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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO.: 1-11849
AMERICAN RESIDENTIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 76-0484996
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
POST OAK TOWER, SUITE 725
5051 WESTHEIMER ROAD
HOUSTON, TEXAS 77056-5604
(Address of principal executive offices) (Zip code)
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(713) 599-0100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $.001 per share New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 30, 1998, there were 15,384,400 shares of common stock, par
value $.001 per share, of the Registrant issued and outstanding, 12,561,831 of
which, having an aggregate market value of $120,907,623, based on the closing
price per share of the common stock of the Registrant reported on the New York
Stock Exchange on that date, were held by non-affiliates of the Registrant. For
purposes of the above statement only, all directors and executive officers of
the Registrant are assumed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement related to the Registrant's 1998 Annual
Stockholders Meeting are incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 1
General..................................................... 1
Industry Overview........................................... 1
Business Strategy........................................... 1
Residential Services........................................ 3
Commercial Maintenance Services............................. 4
Operations.................................................. 4
Sales and Marketing......................................... 5
Hiring, Training and Safety................................. 5
Intellectual Property....................................... 6
Employees................................................... 6
Sources of Supply........................................... 6
Seasonality and Weather..................................... 6
Competition................................................. 6
Governmental Regulation and Environmental Matters........... 7
Factors That May Affect Future Results...................... 8
Executive Officers.......................................... 10
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 12
ITEM 6. SELECTED FINANCIAL DATA..................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS..................................... 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE...................................... 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 41
ITEM 11. EXECUTIVE COMPENSATION...................................... 41
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K....................................................... 41
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PART I
ITEM 1. BUSINESS.
GENERAL
American Residential Services, Inc. ("ARS" and, collectively with its
subsidiaries, the "Company") is 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
(collectively, "residential maintenance services") and (ii) new installations of
those systems in homes and small commercial facilities under construction ("new
residential installation services" and, together with residential maintenance
services, "residential services"). Through its wholly owned subsidiary, American
Mechanical Services ("AMS"), ARS also provides comprehensive maintenance,
repair, replacement, reconfiguration and monitoring services for HVAC, plumbing
and electrical systems and controls in existing large commercial, industrial and
institutional facilities such as office buildings, health care facilities,
educational facilities and retail centers (collectively, "commercial maintenance
services"). The Company currently has operations in Arizona, California,
Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Nebraska,
Nevada, North Carolina, Oklahoma, Pennsylvania, South Carolina, Texas, Virginia
and the Washington, D.C. metropolitan area.
To achieve its goal of becoming the leading national provider of
residential services and commercial maintenance services, the Company has
undertaken an aggressive acquisition program and is implementing a national
operating strategy designed to increase internal growth and capitalize on cost
efficiencies. In September 1996, ARS acquired seven residential services
businesses (together with the common parent of two of those businesses, the
"Founding Companies") in separate transactions simultaneously with the closing
of ARS's initial public offering (the "IPO") of its common stock (the "Common
Stock"). Since then and through December 31, 1997, the Company acquired an
additional 80 businesses providing either or both residential services and
commercial maintenance services (collectively with the Founding Companies, the
"Acquired Businesses").
The Company's principal executive offices are located at Post Oak Tower,
Suite 725, 5051 Westheimer Road, Houston, Texas 77056-5604, and its telephone
number at that address is (713) 599-0100. ARS is a Delaware corporation
incorporated in 1995.
INDUSTRY OVERVIEW
The Company believes the residential and commercial HVAC, plumbing and
electrical industries in the United States represent an annual market in excess
of $60 billion, of which residential maintenance services and commercial
maintenance services each account for in excess of $25 billion. It estimates
this market is served by over 50,000 companies, consisting predominantly of
small, owner-operated businesses operating in single local geographic areas and
providing a limited range of services. It also believes the majority of owners
in its industry have limited access to adequate capital for modernization,
training and expansion and limited opportunities for liquidity in their
businesses.
The Company believes significant opportunities are available to a
well-capitalized, national company employing professionally trained,
customer-oriented service personnel and providing a full complement of
high-quality residential services and commercial maintenance services. It also
believes the highly fragmented nature of its industry will provide it with
significant opportunities to consolidate the capabilities and resources of a
large number of existing residential services and commercial maintenance
services businesses.
BUSINESS STRATEGY
To enhance its market position as a leading national provider of
residential services and commercial maintenance services, the Company emphasizes
growth through acquisitions and continues to implement a national operating
strategy directed toward enhancing internal revenue growth and profitability and
achieve cost efficiencies.
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Acquisition Strategy. The Company has implemented an aggressive acquisition
program that targets large metropolitan and high-growth suburban areas with
attractive demographics. The Company's acquisition strategy involves entering
new geographic markets and expanding within existing markets for residential
services and commercial maintenance services. Given the large size and
fragmentation of its industry, the Company believes there are numerous potential
acquisition candidates both in the markets currently served by the Company and
in other target markets. The Company also 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.
In new markets, the Company targets for acquisition one or more leading
local or regional residential services or commercial maintenance services
businesses. These businesses are typically run by successful entrepreneurs whom
the Company endeavors to retain and are of sufficient size to provide the basis
for future expansion in their markets. Once the Company has entered a market, it
generally seeks to acquire other residential services or commercial maintenance
services providers to expand its share of that market and increase the range of
services offered in that market. Some of the businesses acquired within existing
markets are large enough to warrant their own operating and management
structure, while other "tuck-in" acquisitions are small enough to be folded into
existing operations without significantly increasing the Company's
infrastructure.
The Company expects acquisition candidates to demonstrate potential for
revenue growth and profitability. It also evaluates certain qualitative
characteristics of acquisition candidates, including their reputations in their
respective geographic regions, the size and other characteristics of customer
bases, the quality and experience levels of operating management and service
personnel, the amount, type and condition of their equipment and facilities and
their operating histories. For example, the Company has acquired each of the
winners of Contracting Business magazine's Residential Contractor of the Year
Award for 1995, 1996 and 1997. The Company believes numerous acquisition
candidates meet its acquisition criteria.
The consideration for each acquisition varies on a case-by-case basis, with
the major factors being historical operating results, the future prospects of
the business to be acquired and the ability of that business to complement the
services offered by the Company. The Company may use various combinations of its
Common Stock, cash and debt securities as consideration for acquisitions. See
"Factors That May Affect Future Results" and "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Since the IPO and the acquisitions of the Founding Companies and through
December 31, 1997, the Company has acquired 80 businesses, including 67 acquired
in 1997, which provide residential services, commercial maintenance services or
both. The Company has analyzed various data pertaining to its industry and
believes it is well-positioned to continue 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 and
have become personally acquainted with other owners of residential services and
commercial maintenance services businesses across the country. The Company
believes that the visibility of these individuals within these associations will
increase the industry's awareness of the Company and its acquisition program,
thereby attracting interest from owners of other residential services and
commercial maintenance services businesses. The timing, size and success of the
Company's acquisition efforts and the associated potential capital commitments,
however, cannot be readily predicted.
The Company's acquisition strategy presents numerous risks, any of which
could have a material adverse effect on the Company's business and financial
performance, and the success of that strategy depends on the extent to which it
is able to acquire, successfully integrate and profitably manage additional
businesses. See "Factors That May Affect Future Results." In late 1997, the
Company adjusted its acquisition strategy with greater emphasis on strategic
acquisition candidates and less emphasis on tuck-ins. It also increasingly makes
part of the acquisition consideration contingent on the acquired business
achieving certain post-closing operating objectives. The Company may continue to
adjust its acquisition strategy in the future.
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National Operating Strategy. The Company's national operating strategy
employs "best practices" throughout its operations to increase internal growth
and profitability through enhanced operations and the achievement of cost
efficiencies. For example, the Company provides its 24-hour emergency service at
substantially all its locations, and the Company's residential services
operations monitor service-call quality by attempting to contact each of its
service customers promptly following a service call. In addition, the Company
has developed a national training program to improve and keep current the
technical, selling and customer-relations skills of its service technicians.
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 image at the local
level while fostering its long-term efforts to develop a national brand name.
Another focus of the Company's national operating strategy is the reduction
of total operating expenses through the elimination of duplicative
administrative functions and facilities in tuck-in acquisitions and the
consolidation of certain functions performed separately by each business prior
to its acquisition. In addition, the Company has implemented programs to reduce
costs (as a percentage of revenues) compared to those of individual acquired
businesses in such areas as: the purchase of HVAC equipment for installation or
resale, service vehicles, parts and tools, vehicle and equipment maintenance,
financing arrangements, employee benefits and insurance and bonding.
Various factors may affect the extent to which the Company's internal
growth strategies will be successful. See "Factors That May Affect Future
Results."
RESIDENTIAL SERVICES
The Company provides a variety of residential maintenance services for
HVAC, plumbing, electrical, indoor air quality and other systems and major home
appliances in homes and small commercial buildings. It also installs these
systems in new homes and small commercial buildings under construction. An
important element of the Company's growth strategy is to increase the range of
residential services, particularly the residential maintenance services it
provides, in each geographic market through acquisitions and internally
generated growth. Its residential maintenance services include: checkups,
cleaning, repair and replacement of HVAC systems and associated parts;
maintenance, repair and replacement of electrical switches, outlets, lines,
panels and fixtures; repair and replacement of bathroom fixtures, water filters
and water heaters; cleaning, repair and replacement of pipes, sewer lines and
residential sanitary systems; and maintenance, repair and replacement of other
residential systems and appliances. In connection with its repair and
replacement services, the Company sells on a retail basis a wide range of HVAC,
plumbing, electrical and other equipment, including complete HVAC systems and a
variety of HVAC, plumbing and electrical parts and system components. As a
subcontractor to builders, the Company installs complete central HVAC systems,
electrical systems, plumbing systems and other systems in newly constructed
homes and small commercial buildings.
The Company currently provides residential services in Arizona, California,
Colorado, Florida, Georgia, Illinois, Indiana, Maryland, Michigan, Nebraska,
Nevada, North Carolina, Oklahoma, Pennsylvania, South Carolina, Texas, Virginia
and the Washington, D.C. metropolitan area.
The Company believes its residential maintenance services business
generally benefits from its new residential installation services operations as
a result of (i) the significant volume of purchases of HVAC systems for its
installation services and (ii) the addition of new customer and equipment
information in the Company's marketing database. New installation services also
provide the Company with cooperative advertising credits from certain HVAC
system manufacturers, which it uses to promote its services for existing
residential HVAC systems. Through leveraging these benefits, acquiring
additional businesses and internal development, the Company intends to emphasize
the growth of its higher-margin residential maintenance services business.
The extent to which the Company is able to maintain or increase revenues
from new residential installation services for homebuilders depends on the
levels of housing starts from time to time in the markets in which it operates
and reflects the cyclical nature of the homebuilding industry. That industry is
affected significantly by changes in general and local economic conditions, such
as employment and income levels, the
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availability and cost of financing for home buyers, consumer confidence and
housing demand. 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.
COMMERCIAL MAINTENANCE SERVICES
Another important element of the Company's growth strategy is further
expansion into the commercial maintenance services market to provide services
for existing large commercial, industrial and institutional facilities such as
office buildings, health care facilities, educational facilities and retail
centers. The Company currently provides commercial maintenance services through
AMS in Arizona, California, Colorado, Indiana, Maryland, Texas, Virginia and the
Washington, D.C. metropolitan area. Through AMS, the Company plans to acquire
additional businesses in the commercial maintenance services market and enter
into long-term maintenance agreements for the types of facilities described
above. The Company intends to offer various commercial maintenance service
capabilities, including refrigerant retrofit capabilities, building automation
services, remote monitoring, electrical services and the design and building of
retrofit capabilities for major facility expansion or renovation projects.
The extent to which the Company is able to maintain or increase revenues
from its commercial maintenance services is affected generally by building
occupancy rates and expansion or renovation activities in the markets in which
it operates.
OPERATIONS
The Company operates on a decentralized basis, with its operations
organized into seven geographic regions for its residential services operations
and two geographic regions for its commercial maintenance services operations. A
regional vice president, a regional controller and other support staff oversee
the operations within each region, and management of each operating location is
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. The Company's regional and executive management
personnel coordinate the sharing among operating locations of financial
resources for improved systems and expansion of services, training programs,
financial controls, purchasing information and operating expertise to improve
productivity, lower operating costs and improve customer satisfaction to
stimulate internal growth. The Company requires adherence to its training,
safety, customer-satisfaction, accounting and internal control policies
throughout its operations.
Local operations centers coordinate the Company's provision of services.
They process orders, arrange service calls, ensure timely delivery of required
repair parts or new equipment, communicate with customers and service
technicians and invoice customers. Service personnel work out of service
vehicles equipped with an inventory of equipment and commonly required tools,
parts and supplies needed to complete a variety of jobs. They perform services
under maintenance and service contracts and in response to requests for
emergency or other services not under contract. The Company generally requires
payment for residential maintenance services at the time the services are
provided, except in the case of certain well-established customers or services
under a service contract. In its commercial maintenance operations, the Company
generally offers thirty-day payment terms for services provided.
The Company provides its new residential installation services generally to
builders of new homes and small commercial facilities. Its new residential
installation personnel analyze the architectural plans or mechanical drawings
for the home or facility to be constructed to determine the labor, materials and
equipment type and size required for installing the system specified, price the
job and either bid for or negotiate the written contract for the job. The
Company coordinates its installation work, including ordering and delivery of
necessary equipment and supplies, with the builder's construction schedule. It
often obtains interim payments to cover its labor and materials costs on large
installation projects.
Except for the air ducts that the Company fabricates for HVAC system
installations and replacements, the Company purchases substantially all the
equipment and component parts it sells or installs from original equipment
manufacturers ("OEMs") and other distributors. As a part of its efforts to
achieve efficiencies in
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its purchasing of equipment and other supplies, the Company is reducing the
number of OEMs and distributors from which it obtains those supplies. The
Company is not, however, materially dependent on any one of these outside
sources. See "Sources of Supply."
SALES AND MARKETING
The Company advertises its residential maintenance services through various
advertising programs, which have used mailouts, yellow pages, newspapers, radio
and television to promote the services offered under the trade names or service
marks of the Acquired Businesses. These advertising programs have been effective
in creating name recognition and customer identification with the Acquired
Businesses for the quality of the services they offer in their local areas. The
Company currently continues to utilize the trade names and service marks of
these businesses in its advertising and promotional materials in their local
areas, but intends over a period of years to promote and establish the Company's
name and service marks nationally.
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 it maintains and repairs
selected residential systems for a period of time for a fixed fee and
"maintenance only" or "repair only" contracts whereby it 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 and
Weather." Certain states regulate the provision of services under residential
services warranty contracts. See "Governmental Regulation and Environmental
Matters."
In its new residential installation services operations, the Company
focuses on cultivating long-term relationships with its national, regional and
local home builder and general contractor customers. These marketing efforts
primarily involve direct sales contacts emphasizing the Company's quality of
services and reliability. In addition, the Company applies labels with its name
and phone number to newly installed equipment and times direct telemarketing
sales efforts for service contracts to coincide with the expiration of
manufacturer warranties on Company installed equipment. The Company believes
these measures will lead to residential maintenance business.
