AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
AMERICAN RESIDENTIAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 1711 76-0484996
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION CLASSIFICATION CODE NUMBER)
OR ORGANIZATION)
</TABLE>
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JOHN D. HELD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
AMERICAN RESIDENTIAL SERVICES, INC.
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(713) 599-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPY TO:
JAMES L. LEADER, ESQ.
BAKER & BOTTS, L.L.P.
3000 ONE SHELL PLAZA
HOUSTON, TEXAS 77002-4995
(713) 229-1234
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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=============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER NOTE(1) OFFERING PRICE(1) FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7 1/4% Convertible Subordinated Notes
due 2004.................................... $55,000,000 100% $55,000,000 $16,667
- -----------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per share(2).... (3) (3) (3) None(3)
=============================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes the associated rights to purchase preferred stock.
(3) Such indeterminate number of shares of Common Stock as shall be issuable on
conversion of the Notes being registered hereunder. No additional
consideration will be received for the Common Stock and therefore no
registration fee is required pursuant to Rule 457(i).
------------------------
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 MAY 23, 1997
PROSPECTUS
$55,000,000
[LOGO] -- ARS
7 1/4% CONVERTIBLE SUBORDINATED NOTES DUE 2004
INTEREST PAYABLE APRIL 15 AND OCTOBER 15
------------------
The 7 1/4% Convertible Subordinated Notes due 2004 (the "Notes") of
American Residential Services, Inc., a Delaware corporation ("ARS"), and the
Common Stock, par value $.001 per share, of ARS ("Common Stock") into which
the Notes are convertible (together with the Notes, the "Securities") may be
offered hereby by certain holders of the Securities (the "Selling Holders").
Interest on the Notes is payable semi-annually in arrears on April 15 and
October 15 of each year, commencing October 15, 1997. The Notes mature on April
15, 2004 and do not provide for a sinking fund. ARS may, at its option, redeem
the Notes on and after April 20, 2000 in whole or in part at the redemption
prices set forth in this Prospectus, plus accrued interest. If a Repurchase
Event (as defined herein) occurs, each holder of Notes may require ARS to
repurchase that holder's Notes at a purchase price equal to 100% of the
principal amount thereof, plus accrued interest. See "Description of the
Notes."
The Notes (i) are unsecured obligations of ARS and subordinate to all
present and future Senior Indebtedness (as defined herein) and (ii) will be
effectively subordinated to all indebtedness and other liabilities of the
subsidiaries of ARS. The Indenture (as defined herein) does not restrict the
ability of ARS or its subsidiaries to incur indebtedness or other liabilities.
On their original issuance, the Notes became eligible for trading in the
Private Offerings, Resales and Trading through Automated Linkages ("PORTAL")
Market. Notes sold pursuant to this Prospectus will no longer be eligible for
trading in the PORTAL Market. No assurance can be given a market for the Notes
will develop or as to the liquidity or sustainability of any market that may
develop. See "Risk Factors -- Limited Market for the Notes." They are
convertible into Common Stock at any time at or before maturity, unless
previously redeemed, at a conversion price of $25.50 per share, subject to
adjustment in certain events. The Common Stock trades on the New York Stock
Exchange (the "NYSE") under the symbol "ARS." On May 21, 1997, the closing price
of the Common Stock, as reported on the NYSE, was $21.125 per share.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF FOR A DISCUSSION OF CERTAIN
RISK FACTORS PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY SHOULD
CONSIDER.
------------------
ARS issued and sold the Securities to Smith Barney Inc., Goldman, Sachs &
Co. and Montgomery Securities (the "Initial Purchasers") on April 2, 1997. The
Selling Holders (other than two of the Initial Purchasers) acquired the
Securities from the Initial Purchasers, either directly or indirectly through
one or more resale transactions exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). ARS will not
receive any of the proceeds from the sale of the Securities.
The Selling Holders may sell the Securities from time to time to or through
underwriters, directly to purchasers or through agents in ordinary brokerage
transactions, in negotiated transactions or otherwise, at prices that (i)
represent or relate to then prevailing market prices or (ii) are negotiated. See
"Plan of Distribution."
The Selling Holders may be deemed to be "underwriters" as defined in the
Securities Act, and the following may be deemed underwriting discounts or
commissions under the Securities Act in connection with the sale of the
Securities: (i) agency commissions paid by Selling Holders to broker/dealers;
and (ii) profits realized by Selling Holders and broker/dealers purchasing
Securities for their own account.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The date of this Prospectus is , 1997.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED BY THE CONTEXT, (I)
INFORMATION HEREIN RESPECTING THE COMPANY'S OPERATIONS GIVES EFFECT TO THE
COMPANY'S ACQUISITIONS COMPLETED THROUGH MAY 19, 1997 AND (II) REFERENCES HEREIN
TO (A) "ARS" MEAN AMERICAN RESIDENTIAL SERVICES, INC. AND (B) THE "COMPANY"
MEAN ARS TOGETHER WITH ALL ITS SUBSIDIARIES.
THE COMPANY
ARS was founded in October 1995 to create the leading national provider of
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"). To achieve this goal, the Company
embarked on an aggressive acquisition program and implemented a national
operating strategy designed to increase internal growth and capitalize on cost
efficiencies. Today, the Company is the largest publicly held company in the
United States engaged principally in providing these services. The Company also
has the goal of becoming a 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"). The Company recently acquired its first business
engaged principally in providing commercial maintenance services and, through
May 19, 1997, has acquired six additional businesses that provide some
commercial maintenance services in addition to residential services. The Company
intends to apply the same acquisition and national operating strategies to its
commercial maintenance services business that it has implemented in its
residential services business.
On September 27, 1996, ARS acquired seven residential services businesses
(together with the common parent of two of those businesses, the "Founding
Companies") in separate transactions (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"), 10 additional residential services businesses in the first
quarter of 1997 (the "First Quarter 1997 Acquisitions") and six additional
residential services businesses and one commercial maintenance business in the
second quarter of 1997 through May 19 (collectively, the "Second Quarter 1997
Acquisitions" and, together with the Initial Acquisitions, the Fourth Quarter
1996 Acquisitions and the First Quarter 1997 Acquisitions, the "Acquired
Businesses").
With the inclusion of all the Acquired Businesses, 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
2
<PAGE>
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 subsidiary, American Mechanical
Services ("AMS"), the Company intends to become a leading provider of
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 Securities offered hereby involves a high degree of risk. See "Risk
Factors."
------------------------
3
<PAGE>
THIS OFFERING
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Securities Offered................... $55 million principal amount of 7 1/4% Convertible
Subordinated Notes due April 15, 2004.
Payment of Interest.................. April 15 and October 15, commencing October 15, 1997.
Conversion........................... Convertible into Common Stock of ARS at the option of
the holder at any time at or before maturity, unless
previously redeemed, at $25.50 per share, subject to
adjustment in certain events.
Subordination........................ Subordinated to all present and future Senior Indebt-
edness (as defined herein) of ARS and effectively
subordinated to all indebtedness and other
liabilities of subsidiaries of ARS. As of March 31,
1997, after giving effect to the sale of the Notes and
the application of the net proceeds to the Company
therefrom, the aggregate amount of Senior Indebtedness
to which the Notes are subordinated was approximately
$1.1 million, and the aggregate amount of indebtedness
and other balance sheet liabilities of ARS's
subsidiaries to which the Notes are effectively
subordinated was approximately $16.0 million. See
"Capitalization." The Indenture for the Notes (the
"Indenture") does not restrict the incurrence of
indebtedness (including Senior Indebtedness) or other
liabilities by ARS or its subsidiaries.
Redemption........................... Redeemable, in whole or in part, at the option of ARS,
at the redemption prices set forth herein, together with
accrued interest, except that no redemption may be made
before April 20, 2000.
Redemption at Holder's Option........ If a Repurchase Event (as defined herein) occurs, each
holder of the Notes will have the right, at the Holder's
option, to require ARS to repurchase such Holder's Notes
at 100% of their principal amount, plus accrued
interest. The term Repurchase Event is limited to
transactions involving a Change in Control or a
Termination of Trading (each as defined herein) and does
not include other events that might adversely affect the
financial condition of ARS or result in a downgrade in
the credit rating (if any) of the Notes. The ability of
ARS to repurchase the Notes following a Repurchase Event
will depend on ARS having sufficient funds and may be
limited by the terms of ARS's Senior Indebtedness or the
subordination provisions of the Indenture. No assurance
can be given ARS will be able to repurchase the Notes if
a Repurchase Event occurs.
Use of Proceeds...................... The Company will not receive any of the proceeds from
the sale by the Selling Holders of the Notes or the
Common Stock issuable on conversion thereof.
Listings............................. On their original issuance, the Notes became eligible
for trading in the PORTAL Market. Notes sold pursuant
to this Prospectus will no longer be eligible for
trading in the PORTAL Market. The Common Stock trades
on the NYSE under the symbol "ARS." The shares of
Common Stock issuable on conversion of the Notes have
been approved for listing on the NYSE.
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4
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following summary unaudited pro forma combined statement of operations
information is derived from the unaudited pro forma financial statements of the
Company included elsewhere herein, as adjusted to give effect to (i) for the
year ended December 31, 1996, the acquisitions of all the Acquired Businesses
through May 19, 1997 that have been accounted for as purchase transactions, the
IPO and the issuance and sale of the Notes and the application of the net
proceeds to the Company therefrom to repay bank indebtedness, assuming those
transactions had occurred on January 1, 1996, and (ii) for the three months
ended March 31, 1997, the First Quarter 1997 Acquisitions and Second Quarter
1997 Acquisitions (through May 19, 1997) accounted for as purchase transactions,
assuming those transactions had occurred on January 1, 1997. 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 consolidated financial statements
of the Company included elsewhere herein and (ii) that historical balance sheet
data, on a pro forma combined basis, giving effect to the Second Quarter 1997
Acquisitions accounted for as purchase transactions and the issuance and sale of
the Notes and the application of the net proceeds to the Company therefrom to
repay bank indebtedness. 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 THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -------------------
STATEMENT OF OPERATIONS INFORMATION
(PRO FORMA COMBINED(1)):
Revenues........................ $ 282,604 $62,819
Gross profit.................... 88,271 19,356
Selling, general and
administrative expenses(2).... 65,485 16,229
Goodwill amortization(3)........ 3,696 924
Income from operations.......... 19,090 2,203
Interest income and other
expense, net.................. 1,284 212
Interest expense................ (5,964) (1,366)
Net income from continuing
operations.................... $ 7,517 $ 558
============= ===================
Net income per share from
continuing operations......... $ 0.62 $ 0.04
============= ===================
Shares used in computing pro
forma net income per share
from continuing operations.... 12,119 12,519(4)
============= ===================
Ratio of earnings to fixed
charges....................... 3.35 1.60(5)
============= ===================
MARCH 31, 1997
-------------------------
AS
HISTORICAL ADJUSTED
------------- --------
BALANCE SHEET INFORMATION:
Working capital................. $ 16,408 $ 17,417
Total assets.................... 197,491 223,271
Total debt, including current
portion........................ 54,493 70,280
Stockholders' equity............ 112,903 120,131
- ------------
(1) The pro forma combined financial statement information presented (i) is 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) is based (in the case of certain purchases) on preliminary
estimates of fair value, available information and certain assumptions
management deems appropriate and (iii) should be read in conjunction with
the other historical 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) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before fixed charges and income tax, while
"fixed charges" consist of interest expense and one-third of rental
expense, which the Company estimates to be representative of the interest
and rental factors therein.
5
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RISK FACTORS
PROSPECTIVE INVESTORS IN THE SECURITIES SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF ANY NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
LIMITED COMBINED OPERATING HISTORY
ARS, incorporated in Delaware in October 1995, conducted no operations
prior to the closing on September 27, 1996 of its initial public offering of
Common Stock (the "IPO") and its acquisition of seven residential services
businesses (together with the common parent of two of those businesses, the
"Founding Companies") in separate transactions (the "Initial Acquisitions").
The Company acquired 13 additional residential services businesses in the fourth
quarter of 1996 (the "Fourth Quarter 1996 Acquisitions"), 10 additional
residential services businesses in the first quarter of 1997 (the "First
Quarter 1997 Acquisitions") and six additional residential services businesses
and one commercial maintenance business in the second quarter of 1997 through
May 19 (collectively, the "Second Quarter 1997 Acquisitions" and, together
with the Initial Acquisitions, the Fourth Quarter 1996 Acquisitions and the
First Quarter 1997 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
6
<PAGE>
commercial buildings, including those under construction (collectively,
"residential services"). In addition, 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 subsidiary, American Mechanical Services
("AMS"). The Company recently acquired its first business engaged principally
in providing commercial maintenance services and, through May 19, 1997, has
acquired six additional businesses that provide some commercial maintenance
services in addition to their residential 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 May 19, 1997, 12,018,347 shares of Common Stock were outstanding.
Those shares currently are or will become either freely tradable or eligible for
resale subject to volume limitations and other
7
<PAGE>
requirements of Securities Act Rule 144 ("Rule 144"), as follows (in
thousands): (i) currently and through June 30, 1997 -- 6,910; (ii) through
September 30, 1997 -- 10,505; (iii) through March 31, June 30, and September 30,
1998 -- 10,735; and (iv) through 1998 -- 12,018. The shares becoming eligible
for resale in the third quarter of 1997 include 376,073 shares owned by Equus II
Incorporated ("Equus II") and 1,456,620 shares owned by certain directors and
executive officers of ARS.
In addition to the shares currently outstanding, ARS has reserved for
issuance the 2,156,863 shares currently issuable on conversion of the Notes. ARS
has registered these shares under the Securities Act by means of the
Registration Statement of which this Prospectus is a part (the "Shelf"). If
Notes or shares of Common Stock issued on the conversion of Notes are disposed
of by means of the Shelf, the shares underlying those Notes and those shares
will be freely tradable or (if owned by an affiliate of ARS) eligible for sale
pursuant to Rule 144.
The holders of approximately 4.9 million unregistered shares of Common
Stock have certain demand and piggyback rights to have their shares registered
in the future under the Securities Act. See "Shares Eligible for Future Sale."
None of the demand registration rights may be exercised before September 27,
1997.
At May 20, 1997, options to purchase up to 1,993,100 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 437,000 shares and the
warrant were exercisable at May 20, 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 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."
SUBORDINATION OF NOTES; HOLDING COMPANY STRUCTURE
The Notes are subordinate in right of payment to all current and future
Senior Indebtedness of ARS. Senior Indebtedness includes all indebtedness
(whether secured or unsecured) borrowed under the Company's $100 million credit
facility (the "Credit Facility") or successor credit facilities and
substantially all other indebtedness of ARS, whether existing on or created or
incurred after the date the Notes are issued, that is not made subordinate to or
PARI PASSU with the Notes by the instrument creating the indebtedness. As
8
<PAGE>
of March 31, 1997, $54.0 million was outstanding under the Credit Facility. As
of March 31, 1997, after giving effect to the sale of the Notes and the
aplication of the net proceeds to the Company therefrom, the aggregate amount of
Senior Indebtedness to which the Notes are subordinated was approximately $1.1
million, and the aggregate amount of indebtedness and other balance sheet
liabilities of ARS's subsidiaries to which the Notes are effectively
subordinated was approximately $16.0 million. The Indenture dated as of April 1,
1997 under which ARS issued the Notes (the "Indenture") does not limit the
amount of additional indebtedness, including Senior Indebtedness, which ARS can
create, incur, assume or guarantee. By reason of the subordination of the Notes,
if any insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of the business of ARS occurs, the assets of ARS will be available to
pay the amounts due on the Notes only after all Senior Indebtedness has been
paid in full.
ARS, as a holding company whose principal assets are the shares of capital
stock of its subsidiaries, does not generate any operating revenues of its own.
Consequently, it depends on dividends, advances and payments from its
subsidiaries to fund its activities and meet its cash needs, including its debt
service requirements. The subsidiaries are separate and distinct legal entities
and have no obligation, contingent or otherwise, to pay any amounts due pursuant
to the Notes or to make funds available therefor. Their ability to pay dividends
or make other payments or advances to ARS will depend on their operating results
and will be subject to various business considerations and to applicable state
laws. In addition, Holders of the Notes are effectively subordinated to the
claims of creditors of ARS's subsidiaries to the extent of the assets of such
subsidiaries. If any insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of the business of any subsidiary of ARS occurs,
creditors of that subsidiary generally will have the right to be paid in full
before any distribution is made to ARS or the holders of the Notes. See
"Description of the Notes."
Substantially all the subsidiaries of ARS have guaranteed the payment of
its obligations under the Credit Facility, and the stock of those subsidiaries
has been pledged by ARS or their immediate parent corporations as collateral
securing those obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
LIMITATIONS ON REPURCHASE IF A REPURCHASE EVENT OCCURS
If a Repurchase Event, which consists of either a Change in Control or a
Termination of Trading (each as defined herein), occurs, each holder of Notes
will have the right, at its option, to require ARS to repurchase all or a
portion of its Notes at a purchase price equal to 100% of the principal amount
thereof plus accrued interest to the repurchase date. ARS's ability to
repurchase Notes following a Repurchase Event (i) may be limited by the terms of
the Senior Indebtedness and the subordination provisions of the Indenture and
(ii) will depend on the availability of sufficient funds and compliance with
applicable securities laws. Accordingly, no assurance can be given ARS will
repurchase Notes following a Repurchase Event. The term "Repurchase Event" is
limited to certain specified transactions and may not include other events, such
as a highly leveraged business combination or reorganization not involving a
Repurchase Event, that might adversely affect the financial condition of ARS or
result in a downgrade of the credit rating (if any) of the Notes. See
"Description of the Notes."
LIMITED MARKET FOR THE NOTES
On their original issuance, the Notes became eligible for trading in the
PORTAL Market. Notes sold pursuant to this Prospectus will no longer be eligible
for trading on the PORTAL Market. No assurance can be given a market for the
Notes will develop, or as to the liquidity or sustainability of any market that
may develop, or as to the ability of Noteholders to sell their Notes at any
price. Future trading prices of the Notes will depend on many factors,
including, among others, prevailing interest rates, ARS's operating results, the
price of the Common Stock and the market for similar securities.
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The market price of the Common Stock may be subject to significant
fluctuations from time to time in response to numerous factors, including
variations in the reported financial results of the Company and changing
conditions in the economy in general or in the Company's industry in particular.
In addition, the
9
<PAGE>
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) occurs, each holder of Notes will have the
right, at the holder's option, to require ARS to repurchase all or a portion of
such holder's 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 Indenture could impede or prevent a change of control or
depress the price of the Common Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- The Company" and "Description of Capital Stock."
10
<PAGE>
THE COMPANY
ARS. ARS was founded in October 1995 to create the leading national
provider of 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"). To achieve this goal, the
Company embarked on an aggressive acquisition program and implemented a national
operating strategy designed to increase internal growth and capitalize on cost
efficiencies. Today, the Company is the largest publicly held company in the
United States engaged principally in providing these services. The Company also
has the goal of becoming a 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"). The Company recently acquired its first business
engaged principally in providing commercial maintenance services and through May
16, 1997, the Company had acquired six additional businesses that provide some
commercial maintenance services in addition to their residential services. The
Company intends to apply the same acquisition and national operating strategies
to its commercial maintenance services business that it has implemented in its
residential services business. ARS is a Delaware corporation. Its executive
offices are located at Post Oak Tower, Suite 725, 5051 Westheimer, Houston,
Texas 77056-5604, and its telephone number at that address is (713) 599-0100.
THE FOUNDING COMPANIES. Concurrently with the closing of the IPO, ARS
acquired the seven Founding Companies in the transactions described in "Certain
Transactions -- Organization of the Company." The Founding Companies are
General Heating & Air Conditioning Company, Inc. ("General Heating"), Atlas
Services, Inc. ("Atlas"), Service Enterprises, Inc., which does business as
"Crown Services"("Crown"), Florida Heating & Air Conditioning, Inc.
(together with its affiliated companies, "Florida HAC"), Meridian & Hoosier
Heating and Air Conditioning Company ("Meridian & Hoosier"), ADCOT, Inc.,
which does business as "A-ABC Appliance"("A-ABC"), and Climatic Corporation
of Vero Beach ("Climatic"). The Founding Companies have been in business an
average of 32 years and provide various residential services in and around
Houston (Crown and A-ABC), the Washington-Baltimore metropolitan area and
Richmond, Virginia (General Heating), throughout South Carolina (Atlas),
southeast Florida (Florida HAC and Climatic) and central Indiana (primarily
Indianapolis) (Meridian & Hoosier). 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
11
<PAGE>
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 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.
During the second quarter of 1997 through May 19, the Company acquired an
additional seven businesses for an aggregate consideration of $12.3 million in
cash and 335,730 shares of Common Stock. Each of these acquisitions was
accounted for under the purchase method of accounting. The acquired businesses
include a commercial HVAC services provider operating in Colorado, Texas and
Arizona, representing the Company's initial acquisition of a business engaged
principally in providing commercial maintenance services. Other businesses
acquired include a provider of residential and commercial HVAC services for the
Indianapolis, Indiana metropolitan area, a provider of residential and some
commercial HVAC and plumbing services in San Diego, California, a provider of
residential and commercial HVAC services for the San Bernadino-Riverside,
California metropolitan area (which represents a new market for the Company),
and three providers of residential HVAC services, one in Hilton Head, South
Carolina, another in the Charlotte, North Carolina metropolitan area (which
represents a new market for the Company), and a third in the greater Los Angeles
market.
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Securities by
the Selling Holders.
PRICE RANGE OF COMMON STOCK
The Common Stock trades on the NYSE under the symbol "ARS." The following
table sets forth the high and low sale prices for the Common Stock (based on the
NYSE Composite Transactions Reporting System) for the periods indicated:
HIGH LOW
--------- ---------
1996:
Third quarter (September 25 to
September 30).................. $ 19.625 $ 16.500
Fourth quarter.................. 27.125 16.625
1997:
First quarter................... 28.500 19.125
Second quarter (through May
21)............................ 24.500 17.500
The closing price of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on May 21, 1997 was $21.125. As of May
21, 1997 there were approximately 150 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."
13
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and capitalization of the Company as of March 31, 1997 of (i) the
Company on a historical basis, (ii) the Company on a pro forma combined basis,
giving effect to the Second Quarter 1997 Acquisitions and the financing and
payment of the related purchase prices (including the issuance of Common Stock)
and (iii) the Company on that pro forma combined basis, as adjusted to give
effect to the issuance and sale of the Notes to the Initial Purchasers on April
2, 1997 and the application of the net proceeds to the Company therefrom to
repay indebtedness outstanding under the Credit Facility.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------------------------
PRO FORMA
PRO FORMA COMBINED
HISTORICAL COMBINED AS ADJUSTED
-------------- --------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current maturities of long-term
obligations........................... $ 152 $ 1,271 $ 152
============== =============== ============
Long-term obligations, less current
maturities............................ $ 54,341 69,009 15,128
7 1/4% Convertible Subordinated Notes
due 2004.............................. -- -- 55,000
Stockholders' equity:
Preferred Stock: $0.001 par value,
10,000,000 shares authorized;
none issued or outstanding....... -- -- --
Common Stock: $0.001 par value,
50,000,000 shares authorized;
11,679,617 shares issued and
outstanding historical(1);
12,015,347 shares issued and
outstanding on a pro forma
combined basis(1)................ 12 13 13
Additional paid-in capital......... 123,214 130,441 130,441
Retained deficit................... (10,323) (10,323) (10,323)
-------------- --------------- ------------
Total stockholders' equity.... 112,903 120,131 120,131
-------------- --------------- ------------
Total capitalization..... $167,244 $ 189,140 $190,259
============== =============== ============
</TABLE>
- ------------
(1) Excludes (i) an aggregate of 1,665,700 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."
14
<PAGE>
SELECTED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
For financial reporting purposes, Atlas is presented as the acquiror in all
the acquisitions by ARS through September 30, 1996, the effective date of the
Initial Acquisitions. During the first quarter of 1997, the Company acquired ten
businesses, eight of which were accounted for under the pooling-of-interests
method of accounting. Consequently, the Company's historical financial
statements presented in this Prospectus for periods ended on or before September
30, 1996 are the consolidated historical financial statements of Atlas
retroactively restated for all acquisitions accounted for under the
pooling-of-interests method. As used in this discussion, the "Company" means (i)
Atlas prior to September 30, 1996 and (ii) ARS and its consolidated subsidiaries
on that date and thereafter. The following selected historical financial
information has been derived from the audited consolidated financial statements
of the Company for each year in the three-year period ended December 31, 1996.
