<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): December 8, 1997
AMERICAN RESIDENTIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-11849 76-0484996
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
</TABLE>
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (713) 599-0100
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS
The historical financial statements of American Residential Services, Inc.
and its subsidiaries (collectively, the "Company") have been retroactively
restated to give effect to the operations of 15 businesses acquired by the
Company in 1997 (through December 5) which were accounted for using the
pooling-of-interests method of accounting. The restated historical financial
statements of the Company and the related report of Arthur Andersen LLP,
independent public accountants, are attached hereto as Annex A.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
<TABLE>
<S> <C>
23.1 -- Consent of Arthur Andersen LLP.
</TABLE>
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ HARRY O. NICODEMUS, IV
----------------------------------
Harry O. Nicodemus, IV
Senior Vice President, Chief
Financial Officer and Chief
Accounting Officer
Date: December 8, 1997
<PAGE> 4
ANNEX A
<PAGE> 5
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Residential Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 6
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 give
retroactive effect to certain acquisitions made by the Company during the first
nine months of 1997 which have been accounted for as pooling-of-interests
transactions. 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, after giving
effect to certain pooling-of-interests transactions, 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 certain pooling-of-interests
transactions.
ARTHUR ANDERSEN LLP
Houston, Texas
December 8, 1997
F-2
<PAGE> 7
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,873 $ 9,984
Accounts receivable --
Trade, net of allowance of $500 and $1,343............. 11,195 30,735
Other.................................................. 723 2,023
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 721 1,391
Inventories............................................... 2,046 11,290
Prepaid expenses and other current assets................. 531 1,572
Net assets held for resale................................ -- 338
------- --------
Total current assets.............................. 18,089 57,333
PROPERTY AND EQUIPMENT, net................................. 6,436 21,660
GOODWILL, net............................................... -- 131,193
OTHER NONCURRENT ASSETS..................................... 718 1,438
------- --------
Total assets...................................... $25,243 $211,624
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,474 $ 2,202
Short-term debt........................................... 210 --
Accounts payable and accrued expenses..................... 13,419 29,372
Unearned revenue on service and warranty contracts........ 827 4,081
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 875 2,503
------- --------
Total current liabilities......................... 16,805 38,158
LONG-TERM DEBT, net of current maturities................... 2,873 53,861
UNEARNED REVENUE ON SERVICE AND WARRANTY CONTRACTS.......... -- 633
DEFERRED INCOME TAXES....................................... 86 2,721
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; 4,085,046 and 13,389,255 shares issued and
outstanding............................................ 4 13
Additional paid-in-capital................................ 3,826 126,226
Retained earnings (deficit)............................... 1,649 (9,988)
------- --------
Total stockholders' equity........................ 5,479 116,251
------- --------
Total liabilities and stockholders' equity........ $25,243 $211,624
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 8
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
REVENUES.................................................... $81,125 $97,686 $150,330
COST OF SERVICES............................................ 61,187 72,382 109,060
------- ------- --------
Gross Profit.............................................. 19,938 25,304 41,270
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 16,992 19,914 34,276
COMPENSATION EXPENSE RELATED TO PURCHASE OF EHC (Note 1).... -- -- 3,356
------- ------- --------
INCOME FROM OPERATIONS...................................... 2,946 5,390 3,638
OTHER INCOME (EXPENSE):
Financing fees related to purchase of EHC (Note 1)........ -- -- (4,818)
Interest expense.......................................... (355) (356) (661)
Interest income........................................... 78 151 118
Other..................................................... 533 58 491
------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 3,202 5,243 (1,232)
PROVISION FOR INCOME TAXES.................................. 1,286 2,088 1,803
------- ------- --------
NET INCOME (LOSS)........................................... $ 1,916 $ 3,155 $ (3,035)
======= ======= ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 4,085 4,085 6,277
======= ======= ========
EARNINGS (LOSS) PER SHARE................................... $ 0.47 $ 0.77 $ (0.48)
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 9
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..................... 4,085 $ 4 $ 1,132 $ 2,287 $ 3,423
Capital contributions........................ -- -- 1,099 -- 1,099