The Company's sales efforts in its commercial maintenance services
operations focus on developing and maintaining long-term relationships with its
customers, such as building owners, developers, facilities managers, school
districts and federal and state governments. These efforts primarily involve
direct contact with customers, through a dedicated sales force at many
locations, and emphasize the benefits and potential reduced costs associated
with the Company's commercial maintenance services. The Company also promotes
maintenance and service contracts on equipment that it has installed or
retrofitted.
Through Maio Marketing, Inc. ("Maio"), acquired by the Company in 1997, the
Company also provides training, products and related services to residential
services businesses across the United States. Maio conducts seminars for
business owners and technical personnel, covering areas such as advertising,
marketing and pricing strategies.
The Company has numerous customers. No single customer accounted for more
than 10% of its revenues during 1997.
HIRING, TRAINING AND SAFETY
The Company seeks to ensure through its hiring procedures and continuous
training programs that all its service personnel meet its own and all other
applicable safety standards. It reviews prospective permanent service personnel
to ensure they are trained competently in their trades, know 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 to trainees, apprentices and service and
installation personnel. The Company's senior master plumbers, electricians, HVAC
service personnel and safety supervisors typically present these programs. For
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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 works with operating management to observe and
evaluate safety procedures in an effort to constantly improve the effectiveness
of the Company's safety programs.
INTELLECTUAL PROPERTY
The Company owns various trademarks, service marks and trade names it uses
in its local operations, advertising and promotions. The Company anticipates
that, for the foreseeable future, the Acquired Businesses and most other
additional businesses it subsequently acquires will continue to use their
respective trade names and service marks in their local areas. The Company
intends over time to have its operations identified by the ARS or AMS name and
logos and has implemented certain uniform service names and markings for use on
its vehicles and in its advertising and promotional materials.
EMPLOYEES
As of March 30, 1998, the Company had approximately 4,800 employees, of
which approximately 200 employees principally engaged in providing commercial
maintenance services were members of various unions. The Company believes that a
significant percentage of companies providing commercial maintenance services
have employees who are members of unions and that as the Company continues to
expand into the commercial maintenance services business, the number of union
members it employs will increase. The Company has not experienced any strikes or
work stoppages and believes its relationship with its employees is good.
SOURCES OF SUPPLY
The raw materials the Company uses in its operations, such as HVAC system
components, sheet metal, electrical components and copper and PVC tubing, are
generally available from domestic suppliers at competitive prices. The Company
has been able to obtain price savings on certain equipment and raw materials
through volume purchases and has not experienced any significant difficulty in
obtaining adequate supplies to conduct its operations.
SEASONALITY AND WEATHER
The Company's residential services and commercial maintenance services
operations are subject to different seasonal variations in the different lines
of service. Except in certain areas in 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 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 and commercial maintenance 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. The Company has also 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. As a result of
these factors, the results of any quarterly period may not be indicative of
results to be expected for a full year. See "Factors That May Affect Future
Results."
COMPETITION
The markets for residential services and commercial maintenance services
are highly competitive. See "Factors That May Affect Future Results." The
Company believes that the principal competitive factors in these sectors of its
industry are (i) timeliness, reliability and quality of services provided, (ii)
range of services provided, (iii) market share and visibility, (iv) technical
competence of service personnel and (v) price. The Company believes, as a
leading national provider of comprehensive residential services and commercial
maintenance services, it directly addresses these factors. Quality of service
should be enhanced by the
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implementation and continuous reinforcement of customer-satisfaction policies.
The Company's ability to recruit, train and retain highly motivated service
personnel to provide quality services should be enhanced by its ability to
utilize professionally managed recruiting and training programs. 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. In addition, in the last few years, other public
companies have been formed that offer some of the same residential services that
the Company offers in some of the same geographic markets. There are also a
number of national retail chains that sell a variety of plumbing fixtures and
equipment and HVAC equipment for residential use, and that offer, either
directly or through various subcontractors, installation, warranty and repair
services. Other companies or trade groups engage in franchising their names and
marketing programs in some residential services lines. In the commercial
maintenance services market, other public companies are engaged primarily in
providing commercial maintenance services in the service lines on which the
Company focuses or intends to focus in the future and in some of the same
geographic markets, and certain HVAC OEMs also provide commercial maintenance
services as a complement to their manufacturing and distribution businesses.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Various federal, state and local laws and regulations apply to many aspects
of the Company's operations, including (i) permitting and licensing requirements
applicable to service technicians in their respective trades, (ii) building,
HVAC, plumbing and electrical codes and zoning ordinances, (iii) laws and
regulations relating to consumer protection, including laws and regulations
governing service contracts for residential services, and (iv) laws and
regulations relating to worker safety and protection of the environment. The
Company believes it has all material permits and licenses required to conduct
its operations and is in substantial compliance with applicable regulatory
requirements relating to its operations. Failure of the Company to comply with
the applicable regulations could result in substantial fines or revocation of
the Company's operating permits.
A large number of state and local regulations governing the residential
services and commercial maintenance services trades require various permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's service technicians who work in the geographic area
covered by the permit or license. The Company has implemented a policy to ensure
that, where possible, 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 in that region.
Certain states regulate service agreements as contracts of insurance and
require providers of these agreements to maintain a license and provide periodic
reporting to the applicable regulatory agency. The Company is in the process of
securing the applicable licenses for those states in which it plans to offer
these kinds of service contracts.
Numerous federal, state and local environmental laws and regulations,
including those governing vehicle emissions and the use and handling of
refrigerants, affect the Company's operations. Federal and state environmental
laws include statutes intended to allocate the cost of remedying contamination
among specifically identified parties. The Company's operations are also subject
to the federal Clean Air Act, as amended (the "Clean Air Act"), which governs
air emissions and imposes specific requirements on the use and handling of
chlorofluorocarbons and certain other refrigerants ("CFCs"). Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of systems, equipment and appliances containing these
refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased the Company's training expenses
and expenditures for containment and recycling equipment. The Clean Air Act is
intended to ultimately eliminate the use of CFCs in the United
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States and require alternative refrigerants to be used in replacement HVAC
systems. The implementation of the Clean Air Act restrictions has also increased
the cost of CFCs in recent years and is expected to continue to increase such
costs in the future. As a result, the Company expects the number of conversions
of existing HVAC systems that use CFCs to systems using alternative refrigerants
to increase.
The Company's operations in certain geographic regions are subject to laws
that may, over the next few years, require specified percentages of vehicles in
large vehicle fleets to use "alternative fuels," such as compressed natural gas
or propane, and to meet reduced emissions standards. The Company does not
believe that the cost of fleet conversion that may be required under current
laws will be material. The Company cannot predict to what extent its future
operations and earnings may be affected by new regulations or changes in
existing regulations relating to vehicle emissions.
The Company's capital expenditures for property and equipment for
environmental control facilities during 1997 were not material. The Company does
not currently anticipate any material adverse effect on its business or
consolidated financial position as a result of its future compliance with
existing environmental laws and regulations controlling the discharge of
materials into the environment. However, future events, 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 the Company to make material
additional expenditures.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This Report contains statements of management's plans, objectives and
expectations and "forward-looking statements" that involve a number of risks,
uncertainties and assumptions. No assurance can be given that actual results
will not differ materially from these statements as a result of various factors,
including the following:
The ability of the Company to improve its operating results depends on
the extent to which its business strategies for growth succeed. No
assurance can be given that the Company will not encounter unforeseen
costs, delays or impediments in implementing these strategies, that these
strategies will produce the benefits management expects or that these
strategies will be successful.
The success of the Company will depend, in part, on the extent to
which the Company is able to eliminate the unnecessary duplication of
functions among the Acquired Businesses and otherwise integrate the
Acquired Businesses and such additional businesses as it may acquire in the
future into a cohesive, efficient enterprise.
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 significant
number of those persons do not continue in their management roles and the
Company is unable to attract and retain qualified replacements.
The Company's acquisition strategy presents risks that include the
possibility of the adverse effect on existing operations of the Company
from the diversion of management's attention and resources to acquisitions,
the possible loss of acquired customer bases and key service personnel, and
the contingent and latent risks associated with the past operations of and
other unanticipated problems arising in the acquired businesses. The
success of the Company's acquisition strategy will depend on the extent to
which it is able to acquire, successfully absorb and profitably manage
additional businesses, and no assurance can be given the Company's strategy
will succeed or that the Company's business and financial performance will
not be materially adversely affected thereby. In this connection,
competition for acquisition candidates could cause the cost of acquiring
businesses to increase materially. Acquisitions accounted for as purchases
may result in substantial annual noncash charges for goodwill and other
intangible assets in the Company's consolidated statements of operations,
while material acquisitions accounted for as pooling-of-interests
transactions will require restatements of the Company's historical
8
<PAGE> 11
financial statements to include the results of the acquired businesses,
which could negatively or positively impact those financial statements.
As consideration for future acquisitions, the Company may use various
combinations of its Common Stock, cash, convertible notes or other debt
securities. The extent to which it will be able or willing to use Common
Stock or debt securities in making future acquisitions will depend on the
market value of those securities and the willingness of potential sellers
to accept them as full or partial payment. The Company's ability to fund
future acquisitions may be limited by the extent to which it is able to
raise capital for funding acquisitions, as well as to expand existing
operations, through equity or debt financings, and no assurance can be
given that the Company will be able to obtain the capital it will need to
finance a successful acquisition program and its other cash needs in the
future. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
The factors affecting the Company's ability to generate internal
growth include the extent to which it is able to expand the range of
services it offers, grow 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 include the
extent to which it is able to attract and retain qualified operational
management and service and installation personnel and leverage its
relationships with existing customers to provide them services they
currently obtain from others.
The markets for residential services and commercial maintenance
services are highly competitive and are served principally by small,
owner-operated private companies, some of which may have lower overhead
cost structures, and may be able to provide their services at lower rates,
than the Company. The Company believes (i) the residential services and
commercial maintenance services sectors of its industry are subject to
rapid consolidation, (ii) currently only a few other public companies are
focused on providing residential services in some of the service lines
provided by the Company and (iii) only a small number of public companies
are engaged primarily in commercial maintenance services in the service
lines on which the Company is focusing. Certain of the Company's present
and potential competitors have greater financial resources than the Company
to finance acquisition and internal growth opportunities and may be willing
to pay higher prices than the Company for the same opportunities or to
develop their own residential or commercial maintenance services
operations. Consequently, the Company may encounter significant competition
in its efforts to achieve its growth objectives. See "Competition."
The Company's residential services and commercial maintenance services
operations are subject to different seasonal variations in the different
lines of service. The Company has also 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. See "Seasonality and Weather."
The Company's quarterly results may fluctuate as a result of a number
of other factors, including building occupancy rates and the cyclical
nature of the homebuilding industry and housing starts, which affect the
Company's ability to maintain or increase revenues from its residential
services and commercial maintenance services operations. 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.
9
<PAGE> 12
EXECUTIVE OFFICERS
The following table sets forth certain information as of March 15, 1998
concerning each of the executive officers and certain key employees of ARS:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Thomas N. Amonett.............. 54 President and Chief Executive Officer*
Howard S. Hoover, Jr........... 59 Chairman of the Board*
Gorden H. Timmons.............. 48 Chief Operating Officer*
Harry O. Nicodemus, IV......... 50 Senior Vice President, Chief Financial Officer and
Chief Accounting Officer
John D. Held................... 35 Senior Vice President, General Counsel and Secretary
Frank N. Menditch.............. 46 Senior Vice President, Director of Operations --
Commercial Maintenance Services*
Elliot Sokolow................. 55 Senior Vice President, Director of Operations --
Residential Services*
A. Jefferson Walker III........ 35 Treasurer
Michael B. Mamaux.............. 32 Controller
Elliott Ettlinger.............. 47 Vice President -- Plumbing Operations
Terri L. Hardt................. 37 Vice President -- Retail Sales and Service
Howard C. Menditch............. 45 Vice President -- National Accounts
Jennifer L. Tweeton............ 36 Vice President -- Investor Relations
</TABLE>
- ---------------
* Also serves as a director of the Company.
Thomas N. Amonett has been President and Chief Executive Officer since
November 1997 and a director since September 1996. He served as President and
Chief Executive Officer of Weatherford Enterra, Inc. from July 1996 to May 1997.
From 1992 to 1996, he served as Chairman of the Board and President of Reunion
Resources Company (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., HomeUSA, Inc.,
PetroCorp Incorporated, Reunion Industries, Inc. and Weatherford Enterra, Inc.
Howard S. Hoover, Jr. has been Chairman of the Board since November 1995.
From 1970 until 1991, Mr. Hoover was employed by Browning-Ferris Industries,
Inc. ("BFI"), a waste services company, 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 of
the Company since September 1996. He founded Atlas Services, Inc., one of the
Founding Companies, 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.
Harry O. Nicodemus, IV has served as Senior Vice President, Chief Financial
Officer and Chief Accounting Officer since September 1997. Prior thereto, he
served as Vice President, Chief Financial Officer and Chief Accounting Officer
of the Company from January 1997. From December 1995 through December 1996, Mr.
Nicodemus was Controller of Drilex International, Inc., an oilfield services
company. He was Vice President, Controller and Chief Accounting Officer for
American Ecology Corporation ("American Ecology"), a waste services company,
from February 1993 to December 1995 and a divisional vice president and an
assistant controller at BFI from January 1991 to January 1993. Mr. Nicodemus is
a Certified Public Accountant.
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,
10
<PAGE> 13
L.L.P. Mr. Held was Associate General Counsel of American Ecology from 1994 to
1995 and an associate at the law firm of Baker & Botts, L.L.P., prior thereto.
Frank N. Menditch has been a Senior Vice President since September 1997 and
Director of Operations of the Company's commercial maintenance services
operations since January 1998. He has also served as a director of the Company
since September 1996. He served as Regional Vice President -- Northeast of the
Company from June 1997 to January 1998 and Director of the Company's northeast
operations from November 1996 to June 1997. Mr. Menditch was President of
General Heating & Air Conditioning, Inc. ("General Heating"), one of the
Founding Companies, from 1983 to 1997. He is a past president of the National
Capitol Chapter of ACCA and of the Metro Washington Heat Pump Association. Mr.
Menditch is the brother of Howard C. Menditch.
Elliot Sokolow has been a Senior Vice President and Director of Operations
of the Company's residential services operations since January 1998 and a
director since September 1996. He served as Assistant to the Chairman of the
Company from June 1997 to January 1998 and as Director of the Company's
southeast operations from November 1996 to June 1997. He was a founder of
Florida Heating & Air Conditioning, Inc., one of the Founding Companies, in 1970
and served as its President from 1977 until 1997. Mr. Sokolow served as national
president of ACCA in 1992 and 1993.
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 B. 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. ("U.S. Delivery"), a national provider of delivery and
distribution management services. Prior thereto, he was a Senior Auditor at the
public accounting firm of Arthur Andersen LLP. Mr. Mamaux is a Certified Public
Accountant.
Elliott Ettlinger has been Vice President -- Plumbing Operations since
March 1998 and has served as the President of Larry Teague & Sons Plumbing,
Inc., one of the Acquired Businesses, since its formation in December 1993.
