Date: ________________________ Your signature: ________________________________
(Sign exactly as your name
appears on the face of this
Security)
Signature Guarantee:___________________________________________________________
26
<PAGE>
[OPTION OF HOLDER TO ELECT PURCHASE]
If you wish to have this Security purchased by the Company pursuant to
Section 14.01 of the Indenture, check the Box: [_]
If you wish to have a portion of this Security (which is $1,000 or an
integral multiple thereof) purchased by the Company pursuant to Section 14.01 of
the Indenture, state the amount you wish to have purchased:
$--------------------
Date: ___________________ Your Signature(s): _______________________
Tax Identification No.: _______________________
(Sign exactly as your name appears on the face of this Security)
Signature Guarantee: ____________________________________
27
<PAGE>
[FORM OF SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(2)]
The following exchanges of a part of this Global Security for Definitive
Securities have been made:
<TABLE>
<CAPTION>
Principal Signature of
Amount of Amount of Amount of this authorized
decrease in increase in Global Security signatory of
Principal Principal following such Trustee or
Date of Amount of this Amount of this decrease (or Securities
Exchange Global Security Global Security Increase) Custodian
-------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
1.
2.
3.
4.
5.
</TABLE>
SECTION 2.04 FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
The Trustee's certificate of authentication shall be in substantially
the following form:
This is one of the Securities referred to in the within-mentioned
Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Trustee
By ____________________________
Authorized Signatory
- --------
2 This Schedule should be included only if the Security is issued in
global form.
28
<PAGE>
ARTICLE III.
The Securities
SECTION 3.01 TITLE AND TERMS.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is limited to $63,250,000 (including
$8,250,000 aggregate principal amount of Securities that may be sold to the
Initial Purchasers by the Company upon exercise of the over-allotment option
granted pursuant to the Purchase Agreement), except for Securities authenticated
and delivered upon registration of transfer of, or in exchange for, or in lieu
of, other Securities pursuant to Section 3.04, 3.05, 3.06, 9.06, 11.08, 13.02 or
14.05.
The Securities shall be known and designated as the "7 1/4% Convertible
Subordinated Notes due 2004" of the Company. Their Stated Maturity shall be
April 15, 2004 and they shall bear interest at the rate of 7 1/4% per annum,
from the date of original issuance of Securities pursuant to this Indenture or
from the most recent Interest Payment Date to which interest has been paid or
duly provided for, as the case may be, payable semi-annually on April 15 and
October 15 commencing October 15, 1997, until the principal thereof is paid or
made available for payment.
The principal of and premium, if any, and interest on the Securities
shall be payable (i) in respect of Securities held of record by the Depositary
or its nominee in same day funds on or prior to the respective payment dates and
(ii) in respect of Securities held of record by Holders other than the
Depositary or its nominee at the office or agency of the Company maintained for
such purpose pursuant to Section 10.02; PROVIDED, HOWEVER, that at the option of
the Company payment of interest to Holders of record other than the Depositary
may be made by check mailed to the address of the Person entitled thereto as
such address shall appear in the Security Register.
The Securities shall be subject to the transfer restrictions set forth
in Section 3.05.
The Securities shall be redeemable as provided in Article Eleven.
The Securities shall be subordinated in right of payment to Senior
Indebtedness as provided in Article Twelve.
The Securities shall be convertible as provided in Article Thirteen.
The Securities shall be subject to repurchase at the option of the
Holder as provided in Article Fourteen.
29
<PAGE>
SECTION 3.02 DENOMINATIONS.
The Securities shall be issuable only in fully registered form without
coupons and only in denominations of $1,000 and any integral multiple thereof.
SECTION 3.03 EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
The Securities shall be executed on behalf of the Company by its
Chairman of the Board, its Chief Executive Officer, its President, its Chief
Financial Officer or one of its Vice Presidents, under its corporate seal or a
facsimile thereof reproduced thereon attested by its Secretary or one of its
Assistant Secretaries. The signature of any of these officers on the Securities
may be manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities; and the Trustee in accordance
with such Company Order shall either at one time or from time to time pursuant
to such instructions as may be described therein authenticate and deliver such
Securities as in this Indenture provided and not otherwise. Such Company Order
shall specify the amount of Securities to be authenticated and the date on which
the original issue of Securities is to be authenticated, and shall certify that
all conditions precedent to the issuance of such Securities contained in this
Indenture have been complied with. The aggregate principal amount of Securities
Outstanding at any time may not exceed the amount set forth above except as
provided in Section 3.06.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein duly
executed by the Trustee by manual signature, and such certificate upon any
Security shall be conclusive evidence, and the only evidence, that such Security
has been duly authenticated and delivered hereunder and is entitled to the
benefits of the Indenture. The Trustee may appoint an Authenticating Agent
pursuant to the terms of Section 6.14.
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SECTION 3.04 TEMPORARY SECURITIES.
Pending the preparation of Definitive Securities, the Company may
execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the Definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as evidenced by their
execution of such Securities. Every such temporary Security shall be executed by
the Company and shall be authenticated and delivered by the Trustee upon the
same conditions and in substantially the same manner, and with the same effect,
as the Definitive Security or Securities in lieu of which it is issued.
If temporary Securities are issued, the Company will cause Definitive
Securities to be prepared without unreasonable delay. After the preparation of
Definitive Securities, the temporary Securities shall be exchangeable for
Definitive Securities upon surrender of the temporary Securities at any office
or agency of the Company designated pursuant to Section 10.02, without charge to
the Holder. Upon surrender for cancellation of any one or more temporary
Securities the Company shall execute and the Trustee shall authenticate and
deliver in exchange therefor one or more Definitive Securities of a like
principal amount of authorized denominations. Until so exchanged the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as Definitive Securities.
SECTION 3.05 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 10.02 being herein sometimes
collectively referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers of Securities. The Trustee is hereby
appointed "Security Registrar" for the purpose of registering Securities and
transfers of Securities as herein provided. At all reasonable times the Security
Register shall be open for inspection by the Company.
The Company initially appoints The Depository Trust Company ("DTC") to
act as depositary (the "Depositary") with respect to the Global Security(ies).
The Company initially appoints the Trustee to act as Securities
Custodian with respect to the Global Security(ies).
(b) With respect to the transfer and exchange of Definitive Securities,
when Definitive Securities are presented to the Security Registrar with the
request (x) to register the transfer of the Definitive Securities or (y) to
exchange such Definitive Securities for an equal
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principal amount of Definitive Securities of other authorized denominations, the
Security Registrar shall register the transfer or make the exchange as requested
if its requirements for such transactions are met; PROVIDED, HOWEVER, that the
Definitive Securities presented or surrendered for register of transfer or
exchange:
(i) shall be duly endorsed or accompanied by a written
instruction of transfer in form satisfactory to the Security Registrar
duly executed by the Holder thereof or by its attorney, duly authorized
in writing; and
(ii) shall, in the case of Transfer Restricted Securities that
are Definitive Securities, be accompanied by the following additional
information and documents, as applicable:
(A) if such Transfer Restricted Security is being
delivered to the Security Registrar by a Holder for registration
in the name of such Holder, without transfer, a certification
from such Holder to that effect (in substantially the form of
Exhibit A hereto); or
(B) if such Transfer Restricted Security is being
transferred to a "qualified institutional buyer" (as defined in
Rule 144A under the Securities Act) in reliance on Rule 144A
under the Securities Act or pursuant to an exemption from
registration in accordance with Rule 144 or Regulation S under
the Securities Act or pursuant to an effective registration
statement under the Securities Act, a certification to that
effect (in substantially the form of Exhibit A hereto) and, in
the case of a transfer in accordance with Rule 144A, Rule 144 or
Regulation S under the Securities Act, an Opinion of Counsel
reasonably acceptable to the Company and to the Security
Registrar to the effect that such transfer is in compliance with
the Securities Act; or
(C) if such Transfer Restricted Security is being
transferred in reliance on another exemption from the
registration requirements of the Securities Act, a certification
to that effect (in substantially the form of Exhibit A hereto)
and an Opinion of Counsel reasonably acceptable to the Company
and to the Security Registrar to the effect that such transfer is
in compliance with the Securities Act.
(c) The following restrictions apply to any transfer of a Definitive
Security for a beneficial interest in a 144A Global Security. A Definitive
Security may not be exchanged for a beneficial interest in a 144A Global
Security except until and upon satisfaction of the requirements set forth below.
Upon receipt by the Trustee of a Definitive Security, duly endorsed or
accompanied by appropriate instruments of transfer, in form satisfactory to the
Trustee, together with:
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(i) if such Definitive Security is a Transfer Restricted
Security, certification, substantially in the form of Exhibit A hereto,
that such Definitive Security is being transferred to a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act)
in accordance with Rule 144A and an Opinion of Counsel reasonably
acceptable to the Company and to the Security Registrar to the effect
that such transfer is in compliance with the Securities Act; and
(ii) whether or not such Definitive Security is a Transfer
Restricted Security, written instructions directing the Trustee to make,
or to direct the Securities Custodian to make, an endorsement on the
144A Global Security to reflect an increase in the aggregate principal
amount of the Securities represented by the 144A Global Security,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the 144A Global Security
to be increased accordingly. If no 144A Global Securities are then outstanding,
the Company shall execute and, upon receipt of an authentication order in the
form of a Company Order in accordance with Section 3.03, the Trustee shall
authenticate a new 144A Global Security in the appropriate principal amount.
(d) The following restrictions apply to any transfer of a Definitive
Security for a beneficial interest in a Regulation S Global Security. A
Definitive Security may not be exchanged for a beneficial interest in a
Regulation S Global Security except until and upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive
Security, duly endorsed or accompanied by appropriate instruments of transfer,
in form satisfactory to the Trustee, together with:
(i) if such Definitive Security is a Transfer Restricted
Security, certification, substantially in the form of Exhibit A hereto,
that such Definitive Security is being transferred in accordance with
Regulation S and an Opinion of Counsel reasonably acceptable to the
Company and to the Security Registrar to the effect that such transfer
is in compliance with the Securities Act; and
(ii) whether or not such Definitive Security is a Transfer
Restricted Security, written instructions directing the Trustee to make,
or to direct the Securities Custodian to make, an endorsement on the
Regulation S Global Security to reflect an increase in the aggregate
principal amount of the Securities represented by the Regulation S
Global Security,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the Regulation S Global
Security to be increased accordingly. If no Regulation S
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Global Securities are then outstanding, the Company shall execute and, upon
receipt of an authentication order in the form of a Company Order in accordance
with Section 3.03, the Trustee shall authenticate a new Regulation S Global
Security in the appropriate principal amount.
(e) The transfer and exchange of Global Securities or beneficial
interests therein shall be effected through the Depositary, in accordance with
this Indenture (including the restrictions on transfer set forth herein) and the
procedures of the Depositary therefor.
(f) With respect to the transfer of a beneficial interest in a 144A
Global Security or a Regulation S Global Security for a Definitive Security:
(i) Any person having a beneficial interest in a 144A Global
Security or a Regulation S Global Security may upon request exchange
such beneficial interest for a Definitive Security. Upon receipt by the
Trustee of written instructions or such other form of instructions as is
customary for the Depositary or its nominee on behalf of any person
having a beneficial interest in a 144A Global Security or a Regulation S
Global Security constituting a Transfer Restricted Security only, and
receipt by the Trustee of the following additional information and
documents (all of which may be submitted by facsimile):
(A) if such beneficial interest is being transferred to
the person designated by the Depositary as being the beneficial
owner, a certification from such person to that effect (in
substantially the form of Exhibit A hereto); or
(B) if such beneficial interest is being transferred to a
"qualified institutional buyer" (as defined in Rule 144A under
the Securities Act) in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration in
accordance with Rule 144 or Regulation S under the Securities Act
or pursuant to an effective registration statement under the
Securities Act, a certification to that effect from the
transferor (in substantially the form of Exhibit A hereto) and,
in the case of a transfer in accordance with Rule 144A, Rule 144
or Regulation S under the Securities Act, an Opinion of Counsel
reasonably acceptable to the Company and to the Security
Registrar to the effect that such transfer is in compliance with
the Securities Act; or
(C) if such beneficial interest is being transferred in
reliance on another exemption from the registration requirements
of the Securities Act, a certification to that effect from the
transferee or transferor (in substantially the form of Exhibit A
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hereto) and an Opinion of Counsel from the transferee or
transferor reasonably acceptable to the Company and to the
Security Registrar to the effect that such transfer is in
compliance with the Securities Act,
then the Trustee or the Securities Custodian, at the direction of the Trustee,
will cause, in accordance with the standing instructions and procedures existing
between the Depositary and the Securities Custodian, the aggregate principal
amount of the Global Security to be reduced and, following such reduction, the
Company will execute and, upon receipt of an authentication order in the form of
a Company Order in accordance with Section 3.03, the Trustee will authenticate
and deliver to the transferee a Definitive Security.
(ii) Definitive Securities issued in exchange for a beneficial
interest in a 144A Global Security or a Regulation S Global Security
pursuant to this Section 3.05 shall be registered in such names and in
such authorized denominations as the Depositary, pursuant to
instructions from its direct or indirect participants or otherwise,
shall instruct the Trustee. The Trustee shall deliver such Definitive
Securities to the persons in whose names such Securities are so
registered.
(g) With respect to the transfer of a beneficial interest in a
Regulation S Global Security for a beneficial interest in a 144A Global
Security, any person having a beneficial interest in a Regulation S Global
Security may upon request exchange such beneficial interest for an interest in a
144A Global Security. Upon receipt by the Trustee of written instructions or
such other form of instructions as is customary for the Depositary or its
nominee on behalf of any person having a beneficial interest in a Regulation S
Global Security constituting a Transfer Restricted Security only, and receipt by
the Trustee of the following additional information and documents (all of which
may be submitted by facsimile):
(i) instructions given in accordance with the procedures of
Euroclear or Cedel, the Depositary and the Securities Custodian, as the
case may be, from or on behalf of a beneficial owner of an interest in
the Regulations S Global Security directing the Trustee, as transfer
agent, to credit or cause to be credited a beneficial interest in the
144A Global Security in an amount equal to the beneficial interest in
the Regulation S Global Security to be exchanged or transferred,
(ii) a written order given in accordance with the procedures of
Euroclear or Cedel, the Depositary and the Securities Custodian, as the
case may be, containing information regarding the account with the
Depositary to be credited with such increase and the name of such
account, and
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(iii) a certification from the transferor (in substantially the
form of Exhibit A hereto) to the effect that such beneficial interest is
being transferred to a "qualified institutional buyer" (as defined in
Rule 144A under the Securities Act) in accordance with Rule 144A under
the Securities Act and an Opinion of Counsel reasonably acceptable to
the Company and to the Security Registrar to the effect that such
transfer is in compliance with the Securities Act,
then the Trustee, as transfer agent, shall promptly deliver appropriate
instructions to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, to reduce or reflect on its records a reduction
of the Regulation S Global Security by the aggregate principal amount of the
beneficial interest in such Regulation S Global Security to be exchanged or
transferred, and the Trustee, as transfer agent, shall promptly deliver
appropriate instructions to the Depositary, its nominee, or the custodian for
the Depositary, as the case may be, concurrently with such reduction, increase
or reflect on its records an increase of the principal amount of the 144A Global
Security by the aggregate principal amount of the beneficial interest in the
Regulation S Global Security to be so exchanged or transferred, and to credit or
cause to be credited to the account of the person specified in such instructions
a beneficial interest in the 144A Global Security equal to the reduction in the
principal amount of the Regulation S Global Security.
(h) With respect to the transfer of a beneficial interest in a 144A
Global Security for a beneficial interest in a Regulation S Global Security, any
person having a beneficial interest in a 144A Global Security may upon request
exchange such beneficial interest for an interest in a Regulation S Global
Security. Upon receipt by the Trustee of written instructions or such other form
of instructions as is customary for the Depositary or its nominee on behalf of
any person having a beneficial interest in a 144A Global Security constituting a
Transfer Restricted Security only, and receipt by the Trustee of the following
additional information and documents (all of which may be submitted by
facsimile):
(i) instructions given in accordance with the procedures of the
Depositary and the Securities Custodian, as the case may be, from or on
behalf of a holder of a beneficial interest in the 144A Global Security,
directing the Trustee, as transfer agent, to credit or cause to be
credited a beneficial interest in the Regulation S Global Security in an
amount equal to the beneficial interest in the 144A Global Security to
be exchanged or transferred,
(ii) a written order given in accordance with the procedures of
the Depositary and the Securities Custodian, as the case may be,
containing information regarding the Euroclear or Cedel account to be
credited with such increase and the name of such account, and
(iii) a certification from the transferor (in substantially the
form of Exhibit A hereto) to the effect that such beneficial interest is
being transferred in
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accordance with Regulation S and an Opinion of Counsel reasonably
acceptable to the Company and to the Security Registrar to the effect
that such transfer is in compliance with the Securities Act, then the
Trustee, as transfer agent, shall promptly deliver appropriate
instructions to the Depositary, its nominee, or the custodian for the
Depositary, as the case may be, to reduce or reflect on its records a
reduction of the 144A Global Security by the aggregate principal amount
of the beneficial interest in such 144A Global Security to be so
exchanged or transferred from the relevant participant, and the Trustee,
as transfer agent, shall promptly deliver appropriate instructions to
the Depositary, its nominee, or the custodian for the Depositary, as the
case may be, concurrently with such reduction, to increase or reflect on
its records an increase of the principal amount of such Regulation S
Global Security by the aggregate principal amount of the beneficial
interest in such 144A Global Security to be so exchanged or transferred,
and to credit or cause to be credited to the account of the person
specified in such instructions (who shall be Morgan Guaranty Trust
Company of New York, Brussels office, as operator of Euroclear or Cedel
or another agent member of Euroclear or Cedel, or both, as the case may
be, acting for and on behalf of them) a beneficial interest in such
Regulation S Global Security equal to the reduction in the principal
amount of such 144A Global Security.
(i) Notwithstanding any other provisions of this Indenture (other than
the provisions set forth in subsection (j) of this Section 3.05), a Global
Security may not be transferred as a whole except by the Depositary to a nominee
of the Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(j) The following relates to the authentication of Definitive Securities
in absence of the Depositary. If at any time, either: (i) the Depositary for the
Securities notifies the Company that the Depositary is unwilling or unable to
continue as Depositary for the Global Securities and a successor Depositary for
the Global Securities is not appointed by the Company within 90 days after
delivery of such notice or (ii) the Company, at its sole discretion, notifies
the Trustee in writing that it elects to cause the issuance of Definitive
Securities under this Indenture, then the Company will execute, and the Trustee,
upon receipt of a Company Order in accordance with Section 3.03 requesting the
authentication and delivery of Definitive Securities, will authenticate and
deliver Definitive Securities, in an aggregate principal amount equal to the
principal amount of the Global Securities, in exchange for such Global
Securities.
(k) (i)Except as permitted by the following paragraph (ii), each
Security certificate evidencing the Global Securities and the Definitive
Securities (and all Securities issued in exchange therefor or substitution
thereof) shall bear a legend in substantially the following form:
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THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES NOT TO
OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS THREE YEARS AFTER THE LATER OF
_____________, 1997 AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATED
PERSON OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH
SECURITY) UNLESS SUCH OFFER, SALE OR OTHER TRANSFER IS (A) TO THE COMPANY OR ANY
OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES
ARE ELIGIBLE FOR RESALE PURSUANT TO SECURITIES ACT RULE 144A, TO A PERSON THE
HOLDER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE
ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE
TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND
SALES TO NON-U.S. PERSONS WHICH OCCUR OUTSIDE THE UNITED STATES WITHIN THE
MEANING OF REGULATION S UNDER THE SECURITIES ACT OR (E) PURSUANT TO ANOTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT,
SUBJECT TO THE RIGHT OF THE COMPANY, U.S. TRUST COMPANY OF TEXAS, N.A. AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C. PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER PURSUANT TO CLAUSES (C), (D) OR (E) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH
OF THEM, AND IN EACH OF THE FOREGOING CASES PROVIDED THAT A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED BY
THE TRANSFEROR TO U.S. TRUST COMPANY OF TEXAS, N.A. AND SUBJECT TO ANY
APPLICABLE STATE SECURITIES LAWS. THIS LEGEND WILL BE REMOVED UPON THE REQUEST
OF THE THEN HOLDER OF THIS SECURITY AFTER THE RESALE RESTRICTION TERMINATION
DATE.
(ii) Upon any sale or transfer of a Transfer Restricted Security
(including any Transfer Restricted Security represented by a Global Security)
pursuant to Rule 144 under the
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Securities Act or an effective registration statement under the Securities Act
(including the Shelf Registration Statement):
(A) in the case of any Transfer Restricted Security that is a
Definitive Security, the Security Registrar shall permit the Holder thereof to
exchange such Transfer Restricted Security for a Definitive Security that does
not bear the legend set forth above and rescind any restriction on the transfer
of such Transfer Restricted Security; PROVIDED, HOWEVER, that with respect to a
transfer made in reliance upon Rule 144 or an effective registration statement,
the Holders thereof shall certify in writing to the Security Registrar that such
request is being made pursuant to Rule 144 or an effective registration
statement (such Certification to be substantially in the form of Exhibit A
hereto) and, in the case of a transfer made in reliance upon Rule 144, shall be
accompanied by an Opinion of Counsel reasonably acceptable to the Company and to
the Security Registrar to the effect that such transfer is in compliance with
the Securities Act; and
(B) any such Transfer Restricted Security represented by a Global
Security shall not be subject to the provisions set forth in (i) above (such
sales or transfers being subject only to the provisions of Section 3.05(e)
hereof); PROVIDED, HOWEVER, that with respect to any request for an exchange of
a Transfer Restricted Security that is represented by a Global Security for a
Definitive Security that does not bear a legend, which request is made in
reliance upon Rule 144 or an effective registration statement, the Holder
thereof shall certify in writing to the Security Registrar that such request is
being made pursuant to Rule 144 or an effective registration statement (such
certification to be substantially in the form of Exhibit A hereto) and, in the
case of a transfer made in reliance upon Rule 144, shall be accompanied by an
Opinion of Counsel reasonably acceptable to the Company and to the Security
Registrar to the effect that such transfer is in compliance with the Securities
Act.
(l) At such time as all beneficial interests in a Global Security have
either been exchanged for Definitive Securities, redeemed, repurchased or
canceled, such Global Security shall be returned to or retained and cancelled by
the Trustee. At any time prior to such cancellation, if any beneficial interest
in a Global Security is exchanged for Definitive Securities, redeemed,
repurchased or cancelled, the principal amount of Securities represented by such
Global Security shall be reduced and an endorsement shall be made on such Global
Security, by the Trustee or the Securities Custodian, at the direction of the
Trustee, to reflect such reduction.