Dividends paid by Restated Businesses........ -- -- -- (2,740) (2,740)
Other equity transactions of Restated
Businesses................................ -- -- 292 -- 292
Net income................................... -- -- -- 1,916 1,916
------ --- -------- -------- --------
BALANCE, December 31, 1994..................... 4,085 4 2,523 1,463 3,990
Capital contributions........................ -- -- 1,299 -- 1,299
Adjustment to conform fiscal year-ends of
certain Restated Businesses............... -- -- 4 -- 4
Dividends paid by Restated Businesses........ -- -- -- (2,969) (2,969)
Net income................................... -- -- -- 3,155 3,155
------ --- -------- -------- --------
BALANCE, December 31, 1995..................... 4,085 4 3,826 1,649 5,479
Offering, net of Offering costs.............. 4,830 5 60,626 -- 60,631
Acquisition of Founding Companies............ 3,184 3 29,231 -- 29,234
1996 Acquisitions............................ 1,282 1 30,625 -- 30,626
Exercise of warrant.......................... 8 -- 125 -- 125
Cash distributions to stockholders of
Founding Companies........................ -- -- -- (6,031) (6,031)
Capital contributions........................ -- -- 1,811 -- 1,811
Adjustment to conform fiscal year-ends of
certain Restated Businesses............... -- -- (18) (2) (20)
Dividends paid by Restated Businesses........ -- -- -- (2,569) (2,569)
Net loss..................................... -- -- -- (3,035) (3,035)
------ --- -------- -------- --------
BALANCE, December 31, 1996..................... 13,389 $13 $126,226 $ (9,988) $116,251
====== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 10
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,916 $ 3,155 $ (3,035)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 1,236 1,437 3,233
Taxes on acquired S Corporations........................ 1,099 1,299 1,811
Stock portion of compensation and financing fees related
to purchase of EHC.................................... -- -- 6,276
Deferred income tax expense (benefit)................... 122 (3) (667)
(Gain) loss on sale of property and equipment........... 11 9 (77)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................ (3,860) (2,087) (2,421)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (405) 322 (92)
Inventories........................................ (288) (357) (96)
Prepaid expenses and other current assets.......... 968 517 (1,141)
Other noncurrent assets............................ 264 (174) (60)
Increase (decrease) in --
Accounts payable and accrued expenses.............. 3,729 3,030 (1,095)
Unearned revenue on service and warranty
contracts........................................ 54 112 82
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 193 132 358
Other, net.............................................. (328) (879) (127)
------- ------- --------
Net cash provided by operating activities........ 4,711 6,513 2,949
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............. 272 271 635
Additions to property and equipment....................... (2,339) (2,114) (4,089)
Cash paid for acquisitions, net of cash acquired.......... -- -- (44,458)
------- ------- --------
Net cash used in investing activities............ (2,067) (1,843) (47,912)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short- and long-term debt................... 2,569 1,372 43,457
Principal payments of short- and long-term debt........... (2,080) (2,230) (42,734)
Proceeds from issuances of Common Stock, net of offering
costs................................................... -- -- 60,631
Distributions to stockholders of Founding Companies....... -- -- (6,031)
S Corporation dividends paid by Restated Businesses....... (2,740) (2,969) (2,569)
Other, net................................................ 205 (36) (680)
------- ------- --------
Net cash provided by (used in) financing
activities..................................... (2,046) (3,863) 52,074
------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 598 807 7,111
CASH AND CASH EQUIVALENTS, beginning of period.............. 1,468 2,066 2,873
------- ------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 2,066 $ 2,873 $ 9,984
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 386 $ 350 $ 823
Income taxes............................................ 491 843 518
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 11
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
In October 1995, American Residential Services, Inc. ("ARS" and
collectively with its subsidiaries, the "Company") was founded to create a
leading national provider of (i) comprehensive maintenance, repair and
replacement services for heating, ventilating and air conditioning ("HVAC"),
plumbing, electrical, indoor air quality and other systems and major home
appliances in homes and small commercial buildings and (ii) new installation of
those systems in homes and small commercial facilities under construction
(collectively "residential services"). On September 27, 1996, ARS acquired in
separate transactions seven residential services businesses (together with
Enterprises Holding Company ("EHC"), the common parent of two of the businesses,
the "Founding Companies") in exchange for consideration consisting of a
combination of cash and shares of its common stock, par value $.001 per share
(the "Common Stock"). The initial public offering (the "Offering") of the Common
Stock closed simultaneously with the closing of those acquisitions.
For financial statement presentation purposes, Atlas Services, Inc.