Prior thereto, Mr. Ettlinger was Vice President of Indoor Quality Technologies,
a company providing HVAC, electrical and plumbing services, from December 1992
to November 1993 and Vice President of The Vitalizers, a residential real estate
service company from March 1992 to December 1992. From July 1986 to December
1991, he was a Regional Vice President of Roto-Rooter Services Co. Inc.
("Roto-Rooter"), a national plumbing company. Mr. Ettlinger also served on the
board of directors of Roto-Rooter in 1990.
Terri L. Hardt has been Vice President -- Retail Sales and Service since
June 1997. From May 1997 to June 1997, she was Director of Retail Services of
the Company. From May 1996 to May 1997, Ms. Hardt was a Division
Manager -- Heating and Cooling Division with Warm Thoughts Communications, Inc.,
an advertising and marketing firm for the home services industry. From August
1995 to May 1996, she served as a Small Business Consultant with Allison &
Associates, a communications consulting firm. From May 1994 to May 1996, Ms.
Hardt served as an independent consultant with Business Ventures Corporation,
Inc., a management facilitation and consulting firm specializing in HVAC
businesses. Prior thereto, she served in various management positions, including
President, with Automatic Controls Service, one of the Acquired Businesses.
Howard C. Menditch has been Vice President -- National Accounts since March
1998. He has also served as Executive Vice President of General Heating since
September 1996 and, prior thereto, as Senior Vice President of General Heating
from 1974 to September 1996. From September 1997 to March 1998, Mr. Menditch was
also responsible for the Company's operations in the Washington, D.C. area and
Virginia, Maryland and Pennsylvania. Mr. Menditch is the brother of Frank N.
Menditch.
Jennifer L. Tweeton has been Vice President -- Investor Relations since
June 1997. From July 1996 to June 1997, she was Director of Investor Relations
for the Company. Prior thereto, she was Vice President of
11
<PAGE> 14
Special Projects for Infrastructure Services, Inc., an industrial contractor for
highway maintenance and repair, from March 1996 to July 1996 and Financial
Planning Manager for U.S. Delivery from 1994 to March 1996. From 1990 to 1994,
Ms. Tweeton was employed as Financial Planning Manager by Team, Inc., a service
provider to the petrochemical industry.
ITEM 2. PROPERTIES.
The Company's facilities consist principally of offices, garages and
maintenance and warehouse facilities. The Company believes its facilities are
generally well-maintained and adequate for the Company's existing and planned
operations at each operating location.
The Company owns certain of its facilities and leases the remainder 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. Certain of these
leases are with officers and directors of the Company who were formerly owners
of the Acquired Businesses.
The Company leases its principal executive and administrative offices in
Houston, Texas.
ITEM 3. LEGAL PROCEEDINGS.
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 it 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 that such insurance will be
sufficient under all circumstances to protect the Company against significant
claims for damages or that the Company will be able to maintain adequate
insurance in the future at commercially reasonable rates or on acceptable terms.
The occurrence of a significant event not fully insured against could materially
and adversely affect the Company's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock of ARS trades on the New York Stock Exchange (the "NYSE")
under the symbol "ARS." As of March 30, 1998, there were 15,384,400 shares of
Common Stock outstanding, held by approximately 250 stockholders of record. The
number of record holders does not necessarily bear any relationship to the
number of beneficial owners of the Common Stock.
The following table sets forth the range of high and low sale prices for
the Common Stock on the NYSE (as reported on the Composite Transactions
Reporting System) for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Year ended December 31, 1996:
Third Quarter (September 25 to September 30).............. $19.62 $16.50
Fourth Quarter............................................ 27.12 16.62
Year ended December 31, 1997:
First Quarter............................................. 28.50 19.12
Second Quarter............................................ 24.50 17.50
Third Quarter............................................. 25.37 15.37
Fourth Quarter............................................ 18.81 12.00
</TABLE>
The last reported sale of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on March 30, 1998 was $9.62.
ARS has never paid or declared any dividends 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 the Company's financial condition and performance,
cash needs and expansion plans, the income tax laws then in effect, the
requirements of Delaware law and the restrictions the Company's credit facility
imposes and the Company's future credit facilities or debt instruments may
impose. The Company's credit facility prohibits the payment of dividends (except
for dividends payable in Common Stock and certain preferred stock). See "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and Note 7 of the Notes to
Consolidated Financial Statements of the Company.
In April 1997, ARS sold $55.0 million aggregate principal amount of its
7 1/4% Convertible Subordinated Notes due 2004 (the "7 1/4% Notes") to Salomon
Smith Barney, Inc., Goldman, Sachs & Co. and NationsBanc Montgomery Securities,
LLC (the "Initial Purchasers") in reliance on Section 4(2) under the Securities
Act of 1933, as amended (the "Securities Act") for resale by the Initial
Purchasers to "qualified institutional buyers" (as defined in Securities Act
Rule 144A). The initial price to investors totaled $55.0 million, and the
discounts and commissions totaled $1.65 million. The 7 1/4% Notes are
convertible into an aggregate of 2,156,863 shares of Common Stock, at any time
prior to their maturity on April 15, 2004, at a conversion price of $25.50 per
share, subject to adjustment in certain events. Subsequent to their issuance,
ARS registered the offering and resale of the 7 1/4% Notes and the underlying
shares of Common Stock under the Securities Act on behalf of certain holders of
the 7 1/4% Notes.
ITEM 6. SELECTED FINANCIAL DATA.
For financial reporting purposes, Atlas Services, Inc. ("Atlas"), one of
the Founding Companies, is presented as the accounting acquiror in all
acquisitions by ARS through September 30, 1996, the effective date of the
acquisitions of the Founding Companies. From that date to December 31, 1997, the
Company acquired 80 businesses, 23 of which were accounted for under the
pooling-of-interests method of accounting (the "Pooled Businesses"). 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 15 of the Pooled Businesses (the "Restated
Businesses"). The eight remaining Pooled Businesses are not significant to prior
historical periods, and their results and the results of the other 57 acquired
businesses accounted for under the purchase method of accounting through
December 31, 1997 have been included in the consolidated results of the Company
beginning on their respective dates of acquisition. As used in this discussion,
the
13
<PAGE> 16
"Company" means (i) Atlas plus the Restated Businesses prior to September 30,
1996 and (ii) ARS and its consolidated subsidiaries on that date and thereafter.
The following selected financial information has been derived from the audited
financial statements of the Company for each year in the three-year period ended
December 31, 1997. The remaining selected financial information 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 summary financial
information below should be read in conjunction with the consolidated financial
statements and notes thereto elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $55,525 $81,125 $97,686 $150,330 $382,518
Gross profit..................... 13,811 19,938 25,304 41,270 106,293
Selling, general and
administrative expenses(1).... 12,236 16,992 19,914 37,632 81,405
Special charge and other
costs(2)...................... -- -- -- -- 24,194
Income from operations........... 1,575 2,946 5,390 3,638 694
Interest expense(1).............. (353) (355) (356) (5,479) (7,469)
Interest income and other
expense, net.................. 316 611 209 609 1,073
Net income (loss)................ $ 1,226 $ 1,916 $ 3,155 $ (3,035) $ (4,701)
======= ======= ======= ======== ========
Basic and diluted net income (loss)
per share........................ $ 0.30 $ 0.47 $ 0.77 $ (0.48) $ (0.33)
======= ======= ======= ======== ========
Shares used in computing net income
(loss) per share................. 4,085 4,085 4,085 6,277 14,330
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Working capital.................. $ 1,864 $ 2,249 $ 1,284 $ 19,175 $ 23,094
Total assets..................... 16,682 21,854 25,243 211,624 335,313
Total debt, including current
portion....................... 4,823 4,882 4,557 56,063 136,371
Stockholders' equity............. 3,346 4,029 5,479 116,251 134,563
</TABLE>
- ---------------
(1) For the year ended December 31, 1996, includes nonrecurring compensation
expense of $3,356 (included in selling, general and administrative expense)
and financing fees of $4,818 (included in interest expense) related to the
purchase of Enterprises Holding Company ("EHC"), one of the Founding
Companies, by ARS. See Note 1 of Notes to Consolidated Financial Statements
of the Company.
(2) For the year ended December 31, 1997, special charge and other costs of
$24,194 relate to the planned sale or abandonment of certain operating
facilities, payroll costs, principally termination and severance costs,
related to terminated officers and employees, write-downs relating to the
planned sale of the Company's retail appliance business and a loss accrual
on future lease commitments, write-off of costs incurred for an
enterprise-wide information system and write-off of certain costs of a
corporate identity advertising and image campaign that has been
discontinued. See Note 2 of Notes to Consolidated Financial Statements of
the Company for further discussion.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto, "Item 6 -- Selected
Financial Data" and "Item 1 -- Business -- Factors That May Affect Future
Results" in this Report.
14
<PAGE> 17
INTRODUCTION
The Company derives its revenues primarily from (i) owners and occupants of
homes and small commercial buildings, (ii) builders and developers of new homes,
residential developments and small commercial buildings and (iii) owners and
managers of large commercial, industrial, educational, institutional and retail
facilities and federal and local governments. Cost of services consists
primarily of salaries and benefits of service and installation personnel, parts
and materials, subcontracted services, depreciation, maintenance, fuel and
equipment rentals. Selling, general and administrative expenses consist
primarily of compensation and related benefits payable to former owners of the
businesses acquired and to management and administrative personnel, advertising,
office rent and utilities, communications and professional fees.
ARS, incorporated in October 1995, conducted no operations prior to
September 27, 1996 other than in connection with the IPO and the acquisitions of
the Founding Companies. Since then and through December 31, 1997, the Company
acquired an additional 80 businesses (collectively with the Founding Companies,
the "Acquired Businesses"), of which 13 were acquired in the fourth quarter of
1996 (the "1996 Acquisitions") and 67 were acquired in 1997. Each of the
Acquired Businesses operated as separate, independent businesses prior to its
acquisition by the Company. The integration of the operations and administrative
functions of the Acquired Businesses with the Company may present opportunities
to reduce costs as a percentage of revenues 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. The success of
the Company will depend, in part, on the extent to which the Company is able to
effectively integrate the Acquired Businesses and the additional businesses that
the Company may acquire in the future. In addition, the various costs and
possible cost-savings resulting from the integration process may make historical
operating results not comparable to, or indicative of, future performance.
For financial reporting purposes, Atlas is presented as the accounting
acquiror in all acquisitions by ARS through September 30, 1996, the effective
date of the acquisitions of the Founding Companies for accounting purposes. The
Company's historical financial statements for periods ended before September 30,
1996 are the consolidated historical financial statements of Atlas retroactively
restated to give effect to the operations of the 15 Restated Businesses
accounted for under the pooling-of-interests method of accounting. As used in
this discussion, the "Company" means (i) Atlas and the Restated Businesses prior
to September 30, 1996 and (ii) ARS and its consolidated subsidiaries on that
date and thereafter, and the term "Acquired Businesses" does not include Atlas.
15
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data of the
Company and that data as a percentage of the Company's revenues for the periods
indicated (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------
1995 1996 1997
---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $97,686 100.0% $150,330 100.0% $382,518 100.0%
Cost of services.............. 72,382 74.1 109,060 72.6 276,225 72.2
------- ------ -------- ------ -------- -----
Gross profit.................. 25,304 25.9 41,270 27.4 106,293 27.8
Selling, general and
administrative expenses..... 19,914 20.4 37,632 25.0 81,405 21.3
Special charge and other
costs....................... -- -- -- -- 24,194 6.3
------- ------ -------- ------ -------- -----
Income from operations........ 5,390 5.5 3,638 2.4 694 0.2
Interest expense.............. (356) (0.4) (5,479) (3.6) (7,469) (2.0)
Interest income and other
expense, net................ 209 0.2 609 0.4 1,073 0.3
------- ------ -------- ------ -------- -----
Income (loss) from operations
before income taxes......... 5,243 5.3 (1,232) (0.8) (5,702) (1.5)
Provision (benefit) for income
taxes....................... 2,088 2.1 1,803 1.2 (1,001) (0.3)
------- ------ -------- ------ -------- -----
Net income (loss)............. $ 3,155 3.2 $ (3,035) (2.0) $ (4,701) (1.2)
======= ====== ======== ====== ======== =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues -- Revenues increased $232.2 million, or 154.5%, from $150.3
million for the year ended December 31, 1996 to $382.5 million for the year
ended December 31, 1997. Approximately $219.7 million of the increase in
revenues was attributable to the inclusion of revenues from those Acquired
Businesses for which the results of operations are included in the Company's
consolidated results from their respective acquisition dates. The remainder of
the increase was primarily attributable to increased demand for the Company's
services.
Cost of services -- Cost of services increased $167.1 million, or 153.2%,
from $109.1 million for the year ended December 31, 1996 to $276.2 million for
the year ended December 31, 1997, reflecting increased costs associated with the
higher level of revenues of those Acquired Businesses for which the results of
operations are included in the Company's consolidated results from their
respective acquisition dates. Gross profit, as a percentage of revenues,
remained relatively consistent at 27.8% for the year ended December 31, 1997, as
compared to 27.4% for the year ended December 31, 1996.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased $43.8 million, or 116.5%, from $37.6 million
for the year ended December 31, 1996 to $81.4 million for the year ended
December 31, 1997. This increase was primarily attributable to the following:
inclusion of selling, general and administrative expenses of those Acquired
Businesses for which the results of operations are included in the Company's
consolidated results from their respective acquisition dates and goodwill
amortization associated with the purchase acquisitions, coupled with the
addition of ARS's corporate personnel and administrative infrastructure. This
increase was partially offset by adjustments in 1996 of $3.4 million for
nonrecurring compensation expenses related to the acquisition of EHC and $0.6
million for compensation expense related to the issuance of 39,987 shares of
Common Stock to certain employees, consultants and three officers of ARS.
Excluding the effect of the adjustments in 1996 described in the preceding
sentence, selling, general and administrative expenses, as a percentage of
revenues, remained consistent at 21.3% for the year ended December 31, 1997, as
compared to 22.4% for the year ended December 31, 1996.
16
<PAGE> 19
Special charge and other costs -- In the fourth quarter of 1997, under the
direction of the Company's new chief executive officer appointed in October
1997, the Company's management undertook a comprehensive review of its
operations, properties and lease commitments, information system and personnel.
As a result of this review, the Company recorded a special charge and other
costs of $24.2 million. The components of the charge consist of: (i) $7.1
million for the planned sale or abandonment of facilities (including future
lease commitments) resulting from the consolidation of certain operating
facilities in the same market areas, (ii) $6.6 million for payroll costs,
principally termination and severance costs, related to former officers and
employees that were terminated as a result of the Company's headcount reduction
initiative, (iii) $5.1 million for the write-down of the Company's retail
appliance business, including a loss accrual on future lease commitments,
resulting from the planned sale of that business, (iv) $3.6 million for a
write-off of costs incurred for an enterprise-wide information system that the
Company has determined was not suitable for its current needs and (v) $1.8
million for a write-off of costs and expenses incurred in a corporate identity
advertising and image campaign that has been discontinued because it was not
consistent with the Company's current decentralized operating strategy.