The remaining selected historical financial information of the Company has been
derived from unaudited financial statements of the Company, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of the Company, reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of that information. The
following selected unaudited pro forma combined statement of operations
information is derived from the unaudited pro forma combined financial
statements of the Company included elsewhere herein and, (i) in the case of the
pro forma combined statement of operations information for the year ended
December 31, 1996, gives effect to the acquisitions of all the Acquired
Businesses acquired to date that have been accounted for as purchase
transactions, the IPO and the issuance and sale of the Notes and the application
of the net proceeds to the Company therefrom to repay indebtedness outstanding
under the Credit Facility, assuming those transactions had occurred on January
1, 1996 and (ii) in the case of the pro forma combined statement of operations
information for the three months ended March 31, 1997, gives effect to the
acquisitions of all the Acquired Businesses acquired in 1997 that have been
accounted for as purchase transactions and the issuance and sale of the Notes
and the application of the net proceeds to the Company therefrom to repay bank
indebtedness outstanding under the Credit Facility, assuming those transactions
had occurred on January 1, 1997. See the Unaudited Pro Forma Combined Financial
Statements and the notes thereto included elsewhere herein. The following
selected balance sheet information presents (i) certain historical information
derived from the consolidated financial statements of the Company and (ii) the
March 31, 1997 historical balance sheet on a pro forma combined basis, as
adjusted to give effect to the Second Quarter 1997 Acquisitions and the issuance
and sale of the Notes and the application of the net proceeds to the Company
therefrom to repay indebtedness outstanding under the Credit Facility. The
summary financial information below should be read in conjunction with the
historical and unaudited pro forma consolidated financial statements and notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS INFORMATION:
HISTORICAL:
Revenues.............................. $ 22,388 $ 27,607 $ 41,151 $ 48,401 $ 95,518 $ 13,648 $ 55,446
Gross profit.......................... 5,847 6,801 9,565 12,446 27,374 3,932 16,491
Selling, general and administrative
expenses............................ 5,218 5,963 8,766 9,648 25,787 3,205 14,572
Income from continuing operations..... 629 838 799 2,798 1,587 727 1,919
Interest income and other expense,
net................................. 7 95 245 160 457 80 191
Interest expense...................... (247) (269) (254) (274) (5,392) (73) (1,110)
Net income (loss) from continuing
operations.......................... $ 185 $ 366 $ 469 $ 1,608 $ (4,305 (1) $ 436 $ 559
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges(2).......................... 2.12x 2.87x 3.03x 6.71x -- 5.10x 1.82x
========= ========= ========= ========= ========= ========= =========
</TABLE>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
------------------ ------------------
PRO FORMA COMBINED(3):
Revenues......................... $ 282,604 $62,819
Gross profit..................... 88,271 19,356
Selling, general and
administrative expenses(4)...... 65,485 16,229
Goodwill amortization(5)......... 3,696 924
Income from operations........... 19,090 2,203
Interest income and other
expenses, net................... 1,284 212
Interest expense................. (5,964) (1,366)
Net income from continuing
operations...................... $ 7,517 $ 558
================== ========
Net income per share from
continuing operations........... $ 0.62 $ 0.04
================== ========
Shares used in computing pro
forma net income per share from
continuing operations........... 12,119(6) 12,519
================== ========
Ratio of earnings to fixed
charges(2)...................... 3.35x 1.60x
================== ========
(TABLE CONTINUED ON FOLLOWING PAGE)
15
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31, 1997
----------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 HISTORICAL AS ADJUSTED
--------- --------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital (deficit)........ $ (621) $ (527) $ (568) $ (359) $ 16,256 $ 16,408 $ 17,417
Total assets..................... 6,488 8,209 10,814 12,980 196,857 197,491 223,271
Total debt, including current
portion........................ 3,792 3,925 3,769 3,474 53,913 54,493 70,280
Stockholders' equity............. 190 732 1,218 2,232 112,056 112,903 120,131
</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 consolidated financial statements.
(2) For purposes of calculating this ratio, "earnings" consist of earnings
from continuing operations before fixed charges and income tax, while
"fixed charges" consist of interest expense and one-third of rental
expense, which the Company estimates to be representative of the interest
and rental factors therein. As a result of the operating loss in 1996,
earnings did not cover fixed charges for that year by $2,349.
(3) 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.
(4) 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.
(5) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Acquired Businesses over a 40-year period.
(6) Computed as described in Note 4 to the Unaudited Pro Forma Combined
Financial Statements.
16
<PAGE>
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
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, 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>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------------------------------- --------------------
1994 1995 1996 1996
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 41,151 100.0% $ 48,401 100.0% $ 95,518 100.0% $ 13,648 100.0%
Cost of services..................... 31,586 76.8 35,955 74.3 68,144 71.3 9,716 71.2
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 9,565 23.2 12,446 25.7 27,374 28.7 3,932 28.8
Selling, general and administrative
expenses........................... 8,766 21.3 9,648 19.9 25,787 27.0 3,205 23.5
--------- --------- --------- --------- --------- --------- --------- ---------
Income from continuing operations.... 799 1.9 2,798 5.8 1,587 1.7 727 5.3
Interest income and other expense,
net................................ 245 0.6 160 0.3 457 0.5 80 0.6
Interest expense..................... (254) (0.6) (274) (0.6) (5,392) (5.6) (73) (0.5)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 790 1.9 2,684 5.5 (3,348) (3.4) 734 5.4
Income taxes......................... 321 0.8 1,076 2.2 957 1.0 298 2.2
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) from continuing
operations......................... $ 469 1.1 $ 1,608 3.3 $ (4,305) (4.4) $ 436 3.2
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1997
--------------------
Revenues............................. $ 55,466 100.0%
Cost of services..................... 38,955 70.3
--------- ---------
Gross profit......................... 16,491 29.7
Selling, general and administrative
expenses........................... 14,572 26.2
--------- ---------
Income from continuing operations.... 1,919 3.5
Interest income and other expense,
net................................ 191 0.3
Interest expense..................... (1,110) (2.0)
--------- ---------
Income (loss) from continuing
operations before income taxes..... 1,000 1.8
Income taxes......................... 441 0.8
--------- ---------
Net income (loss) from continuing
operations......................... $ 559 1.0
========= =========
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996
REVENUES -- Revenues increased by 307.4% from $13.6 million for the three
months ended March 31, 1996 to $55.4 million for the three months ended March
31, 1997. Approximately $37.0 million of the increase from the first quarter of
1996 to the corresponding period in 1997 resulted from the inclusion of revenues
from the Founding Companies, the Fourth Quarter 1996 Acquisitions and the First
Quarter 1997 Acquisitions accounted for as purchase acquisitions. The remainder
of the increase was primarily attributable to increases in new installation
projects in Virginia and South Carolina. These increases were partially offset
by revenue reductions in Texas and Florida resulting from the mild spring
weather experienced in those states.
COST OF SERVICES -- Cost of services increased 300.9% to $39.0 million for
the three months ended March 31, 1997, as compared to the corresponding period
in the prior year, reflecting increased costs associated with the higher level
of revenues. Gross profit, as a percentage of revenues, increased from 28.8% for
the three months ended March 31, 1996 to 29.7% for the three months ended March
31, 1997. The improvement in gross profit in the first quarter of 1997 was
attributable to the purchase acquisitions of businesses providing maintenance,
repair and replacement services, which generate higher margins than new
installation services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $11.4 million to $14.6 million for the three
months ended March 31, 1997, as compared to the corresponding period in the
prior year. The increase was primarily attributable to the acquisition of the
Founding Companies, the Fourth Quarter 1996 Acquisitions and the First Quarter
1997 Acquisitions accounted for as purchase acquisitions, coupled with the
addition of ARS's corporate personnel and administrative infrastructure.
INTEREST INCOME AND OTHER EXPENSE, NET -- Interest income and other
expense, net increased $0.1 million from $0.1 million for the three months ended
March 31, 1996 to $0.2 million for the three months ended March 31, 1997.
INTEREST EXPENSE -- Interest expense increased $1.0 million, from $0.1
million for the three months ended March 31, 1996 to $1.1 million for the three
months ended March 31, 1997. The increase was attributable to the use of debt to
fund the cash portion of the Fourth Quarter 1996 Acquisitions and First Quarter
1997 Acquisitions.
18
<PAGE>
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.
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
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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES -- THE COMPANY
During the three months ended March 31, 1997, net cash used in operating
activities was $2.1 million, capital expenditures totaled $2.0 million and net
borrowings of debt amounted to $0.3 million. The Company anticipates capital
expenditures (exclusive of acquisitions) of approximately $6.0 million during
the remainder of 1997, primarily for computer equipment, leasehold improvements
and furniture and fixtures.
On March 3, 1997, the Company increased the size of the Credit Facility
from $55.0 million to $100.0 million. Borrowings under the Credit Facility may
be used for general corporate purposes, including the funding of any cash paid
in connection with acquisitions, refinancing indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest at a designated variable base rate plus a margin ranging
from 0 to 50 basis points, depending on the ratio of the Company's
interest-bearing debt to its trailing twelve-month earnings before interest,
taxes, depeciation and amortization. At the Company's option, the loans may bear
interest based on a designated London interbank offering rate plus a margin
ranging from 100 to 200 basis points, depending on the same ratio. The margin is
reset on a quarterly basis and also may be reset upon the closing of an
acquisition involving cash consideration in excess of $5.0 million or upon a
principal repayment in excess of $5.0 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility has a $5.0 million sublimit for standby letters of credit. The
Credit Facility also requires the consent of the lenders for acquisitions
exceeding a certain level of cash consideration, prohibits the payment of
dividends by the Company (except for dividends payable in Common Stock and
certain preferred stock), does not permit the Company to incur or assume other
indebtedness in excess of any amount equal to 5% of its consolidated net worth
and requires the Company to comply with certain financial covenants. The Credit
Facility will terminate and all amounts outstanding, if any, thereunder will be
due and payable in September 1999. The Company's subsidiaries have guaranteed
the repayment of all amounts due under the Credit Facility, and the Company has
pledged the stock of its operating subsidiaries as collateral for its
obligations under the Credit Facility. At March 31, 1997, the Company's
outstanding borrowings under the Credit Facility were $54.0 million, bearing
interest at a weighted average rate of 7.78%. As of May 19, 1997, the Company
had outstanding borrowings under the Credit Facility in the amount of $21.8
million, bearing interest at a weighted average rate of 7.63%.
On April 2, 1997, the Company issued $55.0 million aggregate principal
amount of its 7 1/4% Convertible Subordinated Notes due 2004 (the "7 1/4%
Notes"). These notes are unsecured obligations of ARS and are convertible into
an aggregate of 2,156,863 shares of Common Stock of the Company at a conversion
price of $25.50 per share. The Company used substantially all the net proceeds
of the offering of the 7 1/4% 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 May 19, 1997, 3,355,518 shares remain available for issuance
under the Shelf Registration Statement.
Following the end of the first quarter of 1997 through May 19, 1997, the
Company has acquired an additional seven companies for an aggregate
consideration of $12.3 million in cash and 335,730 shares of Common Stock, all
of which were issued under the Shelf Registration Statement. Each of those
acquisitions was accounted for under the purchase method of accounting. Funding
of the cash portion of the purchase prices and repayment of indebtedness assumed
in connection with those acquisitions was provided by borrowings under the
Credit Facility. The Company believes its cash flow from operations and the
borrowings available under the Credit Facility are sufficient to support its
ongoing operations and anticipated capital expenditures for the remainder of
1997.
The Company intends to continue to pursue attractive acquisition
opportunities of both residential and commercial maintenance services
businesses. The timing, size or success of any acquisitions effort and the
associated potential capital commitments are unpredictable. The Company expects
to fund future acquisitions primarily through a combination of working capital,
cash flow from operations and borrowings,
20
<PAGE>
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.
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
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 34,642 100.0% $ 36,334 100.0% $ 35,159 100.0% $ 25,534 100.0%
Cost of services..................... 27,393 79.1 29,928 82.4 28,866 82.1 20,965 82.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 7,249 20.9 6,406 17.6 6,293 17.9 4,569 17.9
Selling, general and administrative
expenses........................... 5,011 14.5 5,245 14.4 5,280 15.0 3,902 15.3
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ $ 2,238 6.4 $ 1,161 3.2 $ 1,013 2.9 $ 667 2.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 27,054 100.0%
Cost of services..................... 21,814 80.6
--------- ---------
Gross profit......................... 5,240 19.4
Selling, general and administrative
expenses........................... 4,512 16.7
--------- ---------
Income (loss) from operations........ $ 728 2.7
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.6 million, or 6.3%, from $25.5 million
for the nine months ended September 30, 1995, to $27.1 million for the nine
months ended September 30, 1996. This increase was attributable to a $0.6
million increase in new installation revenues, a $0.6 million increase in HVAC
replacement revenues and a $0.4 million increase in other revenues.
21
<PAGE>
COST OF SERVICES -- Cost of services increased $0.8 million, or 3.8%, from
$21.0 million for the nine months ended September 30, 1995 to $21.8 million for
the nine months ended September 30, 1996. Cost of services as a percentage of
revenues decreased from 82.1% for the nine months ended September 30, 1995 to
80.6% for the nine months ended September 30, 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.6 million, or 15.4%, from $3.9 million for
the nine months ended September 30, 1995 to $4.5 million for the nine months
ended September 30, 1996. This increase was primarily attributable to increases
in selling commissions corresponding to the increased revenues.
1995 COMPARED TO 1994
REVENUES -- Revenues decreased $1.1 million, or 3.0%, from $36.3 million in
1994 to $35.2 million in 1995. This decrease was attributable to a reduction in
the number of new home starts in the Washington-Baltimore metropolitan area.
COST OF SERVICES -- Cost of services decreased $1.0 million, or 3.3%, from
$29.9 million in 1994 to $28.9 million in 1995. This decrease was consistent
with the percentage decrease in revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses were unchanged at $5.3 million for 1994 and 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $1.7 million, or 4.9%, from $34.6 million in
1993 to $36.3 million in 1994. This increase was attributable to a $1.0 million
increase in new installation volume and a $0.7 million increase in HVAC system
replacement services.
COST OF SERVICES -- Cost of services increased $2.5 million, or 9.1%, from
$27.4 million in 1993 to $29.9 million in 1994. As a percentage of revenues,
cost of services increased to 82.4% in 1994 from 79.1% in 1993. This increase
was primarily attributable to: (i) a $0.5 million adjustment to write off
certain obsolete inventory; (ii) increased depreciation on replacement of fully
depreciated trucks; (iii) an increase in payroll and related employee benefits;
and (iv) an increase in the cost of delivery of parts and materials, as the
Company's operations were spread over a larger geographic region.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.2 million, or 4.0%, from $5.0 million in
1993 to $5.2 million in 1994. This increase was consistent with the percentage
increase in revenues and was attributable to increases in payroll and related
employee benefits.
LIQUIDITY AND CAPITAL RESOURCES -- GENERAL HEATING
The following table sets forth selected information from General Heating
statements of cash flows (dollars in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in)
operating activities............... $ 0.9 $ 2.1 $ 2.9 $ 1.4 $ (0.5)
Net cash provided by (used in)
investing activities............... (1.0) (3.1) (0.3) (1.2) 1.9
Net cash used in financing
activities......................... (1.7) (0.2) (1.5) (0.6) (4.3)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ (1.8) $ (1.2) $ 1.1 $ (0.4) $ (2.9)
========= ========= ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, General Heating
generated $5.4 million in cash from operating activities and used $2.6 million
of this cash to fund increases in working capital, resulting in a net cash
generation of $8.0 million.
22
<PAGE>
Cash used in investment activities was primarily attributable to the
purchase and replacement of trucks in General Heating's fleet. In addition, in
1994, General Heating invested approximately $2.5 million in short-term
investment securities.
Cash used in financing activities consists primarily of S corporation
distributions to General Heating's stockholders.
Prior to the closing of the Initial Acquisitions, General Heating made
distributions to its stockholders in respect of its estimated S corporation
accumulated adjustment account as of the date of the closing. These
distributions (approximately $10.9 million as of September 30, 1996) were funded
primarily through working capital, cash provided by General Heating's operating
activities and short-term debt.
General Heating had working capital of $1.8 million as of September 30,
1996. It historically funded its operations with cash flows from operations.
RESULTS OF OPERATIONS -- CROWN
The following table sets forth certain historical selected financial data
of Crown and that data as a percentage of revenues for the periods indicated
(dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------------------------------- --------------------
1993 1994 1995 1995
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 16,268 100.0% $ 16,844 100.0% $ 19,124 100.0% $ 14,420 100.0%
Cost of services..................... 10,332 63.5 10,314 61.2 11,333 59.3 8,603 59.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 5,936 36.5 6,530 38.8 7,791 40.7 5,817 40.3
Selling, general and administrative
expenses........................... 5,698 35.0 5,837 34.7 6,165 32.2 4,574 31.7
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 238 1.5 $ 693 4.1 $ 1,626 8.5 $ 1,243 8.6
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
1996
--------------------
Revenues............................. $ 15,556 100.0%
Cost of services..................... 9,636 61.9
--------- ---------
Gross profit......................... 5,920 38.1
Selling, general and administrative
expenses........................... 4,335 27.9
--------- ---------
Income from operations............... $ 1,585 10.2
========= =========
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $1.2 million, or 8.3%, from $14.4 million
for the nine months ended September 30, 1995 to $15.6 million for the nine
months ended September 30, 1996. This increase was attributable to increases of
$0.6 million each in plumbing and HVAC revenues.
COST OF SERVICES -- Cost of services increased $1.0 million, or 11.6%, from
$8.6 million for the nine months ended September 30, 1995 to $9.6 million for
the nine months ended September 30, 1996, and increased as a percentage of
revenues from 59.7% in the nine months ended September 30, 1995 to 61.9% in the
nine months ended September 30, 1996. The increase in cost of services as a
percentage of revenue was primarily attributable to a reduction in the pricing
of services in order to increase market share.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.3 million, or 6.5%, from $4.6 million for
the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996, but declined as a percentage of revenues from 31.7% in
the nine months ended September 30, 1995 to 27.9% in the nine months ended
September 30, 1996. This percentage reduction was primarily attributable to a
$0.3 million reduction in owner compensation.
1995 COMPARED TO 1994
REVENUES -- Revenues increased $2.3 million, or 13.7%, from $16.8 million
in 1994 to $19.1 million in 1995. The increase in revenues was primarily
attributable to increases of $1.3 million and $0.9 million in HVAC revenues and
plumbing revenues, respectively.
COST OF SERVICES -- Cost of services increased $1.0 million, or 9.7%, from
$10.3 million in 1994 to $11.3 million in 1995, but decreased as a percentage of
revenues from 61.2% in 1994 to 59.3% in 1995. The
23
<PAGE>
percentage decrease was attributable to a change in the mix of services provided
from lower-margin services to higher-margin services and an increase in the use
of contractors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 6.9%, from $5.8 million in
1994 to $6.2 million in 1995, but decreased as a percentage of revenues from
34.7% in 1994 to 32.2% in 1995. The dollar increase was primarily attributable
to increased advertising.
1994 COMPARED TO 1993
REVENUES -- Revenues increased $0.5 million, or 3.1%, from $16.3 million in
1993 to $16.8 million in 1994. The increase in revenues was attributable to a
$0.5 million increase in HVAC revenues.
COST OF SERVICES -- Cost of services was unchanged at $10.3 million for
1993 and 1994, but decreased 2.3% as a percentage of sales from 63.5% in 1993 to
61.2% in 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.1 million, or 1.8%, from $5.7 million in
1993 to $5.8 million in 1994.
LIQUIDITY AND CAPITAL RESOURCES -- CROWN
The following table sets forth selected information from Crown statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
----------------------------- --------------------
1993 1994 1995 1995 1996
--------- ---- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $ 0.5 $0.7 $ 1.3 $ 0.7 $ 1.4
Net cash provided by (used in)
investing activities............... (0.7) 0.1 (0.6) (1.0) 0.8
Net cash provided by (used in)
financing activities............... 0.2 0.2 0.3 0.0 (4.0)
--------- ---- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents................... $ 0.0 $1.0 $ 1.0 $ (0.3) $ (1.8)
========= ==== ========= ========= =========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Crown generated
$3.9 million in net cash from operating activities, primarily generated from net
income plus depreciation and amortization. For the year ended December 31, 1993,
Crown recorded a loss on the sale of certain assets of $0.5 million.
The change in net cash provided by (used in) investing activities was
primarily attributable to purchases/sales of investments and marketable
securities and proceeds from the sale of property and equipment.
The change in net cash provided by (used in) financing activities was
attributable to net borrowings and repayments of debt obligations and
advances/payments to/from the sole shareholder of Crown.
Crown had working capital of $0.6 million as of September 30, 1996. It
historically funded its operations with cash flows from operations and
borrowings from lenders and its sole shareholder.
RESULTS OF OPERATIONS -- FLORIDA HAC
The following table sets forth certain historical selected financial data
and data as a percentage of revenues for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31 ENDED SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 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>
24
<PAGE>
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)
========= ========= ========= =========
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.
25
<PAGE>
RESULTS OF OPERATIONS -- MERIDIAN & HOOSIER
The following table sets forth certain historical selected financial data
of Meridian & Hoosier and that data as a percentage of revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------ ------------------------------------------
1994 1995 1995 1996
-------------------- -------------------- -------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 8,066 100.0% $ 10,133 100.0% $ 7,499 100.0% $ 11,508 100.0%
Cost of services..................... 5,797 71.9 7,281 71.9 5,357 71.4 7,795 67.7
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 2,269 28.1 2,852 28.1 2,142 28.6 3,713 32.3
Selling, general and administrative
expenses........................... 1,988 24.6 2,350 23.2 1,660 22.1 2,785 24.2
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations............... $ 281 3.5 $ 502 4.9 $ 482 6.5 $ 928 8.1
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
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.
26
<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
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues............ $ 10,900 100.0% $ 8,676 100.0% $ 8,707 100.0% $ 6,534 100.0% $ 6,855 100.0%
Cost of services.... 6,921 63.5 5,574 64.2 5,709 65.6 4,314 66.0 3,733 54.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........ 3,979 36.5 3,102 35.8 2,998 34.4 2,220 34.0 3,122 45.6
Selling, general and
administrative
expenses.......... 2,830 26.0 2,444 28.2 2,348 27.0 1,722 26.4 2,084 30.4
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Income from
continuing
operations........ $ 1,149 10.5 $ 658 7.6 $ 650 7.4 $ 498 7.6 $ 1,038 15.2
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Loss from
discontinued
operations........ $ (1,452) $ (142) $ (115) $ (54) $ (271)
========= ========= ========= ========= =========
</TABLE>
UNAUDITED INTERIM RESULTS
REVENUES -- Revenues increased $0.4 million, or 6.1%, from $6.5 million for
the nine months ended September 30, 1995 to $6.9 million for the nine months
ended September 30, 1996. The increase in revenue was primarily attributable to
a $0.2 increase in HVAC installations and a $0.1 million increase in appliance
service.
COST OF SERVICES -- Cost of services decreased $0.6 million, or 14.0%, from
$4.3 million for the nine months ended September 30, 1995 to $3.7 million for
the nine months ended September 30, 1996. This decrease was primarily due to an
increase in volume purchase discounts and better utilization of employees,
resulting in reduced labor costs as a percentage of sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses increased $0.4 million, or 23.5%, from $1.7 million for
the nine months ended September 30, 1995 to $2.1 million for the nine months
ended September 30, 1996.
1995 COMPARED TO 1994
REVENUES -- Revenues remained constant at $8.7 million for 1994 and 1995.
COST OF SERVICES -- Cost of services increased $0.1 million, or 1.8%, from
$5.6 million in 1994 to $5.7 million in 1995.
27
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.1 million, or 4.2%, from $2.4 million in
1994 to $2.3 million in 1995.
1994 COMPARED TO 1993
REVENUES -- Revenues decreased $2.2 million, or 20.2%, from $10.9 million
for 1993 to $8.7 million for 1994. The decrease was primarily attributable to
decreases of $0.9 million, $0.7 million and $0.4 million from appliance service,
HVAC installations and plumbing service, respectively.
COST OF SERVICES -- Cost of services decreased $1.3 million, or 18.8%, from
$6.9 million in 1993 to $5.6 million in 1994 and was consistent as a percentage
of revenue with the reduction in revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -- Selling, general and
administrative expenses decreased $0.4 million, or 14.3%, from $2.8 million in
1993 to $2.4 million in 1994. This decrease resulted from a $0.4 million
reduction in advertising expense.
LOSS FROM DISCONTINUED OPERATIONS -- Loss from discontinued operations
decreased $1.4 million, or 93.3%, from a $1.5 million loss for 1993 to a $0.1
million loss for 1994. The decrease in the loss was primarily attributable to
reductions of $0.6 million, $0.1 million and $0.3 million in salary and benefit
cost, rent and property tax expense and advertising expense, respectively.
LIQUIDITY AND CAPITAL RESOURCES -- A-ABC
The following table sets forth selected information from A-ABC's statements
of cash flows (in millions):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31 SEPTEMBER 30
---------------------- ---------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities......................... $0.8 $0.3 $0.6 $ 0.1 $ 0.5
Net cash provided by (used in)
investing activities............... (1.2) 0.2 (0.4) (0.2) (0.6)
Net cash used in financing
activities......................... 0.4 (0.4) (0.1) 0.0 (0.1)
---- ---- ---- ----- -----
Net increase (decrease) in cash and
cash equivalents................... $0.0 $0.1 $0.1 $(0.1) $(0.2)
==== ==== ==== ===== =====
</TABLE>
From 1993 through the nine months ended September 30, 1996, A-ABC generated
$2.2 million in net cash from operating activities.
Cash used in investment activities was primarily attributable to purchasing
additional trucks and the net change in the cash provided by (used in)
discontinued operations.
Cash used in financing activities consisted primarily of S corporation
distributions to the Company's sole shareholder and net borrowings and
repayments of long-term obligations.
A-ABC had a working capital deficit of $1.2 million at September 30, 1996.
It historically funded its operations with cash flows from operations and
borrowings from lenders and its shareholder.
28
<PAGE>
BUSINESS
GENERAL
ARS was founded in October 1995 to create the leading national provider of
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"). To achieve this goal, the Company
embarked on an aggressive acquisition program and implemented a national
operating strategy designed to increase internal growth and capitalize on cost
efficiencies. Today, the Company is the largest publicly held company in the
United States engaged principally in providing these services. The Company also
has the goal of becoming a 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"). The Company recently acquired its first business
engaged principally in providing commercial maintenance services and, through
May 19, 1997, has acquired six additional businesses that provide some
commercial maintenance services in addition to their residential services. The
Company intends to apply the same acquisition and national operating strategies
to its commercial maintenance services business that it has implemented in its
residential services business.
With the inclusion of all the Acquired Businesses, 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 a leading provider of commercial maintenance services.