(m) All Definitive Securities and Global Securities issued upon any
registration of transfer or exchange of Definitive Securities or Global
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Definitive
Securities or Global Securities surrendered upon such registration of transfer
or exchange.
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To permit registrations of transfer and exchanges, the Company shall
execute and the Trustee shall authenticate Definitive Securities and Global
Securities at the Security Registrar's request.
No service charge to a Holder shall be made for any registration of
transfer or exchange of Securities except as provided in Section 3.06. The
Company may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Securities, other than exchanges pursuant to Section
3.04, 9.06, 11.08 or 13.02 not involving any transfer.
The Company or the Security Registrar shall not be required (i) to
issue, register the transfer of or exchange any Security during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption of Securities selected for redemption under Section 11.04
and ending at the close of business on the day of such mailing, or (ii) to
register the transfer of or exchange any Definitive Security or beneficial
interest in any Global Security so selected for redemption in whole or in part,
except the unredeemed portion of any Definitive Security being redeemed in part.
SECTION 3.06 MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If any mutilated Security is surrendered to the Trustee, the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a new Security of like tenor and principal amount and bearing a number
not contemporaneously outstanding.
If there shall be delivered to the Company and the Trustee (i) evidence
to their satisfaction of the destruction, loss or theft of any Security and (ii)
such security or indemnity as may be required by them to save each of them and
any agent of either of them harmless, then, in the absence of notice to the
Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall execute and the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Security, a new Security
of like tenor and principal amount and bearing a number not contemporaneously
outstanding. The Trustee may charge the Company for the Trustee's expenses in
replacing such Security.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
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Every new Security issued pursuant to this Section in lieu of any
destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07 PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Interest on any Security which is payable, and is punctually paid or
duly provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security (or one or more Predecessor Securities) is registered
at the close of business on the Regular Record Date for such interest. Payment
of interest will be made (i) in respect of Securities held by the Depositary or
its nominee, in same day funds on or prior to the respective Interest Payment
Dates and (ii) in respect of Securities held of record by Holders other than the
Depositary or its nominee, at the office of the Trustee in New York, New York or
at such other office or agency of the Company as it shall maintain for that
purpose pursuant to Section 10.02, PROVIDED, HOWEVER, that, at the option of the
Company, interest on any Security held of record by Holders other than the
Depositary or its nominee may be paid by mailing checks to the addresses of the
Holders thereof as such addresses appear in the Securities Register.
Any interest on any Security which is payable, but is not punctually
paid or duly provided for, on any Interest Payment Date (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant Regular Record Date by virtue of having been such Holder, and such
Defaulted Interest may be paid by the Company, at its election in each case, as
provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Securities (or their respective Predecessor
Securities) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest which shall be fixed in the following
manner. The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on each Security and the date of the
proposed payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The
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Trustee shall promptly notify the Company of such Special Record Date and, in
the name and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to be
mailed, first-class postage prepaid, to each Holder at his address as it appears
in the Security Register, not less than 10 days prior to such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been so mailed, such Defaulted Interest shall be
paid to the Persons in whose names the Securities (or their respective
Predecessor Securities) are registered at the close of business on such Special
Record Date and shall no longer be payable pursuant to the following Clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities exchange
on which the Securities may be listed, and upon such notice as may be required
by such exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this Clause, such manner of payment shall be deemed
practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
In the case of any Security which is converted after any Regular Record
Date and on or prior to the next succeeding Interest Payment Date (other than
any Security whose Maturity is prior to such Interest Payment Date), interest
whose Stated Maturity is on such Interest Payment Date shall be payable on such
Interest Payment Date notwithstanding such conversion, and such interest
(whether or not punctually paid or duly provided for) shall be paid to the
Person in whose name that Security (or one or more Predecessor Securities) is
registered at the close of business on such Regular Record Date, PROVIDED,
HOWEVER, that Securities so surrendered for conversion shall (except in the case
of Securities or portions thereof called for redemption) be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Company of an amount equal to the interest payable on such Interest Payment Date
on the principal amount being surrendered for conversion. Except as otherwise
expressly provided in the immediately preceding sentence, in the case of any
Security which is converted, interest whose Stated Maturity is after the date of
conversion of such Security shall not be payable.
SECTION 3.08 PERSONS DEEMED OWNERS.
Prior to due presentment of a Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name such Security is registered as the owner of such Security
for the purpose of receiving payment of principal of and premium, if any, and
(subject to Section 3.07) interest on such Security and for all other purposes
whatsoever, whether or not such Security be overdue, and neither the
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Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 3.09 CANCELLATION.
All Securities surrendered for payment, redemption, registration of
transfer, exchange or conversion shall, if surrendered to any Person other than
the Trustee, be delivered to the Trustee and shall be promptly canceled by it.
The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and all Securities so delivered
shall be promptly canceled by the Trustee. No Securities shall be authenticated
in lieu of or in exchange for any Securities canceled as provided in this
Section, except as expressly permitted by this Indenture. All canceled
Securities held by the Trustee shall be disposed of as directed by a Company
Order.
SECTION 3.10 COMPUTATION OF INTEREST.
Interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
ARTICLE IV.
Satisfaction and Discharge
SECTION 4.01 SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of further effect
(except as expressly provided for in this Article IV), and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered
(other than (i) Securities which have been destroyed, lost or
stolen and which have been replaced or paid as provided in
Section 3.06 and (ii) Securities for whose payment money has
theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or
discharged from such trust, as provided in Section 10.03) have
been delivered to the Trustee for cancellation; or
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(B) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within one year
under arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the
expense, of the Company, or
(iv) are delivered to the Trustee for conversion in
accordance with Article XIII,
and the Company, in the case of (i), (ii), (iii) or (iv) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust for
the purpose an amount in cash sufficient (without consideration of any
investment of such cash) to pay and discharge the entire indebtedness on such
Securities not theretofore delivered to the Trustee for cancellation for
principal and premium, if any, and interest to the date of such deposit (in the
case of Securities which have become due and payable) or to the Stated Maturity
or Redemption Date, as the case may be; PROVIDED that the Trustee is irrevocably
instructed to apply such amount to said payments with respect to the Securities;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
following rights or obligations under the Securities and this Indenture shall
survive until otherwise terminated or discharged hereunder: (a) Article XIII,
Article XIV and the Company's obligations under Sections 3.04, 3.05, 3.06, 10.02
and 10.03, in each case with respect to any Securities described in subclause
(B) of Clause (1) of this Section, (b) this Article XIV, (c) the rights, powers,
trusts, duties and immunities of the Trustee hereunder, including the
obligations of the Company to the Trustee under Section 6.07, and the
obligations of the Trustee to any Authenticating Agent under Section 614 and (d)
if money shall have been deposited with the Trustee pursuant to subclause (B) of
Clause (1) of this Section, the rights of Holders of any Securities described in
subclause (B) of Clause (1) of this Section to receive, solely from the trust
fund described in such
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subclause (B), payments in respect of the principal of, and premium (if any) and
interest on, such Securities when such payment are due.
SECTION 4.02 APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.03, all
money deposited with the Trustee pursuant to Section 4.01 shall be held in trust
and applied by it, in accordance with the provisions of the Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal and premium, if
any, and interest for whose payment such money has been deposited with the
Trustee. All moneys deposited with the Trustee pursuant to Section 4.01 (and
held by it or any Paying Agent) for the payment of Securities subsequently
converted shall be returned to the Company upon Company Request.
SECTION 4.03 REINSTATEMENT.
If the Trustee or the Paying Agent is unable to apply any money in
accordance with this Article IV by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article IV until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust with respect to the Securities;
PROVIDED, HOWEVER, that if the Company makes any payment of principal of or any
premium or interest on any Security following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of the
Securities to receive such payment from the money so held in trust.
ARTICLE V.
Remedies
SECTION 5.01 EVENTS OF DEFAULT.
"Event of Default", wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
occasioned by the provisions of Article XII or be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body);
(1) default in the payment of the principal of or premium, if
any, on any Security at its Maturity, whether or not such payment is
prohibited by the provisions of Article XII; or
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(2) default in the payment of any interest upon any Security when
it becomes due and payable, whether or not such payment is prohibited by
the provisions of Article XII, and continuance of such default for a
period of 30 days; or
(3) failure to provide timely notice of a Repurchase Event as
required in accordance with the provisions of Article XIV; or
(4) default in the payment of the Repurchase Price in respect of
any Security on the Repurchase Date therefor in accordance with the
provisions of Article XIV, whether or not such payment is prohibited by
the provisions of Article XII; or
(5) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with), and continuance of such default
or breach for a period of 60 days after there has been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or
(6) default under one or more bonds, notes, debentures or other
evidences of indebtedness for money borrowed by the Company or any
Consolidated Subsidiary or under one or more mortgages, indentures or
instruments under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company
or any Consolidated Subsidiary, whether such indebtedness now exists or
shall hereafter be created, which default individually or in the
aggregate shall constitute a failure to pay the principal of
indebtedness in excess of $10,000,000 when due and payable after the
expiration of any applicable grace period with respect thereto or shall
have resulted in indebtedness in excess of $10,000,000 becoming or being
declared due and payable prior to the date on which it would otherwise
have become due and payable, without such indebtedness having been
discharged, or such acceleration having been rescinded or annulled,
within a period of 30 days after there shall have been given, by
registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities a written notice specifying such
default and requiring the Company to cause such indebtedness to be
discharged or cause such acceleration to be rescinded or annulled and
stating that such notice is a "Notice of Default" hereunder; or
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(7) the filing or commencement of an involuntary case or other
proceeding against the Company or any Significant Subsidiary of the
Company seeking liquidation, reorganization or other relief with respect
to it or its debts under any bankruptcy, insolvency or other similar law
now or thereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 90
days; or an order for relief shall be entered against the Company or any
Significant Subsidiary of the Company under the federal bankruptcy laws
as now or hereafter in effect; or
(8) the filing or commencement by the Company or any Significant
Subsidiary of the Company of a voluntary case or other proceeding
seeking liquidation, reorganization or other similar relief with respect
to itself or its debts under any bankruptcy, insolvency or other similar
law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or the Company or any Significant
Subsidiary of the Company shall consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall make
a general assignment for the benefit of creditors.
SECTION 5.02 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default (other than as specified in subparagraph (7) or
(8) of Section 5.01) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% in principal amount of the
Outstanding Securities may declare the principal of all the Securities to be due
and payable immediately, by a notice in writing to the Company (and to the
Trustee if given by Holders), and upon any such declaration such principal plus
any interest accrued on the securities to the date of declaration shall become
immediately due and payable. If an Event of Default specified in subparagraph
(7) or (8) of Section 5.01 occurs and is continuing, then the principal of,
premium, if any, and accrued and unpaid interest, if any, on all of the
Securities shall IPSO FACTO become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder of
Securities.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter in this Article provided, the Holders of a majority
in principal amount of the Outstanding Securities, by written notice to the
Company and the Trustee, may rescind and annul such declaration and its
consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
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(A) all overdue interest on all Securities,
(B) the principal of and premium, if any, on any
Securities which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate
borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the
Securities, and
(D) all sums paid or advanced by the Trustee and each
predecessor Trustee, their respective agents and counsel
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor
Trustee, their respective agents and counsel;
and
(2) all Events of Default, other than the nonpayment of the
principal of, premium, if any, and interest on the Securities that has
become due solely by such declaration of acceleration, have been cured
or waived as provided in Section 5.13.
No such rescission and waiver shall affect any subsequent default or impair any
right consequent thereon.
SECTION 5.03 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
The Company covenants that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default
continues for a period of 30 days, or
(2) default is made in the payment of the principal of or
premium, if any, on any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities, the whole amount then due and payable on such
Securities for principal and premium, if any, and interest, and, to the extent
that payment of such interest shall be legally enforceable, interest on any
overdue principal and premium, if any, and on any overdue interest, at the rate
borne by the Securities, and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation,
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expenses, disbursements and advances of the Trustee and each predecessor
Trustee, their respective agents and counsel, and any other amounts due the
Trustee or any predecessor Trustee under Section 6.07.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid and may
prosecute any such proceeding to judgment or final decree, and may enforce the
same against the Company (or any other obligor upon the Securities) and collect
the moneys adjudged or decreed to be payable in the manner provided by law out
of the property of the Company (or any other obligor upon the Securities),
wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 5.04 TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of any judicial proceeding relative to the Company (or any other
obligor upon the Securities), its property or its creditors, the Trustee shall
be entitled and empowered, by intervention in such proceeding or otherwise, to
take any and all actions authorized under the Trust Indenture Act in order to
have the claims of the Holders and the Trustee allowed in any such proceeding.
In particular, the Trustee shall be authorized to collect and receive any moneys
or other property payable or deliverable on any such claims and to distribute
the same; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it and each predecessor Trustee
for the reasonable compensation, expenses, disbursements and advances of the
Trustee and each predecessor Trustee and their respective agents and counsel,
and any other amounts due the Trustee under Section 6.07.
No provision of this Indenture shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding; PROVIDED,
HOWEVER, that the Trustee may, on behalf of the Holders, vote for the election
of a trustee in bankruptcy or similar official and may be a member of the
Creditors' Committee.
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SECTION 5.05 TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any of
the Securities or the production thereof in any proceeding relating thereto, and
any such proceeding instituted by the Trustee shall be brought in its own name
as trustee of an express trust, and any recovery of judgment shall, after
provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee and each predecessor Trustee and their
respective agents and counsel, be for the ratable benefit of the Holders of the
Securities in respect of which such judgment has been recovered.
SECTION 5.06 APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or premium, if
any, or interest, upon presentation of the Securities and the notation thereon
of the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: Subject to Article Twelve, to the holders of Senior
Indebtedness;
SECOND: To payment of all amounts due the Trustee under Section
6.07;
THIRD: To the payment of the amounts then due and unpaid for
principal of and premium, if any, and interest on the Securities in
respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind,
according to the amounts due and payable on such Securities for
principal and premium, if any, and interest, respectively; and
FOURTH: The balance, if any, to the Company or any other Person
or Persons determined to be entitled thereto.
SECTION 5.07 LIMITATION ON SUITS.
No Holder of any Security shall have any right to institute any
proceeding, judicial or otherwise, with respect to this Indenture, or for the
appointment of a receiver or trustee, or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities shall have made written request to the Trustee to
institute
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proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity satisfactory to it against the costs, expenses and liabilities
to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities;
it being understood and intended that no one or more holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 5.08 UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND
INTEREST AND TO CONVERT.
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal of and premium, if any, and (subject to Section 3.07)
interest on such Security on the respective Stated Maturities expressed in such
Security (or, in the case of redemption, on the Redemption Date or, in the case
of a repurchase pursuant to Article Fourteen, on the Repurchase Date) and to
convert such Security in accordance with Article Thirteen and to institute suit
for the enforcement of any such payment and right to convert, and such rights
shall not be impaired without the consent of such Holder.
SECTION 5.09 RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
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SECTION 5.10 RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities in Section 3.06, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
SECTION 5.11 DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Security to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 5.12 CONTROL BY HOLDERS.
The Holders of a majority in principal amount of the Outstanding
Securities shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee; PROVIDED, that
(1) such direction shall not be in conflict with any rule of law
or with this Indenture; and
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and
(3) subject to the provisions of Section 6.01, the Trustee shall
have the right to decline to follow any such direction if the Trustee in
good faith shall determine that the action so directed would involve the
Trustee in personal liability or would be unduly prejudicial to Holders
not joining in such direction.
SECTION 5.13 WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities may on behalf of the Holders of all the Securities waive
any past default hereunder and its consequences, except a default
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(1) in the payment of the principal of or premium, if any, or
interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article IX cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture, or in any suit against the Trustee for any action taken, suffered or
omitted by it as Trustee, a court may require any party litigant in such suit to
file an undertaking to pay the costs of such suit, and may assess costs against
any such party litigant, in the manner and to the extent provided in the Trust
Indenture Act; PROVIDED, that neither this Section nor the Trust Indenture Act
shall be deemed to authorize any court to require such an undertaking or to make
such an assessment in any suit instituted by the Company, in any suit instituted
by the Trustee, a suit by a Holder pursuant to Section 5.08, or a suit by a
Holder or Holders of more than 10% in principal amount of the Outstanding
Securities.
ARTICLE VI.
The Trustee
SECTION 6.01 CERTAIN DUTIES AND RESPONSIBILITIES.
The duties and responsibilities of the Trustee shall be as provided by
this Indenture and the Trust Indenture Act for securities issued pursuant to
indentures qualified thereunder. Except as otherwise provided herein,
notwithstanding the foregoing, no provision of this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur any financial
liability or risk in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity satisfactory to it
against such risk or liability is not reasonably assured to it. Whether or not
therein expressly so provided, every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this Section. The Trustee shall not be
liable (x) for any error of judgment made in good faith by a Responsible Officer
or Responsible Officers of the Trustee, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts or (y) with respect to
any action taken or omitted to be taken by it in good faith in accordance with
the direction of the
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holders of not less than a majority in aggregate principal amount of the
Securities at the time Outstanding relating to the time, method and place of
conducting any proceeding or any remedy available to the Trustee, or exercising
any trust or power conferred upon the Trustee, under this Indenture. Prior to
the occurrence of an Event of Default and after the curing or waiving of all
Events of Default which may have occurred: (i) the duties and obligations of the
Trustee shall be determined solely by the express provisions of this Indenture
and in the Trust Indenture Act, and the Trustee shall not be liable except for
the performance of such duties and obligations as are specifically set forth in
this Indenture and in the Trust Indenture Act, and no implied covenants or
obligations shall be read in to this Indenture against the Trustee; and (ii) in
the absence of bad faith on the part of the Trustee, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions therein, upon any statements, certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture and believed by the
Trustee to be genuine and to have been signed or presented by the proper party
or parties; but in the case of any such statements, certificates or options
which by any provisions hereof are specifically required to be furnished to the
Trustee, the Trustee shall be under a duty to examine the same to determine
whether or not they conform on their face to the requirements of this Indenture.
If a default or an Event of Default has occurred and is continuing, the Trustee
shall exercise the rights and powers vested in it by this Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise or use under the circumstances in the conduct of his own affairs.
SECTION 6.02 NOTICE OF DEFAULTS.
The Trustee shall give the Holders notice of any default hereunder known
to it as and to the extent provided by the Trust Indenture Act; PROVIDED,
HOWEVER, that in the case of any default of the character specified in Section
5.01(5), no such notice to Holders shall be given until at least 30 days after
the occurrence thereof; and PROVIDED, FURTHER, that, except in the case of a
default in payment of principal of, premium, if any, or interest on any
Securities, the Trustee may withhold notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of the Holders of Securities. For the purpose of this Section, the
term "default" means any event which is, or after notice or lapse of time or
both would become, an Event of Default.
SECTION 6.03 CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of Section 6.01:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
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(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any resolution
of the Board of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its part,
rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders pursuant to this Indenture, unless such Holders shall have
offered to the Trustee reasonable security or indemnity satisfactory to it
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction;
(f) before the Trustee acts or refrains from acting with respect to any
matter contemplated by this Indenture, it may require an Officers' Certificate
or an Opinion of Counsel, which shall conform to the provisions of Section 1.02,
and the Trustee shall be protected and shall not be liable for any action it
takes or omits to take in good faith and without gross negligence in reliance on
such certificate or opinion;
(g) the Trustee shall not be required to give any bond or surety in
respect of the performance of its power and duties hereunder;
(h) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit, and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or attorney;
and
(i) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
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SECTION 6.04 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The statements and recitals contained herein and in the Securities and
in any other document in connection with the sale of the Securities, except the
Trustee's certificate of authentication, shall be taken as the statements of the
Company, and the Trustee and any Authenticating Agent assume no responsibility
for their correctness. The Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Securities. The Trustee and any
Authenticating Agent shall not be accountable for the use or application by the
Company of Securities or the proceeds thereof.
SECTION 6.05 MAY HOLD SECURITIES.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to Sections
6.08 and 6.13, may otherwise deal with the Company or any Affiliate of the
Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 6.06 MONEY HELD IN TRUST.
Money held by the Trustee or any Paying Agent in trust hereunder need
not be segregated from other funds except to the extent required by law. The
Trustee or any Paying Agent shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed with the Company.
SECTION 6.07 COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (including its
services as Security Registrar or Paying Agent, if so appointed by the
Company) as may be mutually agreed upon in writing by the Company and
the Trustee (which compensation shall not be limited by any provision of
law in regard to the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to reimburse
the Trustee and each predecessor Trustee promptly upon its request for
all reasonable expenses, disbursements and advances incurred or made by
or on behalf of it in connection with the performance of its duties
under any provision of this Indenture (including the reasonable
compensation and the expenses and disbursements of its agents and
counsel and all other persons not regularly in its employ) except to the
extent any such expense, disbursement or advance may be attributable to
its negligence or bad faith; and
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(3) to indemnify the Trustee and each predecessor Trustee (each,
an "indemnitee") for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its
part, arising out of or in connection with the acceptance or
administration of this Indenture or the trusts hereunder and its duties
hereunder (including its services as Security Registrar or Paying Agent,
if so appointed by the Company), including enforcement of this Indenture
(including Section 6.07) and including the costs and expenses of
defending itself against or investigating any claim or liability in
connection with the exercise or performance of any of its powers or
duties hereunder. The Company shall defend any claim or threatened claim
asserted against an indemnitee for which it may seek indemnity, and the
indemnitee shall cooperate in the defense unless, in the reasonable
opinion of the indemnitee's counsel, the indemnitee has an interest
adverse to the Issuer or a potential conflict of interest exists between
the indemnitee and the Company, in which case the indemnitee may have
separate counsel and the Company shall pay the reasonable fees and
expenses of such counsel; PROVIDED that the Company shall only be
responsible for the reasonable fees and expenses of one law firm (in
addition to local counsel) in any one action or separate substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, such law firm to be designated by the
indemnitee.
As security for the performance of the obligations of the Company under
this Section 6.07, the Trustee shall have a lien prior to the Securities upon
all property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the Holders of particular Securities, and the
Securities are hereby subordinated to such prior lien. The obligations of the
Company under this Section to compensate and indemnify the Trustee and any
predecessor Trustee and to pay or reimburse the Trustee and any predecessor
Trustee for expenses, disbursements and advances, and any other amounts due the
Trustee or any predecessor Trustee under Section 6.07, shall constitute an
additional obligation hereunder and shall survive the satisfaction and discharge
of this Indenture.