Interest expense -- Interest expense increased from $5.5 million, or 36.4%,
for the year ended December 31, 1996 to $7.5 million for the year ended December
31, 1997. This increase was attributable to the use of debt financing to fund
the cash portion of the purchase prices paid for certain Acquired Businesses at
various times during 1997 and the issuance by ARS of its 7 1/4% Convertible
Subordinated Notes due 2004 in April 1997, partially offset by the effect of a
nonrecurring charge during 1996 for financing fees of $4.8 million related to
the purchase of EHC.
Interest income and other expense, net -- Interest income and other
expense, net, increased by $0.5 million during 1997. This increase was
attributable to (i) gains realized on the sale of excess vehicles and equipment
acquired by the Company in connection with the acquisitions of the Acquired
Businesses and (ii) rental income earned on property leased to third parties.
Provision (benefit) for income taxes -- For the year ended December 31,
1997, the Company recorded a benefit for income taxes of $1.0 million, as
compared to a provision for income taxes of $1.8 million recorded for the year
ended December 31, 1996. See Note 11 of the Notes to Consolidated Financial
Statements of the Company for further discussion of the tax benefit.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues -- Revenues increased $52.6 million, or 53.8%, from $97.7 million
for the year ended December 31, 1995 to $150.3 million for the year ended
December 31, 1996. Approximately $31.2 million of the increase in revenues was
attributable to the inclusion of additional revenues resulting from the
acquisition of the Founding Companies and the 1996 Acquisitions. The remaining
increase in revenues was primarily attributable to increased demand for the
Company's residential services, primarily in California, Michigan, Nebraska and
South Carolina.
Cost of services -- Cost of services increased $36.7 million, or 50.7%,
from $72.4 million for the year ended December 31, 1995 to $109.1 million for
the year ended December 31, 1996. This increase was consistent with the increase
in revenue. Gross profit, as a percentage of revenues, increased from 25.9% for
the year ended December 31, 1995 to 27.4% for the year ended December 31, 1996.
This increase in gross profit reflected the increase in revenues from
residential maintenance services, which typically generate higher margins than
other services.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased $17.7 million, or 88.9%, from $19.9 million
for the year ended December 31, 1995 to $37.6 million for the year ended
December 31, 1996. As a percentage of revenues, selling, general and
administrative expenses increased from 20.4% in 1995 to 25.0% in 1996. The
increase was primarily attributable to (i) the addition of $7.6 million of these
expenses associated with the operations of the Founding Companies and the 1996
Acquisitions and the formation of a corporate office and (ii) adjustments during
1996 of $3.4 million for compensation expenses related to the acquisition of EHC
and $0.6 million for compensation expense related
17
<PAGE> 20
to the issuance of 39,987 shares of Common Stock to certain employees,
consultants and three officers of ARS.
Interest expense -- Interest expense increased from $0.4 million for the
year ended December 31, 1995 to $5.5 million for the year ended December 31,
1996. This increase was attributable to (i) the use of debt financing to fund
the cash portion of the purchase prices of the Founding Companies and the 1996
Acquisitions and (ii) a nonrecurring charge during 1996 for financing fees of
$4.8 million related to the purchase of EHC.
Interest income and other expense, net -- Interest income and other
expense, net, increased by $0.4 million during 1996. This increase was
attributable to (i) gains realized on the sale of excess vehicles and equipment
acquired by the Company in connection with the acquisitions of the Founding
Companies and the 1996 Acquisitions and (ii) rental income earned on property
leased to third parties.
Provision (benefit) for income taxes -- For the year ended December 31,
1996, the Company recorded a provision for income taxes of $1.8 million, as
compared to a provision for income taxes of $2.1 million recorded for the year
ended December 31, 1995. See Note 11 of the Notes to Consolidated Financial
Statements of the Company for further discussion of the tax provision.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, net cash used in operating
activities was $11.5 million, compared to $2.9 million net cash provided by
operating activities during the year ended December 31, 1996. This change was
primarily attributable to an increase of $13.9 million in accounts receivable
and costs and estimated earnings in excess of billings on uncompleted contracts
and a corresponding decrease of $15.7 million in accounts payable and accrued
liabilities since December 31, 1996. The increase in accounts receivable and
costs and estimated earnings in excess of billings on uncompleted contracts was
attributable primarily to the inclusion of additional accounts receivable
acquired through those Acquired Businesses that are consolidated with the
Company's consolidated financial position as of their respective acquisition
dates. The decrease in accounts payable and accrued liabilities during 1997
resulted primarily from the conformity of the accounts payable of the Acquired
Businesses with the Company's accounts payable policy, which mandates prompt
payment to achieve vendor discounts and uniform timing for payments. The
increase in net cash used in operating activities was offset by the noncash
components of the special charge and other costs of $19.4 million. Also during
1997, aggregate capital expenditures totaled $17.0 million (exclusive of
acquisitions) and net borrowings of debt amounted to $69.2 million. The Company
anticipates capital expenditures (exclusive of acquisitions) of approximately
$10.0 million during 1998, primarily for information systems, leasehold
improvements and furniture and fixtures. The Company believes its cash flow from
operations and available borrowings will be sufficient to support its ongoing
operations and anticipated capital expenditures for 1998.
On September 27, 1996, ARS completed its initial public offering (the
"IPO"), which involved the issuance of 4,200,000 shares of Common Stock at a
price of $15.00 per share (before deducting underwriting discounts and
commissions). On October 7, 1996, ARS sold an additional 630,000 shares of
Common Stock at a price of $15.00 per share (before deducting underwriting
discounts and commissions) pursuant to the underwriters' over allotment option
granted in connection with the IPO. The proceeds from these transactions, net of
underwriting discounts and commissions of $1.05 per share and after deducting
the expenses of the IPO, were approximately $60.6 million. Of this amount, $34.8
million was used to fund the cash portion of the purchase prices relating to the
acquisitions of the Founding Companies. The Company made additional aggregate
payments to the former owners of the Founding Companies of $4.7 million,
representing working capital adjustments based on the September 30, 1996 balance
sheets of the Founding Companies pursuant to the agreements relating to the
acquisitions.
The Company has in place a revolving credit facility (the "Credit
Facility") with a syndicate of banks. On March 3, 1997, the Company increased
the size of its 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 paid
in connection with acquisitions, refinancing
18
<PAGE> 21
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 12-month earnings before
interest, taxes, depreciation and amortization. At the Company's option, the
loans may bear interest based on a designated London interbank offering rate
plus a margin ranging from 100 to 200 basis points, depending on the same ratio.
The margin is reset on a quarterly basis and also may be reset on the closing of
an acquisition involving cash consideration in excess of $5.0 million or on a
principal repayment in excess of $5.0 million. Commitment fees of 30 to 50 basis
points per annum are payable on the unused portion of the line of credit. The
Credit Facility has a $5.0 million sub-limit for standby letters of credit. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of dividends by the
Company (except for dividends payable in Common Stock and certain preferred
stock), does not permit the Company to incur or assume other indebtedness (other
than approved subordinated indebtedness) in excess of an amount equal to 5% of
its consolidated net worth and requires the Company to comply with certain
financial covenants, including minimum net worth requirements and maintenance of
a total consolidated funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) ratio and an income coverage ratio.
Management currently estimates, primarily as a result of the impact of the
special charge, that its margin of compliance under the Credit Facility for its
reporting periods in 1998 for certain financial covenants in the Credit Facility
will be lower than it was in prior reporting periods. 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 under the Credit Facility, and the Company has pledged
the stock of its operating subsidiaries as collateral for its obligations under
the Credit Facility. The Company is obligated to pay all principal and interest
outstanding on the Credit Facility in the event of a change in control of the
Company, as defined in the agreement governing the Credit Facility. As of
December 31, 1997, the Company's outstanding borrowings under the Credit
Facility were $79.2 million, bearing interest at a weighted average rate of
7.57%. As of March 30, 1998, the Company had outstanding borrowings under the
Credit Facility in the amount of $90.7 million, bearing interest at a weighted
average rate of 7.13%.
The Company is currently evaluating an increase to the size of its Credit
Facility or alternate sources of financing to provide for borrowings in excess
of $100.0 million, which will be utilized to retire the Credit Facility. Such
increased or alternate sources of financing will also be used to fund the cash
portion of the purchase price of future acquisitions and for general corporate
purposes. Unless and until such an increased or alternate source of financing is
put in place, the Company's ability to consummate acquisitions that require
material amounts of cash as purchase price consideration will be materially
constrained. If the Credit Facility is retired in the second quarter of 1998,
the Company expects to take a non-cash charge for bank loan origination and
commitment fees of approximately $800,000.
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"). 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, subject to adjustment in certain events. The 7 1/4% Notes contain
cross-default provisions that give the holders of the 7 1/4% Notes the right to
accelerate payment in the event of a default under certain of the Company's debt
agreements, including the Credit Facility. The Company is obligated to
repurchase the 7 1/4% Notes in the event of a change in control of the Company,
as defined in the indenture governing the 7 1/4% Notes. ARS used substantially
all the net proceeds from its sale of the 7 1/4% Notes to repay indebtedness
outstanding under the Credit Facility.
In January 1997, ARS registered 5,000,000 shares of its 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. As of March
30, 1998, 10,086,845 shares remained available for issuance under those
registration statements. ARS is currently
19
<PAGE> 22
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. As of March
30, 1998, ARS had issued $1.25 million aggregate principal amount of Series A
Notes, bearing interest at 7.5% per annum, issued in connection with an
acquisition completed in 1998.
In 1997, the Company acquired 67 businesses for an aggregate consideration
of $48.4 million in cash, 4,856,077 shares of Common Stock and a promissory note
in the principal amount of $1.8 million. In 1998 (through March 30), the Company
acquired an additional three businesses for an aggregate consideration of $1.3
million in cash, 57,078 shares of Common Stock and $1.25 million aggregate
principal amount of Series A Notes. All shares of Common Stock and the Series A
Notes issued for the acquisitions during 1997 and 1998 were issued under ARS's
shelf registration statements. 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.
The Company intends to continue to pursue attractive acquisition
opportunities of both residential services and commercial maintenance services
businesses; however, the timing, size or success of any acquisitions effort and
the associated potential capital commitments are unpredictable. In late 1997,
the Company adjusted its acquisition strategy with greater emphasis on strategic
acquisition candidates and less emphasis on tuck-ins. It also increasingly makes
part of the acquisition consideration contingent on the acquired business
achieving certain post-closing operating objectives. Due to these revisions, the
Company anticipates that contributions to operating results from acquisitions in
1998 may be less than would have been the case had these revisions not been
made. The Company expects to fund future acquisitions primarily through a
combination of Common Stock, working capital, cash flow from operations and
borrowings, issuances of the Convertible Debt Securities and the possible public
or private sale of additional debt or equity securities. See "Item
1 -- Business -- Factors That May Affect Future Results."
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs written using two
digits rather than four digits to define the applicable year. The Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000, resulting in a system failure
or material miscalculation, either of which could cause a disruption of
operations. These disruptions could include, among other things, a temporary
inability to process transactions, process invoices or engage in similar routine
business activities.
The Company believes that it will have to modify or replace portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operations problems for its computer
systems. The Company intends to utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications and
does not expect that the costs of this project will be material. If such
modifications and conversions are not completed timely, however, the Year 2000
issue could have a material adverse effect on the operations of the Company.
INFLATION
Due to the relatively low levels of inflation experienced in 1995, 1996 and
1997, inflation did not have a significant effect on the results of the Company
in those periods.
20
<PAGE> 23
SEASONALITY AND WEATHER
The Company's residential services operations are subject to different
seasonal variations in different lines of service. The Company has also
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. See "Item 1 -- Business -- Seasonality and Weather."
21
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
American Residential Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. 22
Consolidated Balance Sheets............................... 23
Consolidated Statements of Operations..................... 24
Consolidated Statements of Stockholders' Equity........... 25
Consolidated Statements of Cash Flows..................... 26
Notes to Consolidated Financial Statements................ 27
</TABLE>
22
<PAGE> 25
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, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1996
and 1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
23
<PAGE> 26
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,984 $ 5,190
Accounts receivable --
Trade, net of allowance of $1,343 and $2,315........... 30,735 47,383
Other.................................................. 2,023 8,821
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,391 5,337
Inventories............................................... 11,290 17,847
Prepaid expenses and other current assets................. 1,572 3,282
Net assets held for resale................................ 338 425
-------- --------
Total current assets.............................. 57,333 88,285
PROPERTY AND EQUIPMENT, net................................. 21,660 35,528
GOODWILL, net............................................... 131,193 205,528
OTHER NONCURRENT ASSETS..................................... 1,438 5,972
-------- --------
Total assets...................................... $211,624 $335,313
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 2,202 $ 1,284
Accounts payable and accrued expenses..................... 29,372 53,409
Unearned revenue on service and warranty contracts........ 4,081 6,001
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 2,503 4,497
-------- --------
Total current liabilities......................... 38,158 65,191
LONG-TERM DEBT, net of current maturities................... 53,861 135,087
UNEARNED REVENUE ON SERVICE AND WARRANTY CONTRACTS.......... 633 472
DEFERRED INCOME TAXES....................................... 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; 13,389,255 and 15,321,322 shares issued and
outstanding............................................ 13 15
Additional paid-in-capital................................ 126,226 152,983
Retained deficit.......................................... (9,988) (18,435)
-------- --------
Total stockholders' equity........................ 116,251 134,563
-------- --------
Total liabilities and stockholders' equity........ $211,624 $335,313
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 27
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................... $97,686 $150,330 $382,518
COST OF SERVICES............................................ 72,382 109,060 276,225
------- -------- --------
Gross profit.............................................. 25,304 41,270 106,293
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 19,914 34,276 81,405
SPECIAL CHARGE AND OTHER COSTS (Note 2)..................... -- -- 24,194
COMPENSATION EXPENSE RELATED TO PURCHASE OF EHC (Note 1).... -- 3,356 --
------- -------- --------
INCOME FROM OPERATIONS...................................... 5,390 3,638 694
OTHER INCOME (EXPENSE):
Financing fees related to purchase of EHC (Note 1)........ -- (4,818) --
Interest expense.......................................... (356) (661) (7,469)
Interest income........................................... 151 118 227
Other..................................................... 58 491 846
------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... 5,243 (1,232) (5,702)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 2,088 1,803 (1,001)
------- -------- --------
NET INCOME (LOSS)........................................... $ 3,155 $ (3,035) $ (4,701)
======= ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (Note
3)........................................................ 4,085 6,277 14,330
======= ======== ========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 3)........ $ 0.77 $ (0.48) $ (0.33)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 28
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, 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
1997 Acquisitions............................ 1,895 2 25,596 -- 25,598
Exercise of stock options.................... 37 -- 485 -- 485
Capital contributions........................ -- -- 676 -- 676
Dividends paid by Restated Businesses........ -- -- -- (3,746) (3,746)
Net loss..................................... -- -- -- (4,701) (4,701)
------ --- -------- -------- --------
BALANCE, December 31, 1997..................... 15,321 $15 $152,983 $(18,435) $134,563
====== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 3,155 $(3,035) $ (4,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities --
Depreciation and amortization........................... 1,437 3,233 10,224
Special charge and other costs.......................... -- -- 19,430
Taxes on acquired S corporations........................ 1,299 1,811 530
Stock portion of compensation and financing fees related
to purchase of EHC.................................... -- 6,276 --
Deferred income tax expense (benefit)................... (3) (667) (3,989)
(Gain) loss on sale of property and equipment........... 9 (77) (352)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................ (2,087) (2,421) (10,594)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 322 (92) (3,256)
Inventories........................................ (357) (96) (2,286)
Prepaid expenses and other current assets.......... 517 (1,141) (514)
Other noncurrent assets............................ (174) (60) (97)
Increase (decrease) in --
Accounts payable and accrued expenses.............. 3,030 (1,095) (15,718)
Unearned revenue on service and warranty
contracts........................................ 112 82 (612)
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 132 358 1,929
Other, net.............................................. (879) (127) (1,508)
------- ------- --------
Net cash provided by (used in) operating
activities..................................... 6,513 2,949 (11,514)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............. 271 635 959
Additions to property and equipment for assets written off
in special charge and other costs....................... -- -- (4,853)
Additions to property and equipment on Restated
Businesses.............................................. (1,165) (3,831) (1,171)
Additions to property and equipment....................... (949) (258) (10,802)
Cash paid for acquisitions, net of cash acquired.......... -- (44,458) (43,227)
------- ------- --------
Net cash used in investing activities............ (1,843) (47,912) (59,094)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,372 43,457 223,873
Principal payments of long-term debt...................... (2,230) (42,734) (154,691)
Proceeds from issuances of Common Stock, net of offering
costs................................................... -- 60,631 485
Distributions to stockholders of Founding Companies....... -- (6,031) --
S corporation dividends paid by Restated Businesses....... (2,969) (2,569) (3,746)
Other, net................................................ (36) (680) (107)
------- ------- --------
Net cash provided by (used in) financing
activities..................................... (3,863) 52,074 65,814
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 807 7,111 (4,794)
CASH AND CASH EQUIVALENTS, beginning of period.............. 2,066 2,873 9,984
------- ------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 2,873 $ 9,984 $ 5,190
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 350 $ 823 $ 6,078
Income taxes............................................ 843 518 7,449
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 30
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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"). Through its wholly owned subsidiary,
American Mechanical Services ("AMS"), ARS also provides comprehensive
maintenance, repair, replacement, reconfiguration and monitoring services for
HVAC, plumbing and electrical systems and controls in existing large commercial,
industrial and institutional facilities such as office buildings, health care
facilities, educational facilities and retail centers (collectively, "commercial
maintenance services"). 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, is 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 and financing fees of
$4,818 in the accompanying consolidated statements of operations for the year
ended December 31, 1996.