29
<PAGE>
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 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
30
<PAGE>
increasing their revenues and improving their profitability. Once the Company
has entered a market, it seeks to acquire other residential or commercial
maintenance services providers in order to expand its share of that market and
increase the range of services offered in that market. Some of the acquisitions
within existing markets are large enough to warrant their own operating and
management structure, while other acquisitions are small enough to be folded
into an existing operation without significantly increasing the Company's
infrastructure. If an acquisition is large enough to warrant its own operating
structure, the Company will develop a regional operating plan 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 and
commercial maintenance services businesses as an attractive acquiror because of:
(i) the Company's strategy for creating a large, professionally managed company
with national name recognition and a reputation for quality service and customer
satisfaction; (ii) management's experience in consolidations; (iii) the
Company's decentralized operating strategy; (iv) the Company's increased
visibility and access to financial resources as a public company; (v) the
potential for increased profitability 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 and commercial
maintenance services industries and individual businesses within those
industries and believes it is well-positioned to implement its acquisition
program. On the basis of the Company's experience in connection with the
acquisitions of the Acquired Businesses, the Company believes its operating
management will be instrumental in identifying and completing future
acquisitions. Several of these executives have had leadership roles in both
national and regional trade associations, which have allowed these principals to
become personally acquainted with other owners of residential and commercial
maintenance services businesses across the country. The Company believes the
visibility of these individuals within these associations will increase the
industry's awareness of the Company and its acquisition program, thereby
attracting interest from owners of other residential and commercial maintenance
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
31
<PAGE>
maintenance, repair and replacement services include: checkups, cleaning, repair
and replacement of HVAC systems and associated parts; maintenance, repair and
replacement of electrical switches, outlets, lines, panels and fixtures; repair
and replacement of bathroom fixtures, water filters and water heaters; cleaning,
repair and replacement of pipes, sewer lines and residential sanitary systems;
and maintenance, repair and replacement of other residential systems, including
home appliances. In connection with its repair and replacement services, the
Company sells on a retail basis a wide range of HVAC, plumbing, electrical and
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 May 19, 1997.
<TABLE>
<CAPTION>
OTHER
HVAC PLUMBING ELECTRICAL SERVICES
---- -------- ---------- --------
<S> <C> <C> <C> <C>
MAINTENANCE, REPAIR AND REPLACEMENT
SERVICES:
California........................... X X
Florida.............................. X X
Illinois............................. X
Indiana.............................. X X X
Michigan............................. X
North Carolina....................... X
Oklahoma............................. X
South Carolina....................... X X X
Texas................................ X X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X
NEW INSTALLATION SERVICES:
California........................... X
Florida.............................. X
Indiana.............................. X X X
Michigan............................. X
North Carolina....................... X
South Carolina....................... X X X X
Virginia and the Washington-Baltimore
metropolitan area.................. X X
</TABLE>
An important element of the Company's growth strategy is to increase the
range of residential services, particularly the maintenance, repair and
replacement services it provides, in each of its regions through acquisitions
and internally generated growth. Accordingly, the mix of services reflected in
the foregoing table is expected to change over time as the Company implements
its growth strategy. In addition, the Company intends to provide a full range of
these services in new geographic areas into which it will expand, principally by
acquisitions. See " -- Business Strategy."
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
32
<PAGE>
facilities such as office buildings, health care facilities, educational
institutions and large retail outlets. The Company recently made its first
acquisition of a company engaged principally in providing commercial maintenance
services and, through May 19, 1997, has acquired six additional companies that
provide some commercial maintenance services in addition to residential
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 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 and commercial service operations are coordinated
by local operations centers, which are staffed by order entry and customer
service personnel, operations or service coordinators, and inventory, vehicle
maintenance and office personnel. These centers use specialized computer and
communications technology to process orders, arrange service calls, ensure
timely delivery of required repair parts or new equipment, communicate with
customers and service technicians and invoice customers. A typical maintenance,
repair or replacement service call begins with either the customer telephoning a
local operations center and requesting an estimate or placing an order for
repair service or the Company calling the customer to make an appointment for
periodic service agreement maintenance. Coordination and deployment of service
technicians are managed by the operations center through communications systems
linked to the center's computer system, cellular telephone, pager or radio.
Service personnel work out of service vehicles, which are equipped with an
inventory of equipment and commonly required tools, parts and supplies needed to
complete a variety of jobs. The service technician assigned to a service call is
generally responsible for driving to the service location, initiating the
customer contact, analyzing the problem and job requirements, providing the
price quotation, overseeing the work and collecting payment for the service.
Payment for maintenance, repair and replacement services not covered by a
service contract is generally made in cash or by check or credit card at the job
site, except for certain well-established customers.
The Company's service technicians respond to three general types of
maintenance, repair and replacement service calls: requests for services under
the Company's monitoring service contracts, requests for service under the
Company's warranty service contracts and requests for emergency or other
services not under contract. A substantial majority of these service calls are
for emergency or other services not under contract. Service calls cover a wide
variety of services, including the replacement of entire HVAC systems. Service
histories on past customers are generally available to the customer service
representatives in a continuously updated computer database matched to addresses
in the local service area.
The Company's new installation services are generally provided to builders
of new homes and small commercial facilities. Typically, new installation
service begins with the customer providing the architectural plans or mechanical
drawings for the particular home or an entire tract of homes or other facility
to be constructed and either requesting a bid or entering into direct
negotiation for the work required. The Company's new installation personnel
analyze the plans to determine the labor, materials and equipment
33
<PAGE>
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 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 HVAC, plumbing, electrical and other systems for a period
of time for a fixed fee and "maintenance only" or "repair only" contracts
whereby the Company makes periodic inspections of these systems and provides
certain preventative maintenance for a period of time for a fixed fee. The
Company believes that such service contracts provide the Company with
flexibility in determining the timing for delivery of its services, thereby
generating greater stability in the level of demand for services throughout
different seasons of the year. See " -- Seasonality." Certain states regulate
the provision of service under residential services warranty contracts. See
" -- Governmental Regulation and Environmental Matters."
With respect to its new installation business, the Company's marketing
strategy focuses on cultivating long-term relationships with its national,
regional and local home builder and general contractor customers. The Company's
marketing efforts with these customers primarily involve direct sales contacts
emphasizing the Company's quality of services and reliability. In addition,
labels with the Company's name and phone number are applied to newly installed
equipment, and direct telemarketing sales efforts for service contracts are
timed to closely coincide with the expiration of manufacturer warranties on
Company installed equipment. The Company believes these measures in connection
with its new installation business will lead to maintenance, repair and
replacement business.
34
<PAGE>
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.
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."
35
<PAGE>
EMPLOYEES
As of May 19, 1997, the Company had approximately 2,800 employees. As it
implements its internal growth and acquisition strategies, the Company expects
that the number of employees will increase. The Company has not experienced any
strikes or work stoppages and believes its relationship with its employees is
good.
As of May 19, 1997, none of the Company's employees principally engaged in
providing residential services were represented by a union, while approximately
30 employees principally engaged in providing commercial maintenance services
were represented by a union. The Company believes that a significant percentage
of companies providing commercial maintenance services have employees who are
members of unions. Thus, as the Company expands into the commercial maintenance
services business, it expects the number of union members it employs to
increase.
Both the residential services business and the commercial maintenance
services business are characterized by, among other things, high turnover rates
among service technicians. A substantial majority of the service technician
turnover experienced by the Acquired Businesses in recent years has been during
the extended screening period in the first year of employment. The Company's
future success will depend, in part, on its ability to continue to attract,
retain and motivate qualified service technicians and operational management
personnel. 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 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
36
<PAGE>
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.
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
37
<PAGE>
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 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.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each director
and executive officer (ages are as of May 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............. 35 Treasurer
Michael Mamaux...................... 31 Controller
Thomas N. Amonett................... 53 Director(4)(5) I
Robert J. Cruikshank................ 66 Director(2)(4) II
Randall B. Hale..................... 34 Director(4) II
Nolan Lehmann....................... 53 Director(5) III
William P. McCaughey................ 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 ("American
Ecology"). From 1990 to 1991, Mr. Wright was a Director of Corporate Finance
with KPMG Peat Marwick. Prior thereto, he was a divisional vice president in
finance and planning of Browning-Ferris Industries, Inc. ("BFI"). Mr. Wright
is a Certified Public Accountant.
HOWARD S. HOOVER, JR. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by BFI and served during his
tenure as a director and in various management capacities as a member of the
Senior Management Committee, Senior Vice President, General Counsel and
Secretary. From 1992 until 1995, Mr. Hoover was engaged in various business
development and consulting activities.
GORDEN H. TIMMONS has served as Chief Operating Officer and a director
since September 1996. He founded Atlas in 1976 and served as its President until
September 1996. Mr. Timmons was a founder of the Charleston Chapter of the Air
Conditioning Contractors of America ("ACCA") and is a past President of that
Chapter.
JOHN D. HELD has been Senior Vice President, General Counsel and Secretary
since March 1996. From October 1995 to March 1996, he was an associate at the
law firm of Liddell, Sapp, Zivley, Hill and LaBoon, LLP. Mr. Held was Associate
General Counsel of American Ecology from 1994 to 1995 and was an associate at
the law firm of Baker & Botts, L.L.P. prior thereto.
39
<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 since February 1993. From January 1991 to January 1993, he was
Divisional Vice President and Assistant Controller of BFI. Mr. Nicodemus is a
Certified Public Accountant.
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 as a Manager-Financial
Analysis and Assistant Treasurer. From 1990 to 1993, Mr. Walker served as a
Senior Financial Analyst and Assistant Banking Officer of Mellon Bank
Corporation in Houston, Texas. Mr. Walker was a financial analyst at BFI from
1988 to 1989.
MICHAEL MAMAUX joined the Company in April 1996 as Controller. From 1995
until April 1996, Mr. Mamaux was an assistant corporate controller at U.S.
Delivery Systems, Inc. Prior thereto, he was a Senior Auditor at Arthur Andersen
LLP. Mr. Mamaux is a Certified Public Accountant.
THOMAS N. AMONETT has been a director since September 1996. He has served
as President and 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 and is
a director of Brazos Sportswear, Inc. From 1985 to 1992, he was employed by
Arthur Andersen LLP. Mr. Hale is a Certified Public Accountant. He was appointed
to the Board of Directors pursuant to the funding agreement between ARS and
Equus II (the "Equus Funding Agreement"), which terminated pursuant to its
terms on completion of the IPO. See "Certain Transactions -- Organization of
the Company."
NOLAN LEHMANN has been a director since September 1996. He has been the
President of ECMC since its formation in 1983 and of Equus II since its
formation in 1991 (see "Certain Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"). Prior thereto, Mr. Lehmann was
employed by Service Corporation International, where he held various positions,
including vice president -- regional manager and vice president -- corporate
development. Mr. Lehmann currently serves as a director of a number of public
and private companies, including Allied Waste Industries, Inc., Brazos
Sportswear,
40
<PAGE>
Inc., Drypers Corporation and Garden Ridge Corporation. Mr. Lehmann was
appointed to the Board of Directors pursuant to the Equus Funding Agreement.
WILLIAM P. MCCAUGHEY has been a director since November 1995. Mr. McCaughey
also served the Company as Executive Vice President and Chief Financial Officer
from October 1996 through January 1997 and as Executive Vice
President -- Planning and Development from November 1995 until October 1996.
From 1992 to 1995, Mr. McCaughey was Treasurer of American Ecology. From 1991 to
1992, he was President of Environmental Financial Services, Inc., a research and
consulting firm. He served as Vice President and Corporate Treasurer of Republic
Waste Industries, Inc. from 1990 to 1991 and, prior thereto, was employed by BFI
in several financial positions from 1982 to 1990. Mr. McCaughey is a Chartered
Financial Analyst.
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
The Company currently pays each director who is not a Company employee (a
"Nonemployee Director") a fee of $1,500 for each Board meeting attended and
$1,000 for each Board committee meeting attended (except for committee meetings
held on the same day as Board meetings) and periodically grants Nonemployee
Directors options to purchase shares of Common Stock pursuant to the Company's
1996 Incentive Plan (the "Incentive Plan"). It does not pay any additional
compensation to its employees for serving as directors, but will reimburse all
directors for out-of-pocket expenses they incur in connection with attending
meetings of the Board or Board committees or otherwise in their capacity as
directors.
On the closing of the IPO, each Nonemployee Director was granted an option
to purchase up to 10,000 shares of Common Stock under the Incentive Plan. These
options will become exercisable at $15 per share (the IPO price to the public)
in 33 1/3% annual increments beginning in September 1997 and expire in June
2006. On the first business day of the month following the date on which each
annual meeting of the Company's stockholders is held, each Nonemployee Director
also will automatically be granted an option to purchase up to 5,000 shares of
Common Stock. Such options will (i) have a ten-year term, (ii) have an exercise
price per share equal to the fair market value of a share of Common Stock on the
date of grant and (iii) become exercisable in 33 1/3% annual increments
beginning on the first anniversary of the date of grant.
41
<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) $100,220(5) -- 75,000 $ 685
Senior Vice President, General
Counsel and Secretary
Gorden H. Timmons.................... $ 56,540(6) $ 27,910 -- 150,000 $ 354
Chief Operating Officer
</TABLE>
- ------------
(1) Except as stated in Note (5) below, represents cash performance-based bonus
awards paid for the period from September 27, 1996 to December 31, 1996.
(2) Represents: (i) matching contributions by the Company under the ARS 401(k)
plan for the executive officers named in the above table in the amounts of
$417 for Mr. Wright, $355 for Mr. McCaughey, $307 for Mr. Held and $354 for
Mr. Timmons; and (ii) the dollar value of insurance coverage provided to the
named executive officers by ARS under the ARS Executive Life Insurance
Program in the amounts of $823 for Mr. Wright, $498 for Mr. Hoover, $455 for
Mr. McCaughey and $378 for Mr. Held.
(3) Mr. McCaughey ceased serving as an executive officer effective January 1997.
(4) Salary earned since the date of commencement of Mr. Held's employment with
ARS in March 1996.
(5) Of this amount, $80,000 represents 5,333 shares of Common Stock awarded to
Mr. Held under the Incentive Plan when the IPO closed and valued at the IPO
price to the public ($15 per share).
(6) Salary earned since the date of commencement of Mr. Timmons' employment with
ARS in September 1996.
42
<PAGE>
OPTION GRANTS
The following table sets forth information regarding the options granted
during 1996 to the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES
NUMBER OF TOTAL OF STOCK PRICE
OF SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(2)
OPTIONS EMPLOYEES EXERCISE --------------------------
NAME GRANTED IN 1996 PRICE(1) EXPIRATION DATE 5% 10%
- ------------------------------------- ---------- ---------- -------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
C. Clifford Wright, Jr............... 200,000 13.3% $ 8.00 January 31, 2006 $ 1,006,000 $ 2,550,000
Howard S. Hoover, Jr................. 150,000 10.0% $ 8.00 January 31, 2006 $ 754,500 $ 1,912,500
William P. McCaughey................. 120,000 8.0% $ 8.00 January 31, 2006 $ 603,600 $ 1,530,000
John D. Held......................... 75,000 5.0% $ 9.60 March 6, 2006 $ 453,000 $ 1,147,500
Gorden H. Timmons.................... 150,000 10.0% $ 15.00 June 12, 2006 $ 1,414,500 $ 3,586,500
</TABLE>
- ------------
(1) All options shown in this table were granted prior to the closing of the
Initial Acquisitions and the IPO, and the ARS Board of Directors determined
that, as of the respective grant dates of these options, their per-share
exercise prices exceeded the then fair market value of a share of Common
Stock. This presentation assumes the exercise price of each of these options
equaled that fair market value on the grant date.
(2) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the assumed fair market value
on the grant date, from the grant date to the end of the option term.
The options granted to Messrs. Wright, Hoover, McCaughey and Held have
10-year terms, became exercisable as to 50% of the shares subject thereto on
March 27, 1997 and will become fully exercisable on March 27, 1998. The options
granted to Mr. Timmons have a 10-year term, are currently exercisable as to 20%
of the shares subject thereto and will vest an additional 20% per year,
commencing on September 27, 1997.
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.
43
<PAGE>
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.
ARS also has employment agreements with other executive officers of the
Company.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
ARS was initially capitalized in October 1995 with $1,000 provided by
Messrs. Wright, Hoover and McCaughey. As a result of stock splits, the 1,000
shares initially issued by ARS to its founders total 422,480 shares of Common
Stock. Prior to the IPO, Equus II advanced funds to ARS pursuant to a $2.6
million commitment to enable ARS to pay various expenses incurred in connection
with its efforts to create the Company and effect the IPO. On the closing of the
IPO, $0.5 million of this note was converted into 844,962 shares of Common
Stock, and ARS repaid the balance of the note with proceeds from the IPO. As a
part of its funding arrangements with Equus II, ARS issued a warrant to Equus II
in March 1996 to purchase up to 100,000 shares of Common Stock at $15 per share.
That warrant will expire in 2001 to the extent not exercised.
In connection with the Initial Acquisitions and as consideration for their
interests in the Founding Companies, certain directors and executive officers of
ARS, together with a family trust in one case, received cash and shares of
Common Stock, as follows: Mr. Menditch -- $5.24 million and 222,222 shares; Mr.
Timmons -- $5.83 million and 820,029 shares; and Mr. Sokolow -- $6.68 million
and 266,666 shares. In addition, the following persons, together with family
trusts in one case, received as consideration for their interests in EHC the
following: Mr. Wright -- 52,300 shares and $237,000; Mr. Hoover -- 34,866 shares
and $158,000; Mr. McCaughey -- 52,300 shares and $237,000; and Equus
II -- 376,073 shares and $1.27 million. The consideration paid by ARS for EHC
also included the repayment or assumption of $13.2 million of indebtedness and
other obligations EHC had incurred to purchase Crown in March 1996 and A-ABC in
May 1996. In addition, ARS issued a warrant (since exercised) to purchase 8,333
shares of Common Stock at a total purchase price of $83.33 in exchange for a
warrant previously issued by EHC to NationsBank of Texas, N.A. ("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,
44
<PAGE>
ARS valued EHC on a basis consistent with the other Initial Acquisitions, using
the same multiple of cash flow, as adjusted for owners' compensation and other
nonrecurring items and for working capital and the fair market value of real
estate, if any, being acquired.
REAL ESTATE AND OTHER TRANSACTIONS
Atlas leases office and warehouse space at two locations from a company in
which Mr. Timmons has a 50% ownership interest. Rentals under these leases,
which extend to May 2005 and May 2006, respectively, currently total $178,800
annually and will increase if a specified prime interest rate increases to 11%
or above. Atlas also leases office and warehouse space from a partnership in
which members of Mr. Timmons' immediate family have a 50% ownership interest.
This lease extends to February 2006 and provides for total annual rentals of
$42,000. 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.
General Heating leases office and warehouse space under four leases from a
limited partnership owned by Mr. Menditch, his brothers and trusts for the
benefit of their children. Annual rentals under the leases, which expire at the
end of 2005, currently total $511,027 and will increase a minimum of 4% each
year.
Florida HAC leases its principal office and warehouse space from a limited
partnership 80% owned by Mr. Sokolow. The annual rental under the lease, which
is scheduled to expire May 31, 2005, currently is $236,099 and will increase 5%
each year.
The Company believes the rentals provided under the leases described above
are fair market rentals.
45
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 19, 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 2.6%
Elliot Sokolow....................... 276,666 2.4%
William P. McCaughey................. 270,730 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............... 1,000 *
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)......... 2,230,600 18.6%
- ------------
* 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 May
19, 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
executive officers and directors as a group -- 340,000 shares.
(2) Based on a Schedule 13G dated October 4, 1996. That Schedule 13G indicates
that the 1,321,035 shares reported as beneficially owned includes 100,000
shares obtainable on exercise of a warrant exercisable at $15.00 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 Randall B.
Hale, a director of the Company, is a Vice President of Equus II and thus
each may be deemed to be the beneficial owner of the shares held by Equus
II. 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.
46
<PAGE>
THE SELLING HOLDERS
ARS issued and sold the Securities to the Initial Purchasers pursuant to a
purchase agreement dated as of March 27, 1997. The Selling Holders (other than
two of the Initial Purchasers) acquired the Securities from the Initial
Purchasers, either directly or indirectly in one or more resale transactions
exempt from the registration requirements of the Securities Act. ARS has agreed
to indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
Except as otherwise indicated, the following table is as of May 22, 1997.
The term "Selling Holders" includes the beneficial owners of the Securities
listed below and their respective transferees, pledgees, donees or other
successors. Except for Montgomery Securities and Smith Barney Inc., which were
representatives of the underwriters of the IPO and two of the Initial
Purchasers, no Selling Holder has had any material relationship with the Company
or any of its affiliates within the past three years.
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL NUMBER OF SHARES
AMOUNT OF NOTES OF COMMON STOCK
OWNED AND OWNED AND
NAME OF SELLING HOLDER OFFERED HEREBY OFFERED HEREBY(1)
- ---------------------------------------- ------------------- ------------------
<S> <C> <C>
Bankers Trust trustee for Chrysler Corp.
Emp. #1 Pension Plan Dtd. 4-1-89...... $ 4,390,000 172,156
Boston Safe Deposit & Trust Co. for
Thermo Electron Corp. Pension Plan.... 210,000 8,235
Brook Convertible Strategies, Ltd....... 250,000 9,803
Chase Manhattan N.A. Trustee for IBM
Corp. Retirement Plan Trust Dtd.
12/18/45.............................. 4,890,000 191,764
Christian Science Trustees for Gifts and
Endowments............................ 175,000 6,862
Declaration of Trust for the Defined
Benefit Plans of ICI American Holdings
Inc................................... 685,000 26,862
Declaration of Trust for the Defined
Benefit Plans of ZENECA Holdings
Inc................................... 470,000 18,431
Delaware State Employees' Retirement
Fund.................................. 2,250,000 88,235
First Church of Christ,
Scientist -- Endowment................ 185,000 7,254
Franklin & Marshall College............. 240,000 9,411
General Motors Employees Domestic Group
Trust................................. 8,000,000 313,725
Hillside Capital Incorporated Corporate
Account............................... 200,000 7,843
JMG Capital Partners L.P................ 500,000 19,607
JMG Convertible Investments L.P......... 500,000 19,607
J.W. McConnell Family Foundation........ 460,000 18,039
Lincoln National Life Insurance......... 4,265,000 167,254
LLT LTD................................. 800,000 31,372
Mellon Bank trustee for Nynex Master
Pension Trust dtd. 1-1-84............. 490,000 19,215
Montgomery Securities................... 1,200,000 47,058
Offshore Strategies, LTD................ 200,000 7,843
Paloma Securities L.L.C................. 800,000 31,372
Smith Barney Inc........................ 1,240,000 48,627
Societe Generale Securities
Corporation........................... 750,000 29,411
Southport Management Partners L.P....... 1,200,000 47,058
Southport Partners International Ltd.... 400,000 15,686
State Street Bank Cust. for GE Pension
Trust................................. 2,640,000 103,529
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
47
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL NUMBER OF SHARES
AMOUNT OF NOTES OF COMMON STOCK
OWNED AND OWNED AND
NAME OF SELLING HOLDER OFFERED HEREBY OFFERED HEREBY(1)
- ---------------------------------------- ------------------- ------------------
<S> <C> <C>
Summer Hill Global Partners L.P......... 40,000 1,568
Thermo Electron Balanced Investment
Fund.................................. 535,000 20,980
United National Life Insurance.......... 75,000 2,941
Vista Balanced Fund..................... 250,000 9,803
Vista Equity Income Fund................ 250,000 9,803
Vista Select Balanced Fund.............. 500,000 19,607
Vista Select Equity Income Fund......... 2,500,000 98,039
Walker Art Center....................... 180,000 7,058
Wierton Trust........................... 480,000 18,823
------------------- ------------------
Total(2)........................... $42,200,000 1,654,881
=================== ==================
</TABLE>
- ------------
(1) Unless otherwise noted, the nature of beneficial ownership is sole voting
and/or investment power. Shares shown are the number of whole shares into
which the holder's Notes are convertible at the initial conversion price. No
Selling Holder reported owning any other shares.
(2) Selling Holders do not include holders of $12,800,000 aggregate principal
amount of Notes (convertible into 501,960 whole shares of Common Stock)
which have not complied with the conditions to being included as Selling
Holders and are not entitled to offer or sell their Securities by means of
this Prospectus until they are included as Selling Holders in a supplement
hereto. See "Description of the Notes -- Registration Rights; Liquidated
Damages."
The table above reflects information furnished to ARS by the Depository
Trust Company ("DTC") and by or on behalf of the Selling Holders. Changes in
that information and information respecting additional Selling Holders will be
included in supplements hereto when necessary.
DESCRIPTION OF THE NOTES
U.S. Trust Company of Texas, N.A. is the trustee under the Indenture (the
"Trustee"). The terms of the Notes include those set forth or referred to in
the Indenture and those made part of the Indenture by the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all the provisions of the
Indenture, including the definitions therein of certain terms, and the Trust
Indenture Act. The Indenture is an exhibit to the Shelf and is incorporated
herein by this reference.
GENERAL
The Notes (i) are unsecured obligations of ARS, (ii) are limited to
$55,000,000 in aggregate principal amount and (iii) mature on April 15, 2004.
The Notes bear interest at 7 1/4% per annum from April 2, 1997 or from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually on April 15 and October 15 of each year, commencing October
15, 1997, to the Person in whose name the Note (or any predecessor Note) is
registered at the close of business on the preceding April 1 or October 1, as
the case may be (whether or not a business day). Interest on the Notes is paid
on the basis of a 360-day year of twelve 30-day months.
Principal of, and interest on, the Notes is payable (i) in same-day funds
on or prior to the payment dates with respect to such amounts in the case of
Notes held of record by DTC or its nominee and (ii) at the office of the Trustee
in New York, New York, in the case of Notes held of record by Holders other than
DTC or its nominee, and the Notes may be surrendered for registration of
transfer, exchange or conversion at the office of the Trustee in New York, New
York. ARS may, at its option, pay interest on Notes held of record by Holders
other than DTC or its nominee by check mailed to the address of the persons
entitled thereto as it appears in the Register for the Notes on the Regular
Record Date for that interest payment.
48
<PAGE>
No service charge will be made for any registration of transfer or exchange
of the Notes, but ARS may require payment of a sum sufficient to cover any tax
or other governmental charge and any other expenses (including the fees and
expenses of the Trustee) payable in connection therewith. ARS is not required
(i) to issue, register the transfer of or exchange any Notes during a period
beginning at the opening of business 15 days before the day of the mailing of a
notice of redemption and ending at the close of business on the day of that
mailing or (ii) to register the transfer of or exchange any Notes selected for
redemption in whole or in part, except the unredeemed portion of Notes being
redeemed in part.