When the Trustee or any predecessor Trustee incurs expenses or renders
services in connection with the performance of its obligations hereunder
(including its services as Security Registrar or Paying Agent, if so appointed
by the Company) after an Event of Default specified in Section 5.01(7) or (8)
occurs, the expenses and the compensation for the services are intended to
constitute expenses of administration under any applicable bankruptcy,
insolvency or other similar federal or state law to the extent provided in
Section 5.03(b)(5) of Title 11 of the United States Code, as now or hereafter in
effect.
SECTION 6.08 DISQUALIFICATION; CONFLICTING INTERESTS.
If the Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Trustee shall either eliminate such
interest or resign, to the extent and in the manner provided by, and subject to
the provisions of, the Trust Indenture Act and this Indenture.
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SECTION 6.09 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder which shall be a Person
that (i) is eligible pursuant to the Trust Indenture Act to act as such, (ii)
has (or, in the case of a corporation included in a bank holding company system,
whose related bank holding company has) a combined capital and surplus of at
least $50,000,000 and (iii) has a Corporate Trust Office in the Borough of
Manhattan, The City of New York, or a designated agent. If such Person publishes
reports of conditions at least annually, pursuant to law or to the requirements
of a Federal or state supervising or examining authority, then for the purposes
of this Section, the combined capital and surplus of such Person shall be deemed
to be its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time the Trustee shall cease to be eligible in
accordance with the provisions of this Section, it shall resign immediately in
the manner and with the effect hereinafter specified in this Article.
SECTION 6.10 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 6.11.
(b) The Trustee may resign at any time by giving written notice thereof
to the Company. If an instrument of acceptance by a successor Trustee required
by Section 6.11 shall not have been delivered to the resigning Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(c) The Trustee may be removed at any time by an Act of the Holders of a
majority in principal amount of the Outstanding Securities delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with Section 6.08 after
written request therefor by the Company or by any Holder who has been a
bona fide Holder of a Security for the last six months, or
(2) the Trustee shall cease to be eligible under Section 6.09 and
shall fail to resign after written request therefor by the Company or by
any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
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then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide
Holder of a Security for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee and
such successor Trustee shall comply with the applicable requirements of Section
6.11. If, within one year after such resignation, removal or incapability, or
the occurrence of such vacancy, a successor Trustee shall be appointed by Act of
the Holders of a majority in principal amount of the Outstanding Securities
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in accordance
with the applicable requirements of Section 6.11 become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner required by Section 6.11, any Holder who has been a
bona fide Holder of a Security for at least six months may, on behalf of himself
and all others similarly situated, petition any court of competent jurisdiction
for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 1.06. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.
SECTION 6.11 ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time of
such acceptance such successor Trustee shall be qualified and eligible under
this Article.
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SECTION 6.12 MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or
with it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of the Trustee, shall be the successor of the Trustee hereunder, provided such
corporation shall be otherwise qualified and eligible under this Article,
without the execution or filing of any paper or any further act on the part of
any of the parties hereto. In case any Securities shall have been authenticated,
but not delivered, by the Trustee then in office, any successor by merger,
conversion or consolidation to such authenticating Trustee may adopt such
authentication and deliver the Securities so authenticated with the same effect
as if such successor Trustee had itself authenticated such Securities.
SECTION 6.13 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
If and when the Trustee shall be or become a creditor of the Company (or
any other obligor upon the Securities), the Trustee shall be subject to the
provisions of the Trust Indenture Act regarding the collection of claims against
the Company (or any such other obligor).
SECTION 6.14 APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint an Authenticating Agent or Agents acceptable to
and at the expense of the Company which shall be authorized to act on behalf of
the Trustee to authenticate Securities issued upon original issue and upon
exchange, registration of transfer, partial conversion or partial redemption or
pursuant to Section 3.06, and Securities so authenticated shall be entitled to
the benefits of this Indenture and shall be valid and obligatory for all
purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a Person organized and doing
business under the laws of the United States of America, any State thereof or
the District of Columbia, authorized under such laws to act as Authenticating
Agent, having (or, in the case of a corporation included in a bank holding
company system, whose related bank holding company has) a combined capital and
surplus of not less than $50,000,000 and subject to supervision or examination
by Federal or State authority. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or to the requirements of said
supervising or examining authority, then for the purposes of this Section, the
combined capital and surplus of such Authenticating Agent shall be deemed to be
its combined capital and surplus as set forth in its most recent report of
condition so published. If at any time an Authenticating Agent shall cease to be
eligible in accordance with the provisions of this Section, such Authenticating
Agent shall resign immediately in the manner and with the effect specified in
this Section.
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Any Person into which an Authenticating Agent may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Authenticating Agent shall be a party,
or any Person succeeding to the corporate agency or corporate trust business of
an Authenticating Agent, shall continue to be an Authenticating Agent, provided
such Person shall be otherwise eligible under this Section, without the
execution or filing of any paper or any further act on the part of the Trustee
or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and to the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall mail notice of such
appointment by first-class mail, postage prepaid, to all Holders as their names
and addresses appear in the Security Register. Any successor Authenticating
Agent upon acceptance of its appointment under this Section shall become vested
with all the rights, powers and duties of its predecessor hereunder, with like
effect as if originally named as an Authenticating Agent. No successor
Authenticating Agent shall be appointed unless eligible to act as such under the
provisions of this Section.
Any Authenticating Agent by the acceptance of its appointment shall be
deemed to have represented to the Trustee that it is eligible for appointment as
Authenticating Agent under this Section and to have agreed with the Trustee
that: it will perform and carry out the duties of an Authenticating Agent as
herein set forth, including, among other duties, the duties to authenticate
Securities when presented to it in connection with the original issuance and
with exchanges, registrations of transfer or redemptions or conversions thereof
or pursuant to Section 3.06; it will keep and maintain, and furnish to the
Trustee from time to time as requested by the Trustee, appropriate records of
all transactions carried out by it as Authenticating Agent and will furnish the
Trustee such other information and reports as the Trustee may reasonably
require; and it will notify the Trustee promptly if it shall cease to be
eligible to act as Authenticating Agent in accordance with the provisions of
this Section. Any Authenticating Agent by the acceptance of its appointment
shall be deemed to have agreed with the Trustee to indemnify the Trustee against
any loss, liability or expense incurred by the Trustee and to defend any claim
asserted against the Trustee by reason of any acts or failures to act of such
Authenticating Agent, but such Authenticating Agent shall have no liability for
any action taken by it in accordance with the specific written direction of the
Trustee.
The Trustee shall not be liable for any act or any failure of the
Authenticating Agent to perform any duty either required herein or authorized
herein to be performed by such person in accordance with this Indenture.
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The Company agrees to pay to each Authenticating Agent from time to time
reasonable compensation for its services under this Section.
If an appointment is made pursuant to this Section, the Securities may
have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternative certificate of authentication in the following
form:
This is one of the Securities described in the within-mentioned
Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A.,
As Trustee
By AUTHENTICATING AGENT,
As Authenticating Agent
By ________________________________
Authorized Signatory
ARTICLE VII.
Holders' Lists and Reports by Trustee and Company
SECTION 7.01 COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
The Company will furnish or cause to be furnished to the Trustee:
(a) semi-annually, not more than 15 days after each Regular
Record Date, a list, in such form as the Trustee may reasonably require, of the
names and addresses of the Holders as of such Regular Record Date, and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the time
such list is furnished.
Notwithstanding the foregoing, so long as the Trustee is the Security Registrar,
no such list shall be required to be furnished.
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SECTION 7.02 PRESERVATION OF INFORMATION; COMMUNICATION TO HOLDERS.
(a) The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the Trustee as provided in Section 7.01 and the names
and addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
Section 7.01 upon receipt of a new list so furnished.
(b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and duties of the Trustee, shall be as provided by the
Trust Indenture Act.
(c) Every Holder of Securities, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act or otherwise in accordance with this Indenture.
SECTION 7.03 REPORTS BY TRUSTEE.
(a) Not later than 60 days following each May 15, the Trustee
shall transmit to Holders such reports concerning the Trustee and its actions
under this Indenture as may be required pursuant to the Trust Indenture Act at
the times and in the manner provided pursuant thereto.
(b) A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange upon
which the Securities are listed, with the Commission and with the Company. The
Company will notify the Trustee when the Securities are listed on any stock
exchange.
SECTION 7.04 REPORTS BY COMPANY.
The Company shall file with the Trustee and the Commission, and transmit
to Holders, such information, documents and other reports, and such summaries
thereof, as may be required pursuant to the Trust Indenture Act at the times and
in the manner provided pursuant to such Act; PROVIDED, that any such
information, documents or reports required to be filed with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the
Trustee within 15 days after the same is so required to be filed with the
Commission.
SECTION 7.05 RULE 144A INFORMATION REQUIREMENT.
If at any time prior to the Resale Restriction Termination Date the
Company is no longer subject to Section 13 or 15(d) of the Exchange Act, the
Company will furnish to the Holders or
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beneficial holders of the Securities and prospective purchasers of the
Securities designated by the Holders of the Securities, upon their request,
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act for so long as any of the Securities or shares of underlying
Common Stock that are Transfer Restricted Securities remain outstanding.
ARTICLE VIII.
Consolidation, Merger, Conveyance, Transfer or Lease
SECTION 8.01 COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person in one transaction or a series of related transactions, and the
Company shall not permit any Person to consolidate with or merge into the
Company, unless:
(1) in case the Company shall consolidate with or merge into another
Person or convey, transfer or lease its properties and assets substantially as
an entirety to any Person in one transaction or a series of related
transactions, the Person formed by such consolidation or into which the Company
is merged or the Person which acquires by conveyance or transfer, or which
leases, the properties and assets of the Company substantially as an entirety
shall be a corporation, partnership, limited liability company or trust, shall
be organized and validly existing under the laws of the United States of
America, any State thereof or the District of Columbia and shall expressly
assume, by an indenture supplemental hereto, executed and delivered to the
Trustee, in form satisfactory to the Trustee, the due and punctual payment of
the principal of and premium, if any, and interest on all the Securities and the
performance or observance of every covenant of this Indenture on the part of the
Company to be performed or observed and shall have provided for conversion
rights in accordance with Section 13.11;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing;
(3) such consolidation, merger, conveyance, transfer or lease does not
adversely affect the validity or enforceability of the Securities; and
(4) the Company or the successor Person has delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction, such supplemental
indenture comply with this Article and that all conditions precedent herein
provided for relating to such transaction have been complied with.
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SECTION 8.02 SUCCESSOR SUBSTITUTED.
Upon any consolidation of the Company with, or merger of the Company
into, any other Person or any conveyance, transfer or lease the properties and
assets of the Company substantially as an entirety to any Person in one
transaction or a series of related transactions in accordance with Section 8.01,
the successor Person formed by such consolidation or into which the Company is
merged or to which such conveyance, transfer or lease is made shall succeed to,
and be substituted for, and may exercise every right and power of, the Company
under this Indenture with the same effect as if such successor Person had been
named as the Company herein, and thereafter, except in the case of a transfer by
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Indenture and the Securities.
ARTICLE IX.
Supplemental Indentures
SECTION 9.01 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to cause this Indenture to be qualified under the Trust
Indenture Act; or
(2) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company
herein and in the Securities; or
(3) to add to the covenants of the Company for the benefit of the
Holders or an additional Event of Default, or to surrender any right or
power conferred herein or in the Securities upon the Company; or
(4) to secure the Securities; or
(5) to make provision with respect to the conversion rights of
Holders pursuant to the requirements of Section 13.11; or
(6) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities; or
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(7) to cure any ambiguity or omission, to correct or supplement
any provision herein or in the Securities which may be defective or
inconsistent with any other provision herein or in the Securities, or to
make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provisions
of this Indenture; PROVIDED, that such action pursuant to this Clause
(7) shall not adversely affect the interests of the Holders in any
material respect and the Trustee may rely upon an Opinion of Counsel to
that effect.
SECTION 9.02 SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Securities, by Act of said Holders delivered to the
Company and the Trustee, the Company, when authorized by a Board Resolution, and
the Trustee may enter into an indenture or indentures supplemental hereto for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of this Indenture or of modifying in any manner the rights
of the Holders under this Indenture; PROVIDED, HOWEVER, that no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any premium payable upon the
redemption thereof, or change the place of payment where, or the coin or
currency in which, any Security or any premium or interest thereon is
payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the
case of redemption, on or after the Redemption Date), or adversely
affect the right to convert any Security as provided in Article XIII
(except as permitted by Section 9.01(5)), or modify the provisions of
Article XIV, or the provisions of this Indenture with respect to the
subordination of the Securities, in a manner adverse to the Holders, or
(2) reduce the percentage in principal amount of the Outstanding
Securities, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for
any waiver of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences provided for in this
Indenture, or
(3) modify any of the provisions of this Section, Section 5.13 or
Section 10.06, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby; PROVIDED, HOWEVER, that this Clause shall not be deemed to
require the consent of any Holder with respect to changes in the
references to "the Trustee" and concomitant changes in this Section and
Section 10.06, or the deletion of this proviso, in accordance with the
requirements of Section 9.01(6).
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It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 9.03 EXECUTION OF SUPPLEMENTAL INDENTURES.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 6.01) shall be fully protected in relying upon, an
Officers' Certificate and an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture. The
Trustee may, but shall not be obligated to, enter into any such supplemental
indenture which adversely affects the Trustee's own rights, duties or immunities
under this Indenture or otherwise.
SECTION 9.04 EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
shall be bound thereby.
SECTION 9.05 CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act.
SECTION 9.06 REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and (at the specific direction of the Company) authenticated and
delivered by the Trustee in exchange for Outstanding Securities.
SECTION 9.07 NOTICE OF SUPPLEMENTAL INDENTURE.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 9.02, the Company shall transmit to
the Holders a notice setting forth the substance of such supplemental indenture.
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ARTICLE X.
Covenants
SECTION 10.01 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
The Company will duly and punctually pay the principal of and premium,
if any, and interest on the Securities in accordance with the terms of the
Securities and this Indenture.
SECTION 10.02 MAINTENANCE OF OFFICE OR AGENCY.
The Company will maintain in New York, New York an office or agency
where Securities may be presented or surrendered for payment, where Securities
may be surrendered for registration of transfer, where Securities may be
surrendered for exchange or conversion and where notices and demands to or upon
the Company in respect of the Securities and this Indenture may be served. The
Company will give prompt written notice to the Trustee of the location, and any
change in the location, of any such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, and the Company hereby appoints the Trustee as its agent to receive all
such presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
PROVIDED, HOWEVER, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in New
York, New York for such purposes. The Company will give prompt written notice to
the Trustee of any such designation or rescission and of any change in the
location of any such other office or agency.
SECTION 10.03 MONEY FOR SECURITY PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of and premium, if any, or interest
on any of the Securities, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal and premium, if
any, or interest so becoming due until such sums shall be paid to such Persons
or otherwise disposed of as herein provided and will promptly notify the Trustee
of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents, it will, on
or prior to 11:00 a.m. (New York City time) on each due date of the principal of
and premium, if any, or interest on any Securities, deposit with a Paying Agent
a sum in same day funds sufficient to pay
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the principal and any premium and interest so becoming due, such sum to be held
as provided by the Trust Indenture Act, and (unless such Paying Agent is the
Trustee) the Company will promptly notify the Trustee of its action or failure
so to act.
The Company will cause each Paying Agent other than the Trustee or the
Company to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee, subject to the provisions of this Section,
that such Paying Agent will (i) comply with the provisions of the Trust
Indenture Act and this Indenture applicable to it as a Paying Agent and hold all
sums held by it for the payment of principal of or any premium or interest on
the Securities in trust for the benefit of the Persons entitled thereto until
such sums shall be paid to such Persons or otherwise disposed of as herein
provided; (ii) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any payment in respect of
the Securities; and (iii) at any time during the continuance of any default by
the Company (or any other obligor upon the Securities) in the making of any
payment in respect of the Securities, upon the written request of the Trustee,
forthwith pay to the Trustee all sums held in trust by such Paying Agent for
payment in respect of the Securities, and account for any funds disbursed.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such money.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of and premium, if
any, or interest on any Security and remaining unclaimed for two years after
such principal and premium, if any, or interest has become due and payable shall
be paid to the Company on Company Request, or (if then held by the Company)
shall be discharged from such trust; and the Holder of such Security shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in New York, New York, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then remaining
will be repaid to the Company.
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SECTION 10.04 STATEMENT BY OFFICERS AS TO DEFAULT.
The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year of the Company ending after the date hereof, an Officers'
Certificate stating whether or not to the best knowledge of the signers thereof
the Company is in default in the performance and observance of any of the terms,
provisions and conditions of this Indenture (without regard to any period of
grace or requirement of notice provided hereunder) and, if the Company shall be
in default, specifying all such defaults and the nature and status thereof of
which they may have knowledge.
SECTION 10.05 EXISTENCE.
Subject to Article VIII, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect its existence,
rights (charter and statutory) and franchises and the existence, rights (charter
and statutory) and franchises of each Subsidiary; PROVIDED, HOWEVER, that the
Company shall not be required to preserve any such right or franchise if the
Board of Directors shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company and that the loss
thereof is not disadvantageous in any material respect to the Holders.
SECTION 10.06 WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
covenant or condition set forth in Section 10.05, if before the time for such
compliance the Holders of at least a majority in principal amount of the
Outstanding Securities shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such covenant or
condition, but no such waiver shall extend to or affect such covenant or
condition except to the extent so expressly waived, and, until such waiver shall
become effective, the obligations of the Company and the duties of the Trustee
in respect of any such covenant or condition shall remain in full force and
effect.
ARTICLE XI.
Redemption of Securities
SECTION 11.01 RIGHT OF REDEMPTION.
The Securities may be redeemed at the election of the Company, in whole
or from time to time in part, at any time on or after April 20, 2000, at the
Redemption Prices specified in the form of Security hereinbefore set forth,
together with accrued interest, to the Redemption Date.
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SECTION 11.02 APPLICABILITY OF ARTICLE.
Redemption of Securities at the election of the Company as permitted by
any provision of this Indenture shall be made in accordance with such provision
and this Article.
SECTION 11.03 ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Securities pursuant to Section
11.01 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company of less than all the Securities, the Company shall, at
least 60 days prior to the Redemption Date fixed by the Company (unless a
shorter period shall be satisfactory to the Trustee), notify the Trustee of such
Redemption Date and of the principal amount of Securities to be redeemed. In
case of any redemption at the election of the Company of all of the Securities,
the Company shall, at least 45 days prior to the Redemption Date fixed by the
Company (unless a shorter period shall be satisfactory to the Trustee), notify
the Trustee of such Redemption Date.
SECTION 11.04 SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all the Securities are to be redeemed, the particular
Securities to be redeemed shall be selected not more than 60 days prior to the
Redemption Date by the Trustee, from the Outstanding Securities not previously
called for redemption, by lot or pro rata or by such other method as the Trustee
shall deem fair and appropriate and which may provide for the selection for
redemption of portions (equal to $1,000 or any integral multiple thereof) of the
principal amount of Securities of a denomination larger than $1,000.
If any Security selected for partial redemption is converted in part
before termination of the conversion right with respect to the portion of the
Security so selected, the converted portion of such Security shall be deemed (so
far as may be) to be the portion selected for redemption. Securities which have
been converted during a selection of Securities to be redeemed shall be treated
by the Trustee as Outstanding for the purpose of such selection. In any case
where more than one Security is registered in the same name, the Trustee in its
discretion may treat the aggregate principal amount so registered as if it were
represented by one Security.
The Trustee shall promptly notify the Company and each Security
Registrar in writing of the Securities selected for redemption and, in the case
of any Securities selected for partial redemption, the principal amount thereof
to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal amount of such Securities which has been or is to be
redeemed.
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SECTION 11.05 NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail, postage
prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption
Date, to the Trustee and to each Holder of Securities to be redeemed, at his
address appearing in the Security Register.
All notices of redemption shall state:
(a) the Redemption Date,
(b) the Redemption Price,
(c) if less than all the Outstanding Securities are to be
redeemed, the identification (and, in the case of partial redemption of
any Securities, the principal amounts) of the particular Securities to
be redeemed,
(d) that on the Redemption Date the Redemption Price will become
due and payable upon each such Security to be redeemed and that (unless
the Company shall default in payment of the Redemption Price) interest
thereon will cease to accrue on and after said date,
(e) the conversion price, the date on which the right to convert
the Securities to be redeemed will terminate and the place or places
where such Securities may be surrendered for conversion, and
(f) the place or places where such Securities are to be
surrendered for payment of the Redemption Price.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request received by
the Trustee at least 25 days prior to the Redemption Date, by the Trustee in the
name and at the expense of the Company.
SECTION 11.06 DEPOSIT OF REDEMPTION PRICE.
At or prior to 9:00 a.m. (New York City time) on any Redemption Date,
the Company shall deposit with the Trustee or with a Paying Agent (or, if the
Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 10.03) an amount of money in same day funds sufficient to
pay the Redemption Price of, and (except if the Redemption Date shall be an
Interest Payment Date) accrued interest on, all the Securities or portions
thereof which are to be redeemed on that date other than any Securities called
for redemption on that date which have been converted prior to the date of such
deposit.
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If any Security called for redemption is converted, any money deposited
with the Trustee or with any Paying Agent or so segregated and held in trust for
the redemption of such Security shall (subject to any right of the Holder of
such Security or any Predecessor Security to receive interest as provided in the
last paragraph of Section 3.07) be paid to the Company upon Company Request or,
if then held by the Company, shall be discharged from such trust.
SECTION 11.07 SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security shall
be paid by the Company at the Redemption Price, together with accrued interest
to the Redemption Date; PROVIDED, HOWEVER, that installments of interest whose
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such at
the close of business on the relevant Record Dates according to their terms and
the provisions of Section 3.07.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and premium, if any, shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.
SECTION 11.08 SECURITIES REDEEMED IN PART.
Any Security which is to be redeemed only in part shall be surrendered
at an office or agency of the Company maintained for that purpose pursuant to
Section 10.02 (with, if the Company or the Trustee so requires, due endorsement
by, or a written instrument of transfer in form satisfactory to the Company and
the Trustee duly executed by, the Holder thereof or his attorney duly authorized
in writing), and the Company shall execute, and the Trustee shall authenticate
and deliver to the Holder of such Security without service charge, a new
Security or Securities, of any authorized denomination as requested by such
Holder, in aggregate principal amount equal to and in exchange for the
unredeemed portion of the principal of the Security so surrendered.