During the fourth quarter of 1996, the Company acquired 13 businesses (the
"1996 Acquisitions"), all of 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.
During 1997, the Company acquired 67 businesses (the "1997 Acquisitions"),
23 of which were accounted for in accordance with the pooling-of-interests
method of accounting (the "Pooled Businesses"). The Company retroactively
restated the historical financial statements to give effect to the operations of
15 of the Pooled Businesses (the "Restated Businesses"). For information
regarding the eight remaining Pooled Businesses and the 57 businesses that were
accounted for under the purchase method of accounting (including the 1996
Acquisitions), see Note 4.
2. SPECIAL CHARGE AND OTHER COSTS:
In the fourth quarter of 1997, under the direction of the Company's new
chief executive officer appointed in October 1997, the Company's management
undertook a comprehensive review of its operations, properties and lease
commitments, information system and personnel. As a result of this review, the
Company recorded a special charge and other costs in the amount of $24,194. The
components of the charge consist of: (i) $7,076 for the planned sale or
abandonment of facilities (including future lease commitments) resulting from
the consolidation of certain operating facilities in the same market areas, (ii)
$6,595 for payroll costs, principally termination and severance costs, related
to former officers and employees terminated as a result of the Company's
headcount reduction initiative, (iii) $5,093 for the write-down of the Company's
retail appliance business, including a loss accrual on future lease commitments,
resulting from the planned sale of that business, (iv) $3,660 for a write-off of
costs incurred for an enterprise-wide information system that the Company has
determined was not suitable for its current needs and (v) $1,770 for a write-off
for costs and
28
<PAGE> 31
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
expenses incurred in a corporate identity advertising and image campaign that
has been discontinued because it was not consistent with the Company's current
decentralized operating strategy. This charge reduced net income by $15,196 (net
of tax), or $1.06 cents per share.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
ARS and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentrations of Credit Risk
The Company provides services in various geographical regions. The
Company's credit risk primarily consists of receivables from a variety of
customers, including residential consumers, home builders, governmental units
and commercial businesses. Management performs ongoing credit evaluations of its
customers and provides allowances as deemed necessary.
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. On 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 consolidated 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 lease 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 and 1997, accumulated
amortization of goodwill was approximately $584 and $5,080, respectively.
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
29
<PAGE> 32
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
flows as well as other factors, such as business trends and prospects and market
and economic conditions. Any resulting impairment is recognized in the
consolidated statements of operations.
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 and 1997,
accumulated amortization of debt issue costs was approximately $49 and $654,
respectively.
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 as services are
provided. Revenues from sales of extended warranties are recognized over the
life of the warranty.
Revenues from construction contracts are recognized on a
percentage-of-completion method measured primarily on the basis of percentage of
costs incurred to total estimated costs for each contract. Provisions for the
total estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and are recognized in the period in which the revisions are
determined.
Warranty Costs
The Company typically warrants labor for the first year after installation
on new air conditioning and heating units. The Company also generally warrants
labor for 30 days after servicing existing air conditioning and heating units.
An accrual for warranty costs is recorded on 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." Entities
electing to remain with the accounting method in APB No. 25 must 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 consolidated financial position and consolidated
results of operations as a result of SFAS No. 123. See 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 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, "Accounting for Income Taxes." Under this method,
deferred income taxes are recorded based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
30
<PAGE> 33
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 are reflected
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.
Realization of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the Company
evaluates the recoverability of property and equipment, intangible or other
assets, if facts and circumstances indicate that any of those assets might be
impaired. 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. The initial adoption of this standard in 1996 did not have a material
effect on the consolidated financial position or consolidated results of
operations of the Company.
Earnings Per Share
The following table summarizes weighted average shares outstanding for each
of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1995 1996 1997
----- ----- ------
<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
Weighted average portion of shares issued in the formation
of ARS.................................................... -- 318 1,268
Weighted average portion of shares issued to the remaining
stockholders of the Founding Companies.................... -- 472 1,884
Weighted average portion of shares sold in the Offering..... -- 1,204 4,830
Weighted average portion of shares awarded to certain
employees and consultants................................. -- 10 40
Weighted average portion of shares issued in the 1996
Acquisitions.............................................. -- 188 1,282
Weighted average portion of shares issued in the 1997
Acquisitions.............................................. -- -- 926
Weighted average shares attributable to exercised stock
options................................................... -- -- 15
----- ----- ------
Basic and diluted weighted average shares
outstanding..................................... 4,085 6,277 14,330
===== ===== ======
</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 replaced with
"basic" and "diluted" EPS. Basic EPS is computed by dividing net income by the
weighted
31
<PAGE> 34
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 adopted SFAS No. 128 effective December 15, 1997 and restated
EPS for all periods presented. However, there was no impact on weighted average
shares outstanding in prior periods because common stock equivalents are
excluded in the calculation of weighted average shares outstanding as the
Company reported a net loss in each of 1996 and 1997. SFAS No. 128 had no impact
on EPS in 1995 as no common stock equivalents were issued or outstanding.
New Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," was issued in 1997 and
requires the presentation of comprehensive income in an entity's financial
statements for fiscal years beginning after December 15, 1997. Comprehensive
income represents all changes in equity of an entity during the reporting
period, including net income and charges directly to equity that are excluded
from net income. The Company will present the components of comprehensive income
within its consolidated statements of stockholders' equity during its fiscal
year ending December 31, 1998. The Company expects the adoption of SFAS No. 130
will not have a material effect on its consolidated financial position or
consolidated results of operations.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. SFAS No. 131 provides revised disclosure
guidelines for segments of an enterprise based on a management approach to
defining operating segments and requires compliance for fiscal years beginning
after December 15, 1997. The Company will provide reporting disclosures as
required by SFAS No. 131 during its fiscal year ending December 31, 1998.
4. BUSINESS COMBINATIONS:
Poolings
During 1997, the Company acquired all the outstanding stock of the Restated
Businesses in exchange for 3,018,390 shares of Common Stock. These businesses
provide residential services and commercial maintenance services. These
acquisitions have been accounted for under the pooling-of-interests method of
accounting.
The following table summarizes the restated consolidated revenues, net
income (loss) and per share data of the Company for prior reporting periods,
after giving effect to these transactions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1995 1996
----------------- ---------------------
NET NET INCOME
REVENUES INCOME REVENUES (LOSS)
-------- ------ -------- ----------
<S> <C> <C> <C> <C>
Revenues and net income (loss):
As previously reported............................ $22,048 $ 684 $ 64,229 $(5,539)
Restated Businesses............................... 75,638 2,471 86,101 2,504
------- ------ -------- -------
As restated....................................... $97,686 $3,155 $150,330 $(3,035)
======= ====== ======== =======
Basic and diluted net income (loss) per share:
As previously reported............................ $ 0.64 $ (1.70)
Restated Businesses............................... 0.13 1.22
------ -------
As restated....................................... $ 0.77 $ (0.48)
====== =======
</TABLE>
32
<PAGE> 35
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Purchases
In addition to the acquisitions of the Restated Businesses, the Company
acquired 65 residential services and commercial maintenance services businesses
from October 1, 1996 through December 31, 1997 for an aggregate consideration of
$89,600 in cash, 3,178,327 shares of Common Stock and a promissory note in the
principal amount of $1,775. Of these acquisitions, 57 were accounted for under
the purchase method of accounting, with their results of operations 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 their results of operations are included in
the consolidated results of the Company from their respective acquisition dates,
as these transactions were not deemed significant to prior historical periods.
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. The accompanying
consolidated balance sheet as of December 31, 1997 includes preliminary
allocations of the respective purchase prices of certain acquisitions, which are
subject to final adjustment. Set forth below are unaudited pro forma combined
revenues and net income data reflecting the pro forma effect of the acquisitions
on the Company's consolidated results of operations for the years ended December
31, 1996 and 1997. 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 nine months
ended September 30, 1996 and (ii) income statement data for the 1996
Acquisitions and the 1997 Acquisitions, to the extent not otherwise included as
the Restated Businesses in the consolidated financial statements, as if these
acquisitions were effective on January 1, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $465,064 $466,810
======== ========
Net income (loss)........................................... $ 16,329 $ (2,460)
======== ========
Basic and diluted net income (loss) per share............... $ 1.08 $ (0.16)
======== ========
</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) for 1996, an adjustment for
nonrecurring compensation expense of $3,356 and financing fees of $4,818 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 businesses
acquired, (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, increased
by interest expense on borrowed funds used to pay the cash portion of the
purchase price of the businesses acquired and (vii) adjustments to the federal
and state income tax provisions based on pro forma operating results. Basic and
diluted net income (loss) per share for 1996 and 1997 assumes all shares issued
for the acquisitions had been outstanding at the beginning of the periods
presented.
The pro forma results presented are not necessarily indicative of actual
results that might have occurred had the operations and management teams of ARS
and the businesses acquired been combined at the beginning of the periods
presented and are not necessarily indicative of future consolidated operating
results.
33
<PAGE> 36
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
ESTIMATED USEFUL --------------------
LIVES IN YEARS 1996 1997
---------------- ------- -------
<S> <C> <C> <C>
Land and land improvements..................... -- $ 2,772 $ 2,287
Buildings and leasehold improvements........... 5-40 6,581 12,829
Transportation equipment....................... 5 15,098 18,294
Machinery and equipment........................ 5-7 3,970 12,343
Furniture and fixtures......................... 5-10 2,765 5,129
------- -------
31,186 50,882
Less -- accumulated depreciation............... 9,526 15,354
------- -------
Property and equipment, net.................... $21,660 $35,528
======= =======
</TABLE>
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1995 1996 1997
----- ------ -------
<S> <C> <C> <C>
Balance at beginning of year......................... $ 449 $ 500 $ 1,343
Additions charged to costs and expenses............ 156 400 511
Deductions for uncollectible receivables written
off............................................. (105) (156) (999)
Allowance for doubtful accounts at acquisition
dates........................................... -- 599 1,460
----- ------ -------
Balance at end of year............................... $ 500 $1,343 $ 2,315
===== ====== =======
</TABLE>
Other receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Tax receivable.............................................. $ -- $ 2,900
Vendor receivables.......................................... -- 1,955
Notes receivable............................................ -- 1,543
Other receivables........................................... 2,023 2,423
------- -------
$ 2,023 $ 8,821
======= =======
</TABLE>
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Accounts payable, trade..................................... $14,573 $18,173
Special charge and other costs (see Note 2)................. -- 15,983
Accrued compensation and benefits........................... 6,952 8,035
Accrued insurance........................................... 1,668 3,016
Accrued warranty expense.................................... 1,214 2,133
Other accrued expenses...................................... 4,965 6,069
------- -------
$29,372 $53,409
======= =======
</TABLE>
34
<PAGE> 37
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
At December 31, 1997, the accrued expenses related to the special charge
and other costs in the amount of $15,983 consisted principally of $5,201 for
accrued termination and severance costs related to terminated officers and
employees, $4,221 for the write-down on the Company's retail appliance business
and $6,561 on the planned sale or abandonment of facilities (including future
lease commitments). Approximately $8,182 is expected to be paid and reversed in
1998, with the remaining amounts paid and reversed through 2011.
Installation contracts in progress are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Costs incurred on contracts in progress..................... $26,123 $41,676
Estimated earnings, net of losses........................... 7,498 12,594
------- -------
33,621 54,270
Less -- Billings to date.................................... 34,733 53,430
------- -------
$(1,112) $ 840
======= =======
</TABLE>
The following are included in the accompanying consolidated balance sheets
under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 1,391 $ 5,337
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (2,503) (4,497)
------- -------
$(1,112) $ 840
======= =======
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
-------- --------
<S> <C> <C>
Credit Facility (see below)................................. $ 27,200 $ 79,200
7 1/4% Notes (see below).................................... -- 55,000
Notes payable to selling shareholders of certain 1996
Acquisitions repaid in January 1997 from borrowings under
Credit Facility........................................... 24,613 --
Other....................................................... 4,250 2,171
-------- --------
56,063 136,371
Less -- Current maturities.................................. 2,202 1,284
-------- --------
$ 53,861 $135,087
======== ========
</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 $55,000, which was in place at
December 31, 1996, to $100,000. 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
35
<PAGE> 38
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 on the closing of an acquisition involving cash consideration in
excess of $5,000 or on a principal repayment in excess of $5,000. 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 $5,000 sublimit for standby letters of
credit. The Credit Facility requires the consent of the lenders for acquisitions
exceeding a certain level of cash consideration, prohibits the payment of
dividends by the Company (except for dividends payable in Common Stock and
certain preferred stock), does not permit the Company to incur or assume other
indebtedness (other than approved subordinated indebtedness) in excess of an
amount equal to 5% of its consolidated net worth and requires the Company to
comply with certain financial covenants, including minimum net worth
requirements and maintenance of a total consolidated funded debt to earnings
before interest, taxes, depreciation and amortization (EBITDA) ratio and an
income coverage ratio. Management currently estimates, primarily as a result of
the impact of the special charge, that its margin of compliance under the Credit
Facility for its reporting periods in 1998 for certain financial covenants in
the Credit Facility will be lower than it was in prior reporting periods. 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. The Company is obligated to pay all
principal and interest outstanding on the Credit Facility in the event of a
change in control of the Company, as defined in the agreement governing the
Credit Facility. As of December 31, 1996 and 1997, the Company had $27,200 and
$79,200, respectively, in outstanding borrowings under the Credit Facility,
bearing interest at a weighted average rate of approximately 7.40% and 7.57%,
respectively.