All monies paid by ARS to the Trustee or any Paying Agent, or held by ARS,
in trust for the payment of principal of and premium and interest on any Note
which remain unclaimed for two years after such principal, premium or interest
becomes due and payable may be repaid to ARS or released from trust, as the case
may be. Thereafter, the Holder of such Note may, as an unsecured general
creditor, look only to ARS for payment thereof.
The Indenture does not contain any provisions that would provide protection
to Holders of the Notes against a sudden and dramatic decline in credit quality
of the Company resulting from any takeover, recapitalization or similar
restructuring, except as described below under "-- Certain Rights To Require
Repurchase of Notes."
CONVERSION RIGHTS
The Notes are convertible into Common Stock, at the option of the Holder,
at any time prior to redemption or final maturity, initially at the conversion
price of $25.50 per share. The right to convert Notes that have been called for
redemption will terminate at the close of business on the second business day
preceding the Redemption Date unless ARS defaults in making the payment due on
that redemption. See " -- Optional Redemption."
The conversion price is subject to adjustment on the occurrence of any of
the following events: (i) the subdivision, combination or reclassification of
outstanding shares of Common Stock; (ii) the payment of a dividend or
distribution on the Common Stock exclusively in Common Stock or any other class
of capital stock of ARS which includes Common Stock; (iii) the issuance of
rights or warrants to all holders of Common Stock entitling them to acquire
shares of Common Stock (or securities convertible into Common Stock) at a price
per share less than the then Current Market Price; (iv) the distribution to all
holders of Common Stock of shares of capital stock of ARS other than Common
Stock, evidences of indebtedness of ARS, cash or assets (including securities,
but excluding (a) dividends or distributions paid exclusively in cash, (b)
dividends or distributions provided for in clause (ii) above and (c) rights and
warrants provided for in clause (iii) above); (v) a distribution consisting
exclusively of cash (excluding any cash distributions referred to in clause (iv)
above) to all holders of Common Stock in an aggregate amount that, together with
(a) all other cash distributions (excluding any cash distributions referred to
in clause (iv) above) made within the 12 months preceding the record date for
that distribution and (b) any cash and the fair market value of other
consideration paid in respect of any tender offer subject to the provisions of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), made by
ARS or a subsidiary of ARS for Common Stock consummated within the 12 months
preceding that distribution, exceeds the greater of (1) 12.5% of ARS's market
capitalization (being at any time the product of the then Current Market Price
times the number of shares of Common Stock then outstanding) on that record date
and (2) the Company's consolidated retained earnings on that record date
(determined without giving effect to that distribution); and (vi) the
consummation of a tender offer made by ARS or any subsidiary of ARS for Common
Stock which involves an aggregate consideration that, together with (a) any cash
and other consideration payable in respect of any tender offer made by ARS or a
subsidiary of ARS for Common Stock consummated within the 12 months preceding
the last time on which tenders of Common Stock may be made pursuant to the
current tender offer (the "Expiration Time") and (b) the aggregate amount of
all cash distributions (excluding any cash distributions referred to in clause
(iv) above) to all holders of Common Stock within the 12 months preceding the
consummation of that tender offer, exceeds the greater of (1) 12.5% of ARS's
market capitalization immediately prior to that Effective Time (determined using
all then tendered shares) and (2) the Company's consolidated retained earnings
at the Effective Time (determined without giving
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effect to the purchase of tendered shares). No adjustment of the conversion
price will be required to be made until cumulative adjustments amount to at
least 1.0% of the conversion price, as last adjusted. Any adjustment that would
otherwise be required to be made will be carried forward and taken into account
in any subsequent adjustment.
ARS will be permitted to reduce the conversion price as it considers to be
advisable in order that any event treated for federal income tax purposes as a
dividend of stock or stock rights will not be taxable to the holders of Common
Stock or, if that is not possible, to diminish any income taxes that are
otherwise payable because of that event. In the case of any consolidation or
merger of ARS with or into any other corporation (other than one in which no
change is made in the outstanding Common Stock), or the sale or transfer of all
or substantially all the properties and assets of ARS, the Holder of any Note
then outstanding will, with certain exceptions, have the right thereafter to
convert that Note only into the kind and amount of securities, cash and other
property receivable on that consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock into which that Note might have been
converted immediately prior to that consolidation, merger, sale or transfer; and
adjustments will be provided for events subsequent thereto which are as nearly
equivalent as practical to the conversion price adjustments described above.
Fractional shares of Common Stock will not be issued on conversion, but, in
lieu thereof, ARS will pay a cash adjustment based on the Closing Price at the
close of business on the day of conversion. If any Notes are surrendered for
conversion during the period from the close of business on any Regular Record
Date through and including the next succeeding Interest Payment Date (except any
such Note called for redemption on a Redemption Date, or repurchasable on a
Repurchase Date occurring within such period), those Notes when surrendered for
conversion must be accompanied by payment in New York Clearing House funds, or
other funds acceptable to ARS, of an amount equal to the interest thereon which
the registered Holder on that Regular Date is to receive. Except as described in
the preceding sentence, no interest will be payable by ARS on converted Notes
with respect to any Interest Payment Date subsequent to the date of conversion.
No other payment or adjustment for interest or dividends is to be made on
conversion.
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the
Notes and any other payment obligations of ARS in respect of the Notes
(including any obligation to repurchase the Notes) are, to the extent set forth
in the Indenture, subordinated in right of payment to the prior payment in full
in cash or cash equivalents of all Senior Indebtedness, whether outstanding on
the date of the Indenture or thereafter incurred. If there is a payment or
distribution of assets to creditors on any liquidation, dissolution, winding up,
receivership, reorganization, assignment for the benefit of creditors,
marshaling of assets and liabilities or any bankruptcy, insolvency or similar
case or proceeding of ARS, the holders of all Senior Indebtedness will be
entitled to receive payment in full in cash or cash equivalents of all
Obligations due or to become due in respect of that Senior Indebtedness
(including interest after the commencement of any such case or proceeding,
notwithstanding that ARS may be excused as a result of such case or proceeding
from the obligation to pay all or any part of the interest otherwise payable in
respect of any Senior Indebtedness) before the Holders of the Notes will be
entitled to receive any payment in respect of the principal of or premium, if
any, or interest on the Notes, and until all Obligations with respect to the
Senior Indebtedness are paid in full in cash or cash equivalents, any
distribution to which the Holders of the Notes would be entitled shall be made
to the holders of the Senior Indebtedness. ARS also may not make any payment
(whether by redemption, purchase, retirement, defeasance or otherwise) upon or
in respect of the Notes if (i) a default in the payment of the principal of or
premium, if any, or interest on any Designated Senior Indebtedness (a "Payment
Default") occurs or (ii) any other default occurs and is continuing with
respect to any Designated Senior Indebtedness which permits holders of
Designated Senior Indebtedness as to which that default relates to accelerate
its maturity (a "Nonpayment Default") and the Trustee receives notice of that
default (a "Payment Blockage Notice") from (a) if such Nonpayment Default
shall have occurred under the Credit Facility or any other debt facility
referred to in the description of "Designated Senior Indebtedness" below, the
representative of the Credit Facility or such other debt facility, as the case
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may be, or (b) if such Nonpayment Default shall have occurred with respect to
any other issue of Designated Senior Indebtedness, the holders, or a
representative of the holders, of at least 20% of such Designated Senior
Indebtedness. The payments on or in respect of the Notes shall be resumed (i) in
the case of a Payment Default respecting Designated Senior Indebtedness, on the
date on which that default is cured or waived and (ii) in the case of a
Nonpayment Default respecting Designated Senior Indebtedness, the earliest of
(a) the date on which that Nonpayment Default is cured or waived, (b) the date
the applicable Payment Blockage Notice is retracted by written notice to the
Trustee from a representative of the holders of the Designated Senior
Indebtedness which have given that Payment Blockage Notice and (c) 179 days
after the date on which the applicable Payment Blockage Notice is received by
the Trustee, unless any Payment Default has occurred and is continuing or an
Event of Default of the type referred to in clause (vii) of the first sentence
under "-- Events of Default" has occurred. No new period of payment blockage
may be commenced unless and until 360 days have elapsed since the date of
commencement of the payment blockage period resulting from the immediately prior
Payment Blockage Notice, and no Nonpayment Default that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice.
If the Maturity of the Notes is accelerated because of an Event of Default,
(i) the Indenture requires ARS to promptly notify holders of Designated Senior
Indebtedness of that event and (ii) the Holders will, to the extent permitted by
law, be prohibited for a period of 180 days thereafter from making any
bankruptcy filing with respect to ARS or, to the extent permitted by law, from
filing suit to enforce their rights under the Indenture.
"Senior Indebtedness" is defined in the Indenture as the principal of and
premium, if any, and interest on and other Obligations in respect of (i) all
indebtedness of ARS for money borrowed (including any indebtedness under the
Credit Facility and any predecessor or successor thereto), 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 it was created or incurred, expressly provides that it
(a) is junior in right of payment to the Notes or (b) ranks PARI PASSU in right
of payment with the Notes, and (ii) any amendments, renewals, extensions,
modifications, refinancings and refundings of any of the foregoing. For purposes
of this definition, "indebtedness for money borrowed" when used with respect
to ARS means (i) any obligation of, or any obligation guaranteed by, ARS for the
repayment of borrowed money (including fees, penalties and other obligations in
respect thereof), whether or not evidenced by bonds, debentures, notes or other
written instruments, (ii) any deferred payment obligation of, or any such
obligation guaranteed by, ARS for the payment of the purchase price of property
or assets evidenced by a note or similar instrument and (iii) any obligation of,
or any such obligation guaranteed by, ARS for the payment of rent or other
amounts under a lease of property or assets, which obligation is required to be
classified and accounted for as a capitalized lease on the balance sheet of ARS
under generally accepted accounting principles. For a description of the Credit
Facility, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 7 to the Company's historical financial
statements. As used in the Indenture: (i) "Obligations" in respect of the
Senior Indebtedness include any principal, interest, premiums, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any such indebtedness; and (ii) "Designated Senior
Indebtedness" means (a) Obligations under the Credit Facility or any other debt
facility with banks or other lenders which provide for revolving credit loans,
term loans, receivables financing (including through the sale of receivables) or
letters of credit to ARS or any of its subsidiaries and (b) any other Senior
Indebtedness the principal amount of which is $25.0 million or more and that has
been designated by ARS as "Designated Senior Indebtedness."
The Notes are obligations exclusively of ARS. ARS currently conducts its
operations through its subsidiaries, which are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts due
in respect of the Notes or to make any funds available therefor, whether by
dividends, loans or other payments. The ability of any subsidiary of ARS to loan
or advance funds or pay dividends to ARS (i) may be subject to contractual or
statutory restrictions, (ii) will be contingent on the subsidiary's earnings and
cash flows and (iii) will be subject to various business considerations.
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The Notes are effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
subsidiaries of ARS. Any right of ARS to receive assets of any of its
subsidiaries on the liquidation or reorganization of that subsidiary (and any
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that subsidiary's creditors,
except to the extent that ARS is itself recognized as a creditor of that
subsidiary, in which case the claims of ARS would still be subordinated to any
security in the assets of that subsidiary and any indebtedness of that
subsidiary senior to that held by ARS.
The Indenture does not limit or prohibit the incurrence of (i) Senior
Indebtedness or (ii) indebtedness, liabilities or other commitments by ARS or
its subsidiaries. As of March 31, 1997, after giving effect to the sale of the
Notes and the application of the proceeds therefrom, the aggregate amount of
Senior Indebtedness to which the Notes are subordinated was approximately $1.1
million, and the aggregate amount of indebtedness and other balance sheet
liabilities of ARS's subsidiaries to which the Notes are effectively
subordinated was approximately $16.0 million. ARS also expects to incur Senior
Indebtedness from time to time in the future, including Senior Indebtedness
under the $100 million Credit Facility. See "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OPTIONAL REDEMPTION
ARS may, at its option, redeem the Notes, in whole or from time to time in
part, at any time on or after April 20, 2000, on not less than 15 nor more than
60 days' notice mailed to each Holder of Notes to be redeemed at its address
appearing in the Security Register and prior to Maturity at the following
Redemption Prices (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
No sinking fund is provided for the Notes.
CONSOLIDATION, MERGER AND SALE OF ASSETS
ARS will not consolidate with or merge into any other Person or convey,
transfer or lease its properties and assets substantially as an entirety to any
Person in one transaction or a series of related transactions, or permit any
single Person to consolidate with or merge into ARS, unless (i) if applicable,
the Person formed by such consolidation or into which ARS is merged or the
Person or corporation which acquires the properties and assets of the Company
substantially as an entirety is a corporation, limited liability company,
partnership or trust organized and validly existing under the laws of the United
States or any state thereof or the District of Columbia and expressly assumes
payment of the principal of and premium, if any, and interest on the Notes and
the performance or observance of each obligation of ARS under the Indenture,
(ii) immediately after giving effect to such transaction no Event of Default
will have occurred and be continuing, (iii) such consolidation, merger,
conveyance, transfer or lease does not adversely affect the validity or
enforceability of the Notes and (iv) ARS has delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease complies with the
provisions of the Indenture.
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CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
If any Repurchase Event (as defined below) occurs on or prior to Maturity,
each Holder of Notes has the right, at the Holder's option, to require ARS to
repurchase all or any part of the Holder's Notes on the date (the "Repurchase
Date") that is 30 days after the date ARS gives notice of the Repurchase Event
as described below at a price (the "Repurchase Price") equal to 100% of the
principal amount thereof, together with accrued and unpaid interest to the
Repurchase Date. On or prior to the Repurchase Date, ARS is required to deposit
with the Trustee or a Paying Agent an amount of money in same-day funds
sufficient to pay the Repurchase Price of the Notes to be repaid on the
Repurchase Date.
Failure by ARS (i) to provide timely notice of a Repurchase Event, as
provided for below, or (ii) to repurchase the Notes when required will result in
an Event of Default under the Indenture whether or not that repurchase is
permitted by the subordination provisions of the Indenture.
On or before the 15th day after a Repurchase Event occurs, ARS is obligated
to mail to all Holders of Notes a notice of that occurrence which states the
Repurchase Date, the date by which the repurchase right must be exercised, the
Repurchase Price and the procedures the Holder must follow to exercise its
repurchase right. To exercise this right, a Holder must deliver to ARS or its
designated agent and to the Trustee, on or before the close of business on the
Repurchase Date, written notice of the Holder's exercise of that right, together
with the certificates evidencing the Notes to be repurchased, duly endorsed for
transfer to ARS. Any such notice will be irrevocable.
A "Repurchase Event" is the occurrence of a Change in Control or a
Termination of Trading. A "Change in Control" will occur when: (i) all or
substantially all the assets of the Company or of the Company and its
subsidiaries, taken as a whole, are sold in one transaction or any series of
related transactions as an entirety to any Person or related group of Persons;
(ii) any consolidation or merger of ARS occurs (a) in which ARS is not the
continuing or surviving corporation (other than a consolidation or merger with a
wholly owned subsidiary of ARS in which all shares of Common Stock outstanding
immediately prior to the effectiveness thereof are changed into or exchanged for
the same consideration) or (b) pursuant to which the Common Stock would be
converted into cash, securities or other property, in each case other than a
consolidation or merger of ARS in which the holders of the Common Stock
immediately prior to the consolidation or merger have, directly or indirectly,
at least a majority of the total voting power of all classes of capital stock
entitled to vote generally in the election of directors of the continuing or
surviving corporation immediately after such consolidation or merger in
substantially the same proportion as their ownership of Common Stock immediately
before such transaction; (iii) any Person, or any Persons acting together that
would constitute a "group" for purposes of Section 13(d) of the Exchange Act,
together with any affiliates thereof, shall beneficially own (as defined in
Exchange Act Rule 13d-3) at least 50% of the total voting power of all classes
of capital stock of ARS entitled to vote generally in the election of directors
of ARS; (iv) at any time during any consecutive two-year period, individuals who
at the beginning of that period constituted the Board of Directors of ARS (the
"Board") (together with any new directors whose election by the Board or whose
nomination for election by the stockholders of ARS was approved by a vote of
66 2/3% of the directors then still in office who were either directors at the
beginning of that period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board then in office; or (v) ARS is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
A "Termination of Trading" will occur if the Common Stock (or other
common stock into which the Notes are then convertible) is neither listed for
trading on a national securities exchange in the United States nor approved for
trading on an established automated over-the-counter trading market in the
United States.
The right of Holders to require ARS to repurchase Notes if a Repurchase
Event occurs could create an Event of Default under Senior Indebtedness, as a
result of which any repurchase could, absent a waiver of such repurchase right,
be blocked by the subordination provisions of the Indenture. See
"-- Subordination." Failure by ARS to repurchase the Notes when required will
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by those subordination provisions. The ability of
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ARS to pay cash to the Holders of Notes upon a repurchase may be limited by
certain financial covenants contained in Senior Indebtedness.
If a Repurchase Event occurs and Holders exercise their rights to require
ARS to repurchase Notes, ARS intends to comply with applicable tender offer
rules under the Exchange Act, including Rules 13e-4 and 14e-1, as then in
effect, with respect to any such repurchase.
The foregoing provisions (i) may not afford Holders protection in the event
of highly leveraged or other transactions involving ARS which may adversely
affect Holders and (ii) may discourage open market purchases of the Common Stock
or a non-negotiated tender or exchange offer for such stock and, accordingly,
may limit a stockholder's ability to realize a premium over the market price of
the Common Stock in connection with any such transaction.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture: (i) default in the
payment of principal of or any premium on any Note when due (even if such
payment is prohibited by the subordination provisions of the Indenture); (ii)
default in the payment of any interest on any Note when due, which default
continues for 30 days (even if that payment is prohibited by the subordination
provisions of the Indenture); (iii) failure to provide timely notice of a
Repurchase Event as required by the Indenture; (iv) default in the payment of
the Repurchase Price in respect of any Note on the Repurchase Date therefor
(even if that payment is prohibited by the subordination provisions of the
Indenture); (v) default in the performance or breach of any other covenant or
warranty of ARS in the Indenture which continues for 60 days after written
notice as provided in the Indenture; (vi) default under one or more bonds,
debentures, notes or other evidences of indebtedness for money borrowed by ARS
or any of its consolidated subsidiaries or under one or more mortgages,
indentures or instruments under which there may be issued or by which there may
be secured or evidenced any indebtedness for money borrowed by ARS or any of its
consolidated subsidiaries, whether that indebtedness now exists or is hereafter
created, which default individually or in the aggregate constitutes a failure to
pay the principal of indebtedness in excess of $10 million when due and payable
after the expiration of any applicable grace period with respect thereto or
results in indebtedness in excess of $10 million becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without that indebtedness having been discharged, or that acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to ARS by the Trustee or to ARS and the Trustee by Holders of at
least 25% in aggregate principal amount of the Outstanding Notes a written
notice specifying such default and requiring ARS to cause such indebtedness to
be discharged or cause such acceleration to be rescinded or annulled; and (vii)
certain events in bankruptcy or reorganization of or similar events respecting
ARS or any of its Significant Subsidiaries.
If an Event of Default shall occur and be continuing, the Trustee or
Holders of not less than 25% in aggregate principal amount of the Outstanding
Notes may declare the principal of and premium, if any, on all the Notes to be
due and payable immediately but if a majority in principal amount of Holders of
Outstanding Notes waive any past default (except the nonpayment of interest on,
premium, if any, and principal of any Note and certain other limitations), then
such default will cease to exist and any Event of Default arising therefrom will
be deemed cured for every purpose of the Indenture; but no such waiver will
extend to any subsequent or other default. If an Event of Default occurs and is
continuing as a result of an event of bankruptcy or reorganization of ARS or any
of its Significant Subsidiaries, the principal of, premium, if any, and accrued
and unpaid interest on the Notes will automatically become due and payable
without any declaration or other act on the part of the Trustee or any Holder of
Notes. ARS is required to furnish to the Trustee annually a statement as to the
performance by ARS of certain of its obligations under the Indenture and as to
any default in that performance. The Indenture provides that the Trustee may
withhold notice to Holders of the Notes of any continuing default (except in the
case of a default in payment of the principal of or premium, if any, or interest
on any Notes) if the Trustee considers it in the interest of Holders of the
Notes to do so.
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MODIFICATIONS, AMENDMENTS AND WAIVERS
ARS and the Trustee may modify or amend the Indenture without the consent
of Holders to: (i) cause the Indenture to be qualified under the Trust Indenture
Act; (ii) evidence the succession of another Person to ARS and the assumption by
any such successor of the covenants of ARS in the Indenture and the Notes; (iii)
add to the covenants of ARS for the benefit of Holders, add an additional Event
of Default or surrender any right or power conferred upon ARS; (iv) secure the
Notes; (v) make provision with respect to the conversion rights of Holders in
the event of a consolidation, merger or sale of assets involving ARS, as
required by the Indenture; (vi) evidence and provide for the acceptance of
appointment by a successor Trustee with respect to the Notes; or (vii) cure any
ambiguity or omission, correct or supplement any provision in the Indenture or
the Notes which may be defective or inconsistent with any other provision or
make any other provisions with respect to matters or questions arising under the
Indenture which shall not be inconsistent with the provisions of the Indenture;
provided, however, that no such modification or amendment described in this
clause (vii) may adversely affect the interest of Holders in any material
respect.
SATISFACTION AND DISCHARGE
ARS may discharge its obligations under the Indenture while Notes remain
Outstanding, subject to certain conditions, if (i) all Outstanding Notes have
become due and payable or will become due and payable at their scheduled
maturity within one year or (ii) all Outstanding Notes are scheduled for
redemption within one year, and in either case ARS has deposited with the
Trustee an amount in cash sufficient (without any consideration of any
investment of that cash) to pay and discharge all Outstanding Notes on the date
of their scheduled maturity or the scheduled date of redemption.
FORM, DENOMINATION AND REGISTRATION
The Notes were issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiples thereof.
GLOBAL NOTES; BOOK-ENTRY FORM. Notes held by "qualified institutional
buyers," as defined in Rule 144A ("QIBs"), are evidenced by a global Note
(hereinafter referred to as the "Global Note") which was deposited with, or on
behalf of, DTC in New York, and registered in the name of Cede & Co. ("Cede")
as DTC's nominee.
Except as set forth below, the Global Note may be transferred, in whole or
in part, only to another nominee of DTC or to a successor of DTC or its nominee.
A QIB may hold its interests in the Global Note directly through DTC if the
QIB is a participant in DTC, or indirectly through organizations that are
participants in DTC (the "Participants"). Transfers between Participants will
be effected in the ordinary way in accordance with DTC rules and will be settled
in same day funds.
The laws of some states require that certain persons take physical delivery
of securities in definitive form. Consequently, the ability to transfer
beneficial interests in the Global Note to those persons may be limited.
QIBs who are not Participants may beneficially own interests in the Global
Note held by DTC only through Participants or certain banks, brokers, dealers,
trust companies and other parties that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants"). So long as Cede, as the nominee of DTC, is the registered owner
of the Global Note, Cede for all purposes will be considered the sole holder of
the Global Note. Except as provided below, owners of beneficial interests in the
Global Note will not (i) be entitled to have certificates registered in their
names, (ii) receive or be entitled to receive physical delivery of certificates
in definitive form or (iii) be considered the holders thereof.
Payment of interest on and the redemption price of the Global Note will be
made to Cede, the nominee for DTC, as the registered owner of the Global Note,
by wire transfer of immediately available funds on
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each interest payment date or the redemption date, as the case may be. Neither
ARS, the Trustee nor any paying agent will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Global Note or for maintaining,
supervising or reviewing any records relating to those beneficial ownership
interests.
DTC has advised ARS that, with respect to any payment of interest on and
the redemption price of the Global Note, DTC's practice is to credit
Participants' accounts on the payment date therefor with payments in amounts
proportionate to their respective beneficial interests in the Notes represented
by the Global Notes as shown on the records of DTC, unless DTC has reason to
believe that it will not receive payment on that payment date. Payments by
Participants to owners of beneficial interests in Notes represented by the
Global Note held through those Participants will be the responsibility of those
Participants, as is now the case with securities held for the accounts of
customers registered in "street name."
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Global Note to pledge
that interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of that interest, may be affected by the
lack of a physical certificate evidencing that interest.
Neither ARS nor the Trustee (or any registrar, paying agent or conversion
agent under the Indenture) will have any responsibility for the performance by
DTC or its Participants or Indirect Participants of their respective obligations
under the rules and procedures governing their operations. DTC has advised ARS
that it will take any action permitted to be taken by a Holder of Notes
(including the presentation of Notes for exchange as described below), only at
the direction of one or more Participants to whose account with DTC interests in
the Global Note are credited, and only in respect of the principal amount of the
Notes represented by the Global Note as to which such Participant or
Participants has or have given such direction.
DTC has advised ARS as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations such as the Initial Purchasers. Certain Participants (or their
representatives), together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with, a
Participant, either directly or indirectly.
DTC has agreed to the foregoing procedures in order to facilitate transfers
of interests in the Global Note among Participants, but it is under no
obligation to perform or continue to perform those procedures, and those
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
ARS within 90 days, ARS will cause Notes to be issued in definitive form in
exchange for the Global Note.
PAYMENTS OF PRINCIPAL AND INTEREST
The Indenture requires that payments in respect of the Notes held of record
by DTC or its nominee (including Notes evidenced by the Global Note) be made in
same-day funds. Payments in respect of the Notes held of record by holders other
than DTC or its nominee may, at the option of ARS, be made by check and mailed
to those holders of record as shown on the register for the Notes.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
Pursuant to a registration rights agreement among ARS and the Initial
Purchasers (the "RRA"), ARS has registered the Transfer Restricted Securities
(defined below) under the Securities Act for resale by the
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holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf. Holders of Securities constituting
"Transfer Restricted Securities" are entitled to the benefits of the RRA. Each
Note or the Common Stock into which the Note has been converted will be a
"Transfer Restricted Security" until the first to occur of (i) the date it is
disposed of in accordance with the Shelf, (ii) the date it is distributed to the
public pursuant to Rule 144 or (iii) the first date it may be sold or
distributed pursuant to Rule 144(k) (April 2, 1999 for holders that have not
then been affiliates of ARS for at least three months) or any similar provision
then in force.