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ARTICLE XII.
Subordination of Securities
SECTION 12.01 SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company covenants and agrees, and each Holder of a Security, by his
acceptance thereof, likewise covenants and agrees, that, at all times and in all
respects, the indebtedness represented by the Securities and the payment of the
principal of and premium, if any, and interest on each and all of the Securities
are hereby expressly made subordinate and subject in right of payment to the
prior payment in full of all Senior Indebtedness. Obligations in respect of
Senior Indebtedness will not be deemed to have been paid in full unless the
holders thereof shall have received payment in full in cash or cash equivalents
with respect thereto.
Each Holder of the Securities by its acceptance thereof acknowledges and
agrees that the subordination provisions included herein are, and are intended
to be, an inducement and a consideration to each holder of any Senior
Indebtedness, whether such Senior Indebtedness was created or acquired before or
after the issuance of Securities, to acquire and/or continue to hold such Senior
Indebtedness, and such holder of Senior Indebtedness shall be deemed
conclusively to have relied on such subordination provisions in acquiring and/or
continuing to hold such Senior Indebtedness.
SECTION 12.02 PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC.
In the event of (a) any insolvency or bankruptcy case or proceeding, or
any receivership, liquidation, reorganization or other similar case or
proceeding, relative to the Company or to its creditors, as such, or to a
substantial part of its assets, or (b) any proceeding for the liquidation,
dissolution or other winding up of the Company, whether voluntary or involuntary
and whether or not involving insolvency or bankruptcy, or (c) any general
assignment for the benefits of creditors or any other marshaling of assets and
liabilities of the Company, then and in any such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations due
or to become due on or in respect of all Senior Indebtedness before the Holders
of the Securities are entitled to receive any payment or distribution of any
kind or character, whether in cash, property or securities, on account of
principal of or premium, if any, or interest on the Securities, and to that end
the holders of Senior Indebtedness shall be entitled to receive, for application
to the payment thereof, any payment or distribution of any kind or character,
including any such payment or distribution which may be payable or deliverable
by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities, which may be payable or
deliverable in respect of the Securities in any such case, proceeding,
dissolution, liquidation or other winding up or event. In furtherance of the
foregoing, but not by way of limitation thereof, in the event of any case or
proceeding described in clause (a) above with the result that the Company is
excused from the obligation to pay all or
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any part of the interest otherwise payable in respect of any Senior during the
period subsequent to the commencement of any such case or proceeding, all or
such part, as the case may be, of such interest shall be payable out of, and to
that extent shall diminish and be at the expense of, reorganization dividends or
other distributions in respect of the Securities.
In the event that, notwithstanding the foregoing provisions of this
Section, the Trustee or the Holder of any Security shall have received any
payment or distribution of any kind or character in respect of the Securities,
whether in cash, property or securities, including any such payment or
distribution which may be payable or deliverable by reason of the payment of any
other indebtedness of the Company being subordinated to the payment of the
Securities, before all Senior Indebtedness is paid in full, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is prohibited by this Section 12.02) or by such
Holder (in trust) for the holders of Senior Indebtedness, and shall be paid
forthwith over and delivered to, the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other Person making payment
or distribution of assets of the Company for application to the payment of all
Senior Indebtedness remaining unpaid, to the extent necessary to pay all Senior
Indebtedness in full, after giving effect to any concurrent payment or
distribution to or for the holders of Senior Indebtedness.
To the extent any payment of or distribution in respect of Senior
Indebtedness (whether by or on behalf of the Company, as proceeds of security or
enforcement of any right of set off or otherwise) is declared to be fraudulent
or preferential, set aside or required to be paid to any receiver, trustee in
bankruptcy, liquidating trustee, agent or other similar Person under any
bankruptcy, insolvency, receivership, fraudulent conveyance or similar law, then
if such payment or distribution is recovered by, or paid over to, such receiver,
trustee in bankruptcy, liquidating trustee, agent or other similar Person, the
Senior Indebtedness or part thereof originally intended to be satisfied shall be
deemed to be reinstated and outstanding as if such payment has not occurred.
For purposes of this Article only, (i) a "distribution" may consist of
cash, securities or other property, by set-off or otherwise and (ii) the words
"cash, property or securities" shall not be deemed to include securities of the
Company as reorganized or readjusted or securities of the Company or any other
corporation provided for by a plan of reorganization or readjustment, which
securities are subordinated in right of payment to all Senior Indebtedness which
may at the time be outstanding to substantially the same extent as, or to a
greater extent than, the Securities are so subordinated as provided in this
Article. The consolidation of the Company with, or the merger of the Company
into, another Person or the liquidation or dissolution of the Company following
the conveyance or transfer of its properties and assets substantially as an
entirety to another Person upon the terms and conditions set forth in Article
VIII shall not be deemed a dissolution, winding up, liquidation, reorganization,
general assignment for the benefit of creditors or marshaling of assets and
liabilities of the Company for the purposes of this Section if the Person formed
by such consolidation or into which the Company is merged or which acquires by
conveyance or transfer such properties and assets substantially as an entirety,
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as the case may be, shall, as a part of such consolidation, merger, conveyance
or transfer, comply with the conditions set forth in Article VIII.
SECTION 12.03 PRIOR PAYMENT TO SENIOR INDEBTEDNESS UPON ACCELERATION OF
SECURITIES.
If any Securities are declared due and payable before their Stated
Maturity, the Company shall promptly notify all holders of Senior Indebtedness
of such event. In the event that any Securities are declared due and payable
before their Stated Maturity, then and in such event the holders of Senior
Indebtedness shall be entitled to receive payment in full of all Obligations in
respect of Senior Indebtedness before the Holders of the Securities are entitled
to receive any payment or other distribution (including any payment which may be
payable by reason of the payment of any other indebtedness of the Company being
subordinated to the payment of the Securities) on account of the principal of or
premium, if any, or interest on the Securities or on account of the purchase or
other acquisition of Securities, and upon any such event the Holders of the
Securities shall, to the extent permitted by law, be prohibited for a period of
180 days thereafter from making any bankruptcy filing with respect to the
Company or from filing suit to enforce their rights under this Indenture
(PROVIDED, HOWEVER, that if the acceleration of Securities is rescinded or
annulled prior to the expiration of such 180-day period, such prohibition shall
terminate on such earlier date as the acceleration of such Securities is
rescinded or annulled), subject to the rights, if any, under this Article of the
holders, from time to time, of Senior Indebtedness to receive the cash, property
or securities receivable upon the exercise of such rights.
In the event that, notwithstanding the foregoing, the Company shall make
any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case, for application to the
payment of all Obligations with respect to Senior Indebtedness remaining unpaid
to the extent necessary to pay such Obligations in full in accordance with their
terms, after giving effect to any concurrent payment or distribution to or for
the holders of Senior Indebtedness.
The provisions of this Section shall not apply to any payment with
respect to which Section 12.02 would be applicable.
SECTION 12.04 NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT.
The Company may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) to the Trustee or any Holder on account of
the principal of or premium, if any, or interest on the Securities and may not
acquire from the Trustee or any Holder any
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Securities (other than payments and other distributions made from any defeasance
trust created pursuant to Section 4.01 if the applicable deposit does not
violate Article IV or XII of this Indenture) until all principal and other
Obligations with respect to the Senior Indebtedness of the Company have been
paid in full if:
(i) a default in the payment of any principal of, premium, if
any, or interest on Designated Senior Indebtedness occurs; or
(ii) a default, other than a payment default, on Designated
Senior Indebtedness occurs and is continuing that then permits holders
of the Designated Senior Indebtedness as to which such default relates
to accelerate its maturity and the Trustee receives a notice of the
default (a "Payment Blockage Notice") from a Person who is a
Representative of the holders of such Designated Senior Indebtedness
provided, that if such Designated Senior Indebtedness is of the type
referred to in clause (b) of the definition thereof, the Payment
Blockage Notice shall be given by a Representative of the holders of at
least 20% of such Designated Senior Indebtedness. If the Trustee
receives any such Payment Blockage Notice, no subsequent Payment
Blockage Notice shall be effective for purposes of this Section unless
and until 360 days shall have elapsed since the date of commencement of
the payment blockage period resulting from the immediately prior Payment
Blockage Notice. No nonpayment default in respect of any Designated
Senior Indebtedness that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be
made, the basis for subsequent Payment Blockage Notices.
The Company shall resume payments on and distributions in respect of the
Securities and may acquire Securities upon:
(1) in the case of a default referred to in Section 12.04(i),
the date on which the default is cured or waived, or
(2) in the case of a default referred to in Section 12.04(ii),
the earliest of (x) the date on which such nonpayment default is cured
or waived, (y) the date the applicable Payment Blockage Notice is
retracted by written notice to the Trustee from the Person who is a
Representative of the holders of the relevant Designated Senior
Indebtedness and (z) 179 days after the date on which the applicable
Payment Blockage Notice is received unless (A) any of the events
described in Section 12.04(i) hereof has occurred and is continuing or
(B) a Default or Event of Default under clause (7) or (8) of Section
5.01 has occurred,
if this Article otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
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In the event that, notwithstanding the foregoing, the Company shall make
any payment or distribution to the Trustee or the Holder of any Security
prohibited by the foregoing provisions of this Section, such payment or
distribution shall be held by the Trustee (if the Trustee has knowledge that
such payment or distribution is so prohibited) or by such Holder (in trust) for
the holders of Senior Indebtedness, and shall be paid forthwith over and
delivered (a) to the holders of Senior Indebtedness or their respective
Representatives as their respective interests may appear or (b) as a court of
competent jurisdiction shall direct, in each case for application to the payment
of all Obligations with respect to Senior Indebtedness remaining unpaid to the
extent necessary to pay such Obligations in full in accordance with their terms,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness.
The provisions of this Section shall not apply to any payment with
respect to which Section 12.02 would be applicable.
SECTION 12.05 PAYMENT PERMITTED IF NO DEFAULT.
Nothing contained in this Article or elsewhere in this Indenture or in
any of the Securities shall prevent (a) the Company, at any time except under
the circumstances referred to in Section 12.02 or under the conditions described
in Section 12.03 or 12.04, from making payments at any time of principal of and
premium, if any, or interest on the Securities, or (b) the application by the
Trustee of any money deposited with it hereunder to the payment of or on account
of the principal of and premium, if any, or interest on the Securities if, at
the time of such application by the Trustee, it did not have knowledge within
the meaning of Section 12.10 that such payment would have been prohibited by the
provisions of this Article.
SECTION 12.06 SUBROGATION TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS.
Subject to the payment in full of all Obligations in respect of Senior
Indebtedness, the Holders of the Securities shall be subrogated to the extent of
the payments or distributions made to the holders of Senior Indebtedness
pursuant to the provisions of this Article (equally and ratably with the holders
of all indebtedness of the Company which by its express terms is subordinated to
other indebtedness of the Company to substantially the same extent as the
Securities are subordinated and is entitled to like rights of subrogation) to
the rights of the holders of Senior Indebtedness to receive payments and
distributions applicable to the Senior Indebtedness until the principal of and
premium, if any, and interest on the Securities shall be paid in full. For
purposes of such subrogation, no payments or distributions to the holders of the
Senior Indebtedness to which the Holders of the Securities or the Trustee would
be entitled except for the provisions of this Article, and no payments over
pursuant to the provisions of this Article to the holders of Senior Indebtedness
by Holders of the Securities or the Trustee, shall, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Securities, be deemed to be a payment or distribution by the Company to or on
account of the Senior Indebtedness.
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SECTION 12.07 PROVISIONS SOLELY TO DEFINE RELATIVE RIGHTS.
The provisions of this Article are and are intended solely for the
purpose of defining the relative rights of the Holders of the Securities on the
one hand and the holders of Senior Indebtedness on the other hand. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall (a) impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the obligation
of the Company, which is absolute and unconditional, to pay to the Holders of
the Securities the principal of and premium, if any, and interest on the
Securities as and when the same shall become due and payable in accordance with
their terms; or (b) affect the relative rights against the Company or the
Holders of the Securities and creditors of the Company other than the holders of
Senior Indebtedness; or (c) prevent the Trustee or the Holder of any Security
from exercising all remedies otherwise permitted by applicable law upon default
under this Indenture, subject to the rights, if any, under this Article of the
holders of Senior Indebtedness to receive distributions otherwise payable or
deliverable to the Trustee or such Holder.
SECTION 12.08 TRUSTEE TO EFFECTUATE SUBORDINATION.
Each holder of a Security by his acceptance thereof authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided in this Article and
appoints the Trustee his attorney-in-fact for any and all such purposes.
SECTION 12.09 NO WAIVER OF SUBORDINATION PROVISIONS.
No right of any present or future holder of any Senior Indebtedness to
enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act by any such holder, or by any noncompliance by
the Company with the terms, provisions and covenants of this Indenture,
regardless of any knowledge thereof any such holder may have or be otherwise
charged with.
Without in any way limiting the generality of the foregoing paragraph,
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Trustee or the Holders of
the Securities and without impairing or releasing the subordination provided in
this Article or the obligations hereunder of the Trustee or the Holders of the
Securities to the holders of Senior Indebtedness, do any one or more of the
following: (i) change the manner, place or terms of payment or extend the time
of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or
supplement in any manner Senior Indebtedness or any instrument evidencing the
same or any agreement under which Senior Indebtedness is outstanding; (ii) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing Senior Indebtedness; (iii) release any Person liable in any
manner for the collection of Senior
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Indebtedness; and (iv) exercise or refrain from exercising any rights against
the Company and any other Person.
SECTION 12.10 NOTICE TO TRUSTEE.
The Company shall give prompt written notice to the Trustee of any fact
known to the Company which would prohibit the making of any payment to or by the
Trustee in respect of the Securities. Notwithstanding the provisions of this
Article or any other provision of this Indenture, the Trustee shall not be
charged with knowledge of the existence of any facts which would prohibit the
making of any payment to or by the Trustee in respect of the Securities, unless
and until the Trustee shall have received written notice thereof from the
Company or a holder of Senior Indebtedness or from any Representative therefor;
and, prior to the receipt of any such written notice, the Trustee, subject to
the provisions of Section 6.01, shall be entitled in all respects to assume that
no such facts exist; PROVIDED, HOWEVER, that if the Trustee shall not have
received the notice provided for in this Section at least two Business Days
prior to the date upon which by the terms hereof any money may become payable
for any purpose (including, without limitation, the payment of the principal of
and premium, if any, or interest on any Security), then, anything herein
contained to the contrary notwithstanding, the Trustee shall have full power and
authority to receive such money and to apply the same to the purpose for which
such money was received and shall not be affected by any notice to the contrary
which may be received by it within two Business Days prior to such date.
Subject to the provisions of Section 6.01, the Trustee shall be entitled
to rely on the delivery to it of a written notice by a Person representing
himself to be a holder of Senior Indebtedness (or a Representative therefor) to
establish that such notice has been given by a holder of Senior Indebtedness (or
a Representative therefor). In the event that the Trustee determines in good
faith that further evidence is required with respect to the right of any Person
as a holder of Senior Indebtedness to participate in any payment or distribution
pursuant to this Article, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article, and if such evidence
is not furnished, the Trustee may defer any payment to such Person pending
judicial determination as to the right of such Person to receive such payment.
SECTION 12.11 RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT.
Upon any payment or distribution in respect of the Securities or Senior
Indebtedness referred to in this Article, the Trustee, subject to the provisions
of Section 6.01, and the Holders of the Securities shall be entitled to rely
upon any order or decree entered by any court of competent jurisdiction in which
such insolvency, bankruptcy, receivership, liquidation, reorganization,
dissolution, winding up or similar case or proceeding is pending, or a
certificate of the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee for the benefit of
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creditors, agent or other Person making such payment or distribution, delivered
to the Trustee or to the Holders of Securities, for the purpose of ascertaining
the Persons entitled to participate in such payment or distribution, the holders
of the Senior Indebtedness and other indebtedness of the Company, the amount
thereof or payable thereon, the amount or amounts paid or distributed thereon
and all other facts pertinent thereto or to this Article.
SECTION 12.12 TRUSTEE NOT FIDUCIARY FOR HOLDERS OF SENIOR INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the holders
of Senior Indebtedness and shall not be liable to any such holders if it shall,
absent gross negligence or wilful misconduct, mistakenly pay over or distribute
to Holders of Securities or to the Company or to any other Person cash, property
or securities to which holders of Senior Indebtedness shall be entitled by
virtue of this Article or otherwise. With respect to the holders of Senior
Indebtedness, the Trustee undertakes to perform or to observe only such of its
covenants and obligations as are specifically set forth in this Article, and no
implied covenants or obligations with respect to the holders of Senior
Indebtedness shall be read into this Article against the Trustee.
SECTION 12.13 RIGHTS OF TRUSTEE AS HOLDER OF SENIOR INDEBTEDNESS;
PRESERVATION OF TRUSTEE'S RIGHTS.
The Trustee in its individual capacity shall be entitled to all the
rights set forth in this Article with respect to any Senior Indebtedness which
may at any time be held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder.
Nothing in this Article shall apply to claims of, or payments to, the
Trustee under or pursuant to Section 6.07.
SECTION 12.14 ARTICLE APPLICABLE TO PAYING AGENTS.
In case at any time any Paying Agent other than the Trustee shall have
been appointed by the Company and be then acting hereunder, the term "Trustee"
as used in this Article shall in such case (unless the context otherwise
requires) be construed as extending to and including such Paying Agent within
its meaning as fully for all intents and purposes as if such Paying Agent were
named in this Article in addition to or in place of the Trustee; PROVIDED,
HOWEVER, that Section 12.13 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
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SECTION 12.15 CERTAIN CONVERSIONS DEEMED PAYMENT.
For the purposes of this Article only, (1) the issuance and delivery of
junior securities upon conversion of Securities in accordance with Article XIII
shall not be deemed to constitute a payment or distribution on account of the
principal of or premium or interest on Securities or on account of the purchase
or other acquisition of Securities, and (2) the payment, issuance or delivery of
cash, property or securities (other than junior securities) upon conversion of a
Security shall be deemed to constitute payment on account of the principal of
such Security. For the purposes of this Section, the term "junior securities"
means (a) shares of any class of capital stock of the Company and (b) securities
of the Company which are subordinated in right of payment to all Senior
Indebtedness which may be outstanding at the time of issuance or delivery of
such securities to substantially the same extent as, or to a greater extent
than, the Securities are so subordinated as provided in this Article. Nothing
contained in this Article or elsewhere in this Indenture or in the Securities is
intended to or shall impair, as among the Company, its creditors other than
holders of Senior Indebtedness and the Holders of the Securities, the right,
which is absolute and unconditional, of the Holder of any Security to convert
such Security in accordance with Article XIII.
SECTION 12.16 NO SUSPENSION OF REMEDIES.
Except as provided in Section 12.03, nothing contained in this Article
shall limit the right of the Trustee or the Holders of the Securities to take
any action to accelerate the maturity of the Securities pursuant to the
provisions described under Article V and as set forth in this Indenture or to
pursue any rights or remedies hereunder or under applicable law, subject to the
rights, if any, under this Article of the holders, from time to time, of Senior
Indebtedness to receive the cash, property or securities receivable upon the
exercise of such rights or remedies.
ARTICLE XIII.
Conversion of Securities
SECTION 13.01 CONVERSION PRIVILEGE AND CONVERSION PRICE.
Subject to and upon compliance with the provisions of this Article, at
the option of the Holder thereof, any Security or any portion of the principal
amount thereof which equals $1,000 or any integral multiple thereof may be
converted at any time following the date of original issuance of Securities
under this Indenture at the principal amount thereof, or of such portion
thereof, into fully paid and nonassessable shares (calculated as to each
conversion to the nearest 1/100 of a share) of Common Stock, at the conversion
price, determined as hereinafter provided, in effect at the time of conversion.
Such conversion right shall expire at the close of business on April 15, 2004.
In case a Security or portion thereof is called for redemption, such conversion
right in respect of the Security or portion so called shall expire at the close
of business on the
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second business day preceding the applicable Redemption Date, unless the Company
defaults in making the payment due upon redemption.
The price at which shares of Common Stock shall be delivered upon
conversion (herein called the "conversion price") shall be initially $25.50 per
share of Common Stock. The conversion price shall be adjusted in certain
instances as provided in paragraphs (a), (b), (c), (d), (e), (f) and (i) of
Section 13.04.
SECTION 13.02 EXERCISE OF CONVERSION PRIVILEGE.
In order to exercise the conversion privilege, the Holder of any
Security shall surrender such Security, duly endorsed or assigned to the Company
or in blank, at any office or agency of the Company maintained pursuant to
Section 10.02, accompanied by written notice to the Company in the form provided
in the Security (or such other notice as is acceptable to the Company) at such
office or agency that the Holder elects to convert such Security or, if less
than the entire principal amount thereof is to be converted, the portion thereof
to be converted. Securities surrendered for conversion during the period from
the opening of business on any Regular Record Date next preceding any Interest
Payment Date to the close of business on such Interest Payment Date (except in
the case of Securities or portions thereof which have been called for redemption
on a Redemption Date, or which are repurchaseable on a Repurchase Date,
occurring, in either case, within such period) must be accompanied by payment in
New York Clearing House funds or other funds acceptable to the Company of an
amount equal to the interest payable on such Interest Payment Date on the
principal amount of Securities being surrendered for conversion. Except as
provided in the immediately preceding sentence and subject to the fourth
paragraph of Section 3.07, no payment or adjustment shall be made upon any
conversion on account of any interest accrued on the Securities surrendered for
conversion or on account of any dividends on the Common Stock issued upon
conversion.
Securities shall be deemed to have been converted immediately prior to
the close of business on the day of surrender of such Securities for conversion
in accordance with the foregoing provisions, and at such time the rights of the
Holders of such Securities as Holders shall cease, and the Person or Persons
entitled to receive the Common Stock issuable upon conversion shall be treated
for all purposes of the record holder or holders of such Common Stock as and
after such time. As promptly as practicable on or after the conversion date, the
Company shall issue and shall deliver at such office or agency a certificate or
certificates for the number of full shares of Common Stock issuable upon
conversion, together with payment in lieu of any fraction of a share, as
provided in Section 13.03.
In the case of any Security which is converted in part only, upon such
conversion the Company shall execute and the Trustee shall authenticate and
deliver to the Holder thereof, at the expense of the Company, a new Security or
Securities of authorized denominations in aggregate principal amount equal to
the unconverted portion of the principal amount of such Security.