("Atlas"), one of the Founding Companies, has been identified as the accounting
acquiror. The Company accounted for the acquisitions of the remaining Founding
Companies under the purchase method of accounting, with the results of
operations included with those of Atlas from September 30, 1996, the effective
closing date of the acquisitions for accounting purposes. 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 acquisitions of two Founding
Companies 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.
During the fourth quarter of 1996, the Company acquired 13 businesses (the
"1996 Acquisitions") which were accounted for in accordance with the purchase
method of accounting, with the results of their respective operations included
in the Company's consolidated financial statements from their respective
effective acquisition dates for accounting purposes. The allocation of the
purchase price to the assets acquired and liabilities assumed in certain of the
1996 Acquisitions has been recorded initially based on preliminary estimates of
fair value and may be revised as additional information concerning the valuation
of such assets and liabilities becomes available.
The historical consolidated financial statements of the Company included in
its Annual Report on Form 10-K for the year ended December 31, 1996 do not give
effect to any acquisitions of businesses acquired by the Company subsequent to
that date that were accounted for in accordance with the pooling-of-interests
method. The accompanying consolidated financial statements retroactively restate
those historical financial statements to give effect to the operations of 15
businesses acquired by the Company in 1997 (through December 5) that were
accounted for in accordance with the pooling-of-interests method (the "Restated
Businesses"). For information respecting an additional 52 businesses acquired by
the Company in 1997 (through December 5), see Note 3.
The Company's retail appliance sales division, reported as discontinued
operations in the Company's historical consolidated financial statements
included in its Annual Report on Form 10-K for the year ended December 31, 1996,
was reclassified in 1997 as assets held for resale. The consolidated financial
statements of the Company presented herein have been restated for the
reclassification, the effect of which is not material to these consolidated
financial statements.
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.
F-7
<PAGE> 12
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
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 that 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 and 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 of goodwill 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 6) 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 of debt issue costs was approximately $49,000.
Revenue Recognition
The Company recognizes revenue when the services are performed except when
work is being performed under a construction contract. Revenues on residential
and commercial service and maintenance contracts are recorded and collected
monthly. Revenues from sales of extended warranties are recognized over the life
of the warranty on a straight-line basis.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements
F-8
<PAGE> 13
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 existing air conditioning and heating units.
An allowance for warranty costs is recorded upon completion of installation or
service.
Stock-Based Compensation
The disclosure requirements of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," are effective for
transactions entered into in fiscal years that begin after December 15, 1995.
This statement encourages entities to account for employee stock options or
similar equity securities using a fair value approach. However, it also allows
an entity to continue to measure compensation costs using the method prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Those
entities which elect to remain with the accounting method 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 SFAS No. 123. Reference is made to Note 7 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 their
respective acquisition dates. Acquired businesses file "short period" federal
income tax returns through their respective acquisition dates.
The Company follows the liability method of accounting for income taxes in
accordance with SFAS No. 109. Under this method, deferred income taxes are
recorded based upon differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the underlying assets or liabilities are recovered
or settled.
Certain of the Restated Businesses were S Corporations for income tax
purposes prior to their acquisition by the Company. Accordingly, any income tax
liabilities for the periods prior to their respective acquisition dates are the
responsibility of their respective former stockholders. For purposes of these
consolidated financial statements, federal and state income taxes have been
provided as if these companies had filed C Corporation tax returns for the
pre-acquisition periods, with the current income tax expense of these S
Corporations reflected as an increase to additional paid-in-capital.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Pronouncement
Effective January 1, 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, if facts and circumstances indicate that property and
equipment and intangible or other assets may be impaired, an evaluation of
F-9
<PAGE> 14
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are 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 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Shares issued in the acquisition of Atlas................... 1,067 1,067 1,067
Shares issued in the acquisitions of the Restated
Businesses................................................ 3,018 3,018 3,018
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 in the 1996
Acquisitions.............................................. -- -- 84
Stock options and warrant, net of assumed repurchases of
common shares under the treasury stock method............. -- -- 104
----- ----- -----
Weighted average shares outstanding............... 4,085 4,085 6,277
===== ===== =====
</TABLE>
SFAS No. 128, "Earnings Per Share," issued in February 1997, 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
During the period from January 1, 1997 through December 5, 1997, the
Company acquired all the outstanding stock of the Restated Businesses in
exchange for 3,018,390 shares of Common Stock. These companies provide
maintenance, repair, replacement and installation services for HVAC, plumbing
and electrical systems. These acquisitions have been accounted for under the
pooling-of-interests method of accounting.