ARS has agreed to maintain the Shelf until the first to occur of (i) April
2, 2000 or (ii) the date when no security covered by the Shelf remains a
Transfer Restricted Security, but the RRA permits ARS to prohibit offers and
sales of Transfer Restricted Securities by means of the Shelf under certain
circumstances and subject to certain conditions during "Suspension Periods"
(as defined in the RRA). ARS cannot assure it will be able to maintain an
effective, current registration statement under the Securities Act as required
by the RRA, and any failure to do so might adversely affect the marketability
and sale price of the Transfer Restricted Securities.
Holders of Transfer Restricted Securities must satisfy certain conditions
the RRA imposes in order to dispose of those securities by means of the Shelf.
These include (i) delivering information to and making certain representations
to ARS and (ii) being named as Selling Holders in the Shelf. The liquidity of
Transfer Restricted Securities whose holder elects not to meet these conditions
could be adversely affected.
A "Registration Default" will occur under the RRA if, at any time during
which ARS is required to maintain the Shelf, the Shelf ceases to be effective
under the Securities Act (without being succeeded immediately by a replacement
shelf registration statement that is effective under the Securities Act) or
usable for the offer and sale of Transfer Restricted Securities for a period
(including any Suspension Period) exceeding (i) 60 days in the aggregate in any
of the one-year periods ending April 2, 1998, 1999 or 2000 or (ii) 30 days in
any quarter of any of those one-year periods; provided that liquidated damages
will not accrue after the first Saturday to occur after the first to occur of
April 2, 1999 or the end of the holding period for restricted securities under
Rule 144(k). If a Registration Default occurs, the RRA requires ARS to pay
liquidated damages to holders of Transfer Restricted Securities which have
become Selling Holders. During the first 90-day period immediately following the
occurrence of a Registration Default, liquidated damages will accrue while that
default continues on the Transfer Restricted Securities of Selling Holders at
the rates per annum of (i) one quarter of one percent (25 basis points) per
$1,000 principal amount of Notes and (ii) $2.50 per 39.2157 shares of Common
Stock issued on conversion of Notes (subject to adjustment in the event of a
stock split, combination or dividend or the like). These rates per annum will
increase an additional 25 basis points per $1,000 principal amount of Notes and
$2.50 per 39.2157 shares of Common Stock (subject to adjustment as described
above) for each subsequent 90-day period the Registration Default continues, up
to maximum rates of 125 basis points per $1,000 principal amount of Notes and
$12.50 per 39.2157 shares of Common Stock (subject to adjustment as described
above). Accrued and unpaid liquidated damages will be payable in same-day funds
semiannually on each April 15 and October 15 to the Person in whose name the
Security on which the damages accrued is registered or held of record at the
close of business on the preceding April 1 or October 1, as the case may be.
When a Registration Default is cured, liquidated damages attributable to that
default will cease to accrue.
The foregoing summary of certain provisions of the RRA does not purport to
be complete and is subject to, and is qualified in its entirety by reference to,
the provisions of the RRA, which is an exhibit to the Shelf.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance
with the laws of the State of New York, without giving effect to that state's
conflicts of laws principles.
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INFORMATION CONCERNING THE TRUSTEE
ARS and its subsidiaries may maintain deposit accounts and conduct other
banking transactions with the Trustee in the ordinary course of business.
LIMITED MARKET FOR THE NOTES
On their original issuance, the Notes became eligible for trading in the
PORTAL Market. Notes sold pursuant to this Prospectus will no longer be eligible
for trading on the PORTAL Market. No assurance can be given a market for the
Notes will develop, as to the liquidity or sustainability of any market that may
develop, or the ability of Holders to sell their Notes at any price. Future
trading prices of the Notes will depend on many factors, including, among
others, prevailing interest rates, ARS's operating results, the price of the
Common Stock and the market for similar securities.
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 May 19, 1997, 12,018,347
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 an exhibit
to the Shelf.
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
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then-market price of such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the rules of any market on
which the securities of ARS are traded.
STOCKHOLDER RIGHTS PLAN
Each share of Common Stock offered hereby includes one right ("Right") to
purchase from ARS a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.001 per share (the "Series A Preferred Stock"), at a purchase price of
$40.00 per Fractional Share, subject to adjustment in certain events (the
"Purchase Price"). The following summary description of the Rights does not
purport to be complete and is qualified in its entirety by reference to the
Rights Agreement between ARS and a Rights Agent (the "Rights Agreement"), the
form of which is an exhibit to the Shelf.
The Rights currently are attached to all certificates representing shares
of Common Stock now outstanding or hereafter issued, including the shares of
Common Stock into which the Notes are convertible. No separate certificates for
the Rights ("Rights Certificates") have been or will be distributed, except as
described below. The Rights will separate from the Common Stock and a
"Distribution Date" will, with certain exceptions, occur upon the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons (an "Acquiring Person") has acquired, or obtained the
right to acquire, beneficial ownership of 15% or more of the outstanding shares
of Common Stock (the date of the announcement being the "Stock Acquisition
Date") or (ii) 10 business days following the commencement of a tender offer or
exchange offer that would result in a person's becoming an Acquiring Person.
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,
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following the occurrence of any Triggering Event, all Rights that are, or (under
certain circumstances specified in the Rights Agreement) were, beneficially
owned by any Acquiring Person (or by certain related parties) will be null and
void in the circumstances set forth in the Rights Agreement. Rights are not
exercisable following the occurrence of any Flip-In Event until such time as the
Rights are no longer redeemable by the Company as set forth below.
In the event (a "Flip-Over Event") that, at any time from and after the
time an Acquiring Person becomes such, (i) the Company is acquired in a merger
or other business combination transaction (other than certain mergers that
follow a Permitted Offer) or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights that
previously have been voided as set forth above) shall thereafter have the right
to receive, on exercise of such Right, a number of shares of common stock of the
acquiring company having a Current Market Price equal to two times the exercise
price of the Right. Flip-In Events and Flip-Over Events are collectively
referred to as "Triggering Events."
The Purchase Price payable, and the number of Fractional Shares of Series A
Preferred Stock or other securities or property issuable, on exercise of the
Rights are subject to adjustment from time to time to prevent dilution (i) in
the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Series A Preferred Stock, (ii) if holders of the Series
A Preferred Stock are granted certain rights or warrants to subscribe for Series
A Preferred Stock or certain convertible securities at less than the current
market price of the Series A Preferred Stock or (iii) on the distribution to
holders of the Series A Preferred Stock of evidences of indebtedness or assets
(excluding regular quarterly cash dividends) or of subscription rights or
warrants (other than those referred to above).
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock that are not integral
multiples of a Fractional Share are required to be issued and, in lieu thereof,
an adjustment in cash will be made based on the market price of the Series A
Preferred Stock on the last trading date prior to the date of exercise. Pursuant
to the Rights Agreement, the Company reserves the right to require prior to the
occurrence of a Triggering Event that, on any exercise of Rights, a number of
Rights be exercised so that only whole shares of Series A Preferred Stock will
be issued.
At any time until 10 days following the first date of public announcement
of the occurrence of a Flip-In Event, the Company may redeem the Rights in
whole, but not in part, at a price of $.01 per Right, payable, at the option of
the Company, in cash, shares of the Common Stock or such other consideration as
the Board of Directors of the Company may determine. Immediately upon the
effectiveness of the action of the Board of Directors ordering redemption of the
Rights, the Rights will terminate and the only right of the holders of Rights
will be to receive the $.01 redemption price.
At any time after the occurrence of a Flip-In Event and prior to a person's
becoming the beneficial owner of 50% or more of the shares of Common Stock then
outstanding, the Company may, at its option, exchange the Rights (other than
Rights owned by an Acquiring Person or an affiliate or an associate of an
Acquiring Person, which will have become void), in whole or in part, at an
exchange ratio of one share of Common Stock, and/or other equity securities
deemed to have the same value as one share of Common Stock, per Right, subject
to adjustment.
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.
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The Rights will have certain anti-takeover effects. They will cause
substantial dilution to any person or group that attempts to acquire the Company
without the approval of the Company's Board of Directors. As a result, the
overall effect of the Rights may be to render more difficult or discourage any
attempt to acquire the Company, even if such acquisition may be favorable to the
interests of the Company's stockholders. Because the Board of Directors can
redeem the Rights or approve a Permitted Offer, the Rights should not interfere
with a merger or other business combination approved by the Board. The Rights
are being issued to protect the Company's stockholders from coercive or abusive
takeover tactics and to afford the Company's Board of Directors more negotiating
leverage in dealing with prospective acquirors.
STATUTORY BUSINESS COMBINATION PROVISION
ARS is a Delaware corporation and is subject to Section 203 of the DGCL. In
general, Section 203 prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination"(as defined) with a Delaware corporation
for three years following the date such person became an interested stockholder
unless: (i) before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the interested
stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) following the transaction in which such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
OTHER MATTERS
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must exercise
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by Delaware law, directors
are accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables corporations to limit available relief to equitable
remedies such as injunction or rescission. The Certificate of Incorporation
limits the liability of directors of ARS to ARS or its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of ARS will
not be personally liable for monetary damages for breach of a director's
fiduciary duty as a director, except for liability (i) for any breach of the
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
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successful, might otherwise have benefited ARS and its stockholders. The Bylaws
of ARS provide indemnification to its officers and directors and certain other
persons with respect to certain matters, and ARS has entered into agreements
with each of its directors and executive officers providing for indemnification
with respect to certain matters.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written consent.
The Bylaws provide that special meetings of the stockholders can be called only
by the Chairman of the Board, the President or a majority of the Board of
Directors.
The Certificate of Incorporation provides that the Board of Directors shall
consist of three classes of directors serving for staggered terms. The
classified board provision could prevent a party who acquires control of a
majority of the outstanding voting stock of ARS from obtaining control of the
Board of Directors until the second annual stockholders meeting following the
date the acquiror obtains the controlling interest. See
"Management -- Directors and Executive Officers."
The Certificate of Incorporation provides that the number of directors
shall be as determined by the Board of Directors from time to time, but shall
not be less than three. It also provides that directors may be removed only for
cause, and then only by the affirmative vote of the holders of at least a
majority of all outstanding voting stock entitled to vote. This provision, in
conjunction with the provisions of the Certificate of Incorporation authorizing
the Board of Directors to fill vacant directorships, will prevent stockholders
from removing incumbent directors without cause and filling the resulting
vacancies with their own nominees.
STOCKHOLDER PROPOSALS
The Bylaws contain provisions (i) requiring that advance notice be
delivered to ARS of any business to be brought by a stockholder before an annual
meeting of stockholders and (ii) establishing certain procedures to be followed
by stockholders in nominating persons for election to the Board of Directors.
Generally, such advance notice provisions provide that written notice must be
given to the Secretary of ARS by a stockholder (i) in the event of business to
be brought by a stockholder before an annual meeting, not less than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders (with certain exceptions if the date of the annual meeting is
different by more than specified amounts from the anniversary date), and (ii) in
the event of nominations of persons for election to the Board of Directors by
any stockholder, (a) with respect to an election to be held at the annual
meeting of stockholders, not less than 90 days prior to the anniversary date of
the immediately preceding annual meeting of stockholders (with certain
exceptions if the date of the annual meeting is different by more than specified
amounts from the anniversary date), and (b) with respect to an election to be
held at a special meeting of stockholders for the election of directors, not
later than the close of business on the 10th day following the day on which
notice of the date of the special meeting was mailed to stockholders or public
disclosure of the date of the special meeting was made, whichever first occurs.
Such notice must set forth specific information regarding such stockholder and
such business or director nominee, as described in the Bylaws. The foregoing
summary is qualified in its entirety by reference to the Bylaws, which are in an
exhibit to the Shelf.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 19, 1997, 12,018,347 shares of Common Stock were outstanding.
Those shares currently are or will become either freely tradable or eligible for
resale subject to volume limitations and other requirements of Rule 144, as
follows (in thousands): currently and through June 30, 1997 -- 6,910; (ii)
through September 30, 1997 -- 10,505; (iii) through March 31, June 30, and
September 30, 1998 -- 10,735; and (iv) through 1998 -- 12,018. The shares
becoming eligible for resale in the third quarter of
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1997 include 376,073 shares owned by Equus II and 1,456,620 shares owned by
certain directors and executive officers of ARS.
In addition to the shares currently outstanding, the Company has reserved
for issuance the 2,156,863 shares currently issuable on conversion of the Notes.
ARS has registered these shares under the Securities Act by means of the Shelf.
If Notes or shares of Common Stock issued on the conversion of Notes are
disposed of by means of the Shelf, the shares underlying those Notes and those
shares will be freely tradable or (if owned by an affiliate of ARS) eligible for
sale pursuant to Rule 144.
The shares of Common Stock reserved or to be available for issuance
pursuant to the Incentive Plan are registered for issuance under the Securities
Act. These shares generally may be sold in the open market by holders who are
not affiliates of the Company and, subject to the volume and other limitations
of Rule 144, by holders who are affiliates of the Company.
In general, under Rule 144, if a minimum of one year has elapsed since the
later of the date of acquisition of the restricted securities from the issuer or
from an affiliate of the issuer, a person (or persons whose shares of Common
Stock are aggregated), including persons who may be deemed "affiliates" of the
Company, would be entitled to sell within any three-month period a number of
shares of Common Stock that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock and (ii) the average weekly trading volume
during a preceding period of four calendar weeks. Sales under Rule 144 are also
subject to certain provisions as to the manner of sale, notice requirements and
the availability of current public information about the Company. In addition,
under Rule 144(k), if a period of at least two years has elapsed since the later
of the date restricted securities were acquired from the Company or the date
they were acquired from an affiliate of the Company, a stockholder who is not an
affiliate of the Company at the time of sale and has not been an affiliate for
at least three months prior to the sale would be entitled to sell shares of
Common Stock in the public market immediately without compliance with the
foregoing requirements under Rule 144. Rule 144 does not require the same person
to have held the securities for the applicable periods. The foregoing summary of
Rule 144 is not intended to be a complete description thereof. The SEC has
proposed amendments to Rule 144 that would, among other things, eliminate the
manner of sale requirements and revise the notice provisions of that rule. The
SEC has also solicited comments on other possible changes to Rule 144, including
possible revisions to the one- and two-year holding periods and the volume
limitations referred to above.
At May 19, 1997, options to purchase up to 1,993,100 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 437,000 shares and the
warrant were 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 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
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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 registration rights 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 that includes shares pursuant to that agreement.
The effect, if any, the availability for sale, or sale, of the shares of
Common Stock eligible for future sale will have on the market price of the
Common Stock prevailing from time to time is unpredictable, and no assurance can
be given the effect will not be adverse.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discusses the material United States federal income tax
consequences under generally applicable current law of the acquisition,
ownership, conversion and disposition of Notes and the acquisition, ownership
and disposition of any Common Stock which is received on the conversion of a
Note for persons who acquire Notes from the Initial Purchasers and who hold
those Notes and any such Common Stock as capital assets. It does not, however,
discuss the effect of (i) special rules, such as those which apply to tax-exempt
organizations, insurance companies, financial institutions, persons who hold the
Notes or Common Stock in connection with a straddle or dealers or (ii) any
foreign, state or local tax law. Accordingly, each prospective purchaser of
Notes is advised to consult its own tax advisor regarding the matters discussed
herein in light of its particular circumstances and the application of state,
local and foreign tax laws.
The following statements are based upon the Internal Revenue Code of 1986,
as amended (the "Code"), existing regulations thereunder and the current
judicial and administrative interpretations thereof.
OWNERSHIP BY U.S. PERSONS
The following applies to a person who is a citizen or resident of the
United States (a "U.S. Holder"), a corporation or partnership created or
organized in the United States or any state thereof or an estate or trust the
income of which is includible in income for United States federal income tax
purposes regardless of its source.
INTEREST ON NOTES. The stated interest on a Note will be taxable as
ordinary income at the time interest is paid or accrued in accordance with the
U.S. Holder's method of accounting for United States federal income tax
purposes. ARS expects the Notes will not be issued with original issue discount.
The occurrence of certain events (which ARS does not expect to occur) described
under "Description of the Notes -- Registration Rights; Liquidated Damages"
will cause liquidated damages to be payable to the holders of the Notes in the
manner described therein. The possibility that such liquidated damages may be
paid on the Notes will not cause the Notes to be issued with original issue
discount. Any liquidated damages that are paid on the Notes will be includible
in income by the holders of Notes in accordance with applicable law, under which
the treatment of such liquidated damages is not entirely clear.
MARKET DISCOUNT. If a Note is acquired at a "market discount," gain
realized on a taxable disposition (and certain nontaxable dispositions) thereof
will be treated as interest income to the extent of the theretofore unrecognized
accrued market discount. Subject to a de minimis exception, "market discount"
with respect to a Note is equal to the excess of (i) the stated redemption price
at maturity of the Note over (ii) the Holder's initial basis in the Note. Any
market discount accrues on a ratable basis or, at the election
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of the Holder, on the basis of a constant interest rate, and a Holder of a
market discount Note may elect to include the market discount in its income as
that market discount accrues.
If a holder converts a market discount Note into Common Stock, the
theretofore unrecognized accrued market discount on that Note will not, in
general, be recognized, but will be treated as ordinary income on the later
disposition of that Common Stock to the extent of any gain recognized at that
time on the disposition of that Common Stock.
CONVERSION OF NOTES. A U.S. Holder generally will not recognize gain or
loss on the conversion of a Note into Common Stock except that it will recognize
a capital gain or loss as a result of the receipt of cash in lieu of a
fractional share equal to the amount of cash reduced by the basis of the portion
of the Note in respect of which that cash was paid. The basis of the Common
Stock that is received on the conversion will be the adjusted basis of the Note
which was converted at the time of conversion increased by any gain that is
recognized, decreased by any loss that is recognized and decreased by any cash
that is received. The holding period of that Common Stock will include the
holding period of the converted Note.
CONSTRUCTIVE DIVIDEND. A distribution to holders of Common Stock may cause
a deemed distribution (which will be a dividend to the extent of ARS's current
or accumulated earnings and profits) to the Noteholders if the conversion price
or conversion ratio of the Notes is adjusted to reflect that distribution.
SALE OR EXCHANGE OF NOTES OR COMMON STOCK. Gain or loss will be recognized
on the sale or exchange of the Notes or of Common Stock in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
other property received by the Holder (excluding, in the case of the Notes, any
amount representing accrued interest, which will be taxable as such) and (ii)
the Holder's adjusted basis in the property sold or exchanged. Any such gain
(other than gain characterized as interest under the market discount rules) or
loss with respect to a Note or Common Stock will be a capital gain or loss and
will be a long-term capital gain or loss if the holding period of the asset was
more than one year.
DIVIDENDS ON COMMON STOCK. Distributions on the Common Stock will be
dividends to the extent of the current or accumulated earnings and profits of
ARS, then a nontaxable return of capital reducing the holder's adjusted basis in
the Common Stock until such adjusted basis is reduced to zero and finally an
amount received in exchange for the Common Stock. Dividends paid to domestic
corporations may qualify for the dividends received deduction subject to the
limiting provisions that apply thereto.
OWNERSHIP BY NON-U.S. HOLDERS
The following applies to a person who is not a U.S. Holder (a "Non-U.S.
Holder") and to the income received thereby, such as interest, dividends and
gain or loss on disposition, with respect to Notes and Common Stock which is not
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States. Any such effectively connected items of
income will be subject to the United States federal income tax that applies to
U.S. Holders generally, and, in the case of such a Non-U.S. Holder that is a
foreign corporation, those items also will be subject to the branch profits tax.
INTEREST ON NOTES. Interest paid on Notes to a Non-U.S. Holder will not be
subject to United States federal income tax or to withholding in respect thereof
if: (i) the beneficial owner (or if certain requirements are satisfied, a member
of a class of financial institutions) certifies, under penalties of perjury,
that the beneficial owner is not a U.S. Holder and provides the beneficial
owner's name and address; (ii) the Non-U.S. Holder does not own actually or
constructively 10% or more of the total voting power of all classes of stock of
ARS entitled to vote (Common Stock into which a Note can be converted is
constructively owned for these purposes); (iii) the Non-U.S. Holder is not a
controlled foreign corporation with respect to which ARS is a "related person"
within the meaning of Section 864(d)(4) of the Code; and (iv) the Non-U.S.
Holder is not a bank holding the Notes as a result of an extension of credit
made pursuant to a loan agreement entered into in the ordinary course of its
trade or business. Accrued market discount on a Note is not treated for these
purposes as interest income.
If the foregoing conditions are not satisfied, then the interest will
generally be subject to United States federal income tax withholding at a rate
of 30% (or any lower rate that is provided by any applicable treaty).
65
<PAGE>
SALE OR EXCHANGE OF NOTES OR COMMON STOCK; CONVERSION OF NOTES. A Non-U.S.
Holder generally will not be subject to United States federal income tax on gain
recognized on the sale or exchange of Notes or Common Stock or on the conversion
of a Note unless (i) the Holder is an individual who is present in the United
States for 183 or more days in the taxable year and certain other conditions are
satisfied or (ii) ARS is (as is not expected) a "United States real property
holding corporation," as defined in Section 897 of the Code, and certain
exceptions do not apply.
DIVIDENDS ON COMMON STOCK. Any distribution on Common Stock to a Non-U.S.
Holder will be subject to United States federal income tax withholding at a rate
of 30% (or any lower rate which is provided by any applicable treaty).
ESTATE TAX. An individual Non-U.S. Holder of a Note will not be required
to include the value of such Note in his gross estate for United States federal
estate tax purposes, provided that such Holder did not at the time of death
actually or constructively own 10% or more of the combined voting power of all
classes of stock of ARS and, at the time of such Holder's death, payments of
interest on such Note would not have been effectively connected with the conduct
by such Holder of a trade or business in the United States. An individual
Non-U.S. Holder who is treated as the owner of, or has made certain lifetime
transfers of, an interest in the Common Stock will be required to include the
value thereof in his gross estate for United States federal estate tax purposes
(and may be subject to United States federal estate tax with respect thereto),
unless otherwise provided by an applicable estate tax treaty.
BACKUP WITHHOLDING; INFORMATION REPORTING
A noncorporate U.S. Holder holding Notes or Common Stock (and any Non-U.S.
Holder failing to provide a certificate that it is not a U.S. Holder) will be
subject to backup withholding at the rate of 31% with respect to interest paid
on the Notes, dividends paid on Common Stock and the proceeds of any sale,
exchange or redemption thereof if the payee fails to furnish a taxpayer
identification number and in certain other circumstances. Any amounts so
withheld will be allowed as a refund or a credit against the Holder's United
States federal income tax liability, provided that certain information is
furnished to the Internal Revenue Service.
Information reporting will be required with respect to a payment of
proceeds from the sale or exchange of Notes or Common Stock through a foreign
office of a broker that is a United States person or of certain foreign brokers
unless the broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and the broker has no actual knowledge to the contrary.
The Internal Revenue Service has proposed regulations that, if issued as
final regulations, would require certain Non-U.S. Holders to provide additional
information in order to establish an exemption from, or reduce the rate of,
withholding tax or backup withholding tax and in particular would require that
foreign partnerships and partners of a foreign partnership provide certain
information and comply with certain certification requirements not required
under existing law. Such proposed regulations are proposed to be effective
generally for payments made after December 31, 1997. It is not possible to
predict whether, or in what form, the proposed regulations ultimately will be
adopted.
PLAN OF DISTRIBUTION
The Selling Holders may offer and sell the Securities from time to time and
will act independently of ARS in deciding the timing, manner and size of any
sale. ARS expects that sales generally will be made at then prevailing market
prices, but prices in negotiated transactions may differ considerably.
ARS cannot predict the extent, if any, to which Selling Holders may sell
the Notes.
Selling Holders may sell Securities in the over-the-counter market or
otherwise and the Common Stock on the NYSE, at prices that (i) represent or
relate to then prevailing market prices or (ii) are negotiated, including by
means of an underwritten offering or one or more of the following methods: (i)
purchases by a broker-dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (ii) ordinary brokerage
transactions and transactions in which a broker solicits purchasers; and (iii)
block trades in which a broker-dealer so engaged will attempt to sell the
Securities or Common Stock as agent but may
66
<PAGE>
take a position and resell a portion of the block as principal to facilitate the
transaction. In addition, any securities covered by this Prospectus which
qualify for sale pursuant to Rule 144 or Rule 144A of the Securities Act may be
sold under Rule 144 or 144A rather than pursuant to this Prospectus.
No Selling Holder has advised ARS, as of the date hereof, that it has
arranged for the offering or sale of any Security with any broker. Underwriters,
brokers, dealers or agents (collectively, "underwriters") may participate in
these transactions as agents and, in that capacity, may (i) be deemed
"underwriters" for purposes of the Securities Act and (ii) receive brokerage
commissions from Selling Holders or their purchasers which (together with any
profits received by the Selling Holders) may be deemed underwriting discounts
and commissions under the Securities Act. The Selling Holders have disclaimed
the status of Securities Act "underwriters."
To comply with the securities laws of certain jurisdictions, if applicable,
the Securities will be offered or sold in those jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain
jurisdictions, the Securities may not be offered or sold unless they have been
registered or qualified for sale in those jurisdictions or unless an exemption
from that registration or qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Securities may be limited in its ability to
engage in market activities respecting the Securities. In addition and without
limiting the foregoing, each Selling Holder is subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including, Rule
10b-2 and Regulation M, which provisions may limit the timing of purchases and
sales of any of the Securities by the Selling Holders. All the foregoing may
affect the marketability of the Securities.
ARS may suspend the use of this Prospectus and any supplements hereto in
certain circumstances because of pending corporate developments or a need to
file a post-effective amendment to the Shelf. In any such event, ARS will use
its reasonable efforts to ensure that the use of the Prospectus may be resumed
as soon as practicable.
ARS has agreed to pay substantially all the expenses incident to the
registration, offering and sale of the Securities by the Selling Holders to the
public other than any broker's commission, agency fee or underwriter's discount
or commission, which will be borne by the relevant Selling Holder.
LEGAL MATTERS
The validity of the Securities offered hereby has been passed on for the
Company by John D. Held, Esq., Senior Vice President, General Counsel and
Secretary of the Company. Mr. Held owns 5,333 shares of Common Stock and
Incentive Plan options to purchase 75,000 shares of Common Stock.