At December 31, 1997, the prime rate was 8.5% and LIBOR rates were 5.72%,
5.82%, 5.84% and 5.97% for the 30-day, 60-day, 90-day and 180-day interest
periods, respectively.
On April 2, 1997, ARS sold $55,000 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. The 7 1/4% Notes contain cross-default
provisions that give the holders of the 7 1/4% Notes the right to accelerate
payment in the event of a default under certain of the Company's debt
agreements, including the Credit Facility. The Company is obligated to
repurchase the 7 1/4% Notes in the event of a change in control of the Company,
as defined in the indenture governing the 7 1/4% Notes. ARS used substantially
all the net proceeds from the sale of the 7 1/4% Notes to repay indebtedness
outstanding under the Credit Facility.
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 --
--------------
<S> <C>
1998................................................... $ 1,284
1999................................................... 80,087
2000................................................... --
2001................................................... --
2002................................................... --
Thereafter............................................. 55,000
--------
$136,371
========
</TABLE>
Management estimates that the fair value of its debt obligations
approximates the historical value at December 31, 1997.
36
<PAGE> 39
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. STOCK OPTIONS AND WARRANTS:
Stock Options
The Company has in place a 1996 Incentive Plan (the "1996 Plan"), which
provides for the granting or awarding of stock options and stock appreciation
rights to nonemployee directors, officers and other key employees and
independent contractors. The Company also has in place a 1997 Employee Incentive
Plan (the "1997 Plan" and collectively with the 1996 Plan, the "Plans"), which
provides for the granting of stock options to key employees and independent
contractors. The Company accounts for the Plans under APB Opinion No. 25, and no
compensation expense has been recognized. The number of shares authorized and
reserved for issuance under the 1996 Plan at any one time is limited to 15% of
the number of shares of Common Stock outstanding on the last day of each
preceding calendar quarter (2,298,198 shares at December 31, 1997). The number
of shares authorized and reserved for issuance under the 1997 Plan at any one
time is limited to 10% of the number of shares of Common Stock outstanding on
the last day of each preceding calendar quarter (1,532,132 shares as of December
31, 1997). In general, the terms of the option awards (including vesting
schedules) issued under the Plans will be established by the Compensation
Committee of the Company's Board of Directors. As of December 31, 1997, the
Company has granted options under the Plans covering an aggregate of 2,063,539
shares of Common Stock under the 1996 Plan and 984,550 shares of Common Stock
under the 1997 Plan.
The following table summarizes activity under the Plans for the years ended
December 31, 1996 and 1997:
<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
Granted...................................... 1,493,589 $13.09 - $25.75 $19.55
Exercised.................................... (36,650) $8.00 - $15.00 $13.24
Forfeited and canceled....................... (153,200) $15.00 - $25.75 $19.71
---------
Outstanding at December 31, 1997............... 2,808,239 $15.89
========= ======
1996 1997
--------- ---------------
Options exercisable at year end................ -- 609,420
Weighted average fair value of
options granted.............................. $6.18 $12.87
Weighted average remaining contractual life in
years........................................ 9.35 9.51
</TABLE>
Unexercised options expire at various dates from January 2006 through
December 2007.
37
<PAGE> 40
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
If the Company had recorded compensation cost for the Plan consistent with
SFAS No. 123, net loss and loss per share for the years ended December 31, 1996
and 1997 would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Net loss:
As reported............................................... $(3,035) $(4,701)
Pro forma................................................. $(4,010) $(6,334)
Diluted net loss per share:
As reported............................................... $ (0.48) $ (0.33)
Pro forma................................................. $ (0.64) $ (0.44)
</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 and 1997: dividend yield of 0%; expected
volatility of 32.19% and 46.51%; risk-free interest rate of 6.72% and 6.39%; and
expected lives of 10 years, respectively.
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. REGISTERED SECURITIES:
During 1997, ARS registered 15,000,000 shares of Common Stock and $100,000
aggregate principal amount of convertible subordinated debt securities (the
"Convertible Debt Securities") under the Securities Act of 1933, as amended,
pursuant to shelf registration statements on Form S-4, for issuance from time to
time in connection with acquisitions. ARS is currently authorized pursuant to
its Credit Facility to issue up to $25,000 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. At December 31, 1997, the Company had issued
4,856,077 shares of Common Stock and no Series A Notes pursuant to the
registration statements.
38
<PAGE> 41
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. LEASES:
The Company leases facilities and vehicles under noncancelable leases. The
following represents future minimum rental payments under noncancellable
operating leases:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 --
--------------
<S> <C>
1998........................................................ $ 8,034
1999........................................................ 7,737
2000........................................................ 6,826
2001........................................................ 6,142
2002........................................................ 5,007
Thereafter.................................................. 12,616
-------
$46,362
=======
</TABLE>
Rental expense for the years ended December 31, 1995, 1996, and 1997 was
approximately $1,040, $1,769, and $6,947, respectively. Included in these
amounts are rental expenses and commissions paid to related parties of
approximately $227, $482, and $3,115 for the years ended December 31, 1995, 1996
and 1997, respectively.
11. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Federal --
Current.................................................. $1,664 $1,958 $ 2,613
Deferred................................................. 15 (524) (3,430)
State --
Current.................................................. 427 512 374
Deferred................................................. (18) (143) (558)
------ ------ -------
$2,088 $1,803 $(1,001)
====== ====== =======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% for 1995 and 1996
and 35% for 1997 to income before income tax as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1995 1996 1997
------ ------ -------
<S> <C> <C> <C>
Tax provision (benefit) at the statutory rate.............. $1,783 $ (419) $(1,996)
Increase (decrease) resulting from --
State income taxes....................................... 229 207 (184)
Nondeductible expenses................................... (12) 97 738
Nondeductible costs related to purchase of EHC........... -- 1,740 --
Other.................................................... 88 178 441
------ ------ -------
$2,088 $1,803 $(1,001)
====== ====== =======
</TABLE>
39
<PAGE> 42
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1997
------- -------
<S> <C> <C>
Accruals and reserves not deductible until paid............. $(1,224) $(3,995)
Net changes in accounting methods........................... 2,167 1,151
Depreciation and amortization............................... 315 897
Other....................................................... 1,323 (293)
------- -------
Net deferred income tax (assets)/liabilities...... $ 2,581 $(2,240)
======= =======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1996 1997
------ -------
<S> <C> <C>
Deferred tax assets --
Current................................................... $2,204 $ 1,033
Long-term................................................. 624 8,494
------ -------
Total............................................. 2,828 9,527
------ -------
Deferred tax liabilities --
Current................................................... 2,064 372
Long-term................................................. 3,345 6,915
------ -------
Total............................................. 5,409 7,287
------ -------
Net deferred income tax (assets)/liabilities...... $2,581 $(2,240)
====== =======
</TABLE>
12. 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 consolidated 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. 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 costs in satisfying
the self-insurance retention for claims occurring through December 31, 1997. The
accruals are based on known facts and historical trends, and management believes
such accruals to be adequate.
13. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan that covered substantially all employees. Atlas's
contributions during the year ended December 31, 1995 and the nine months ended
September 30, 1996 were $21 and $35, respectively.
40
<PAGE> 43
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On September 26, 1996, effective with the Offering, the Company established
a defined contribution profit-sharing plan that 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% 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 Common
Stock, were approximately $91 and $551 in 1996 and 1997, respectively. The
Company also may make additional discretionary contributions.
14. SUBSEQUENT EVENTS:
Stock Option Exchange
In March 1998, the Board of Directors and the Compensation Committee of the
Board of Directors approved a program whereby the Company would offer
non-officer employees of the Company the ability to exchange existing stock
options for a smaller number of newly issued stock options with an $11.00
exercise price. The number of options eligible for exchange is 718,000, and such
options currently have exercise prices which range from $15.00 to $25.75. If all
eligible employees elected to exchange the maximum number of eligible options,
the number of newly issued options would be 581,000. The offer will terminate on
April 30, 1998.
15. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
Acquisitions Subsequent to December 31, 1997
In the first quarter of 1998, the Company acquired all the outstanding
stock or assets of three companies in exchange for 57,078 shares of Common
Stock, $1,265 in cash and $1,250 aggregate principal amount of Series A Notes,
bearing interest at 7.5% per annum. These companies provide residential services
and commercial maintenance services.
41
<PAGE> 44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
For the information called for by Item 10 (other than the information
regarding Executive Officers, which is set forth in "Item
1 -- Business -- Executive Officers") and Items 11, 12 and 13, reference is made
to the Company's definitive proxy statement for its 1998 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
(the "Commission") within 120 days after December 31, 1997, and which is
incorporated herein by reference (except for the material included under the
captions "Report of Compensation Committee" and "Performance Graph").
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
For the financial statements filed as part of this Annual Report on
Form 10-K, refer to "Index to Financial Statements" included in "Item
8 -- Financial Statements and Supplementary Data."
(2) Financial Statement Schedules.
All financial statement schedules are omitted because they are not
required or the required information is shown in the Company's consolidated
financial statements or the notes thereto.
(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1,
Reg. No. 333-06195, Ex. 3.1).
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior
Participating Preferred Stock (Form S-1, Reg. No.
333-06195, Ex. 3.3).
*4.1 -- Form of Certificate representing Common Stock (Form S-1,
Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights
Certificate as Exhibit B thereto (Form S-8, Reg. No.
333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the
stockholders listed on the signature pages thereto (Form
S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996
between ARS and Equus II Incorporated (Form S-1, Reg. No.
333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March
19, 1996 between EHC and NationsBank of Texas, N.A.
("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*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 -- Second Amendment to Revolving Loan Agreement dated as of
June 30, 1997, among ARS, NationsBank and the other
parties designated therein (Form 10-Q for the period
ended June 30, 1997, File No. 1-11849, Ex. 4.8).
*4.9 -- Indenture dated as of April 1, 1997 between ARS and U.S.
Trust Company of Texas, N.A., as Trustee, relating to the
7 1/4% Convertible Subordinated Notes due 2004 (Form S-4,
Reg. No. 333-18623, Ex. 4.8).
*4.10 -- Registration Rights Agreement dated as of April 1, 1997
between ARS and Smith Barney, Inc., Goldman Sachs & Co.
and Montgomery Securities (Form S-4, Reg. No. 333-18623,
Ex. 4.9).
*4.11 -- Indenture dated as of July 31, 1997 between ARS and U.S.
Trust Company of Texas, N.A., as Trustee, relating to the
Convertible Subordinated Debt Securities (the
"Convertible Debt Securities Indenture") (Form 10-Q for
the period ended June 30, 1997, File 1-11849, Ex. 4.11).
4.12 -- Form of Convertible Senior Subordinated Note, Series A,
issuable pursuant to the Convertible Debt Securities
Indenture.
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.
+*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195,
Ex. 10.1).
+10.2 -- Amendment to 1996 Incentive Plan.
+*10.3 -- ARS 1997 Employee Incentive Plan (Form S-8, Reg. No.
333-44913, Ex. 4.5).
+10.4 -- Amendment to 1997 Employee Incentive Plan.
+*10.5 -- 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).
+*10.6 -- Employment Agreement dated as of November 1, 1997 between
ARS and Thomas Amonett (Form S-4, No. 333-31815, Ex.
10.17).
+*10.7 -- 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).
+10.8 -- Employment Agreement dated as of March 4, 1998 between
ARS and Harry O. Nicodemus, IV.
+*10.9 -- 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).
+*10.10 -- 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).
+*10.11 -- Employment Agreement dated as of April 15, 1996 between
ARS and Michael Mamaux (Form S-1, Reg. No. 333-06195, Ex.
10.7).
+*10.12 -- Employment Agreement dated as of June 13, 1996 between
ARS and Elliot Sokolow (Form S-1, Reg. No. 333-06195, Ex.
10.8).
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+*10.13 -- Employment Agreement dated as of June 13, 1996 between
ARS and Gorden H. Timmons (Form S-1, Reg. No. 333-06195,
Ex. 10.10).
+*10.14 -- Employment Agreement dated as of June 13, 1996 between
ARS and Frank N. Menditch (Form S-1, Reg. No. 333-06195,
Ex. 10.12).
*10.15 -- Form of Indemnification Agreement between ARS and each of
its directors and executive officers (Form S-1, Reg. No.
333-06195, Ex. 10.15).
+*10.16 -- Executive Supplemental Disability Plan of ARS (Form S-1,
Reg. No. 333-06195, Ex. 10.16).
+*10.17 -- Executive Supplemental Life Insurance Plan of ARS (Form
S-1, Reg. No. 333-06195, Ex. 10.17).
+*10.18 -- 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.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
(b) Reports on Form 8-K.
In 1997, the Company filed Current Reports on Form 8-K dated (i) March
4, 1997 to announce the Company's proposed private placement of convertible
subordinated notes, and (ii) December 8, 1997 to file historical financial
statements of the Company that were retroactively restated to give effect
to the operations of 15 businesses acquired by the Company in 1997
accounted for using the pooling-of-interests method of accounting.
44
<PAGE> 47
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ THOMAS N. AMONETT
----------------------------------
Thomas N. Amonett
President and Chief Executive
Officer
Date: March 31, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON MARCH 31,
1998 IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ THOMAS N. AMONETT President, Chief Executive Officer, and
- ----------------------------------------------------- Director (Principal Executive Officer)
Thomas N. Amonett
/s/ HARRY O. NICODEMUS, IV Senior Vice President, Chief Financial
- ----------------------------------------------------- Officer and Chief Accounting Officer
Harry O. Nicodemus, IV (Principal Financial Officer and Principal
Accounting Officer)
/s/ HOWARD S. HOOVER, JR. Chairman of the Board
- -----------------------------------------------------
Howard S. Hoover, Jr.