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SECTION 13.03 FRACTIONS OF SHARES.
No fractional share of Common Stock shall be issued upon conversion of
Securities. If more than one Security shall be surrendered for conversion at one
time by the same Holder, the number of full shares which shall be issuable upon
conversion thereof shall be computed on the basis of the aggregate principal
amount of the Securities (or specified portions thereof) so surrendered. Instead
of any fractional share of Common Stock which would otherwise be issuable upon
conversion of any Security or Securities (or specified portions thereof), the
Company shall pay a cash adjustment in respect of such fraction in an amount
equal to the same fraction of the Closing Price (as hereinafter defined) at the
close of business on the day of conversion (or, if such day is not a Trading Day
(as hereafter defined), on the Trading Day immediately preceding such day).
SECTION 13.04 ADJUSTMENT OF CONVERSION PRICE.
(a) In case the Company shall pay or make a dividend or other
distribution on the Common Stock exclusively in Common Stock or shall pay or
make a dividend or other distribution on any other class of capital stock of the
Company which dividend or distribution includes Common Stock, the conversion
price in effect at the opening of business on the day following the date fixed
for the determination of shareholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such conversion price by a fraction
of which the numerator shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination and the
denominator shall be the sum of such number of shares and the total number of
shares constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day following
the date fixed for such determination. For the purpose of this paragraph (a),
the number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company. The Company shall not pay any
dividend or make any distribution on shares of Common Stock held in the treasury
of the Company.
(b) Subject to paragraph (g) of this Section, in case the Company shall
pay or make a dividend or other distribution on the Common Stock consisting
exclusively of, or shall otherwise issue to all holders of the Common Stock,
rights or warrants entitling the holders thereof to subscribe for or purchase
shares of Common Stock at a price per share less than the Current Market Price
(determined as provided in paragraph (h) of this Section) on the date fixed for
the determination of shareholders entitled to receive such rights or warrants,
the conversion price in effect at the opening of business on the day following
the date fixed for such determination shall be reduced by multiplying such
conversion price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate of the offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such Current Market Price
and the denominator shall be the number of shares of Common Stock outstanding at
the close of business on the date fixed for such
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determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately after
the opening of business on the day following the date fixed for such
determination. For the purposes of this paragraph (b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company shall not issue any rights or warrants in
respect of shares of Common Stock held in the treasury of the Company.
(c) In case outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock, the conversion price in effect at
the opening of business on the day following the day upon which such subdivision
becomes effective shall be proportionately reduced, and, conversely, in case
outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the conversion price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of business on
the day following the day upon which subdivision or combination becomes
effective.
(d) Subject to the last sentence of this paragraph (d) and to paragraph
(g) of this Section, in case the Company shall, by dividend or otherwise,
distribute to all holders of the Common Stock evidences of its indebtedness,
shares of any class of its capital stock, cash or other assets (including
securities, but excluding any rights or warrants referred to in paragraph (b) of
this Section, excluding any dividend or distribution paid exclusively in cash
and excluding any dividend or distribution referred to in paragraph (a) of this
Section), the conversion price shall be reduced by multiplying the conversion
price in effect immediately prior to the close of business on the date fixed for
the determination of shareholders entitled to such distribution by a fraction of
which the numerator shall be the Current Market Price (determined as provided in
paragraph (h) of this Section) on such date less the fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) on such date of the portion of the
evidences of indebtedness, shares of capital stock, cash and other assets to be
distributed applicable to one share of Common Stock and the denominator shall be
such Current Market Price, such reduction to become effective immediately prior
to the opening of business on the day following such date. If the Board of
Directors determines the fair market value of any distribution for purposes of
this paragraph (d) by reference to the actual or when-issued trading market for
any securities comprising part or all of such distribution, it must in doing so
consider the prices in such market over the same period used in computing the
Current Market Price pursuant to paragraph (h) of this Section, to the extent
possible. For purposes of this paragraph (d), any dividend or distribution that
includes shares of Common Stock, rights or warrants to subscribe for or purchase
shares of Common Stock or securities convertible into or exchangeable for shares
of Common Stock shall be deemed to be (x) a dividend or distribution of the
evidences of indebtedness, cash, assets or shares of capital stock other than
such shares of Common Stock, such rights or warrants or such convertible or
exchangeable securities (making any conversion price reduction required by this
paragraph (d)) immediately followed by (y) in the case of such shares of Common
Stock or such
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rights or warrants, a dividend or distribution thereof (making any further
conversion price reduction required by paragraph (a) and (b) of this Section,
except any shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the date fixed for
such determination" within the meaning of paragraph (a) of this Section), or (z)
in the case of such convertible or exchangeable securities, a dividend or
distribution of the number of shares of Common Stock as would then be issuable
upon the conversion or exchange thereof, whether or not the conversion or
exchange of such securities is subject to any conditions (making any further
conversion price reduction required by paragraph (a) of this Section, except the
shares deemed to constitute such dividend or distribution shall not be deemed
"outstanding at the close of business on the date fixed for such determination"
within the meaning of paragraph (a) of this Section).
(e) In case the Company shall, by dividend or otherwise, at any time
distribute to all holders of the Common Stock cash (excluding any cash that is
distributed as part of a distribution referred to in paragraph (d) of this
Section or in connection with a transaction to which Section 13.11 applies) in
an aggregate amount that, together with (A) the aggregate amount of any other
distributions to all holders of the Common Stock made exclusively in cash within
the 12 months preceding the date fixed for the determination of shareholders
entitled to such distribution and in respect of which no conversion price
adjustment pursuant to this paragraph (e) has been made previously and (B) the
aggregate of any cash plus the fair market value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a Board
Resolution) as of such date of determination of any other consideration payable
in respect of any tender offer by the Company or a Subsidiary for all or any
portion of the Common Stock consummated within the 12 months preceding such date
of determination and in respect of which no conversion price adjustment pursuant
to paragraph (f) of this Section has been made previously, exceeds the greater
of (I) 12.5% of the product of the Current Market Price (determined as provided
in paragraph (h) of this Section) on such date of determination times the number
of shares of Common Stock outstanding on such date or (II) the Company's
consolidated retained earnings on the date fixed for determining the
stockholders entitled to such distribution (determined without giving effect to
such distribution), the conversion price shall be reduced by multiplying the
conversion price in effect immediately prior to the close of business on such
date of determination by a fraction of which the numerator shall be the Current
Market Price (determined as provided in paragraph (h) of this Section) on such
date less the amount of such cash previously distributed or to be distributed at
such time applicable to one share of Common Stock and the denominator shall be
such Current Market Price, such reduction to become effective immediately prior
to the opening of business on the day after such date.
(f) In case a tender offer made by the Company or any Subsidiary for all
or any portion of the Common Stock shall be consummated and such tender offer
shall involve an aggregate consideration having a fair market value (as
determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) as of the last time (the "Expiration Time")
that tenders may be made pursuant to such tender offer (as it shall have been
amended) that, together with (A) the aggregate of the cash plus the fair market
value (as
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determined by the Board of Directors, whose determination shall be conclusive
and described in a Board Resolution) as of the Expiration Time of the other
consideration paid in respect of any other tender offer by the Company or a
Subsidiary for all or any portion of the Common Stock consummated within the 12
months preceding the Expiration Time and in respect of which no conversion price
adjustment pursuant to this paragraph (f) has been made previously and (B) the
aggregate amount of any distributions to all holders of the Common Stock made
exclusively in cash within the 12 months preceding the Expiration Time and in
respect of which no conversion price adjustment pursuant to paragraph (e) of
this Section has been made previously, exceeds the greater of (I) 12.5% of the
product of the Current Market Price (determined as provided in paragraph (h) of
this Section) immediately prior to the Expiration Time times the number of
shares of Common Stock outstanding (including any tendered shares) at the
Expiration Time or (II) the Company's consolidated retained earnings as of the
Expiration Time (determined without giving effect to the purchase of tendered
shares), the conversion price shall be reduced by multiplying the conversion
price in effect immediately prior to the Expiration Time by a fraction of which
the numerator shall be (x) the product of the Current Market Price (determined
as provided in paragraph (h) of this Section) immediately prior to the
Expiration Time times the number of shares of Common Stock outstanding
(including any tendered shares at the Expiration Time) minus (y) the fair market
value (determined as aforesaid) of the aggregate consideration payable to
shareholders upon consummation of such tender offer and the denominator shall be
the product of (A) such Current Market Price times (B) such number of
outstanding shares at the Expiration Time minus the number of shares accepted
for payment in such tender offer (the "Purchased Shares"), such reduction to
become effective immediately prior to the opening of business on the day
following the Expiration Time; PROVIDED, that if the number of Purchased Shares
or the aggregate consideration payable therefor have not been finally determined
by such opening of business, the adjustment required by this paragraph (f)
shall, pending such final determination, be made based upon the preliminarily
announced results of such tender offer, and, after such final determination
shall have been made, the adjustment required by this paragraph (f) shall be
made based upon the number of Purchased Shares and the aggregate consideration
payable therefor as so finally determined.
(g) The reclassification of Common Stock into securities which include
securities other than Common Stock (other than any reclassification upon a
consolidation or merger to which Section 13.11 applies) shall be deemed to
involve (i) a distribution of such securities other than Common Stock to all
holders of Common Stock (and the effective date of such reclassification shall
be deemed to be "the date fixed for the determination of shareholders entitled
to such distribution" within the meaning of paragraph (d) of this Section), and
(ii) a subdivision or combination, as the case may be, of the number of shares
of Common Stock outstanding immediately prior to such reclassification into the
number of shares of Common Stock outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective", as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of paragraph
(c) of this Section).
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Rights or warrants issued by the Company to all holders of the Common
Stock entitling the holders thereof to subscribe for or purchase shares of
Common Stock (either initially or under certain circumstances), which rights or
warrants (i) are deemed to be transferred with such shares of Common Stock, (ii)
are not exercisable and (iii) are also issued in respect of future issuances of
Common Stock, in each case in clauses (i) through (iii) until the occurrence of
a specified event or events ("Trigger Event"), shall for purposes of this
Section 13.04 not be deemed issued until the occurrence of the earliest Trigger
Event. If any such rights or warrants, including any such existing rights or
warrants distributed prior to the date of this Indenture, are subject to
subsequent events, upon the occurrence of each of which such rights or warrants
shall become exercisable to purchase different securities, evidences of
indebtedness or other assets, then the occurrence of each such event shall be
deemed to be such date of issuance and record date with respect to new rights or
warrants (and a termination or expiration of the existing rights or warrants
without exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of such rights or warrants, or any Trigger
Event with respect thereto, that was counted for purposes of calculating a
distribution amount for which an adjustment to the Conversion Price under this
Section 13.04 was made, (1) in the case of any such rights or warrant which
shall all have been redeemed or repurchased without exercise by any holders
thereof, the Conversion Price shall be readjusted upon such final redemption or
repurchase to give effect to such distribution or Trigger Event, as the case may
be, as though it were a cash distribution, equal to the per share redemption or
repurchase price received by a holder or holders of Common Stock with respect to
such rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (2) in the case of such rights or warrants which shall have
expired or been terminated without exercise by any holders thereof, the
Conversion Price shall be readjusted as if such rights and warrants had not been
issued.
Notwithstanding any other provision of this Section 13.04 to the
contrary, rights, warrants, evidences of indebtedness, other securities, cash or
other assets (including, without limitation, any rights distributed pursuant to
any stockholder rights plan) shall be deemed not to have been distributed for
purposes of this Section 13.04 if the Company makes proper provision so that
each holder of Securities who converts a Security (or any portion thereof) after
the date fixed for determination of stockholders entitled to receive such
distribution shall be entitled to receive upon such conversion, in addition to
the shares of Common Stock issuable upon such conversions, the amount and kind
of such distributions that such holder would have been entitled to receive if
such holder had, immediately prior to such determination date, converted such
Security into Common Stock.
(h) For the purpose of any computation under this paragraph and
paragraphs (b), (d) and (e) of this Section, the current market price per share
of Common Stock (the "Current Market Price") on any date shall be deemed to be
the average of the daily Closing Prices for the 5 consecutive Trading Days
selected by the Company commencing not more than 20 Trading Days before, and
ending not later than, the date in question; PROVIDED, HOWEVER, that (i) if the
"ex" date for any event (other than the issuance or distribution requiring such
computation) that
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requires an adjustment to the conversion price pursuant to paragraph (a), (b),
(c), (d), (e) or (f) above occurs on or after the 20th Trading Day prior to the
date in question and prior to the "ex" date for the issuance or distribution
requiring such computation, the Closing Price for each Trading Day prior to the
"ex" date for such other event shall be adjusted by multiplying such Closing
Price by the same fraction by which the conversion price is so required to be
adjusted as a result of such other event, (ii) if the "ex" date for any event
(other than the issuance or distribution requiring such computation) that
requires an adjustment to the conversion price pursuant to paragraph (a), (b),
(c), (d), (e) or (f) above occurs on or after the "ex" date for the issuance or
distribution requiring such computation and on or prior to the date in question,
the Closing Price for each Trading Day on and after the "ex" date for such other
event shall be adjusted by multiplying such Closing Price by the reciprocal of
the fraction by which the conversion price is so required to be adjusted as a
result of such other event, and (iii) if the "ex" date for the issuance or
distribution requiring such computation is on or prior to the date in question,
after taking into account any adjustment required pursuant to clause (ii) of
this proviso, the Closing Price for each Trading Day on or after such "ex" date
shall be adjusted by adding thereto the amount of any cash and the fair market
value on the date in question (as determined by the Board of Directors in a
manner consistent with any determination of such value for purposes of paragraph
(d) or (e) of this Section, whose determination shall be conclusive and
described in a Board Resolution) of the evidences of indebtedness, shares of
capital stock or assets being distributed applicable to one share of Common
Stock as of the close of business on the day before such "ex" date. For the
purpose of any computation under paragraph (f) of this Section, the Current
Market Price on any date shall be deemed to be the average of the daily Closing
Prices for the five (5) consecutive Trading Days selected by the Company
commencing on or after the latest (the "Commencement Date") of (i) the date 20
Trading Days before the date in question, (ii) the date of commencement of the
tender offer requiring such computation and (iii) the date of the last
amendment, if any, of such tender offer involving a change in the maximum number
of shares for which tenders are sought or a change in the consideration offered,
and ending not later than the Expiration Time of such tender offer; PROVIDED,
HOWEVER, that if the "ex" date for any event (other than the tender offer
requiring such computation) that requires an adjustment to the conversion price
pursuant to paragraph (a), (b), (c), (d), (e) or (f) above occurs on or after
the Commencement Date and prior to the Expiration Time for the tender offer
requiring such computation, the Closing Price for each Trading Day prior to the
"ex" date for such other event shall be adjusted by multiplying such Closing
Price by the same fraction by which the conversion price is so required to be
adjusted as a result of such other event. The closing price for any Trading Day
(the "Closing Price") shall be the last reported sales price regular way or, in
case no such reported sale takes place on such day, the average of the reported
closing bid and asked prices regular way, in either case on the New York Stock
Exchange or, if the Common Stock is not listed or admitted to trading on such
exchange, on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or, if not listed or admitted to trading
on any national securities exchange, on the Nasdaq National Market or, if the
Common Stock is not listed or admitted to trading on any national securities
exchange or quoted on such National Market, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any New York Stock
Exchange member
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firm selected from time to time by the Company for that purpose. For purposes of
this paragraph, the term "Trading Day" means each Monday, Tuesday, Wednesday,
Thursday and Friday, other than any day on which securities are generally not
traded on the applicable securities exchange or in the applicable securities
market and the term "`ex' date," (i) when used with respect to any issuance or
distribution, means the first date on which the Common Stock trades regular way
on the relevant exchange or in the relevant market from which the Closing Prices
were obtained without the right to receive such issuance or distribution, (ii)
when used with respect to any subdivision or combination of shares of Common
Stock, means the first date on which the Common Stock trades regular way on such
exchange or in such market after the time at which such subdivision or
combination becomes effective, and (iii) when used with respect to any tender
offer means the first date on which the Common Stock trades regular way on such
exchange or in such market after the last time that tenders may be made pursuant
to such tender offer (as it shall have been amended).
(i) The Company may make such reductions in the conversion price, in
addition to those required by paragraphs (a), (b), (c), (d), (e) and (f) of this
Section, as it considers to be advisable (as evidenced by a Board Resolution) in
order that any event treated for federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the recipients or, if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event.
(j) No adjustment in the conversion price shall be required unless such
adjustment (plus any other adjustments not previously made by reason of this
paragraph (j)) would require an increase or decrease of at least 1% in the
conversion price; PROVIDED, HOWEVER, that any adjustments which by reason of
this paragraph (j) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment.
(k) Notwithstanding any other provision of this Section 13.04, no
adjustment to the conversion price shall reduce the conversion price below the
then par value per share of the Common Stock, and any such purported adjustment
shall instead reduce the conversion price to such par value. The Company hereby
covenants not to take any action to increase the par value per share of the
Common Stock.
SECTION 13.05 NOTICE OF ADJUSTMENTS OF CONVERSION PRICE.
Whenever the conversion price is adjusted as herein provided:
(a) the Company shall compute the adjusted conversion price in
accordance with Section 13.04 and shall prepare an Officers' Certificate
signed by the Treasurer of the Company setting forth the adjusted
conversion price and showing in reasonable detail the facts upon which
such adjustment is based, and such certificate shall forthwith be filed
(with a copy to the Trustee) at each office or agency maintained for the
purpose of conversion of Securities pursuant to Section 10.02; and
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(b) a notice stating that the conversion price has been adjusted
and setting forth the adjusted conversion price shall forthwith be
prepared, and as soon as practicable after it is prepared, such notice
shall be mailed by the Company to all Holders at their last addresses as
they shall appear in the Security Register.
SECTION 13.06 NOTICE OF CERTAIN CORPORATE ACTION.
In case:
(a) the Company shall declare a dividend (or any other
distribution) on its Common Stock payable (i) otherwise than exclusively
in cash or (ii) exclusively in cash in an amount that would require a
conversion price adjustment pursuant to paragraph (e) of Section 13.04;
or
(b) the Company shall authorize the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
shares of capital stock of any class or of any other rights (excluding
shares of capital stock or option for capital stock issued pursuant to a
benefit plan for employees, officers or directors of the Company); or
(c) of any reclassification of the Common Stock (other than a
subdivision or combination of the outstanding shares of Common Stock),
or of any consolidation, merger or share exchange to which the Company
is a party and for which approval of any stockholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company or any Subsidiary shall commence a tender offer
for all or a portion of the outstanding shares of Common Stock (or shall
amend any such tender offer to change the maximum number of shares being
sought or the amount or type of consideration being offered therefor);
then the Company shall cause to be filed at each office or agency maintained
pursuant to Section 10.02, and shall cause to be mailed to all Holders at their
last addresses as they shall appear in the Security Register, at least 21 days
(or 11 days in any case specified in clause (a), (b) or (e) above) prior to the
applicable record, effective or expiration date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution or granting of rights or warrants, or, if a record is not
to be taken, the date as of which the holders of Common Stock of record who will
be entitled to such dividend, distribution, rights or warrants are to be
determined, (y) the date on which such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall
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be entitled to exchange their shares of Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
share exchange, sale, transfer, dissolution, liquidation or winding up, or (z)
the date on which such tender offer commenced, the date on which such tender
offer is scheduled to expire unless extended, the consideration offered and the
other material terms thereof (or the material terms of any amendment thereto).
Neither the failure to give any such notice nor any defect therein shall affect
the legality or validity of any action described in clauses (a) through (e) of
this Section 13.06.
SECTION 13.07 COMPANY TO RESERVE COMMON STOCK.
The Company shall at all times reserve and keep available, free from
preemptive and other rights, out of the authorized but unissued Common Stock or
out of the Common Stock held in treasury, for the purpose of effecting the
conversion of Securities, the full number of shares of Common Stock then
issuable upon the conversion of all outstanding Securities. Shares of Common
Stock issuable upon conversion of outstanding Securities shall be issued out of
the Common Stock held in Treasury to the extent available.
SECTION 13.08 TAXES ON CONVERSIONS.
The Company will pay any and all taxes that may be payable in respect of
the issue or delivery of shares of Common Stock on conversion of Securities
pursuant hereto. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that of the Holder of
the Security or Securities to be converted, and no such issue or delivery shall
be made unless and until the Person requesting such issue has paid to the
Company the amount of any such tax, or has established to the satisfaction of
the Company that such tax has been paid.
SECTION 13.09 COVENANT AS TO COMMON STOCK.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Securities will upon issue be fully paid and
nonassessable and, except as provided in Section 13.08, the Company will pay all
taxes, liens and charges with respect to the issue thereof.
SECTION 13.10 CANCELLATION OF CONVERTED SECURITIES.
All Securities delivered for conversion shall be delivered to the
Trustee to be canceled by or at the direction of the Trustee, which shall
dispose of the same as provided in Section 3.09.
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SECTION 13.11 PROVISIONS OF CONSOLIDATION, MERGER OR SALE OF ASSETS.
In case of any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock) or any sale or
transfer of all or substantially all of the assets of the Company (other than to
a wholly-owned subsidiary), the Person formed by such consolidation or resulting
from such merger or which acquires such assets, as the case may be, shall
execute and deliver to the Trustee a supplemental indenture providing that the
Holder of each Security then Outstanding shall have the right thereafter, during
the period such Security shall be convertible as specified in Section 13.01, to
convert such Security only into the kind and amount of securities, cash and
other property, if any, receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock into which such
Security might have been converted immediately prior to such consolidation,
merger, sale or transfer, assuming such holder of Common Stock (i) is not a
Person with which the Company consolidated or into which the Company merged or
which merged into the Company or to which such sale or transfer was made, as the
case may be (a "Constituent Person"), or an Affiliate of a Constituent Person
and (ii) failed to exercise his rights of election, if any, as to the kind or
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer (provided that if the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer is not the same for each share of Common Stock held immediately
prior to such consolidation, merger, sale or transfer by other than a
Constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("nonelecting share"), then for the
purpose of this Section the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
nonelecting share shall be deemed to be the kind and amount so receivable per
share by a plurality of the nonelecting shares). Such supplemental indenture
shall provide for adjustments which, for events subsequent to the effective date
of such supplemental indenture, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article. The above
provisions of this Section shall similarly apply to successive consolidations,
mergers, sales or transfers.
SECTION 13.12 TRUSTEE'S DISCLAIMER.