EXPERTS
The audited financial statements included in this Registration Statement
and elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
67
<PAGE>
ADDITIONAL INFORMATION
ARS is subject to the reporting requirements of the Exchange Act, and, in
accordance therewith, files reports, proxy statements and other information with
the SEC. These reports, proxy statements and other information, once filed, may
be inspected, without charge, at the public reference facilities of the SEC at
its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and its regional offices at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any portion of
these documents can be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains an Internet web site
that contains such reports, proxy statements and other information regarding
issuers (including ARS) that file electronically with the SEC. The address of
that site is http://www.sec.gov.
ARS has filed the Shelf on Form S-1 under the Securities Act with the SEC
with respect to this offering. This Prospectus, filed as a part of the Shelf,
does not contain all the information set forth in the Shelf, 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 Shelf 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 Shelf and the exhibits and
schedules thereto may be inspected and copied at the principal office of the SEC
in Washington, D.C., as described above, and are also available at the SEC's
Internet web site described above.
Proxy statements, reports and other information concerning the Company that
are filed under the Exchange Act also can be inspected at the offices of the New
York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
-----
Unaudited Pro Forma Combined Financial Statements -- American
Residential Services, Inc. and Subsidiaries
Basis of Presentation .............................................. F-3
Pro Forma Combined Balance Sheet as of March 31, 1997 (unaudited) .. F-4
Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1996 (unaudited) .................................... F-5
Pro Forma Combined Statement of Operations for the three months
ended March 31, 1997 (unaudited) ................................. F-6
Notes to Unaudited Pro Forma Combined Financial Statements ......... F-7
Financial Statements
American Residential Services, Inc. and Subsidiaries
Report of Independent Public Accountants ...................... F-9
Consolidated Balance Sheets ................................... F-10
Consolidated Statements of Operations ......................... F-11
Consolidated Statments of Stockholders' Equity ................ F-12
Consolidated Statements of Cash Flows ......................... F-13
Notes to Consolidated Financial Statements .................... F-14
American Residential Services, Inc. ................................
Report of Independent Public Accountants ...................... F-27
Balance Sheets ................................................ F-28
Statements of Operations ...................................... F-29
Statements of Shareholders' Deficit ........................... F-30
Statements of Cash Flows ...................................... F-31
Notes to Financial Statements ................................. F-32
General Heating Engineering Company, Inc. ..........................
Report of Independent Public Accountants ...................... F-37
Balance Sheets ................................................ F-38
Statements of Operations ...................................... F-39
Statements of Shareholders' Equity ............................ F-40
Statements of Cash Flows ...................................... F-41
Notes to Financial Statements ................................. F-42
Atlas Services, Inc., and Subsidiary
Report of Independent Public Accountants ...................... F-47
Consolidated Balance Sheets ................................... F-48
Consolidated Statements of Operations ......................... F-49
Consolidated Statements of Shareholders' Equity ............... F-50
Consolidated Statements of Cash Flows ......................... F-51
Notes to Consolidated Financial Statements .................... F-52
Enterprises Holding Company and Subsidiaries
Consolidated Balance Sheet .................................... F-60
Consolidated Statement of Operations .......................... F-61
Consolidated Statement of Shareholders' Equity ................ F-62
Consolidated Statement of Cash Flows .......................... F-63
Notes to Consolidated Financial Statements .................... F-64
F-1
<PAGE>
Service Enterprises, Inc., and Subsidiaries
Report of Independent Public Accountants ...................... F-72
Consolidated Balance Sheets ................................... F-73
Consolidated Statements of Operations ......................... F-74
Consolidated Statements of Shareholder's Equity ............... F-75
Consolidated Statements of Cash Flows ......................... F-76
Notes to Consolidated Financial Statements .................... F-77
Florida Heating and Air Conditioning, Inc., and Related Companies
Report of Independent Public Accountants ...................... F-84
Combined Balance Sheets ....................................... F-85
Combined Statements of Operations ............................. F-86
Combined Statements of Shareholders' Equity ................... F-87
Combined Statements of Cash Flows ............................. F-88
Notes to Combined Financial Statements ........................ F-89
DIAL ONE Meridian and Hoosier, Inc. ................................
Report of Independent Public Accountants ...................... F-95
Balance Sheets ................................................ F-96
Statements of Operations ...................................... F-97
Statements of Shareholder's Equity ............................ F-98
Statements of Cash Flows ...................................... F-99
Notes to Financial Statements ................................. F-100
ADCOT, Inc. ........................................................
Report of Independent Public Accountants ...................... F-107
Balance Sheets ................................................ F-108
Statements of Operations ...................................... F-109
Statements of Shareholder's Deficit ........................... F-110
Statements of Cash Flows ...................................... F-111
Notes to Financial Statements ................................. F-112
Metro Heating and Air Conditioning, Inc. ...........................
Report of Independent Public Accountants ...................... F-116
Balance Sheets ................................................ F-117
Statements of Operations ...................................... F-118
Statements of Shareholders' Equity ............................ F-119
Statements of Cash Flows ...................................... F-120
Notes to Financial Statements.................................. F-121
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" and, together
with its subsidiaries, the "Company"), 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. During the second quarter of 1997 through May 19,
1997, ARS acquired an additional seven residential service businesses (the
"Second Quarter 1997 Acquisitions"), which were accounted for using the purchase
method of accounting. All acquisitions are herein referred to as the "Acquired
Businesses."
The unaudited pro forma combined balance sheet as of March 31, 1997 is
based on the unaudited consolidated balance sheet of the Company as of March 31,
1997 and reflects (i) the seven Second Quarter 1997 Acquisitions and (ii) the
sale of 7 1/4% Convertible Subordinated Notes and the application of the
proceeds therefrom as if each had occurred on March 31, 1997. The allocation of
purchase prices to the assets acquired and liabilities assumed relating to
certain of the Acquired Businesses accounted for using the purchase method of
accounting has been initially assigned and recorded based on preliminary
estimates of fair value and may be revised as additional information concerning
the valuation of such assets and liabilities becomes available. Also, the
purchase prices are based on available information, certain assumptions
management deems appropriate and preliminary estimates of fair value assigned to
the shares of ARS Common Stock issued in certain of these transactions which
carry certain restrictions regarding disposition by their holders, and such
value may be revised as additional information becomes available. The unaudited
pro forma combined 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 periods 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
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SECOND
QUARTER
1997 PRO FORMA AS
HISTORICAL ACQUISITIONS ADJUSTMENTS COMBINED OFFERING ADJUSTED
---------- ------------- ----------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 2,872 $ 810 $ (20)(a) $ 3,662 $(2,050 )(c) $ 1,612
Accounts receivable --
Trade, net of allowance...... 23,200 2,557 -- 25,757 -- 25,757
Other........................ 1,868 1,049 (255)(a) 2,662 -- 2,662
Costs and estimated earnings in
excess of billings on
uncompleted contracts.......... 1,367 38 -- 1,405 -- 1,405
Inventories...................... 12,138 889 -- 13,027 -- 13,027
Prepaid expenses and other
current assets................. 1,972 685 (49)(a) 2,608 -- 2,608
Net assets of discontinued
operations..................... 233 -- -- 233 -- 233
---------- ------------- ----------- --------- -------- --------
Total current assets..... 43,650 6,028 (324) 49,354 (2,050 ) 47,304
PROPERTY AND EQUIPMENT, net.......... 20,203 3,116 -- 23,319 -- 23,319
GOODWILL, net........................ 131,473 60 16,900(a) 148,433 -- 148,433
OTHER NONCURRENT ASSETS.............. 2,165 -- -- 2,165 2,050 (c) 4,215
---------- ------------- ----------- --------- -------- --------
Total assets............. $197,491 $ 9,204 $16,576 $223,271 $ -- $223,271
========== ============= =========== ========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 152 $ 1,119 $-- $ 1,271 $(1,119 )(c) $ 152
Accounts payable and accrued
expenses....................... 21,600 2,473 (740)(a) 23,333 -- 23,333
Unearned revenue on service and
warranty contracts............. 3,559 474 -- 4,033 -- 4,033
Billings in excess of costs and
estimated earnings on
uncompleted contracts.......... 1,931 438 -- 2,369 -- 2,369
---------- ------------- ----------- --------- -------- --------
Total current
liabilities............ 27,242 4,504 (740) 31,006 (1,119 ) 29,887
LONG-TERM DEBT, net of current
maturities......................... 54,341 2,417 12,251(b) 69,009 (53,881 )(c) 15,128
CONVERTIBLE SUBORDINATED NOTES....... -- -- -- -- 55,000 (c) 55,000
UNEARNED REVENUE ON EXTENDED WARRANTY
CONTRACTS.......................... 613 120 -- 733 -- 733
DEFERRED INCOME TAXES................ 2,392 -- -- 2,392 -- 2,392
STOCKHOLDERS' EQUITY
Common stock..................... 12 153 (153)(a) 12 -- 12
Additional paid-in capital....... 123,214 620 (620)(a) 130,442 -- 130,442
7,228(b)
Retained earnings (deficit)...... (10,323) 1,390 (1,390)(a) (10,323 ) -- (10,323 )
---------- ------------- ----------- --------- -------- --------
Total stockholders'
equity................. 112,903 2,163 5,065 120,131 -- 120,131
---------- ------------- ----------- --------- -------- --------
Total liabilities and
stockholders' equity... $197,491 $ 9,204 $16,576 $223,271 $ -- $223,271
========== ============= =========== ========= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma combined financial statements.
F-4
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACQUISITIONS
-------------------- PRO FORMA
HISTORICAL 1996(1) 1997(2) ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
----------- --------- --------- ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................. $95,518 $ 155,177 $ 31,909 $-- $282,604 $ -- $ 282,604
COST OF SERVICES..................... 68,144 107,191 18,998 -- 194,333 -- 194,333
----------- --------- --------- ----------- --------- -------- -----------
Gross Profit..................... 27,374 47,986 12,911 -- 88,271 -- 88,271
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 21,936 40,063 11,598 (5,696)(a) 65,485 -- 65,485
(1,894)(b)
(522)(c)
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC.................... 3,356 -- -- (3,356)(d) -- -- --
GOODWILL AMORTIZATION................ 495 -- -- 3,201(e) 3,696 -- 3,696
----------- --------- --------- ----------- --------- -------- -----------
INCOME FROM OPERATIONS............... 1,587 7,923 1,313 8,267 19,090 -- 19,090
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC................ (4,818) -- -- 4,818(f) -- -- --
Interest Expense................. (574) (1,234) (643) (3,346)(f) (5,797 ) (167 )(i) (5,964)
Interest Income.................. 44 270 -- -- 314 -- 314
Other............................ 413 264 293 -- 970 -- 970
----------- --------- --------- ----------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... (3,348) 7,223 963 9,739 14,577 (167 ) 14,410
PROVISION FOR INCOME TAXES........... 957 2,080 -- 3,923(g) 6,960 (67 )(g) 6,893
----------- --------- --------- ----------- --------- -------- -----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $(4,305) $ 5,143 $ 963 $ 5,816 $ 7,617 $ (100 ) $ 7,517
=========== ========= ========= =========== ========= ======== ===========
SHARES USED IN COMPUTING INCOME
PER SHARE FROM CONTINUING
OPERATIONS......................... 4,541 7,578 12,119 (h) 12,119
=========== =========== ========= ===========
NET INCOME (LOSS) PER SHARE FROM
CONTINUING OPERATIONS.............. $ (.95) $ 0.63 $ 0.62
=========== ========= ===========
</TABLE>
- ------------
(1) Includes the pro forma effect of the Founding Companies (excluding Atlas)
and the Fourth Quarter 1996 Acquisitions accounted for using the purchase
method of accounting.
(2) Includes the pro forma effect of First and Second Quarter 1997 Acquisitions
through May 19, 1997 accounted for using the purchase method of accounting.
See accompanying notes to unaudited pro forma combined financial statements.
F-5
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997(1) PRO FORMA
HISTORICAL ACQUISITIONS ADJUSTMENTS COMBINED OFFERING AS ADJUSTED
------------ ------------ ----------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES............................. $ 55,446 $ 7,373 $-- $ 62,819 $ -- $ 62,819
COST OF SERVICES..................... 38,955 4,508 -- 43,463 -- 43,463
------------ ------------ ----------- --------- -------- -----------
Gross Profit..................... 16,491 2,865 -- 19,356 -- 19,356
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 13,762 2,760 (95)(a) 16,229 -- 16,229
(198)(b)
GOODWILL AMORTIZATION................ 810 -- 114(e) 924 -- 924
------------ ------------ ----------- --------- -------- -----------
INCOME FROM OPERATIONS............... 1,919 105 179 2,203 -- 2,203
OTHER INCOME (EXPENSE):
Interest Expense................. (1,110) (81) (220)(f) (1,411 ) 45 (i) (1,366)
Interest Income.................. 15 -- -- 15 -- 15
Other............................ 176 21 -- 197 -- 197
------------ ------------ ----------- --------- -------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES..... 1,000 45 (41) 1,004 45 1,049
PROVISION FOR INCOME TAXES........... 441 -- 29(g) 470 21 (g) 491
------------ ------------ ----------- --------- -------- -----------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... $ 559 $ 45 $ (70) $ 534 $ 24 $ 558
============ ============ =========== ========= ======== ===========
SHARES USED IN COMPUTING INCOME PER
SHARE FROM CONTINUING OPERATIONS... 12,157 362(h) 12,519 12,519
============ =========== ========= ===========
NET INCOME PER SHARE FROM CONTINUING
OPERATIONS......................... $ .05 $ 0.04 $ 0.04
============ ========= ===========
</TABLE>
- ------------
(1) Includes the pro forma effect of the First Quarter and Second Quarter 1997
Acquisitions through May 19, 1997 accounted for using the purchase method of
accounting as if the acquisitions had occurred January 1, 1997.
See accompanying notes to unaudited pro forma combined financial statements.
F-6
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. AMERICAN RESIDENTIAL SERVICES, INC. BACKGROUND:
American Residential Services, Inc. ("ARS" and, together with its
subsidiaries, the "Company") was 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"). In addition, during the first quarter of 1997, ARS acquired ten
residential service businesses (the "First Quarter 1997 Acquisitions") and
during the second quarter of 1997 through May 19, 1997 acquired an additional
six residential service businesses and one commercial maintenance service
business (collectively the "Second Quarter 1997 Acquisitions", and, together
with the Founding Companies, the Fourth Quarter 1996 Acquisitions, and the
First Quarter 1997 Acquisitions, the "Acquired Businesses").
Eight of the First Quarter 1997 Acquisitions 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 in certain purchase transactions has been
initially assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of such assets
and liabilities becomes available. Also, the purchase prices are based on
preliminary estimates of value assigned to the shares of Common Stock issued in
certain of these transactions which carry certain restrictions regarding
disposition by their holders, and such value may be revised as additional
information becomes available.
Based upon management's preliminary analysis, ARS anticipates that the
historical carrying value of the Acquired Businesses' assets and liabilities
will approximate fair value. The amount allocated to goodwill is $148.4 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 elimination of assets and liabilities not acquired by
ARS and record the preliminary allocation of total consideration to
the net tangible assets purchased.
(b) To record the borrowing of $12.3 million of debt and the issuance of
335,730 shares of Common Stock in connection with the acquisition of
the Second Quarter 1997 Acquisitions.
(c) 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-7
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNAUDITED PRO FORMA COMBINED STATEMENTS OF
OPERATIONS ADJUSTMENTS:
(a) Adjusts compensation to the level the owners of certain of the
Acquired Businesses have agreed to receive subsequent to the acquisitions
of the Acquired Businesses.
(b) Adjusts rent expense on certain facilities leased from certain
previous owners to amounts which such owners agreed to following the
acquisition of certain of the Acquired Businesses and adjusts for other
nonrecurring expenses.
(c) Adjusts for the effect of assets distributed to and the costs of
certain leases assumed by the owners of certain Acquired Businesses.
(d) 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 and the
three months ended March 31, 1997 are computed as follows (in thousands):
DECEMBER 31, MARCH 31,
1996 1997
------------- ---------
Shares outstanding...................... 11,653 11,680
Shares issued for First Quarter 1997
Acquisitions accounted for under the
purchase method of accounting......... 27 --
Shares issued for Second Quarter 1997
Acquisitions accounted for under the
purchase method of accounting......... 335 335
Stock options and warrant, net of
assumed repurchases of common shares
as treasury stock..................... 104 504
------------- ---------
12,119 12,519
============= =========
(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-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To American Residential Services, Inc.:
We have audited the accompanying consolidated balance sheets of American
Residential Services, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
American Residential Services, Inc., and subsidiaries as of December 31, 1995
and 1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis with Atlas Services, Inc. as the
accounting acquiror restated for the effect of pooling-of-interests
transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
April 4, 1997
F-9
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 MARCH 31
--------------------- -----------
1995 1996 1997
--------- ---------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,120 $ 7,860 $ 2,872
Accounts receivable --
Trade, net of allowance of
$200, $964 and $954..... 4,039 22,001 23,200
Other...................... 604 1,658 1,868
Costs and estimated earnings in
excess of billings on
uncompleted contracts......... 289 853 1,367
Inventories..................... 1,369 10,488 12,138
Prepaid expenses and other
current assets................ 326 1,903 1,972
Net assets of discontinued
operations.................... -- 338 233
--------- ---------- -----------
Total current
assets................ 7,747 45,101 43,650
PROPERTY AND EQUIPMENT, net.......... 4,640 19,223 20,203
GOODWILL, net........................ -- 131,193 131,473
OTHER NONCURRENT ASSETS.............. 593 1,340 2,165
--------- ---------- -----------
Total assets.......... $ 12,980 $ 196,857 $ 197,491
========= ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt.......................... $ 920 $ 982 $ 152
Short-term debt................. 210 -- --
Accounts payable and accrued
expenses...................... 5,876 22,466 21,600
Unearned revenue on service and
warranty contracts............ 583 3,850 3,559
Billings in excess of costs and
estimated earnings on
uncompleted contracts......... 517 1,547 1,931
--------- ---------- -----------
Total current
liabilities........... 8,106 28,845 27,242
LONG-TERM DEBT, net of current
maturities......................... 2,344 52,931 54,341
UNEARNED REVENUE ON SERVICE AND
WARRANTY CONTRACTS................. -- 633 613
DEFERRED INCOME TAXES................ 298 2,392 2,392
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par
value, 10,000,000 shares
authorized;
none issued and outstanding... -- -- --
Common stock, $.001 par value,
50,000,000 shares authorized;
2,349,094, 11,653,303 and
11,679,617 shares issued and
outstanding................... 2 12 12
Additional paid-in-capital...... 1,180 122,569 123,214
Retained earnings (deficit)..... 1,050 (10,525) (10,323)
--------- ---------- -----------
Total stockholders'
equity................ 2,232 112,056 112,903
--------- ---------- -----------
Total liabilities and
stockholders'
equity................ $ 12,980 $ 196,857 $ 197,491
========= ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES............................. $ 41,151 $ 48,401 $ 95,518 $ 13,648 $ 55,446
COST OF SERVICES..................... 31,586 35,955 68,144 9,716 38,955
--------- --------- --------- --------- ---------
Gross Profit.................... 9,565 12,446 27,374 3,932 16,491
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................... 8,766 9,648 22,431 3,205 14,572
COMPENSATION EXPENSE RELATED TO
PURCHASE OF EHC (Note 1)........... -- -- 3,356 -- --
--------- --------- --------- --------- ---------
INCOME FROM OPERATIONS............... 799 2,798 1,587 727 1,919
OTHER INCOME (EXPENSE):
Financing Fees Related to
Purchase of EHC (Note 1)...... -- -- (4,818) -- --
Interest Expense................ (254) (274) (574) (73) (1,110)
Interest Income................. 32 42 44 8 15
Other........................... 213 118 413 72 176
--------- --------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES.............................. 790 2,684 (3,348) 734 1,000
PROVISION FOR INCOME TAXES........... 321 1,076 957 298 441
--------- --------- --------- --------- ---------
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS......................... 469 1,608 (4,305) 436 559
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX.................. -- -- (3) -- (32)
--------- --------- --------- --------- ---------
NET INCOME (LOSS).................... $ 469 $ 1,608 $ (4,308) $ 436 $ 527
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 2,349 2,349 4,541 2,349 12,157
========= ========= ========= ========= =========
EARNINGS (LOSS) PER SHARE:
Continuing Operations........... $ 0.20 $ 0.68 $ (0.95) $ 0.19 $ 0.05
Discontinued Operations......... -- -- -- -- (0.01)
--------- --------- --------- --------- ---------
Total...................... $ 0.20 $ 0.68 $ (0.95) $ 0.19 $ 0.04
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
------------------ PAID-IN EARNINGS STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.............. 2,349 $ 2 $ 336 $ 394 $ 732
Capital contributions.............. -- -- 352 -- 352
Dividends paid by Pooled
Companies........................ -- -- -- (541) (541)
Other equity transactions of Pooled
Companies........................ -- -- 206 -- 206
Net income......................... -- -- -- 469 469
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1994.............. 2,349 2 894 322 1,218
Capital contributions.............. -- -- 283 -- 283
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- 3 -- 3
Dividends paid by Pooled
Companies........................ -- -- -- (880) (880)
Net income......................... -- -- -- 1,608 1,608
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1995.............. 2,349 2 1,180 1,050 2,232
Public Offering, net of Offering
Costs............................ 4,830 5 60,626 -- 60,631
Acquisition of Founding
Companies........................ 3,184 3 29,231 -- 29,234
Acquisition of Fourth Quarter 1996
Acquisitions..................... 1,282 2 30,624 -- 30,626
Exercise of Warrant................ 8 -- 125 -- 125
Cash Distributions to Founding
Companies stockholders........... -- -- -- (6,031) (6,031)
Capital contributions.............. -- -- 800 -- 800
Adjustment to conform fiscal
year-ends of certain Pooled
Companies........................ -- -- (17) (34) (51)
Dividends paid by Pooled
Companies........................ -- -- -- (1,202) (1,202)
Net loss........................... -- -- -- (4,308) (4,308)
--------- ------ ---------- --------- -------------
BALANCE, December 31, 1996.............. 11,653 $ 12 $ 122,569 $ (10,525) $ 112,056
Acquisition of First Quarter 1997
Purchased Companies
(unaudited)...................... 27 -- 556 -- 556
Capital contributions equal to the
current income taxes of S
Corporations (unaudited)......... -- -- 135 -- 135
Dividends paid by Pooled Companies
(unaudited)...................... -- -- -- (325) (325)
Other equity transactions of
Pooled Companies (unaudited)..... -- -- (46) -- (46)
Net income (unaudited)............. -- -- -- 527 527
--------- ------ ---------- --------- -------------
BALANCE, March 31, 1997................. 11,680 $ 12 $ 123,214 $ (10,323) $ 112,903
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 469 $ 1,608 $ (4,308) $ 436 $ 527
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........ 769 988 2,523 351 1,934
Taxes on acquired S Corporations..... 352 283 800 -- 135
Stock portion of compensation and
financing fees related to purchase
of EHC............................ -- -- 6,276 -- --
Deferred income taxes (benefit)...... (46) 94 (411) (362) 239
(Gain) loss on sale of property and
equipment......................... 11 9 (77) (12) 201
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable....... (987) (1,177) (989) (410) (974)
Costs and estimated
earnings in excess of
billings on uncompleted
contracts............... (456) 504 14 82 (513)
Inventories............... (213) (309) 28 (317) (1,463)
Prepaid expenses and other
current assets.......... 47 (45) (749) 21 (66)
Other noncurrent assets... (97) (155) (89) -- --
Increase (decrease) in --
Accounts payable and
accrued expenses........ 1,505 858 (1,849) 1,209 (1,536)
Unearned revenue on
service and warranty
contracts............... 163 86 93 (11) (362)
Billings in excess of
costs and estimated
earnings on uncompleted
contracts............... 23 93 (241) (35) 384
Other..................... (91) (51) (37) (35) (610)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) operating
activities.............. 1,449 2,786 984 917 (2,104)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 122 87 328 46 47
Additions to property and equipment....... (1,562) (938) (2,487) (272) (1,990)
Cash paid for acquisitions, net of cash
acquired................................ -- -- (44,458) -- (673)
--------- --------- --------- --------- ---------
Net cash used in investing
activities................ (1,440) (851) (46,617) (226) (2,616)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt... 1,804 855 40,458 290 37,630
Principal payments of short- and long-term
debt.................................... (1,510) (1,265) (40,885) (299) (37,466)
Issuances of Common Stock, net of offering
costs................................... 206 45 60,631 -- --
Distributions to Founding Companies
stockholders............................ -- -- (6,031) -- --
S Corporation dividends paid by Pooled
Companies............................... (541) (880) (1,202) (133) (325)
Other, net................................ -- -- (598) 118 (107)
--------- --------- --------- --------- ---------
Net cash provided by (used
in) financing
activities................ (41) (1,245) 52,373 (24) (268)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. (32) 690 6,740 667 (4,988)
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 462 430 1,120 1,120 7,860
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period....... $ 430 $ 1,120 $ 7,860 $ 1,787 $ 2,872
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 339 $ 316 $ 790 $ 42 $ 658
Income taxes.............................. 226 252 184 150 323
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" or the
"Company") was founded to create a leading national provider of (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air conditioning, plumbing, electrical and other systems in
homes and small commercial buildings and (ii) new installation of those systems
in homes and small commercial facilities under construction. On September 27,
1996, ARS acquired in separate transactions seven residential service businesses
(together with Enterprises Holding Company ("EHC"), which is the common parent
of two of the businesses), (the "Founding Companies") in exchange for
consideration consisting of a combination of cash and shares of its common
stock, par value $.001 per share (the "Common Stock"). The Company's initial
public offering (the "Offering") of ARS's Common Stock closed simultaneously
with the closing of the acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the
accounting acquiror. The acquisition of the remaining Founding Companies was
accounted for using the purchase method of accounting, with the results of
operations included from September 30, 1996, the effective closing date of the
acquisitions for accounting purposes. The allocation of purchase prices to the
assets acquired and liabilities assumed has been initially assigned and recorded
based on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
Subsequent to the acquisition of the Founding Companies and the Offering,
ARS acquired 13 residential service businesses during the fourth quarter of 1996
(the "Fourth Quarter 1996 Acquisitions") and an additional ten residential
service businesses during the first quarter of 1997 (the "first quarter 1997
Acquisitions" and, collectively with the Fourth Quarter 1996 Acquisitions and
the Founding Companies, the "Acquired Businesses"). For accounting purposes, the
Fourth Quarter 1996 Acquisitions and two of the First Quarter 1997 Acquisitions
were accounted for using the purchase method of accounting. The remaining eight
companies acquired as part of the First Quarter 1997 Acquisitions (the "Pooled
Companies") have been accounted for under the pooling-of-interests method with
the historical financial statements of ARS retroactively restated for the
effects thereof.