/s/ GORDEN H. TIMMONS Chief Operating Officer and Director
- -----------------------------------------------------
Gorden H. Timmons
/s/ ROBERT J. CRUIKSHANK Director
- -----------------------------------------------------
Robert J. Cruikshank
/s/ RANDALL B. HALE Director
- -----------------------------------------------------
Randall B. Hale
/s/ NOLAN LEHMANN Director
- -----------------------------------------------------
Nolan Lehmann
/s/ WILLIAM P. MCCAUGHEY Director
- -----------------------------------------------------
William P. McCaughey
/s/ FRANK N. MENDITCH Senior Vice President and Director
- -----------------------------------------------------
Frank N. Menditch
/s/ ELLIOT SOKOLOW Senior Vice President and Director
- -----------------------------------------------------
Elliot Sokolow
/s/ DON D. SYKORA Director
- -----------------------------------------------------
Don D. Sykora
</TABLE>
45
<PAGE> 48
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*3.1 -- Restated Certificate of Incorporation of ARS (Form S-1,
Reg. No. 333-06195, Ex. 3.1).
*3.2 -- Bylaws of ARS (Form S-1, Reg. No. 333-06195, Ex. 3.2).
*3.3 -- Certificate of Designation of Series A Junior
Participating Preferred Stock (Form S-1, Reg. No.
333-06195, Ex. 3.3).
*4.1 -- Form of Certificate representing Common Stock (Form S-1,
Reg. No. 333-06195, Ex. 4.1).
*4.2 -- Rights Agreement of ARS, including form of Rights
Certificate as Exhibit B thereto (Form S-8, Reg. No.
333-13299, Ex. 4.4).
*4.3 -- Registration Rights Agreement among ARS and the
stockholders listed on the signature pages thereto (Form
S-1, Reg. No. 333-06195, Ex. 4.3).
*4.4 -- Stock Registration Agreement dated as of March 6, 1996
between ARS and Equus II Incorporated (Form S-1, Reg. No.
333-06195, Ex. 4.4).
*4.5 -- Stock Piggyback Registration Agreement dated as of March
19, 1996 between EHC and NationsBank of Texas, N.A.
("NationsBank") (Form S-1, Reg. No. 333-06195, Ex. 4.5).
*4.6 -- Revolving Loan Agreement dated March 3, 1997 among ARS,
NationsBank and the other parties designated therein
(Form 10-K for 1996, File No. 1-11849, Ex. 4.6).
*4.7 -- First Amendment to Revolving Loan Agreement dated March
24, 1997, among ARS, NationsBank and the other parties
designated therein (Form 10-K for 1996, File No. 1-11849,
Ex. 4.7).
*4.8 -- Second Amendment to Revolving Loan Agreement dated as of
June 30, 1997, among ARS, NationsBank and the other
parties designated therein (Form 10-Q for the period
ended June 30, 1997, File No. 1-11849, Ex. 4.8).
*4.9 -- Indenture dated as of April 1, 1997 between ARS and U.S.
Trust Company of Texas, N.A., as Trustee, relating to the
7 1/4% Convertible Subordinated Notes due 2004 (Form S-4,
Reg. No. 333-18623, Ex. 4.8).
*4.10 -- Registration Rights Agreement dated as of April 1, 1997
between ARS and Smith Barney, Inc., Goldman Sachs & Co.
and Montgomery Securities (Form S-4, Reg. No. 333-18623,
Ex. 4.9).
*4.11 -- Indenture dated as of July 31, 1997 between ARS and U.S.
Trust Company of Texas, N.A., as Trustee, relating to the
Convertible Subordinated Debt Securities (the
"Convertible Debt Securities Indenture") (Form 10-Q for
the period ended June 30, 1997, File 1-11849, Ex. 4.11).
4.12 -- Form of Convertible Senior Subordinated Note, Series A,
issuable pursuant to the Convertible Debt Securities
Indenture.
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.
+*10.1 -- ARS 1996 Incentive Plan (Form S-1, Reg. No. 333-06195,
Ex. 10.1).
+10.2 -- Amendment to 1996 Incentive Plan.
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+*10.3 -- ARS 1997 Employee Incentive Plan (Form S-8, Reg. No.
333-44913, Ex. 4.5).
+10.4 -- Amendment to 1997 Employee Incentive Plan.
+*10.5 -- 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).
+*10.6 -- Employment Agreement dated as of November 1, 1997 between
ARS and Thomas Amonett (Form S-4, No. 333-31815, Ex.
10.17).
+*10.7 -- 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).
+10.8 -- Employment Agreement dated as of March 4, 1998 between
ARS and Harry O. Nicodemus, IV.
+*10.9 -- 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).
+*10.10 -- 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).
+*10.11 -- Employment Agreement dated as of April 15, 1996 between
ARS and Michael Mamaux (Form S-1, Reg. No. 333-06195, Ex.
10.7).
+*10.12 -- Employment Agreement dated as of June 13, 1996 between
ARS and Elliot Sokolow (Form S-1, Reg. No. 333-06195, Ex.
10.8).
+*10.13 -- Employment Agreement dated as of June 13, 1996 between
ARS and Gorden H. Timmons (Form S-1, Reg. No. 333-06195,
Ex. 10.10).
+*10.14 -- Employment Agreement dated as of June 13, 1996 between
ARS and Frank N. Menditch (Form S-1, Reg. No. 333-06195,
Ex. 10.12).
*10.15 -- Form of Indemnification Agreement between ARS and each of
its directors and executive officers (Form S-1, Reg. No.
333-06195, Ex. 10.15).
+*10.16 -- Executive Supplemental Disability Plan of ARS (Form S-1,
Reg. No. 333-06195, Ex. 10.16).
+*10.17 -- Executive Supplemental Life Insurance Plan of ARS (Form
S-1, Reg. No. 333-06195, Ex. 10.17).
+*10.18 -- 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.
27.1 -- Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form pursuant to Item 14(c) of Form 10-K.
<PAGE> 1
EXHIBIT 4.12
AMERICAN RESIDENTIAL SERVICES, INC.
CONVERTIBLE SENIOR SUBORDINATED NOTES, SERIES A
No. ________ $___________
ORIGINAL ISSUE DATE: INTEREST RATE: %
INITIAL CONVERSION PRICE: CONVERTIBILITY COMMENCEMENT DATE:
INITIAL TARGET VALUE:
REDEMPTION PRICES: If redeemed during 12-month period beginning April 15 in the
year indicated (April 20, in the case of 2000), the redemption price will be:
2000 -- ____%; 2001 -- ____%, 2002 -- ____%, and 2003 -- ____%.
American Residential Services, Inc., a corporation duly organized and
existing under the laws of the State of Delaware (herein called the "Company,"
which term includes any successor Person under the Indenture hereinafter
referred to), for value received, hereby promises to pay to
__________________________, or registered assigns, the principal sum of
________________ Dollars on April 15, 2004, and to pay interest thereon from the
Original Issue Date shown above or from and including the most recent Interest
Payment Date to which interest has been paid or duly provided for, semi-annually
on April 15 and October 15 in each year, commencing April 15, 1998 at the rate
per annum shown above, until the principal hereof is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in that Indenture, be paid to the
Person in whose name this Note (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the March 31 or September 30 (whether or not a Business
Day), as the case may be, next preceding that Interest Payment Date. Any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on that Regular Record Date and may either be paid to the
Person in whose name this Note (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
that Defaulted Interest to be fixed by the Trustee or be paid at any time in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed and on such notice as may be required
by that exchange, all as more fully provided in the Indenture. Notice of a
Special Record Date will be given to Holders of Notes not less than 10 days
prior to that Special Record Date. Payment of the principal of and premium, if
any, and interest on this Note will be made at the office or agency of the
Company maintained for that purpose pursuant to Section 10.02 of the Indenture,
in each case in such coin or currency of the United States of America as of the
time of payment is legal tender for payment of public and private debts;
provided, however, that at the option of the Company payment of interest in
respect of the Notes may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register for the
Notes.
REFERENCE IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET
FORTH ON THE REVERSE HEREOF, WHICH FURTHER PROVISIONS WILL FOR ALL PURPOSES
HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE.
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Note
will not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated,
described or provided for in the within-mentioned Indenture.
U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee
By:
---------------------------------
Name:
Title:
AMERICAN RESIDENTIAL SERVICES, INC.
By:
---------------------------------
Name:
Title:
Attest:
- ------------------------------------
Name:
Title:
[SEE REVERSE SIDE FOR RESTRICTIONS ON TRANSFER]
<PAGE> 2
AMERICAN RESIDENTIAL SERVICES, INC.
CONVERTIBLE SENIOR SUBORDINATED NOTES, SERIES A
This Security is one of a duly authorized issue of Securities of the
Company designated as its Convertible Senior Subordinated Notes, Series A
(herein called the "Notes") issued and to be issued in one or more series under
an Indenture, dated as of July 31, 1997 (herein called the "Indenture"), between
the Company and U.S. Trust Company of Texas, N.A., as Trustee (herein called the
"Trustee," which term includes any successor trustee under the Indenture), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a statement of the respective rights, limitations of rights, duties and
immunities thereunder of the Company, the Trustee, the holders of Senior
Indebtedness and the Holders of the Securities and of the terms on which the
Securities are, and are to be, authenticated and delivered. The Notes may be
issued from time to time with different interest rates, Redemption Prices,
Convertibility Commencement Dates and Initial Conversion Prices.
Subject to and on compliance with the provisions of the Indenture, the
Holder of this Note is entitled, at his option, at any time following the
Convertibility Commencement Date set forth on the face hereof and on or before
the close of business on April 15, 2004 or in case this Note or a portion hereof
is called for redemption, then in respect of this Note or that portion hereof
until and including, but (unless the Company defaults in making the payment due
on redemption) not after, the close of business on the second business day
preceding the Redemption Date, and if, as determined as contemplated by Section
3.01 of the Indenture, the average of the closing sale prices per share of
Common Stock for any 20 consecutive trading days occurring on or after that
Convertibility Commencement Date exceeds the Initial Target Value set forth on
the face hereof, as the same may have been appropriately adjusted pursuant to
the Indenture, the Company will be entitled, at its option at any time
thereafter, to convert this Note (or any portion of the principal amount hereof
which is $1,000 or an integral multiple thereof), at the principal amount
hereof, or of such portion, into fully paid and non-assessable shares
(calculated as to each conversion to the nearest 1/100th of a share) of Common
Stock at a conversion price equal to the principal amount set forth on the face
hereof as the Initial Conversion Price for each share of Common Stock (or at the
current adjusted conversion price if an adjustment has been made as provided in
the Indenture) by surrender of this Note, duly endorsed or assigned to the
Company or in blank, to the Company at its office or agency maintained for that
purpose pursuant to Section 10.02 of the Indenture, accompanied by written
notice to the Company in the form provided in this Note (or such other notice as
is acceptable to the Company) that the Holder hereof elects to convert this
Note, or if less than the entire principal amount hereof is to be converted, the
portion hereof to be converted, and, in case that surrender is made during the
period from the opening of business on any Regular Record Date next preceding
any Interest Payment Date to the close of business on that Interest Payment Date
(unless this Note or the portion thereof being converted has been called for
redemption on a Redemption Date, or is repurchaseable on a Repurchase Date
occurring, in either case, within that period), also accompanied by payment in
New York Clearing House funds or other funds acceptable to the Company of an
amount equal to the interest payable on that Interest Payment Date on the
principal amount of this Note then being converted. Subject to the aforesaid
requirement for payment and, in the case of a conversion after the Regular
Record Date next preceding any Interest Payment Date and on or before that
Interest Payment Date, to the right of the Holder of this Note (or any
Predecessor Security) of record at that Regular Record Date to receive an
installment of interest (with certain exceptions provided in the Indenture), no
payment or adjustment is to be made on conversion on account of any interest
accrued hereon or on account of any dividends on the Common Stock issued on
conversion. No fractional shares or scrip representing fractions of shares will
be issued on conversion, but instead of any fractional share the Company will
pay a cash adjustment as provided in the Indenture. The conversion price is
subject to adjustment as provided in the Indenture. In addition, the Indenture
provides that in case of certain consolidations or mergers to which the Company
is a party or the sale or transfer of the properties and assets substantially as
an entirety of the Company in one transaction or a series of related
transactions, the Indenture will be amended, without the consent of any Holders
of Notes, so that this Note, if then outstanding, will be convertible
thereafter, during the period this Note will be convertible as specified above,
only into the kind and amount of securities, cash and other property receivable
on the consolidation, merger, sale or transfer by a holder of the number of
shares of Common Stock into which this Note might have been converted
immediately prior to that consolidation, merger, sale or transfer (assuming that
holder of Common Stock failed to exercise any rights of election and received
per share the kind and amount received per share by a plurality of non-electing
shares).
The Notes are subject to redemption on not less than 15 and not more
than 60 days' notice by mail, at any time on or after April 20, 2000, as a whole
or in part, at the election of the Company, at the Redemption Prices set forth
on the face hereof (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).
In certain circumstances involving the occurrence of a Repurchase Event
(as defined in the Indenture), the Holder hereof will have the right to require
the Company to repurchase this Note at 100% of the principal amount hereof,
together with accrued interest to the Repurchase Date, but interest installments
on this Note whose Stated Maturity is on or prior to that Repurchase Date will
be payable to the Holder of this Note (or any Predecessor Security of this Note)
of record at the close of business on the relevant Record Dates referred to on
the face hereof, all as provided in the Indenture.
In the event of redemption or conversion of this Note in part only, a
new Note or Notes for the unredeemed or unconverted portion hereof, which will
bear interest at the same rate, and have the same Redemption Prices,
Convertibility Commencement Date and Initial Conversion Price, as this Note,
will be issued in the name of the Holder hereof on the cancellation hereof.
-----------------------------
Form of Conversion Notice
-------------------------
TO AMERICAN RESIDENTIAL SERVICES, INC.
The undersigned registered owner of this Note hereby irrevocably
exercises the option to convert this Note or the portion hereof (which is $1,000
or a multiple thereof) designated below, into shares of Common Stock in
accordance with the terms of the Indenture referred to in this Note, and directs
that the shares issuable and deliverable on the conversion, together with any
check in payment for a fractional share and any Note representing any
unconverted principal amount hereof, be issued and delivered to the registered
owner hereof unless a different name has been provided below. If this Notice is
being delivered on a date after the close of business on a Regular Record Date
and prior to the close of business on the related Interest Payment Date, this
Notice is accompanied by payment in New York Clearing House funds, or other
funds acceptable to the Company, of an amount equal to the interest payable on
that Interest Payment Date on the principal of this Note to be converted (unless
this Note has been called for redemption). If shares or any portion of this Note
not converted are to be issued in the name of a person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto. Any amount required to be paid by the undersigned on account of
interest accompanies this Note.
Dated:
-------------------------
-------------------------
Signature(s)
Signature(s) must be guaranteed by a commercial bank or trust company or a
member firm of a national stock exchange if shares of Common Stock are to be
delivered, or Notes to be issued, other than to and in the name of the
registered owner.