The Trustee has no duty to determine when an adjustment under this
Article XIII should be made, how it should be made or what such adjustment
should be, but may accept as conclusive evidence of the correctness of any such
adjustment, and shall be protected in relying upon, the Officers' Certificate
with respect thereto which the Company is obligated to file with the Trustee
pursuant to Section 13.05. The Trustee makes no representation as to the
validity or value of any securities or assets issued upon conversion of
Securities, and the Trustee shall not be responsible for the Company's failure
to comply with any provisions of this Article XIII.
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The Trustee shall not be under any responsibility to determine the
correctness of any provisions contained in any supplemental indenture executed
pursuant to Section 13.11, but may accept as conclusive evidence of the
correctness thereof, and shall be protected in relying upon, the Officers'
Certificate with respect thereto which the Company is obligated to file with the
Trustee pursuant to Section 13.11.
ARTICLE XIV.
Right to Require Repurchase
SECTION 14.01 RIGHT TO REQUIRE REPURCHASE.
In the event that there shall occur a Repurchase Event (as defined in
Section 14.06), then each Holder shall have the right, at such Holder's option,
to require the Company to purchase, and upon the exercise of such right, the
Company shall, subject to the provisions of Section 12.03, purchase, all or any
part of such Holder's Securities on the date (the "Repurchase Date") that is 30
days after the date the Company gives notice of the Repurchase Event as
contemplated in Section 14.02(a) at a price (the "Repurchase Price") equal to
100% of the principal amount thereof, together with accrued and unpaid interest
to the Repurchase Date.
SECTION 14.02 NOTICE; METHOD OF EXERCISING REPURCHASE RIGHT.
(a) On or before the 15th day after the occurrence of a Repurchase
Event, the Company, or at the request of the Company received by the Trustee at
least 40 days prior to the Repurchase Date, the Trustee (in the name and at the
expense of the Company), shall give notice of the occurrence of the Repurchase
Event and of the repurchase right set forth herein arising as a result thereof
by first-class mail, postage prepaid, to the Trustee and to each Holder of the
Securities at such Holder's address appearing in the Security Register. The
Company shall also deliver a copy of such notice of a repurchase right to the
Trustee.
Each notice of a repurchase right shall state:
(1) the event constituting the Repurchase Event and the date thereof,
(2) the Repurchase Date,
(3) the date by which the repurchase right must be exercised,
(4) the Repurchase Price, and
(5) the instructions a Holder must follow to exercise a repurchase
right.
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No failure of the Company to give the foregoing notice shall limit any
Holder's right to exercise a repurchase right. The Trustee shall have no
affirmative obligation to determine if there shall have occurred a Repurchase
Event.
(b) To exercise a repurchase right, a Holder shall deliver to the
Company (or an agent designated by the Company for such purpose in the notice
referred to in (a) above) and to the Trustee on or before the close of business
on the Repurchase Date (i) written notice of the Holder's exercise of such
right, which notice shall set forth the name of the Holder, the principal amount
of the Security or Securities (or portion of a Security) to be repurchased, and
a statement that an election to exercise the repurchased right is being made
thereby, and (ii) the Security or Securities with respect to which the
repurchase right is being exercised, duly endorsed for transfer to the Company.
Such written notice shall be irrevocable.
In the event a repurchase right shall be exercised in accordance with
the terms hereof, the Company shall on the Repurchase Date pay or cause to be
paid in cash to the Holder thereof the Repurchase Price of the Security or
Securities as to which the repurchase right had been exercised. In the event
that a repurchase right is exercised with respect to less than the entire
principal amount of a surrendered Security, the Company shall execute and
deliver to the Trustee and the Trustee shall authenticate for issuance in the
name of the Holder a new Security or Securities in the aggregate principal
amount of the unrepurchased portion of such surrendered security.
SECTION 14.03 DEPOSIT OF REPURCHASE PRICE.
On or prior to the Repurchase Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 10.03) an amount of
money in same day funds sufficient to pay the Repurchase Price of the Securities
which are to be repaid on the Repurchase Date.
SECTION 14.04 SECURITIES NOT REPURCHASED ON REPURCHASE DATE.
If any Security surrendered for repurchase shall not be so paid on the
Repurchase Date, the principal shall, until paid, bear interest to the extent
permitted by applicable law from the Repurchase Date at the rate per annum borne
by such Security.
SECTION 14.05 SECURITIES REPURCHASED IN PART.
Any Security which is to be repurchased only in part shall be
surrendered at any office or agency of the Company designated for that purpose
pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due
endorsement by, or written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing), and the Company shall execute, and the Trustee
shall authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities of any authorized denomination as requested
by such Holder, in aggregate principal
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amount equal to and in exchange for the unrepurchased portion of the principal
of the Security so surrendered.
SECTION 14.06 CERTAIN DEFINITIONS.
For purposes of this Article:
(a) A "Repurchase Event" shall have occurred upon the occurrence of a
Change in Control or a Termination of Trading after the date of this Indenture
and on or prior to April 15, 2004.
(b) A "Change in Control" shall occur when :
(i) all or substantially all of the assets of the Company or of
the Company and its subsidiaries, taken as a whole, are sold in one
transaction or any series of related transactions as an entirety to any
person or related group of persons;
(ii) there shall be consummated any consolidation or merger of
the Company (A) in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly owned
subsidiary of the Company in which all shares of Common Stock
outstanding immediately prior to the effectiveness thereof are changed
into or exchanged for the same consideration) or (B) pursuant to which
the Common Stock would be converted into cash, securities or other
property, in each case, other than a consolidation or merger of the
Company in which the holders of the Common Stock immediately prior to
the consolidation or merger have, directly or indirectly, at least a
majority of the total voting power of all classes of capital stock
entitled to vote generally in the election of directors of the
continuing or surviving corporation immediately after such consolidation
or merger in substantially the same proportion as their ownership of
Common Stock immediately before such transaction;
(iii) any person, or any persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act
(a "Group"), together with any Affiliates thereof, shall beneficially
own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of
the total voting power of all classes of capital stock of the Company
entitled to vote generally in the election of directors of the Company;
(iv) at any time during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election
by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 % of the
directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any
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reason to constitute a majority of the Board of Directors of the Company
then in office; or
(v) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
(c) A "Termination of Trading" shall occur if the Common Stock (or other
common stock into which the Securities are then convertible) is neither listed
for trading on a U.S. national securities exchange nor approved for trading on
an established automated over-the-counter trading market in the United States.
<PAGE>
-----------------------------
This instrument may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
AMERICAN RESIDENTIAL SERVICES, INC.
By ________________________________
C. Clifford Wright, Jr.
President and Chief Executive Officer
Attest:
- ------------------------
John D. Held
Secretary
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Indenture Trustee
By ________________________________
Name:
Title:
Attest:
- -----------------------------
Assistant Secretary
<PAGE>
STATE OF TEXAS )
) ss.
COUNTY OF HARRIS )
On the 2nd day of April 1997, before me personally came C. Clifford
Wright, Jr. to me known, who, being by me duly sworn, did depose and say that he
is President and Chief Financial Officer of American Residential Services, Inc.,
one of the corporations described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation; and that he signed his name thereto
by like authority.
-------------------------------
Notary Public
STATE OF TEXAS )
) ss.:
COUNTY OF HARRIS )
On the 2nd day of April 1997, before me personally came ________________
to me known, who, being by me duly sworn, did depose and say that he is
___________________________ of U.S. Trust Company of Texas, N.A., a national
banking association, described in and which executed the foregoing instrument;
that he knows the seal of said corporation; that the seal affixed to said
instrument is such seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
-------------------------------
Notary Public
<PAGE>
EXHIBIT A
[FORM OF CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION
OF TRANSFER OF SECURITIES]
CERTIFICATE FOR EXCHANGE OR TRANSFER
Re: AMERICAN RESIDENTIAL SERVICES, INC.
7 1/4% Convertible Subordinated Notes due 2004
This Certificate relates to $_________ principal amount of Securities
held in ____________ book-entry or *____________ definitive form by _________
(the "Transferor").
The Transferor*:
[_] has requested the Trustee by written order to deliver in exchange
for its beneficial interest in a Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial interest
in such Global Security (or the portion thereof indicated above); or
[_] has requested the Trustee by written order to deliver in exchange
for its Security or Securities a beneficial interest in a Global Security held
by the Depositary in a principal amount equal to the aggregate principal amount
of such Security or Securities; or
[_] has requested the Trustee by written order to exchange or register
the transfer of a Security or Securities.
In connection with such request and in respect of each such security,
the Transferor does hereby certify to the Company and the Trustee that the
Transferor is familiar with the Indenture relating to the above captioned Notes
and, as provided in Section 3.05 of such Indenture, the transfer of this
Security does not require registration under the Securities Act (as defined
below) because*:
[_] Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 3.05(b)(ii)(A) or Section
3.05(f)(i)(A) of the Indenture).
[_] Such Security is being transferred to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act")) in reliance on Rule 144A or pursuant to an exemption
from registration in accordance with Regulation S under the Securities Act (in
satisfaction of Section 3.05(b)(ii)(B), Section 3.05(c)(i), Section 3.05(d)(i),
Section 3.05(f)(i)(B), Section 3.05(g)(iii) or Section 3.05(h)(iii) of the
Indenture). An Opinion of Counsel to the effect that such transfer does not
require registration under the Securities Act
- ---------
<PAGE>
*Check applicable box.
accompanies this Certificate (in satisfaction of Section 3.05(b)(ii)(B), Section
3.05(c)(i), Section 3.05(d)(i), Section 3.05(f)(i)(B), Section 3.05(g)(iii) or
Section 3.05(h)(iii) of the Indenture).
[_] Such Security is being transferred in accordance with Rule 144 under
the Securities Act, or pursuant to an effective registration statement under the
Securities Act (in satisfaction of Section 3.05(b)(ii)(B), Section 3.05(f)(i)(B)
or Section 3.05(k)(ii) of the Indenture). If such Security is being transferred
in accordance with Rule 144 under the Securities Act, an Opinion of Counsel to
the effect that such transfer does not require registration under the Securities
Act accompanies this Certificate (in satisfaction of Section 3.05(b)(ii)(B),
Section 3.05(f)(i)(B) or Section 3.05(k)(ii) of the Indenture).
[_] Such Security is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Securities Act,
other than Rule 144A, 144 or Regulation S under the Securities Act. An Opinion
of Counsel to the effect that such transfer does not require registration under
the Securities Act accompanies this Certificate (in satisfaction of Section
3.05(b)(ii)(C) or Section 3.05(f)(i)(C) of the Indenture).
You are entitled to rely upon this certificate and you are irrevocably
authorized to produce this certificate or a copy hereof to any interested party
in any administrative or legal proceeding or official inquiry with respect to
the matters covered hereby.
---------------------------------------
[INSERT NAME OF TRANSFEROR]
By: ___________________________________
Date: _______________________
A-2
EXHIBIT 4.9
REGISTRATION RIGHTS AGREEMENT
Dated as of April 1, 1997
relating to
$55,000,000 Aggregate Principal Amount
of 7 1/4 % Convertible Subordinated
Notes due 2004
by and between
American Residential Services, Inc.
and
Smith Barney Inc.
Goldman, Sachs & Co.
Montgomery Securities
This Registration Rights Agreement (this "Agreement") is made and
entered into as of April 1, 1997, by and between American Residential Services,
Inc., a Delaware corporation (the "Company"), and Smith Barney Inc., Goldman,
Sachs & Co. and Montgomery Securities (the "Initial Purchasers"), who have
purchased $55,000,000 aggregate principal amount of 7 1/4% Convertible
Subordinated Notes due 2004 (the "Notes") of the Company (excluding up to an
additional $8,250,000 aggregate principal that may be purchased by the Initial
Purchasers pursuant to their over-allotment option) pursuant to the Purchase
Agreement, dated March 27, 1997 (the "Purchase Agreement"), between the Company
and the Initial Purchasers. In order to induce the Initial Purchasers to enter
into the Purchase Agreement, the Company has agreed to provide the registration
rights set forth in this Agreement. The execution and delivery of this Agreement
is a condition to closing under the Purchase Agreement. All defined terms used
but not defined herein shall have the meanings ascribed to them in the Indenture
(as defined herein).
The parties hereby agree as follows:
<PAGE>
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall
have the following meanings:
CLOSING DATE: The date on which the Notes are sold by the Company to
the Initial Purchasers pursuant to the Purchase Agreement.
COMMISSION: The Securities and Exchange Commission.
COMMON STOCK: The Common Stock, par value $.001 per share, of the
Company.
DAMAGES PAYMENT DATE: With respect to the Notes or the Common Stock,
as applicable, each Interest Payment Date (as defined in the Indenture) as of
which liquidated damages shall have accrued and shall not yet have been paid
under the provisions of Section 4 of this Agreement.
EFFECTIVENESS TARGET DATE: As defined in Section 4 hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended.
EXEMPT RESALES: The transactions in which the Initial Purchasers
propose to sell the Notes to (i) certain "qualified institutional buyers" (as
such term is defined in Rule 144A under the Securities Act) and (ii) certain
persons in offshore transactions in reliance on Regulation S under the
Securities Act.
HOLDERS: As defined in Section 2(b) hereof.
INDENTURE: The Indenture, dated as of April 1, 1997, between the
Company and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"),
pursuant to which the Notes are to be issued, as such Indenture is amended or
supplemented from time to time in accordance with the terms thereof.
INTEREST PAYMENT DATE: As defined in the Indenture.
NASD: National Association of Securities Dealers, Inc.
OFFERING MEMORANDUM: The Offering Memorandum, dated March 27, 1997,
and all amendments and supplements thereto, relating to the Notes and prepared
by the Company pursuant to the Purchase Agreement.
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PERSON: An individual, partnership, corporation, trust or
unincorporated organization, or a government or agency or political subdivision
thereof.
PRELIMINARY PROSPECTUS: As defined in Section 3(g) hereof.
PROSPECTUS: The prospectus included in the Shelf Registration
Statement (as defined herein), as amended or supplemented by any Prospectus
Supplement with respect to the terms of the offering of any portion of the
Transfer Restricted Securities (as defined herein) covered by the Shelf
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments, and all documents which may be
incorporated by reference into such prospectus.
PROSPECTUS SUPPLEMENT: As defined in Section 5(b) hereof.
RECORD HOLDER: (i) With respect to any Damages Payment Date relating
to the Notes, each Person who is registered on the books of the Registrar as the
holder of Notes on the record date with respect to the Interest Payment Date on
which such Damages Payment Date shall occur and (ii) with respect to any Damages
Payment Date relating to the Common Stock, each Person who is a holder of record
of such Common Stock fifteen days prior to the Damages Payment Date.
REGISTRATION EXPENSES: As defined in Section 6(a) hereof.
SECURITIES ACT: The Securities Act of 1933, as amended.
SHELF REGISTRATION STATEMENT: As defined in Section 3(a) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb), as amended through the date of the Indenture.
TRANSFER RESTRICTED SECURITIES: Each Note and share of Common Stock
of the Company issuable upon conversion of a Note, until such Note or share, as
the case may be, (i) has been transferred pursuant to the Shelf Registration
Statement or another registration statement covering it which has been filed
with the Commission pursuant to the Securities Act, in either case after such
registration statement has become effective under the Securities Act, (ii) has
been transferred pursuant to Rule 144 under the Securities Act or (iii) may be
sold or transferred pursuant to Rule 144(k) under the Securities Act (or any
similar provisions then in force) under the Securities Act or otherwise.
UNDERWRITER: Any underwriter, placement agent, selling broker,
dealer manager, qualified independent underwriter or similar securities industry
professional.
3
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UNDERWRITTEN OFFERING: An offering in which Transfer Restricted
Securities are sold to an Underwriter or with the assistance of an Underwriter
for reoffering to the public on a firm commitment or best efforts basis pursuant
to the Shelf Registration Statement.
SECTION 2. SECURITIES SUBJECT TO THIS AGREEMENT
(a) SECURITIES SUBJECT TO THIS AGREEMENT. The only securities
entitled to the benefits of this Agreement are the Transfer Restricted
Securities.
(b) HOLDERS OF TRANSFER RESTRICTED SECURITIES. A Person is deemed to
be a holder of Transfer Restricted Securities (each, a "Holder") whenever such
Person is a "beneficial owner" (as that term is used in Rule 13d-3 under the
Exchange Act) of Transfer Restricted Securities.
SECTION 3. SHELF REGISTRATION
(a) The Company shall cause to be filed with the Commission on or
prior to 60 days after the Closing Date, a shelf registration statement pursuant
to Rule 415 under the Securities Act (as may then be amended, the "Shelf
Registration Statement") on Form S-1 or, at the option of the Company, on Form
S-3, if the use of such form is then available to the Company, to cover resales
of Transfer Restricted Securities by the Holders who satisfy the provisions of
Section 3(g) hereof relating to the provision of information in connection with
the Shelf Registration Statement. The Company shall use its best efforts to
cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to 120 days after the Closing Date. The Company shall use
its reasonable best efforts to keep the Shelf Registration Statement
continuously effective for a period ending three years from the Closing Date or
such shorter period that will terminate when each of the Transfer Restricted
Securities covered by the Shelf Registration Statement shall cease to be a
Transfer Restricted Security.
Upon the occurrence of any event that would cause the Shelf
Registration Statement (i) to contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading or (ii) to be not effective and usable for
resale of Transfer Restricted Securities during the period the Shelf
Registration Statement is required to be effective and usable, the Company shall
as promptly as reasonably practicable file an amendment to the Shelf
Registration Statement, in the case of an event described in clause (i),
correcting any such misstatement or omission, and in the case of an event
described in either clause (i) or (ii), use its reasonable best efforts to cause
such amendment to be declared effective and the Shelf Registration Statement to
become usable as soon as reasonably practicable thereafter.
Notwithstanding anything to the contrary in this Section 3, subject
to compliance with Section 4 hereof, if applicable, the Company may prohibit
offers and sales of Transfer
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Restricted Securities pursuant to the Shelf Registration Statement at any time
if (A) (i) it is in possession of material non-public information, (ii) the
Board of Directors of the Company or the Executive Committee thereof determines
that such prohibition is necessary in order to avoid a requirement to disclose
such material non-public information and (iii) the Board of Directors of the
Company or the Executive Committee thereof determines in good faith that
disclosure of such material non-public information would be materially adverse
to the interests of the Company and its shareholders or (B) the Company has made
a public announcement relating to an acquisition or business combination
transaction including the Company and/or one or more of its subsidiaries (i)
that is material to the Company and its subsidiaries taken as a whole and (ii)
the Board of Directors of the Company or the Executive Committee thereof
determines in good faith that offers and sales of Transfer Restricted Securities
pursuant to the Shelf Registration Statement prior to the consummation of such
transaction (or such earlier date as the Board of Directors or the Executive
Committee thereof shall determine) is materially adverse to the interests of the
Company and its shareholders (the period during which any such prohibition of
offers and sales of Transfer Restricted Securities pursuant to the Shelf
Registration Statement is in effect pursuant to clause (A) or (B) of this
subparagraph (a) is referred to herein as a "Suspension Period"). A Suspension
Period shall commence on and include the date on specified as such in the
written notice to Holders of Transfer Restricted Securities covered by the Shelf
Registration Statement (but shall not commence on any day prior to the date on
which the Company provides such written notice that offers and sales of Transfer
Restricted Securities cannot be made under the Shelf Registration Statement in
accordance with this Section 3 and shall end on the date on which each Holder of
Transfer Restricted Securities covered by the Shelf Registration Statement
either receives copies of a Prospectus Supplement contemplated by Section 5(b)
hereof or is advised in writing by the Company that offers and sales of Transfer
Restricted Securities pursuant to the Shelf Registration Statement and use of
the Prospectus may be resumed.
(b) None of the Company nor any of its security holders (other than
the Holders in such capacity) shall have the right to include any of the
Company's securities in the Shelf Registration Statement.
(c) If (i) only Notes are registered in the Shelf Registration
Statement and the Holders of a majority in aggregate principal amount of the
Notes registered in the Shelf Registration Statement so elect, or (ii) any
shares of Common Stock issued upon conversion of Notes are to be included in the
Shelf Registration Statement and the Holders of a majority of the shares of
Common Stock to be registered in the Shelf Registration Statement so elect, an
offering of Transfer Restricted Securities pursuant to the Shelf Registration
Statement may by effected in the form of an Underwritten Offering. In such
event, and if any Underwriter for an Underwritten Offering advises the Company
and the Holders electing to participate in that Underwritten Offering (the
"Selling Holders") in writing that in that Underwriter's opinion the amount or
number of Transfer Restricted Securities proposed to be sold in that
Underwritten Offering exceeds the amount or number of Transfer Restricted
Securities which can be sold in that Underwritten Offering, there shall be
included in that Underwritten Offering the amount of
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<PAGE>
such Transfer Restricted Securities which in the opinion of such Underwriter can
be sold, and such amount or number of shares shall be allocated pro rata among
the Selling Holders on the basis of the principal amount or number of shares of
Transfer Restricted Securities requested to be included by such Holders. The
Selling Holders shall pay all underwriting discounts and commissions of the
Underwriters in connection with any such Underwritten Offering.
(d) If any of the Transfer Restricted Securities covered by the
Shelf Registration Statement are to be sold in an Underwritten Offering, the
Underwriter(s) that will administer the offering will be selected by the Selling
Holders of a majority of the Transfer Restricted Securities to be covered by the
Shelf Registration Statement (with Holders of Common Stock constituting Transfer
Restricted Securities being deemed to be Selling Holders of the aggregate
principal amount of Notes converted into Common Stock for purposes of such
calculation); PROVIDED, HOWEVER, that such Underwriter(s) shall be reasonably
satisfactory to the Company.
(e) Each Holder whose Transfer Restricted Securities are covered by
the Shelf Registration Statement filed pursuant to this Section 3 agrees, upon
the request of the Underwriter(s) in any Underwritten Offering, not to effect
any sale or distribution of securities of the Company of the same class as the
securities included in such Shelf Registration Statement, including a sale
pursuant to Rule 144 under the Securities Act (except as part of such
registration), during the 10-day period prior to, and during the 90-day period
beginning on, the date of the underwriting agreement entered into in connection
with that Underwritten Offering.
The foregoing provisions of this Section 3(e) shall not apply to any
Holder of Transfer Restricted Securities if such Holder is prevented by
applicable statute or regulation from entering into any such agreement;
PROVIDED, HOWEVER, that any such Holder shall undertake, in its request to
participate in any Underwritten Offering, not to effect any sale or distribution
of any of its Transfer Restricted Securities commencing on the date of sale of
such Transfer Restricted Securities unless it has provided 90 days prior written
notice of such sale or distribution to the Underwriter(s).