F-10
<PAGE> 15
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 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 $(5,539)
Restated Businesses............ 61,942 1,899 75,638 2,471 86,101 2,504
------- ------ ------- ------ -------- -------
As restated.................... $81,125 $1,916 $97,686 $3,155 $150,330 $(3,035)
======= ====== ======= ====== ======== =======
Net income (loss) per share:
As presently reported.......... $ 0.02 $ 0.64 $ (1.70)
Restated Businesses............ 0.45 0.13 1.22
------ ------ -------
As restated.................... $ 0.47 $ 0.77 $ (0.48)
====== ====== =======
</TABLE>
Purchases
The aggregate purchase price paid by the Company for the 1996 Acquisitions
consisted 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 (see Note 6). The
accompanying consolidated balance sheet as of December 31, 1996 includes
preliminary allocations of the respective purchase prices, which are subject to
final adjustment. 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 operations for the years ended December 31, 1995 and
1996. The unaudited pro forma data presented below consists of the income
statement data as presented in these consolidated financial statements plus (i)
income statement data for the Founding Companies for the year ended December 31,
1995 and the nine months ended September 30, 1996 and (ii) income statement data
for the 1996 Acquisitions as if these 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).
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Revenues.................................................... $260,412 $305,522
======== ========
Net income.................................................. $ 8,828 $ 10,182
======== ========
Net income per share........................................ $ 0.66 $ 0.76
======== ========
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(i) compensation differentials, reflecting reduced compensation amounts agreed
to in connection with certain acquisitions, (ii) adjustment for nonrecurring
compensation expense of $3,356,000 and financing fees of $4,818,000 related to
the purchase of EHC, (iii) adjustments for rent expense on certain leased
facilities, reflecting reductions in rent agreed to in connection with certain
acquisitions, (iv) adjustments for the effects of assets distributed to and
costs of certain leases assumed by former owners of certain of the Founding
Companies and the 1996 Acquisitions, (v) adjustments for pro forma goodwill
amortization expense using a 40-year estimated life, (vi) eliminations of
historical interest expense related to certain obligations that were repaid or
not assumed by the Company, reduced by interest expense on borrowed funds used
to pay the cash portion of the purchase price for the Founding Companies and the
1996 Acquisitions, and (vii) adjustments 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 had been outstanding for
the periods presented.
F-11
<PAGE> 16
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma results presented are not necessarily indicative of actual
results that might have occurred had the operations and management teams of ARS,
the Founding Companies, the 1996 Acquisitions and the Restated Businesses been
combined at the beginning of the periods presented.
1997 Acquisitions
In addition to the acquisitions of the Restated Businesses, from January 1,
1997 to December 5, 1997, the Company acquired 52 residential services and
commercial maintenance services businesses for an aggregate consideration of
$47.9 million in cash, 1,837,687 shares of Common Stock and a promissory note in
the principal amount of $1.8 million. Of the 52 acquisitions, 44 were accounted
for under the purchase method of accounting and will be included in the
consolidated results of the Company from their respective acquisition dates. The
remaining eight acquisitions were accounted for under the pooling-of-interests
method of accounting, and will be included in the consolidated results of the
Company beginning on their respective dates of acquisition, as these
transactions were not deemed significant to prior historical periods. All shares
of Common Stock issued for the acquisitions during 1997 were issued under ARS's
shelf registration statements described in Note 8. Funding of the cash portion
of the purchase prices and repayment of indebtedness assumed in connection with
those acquisitions was provided by funds from operations and borrowings under
the Credit Facility.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED USEFUL --------------------
LIVES IN YEARS 1995 1996
---------------- ------- -------
<S> <C> <C> <C>
Land and land improvements..................... -- $ 558 $ 2,772
Buildings and leasehold improvements........... 5-40 2,171 6,581
Transportation equipment....................... 5 7,617 15,098
Machinery and equipment........................ 5-7 2,869 3,970
Furniture and fixtures......................... 5-10 1,001 2,765
------- -------
14,216 31,186
Less -- Accumulated depreciation............... 7,780 9,526
------- -------
Property and equipment, net.......... $ 6,436 $21,660
======= =======
</TABLE>
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
---- ------
<S> <C> <C>
Balance at beginning of year................................ $449 $ 500
Additions charged to costs and expenses................... 156 400
Deductions for uncollectible receivables written off...... (105) (156)
Allowance for doubtful accounts at acquisition dates...... -- 599
---- ------