The accompanying consolidated financial statements reflect the Company on a
historical basis with Atlas as the accounting acquiror. The historical financial
statements have been restated for all periods presented for the effect of the
eight acquisitions accounted for as pooling-of-interests.
In connection with the purchase of EHC, the purchase price paid to the
shareholders of EHC in excess of the purchase price paid by EHC for its previous
acquisition of Service Enterprises, Inc. and Adcot, Inc. is recorded as
nonrecurring compensation expense of $3,356,000 and financing fees of $4,818,000
in the accompanying statements of operations for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ARS and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The interim consolidated financial statements for the three months ended
March 31, 1996 and 1997 are unaudited, and certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the results of operations and cash flows with
respect to the consolidated interim financial statements, have
F-14
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued at the lower of cost or market using
principally a weighted-average method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property or equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Included in property and equipment are certain assets subject to capital
leases. These assets are amortized using the straight-line method over the
lesser of the life of the leases or the estimated useful life of the asset.
GOODWILL
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of December 31, 1996, accumulated
amortization was approximately $584,000.
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows as well as
other factors, such as business trends and prospects and market and economic
conditions.
DEBT ISSUE COSTS
Debt issue costs related to the Company's Credit Facility (see Note 7) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt. As of December 31, 1996, accumulated
amortization was approximately $49,000.
REVENUE RECOGNITION
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are
F-15
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
are recognized in the period in which the revisions are determined.
WARRANTY COSTS
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing of existing air conditioning and heating
units. An allowance for warranty costs is recorded upon completion of
installation or service.
STOCK-BASED COMPENSATION
The disclosure requirements of Statement of Financial Accounting Standards
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 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.
F-16
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
EARNINGS PER SHARE
The following table summarizes weighted average shares outstanding for each
of the periods presented (in thousands).
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Shares issued in the acquisition of
Atlas.............................. 1,067 1,067 1,067
Shares issued in acquisitions
accounted for under the pooling-
of-interests method................ 1,282 1,282 1,282
Shares issued in the formation of
ARS................................ -- -- 318
Weighted average portion of shares
issued to the remaining
stockholders of the Founding
Companies.......................... -- -- 472
Weighted average portion of shares
sold in the Offering............... -- -- 1,204
Weighted average portion of shares
awarded to certain employees and
consultants........................ -- -- 10
Weighted average portion of shares
issued for the acquisition of the
Fourth Quarter 1996 Acquisitions... -- -- 84
Stock options and warrant, net of
assumed repurchases of common
shares as treasury stock........... -- -- 104
--------- --------- ---------
Weighted average shares
outstanding........................ 2,349 2,349 4,541
========= ========= =========
In February 1997, the Financial Standards Accounting Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS
No. 128 revises the methodology to be used in computing earnings per share (EPS)
such that the computations required for primary and fully diluted EPS are to be
replaced with "basic" and "diluted" EPS. Basic EPS is computed by dividing
net income by the weighted average number of shares of common stock outstanding
during the year. Diluted EPS is computed in the same manner as fully diluted
EPS, except that, among other changes, the average share price for the period is
used in all cases when applying the treasury stock method to potentially
dilutive outstanding options.
The Company will adopt SFAS No. 128 effective December 15, 1997 and will
restate EPS for all periods presented. For the years ended December 31, 1994,
1995 and 1996, basic and diluted EPS under SFAS No. 128 are the same and do not
differ from the EPS as presented.
3. BUSINESS COMBINATIONS:
POOLINGS
In the first quarter of 1997, the Company acquired all of the outstanding
stock of the eight Pooled Companies in exchange for 1,282,438 shares of Common
Stock. These companies provide installation and maintenance, repair and
replacement of plumbing, air conditioning and heating and electrical systems.
These acquisitions have been accounted for under the pooling-of-interests method
of accounting.
F-17
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the unaudited restated consolidated
revenues, net income (loss) and per share data from continuing operations of the
Company after giving effect to these transactions (in thousands, except per
share data).
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ----------------------
NET NET NET INCOME
REVENUES INCOME REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income (loss):
As presently reported.............. $19,183 $ 17 $22,048 $ 684 $64,229 $ (5,536)
Subsequent acquisitions............ 21,968 452 26,353 924 31,289 1,231
-------- ------ -------- ------ -------- ----------
As restated........................ $41,151 $ 469 $48,401 $1,608 $95,518 $ (4,305)
======== ====== ======== ====== ======== ==========
Net income (loss) per share:
As presently reported.............. $0.02 $0.64 $ (1.70)
Subsequent acquisitions............ 0.18 0.04 0.75
------ ------ ----------
As restated........................ $0.20 $0.68 $ (0.95)
====== ====== ==========
</TABLE>
PURCHASES
In addition to the acquisition of the Founding Companies, during the fourth
quarter of 1996, the Company acquired 13 companies for an aggregate of
approximately $41.2 million in cash and short-term notes and 1,282,910 shares of
Common Stock. Funding of the cash portion of the purchase prices and repayment
of indebtedness assumed in connection with the acquisitions was provided by
borrowings under the Company's Credit Facility. The accompanying consolidated
balance sheet includes preliminary allocations of the respective purchase price
which are subject to final adjustment. Also, the purchase prices are based on
preliminary estimates of fair value assigned to the Company's Common Stock
issued in all acquisitions accounted for under the purchase method of accounting
which carry certain restrictions regarding dispositions by the holders, and such
value may be revised as additional information becomes available. Set forth
below are unaudited pro forma combined revenues and income data reflecting the
pro forma effect of these acquisitions on the Company's results from continuing
operations for the years ended December 31, 1995 and 1996. The unaudited pro
forma data presented below consists of the income statement data from continuing
operations as presented in these consolidated financial statements plus (i) the
Founding Companies for the year ended December 31, 1995 and the nine months
ended September 30, 1996 and (ii) all Fourth Quarter 1996 Acquisitions as if the
acquisitions were effective on the first day of the year being reported through
the respective dates of acquisition (in thousands, except per share amounts)
(unaudited).
1995 1996
---------- ----------
Revenues................................ $ 211,127 $ 250,695
========== ==========
Net income from continuing operations... $ 5,751 $ 7,244
========== ==========
Net income per share from continuing
operations............................ $ 0.49 $ 0.62
========== ==========
Pro forma adjustments included in the amounts above primarily relate to:
(a) compensation differential, (b) adjustment for nonrecurring compensation
expense of $3,356,000 and financing fees of $4,818,000 related to the purchase
of EHC, (c) adjustment for rent expense on certain leased facilities, (d)
adjustment for the effects of assets distributed to and costs of certain leases
assumed by owners of certain of the Founding Companies and the Fourth Quarter
1996 Acquisitions, (e) adjustment for pro forma goodwill amortization expense
using a 40-year estimated life, (f) elimination of historical interest expense
related to certain obligations which were repaid or not assumed by the Company
reduced by interest expense on
F-18
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
borrowed funds used to pay the cash portion of the purchase price for the
Founding Companies and the Fourth Quarter 1996 Acquisitions, and (g) adjustment
to the federal and state income tax provisions based on pro forma operating
results. Net income per share for 1995 and 1996 assumes all shares issued for
the acquisitions of the Founding Companies and the Fourth Quarter 1996
Acquisitions had been outstanding for the periods presented.
The pro forma results presented are not necessarily indicative of actual
results which might have occurred had the operations and management teams of the
Company and the Founding Companies and the Fourth Quarter 1996 Acquisitions been
combined at the beginning of the periods presented.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
DECEMBER 31
ESTIMATED USEFUL --------------------
LIVES IN YEARS 1995 1996
---------------- --------- ---------
Land and land improvements............. -- $ 538 $ 2,727
Buildings and leasehold improvements... 5-40 1,774 5,786
Transportation equipment............... 5 4,252 11,101
Machinery and equipment................ 5-7 1,267 2,081
Furniture and fixtures................. 5-10 516 2,179
--------- ---------
8,347 23,874
Less -- Accumulated depreciation....... 3,707 4,651
--------- ---------
Property and equipment, net....... $ 4,640 $ 19,223
========= =========
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consisted of the
following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Balance at beginning of year............ $ 184 $ 200
Additions charged to costs and
expenses......................... 78 256
Deductions for uncollectible
receivables written off.......... (62) (80)
Allowance for doubtful accounts at
acquisition dates................ -- 588
--------- ---------
Balance at end of year.................. $ 200 $ 964
========= =========
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accounts payable, trade................. $ 3,174 $ 10,302
Accrued compensation and benefits....... 563 6,101
Accrued insurance....................... 269 1,648
Accrued warranty expense................ 155 944
Federal and state income taxes
payable............................... -- 509
Other accrued expenses.................. 1,715 2,962
--------- ---------
$ 5,876 $ 22,466
========= =========
F-19
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Installation contracts in progress are as follows (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Costs incurred on contracts in
progress.............................. $ 2,914 $ 11,342
Estimated earnings, net of losses....... 1,239 5,264
--------- ---------
4,153 16,606
Less -- Billings to date................ 4,381 17,300
--------- ---------
$ (228) $ (694)
========= =========
The following are included in the accompanying balance sheets under the
following captions (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Costs and estimated earnings in excess
of billings
on uncompleted contracts.............. $ 289 $ 853
Billings in excess of costs and
estimated earnings
on uncompleted contracts.............. (517) (1,547)
--------- ---------
$ (228) $ (694)
========= =========
6. DISCONTINUED OPERATIONS:
In 1996, the Company decided to discontinue its retail appliance sales
division in order to concentrate its financial and human resources on its core
residential services business. The net loss of this division subsequent to
September 30, 1996 is included in the statements of operations under
discontinued operations and therefore revenues, costs of sales, selling, general
and administrative expenses, other income and expense, and income taxes exclude
amounts associated with the discontinued division. Revenues from this division
were approximately $2.9 million from the date of acquisition by ARS through
December 31, 1996. Certain expenses have been allocated to discontinued
operations, which were allocated based upon estimated divisional usage. All
assets of the operations are expected to be sold in 1997.
The components of net assets of discontinued operations included in the
consolidated balance sheet are as follows: (in thousands)
Net working capital..................... $ 218
Property and equipment, net............. 120
---------
$ 338
=========
F-20
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHORT- AND LONG-TERM DEBT:
Short-term debt consisted of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent and was secured by certain accounts
receivable and inventory. The amount outstanding at December 31, 1995 was
$210,000. The revolving line of credit was terminated upon the consummation of
the Offering.
Long-term debt consists of the following (in thousands):
DECEMBER 31
--------------------
1995 1996
--------- ---------
Notes payable to banks bearing
interest ranging from
5.9% to 13.3%, repaid in 1996 with
proceeds from
the Company's Credit Facility...... $ 2,035 $ --
Credit Facility (see below).......... -- 27,200
Notes payable to selling shareholders
of certain Fourth Quarter 1996
Acquisitions repaid in January 1997
from borrowing under Credit
Facility........................... -- 24,613
Other................................ 1,229 2,100
--------- ---------
3,264 53,913
Less -- Current maturities........... 920 982
--------- ---------
$ 2,344 $ 52,931
========= =========
On March 3, 1997, the Company increased the total commitment of its credit
facility (the "Credit Facility") from $55 million, which was in place at
December 31, 1996, to $100 million. The Credit Facility provides the Company
with a revolving line of credit up to $100 million, which may be used for
general corporate purposes, including the funding of any cash that may be paid
in connection with acquisitions, the refinancing of indebtedness of businesses
acquired, capital expenditures and working capital. Loans under the Credit
Facility bear interest, at the Company's option, at the designated variable base
rate plus margins ranging from 0 to 50 basis points, or at a designated London
interbank offering rate (LIBOR) plus a margin ranging from 100 to 200 basis
points, depending on the ratio of the Company's interest-bearing debt to its
trailing earnings before interest, taxes, depreciation and amortization. The
margin is reset on a quarterly basis and also may be reset upon the closing of
an acquisition involving cash consideration in excess of $5 million or upon a
principal repayment in excess of $5 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility contains a sublimit for standby letters of credit of up to $5.0
million. The Credit Facility also requires the consent of the lenders for
acquisitions exceeding a certain level of cash consideration, prohibits the
payment of dividends by the Company (except for dividends payable in Common
Stock and certain preferred stock), does not permit the Company to incur or
assume other indebtedness in excess of 5% of consolidated net worth and will
require the Company to comply with certain financial covenants. The Credit
Facility will terminate and all amounts outstanding, if any, thereunder will be
due and payable in September 1999. The Company's subsidiaries have guaranteed
the repayment of all amounts due under the Credit Facility. ARS has also pledged
the stock of its subsidiaries to guarantee repayment of the indebtedness under
the Credit Facility. As of December 31, 1996, the Company had $27.2 million in
outstanding borrowings under the Credit Facility, bearing interest at a weighted
average rate of approximately 7.40%.
Prime rate at December 31, 1996 was 8.25%. LIBOR rates were 5.50%, 5.53%,
5.56% and 5.59% for the 30 day, 60 day, 90 day and 180 day LIBOR, respectively.
F-21
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows (in thousands):
Year ending December 31 --
1997............................ $ 982
1998............................ 323
1999............................ 202
2000............................ 153
2001............................ 278
Thereafter...................... 51,975
---------
$ 53,913
=========
The maturities schedule above reflects the issuance of the convertible
subordinated notes discussed in Note 13. The Company used substantially all of
the net proceeds of the offering of the convertible subordinated notes to repay
indebtedness outstanding under its existing Credit Facility.
Management estimates that the fair value of its debt obligations
approximates the historical value of $53.9 million at December 31, 1996.
8. STOCK OPTIONS AND WARRANTS:
STOCK OPTIONS
The Company has approved a 1996 Incentive Plan (the Plan), which amended
and restated a prior stock option plan and provides for the granting or awarding
of stock options and stock appreciation rights to non-employee directors,
officers and other key employees and independent contractors. The Company
accounts for this Plan under APB Opinion No. 25, and no compensation expense has
been recognized. The number of shares authorized and reserved for issuance under
the Plan is limited to the greater of 1,550,000 shares or 15 percent of the
number of shares of Common Stock outstanding on the last day of the preceding
calendar quarter (1,550,000 shares at December 31, 1996). In general, the terms
of the option awards (including vesting schedules) will be established by the
Compensation Committee of the Company's Board of Directors. As of December 31,
1996, the Company has granted 10 year options covering an aggregate of 1,504,500
shares of Common Stock.
The following table summarizes activity under the Plan for the year ended
December 31, 1996:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Outstanding at December 31, 1995..... -- -- --
Granted......................... 1,554,500 $8.00 - $23.75 $13.09
Exercised....................... -- -- --
Forfeited and canceled.......... (50,000) $15.00 $15.00
---------
Outstanding at December 31, 1996..... 1,504,500 $12.59
=========
Weighted average fair value of
options granted during 1996........ $ 6.18
Weighted average remaining
contractual life................... 9.35 years
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
F-22
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share would have been increased by the
following pro forma amounts (in thousands, except per share data):
YEAR ENDED
DECEMBER 31, 1996
Net Loss:
As Reported..................... $(4,308)
Pro forma....................... $(5,283)
Loss Per Share:
As Reported..................... $ (.95)
Pro forma....................... $ (1.16)
The pro forma compensation cost may not be representative of that to be
expected in future years because options vest over several years and additional
awards may be made each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with the following weighted average
assumptions used for grants in 1996: dividend yield of 0%; expected volatility
of 32.19%; risk-free interest rate of 6.72%; and expected lives of 10 years.
STOCK WARRANT
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
Year ending December 31 --
1997............................... $ 3,679
1998............................... 3,166
1999............................... 2,891
2000............................... 2,554
2001............................... 1,912
Thereafter......................... 7,005
---------
$ 21,207
=========
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $409,000, $587,000, and $1,276,000, respectively. Included in
these amounts are rent expenses and commissions paid to related parties of
approximately $117,000, $227,000, and $482,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-23
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Federal --
Current............................ $ 300 $ 823 $ 1,130
Deferred........................... (41) 80 (324)
State --
Current............................ 67 159 238
Deferred........................... (5) 14 (87)
--------- --------- ---------
$ 321 $ 1,076 $ 957
========= ========= =========
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34 percent to income
before income tax as follows (in thousands):
YEAR ENDED DECEMBER 31
-------------------------------
1994 1995 1996
--------- --------- ---------
Tax provision at the statutory rate..... $ 268 $ 913 $ (1,138)
Increase (decrease) resulting from --
State income taxes................. 40 114 114
Nondeductible expenses............. 16 42 154
Nondeductible costs related to
purchase of EHC.................. -- -- 1,740
Other.............................. (3) 7 87
--------- --------- ---------
$ 321 $ 1,076 $ 957
========= ========= =========
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred tax assets and liabilities result principally from the following (in
thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Accruals and reserves not deductible
until paid......................... $ (242) $ (848)
Net changes in accounting methods for
the Founding Companies, the Fourth
Quarter 1996 Acquisitions and the
Pooled Companies................... 23 1,474
Depreciation and amortization........ 349 276
Loss on Investment................... -- 268
Other................................ 67 918
--------- ---------
Total deferred income tax
liabilities........................ $ 197 $ 2,088
========= =========
F-24
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Deferred tax assets --
Current......................... $ (401) $ (1,412)
Long-term....................... (9) (618)
--------- ---------
Total...................... (410) (2,030)
--------- ---------
Deferred tax liabilities --
Current......................... 300 1,108
Long-term....................... 307 3,010
--------- ---------
Total...................... 607 4,118
--------- ---------
Net deferred income tax
liabilities............. $ 197 $ 2,088
========= =========
11. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is involved in legal actions arising in the ordinary course of
business. Management does not believe that the outcome of such legal actions
will have a material adverse effect on the Company's financial position or
consolidated results of operations.
INSURANCE
The Company carries a broad range of insurance coverage, including general
and business auto liability, commercial property, workers' compensation and a
general umbrella policy. During the fourth quarter of 1996, the Company
established a self-insurance retention program for a portion of its medical
claims. The Company is now responsible for the first $75,000 per employee of
medical claims filed under its medical insurance policy. In addition, the
Company established a self-insurance retention program for damages to
Company-owned vehicles. The accrued insurance claims payable represents
management's estimate of the Company's potential claims costs in satisfying the
self-insurance retention for claims occurring through December 31, 1996. The
accrual is based on known facts and historical trends, and management believes
such accrual to be adequate.
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) account. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
F-25
<PAGE>
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUBSEQUENT EVENTS:
CONVERTIBLE SUBORDINATED NOTES
On April 2, 1997, the Company issued a series of 7 1/4% convertible
subordinated notes due 2004 (the "7 1/4% Notes") in the aggregate principal
amount of $55 million. The 7 1/4% Notes are unsecured obligations and are
convertible at $25.50 per share into an aggregate of 2,156,862 shares of Common
Stock of the Company based on certain conditions. The Company used substantially
all of the net proceeds of the offering of the 7 1/4% Notes to repay
indebtedness outstanding under its existing Credit Facility.
ACQUISITIONS
As discussed in Note 1, two of the First Quarter 1997 Acquisitions were
accounted for using the purchase method of accounting. Aggregate consideration
for these acquisitions was 26,314 shares of Common Stock and $640,000 in cash.
EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
During the second quarter of 1997 (through May 19, 1997), the Company
purchased six residential services businesses and one commercial maintenance
business for an aggregate consideration of $12.3 million in cash and 335,730
shares of Common Stock. Each of those acquisitions was accounted for under the
purchase method of accounting. Funding of the cash portion of the purchase
prices and repayment of debt was provided by borrowing under the Company's
Credit Facility.
F-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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:
<TABLE>
<CAPTION>
JUNE 30
------------------------ DECEMBER 31,
1994 1995 1995
----------- ----------- ------------
<S> <C> <C> <C>
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)
=========== =========== ============
</TABLE>
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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<PAGE>
FLORIDA HEATING AND AIR CONDITIONING, INC., AND RELATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL LIVES --------------------------
IN YEARS 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Transportation equipment............. 5 $ 869,115 $ 1,051,880
Machinery and equipment.............. 7 115,186 115,774
Computer and telephone equipment..... 5 - 7 343,166 354,674
Leasehold improvements............... 7 57,151 57,151
Furniture and fixtures............... 7 39,308 39,308
------------ ------------
1,423,926 1,618,787
Less -- Accumulated depreciation and
amortization....................... 964,962 1,123,677
------------ ------------
Property and
equipment, net..... $ 458,964 $ 495,110
============ ============
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consist of the
following:
DECEMBER 31
----------------------
1994 1995
---------- ----------
Balance at beginning of year......... $ 41,305 $ 41,305
Additions to costs and expenses...... 53,132 25,038
Deductions for uncollectible
receivables written off............ (53,132) (25,038)
---------- ----------
$ 41,305 $ 41,305
========== ==========
Accounts payable and accrued expenses consist of the following:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Accounts payable, trade.............. $ 1,002,209 $ 1,283,034
Accrued compensation and benefits.... 150,638 198,175
Other accrued expenses............... 143,625 145,360
------------ ------------
$ 1,296,472 $ 1,626,569
============ ============
Installation contracts in progress are as follows:
DECEMBER 31
--------------------------
1994 1995
------------ ------------
Costs incurred on contracts in
progress........................... $ 1,680,864 $ 985,003
Estimated earnings, net of losses.... 575,928 351,711
------------ ------------
2,256,792 1,336,714
Less -- Billings to date............. 2,765,002 1,704,233
------------ ------------
Billings in excess of costs and
estimated earnings on
uncompleted contracts.............. $ (508,210) $ (367,519)
============ ============
F-91
<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-92
<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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<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-113
<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-114
<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-115
<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-116
<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-117
<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-118
<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-119
<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-120
<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-121
<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-122
<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-123
<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-124
<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-125
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH
OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ....................................................... 2
Risk Factors ............................................................. 6
The Company .............................................................. 11
Use of Proceeds .......................................................... 13
Price Range of Common Stock .............................................. 13
Dividend Policy .......................................................... 13
Capitalization ........................................................... 14
Selected Historical Financial Information ................................ 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 17
Business ................................................................. 29
Management ............................................................... 39
Certain Transactions ..................................................... 44
Security Ownership of Certain
Beneficial Owners and Management ....................................... 46
Selling Holders .......................................................... 47
Description of the Notes ................................................. 48
Description of Capital Stock ............................................. 58
Shares Eligible for Future Sale .......................................... 62
Certain United States Federal Income Tax Consequences .................... 64
Plan of Distribution ..................................................... 66
Legal Matters ............................................................ 67
Experts .................................................................. 67
Additional Information ................................................... 68
Index to Financial Statements ............................................ F-1
================================================================================
$55,000,000
[LOGO -- ARS]
7 1/4% CONVERTIBLE
SUBORDINATED NOTES
DUE 2004
------------
PROSPECTUS
, 1997
------------
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the offering
described in this registration statement, all of which shall be paid by American
Residential Services, Inc. (the "Company"). All of such amounts (except the
SEC Registration Fee) are estimated.
SEC Registration Fee .......................................... $ 16,667
Printing and Engraving Costs .................................. 50,000
Legal Fees and Expenses ....................................... 150,000
Accounting Fees and Expenses .................................. 150,000
Trustee and Registrar Fees and Expenses ....................... 20,000
Miscellaneous ................................................. 13,333
--------
$400,000
========
ITEM 14. 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
II-1
<PAGE>
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 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
II-2
<PAGE>
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 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 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the year ended December 31, 1996, ARS sold 5,078,398 shares of its
Common Stock and two warrants to acquire 108,333 shares of its Common Stock that
were not registered under the Securities Act of 1933, as amended (the
"Securities Act"). Of the shares sold, 4,225,103 were issued in a series of
separate acquisition transactions in which ARS purchased 20 residential services
businesses from their owners for consideration consisting of cash and shares of
Common Stock in 18 acquisitions and shares of Common Stock in two acquisitions.
Seven of these acquisitions closed on September 27, 1996, one closed on October
31, 1996, two closed on November 25, 1996 and ten closed in the period from
December 3 to December 16, 1996. These sales were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof as
transactions not involving any public offering. Each acquisition involved a
limited number of owners.
On September 27, 1996, Equus II Incorporated ("Equus") converted a
portion ($500,000) of an ARS convertible note into 844,962 shares of Common
Stock. ARS had issued this note to Equus in early 1996 in connection with the
provision by Equus of start-up financing for ARS. Also in connection with this
financing, ARS issued a warrant to purchase 100,000 shares of Common Stock to
Equus. These transactions were exempt from the registration requirements of the
Securities Act of by virtue of Section 4(2) thereof as transactions not
involving any public offering.
On November 25, 1996, NationsBank of Texas, N.A. exercised a warrant to
purchase 8,333 shares of Common Stock from ARS at a purchase price of $83.33.
This warrant had been issued as a financing fee.
II-3
<PAGE>
Both the warrant and the share transactions were exempt from the registration
requirements of the Securities Act by virture of Section 4(2) thereof as
transactions not involving any public offering.
On April 2, 1997, ARS sold $55,000,000 aggregate principal amount of its
7 1/4% Convertible Subordinated Notes due 2004 (the "Notes") to Smith Barney
Inc., Goldman, Sachs & Co. and Montgomery Securities (the "Initial
Purchasers") for resale by the Initial Purchasers to "qualified institutional
buyers" (as defined in Securities Act Rule 144A). Neither the Notes nor the
underlying shares of ARS Common Stock were registered under the Securities Act.