(f) The Company agrees not to effect any public or private offer,
sale or distribution of securities of the same class as the Transfer Restricted
Securities to be registered in an Underwritten Offering, including a sale
pursuant to Regulation D under the Securities Act, during the 10-day period
prior to, and during the 90-day period beginning on, the date of the
underwriting agreement entered into in connection with that Underwritten
Offering, to the extent timely notified in writing by the Underwriter(s) for
that Underwritten Offering (except as part of such registration, if permitted,
or pursuant to registrations on Form S-1 (for an acquisition shelf registration
only) or on Forms S-4 or S-8 or any successor form to such Forms), unless the
Underwriter(s) shall consent in writing; PROVIDED, HOWEVER, that any such
agreement shall permit (A) the issuance by the Company of any shares of Common
Stock issued to employees of the Company or to any other eligible person
pursuant to any employee stock option plan, stock ownership plan, stock bonus
plan or stock compensation plan of the Company in effect on the
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<PAGE>
date of such Underwritten Offering, (B) the issuance by the Company of Common
Stock upon the conversion of securities, or the exercise of options or warrants,
outstanding at the date of such Underwritten Offering and (C) the issuance by
the Company of Common Stock, securities convertible into or exercisable or
exchangeable for Common Stock or options to purchase Common Stock as
consideration for acquisitions; provided that any Common Stock issued during the
90-day period referred to in this Section 3(f) pursuant to clause (C) (whether
directly or upon conversion or exercise or exchange of any other securities) in
transactions accounted for as purchases are subject to resale restrictions for
the 90-day period from the date of such Underwritten Offering.
(g) No Holder of Transfer Restricted Securities may include any of
its Transfer Restricted Securities in the Shelf Registration Statement pursuant
to this Agreement unless such Holder first furnishes to the Company in writing
(i) such Holder's name and mailing address (which may be used for purposes of
providing written notices and other communications contemplated by this
Agreement) and (ii) within 10 business days after receipt of a request therefor,
such information as the Company may reasonably request for use in connection
with any Shelf Registration Statement or Prospectus or preliminary Prospectus (a
"Preliminary Prospectus") included in the Shelf Registration Statement.
SECTION 4. LIQUIDATED DAMAGES
(a) If (i) the Shelf Registration Statement is not filed with the
Commission on or prior to 60 days after the Closing Date, (ii) the Shelf
Registration Statement has not been declared effective by the Commission within
120 days after the Closing Date (the "Effectiveness Target Date"), or (iii) the
Shelf Registration Statement is filed and declared effective but shall
thereafter cease to be effective (without being succeeded immediately by a
replacement shelf registration statement filed and declared effective) or usable
for the offer and sale of Transfer Restricted Securities for a period of time
(including any Suspension Period) which shall exceed 60 days in the aggregate in
any of the one-year periods ending on the first, second or third anniversaries
of the Closing Date, or which shall exceed 30 days in any calendar quarter
within any of such one-year periods (each such event referred to in clauses (i)
through (iii), a "Registration Default"), the Company will pay liquidated
damages to each Holder who has furnished the information requested of him
pursuant to Section 3(g) of this Agreement and who has otherwise complied with
his respective obligations under this Agreement. The amount of liquidated
damages payable during any period in which any Registration Default shall have
occurred and be continuing is that amount which is equal to one-quarter of one
percent (25 basis points) per annum per $1,000 principal amount or $2.50 per
annum per 39.2157 shares of Common Stock (subject to adjustment in the event of
a stock split, stock re-combination, stock dividend and the like) constituting
Transfer Restricted Securities for each 90-day period until the applicable
registration statement is filed and the applicable registration statement is
declared effective or the Shelf Registration Statement again becomes effective
or usable, as the case may be, up to a maximum of one and one-quarter percent
(125 basis points) per annum per $1,000
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<PAGE>
principal amount of Notes or $12.50 per annum per 39.2157 shares of Common Stock
(subject to adjustment as aforesaid) constituting Transfer Restricted
Securities. The Company shall notify the Trustee and the Initial Purchasers
within three business days after each and every date on which a Registration
Default first occurs. All accrued liquidated damages shall be paid to Record
Holders entitled thereto pursuant to the foregoing provisions by wire transfer
of immediately available funds or by federal funds check by the Company on each
Damages Payment Date. Following the cure of a Registration Default, liquidated
damages will cease to accrue with respect to such Registration Default. No
Liquidated Damages shall be payable with respect to any week commencing three
years or more after the Closing Date (or commencing after the expiration of such
shorter period as may hereafter become applicable as the holding period for
restricted securities under Rule 144(k) under the Securities Act).
All of the Company's obligations set forth in the preceding
paragraph which are outstanding with respect to any Transfer Restricted Security
at the time such security ceases to be a Transfer Restricted Security shall
survive until such time as all such obligations with respect to such security
shall have been satisfied in full.
SECTION 5. REGISTRATION PROCEDURES
In connection with the Shelf Registration Statement, the Company
will use its reasonable best efforts to effect such registration to permit the
sale of the Transfer Restricted Securities being sold in accordance with the
intended method or methods of distribution or disposition thereof, and pursuant
thereto the Company will:
(a) on or prior to the date 60 days after the Closing Date, prepare
and file with the Commission the Shelf Registration Statement, including all
financial statements required to be included or incorporated by reference
therein pursuant to the provisions of the Securities Act and the rules and
regulations thereunder; cooperate and assist in any filings required to be made
with the NASD with respect to the offers and sales to be made under the Shelf
Registration Statement; and use its reasonable best efforts to cause the Shelf
Registration Statement to become effective under the Securities Act on or prior
to the date 120 days after the Closing Date and approved on or prior to such
date by such governmental agencies or authorities as may be necessary under the
state securities laws to enable the Selling Holders to consummate the
disposition of such Transfer Restricted Securities; PROVIDED, HOWEVER, that
before filing the Shelf Registration Statement or any Prospectus, or any
amendments or supplements thereto, the Company will furnish to the Holders of
Transfer Restricted Securities included in the Shelf Registration Statement and
the Underwriter(s), if any, copies of all such documents proposed to be filed
(except that the Company shall not be required to furnish any exhibits to such
documents, including those incorporated by reference, unless so requested by
such a Holder in writing), and the Company will not file any Shelf Registration
Statement or amendment thereto or any Prospectus or any supplement thereto to
which (i) the Underwriter(s), if any, shall reasonably object or (ii) if there
are no Underwriter(s) and if (A) only Notes are to be registered
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<PAGE>
in the Shelf Registration Statement and the Holders of a majority in aggregate
principal amount of the Notes registered in the Shelf Registration Statement
shall reasonably object, or (B) any shares of Common Stock issued upon
conversion of the Notes are included in the Shelf Registration Statement and the
Holders of a majority of the shares of Common Stock so registered in the Shelf
Registration Statement shall reasonably object, in each such case within five
business days after the receipt thereof. A Holder or Underwriter, if any, shall
be deemed to have reasonably objected to such filing if the Shelf Registration
Statement, amendment, Prospectus or supplement, as applicable, as proposed to be
filed contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading which misstatement or omission is specifically identified
by that Holder or Underwriter, as the case may be, to the Company in writing
within such five business days;
(b) subject to the provisions of Section 3(a) hereof, prepare and
file with the Commission such amendments and post-effective amendments to the
Shelf Registration Statement as may be necessary to keep the Shelf Registration
Statement effective for the applicable period set forth in Section 3(a) hereof,
or such shorter period terminating when all Transfer Restricted Securities
covered by the Shelf Registration Statement have been sold or when, for any
other reason, there are no remaining Transfer Restricted Securities; cause the
Prospectus to be supplemented by any required supplement thereto (a "Prospectus
Supplement"), and as so supplemented to be filed pursuant to Rule 424 under the
Securities Act, and to comply fully with the applicable provisions of Rules 424
and 430A under the Securities Act in a timely manner; and comply with the
provisions of the Securities Act applicable to it with respect to the
disposition of all securities covered by the Shelf Registration Statement during
the applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in the Shelf Registration
Statement, the Prospectus or such Prospectus Supplement as applicable;
(c) if requested by the Holders of Transfer Restricted Securities
included in the Shelf Registration Statement or, if the Transfer Restricted
Securities are being sold in an Underwritten Offering, the Underwriter(s) of
such Underwritten Offering, promptly incorporate in the Prospectus, any
Prospectus Supplement or post-effective amendment to the Shelf Registration
Statement such appropriate information as the Underwriter(s) and/or the Holders
of Transfer Restricted Securities being sold agree in writing should be included
therein relating to the plan of distribution of the Transfer Restricted
Securities, including, without limitation, information with respect to the
principal amount of Transfer Restricted Securities being sold to such
Underwriter(s), the purchase price being paid therefor and any other terms with
respect to the offering of the Transfer Restricted Securities to be sold in such
offering; and make all required filings of such Prospectus, Prospectus
Supplement or post-effective amendment as soon as practicable after the Company
is notified of the matters to be incorporated in such Prospectus, Prospectus
Supplement or post-effective amendment;
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<PAGE>
(d) advise the Underwriter(s), if any, and the Holders of Transfer
Restricted Securities included in the Shelf Registration Statement promptly and,
if requested by such Persons, confirm such advice in writing, (i) when the
Prospectus or any Prospectus Supplement or post-effective amendment to the Shelf
Registration Statement has been filed, and, with respect to the Shelf
Registration Statement or any post-effective amendment thereto, when the same
has become effective, (ii) of any request by the Commission to the Company for
amendments to the Shelf Registration Statement or amendments or supplements to
the Prospectus or for additional information relating thereto, (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Shelf Registration Statement under the Securities Act or of the suspension by
any state securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation of any
proceeding for any of those purposes and (iv) if at any time the representations
and warranties of the Company contemplated by paragraph (m)(i) below cease to be
true and correct and (v) of the existence of any fact and the happening of any
event that makes any statement of a material fact made or incorporated by
reference in the Shelf Registration Statement, the Prospectus, any amendment or
supplement thereto untrue, or that requires the making of any additions to or
changes in the Shelf Registration Statement or the Prospectus in order to make
the statements therein not misleading. If at any time the Commission shall issue
any stop order suspending the effectiveness of the Shelf Registration Statement,
or any state securities commission or other regulatory authority shall issue an
order suspending the qualification or exemption from qualification of the
Transfer Restricted Securities under state securities or Blue Sky laws, the
Company shall use its reasonable best efforts to obtain the withdrawal or
lifting of such order at the earliest practicable time;
(e) promptly following the filing of any document that is to be
incorporated by reference into the Shelf Registration Statement or the
Prospectus subsequent to the initial filing of the Shelf Registration Statement,
provide copies of such document (excluding exhibits, unless requested by a
Holder in writing) to the Holders of Transfer Restricted Securities included in
the Shelf Registration Statement;
(f) furnish to each Holder and each of the Underwriter(s), if any,
without charge, at least one copy of the Shelf Registration Statement, as first
filed with the Commission, and of each amendment thereto (excluding exhibits
thereto and documents incorporated by reference therein unless requested by such
Holder or Underwriter);
(g) deliver to each Holder of Transfer Restricted Securities
included in the Shelf Registration Statement and each of the Underwriter(s), if
any, without charge, as many copies of any Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto as such Persons may
reasonably request; the Company consents to the use of any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto by each
Holder of Transfer Restricted Securities included in the Shelf Registration
Statement and each of the Underwriter(s), if any, in connection with the public
offering and the sale of the Transfer
10
<PAGE>
Restricted Securities covered by any Preliminary Prospectus and the Prospectus
or any amendments or supplements thereto;
(h) prior to any public offering of Transfer Restricted Securities,
cooperate with the Holders of Transfer Restricted Securities included in the
Shelf Registration Statement , the Underwriter(s), if any, and their respective
counsel in connection with the registration and qualification of the Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as those Holders or Underwriter(s) may reasonably request and do
any and all other acts or things reasonably necessary or appropriate to enable
the disposition in such jurisdictions of the Transfer Restricted Securities
covered by the Shelf Registration Statement; PROVIDED, HOWEVER, that the Company
shall not be required (i) to register or qualify as a foreign corporation where
it is not now so qualified, (ii) to take any action that would subject it to the
service of process in suits, other than as to matters and transactions relating
to the Shelf Registration Statement, in any jurisdiction where it is not now so
subject, or (iii) to take any action that would subject it to taxation in any
jurisdiction in an amount greater than it would be so subject without having
taken such action;
(i) cooperate with the Holders of Transfer Restricted Securities
included in the Shelf Registration Statement and the Underwriter(s), if any, to
facilitate the timely preparation and delivery of certificates representing
Transfer Restricted Securities to be sold under the Shelf Registration Statement
and not bearing any restrictive legends; and, subject to the provisions of the
Indenture (in the case of Transfer Restricted Securities that are Notes), enable
such Transfer Restricted Securities to be in such denominations and registered
in such names as the Holders of Transfer Restricted Securities included in the
Shelf Registration Statement or the Underwriter(s), if any, may request at least
two full business days prior to any sale of Transfer Restricted Securities under
the Shelf Registration Statement;
(j) if any fact or event contemplated by clause (d)(v) above shall
exist or have occurred, prepare a post-effective amendment or supplement to the
Shelf Registration Statement or related Prospectus or any document incorporated
therein by reference or file any other required document so that, as thereafter
delivered to the purchasers of Transfer Restricted Securities, the Prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading;
(k) provide a CUSIP number for all Transfer Restricted Securities
not later than the effective date of the Shelf Registration Statement and
provide the Trustee under the Indenture and/or the transfer agent for the Common
Stock with printed certificates for the Transfer Restricted Securities which are
in a form eligible for deposit with the Depository Trust Company;
(l) enter into such agreements (including an underwriting agreement)
and take all such other actions in connection therewith as may reasonably be
requested in order to expedite or facilitate the disposition of the Transfer
Restricted Securities pursuant to the Shelf
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Registration Agreement, in connection with an Underwritten Offering, and in
connection therewith, (i) make such representations and warranties to the
Underwriter(s), in form, substance and scope as they may reasonably request and
as are customarily made by issuers to Underwriters in primary underwritten
offerings; (ii) obtain opinions of counsel to the Company and updates thereof in
customary form and covering matters reasonably requested by the Underwriter(s)
of the type customarily covered in legal opinions to Underwriter(s) in
connection with primary underwritten offerings addressed to each selling Holder
and the Underwriter(s) requesting the same and covering the matters as may be
reasonably requested by such Holders and Underwriter(s); (iii) obtain, to the
extent permitted by Statement on Auditing Standards No. 72 or any successor
Statement thereto, "cold comfort" letters and updates thereof from the Company's
independent certified public accountants addressed to the selling Holders of
Transfer Restricted Securities and the Underwriter(s) requesting the same, such
letters to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters to Underwriter(s) in connection with primary
underwritten offerings; and (iv) deliver such documents and certificates as may
be reasonably requested by the Holders of the Transfer Restricted Securities
being sold or the Underwriter(s) of such Underwritten Offering to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement entered into by the Company pursuant to this clause
(l). The above shall be done at or prior to each closing under such underwriting
agreement, as and to the extent required thereunder;
(m) make available at reasonable times and in a reasonable manner
for inspection by a representative of the Holders of Transfer Restricted
Securities covered by the Shelf Registration Statement, any Underwriter
participating in any disposition pursuant to the Shelf Registration Statement,
and any attorney or accountant retained by such Holders or any of the
Underwriter(s), all financial and other records, pertinent corporate documents
and properties of the Company and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such Holder,
Underwriter, attorney or accountant in connection with such Shelf Registration
Statement prior to its effectiveness, PROVIDED, HOWEVER, that such
representatives, attorneys or accountants shall agree to keep confidential
(which agreement shall be confirmed in writing in advance to the Company if the
Company shall so request) all information, records or documents made available
to such persons which are not otherwise available to the general public unless
disclosure of such records, information or documents is required by court or
administrative order (of which the Company shall have been given prior notice
and an opportunity to defend) after the exhaustion of all appeals therefrom, and
to use such information obtained pursuant to this provision only in connection
with the transaction for which such information was obtained, and not for any
other purpose;
(n) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make generally available
to its security holders, as soon as practicable, a consolidated earnings
statement, which consolidated earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act, for the twelve-month period (i) commencing
at the end of any fiscal quarter in which Transfer Restricted Securities are
sold to
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Underwriter(s) in a firm commitment or best efforts Underwritten Offering or
(ii) if not sold to Underwriter(s) in such an offering, beginning with the first
month of the Company's first fiscal quarter commencing after the effective date
of the Shelf Registration Statement;
(o) cause the Indenture to be qualified under the TIA, and, in
connection therewith, cooperate with the Trustee and the Holders to effect such
changes to the Indenture as may be required for such Indenture to be so
qualified in accordance with the terms of the TIA; and execute and use its best
efforts to cause the Trustee to execute, all documents as may be required to
effect such changes and all other forms and documents required to be filed with
the Commission to enable such Indenture to be so qualified in a timely manner;
(p) cause all Transfer Restricted Securities covered by the Shelf
Registration Statement to be listed on each securities exchange or quotation
system on which similar securities issued by the Company are then listed if
requested by the Selling Holders of a majority of the outstanding Transfer
Restricted Securities (with Holders of Common Stock constituting Transfer
Restricted Securities being deemed to be Selling Holders of the aggregate
principal amount of Notes converted into such Common Stock for purposes of such
calculation) or the Underwriter(s), if any; cause the Notes covered by the Shelf
Registration Statement to be rated with the appropriate rating agencies, if so
requested by the Holders of a majority in aggregate principal amount of such
Notes or the Underwriter(s); and
(q) cooperate and assist in any filings required to be made with the
NASD and in the performance of any due diligence investigation by any
Underwriter (including any "qualified independent Underwriter" that is required
to be retained in accordance with the rules and regulations of the NASD).
Each Holder agrees to furnish promptly to the Company all
information required to be disclosed in the Shelf Registration Statement in
order to make the information previously furnished to the Company by such Holder
for that purpose not materially misleading or necessary to cause the Shelf
Registration Statement not to omit a material fact with respect to such Holder
necessary in order to make the statements therein not misleading.
Each Holder agrees by acquisition of any Transfer Restricted
Securities that, upon receipt of any notice from the Company of the existence of
any fact of the kind described in Section 5(d)(iv) hereof, such Holder will
forthwith discontinue disposition of Transfer Restricted Securities until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 5(j) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the Prospectus may be resumed, and has
received copies of any additional or supplemental filings with respect to the
Prospectus. If so directed by the Company, each Holder will deliver to the
Company (at the Company's expense) all copies, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such Transfer
Restricted Securities current at the time of receipt of such notice. In the
event the Company shall give any such notice, the time period regarding the
effectiveness of the Shelf Registration
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Statement set forth in Section 3(a) hereof shall be extended by the number of
days during the period from and including the date of the giving of such notice
pursuant to Section 5(d)(v) hereof to and including the date when each Holder of
Transfer Restricted Securities covered by such Shelf Registration Statement
shall have received the copies of the supplemented or amended Prospectus
contemplated by Section 5(j) hereof or shall have received the Advice.
SECTION 6. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or
compliance with this Agreement (the "Registration Expenses") will be borne by
the Company, regardless of whether a Shelf Registration Statement becomes
effective, including without limitation:
(i) all registration and filing fees (including NASD filing
fees, and if applicable, the fees and expenses of any "qualified
independent Underwriter" (and its counsel) that is required to be
retained in accordance with the rules and regulations of the NASD);
(ii) fees and expenses of the Company's compliance with
federal securities, state or foreign blue sky laws;
(iii) expenses of printing or engraving certificates for the
Transfer Restricted Securities in a form eligible for deposit with
Depository Trust Company and of printing the Prospectus and any
Preliminary Prospectus;
(iv) reasonable fees and disbursements of counsel for the
Company and for the Holders of the Transfer Restricted Securities
included in the Shelf Registration Statement (subject to the
provisions of Section 6(b) hereof);
(v) fees and disbursements of all independent certified public
accountants of the Company (including the expenses of any special
audit and "cold comfort" letters required by or incidental to the
preparation and filing of a Shelf Registration Statement and
Prospectus and the disposition of Transfer Restricted Securities);
and
(vi) fees and expenses of listing the Transfer Restricted
Securities on any securities exchange or quotation system in
accordance with Section 5(q) hereof.
The Company will, in any event, bear its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, rating agency fees and the fees and expenses of any Person, including
special experts, retained by the Company. The Holders of
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Transfer Restricted Securities shall bear the expense of any broker's
commission, agency fee or Underwriter's discount or commission.
(b) In connection with the Shelf Registration Statement, the Company
will reimburse the Holders of Transfer Restricted Securities being registered
pursuant to the Shelf Registration Statement for the fees and disbursements of
not more than one counsel chosen by the Holders of a majority of the principal
amount of the Notes being included in the Shelf Registration Statement;
provided, however, that in the case of an Underwritten Offering which includes
shares of Common Stock, such counsel shall be chosen by the Holders of a
majority of the shares of Common Stock being included in such Underwritten
Offering.
Notwithstanding the provisions of this Section 6(b), each Holder of
Transfer Restricted Securities shall pay all Registration Expenses to the extent
required by applicable law.
SECTION 7. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each Holder
who offers Transfer Restricted Securities pursuant to the Shelf Registration
Statement (each such Holder an "Indemnified Holder"), each agent,
representative, employee, officer and director of any Indemnified Holder and
each person, if any, that controls each Indemnified Holder within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, and agents,
representatives, employees, officers and directors or any such controlling
person of any Indemnified Holder from and against any and all losses, claims,
damages, judgments, liabilities and expenses (including the reasonable fees and
expenses of counsel and other expenses in connection with investigating or,
subject to the provisions of Section 7(b), defending or settling any such action
or claim) as they are incurred which arise out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the Shelf
Registration Statement or the Prospectus or any amendment or supplement thereto
or any Preliminary Prospectus or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except (i) the
Company shall not be liable to any Indemnified Holder in any such case insofar
as such losses, claims, damages, judgments, liabilities or expenses arise out
of, or are based upon, any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Indemnified Holder
furnished in writing by any Indemnified Holder to the Company expressly for use
therein and (ii) the Company shall not be liable to any Indemnified Holder under
the indemnity agreement in this Section 7(a) with respect to any Preliminary
Prospectus to the extent that any such loss, claim, damage, judgment, liability
or expense results from the fact that any Indemnified Holder sold Transfer
Restricted Securities to a person to whom there was not sent or given, at or
prior to the written confirmation of such sale, a copy of the Prospectus as then
amended or supplemented, if the Company has previously furnished sufficient
copies thereof to the Indemnified Holder. The
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foregoing indemnity agreement shall be in addition to any liability which the
Company may otherwise have.