Balance at end of year...................................... $500 $1,343
==== ======
</TABLE>
F-12
<PAGE> 17
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
------- -------
<S> <C> <C>
Accounts payable, trade..................................... $ 7,285 $14,573
Accrued compensation and benefits........................... 1,267 6,952
Accrued insurance........................................... 308 1,668
Accrued warranty expense.................................... 387 1,214
Federal and state income taxes payable...................... 164 680
Other accrued expenses...................................... 4,008 4,285
------- -------
$13,419 $29,372
======= =======
</TABLE>
Installation contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1996
------ -------
<S> <C> <C>
Costs incurred on contracts in progress..................... $8,342 $26,123
Estimated earnings, net of losses........................... 2,226 7,498
------ -------
10,568 33,621
Less -- Billings to date.................................... 10,722 34,733
------ -------
$ (154) $(1,112)
====== =======
</TABLE>
The following are included in the accompanying balance sheets under the
following captions (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1995 1996
----- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 721 $ 1,391
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (875) (2,503)
----- -------
$(154) $(1,112)
===== =======
</TABLE>
F-13
<PAGE> 18
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHORT- AND LONG-TERM DEBT:
Short-term debt consists of a revolving line of credit payable to a bank
with interest due monthly at 9.375 percent 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):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1996
------ -------
<S> <C> <C>
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 1996
Acquisitions repaid in January 1997 from borrowings under
Credit Facility........................................... -- 24,613
Other....................................................... 2,312 4,250
------ -------
4,347 56,063
Less -- Current maturities.................................. 1,474 2,202
------ -------
$2,873 $53,861
====== =======
</TABLE>
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks. On March 3, 1997, the Company increased
the total commitment of the Credit Facility from $55.0 million, which was in
place at December 31, 1996, to $100.0 million. Borrowings under the Credit
Facility may be used for general corporate purposes, including the funding of
any cash that may be paid in connection with acquisitions, refinancing of
indebtedness of businesses acquired, capital expenditures and working capital.
Loans under the Credit Facility bear interest, at the Company's option, at a
designated variable base rate plus a margin 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. The margins depend on the ratio of the
Company's interest-bearing debt to its trailing 12-month 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 $5.0 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 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 the Company's 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. The Company has also pledged the stock of its
subsidiaries as collateral for its obligations 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 interest periods,
respectively.
On April 2, 1997, ARS sold $55.0 million aggregate principal amount of its
7 1/4% convertible subordinated notes due 2004 (the "7 1/4% Notes"). The 7 1/4%
Notes are unsecured obligations of ARS and are convertible at $25.50 per share,
subject to adjustment in certain events, into an aggregate of 2,156,863 shares
of Common Stock of the Company based on certain conditions. ARS used
substantially all of the net proceeds of the offering of the 7 1/4% Notes to
repay indebtedness outstanding under the Credit Facility.
F-14
<PAGE> 19
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):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 --
--------------
<S> <C>
1997................................................... $ 2,202
1998................................................... 523
1999................................................... 335
2000................................................... 222
2001................................................... 351
Thereafter............................................. 52,430
-------
$56,063
=======
</TABLE>
The maturities schedule above reflects the issuance of the 7 1/4% Notes.
Management estimates that the fair value of its debt obligations
approximates the historical value of $56.1 million at December 31, 1996.
7. 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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
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
</TABLE>
At December 31, 1996, no option shares were exercisable. Unexercised
options expire at various dates from January 2006 through December 2006.
F-15
<PAGE> 20
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 for the year ended December 31, 1996
would have been increased to the following pro forma amounts (in thousands,
except per share data):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Net loss:
As reported............................................... $(3,035)
Pro forma................................................. $(4,010)
Loss per share:
As reported............................................... $ (0.48)
Pro forma................................................. $ (0.64)
</TABLE>
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.