ARS sold them in reliance on Section 4(2) under the Securities Act. The initial
price to investors totaled $55,000,000 and the discounts and commissions totaled
$1,650,000. The Notes are convertible into shares of ARS Common Stock at any
time at a conversion price of $25.50 per share, subject to adjustment in certain
events.
ITEM 16. 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 (Form S-4, Reg. No. 333-18623, Ex. 2.11).
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.1).
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior Participating Preferred Stock (Form S-1,
Reg. No. 333-06195, Ex. 3.3).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*4.1 -- Form of Certificate representing Common Stock (Form S-1, Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights Certificate as Exhibit B thereto (Form
S-8, Reg. No. 333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the stockholders listed on the signature pages
thereto (Form S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996 between ARS and Equus II
Incorporated (Form S-1, Reg. No. 333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March 19, 1996 between EHC and
NationsBank of Texas, N.A. ("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
*4.6 -- Revolving Loan Agreement dated March 3, 1997 among ARS, NationsBank and the other parties
designated therein. (Form 10-K for 1996, File No. 1-11849, Ex. 4.6)
*4.7 -- First Amendment to Revolving Loan Agreement dated March 24, 1997, among ARS, NationsBank
and the other parties designated therein. (Form 10-K for 1996, File No. 1-11849, Ex. 4.7)
*4.8 -- Indenture dated as of April 1, 1997 from ARS to U.S. Trust Company of Texas, N.A., as
Trustee (Form S-4, Reg. No. 333-18623, Ex. 4.8).
*4.9 -- Registration Rights Agreement dated as of April 1, 1997 between ARS and Smith Barney Inc.,
Goldman, Sachs & Co. and Montgomery Securities Form S-4, Reg. No. 333-18623, Ex. 4.9).
ARS and certain of its subsidiaries are parties to certain debt instruments under which
the total amount of securities authorized does not exceed 10% of the total assets of ARS
and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item
601(b) of Regulation S-K, ARS agrees to furnish a copy of such instruments to the
Commission upon request.
5.1 -- Opinion of John D. Held, Esq.
*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195, Ex. 10.1).
*10.2 -- Employment Agreement dated as of November 1, 1995 between ARS and Howard S. Hoover, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.2).
*10.3 -- Employment Agreement dated as of November 1, 1995 between ARS and C. Clifford Wright, Jr.,
as amended (Form S-1, Reg. No. 333-06195, Ex. 10.3).
*10.4 Amended and Restated Employment Agreement dated as of April 1, 1997 between ARS and Harry
O. Nicodemus, IV. (Form S-4, Reg. No. 333-18623, Ex. 4.9).
*10.5 -- Employment Agreement dated as of March 6, 1996 between ARS and John D. Held, as amended
(Form S-1, Reg. No. 333-06195, Ex. 10.5).
*10.6 -- Employment Agreement dated as of March 6, 1996 between ARS and A. Jefferson Walker III
(Form S-1, Reg. No. 333-06195, Ex. 10.6).
*10.7 -- Employment Agreement dated as of April 15, 1996 between ARS and Michael Mamaux (Form S-1,
Reg. No. 333-06195, Ex. 10.7).
*10.8 -- Employment Agreement dated as of June 13, 1996 between ARS and Elliot Sokolow (Form S-1,
Reg. No. 333-06195, Ex. 10.8).
*10.9 -- Employment Agreement dated as of June 13, 1996 between ARS and Gorden H. Timmons (Form
S-1, Reg. No. 333-06195, Ex. 10.10).
*10.10 -- Employment Agreement dated as of June 13, 1996 between ARS and Frank N. Menditch (Form
S-1, Reg. No. 333-06195, Ex. 10.12).
*10.11 -- Employment Agreement dated as of November 1, 1995 between ARS and William P. McCaughey, as
amended (Form S-1, Reg. No. 333-06195, Ex. 10.4).
*10.12 -- Form of Indemnification Agreement between ARS and each of its directors and officers (Form
S-1, Reg. No. 333-06195, Ex. 10.15).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
*10.13 -- Executive Supplemental Disability Plan of ARS (Form S-1, Reg. No. 333-06195, Ex. 10.16).
*10.14 -- Executive Supplemental Life Insurance Plan of ARS (Form S-1, Reg. No. 333-06195, Ex.
10.17).
*10.15 -- ARS Deferred Compensation Plan (Form S-1, Reg. No. 333-06195, Ex. 10.18).
21.1 -- List of Subsidiaries.
23.1 -- Consent of Arthur Andersen LLP.
23.2 -- Consent of John D. Held, Esq. (contained in Exhibit 5.1)
24.1 -- Power of Attorney (included on the signature page hereof).
26.1 -- Statement of Eligibility and Qualification (Form T-1) under the Trust Indenture Act of
1939 of U.S. Trust Company of Texas, N.A., as Trustee under Exhibit 4.8.
</TABLE>
- ------------
* Incorporated by reference.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b), if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-6
<PAGE>
(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.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON MAY 22, 1997.
AMERICAN RESIDENTIAL SERVICES, INC.
BY: /s/ C. CLIFFORD WRIGHT, JR.
C. CLIFFORD WRIGHT, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Each person whose signature appears below hereby appoints C. Clifford
Wright, Jr., John D. Held and Harry O. Nicodemus, IV, and both of them, either
of whom may act without the joinder of the other, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any registration statement of the same
offering filed pursuant to Rule 462 under the Securities Act of 1933, and to
file the same, with all exhibits thereto and all other documents in connection
therewith, with the Commission, granting unto said attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
appropriate or necessary to be done, as fully and for all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON MAY 22, 1997
IN THE CAPACITIES INDICATED.
/s/ C. CLIFFORD WRIGHT, JR. /s/ ROBERT J. CRUIKSHANK
C. CLIFFORD WRIGHT, JR. ROBERT J. CRUIKSHANK
PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR DIRECTOR
(PRINCIPAL EXECUTIVE OFFICER)
/s/ HARRY O. NICODEMUS, IV /s/ RANDALL B. HALE
HARRY O. NICODEMUS, IV RANDALL B. HALE
VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR
CHIEF ACCOUNTING OFFICER
/s/ HOWARD S. HOOVER, JR. /s/ NOLAN LEHMANN
HOWARD S. HOOVER, JR. NOLAN LEHMANN
CHAIRMAN OF THE BOARD DIRECTOR
/s/ GORDEN H. TIMMONS /s/ THOMAS N. AMONETT
GORDEN H. TIMMONS THOMAS N. AMONETT
CHIEF OPERATING OFFICER AND DIRECTOR DIRECTOR
II-8
<PAGE>
/s/ DON D. SYKORA /s/ WILLIAM P. MCCAUGHEY
DON D. SYKORA WILLIAM P. MCCAUGHEY
DIRECTOR DIRECTOR
/s/ ELLIOT SOKOLOW /s/ FRANK N. MENDITCH
ELLIOT SOKOLOW FRANK N. MENDITCH
DIRECTOR DIRECTOR
II-9
May 22, 1997
American Residential Services, Inc.
Post Oak Tower
5051 Westheimer, Suite 725
Houston, Texas 77056-5604
Gentlemen:
As set forth in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission (the "Commission") on May 23, 1997 (the
"Registration Statement") by American Residential Services, Inc., a Delaware
corporation (the "Company"), under the Securities Act of 1933, as amended (the
"Act"), relating to $55,000,000 of 7 1/4% Convertible Subordinated Notes due
2004 (the "Notes") and the shares of common stock, par value $.001 per share, of
the Company issuable on conversion thereof (the "Common Stock" and together with
the Notes, the "Securities"), to be sold by the selling securityholders listed
in the Registration Statement form time to time pursuant to Rule 415 under the
Act, certain legal matters in connection with the Securities are being passed on
for the Company by me.
In my capacity as General Counsel of the Company, I have examined
the Restated Certificate of Incorporation and Bylaws of the Company, each as
amended to date, the Indenture dated as of April 1, 1997 from ARS to U.S. Trust
Company of Texas, N.A., as trustee relating to the Notes (the "Indenture"), and
the originals, or copies certified or otherwise identified, of corporate records
of the Company, certificates of public officials and of representatives of the
Company, statutes and other instruments and documents as a basis for the
opinions hereafter expressed.
In connection with this opinion, I have assumed that (i) the
Registration Statement, and any amendments thereto (including post-effective
amendments), will have become effective; and (ii) the Securities will be sold in
compliance with applicable federal and state securities laws and in the manner
stated in the Registration Statement and any appropriate prospectus supplement.
.
Based on and subject to the foregoing, I am of the opinion that:
1. The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Delaware.
2. The Notes have been validly issued and constitute valid and
binding obligations of the Company entitled to the benefits of the
Indenture and enforceable against the Company in accordance with their
terms, except as such enforcement is subject to (i) any applicable
bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium or other laws relating to or affecting creditors'
rights generally and (ii) general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
<PAGE>
American Residential Services, Inc. -2- May 22, 1997
3. The shares of Common Stock have been duly authorized and
reserved for issuance on conversion of the Notes and when certificates
representing the shares of Common Stock have been duly executed,
countersigned, registered and delivered in accordance with the terms of
the Notes and the Indenture on conversion of the Notes, the shares of
Common Stock will be duly authorized, validly issued, fully paid and
non-assessable.
The opinion set forth above is limited in all respects to matters
of the laws of the State of Texas, the General Corporation Law of the State of
Delaware and the federal laws of the United States of America, to the extent
applicable.
I hereby consent to the filing of this opinion of counsel as
Exhibit 5 to the Registration Statement. I also consent to the reference to my
name under the heading "Legal Matters" in the prospectus forming a part of the
Registration Statement.
Very truly yours,
John D. Held
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MAY 23, 1997)
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
- --------------- -------------
<S> <C>
American Mechanical Services, Inc. Delaware
American Mechanical Services of Arizona, Inc. (d\b\a Arizona Air Mechanix) Arizona
American Mechanical Services of California, Inc. (d/b/a Charter Mechanical Systems) California
American Mechanical Services of Colorado, Inc. (d/b/a Continental Mechanical Systems) Colorado
American Mechanical Services of Texas, Inc. (d/b/a Texas Mechanical Systems) Delaware
AMS American Mechanical Services of Maryland, Inc. Maryland
American Residential Services of Colorado, Inc. Colorado
American Residential Services of Florida, Inc. (d/b/a Florida Heating & Air Conditioning, Inc.
and De Moss Air Conditioning Services, Inc.) Florida
Bullseye Air Conditioning, Inc. Florida
Climatic Corporation of Vero Beach Florida
Florida Heating and Air Duct, Inc. Florida
Larry Teague & Sons Plumbing, Inc. Florida
Sasso Air Conditioning, Inc. Delaware
Ted's Plumbing, Inc. Florida
American Residential Services of Illinois, Inc. (d/b/a Ross Heating & Cooling Inc.; Kranz
Mechanical Corporation; Kranz Heating & Cooling, Inc.) Illinois
American Residential Services of Indiana, Inc. (d/b/a Dial One Meridian & Hoosier, Inc.) Indiana
Sagamore Heating & Cooling, Inc. Indiana
American Residential Services of Michigan, Inc. (d/b/a Energy Concepts, Inc.) Michigan
American Residential Services of Nevada, Inc. Nevada
American Residential Services of North Carolina, Inc. (d/b/a Metro Heating & Air Conditioning) North Carolina
American Residential Services of Pennsylvania, Inc. Pennsylvania
American Residential Services of South Carolina, Inc. (d/b/a Atlas Services, Inc.) South Carolina
Doc Plumbing, Inc. South Carolina
Golden Triangle Mechanical, Inc. South Carolina
Kirby Heating & Air, Inc. South Carolina
R. F. Masters, Inc. South Carolina
Rooter Express Service, Inc. South Carolina
American Residential Services of Virginia, Inc. (d/b/a Keenan Heating & Cooling) Virginia
ARS American Residential Services of California, Inc. (d/b/a Southcoast Heating and Air Conditioning, Inc.) California
A. K. Landan, Inc. (d/b/a Allied Plumbing-Heating-Air Conditioning) California
ARS American Residential Services of Oklahoma, Inc. (d/b/a Advanced AirCo & Heating, Inc.) Oklahoma
ARS American Residential Services of Texas, Inc. Delaware
McCannics, Inc. Delaware
Service Enterprise Holdings, LLC Texas
Adcot, Inc. (d/b/a A-ABC Appliances) Texas
Service Enterprises - Houston, Inc. (d/b/a Crown Services) Delaware
Trademark Enterprises, Inc. Delaware
ARS Energy Services Company Delaware
ARS Residential Holding Company Delaware
ARS Residential Management Company Delaware
AT Acquisition Inc. Florida
</TABLE>
<PAGE>
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MAY 23, 1997)
<TABLE>
<CAPTION>
STATE OF
SUBSIDIARY NAME INCORPORATION
- --------------- -------------
<S> <C>
General Heating & Air Conditioning Company, Inc. Delaware
Godby Acquisition Inc. Indiana
Godby Brothers, Inc. Delaware
Godby Brothers LLC Delaware
Godby Brothers Rental, LLC Indiana
Hession Plumbing Company, Inc. Indiana
Illinois Heating & Air Conditioning, Inc. Illinois
Keenan Mechanical Services, Inc. Virginia
Korte Electric, Inc. Delaware
Pro-Formance, Inc. (d/b/a Pro Heating & Air) California
Rental Acquisition Inc. Indiana
USA Heating & Air Conditioning, Inc. Delaware
West Houston Services, Inc. Delaware
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
May 22, 1997
EXHIBIT 26.1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_____
----------------------
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification no.)
2001 Ross Avenue, Suite 2700 75201-2936
Dallas, Texas (Zip code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, Texas 75201-2936
(214) 754-1200
(Name, address and telephone number of agent for service)
----------------------
American Residential Services, Inc.
(Exact name of obligor as specified in its charter)
Delaware 76-0484976
(State of other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056
(Address of principal executive offices) (Zip code)
----------------------
7 1/4% Convertible Subordinated Notes Due 2004
(Title of the indenture securities)
================================================================================
<PAGE>
GENERAL
1. GENERAL INFORMATION.
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS.
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. VOTING SECURITIES OF THE TRUSTEE.
Furnish the following information as to each class of voting securities of
the Trustee:
As of May 19, 1997
Col A. Col B.
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
Not Applicable
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Not Applicable
<PAGE>
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Not Applicable
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
Not Applicable
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Not Applicable
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Not Applicable
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Not Applicable
11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING
50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Not Applicable
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Not Applicable
13. DEFAULTS BY THE OBLIGOR.
Not Applicable
14. AFFILIATIONS WITH THE UNDERWRITERS.
Not Applicable
15. FOREIGN TRUSTEE.
Not Applicable
16. LIST OF EXHIBITS.
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
Texas, N.A.; incorporated herein by reference to Exhibit T-1.1
filed with Form T-1 Statement, Registration No. 22-21897.
<PAGE>
16. (con't)
T-1.2 - A copy of the certificate of authority of U.S. Trust Company of
Texas, N.A. to commence business; incorporated herein by
reference to Exhibit T-1.2 filed with Form T-1 Statement,
Registration No. 22-21897.
T-1.3 - A copy of the authorization of U.S. Trust Company of Texas, N.A.
to exercise corporate trust powers; incorporated herein by
reference to Exhibit T-1.3 filed with Form T-1 Statement,
Registration No. 22-21897.
T-1.4 - A copy of the By-laws of U.S. Trust Company of Texas, N.A.
as amended to date; incorporated herein by reference to Exhibit
T-1.4 filed with Form T-1 Statement, Registration No. 22-21897.
T-1.6 - A consent of the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of May 19, 1997 the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of May 19, 1997 U.S. T.L.P.O.
Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S.
Trust Corporation. U.S. Trust Corporation had outstanding 19,340,102 shares of
$1 par value Common Stock as of May 19, 1997.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S.
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp, and U.S. Trust Corporation.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of
all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10 and
11, the answers to said Items are based upon incomplete information. Items 2, 5,
6, 7, 9, 10 and 11 may, however, be considered correct unless amended by an
amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors of officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
----------
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee,
U.S. Trust Company of Texas, N.A., a national banking association organized and
existing under the laws of the United States of America, has duly caused this
statement of eligibility and qualification to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of Dallas, and State of
Texas on the 19th day of May, 1997.
U.S. Trust Company of Texas, N.A.
Trustee
By: /s/ BILL BARBER
Bill Barber
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of American Residential
Services, Inc. 7 1/4% Convertible Subordinated Notes due 2004, we hereby consent
that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ BILL BARBER
Bill Barber
Vice President
<PAGE>
Exhibit T-1.7
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Federal Financial Office of the Comptroller of the Currency
Institutions Examination OMB Number: 1557-0081
Council Expires March 31, 1999
- --------------------------------------------------------------------------------
Please Refer to Page i, (1)
Table of Contents, for
(LOGO) the required disclosure
of estimated burden
- --------------------------------------------------------------------------------
CONSOLIDATED REPORTS OF CONDITION
AND INCOME FOR A BANK WITH DOMESTIC
OFFICES ONLY AND TOTAL ASSETS OF
LESS THAN $100 MILLION -- FFIEC 034 (970331)
(RCRI 9999)
REPORT AT THE CLOSE OF BUSINESS
March 31, 1997
This report is required by law: 12 This report form is to be filed by
U.S. C. Section 324 (State member banks with domestic offices only.
banks); 12 U.S. C. Section 1817 Banks with branches and
(State nonmember banks); and 12 consolidated subsidiaries in U.S.
U.S. C. Section 161 (National territories and possessions, Edge
banks). or Agreement subsidiaries foreign
branches, consolidated foreign
subsidiaries, or International Banking
Facilities must file FFIEC 031.
- --------------------------------------------------------------------------------
NOTE: The Reports of Condition and The Reports of Condition and Income
Income must be signed by an are to be prepared in accordance
authorized officer and the Report with Federal regulatory authority
of Condition must be attested to by instructions. NOTE: these
not less than two directors instructions may in some cases
(trustees) for State nonmember differ from generally accepted
banks and three directors for State accounting principles.
member and National Banks.
We, the undersigned directors
I, Alfred B. Childs, SVP & Cashier (trustees), attest to the
Name and Title of Officer correctness of this Report of
Authorized to Sign Report Condition (including the supporting
schedules) and declare that it has
of the named bank do hereby declare been examined by us and to the best
that these Reports of Condition and of our knowledge and belief has
Income (including the supporting been prepared in conformance with
schedules) have been prepared in the instructions issued by the
conformance with the instructions appropriate Federal regulatory
issued by the appropriate Federal authority and is true and correct.
regulatory authority and are true
to the best of my knowledge and
belief. /s/ STUART M. PEARMAN
Stuart M. Pearman
/s/ ALFRED B. CHILDS Director (Trustee)
Alfred B. Childs
Signature of Officer /s/ J.T. MOORE JR.
Authorized to Sign Report J.T. Moore Jr.
Director (Trustee)
April 17, 1997
Date of Signature /s/ PETER J. DENKER
Peter J. Denker
Director (Trustee)
- --------------------------------------------------------------------------------
FOR BANKS SUBMITTING HARD COPY REPORT FORMS:
STATE MEMBER BANKS: Return the NATIONAL BANKS: Return the
original and one copy to the original only in the special return
appropriate Federal Reserve address envelope provided. If
District Bank. express mail is used in lieu of the
special return address envelope, return
STATE NONMEMBER BANKS: Return the the original only to the FDIC, c/o
original only in the special return Quality Data Systems, 2127 Espey
address envelope provided. If Court, Suite 204, Crofton, MD
express mail is used in lieu of the 21114.
special return address envelope,
return the original only to the FDIC,
c/o Quality Data Systems, 2127 Espey
Court, Suite 204, Crofton, MD
21114.
- --------------------------------------------------------------------------------
FDIC Certificate Number __________ 12-31-96
(RCRI 9050)
Banks should affix the address label in this space.
U.S. Trust Company of Texas, National Association
Legal Title of Bank (TEXT 9010)
2001 Ross Avenue, Suite 2700
City (TEXT 9130)
Dallas, TX 75201
State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
U.S. TRUST COMPANY OF TEXAS, N.A.
2100 ROSS AVENUE, SUITE 2700
DALLAS, TX 75201
Call Date: 03/31/97 State #: 6797 FFIEC 034
Vendor ID: D Cert#: 33217 Page RC-2
Transit#: 11101765 9
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED
SAVINGS BANKS FOR MARCH 31, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET C100
<TABLE>
<CAPTION>
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
1. Cash and balances due from depository institutions: RCON
<S> <C> <C> <C> <C>
a. Noninterest-bearing balances and currency and coin (1,2) ..................... -- -- 0081 1,255 1.a
b. Interest bearing balances (3) ................................................ -- -- 0071 629 1.b
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A) ................... -- -- 1754 0 2.a
b. Available-for-sale securities (from Schedule RC-B, column D) ................. -- -- 1773 105,764 2.b
3. Federal funds sold and securities purchased under agreements to resell:
a. Federal funds sold (4) ....................................................... -- -- 0276 0 3.a
b. Securities purchased under agreements to resell (5) .......................... -- -- 0277 0 3.b
4. Loans and lease financing receivables: RCON
a. Loans and leases, net of unearned income (from Schedule RC-C) ................ 2122 43,079 -- - 4.a
b. LESS: Allowance for loan and lease losses .................................... 3123 511 -- - 4.b
c. LESS: Allocated transfer risk reserve ........................................ 3128 0 -- - 4.c
d. Loans and leases, net of unearned income, allowance, and reserve RCON
(item 4.a minus 4.b and 4.c) ............................................... -- -- 2125 42,568 4.d
5. Trading assets .................................................................... -- -- 3545 0 5.
6. Premises and fixed assets (including capitalized leases) .......................... -- -- 2145 752 6.
7. Other real estate owned (from Schedule RC-M) ...................................... -- -- 2150 0 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M) ............................................................ -- -- 2130 0 8.
9. Customers' liability to this bank on acceptances outstanding ...................... -- -- 2155 0 9.
10. Intangible assets (from Schedule RC-M) ........................................... -- -- 2143 0 10.
11. Other assets (from Schedule RC-F) ................................................ -- -- 2160 1,933 11.
12. a. Total assets (sum of items 1 through 11) ..................................... -- -- 2170 152,901 12.a
b. Losses deferred pursuant to U.S.C. 1823(j) ................................... -- -- 0306 0 12.b
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 12.a and 12.b) ............................................... -- -- 0307 152,901 12.c
</TABLE>
(1) Includes cash items in process of collection and unposed debits.
(2) The amount reported in this item must be greater than or equal to the sum
of Schedule RC-M, items 3.a and 3.b.
(3) Includes time certificates of deposit not held for trading.
(4) Report 'term federal funds sold' in Schedule RC, item 4.a, 'Loans and
leases, net of unearned income,' and in Schedule RC-C, part 1.
(5) Report securities purchased under agreements to resell that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 3.a, 'Federal
funds sold.'
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
U.S. Trust Company of Texas, N.A. Call Date: 3/31/97 State #: 6797 FFIEC 034
2100 Ross Avenue, Suite 2700 Vendor ID: D Cert #: 33217 Page RC-2
Dallas, TX 75201 Transit #: 11101765
10
SCHEDULE RC - CONTINUED
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------
LIABILITIES
13. Deposits RCON
a. In domestic offices (sum of totals of RCON ----
columns A and C from Schedule RC-E) ---- 2200 124,978 13.a
(1) Noninterest-bearing (1) 6631 19,997 13.a.1
(2) Interest-bearing 6636 104,981
b. In foreign offices, Edge and Agreement
subsidiaries, and IBFs
(1) Noninterest-bearing
(2) Interest-bearing
14. Federal funds purchased and securities RCON
sold under agreements to repurchase: ----
a. Federal funds purchased (2) 0278 0 14.a
b. Securities sold under agreements to
repurchase (3) 0279 0 14.b
15. a. Demand notes issued to the U.S. Treasury 2840 0 15.a
b. Trading liabilities 3548 0 15.b
16. Other borrowed money:
a. WITH A REMAINING MATURITY OF ONE YEAR
OR LESS 2332 1,000 16.a
b. WITH A REMAINING MATURITY OF MORE THAN
ONE YEAR 2333 5,000 16.b
17. Mortgage indebtedness and obligations under
capitalized leases 2910 0 17.
18. Bank's liability on acceptances executed
and outstanding 29200 0 18.
19. Subordinated notes and debentures 3200 0 19.
20. Other liabilities (from Schedule RC-G) 2930 1,468 20.
21. Total liabilities (sum of items 13
through 20) 2948 132,446 21.
22. Limited-life preferred stock and related
surplus 3282 0 22.
EQUITY CAPITAL
23. Perpetual preferred stock and related
surplus 3838 7,000 23.
24. Common Stock 3230 500 24.
25. Surplus (exclude all surplus related to
preferred stock) 2829 8,384 25.
26. a. Undivided profits and capital reserves 3632 4,711 26.a
b. Net unrealized holding gains (losses)
on available-for-sale securities 8434 (140) 26.b
27. Cumulative foreign currency translation
adjustments 3210
28. a. Total equity capital (sum of items 23
through 27) 3210 20,455 28.a
b. Losses deferred pursuant to
12 U.S.C. 1823(j) 0306 0 28.b
c. Total equity capital and losses
deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 28.a and 28.b) 3559 20,455 28.c
29. Total liabilities, limited-life preferred
stock, equity capital, and losses deferred
pursuant to 12 U.S.C. 1823(j) (sum of
items 21, 22, and 28.c) 2257 152,901 29.
MEMORANDUM
TO BE REPORTED ONLY WITH THE MARCH REPORT OF CONDITION.
1. Indicate in the box at the right the number
of the statement below that best describes
the most comprehensive level of auditing work RCON
performed for the bank by independent external ----
auditors as of any date during 1995 6724 1 M.1
</TABLE>
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4 = Directors' examination of the bank performed by other external auditors (may
be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report "term federal funds purchased" in Schedule RC, item 16, 'Other
borrowed money.'
(3) Report securities sold under agreements to repurchase that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 14.a, 'Federal
funds purchased.'