(b) If any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought or asserted against any
Indemnified Holder with respect to which indemnity may be sought against the
Company pursuant to this Section 7, such Indemnified Holder shall promptly
notify the Company in writing, and the Company shall have the right to assume
the defense thereof, including the employment of counsel reasonably satisfactory
to such Indemnified Holder and payment of all fees and expenses; PROVIDED,
HOWEVER, that the omission so to notify the Company shall not relieve the
Company from any liability that they may have to any Indemnified Holder (except
to the extent that the Company is materially prejudiced or otherwise forfeits
substantive rights or defenses by reason of such failure). An Indemnified Holder
shall have the right to employ separate counsel in any such action or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Indemnified Holder unless (i) the
Company agrees in writing to pay such fees and expenses, (ii) the Company has
failed promptly to assume the defense and employ counsel reasonably satisfactory
to the Indemnified Holder or (iii) the named parties to any such action or
proceeding (including any impleaded parties) include both the Indemnified Holder
and the Company and such Indemnified Holder shall have been advised in writing
by its counsel that representation of such Indemnified Party and the Company by
the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation has been proposed) due
to actual or potential differing interests between them (in which case the
Company shall not have the right to assume the defense of such action on behalf
of such Indemnified Holder). It is understood that the Company shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) at any time
for all Indemnified Holders, which firm shall be designated in writing by the
Indemnified Holders of the majority of the outstanding Transfer Restricted
Securities held by Indemnified Holders (with Holders of Common Stock
constituting Transfer Restricted Securities being deemed to be Indemnified
Holders of the aggregate principal amount of Notes converted into such Common
Stock for purposes of such calculation), and that all such fees and expenses
shall be reimbursed on a monthly basis. The Company shall not be liable for any
settlement of any such action effected without the written consent of the
Company, but if settled with the written consent of the Company, or if there is
a final judgment with respect thereto, the Company agrees to indemnify and hold
harmless each Indemnified Holder from and against any loss or liability by
reason of such settlement or judgment. The Company shall not, without the prior
written consent of each Indemnified Holder affected thereby, effect any
settlement of any pending or threatened proceeding in which such Indemnified
Holder has sought indemnity hereunder, unless such settlement includes an
unconditional release of such Indemnified Holder from all liability arising out
of such action, claim, litigation or proceeding.
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(c) Each Indemnified Holder agrees to indemnify and hold harmless
the Company, its directors, its officers who sign the Registration Statement and
any person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act (collectively, the "Company
Indemnified Parties") to the same extent as the foregoing indemnity from the
Company to any Indemnified Holder, but only with respect to information relating
to each Indemnified Holder furnished to the Company in writing by each
Indemnified Holder, expressly for use in the Registration Statement, Prospectus
(or any amendment or supplement thereto), or any Preliminary Prospectus. In case
any action shall be brought against any Company Indemnified Party based on the
Registration Statement, Prospectus (or any amendment or supplement thereto), or
any Preliminary Prospectus and in respect of which indemnification may be sought
against each Indemnified Holder pursuant to this Section 7(c), each Indemnified
Holder shall have the rights and duties given to the Company by Section 7(b)
hereof (except that if the Company shall have assumed the defense thereof, each
Indemnified Holder may, but shall not be required to, employ separate counsel
therein and participate in the defense thereof and the fees and expenses of such
counsel shall be at the expense of the Indemnified Holder) and the Company
Indemnified Parties shall have the rights and duties given to the Indemnified
Holders by Section 7(b) hereof. The foregoing indemnity agreement shall be in
addition to any liability which the Indemnified Holders may otherwise have.
(d) If the indemnification provided for in this Section 7 is
unavailable to any party entitled to indemnification pursuant to Section 7(a) or
7(c) hereof, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, judgments,
liabilities and expenses (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the Indemnified
Holders on the other from the offering of the Transfer Restricted Securities or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Indemnified Holders on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, judgments, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Indemnified Holders on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total net proceeds from
the offering (before deducting expenses) received by the Indemnified Holders.
The relative fault of the Company on the one hand and the Indemnified Holders on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or by any of the Indemnified Holders on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
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(e) The Company and each Indemnified Holder agree that it would not
be just and equitable if contribution pursuant to Section 7(d) hereof were
determined by pro rata allocation or by any other method of allocation that does
not take account of the equitable considerations referred to in Section 7(d)
hereof. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. No
person found guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution hereunder
from any other person.
(f) The Company shall also indemnify each Underwriter participating
in the distribution (as described in such registration statement), their
officers and directors and each person who controls such persons (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act)
to the same extent as provided above with respect to the indemnification of the
Holders.
(g) The indemnity and contribution agreements contained in this
Section 7 (i) are in addition to any liability that any indemnifying party may
otherwise have to any indemnified party and (ii) shall apply to any Underwritten
Offering under the Shelf Registration Statement except to the extent the same
are explicitly stated not to apply in an underwriting agreement to which the
Selling Holders in such Underwritten Offering are parties.
SECTION 8. RULE 144A
The Company hereby agrees with each Holder, during any period in
which the Company is not subject to Section 13 or 15(d) of the Exchange Act, to
make available to the Holders in connection with any sale of Transfer Restricted
Securities and any prospective purchaser (identified as such in a written notice
to the Company from the Selling Holder) of such Transfer Restricted Securities,
the information required by Rule 144A(d)(4) under the Securities Act in order to
permit resales of such Transfer Restricted Securities pursuant to Rule 144A.
SECTION 9. PARTICIPATION IN UNDERWRITTEN OFFERINGS
No Holder may participate in any Underwritten Offering hereunder
unless such Holder (a) agrees to sell such Holder's Transfer Restricted
Securities on the basis provided in any underwriting arrangements approved by
the Persons entitled hereunder to approve such arrangements, (b) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents required under the terms of such underwriting
arrangements and (c) furnishes the Company in writing all information reasonably
requested in
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accordance with Section 3(g) hereof and agrees in writing to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement and any person controlling the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act to the extent
contemplated by Section 7(c) hereof.
SECTION 10. SELECTION OF UNDERWRITERS
Subject to the other provisions of this Agreement, the Holders of
Transfer Restricted Securities covered by the Shelf Registration Statement who
desire to do so may sell such Transfer Restricted Securities in an Underwritten
Offering. In any such Underwritten Offering, the Underwriter(s) that will
administer the offering will be selected by the Holders of the Transfer
Restricted Securities included in such offering in the manner specified in
Section 3(c) hereof; PROVIDED, HOWEVER, that such Underwriter(s) must be
reasonably satisfactory to the Company.
SECTION 11. MISCELLANEOUS
(a) REMEDIES. Each Holder of Transfer Restricted Securities, in
addition to being entitled to exercise all rights provided herein, and as
provided in the Purchase Agreement (for any Holders who are parties thereto) and
granted by applicable law, including recovery of damages, will be entitled to
specific performance of such Holder's rights under this Agreement. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Agreement and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. The Company will not on or after the
date of this Agreement enter into any agreement with respect to its securities
that is inconsistent with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to the holders of the Company's securities under any other
agreements.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given unless the Company has obtained the written consent of Holders
of a majority of Transfer Restricted Securities affected by such amendment,
modification, supplement, waiver or departure (with Holders of Common Stock
constituting Transfer Restricted Securities being deemed to be such Holders of
the aggregate principal amount of Notes converted into such Common Stock for
purposes of such calculation). Notwithstanding the foregoing, a waiver or
consent to departure from the
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provisions hereof that relates exclusively to the rights of Holders of Transfer
Restricted Securities whose securities are being sold pursuant to the Shelf
Registration Statement and that does not directly or indirectly affect the
rights of other Holders shall be valid only with the written consent of Holders
of at least 66-2/3% of Transfer Restricted Securities being sold, calculated as
aforesaid.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder of Transfer Restricted Securities,
initially at the address set forth on the records of the Registrar
under the Indenture or Transfer Agent for Common Stock and
thereafter at such address or at any address provided by such Holder
to the Company pursuant to the provisions of Section 3(g) hereof,
with a copy to the Registrar; and
(ii) if to the Company or an Initial Purchaser, initially at
its address set forth in the Purchase Agreement and thereafter at
such other address, notice of which is given in accordance with the
provisions of this Section.
All such notices and communications shall be deemed to have been
duly given: at the time delivered by hand, if personally delivered; five
business days after being deposited in the mail, postage prepaid, if mailed;
when answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee under the
Indenture at the address specified in the Indenture.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders; PROVIDED, HOWEVER, that this Agreement shall not
inure to the benefit of or be binding upon a successor or assign of a Holder
unless and to the extent such successor or assign acquired Transfer Restricted
Securities from such Holder; and provided further that nothing herein shall be
deemed to permit any assignment, transfer or any disposition of Transfer
Restricted Securities in violation of the terms of the Purchase Agreement. If
any transferee of any Holder shall acquire Transfer Restricted Securities, in
any manner, whether by operation of law or otherwise, such Transfer Restricted
Securities shall be held subject to all of the terms of this Agreement and by
taking and holding such Transfer Restricted Securities such person shall be
conclusively deemed to have agreed to be bound by and to perform all of the
terms and provisions of this Agreement and such Person shall be entitled to
receive the benefits hereof.
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(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTACTS MADE
AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK.
(i) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(j) ENTIRE AGREEMENT. This Agreement together with the other
Operative Documents (as defined in the Purchase Agreement) is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the securities sold pursuant to the Purchase Agreement. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to such subject matter.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
AMERICAN RESIDENTIAL SERVICES, INC.
By: ________________________________
C. Clifford Wright, Jr.
President and Chief Executive Officer
SMITH BARNEY INC.
GOLDMAN, SACHS & CO.
MONTGOMERY SECURITIES
By: Smith Barney Inc.
By: _______________________
Bruce Cummings
Managing Director
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement dated as of April 1,
1997 (this "AGREEMENT") is entered into by and between American Residential
Services, Inc., a Delaware corporation (the "CORPORATION"), and Harry O.
Nicodemus IV (the "EMPLOYEE") and amends and restates in its entirety the
Employment Agreement dated as of January 20, 1997 between the Corporation and
the Employee.
1. EMPLOYMENT. The Corporation hereby employs the Employee and the
Employee hereby accepts employment with the Corporation upon the terms and
subject to the conditions set forth herein.
2. DUTIES AND RESPONSIBILITIES. Subject to the power of the board of
directors of the Corporation to manage the business and affairs of the
Corporation and to elect and remove officers and employees of the Corporation
and its subsidiaries, the Employee shall serve the Corporation as Vice
President, Chief Financial Officer and Chief Accounting Officer and shall
perform the services and functions relating to such offices or otherwise
reasonably incident to such offices. The Employee shall report directly to the
Chief Executive Officer of the Corporation, or such other officer of the
Corporation as the board of directors of the Corporation may determine.
3. COMPENSATION AND OTHER EMPLOYEE BENEFITS.
As compensation for his services under the terms of this
Agreement:
(a) Subject to section 4 hereof, the Employee shall be paid
an annual salary of $125,000, payable in accordance with
the then-current payroll policies of the Corporation (such
annual salary is herein referred to as the "BASE SALARY");
the Base Salary shall be subject to increase (but not
decrease) at the discretion of the Corporation;
(b) subject to the right of the Corporation to amend or
terminate any employee and/or group or senior executive
benefit, bonus and/or stock option plan, the Employee shall
be entitled to receive the following employee benefits:
(1) the Employee shall have the right to participate in
such medical and dental plans as are adopted by the
Corporation, as well as any or future employee and/or group
benefit plans of the Corporation that are available to its
exempt salaried employees generally (including, without
limitation, disability, accident, medical, life insurance
and hospitalization plans);
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(2) the Employee shall have the right to participate, at
levels determined by the board of directors (or the
compensation committee thereof), in such bonus and/or stock
option plans of the Corporation as shall be determined by
the board of directors (or the compensation committee
thereof);
(3) the Employee shall be entitled to reimbursement from
the Corporation for reasonable out-of-pocket expenses
incurred by him in the course of the performance of his
duties hereunder.
4. TERM.
The term of the Employee's employment under this Agreement
shall commence on the date of this Agreement and shall end on April
1, 2000, provided, however, after April 1, 1999, the term shall
continuously extend without the necessity of action of either party
for a continually renewing period of one year's duration, until, in
either case, an event has occurred as described in, or one of the
parties shall have made an appropriate election pursuant to, the
provisions of Section 6 of this Agreement. Such term is referred to
herein as the "EMPLOYMENT TERM".
5. COMPETITION AND CONFIDENTIALITY.
(a) If, during the Employment Term (or any extension
thereof), the employment of the Employee is terminated pursuant to
Section 6(a) or Section 6(e), or if the Employee voluntarily
terminates his employment pursuant to Section 6(d), or if this
Agreement expires pursuant to its terms, then for the period of time
remaining in the Employment Term, the Employee shall not (i) accept
employment with or render service to any person, firm or corporation
and that is engaged in a business directly competitive with the
business of the Corporation, (ii) directly or indirectly own manage,
operate, finance or control or participate in the ownership,
management, operation or control of, or be connected as a principal,
agent, representative, consultant, advisor, investor, owner, partner,
financier, manager or joint venturer with, or permit his name to be
used by or in connection with, any business or enterprise directly
competitive with the business of the Corporation (provided, however,
that the Employee may invest as an investor in the voting securities
of any person that is a reporting company under the Securities
Exchange Act of 1934, as amended, so long as (A) the aggregate amount
of such securities that the Employee owns directly or indirectly is
less than five percent of the total outstanding voting securities of
such person and (B) the Employee has no other affiliation with such
person), or (iii) solicit the employment of any person who, within
six months before or after the date of the Employee's termination, is
employed by the Corporation on a full or part-time basis. For the
purposes of this Section 5, the Corporation shall be deemed to
include all of the
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subsidiaries of the Corporation.
(b) It is the desire and intent of each of the parties that
the provisions of Section 5(a) shall be enforced to the fullest
extent permissible under the laws and public policies applied in the
State of Texas. Accordingly, if any particular portion of Section
5(a) shall be adjudicated to be invalid or unenforceable, Section
5(a) shall be deemed amended to (i) reform the particular portion to
provide for such maximum restrictions as will be valid and
enforceable, or if that is not possible, then (ii) delete therefrom
the portion thus adjudicated to be invalid or unenforceable. Section
5(a) shall inure to the benefit of any successor to the Corporation.
(c) During the Employment Term and for a period of two
years after termination of the Employment Term, the Employee will not
divulge or appropriate to his own use or to the use of others any
secret or confidential information pertaining to the business of the
Corporation obtained by the Employee in his capacity as an employee
of the Corporation. For purposes of this Agreement, the term secret
and confidential information does not include any information that is
or becomes generally available to and known by the public (other than
as a result of an unpermitted disclosure directly or indirectly by
the Employee).
(d) The Employee acknowledges that Sections 5(a) and (c)
are expressly for the benefit of the Corporation, that the
Corporation would be irreparably injured by a violation of Section
5(a) or (c), and that the Corporation would have no adequate remedy
at law in the event of such violation. Therefore, the Employee
acknowledges and agrees that injunctive relief, specific performance
or any other appropriate equitable remedy (without any bond or other
security being required) are appropriate remedies to enforce
compliance by the Corporation with Sections 5(a) and (c).
6. TERMINATION OF EMPLOYMENT.
(a) FOR DUE CAUSE. Nothing herein shall prevent the
Corporation from terminating, without prior notice, the Employee for
"Due Cause" (as hereinafter defined), in which event the Employee
shall be entitled to receive his Base Salary on a pro rata basis to
the date of termination. In the event of such termination for Due
Cause, all other rights and benefits the Employee may have under the
employee and/or group or senior executive benefit, bonus and/or stock
option plans and programs of the Corporation, generally, shall be
determined in accordance with the terms and conditions of such plans
and programs. The term "DUE CAUSE" shall mean (i) the Employee has
committed a willful serious act, such as fraud, embezzlement or
theft, against the Corporation intending to enrich himself at the
expense of the Corporation, (ii) the Employee has been convicted of a
felony, (iii) the Employee has engaged in grossly improper conduct
which has caused demonstrable and serious injury, monetary or
otherwise, to the Corporation, (iv) the Employee, in carrying out his
duties hereunder, has been guilty of willful gross neglect or willful
gross misconduct, (v) the
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Employee has refused to carry out his duties in gross dereliction of
duty and, after receiving written notice to such effect from the
Corporation, the Employee fails to cure the existing problem within
five days, or (vi) the Employee has materially breached this
Agreement and has not remedied such breach within five days after
receipt of written notice from the Corporation that a breach of this
Agreement has occurred.
(b) DUE TO DEATH. In the event of the death of the
Employee, this Agreement shall terminate on the date of death and the
estate of the Employee shall be entitled to the Employee's Base
Salary through the end of the month in which he died. In the event of
such termination due to death, all other rights and benefits the
Employee (or his estate) may have under the employee and/or group or
senior executive benefit, bonus and/or stock option plans and
programs of the Corporation, generally, shall be determined in
accordance with the terms and conditions of such plans and programs.
(c) DISABILITY. In the event the Employee suffers a
"Disability" (as hereinafter defined), this Agreement shall terminate
on the date on which the Disability occurs and the Employee shall be
entitled to his Base Salary through the end of the month in which his
employment is terminated due to the Disability. In the event of such
termination due to Disability, all other rights and benefits the
Employee may have under the employee and/or group or senior executive
benefit, bonus and/or stock option plans and programs of the
Corporation, generally, shall be determined in accordance with the
terms and conditions of such plans and programs. For purposes of this
Agreement, "DISABILITY" shall mean the inability or incapacity (by
reason of a medically determinable physical or mental impairment) of
the Employee to perform the duties and responsibilities related to
the job or position with the Corporation described in Section 2 for a
period that can be reasonably expected to last more than 180 days.
Such inability or incapacity shall be documented to the reasonable
satisfaction of the Corporation by appropriate correspondence from
registered physicians reasonably satisfactory to the Corporation.
(d) VOLUNTARY TERMINATION. The Employee may voluntarily
terminate his employment under this Agreement at any time by
providing at least 21 days' prior written notice to the Corporation.
In such event, the Employee shall be entitled to receive his Base
Salary until the date his employment terminates and all other
benefits the Employee may have under the employee and/or group or
senior executive benefit, bonus and/or stock option plans and
programs of the Corporation, generally, shall be determined in
accordance with the terms and conditions of such plans and programs.
(e) CONSTRUCTIVE TERMINATION.
(i) If the Corporation (i) terminates the employment of the
Employee other than for Due Cause or because of a
Disability, (ii) demotes the Employee to a lesser position
than as provided in Section 2, (iii) decreases the
Employee's Base Salary below the level provided for by the
terms of Section 3(a), or (iv) requires
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the Employee to move his principal residence from the
Houston, Texas area, then such action by the Corporation,
unless consented to in writing by the Employee, shall be
deemed to be a constructive termination by the Corporation
of the Employee's employment ("CONSTRUCTIVE TERMINATION").
(ii) In the event of a Constructive Termination, the
Employee shall be entitled to receive, from the date of
Constructive Termination, his Base Salary (as provided in
Section 3(a)) for a period equal to the remaining period in
the Employment Term, payable in accordance with the
then-current payroll policies of the Corporation. In the
event of such Constructive Termination, all other rights
and benefits the Employee may have under the employee
and/or group or senior executive benefit, bonus and/or
stock option plans and programs of the Corporation,
generally, shall be determined in accordance with the terms
and conditions of such plans and programs.
(iii) In the event of the death or Disability of the
Employee following Constructive Termination, the amounts
set forth in Section 6(e)(ii) shall continue to be owing
and shall be paid to the estate of the Employee or the
Employee, as applicable.
7. NOTICES. All notices, requests, demands and other communications
given under or by reason of this Agreement shall be in writing and shall be
deemed given when delivered in person or when mailed, by certified mail (return
receipt requested), postage prepaid, addressed as follows (or to such other
address as a party may specify by notice pursuant to this provision):
(a) If to the Corporation:
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer Road
Houston, Texas 77056
Attn: Chief Executive Officer
(b) If to the Employee:
Harry O. Nicodemus IV
1810 Crutchfield
Katy, Texas 77449
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8. CONTROLLING LAW. The execution, validity, interpretation and
performance of this Agreement shall be governed by and construed in accordance
with the law of the State of Texas.
9. ADDITIONAL INSTRUMENTS. The Employee and the Corporation shall
execute and deliver any and all additional instruments and agreements that may
be necessary or proper to carry out the purposes of this Agreement.
10. ENTIRE AGREEMENT AND AMENDMENTS. This Agreement contains the
entire agreement of the Employee and the Corporation relating to the matters
contained herein and supersedes all prior agreements and understandings, oral or
written, between the Employee and the Corporation with respect to the subject
matter hereof. This Agreement may be changed only by an agreement in writing
signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought.
11. SEPARABILITY. If any provision of this Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by the decision of any arbitrator or by decree of a court
of last resort, the Employee and the Corporation shall promptly meet and
negotiate substitute provisions for those rendered or declared illegal or
unenforceable to preserve the original intent of this Agreement to the extent
legally possible, but all other provisions of this Agreement shall remain in
full force and effect.
12. ASSIGNMENTS. The Corporation may assign this Agreement to any
person or entity succeeding to all or substantially all of the business
interests of the Corporation by merger or otherwise. The rights and obligations
of the Employee under this Agreement are personal to him, and no such rights,
benefits or obligations shall be subject to voluntary or involuntary alienation,
assignment or transfer, except as otherwise contemplated hereby.
13. EFFECT OF AGREEMENT. Subject to the provisions of Section 12 with
respect to assignments, this Agreement shall be binding upon the Employee and
his heirs, executors, administrators, legal representatives and assigns and upon
the Corporation and its respective successors and assigns, except as otherwise
contemplated hereby.
14. EXECUTION. This Agreement may be executed in multiple
counterparts each of which shall be deemed an original and all of which shall
constitute one and the same instrument.
15. WAIVER OF BREACH. The waiver by either party to this Agreement of
a breach of any provision of the Agreement by the other party shall not operate
or be construed as a waiver by such party of any subsequent breach by such other
party.
6
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IN WITNESS WHEREOF, the Employee and the Corporation have executed
this Agreement effective as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC.
-----------------------------
John D. Held
Senior Vice President and General Counsel
--------------------------
Harry O. Nicodemus IV
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 1997