8. REGISTERED SECURITIES:
In January 1997, ARS registered 5,000,000 shares of Common Stock under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a shelf
registration statement on Form S-4, for issuance from time to time in connection
with acquisitions. In July 1997, ARS registered an additional 10,000,000 shares
of Common Stock and $100.0 million aggregate principal amount of convertible
subordinated debt securities (the "Convertible Debt Securities") under the
Securities Act pursuant to a shelf registration statement on Form S-4, also for
issuance from time to time in connection with acquisitions. ARS is currently
authorized pursuant to its Credit Facility to issue up to $25.0 million
aggregate principal amount of Convertible Senior Subordinated Notes, Series A
(the "Series A Notes") (representing a series of the Convertible Debt
Securities), maturing April 15, 2004. Certain terms of the Series A Notes,
including the interest rate and the conversion price, will be determined by ARS
in connection with the acquisitions for which such notes are issued.
F-16
<PAGE> 21
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASES:
The Company leases facilities under noncancellable leases. The following
represents future minimum rental payments under noncancellable operating leases
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 --
--------------
<S> <C>
1997........................................................ $ 4,040
1998........................................................ 3,231
1999........................................................ 2,923
2000........................................................ 2,568
2001........................................................ 1,912
Thereafter.................................................. 7,005
-------
$21,679
=======
</TABLE>
Rental expense for the years ended December 31, 1994, 1995, and 1996 was
approximately $895,000, $1,040,000, and $1,769,000, respectively. Included in
these amounts are rental expenses and commissions paid to related parties of
approximately $117,000, $227,000, and $482,000 for the years ended December 31,
1994, 1995 and 1996, respectively.
10. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Federal --
Current................................................... $ 949 $1,664 $1,958
Deferred.................................................. 104 15 (524)
State --
Current................................................... 215 427 512
Deferred.................................................. 18 (18) (143)
------ ------ ------
$1,286 $2,088 $1,803
====== ====== ======
</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 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Tax provision at the statutory rate......................... $1,089 $1,783 $ (419)
Increase (decrease) resulting from --
State income taxes........................................ 151 229 207
Nondeductible expenses.................................... (14) (12) 97
Nondeductible costs related to purchase of EHC............ -- -- 1,740
Other..................................................... 60 88 178
------ ------ ------
$1,286 $2,088 $1,803
====== ====== ======
</TABLE>
F-17
<PAGE> 22
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of revenues and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences representing
deferred tax assets and liabilities result principally from the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1995 1996
----- ------
<S> <C> <C>
Accruals and reserves not deductible until paid............. 18 (1,224)
Net changes in accounting methods........................... (808) 2,167
Depreciation and amortization............................... 375 315
Loss on investment.......................................... -- 268
Other....................................................... 93 1,055
----- ------
Net deferred income tax (assets)/liabilities...... (322) 2,581
===== ======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------
1995 1996
----- -------
<S> <C> <C>
Deferred tax assets --
Current................................................... 446 2,204
Long-term................................................. 21 624
----- -------
Total............................................. 467 2,828
----- -------
Deferred tax liabilities --
Current................................................... 38 2,064
Long-term................................................. 107 3,345
----- -------
Total............................................. 145 5,409
----- -------
Net deferred income tax (assets)/liabilities...... (322) 2,581
===== =======
</TABLE>
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
accruals are based on known facts and historical trends, and management believes
such accruals to be adequate.
F-18
<PAGE> 23
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan which covered substantially all employees. Atlas's
contributions during the years ended 1994 and 1995 and the nine months ended
September 30, 1996 were $42,000, $21,000 and $35,000, respectively.
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan which qualifies under Section 401(k)
of the Internal Revenue Code. Participation in the plan is available to
substantially all employees. Eligible employees may contribute up to the lesser
of 15 percent of their annual compensation or the maximum amount permitted under
IRS regulations to their 401(k) accounts. The Company matches the contributions
of participating employees on the basis of the percentages specified in the
plan. Company matching contributions to this plan, which may be invested in the
Common Stock, were approximately $91,000 in 1996. The Company also may make
additional discretionary contributions.
13. SUBSEQUENT EVENT
The Company expects that certain costs associated with the settlement of
employment agreements with the Company's former chief executive officer and
certain other officers and employees of the Company will result in a one-time
charge to earnings of approximately $3.0 million (approximately $1.8 million net
of tax effect) in the fourth quarter of 1997.
F-19
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.1 -- Consent of Arthur Andersen LLP.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our firm) included in or made a part of this
Form 8-K.
ARTHUR ANDERSEN LLP
Houston, Texas
December 8, 1997