- --------------------------------
Signature Guarantee
Fill in for registration of shares of Common Stock if they are to be delivered,
or Notes if they are to be issued, other than to and in the name of the
registered owner: (Please print name and address)
Register: Common Stock
- ----------------------------- ---------------
(Name) Securities
---------------
(Check appropriate line(2))
- -------------------------------------------------
(Street Address)
- -------------------------------------------------
(City, State and zip code)
Principal amount to be converted (if less than all): $ ,000
-------------
- -------------------------------------------------
Social Security or other Taxpayer Identification Number of owner
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as through they were written out in full
according to applicable laws or regulations (additional abbreviations may also
be used though not in the following list):
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entities
JT TEN -- as joint tenants with right of
survivorship and not as tenants in common
UNIF GIFT MIN ACT-- __________ Custodian _____________
(Cust) (Minor)
Under Uniform Gifts to Minors Act ____________
(State)
UNIF TRF MIN ACT -- __________ Custodian until age___
(Cust)
__________ Under Uniform Transfer
(Minor)
to Minors Act _________________
(State)
The indebtedness evidenced by this Note is, in all respects,
subordinate and subject in right of payment to the prior payment in full of all
Senior Indebtedness (as defined in Article I of the Indenture), and this Note is
issued subject to the provisions of the Indenture with respect thereto. Each
Holder of this Note, by accepting the same, (a) agrees to and shall be bound by
those provisions, (b) authorizes and directs the Trustee on his behalf to take
such action as may be necessary or appropriate to effectuate the subordination
so provided and (c) appoints the Trustee his attorney-in-fact for any and all
such purposes.
If an Event of Default with respect to the Notes occurs and is
continuing, the principal of all the Notes may be declared due and payable in
the manner and with the effect provided in the Indenture.
The Indenture provides that no Holder of any Note may enforce any
remedy under the Indenture except in the case of failure of the Trustee to act
after notice of default and after request of the Holders of 25% in principal
amount of Outstanding Notes and the offer to the Trustee of indemnity
satisfactory to it; provided, however, that this provision will not prevent the
Holder hereof from enforcing payment of the principal of and premium, if any,
and interest on this Note after the same shall have become due.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of not less than a majority in aggregate principal amount
of the Securities at the time Outstanding of all series to be affected, and,
under certain circumstances, by the Company and the Trustee without the consent
of the Holders of Securities of any series to be affected under the Indenture.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Securities at the time
Outstanding of any such series, on behalf of the Holders of all those
Securities, to waive compliance by the Company with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Note will be conclusive and
binding on such Holder and on all future Holders of this Note and of any Note
issued on the registration of transfer hereof or in exchange herefor or in lieu
hereof, whether or not notation of that consent or waiver is made upon this
Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture will alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and premium, if any, and
interest on this Note at the times, place and rate, and in the coin or currency,
herein prescribed or to convert this Note as provided in the Indenture.
As provided in the Indenture and subject to certain limitations therein
set forth, and except as otherwise restricted by a legend printed or otherwise
affixed upon the face hereof, the transfer of this Note is registrable in the
Security Register for the Notes, on surrender of this Note for registration of
transfer at the office or agency of the Company in any place where the principal
of and any premium and interest on this Note are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar for the Notes duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereon one or more new
Notes, of authorized denominations and for the same aggregate principal amount,
bearing interest at the same rate, and having the same Redemption Price,
Convertibility Commencement Date and Initial Conversion Price, as this Note,
will be issued to the designated transferee or transferees.
The Notes are issuable only in fully registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like aggregate principal amount of Notes of a different
authorized denomination, bearing interest at the same rate, and having the same
Redemption Prices, Convertibility Commencement Date and Initial Conversion
Price, as the Notes for which they are exchanged, as requested by the Holder
surrendering the same.
No service charge will be made for any such registration of transfer or
exchange except as provided in the Indenture, and the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, except as provided in this Note, whether or not this Note be overdue,
and neither the Company, the Trustee nor any such agent will be affected by
notice to the contrary.
All terms used in this Note which are defined in the Indenture have
the meanings assigned to them in the Indenture. The Company will furnish to any
Holder on written request and without charge a copy of the Indenture.
-------------------------
Assignment Form
---------------
If you the holder want to assign this Note, fill in the form below and have your
signature guaranteed:
I or we assign and transfer this Note
to
-----------------------------------------------------------------------------
(Insert assignee's social security or tax ID
number)
------------------------------------------------------------------------
(Print or type assignee's name, address and zip code) and irrevocably
appoint
------------------------------------------------------------------------
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
Date: Your signature:
--------------------- ----------------------------------
(Sign exactly as your name appears
on the face of this Note)
Signature Guarantee:
-----------------------------------------------------------
------------------
Option of Holder to Elect Purchase
If you wish to have this Note purchased by the Company pursuant to
Section 14.01 of the Indenture, check the Box: [_]
If you wish to have a portion of this Note (which is $1,000 or an
integral multiple thereof) purchased by the Company pursuant to Section 14.01 of
the Indenture, state the amount you wish to have purchased:
$
------------------------------------------------------------------------------
Date: Your signature: Tax Identification No.:
------- --------- --------------
(Sign exactly as your name appears on the face of this Note)
Signature Guarantee:
-----------------------------------------------------------
------------------
[THE SECURITIES REPRESENTED HEREBY WERE ISSUED IN A TRANSACTION CONSTITUTING A
"BUSINESS COMBINATION" WITHIN THE MEANING OF RULE 145 UNDER THE SECURITIES ACT
OF 1933 TO A PERSON WHO WAS AN "AFFILIATE" OF A PARTY TO THAT TRANSACTION (OTHER
THAN THE ISSUER) PURSUANT TO THE [TITLE OF ACQUISITION AGREEMENT] AMONG THE
ISSUER, [NAME OF COMPANY] AND THE OTHER PERSONS PARTIES THERETO AND MAY NOT BE
SOLD OR OTHERWISE DISPOSED OF WITHOUT COMPLIANCE WITH THE PROVISIONS OF THAT
AGREEMENT AND THE REGISTRATION PROVISIONS OF THE SECURITIES ACT OF 1933 OR AN
APPLICABLE EXEMPTION THEREFROM. A COPY OF THE [TITLE OF ACQUISITION AGREEMENT]
MAY BE OBTAINED FREE OF CHARGE BY CONTACTING THE ISSUER'S GENERAL COUNSEL AT
(713) 599-0100.]
<PAGE> 1
EXHIBIT 10.2
AMERICAN RESIDENTIAL SERVICES, INC.
AMENDMENT TO 1996 INCENTIVE PLAN
Paragraph 8(b) of the 1996 Incentive Plan is hereby amended by including
therein as the second sentence thereof the following sentence:
The limitation described in clause (i) of the first sentence
of this paragraph 8(b) will not be applicable to Options granted to
any Employee in lieu of any cash salary the Company or any Subsidiary
otherwise would be obligated to pay that Employee for his or her
service during any specified period.
Adopted: October 31, 1997
<PAGE> 1
EXHIBIT 10.4
AMERICAN RESIDENTIAL SERVICES, INC.
AMENDMENT TO 1997 EMPLOYEE INCENTIVE PLAN
Paragraph 8(i) of the 1997 Employee Incentive Plan is hereby amended and
restated as follows:
Stock Option. An Award may be in the form of an Option. The
price at which any share of Common Stock may be purchased on the
exercise of any Option will be not less than the Fair Market Value of
a share of the Common Stock on the date of grant of that Option and
the Committee will determine the other terms, conditions and
limitations applicable to each Option, including its term and the date
or dates on which it becomes exercisable; and
Adopted: March 3, 1998
<PAGE> 1
EXHIBIT 10.8
Harry O. Nicodemus, IV
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), is entered into
and effective as of March 4, 1998 (the "Effective Date") by and between
AMERICAN RESIDENTIAL SERVICES, INC., a Delaware corporation (the "Company"),
and HARRY O. NICODEMUS, IV (the "Employee").
RECITALS
In entering into this Agreement, the Company desires to
provide the Employee with substantial incentives to serve the Company as a
senior executive performing at the highest levels of leadership and
stewardship, without distraction or concern over minimum compensation, benefits
or tenure, to manage the Company's growth and development and maximize the
returns to the Company's stockholders.
NOW, THEREFORE, in consideration of the foregoing and the
mutual provisions contained herein, and for other good and valuable
consideration, the parties hereto agree with each other as follows:
1. CERTAIN DEFINITIONS
A. Certain Definitions. As used herein, the following
terms have the meanings assigned to them below:
"Acquiring Person" means any Person who or which, together
with all Affiliates and Associates of such Person, is or are the
Beneficial Owner of twenty-five percent (25%) or more of the shares of
Common Stock then outstanding, but does not include any Exempt Person;
provided, however, that a Person shall not be or become an Acquiring
Person if such Person, together with its Affiliates and Associates,
shall become the Beneficial Owner of twenty-five percent (25%) or more
of the shares of Common Stock then outstanding solely as a result of a
reduction in the number of shares of Common Stock outstanding due to
the repurchase of Common Stock by the Company, unless and until such
time as such Person or any Affiliate or Associate of such Person shall
purchase or otherwise become the Beneficial Owner of additional shares
of Common Stock constituting one percent (1%) or more of the then
outstanding shares of Common Stock or any other Person (or Persons)
who is (or collectively are) the Beneficial Owner of shares of Common
Stock constituting one percent (1%) or more of the then outstanding
shares of Common Stock shall become an Affiliate or Associate of such
Person, unless, in either such case, such Person, together with all
Affiliates and Associates of such Person, is not then the Beneficial
Owner of twenty-five percent (25%) or more of the shares of Common
Stock then outstanding.
1
<PAGE> 2
"Active Status" means the Employee's Employment status from
the Effective Date to and including the first to occur of (a) the
Part-time Employment Effective Date or (b) the Termination Date.
"Affiliate" has the meaning ascribed to that term in Exchange
Act Rule 12b-2.
"Annual Cash Compensation" of the Employee for any
Compensation Year means the sum of the salary and bonus earned by the
Employee from the Company during that Compensation Year, including all
amounts deferred at the election of the Employee pursuant to a
Compensation Plan intended to qualify as a plan under Section 401(k)
of the Code or otherwise. If any of that salary or bonus is paid in
whole or in part in property other than cash (such as Common Stock)
the amount so paid shall be the fair market value thereof on the date
of payment.
"Associate" means, with reference to any Person, (a) any
corporation, firm, partnership, association, unincorporated
organization or other entity (other than the Company or a subsidiary
of the Company) of which that Person is an officer or general partner
(or officer or general partner of a general partner) or is, directly
or indirectly, the Beneficial Owner of 10% or more of any class of its
equity securities, (b) any trust or other estate in which that Person
has a substantial beneficial interest or for or of which that Person
serves as trustee or in a similar fiduciary capacity and (c) any
relative or spouse of that Person, or any relative of that spouse, who
has the same home as that Person.
"Average Annual Cash Compensation" of the Employee means, as
of the Part-time Employment Effective Date, the average of (a) the
Annual Cash Compensation earned by the Employee in each of the two (2)
Compensation Years next preceding that date or, if less than two (2)
Compensation Years have occurred prior to that date and since the
Effective Date, (b) the Annual Cash Compensation in each whole
Compensation Year, if any, and, restated on an annualized basis, the
Annual Cash Compensation in each partial Compensation Year (up to a
maximum of two (2) partial Compensation Years) next preceding the
Part-time Employment Effective Date.
"Base Salary" means: (a) prior to the Part-time Employment
Effective Date, the guaranteed minimum annual salary payable by the
Company to the Employee pursuant to Section 4(A); and (b) on and after
the Part-time Employment Effective Date, the guaranteed minimum
annual salary payable by the Company to the Employee pursuant to
Section 5(E).
A specified Person is deemed the "Beneficial Owner" of, and is
deemed to "beneficially own," any securities:
(a) of which that Person or any of that Person's
Affiliates or Associates, directly or indirectly, is the
"beneficial owner" (as determined pursuant to Exchange
2
<PAGE> 3
Act Rule 13d-3) or otherwise has the right to vote or dispose
of, including pursuant to any agreement, arrangement or
understanding (whether or not in writing); provided, however,
that a Person shall not be deemed the "Beneficial Owner" of,
or to "beneficially own," any security under this subparagraph
(a) as a result of an agreement, arrangement or understanding
to vote that security if that agreement, arrangement or
understanding: (1) arises solely from a revocable proxy or
consent given in response to a public (that is, not including
a solicitation exempted by Exchange Act Rule 14a-2(b)(2))
proxy or consent solicitation made pursuant to, and in
accordance with, the applicable provisions of the Exchange
Act; and (2) is not then reportable by such Person on Exchange
Act Schedule 13D (or any comparable or successor report);
(b) which that Person or any of that Person's
Affiliates or Associates, directly or indirectly, has the
right or obligation to acquire (whether that right or
obligation is exercisable or effective immediately or only
after the passage of time or the occurrence of an event)
pursuant to any agreement, arrangement or understanding
(whether or not in writing) or on the exercise of conversion
rights, exchange rights, other rights, warrants or options, or
otherwise; provided, however, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own,"
securities tendered pursuant to a tender or exchange offer
made by that Person or any of that Person's Affiliates or
Associates until those tendered securities are accepted for
purchase or exchange; or
(c) which are beneficially owned, directly or
indirectly, by (1) any other Person (or any Affiliate or
Associate thereof) with which the specified Person or any of
the specified Person's Affiliates or Associates has any
agreement, arrangement or understanding (whether or not in
writing) for the purpose of acquiring, holding, voting (except
pursuant to a revocable proxy or consent as described in the
proviso to subparagraph (a) of this definition) or disposing
of any voting securities of the Company or (2) any group (as
that term is used in Exchange Act Rule 13d-5(b)) of which that
specified Person is a member;
provided, however, that nothing in this definition shall cause a
Person engaged in business as an underwriter of securities to be the
"Beneficial Owner" of, or to "beneficially own," any securities
acquired through such Person's participation in good faith in a firm
commitment underwriting until the expiration of forty (40) days after
the date of that acquisition. For purposes of this Agreement,
"voting" a security shall include voting, granting a proxy, acting by
consent, making a request or demand relating to corporate action
(including, without limitation, calling a stockholder meeting) or
otherwise giving an authorization (within the meaning of Section 14(a)
of the Exchange Act) in respect of such security.
"Board" means the entire Board of Directors of the Company.
3
<PAGE> 4
"Business Reason" for the Company's termination of the
Employee's Employment means any lawful reason other than Cause.
"Cause" for the Company's termination of the Employee's
Employment means: (a) the Employee's final conviction of a felony
crime that enriched the Employee at the expense of the Company; or (b)
the Employee's deliberate and intentional continuing failure to
substantially perform his duties and responsibilities hereunder
(except by reason of the Employee's incapacity due to physical or
mental illness or injury) for a period of forty-five (45) days after
the Required Board Majority has delivered to the Employee a written
demand for substantial performance hereunder which specifically
identifies the bases for the Required Board Majority's determination
that the Employee has not substantially performed his duties and
responsibilities hereunder (such period being the "Grace Period");
provided, that for purposes of this clause (b), the Company shall not
have Cause to terminate the Employee's Employment unless (1) at a
meeting of the Board called and held following the Grace Period in the
city in which the Company's principal executive offices are located of
which the Employee was given not less than ten (10) days' prior
written notice and at which the Employee was afforded the opportunity
to be represented by counsel, appear and be heard, the Required Board
Majority shall adopt a written resolution which (A) sets forth the
Required Board Majority's determination that the failure of the
Employee to substantially perform his duties and responsibilities
hereunder has (except by reason of his incapacity due to physical or
mental illness or injury) continued past the Grace Period and (B)
specifically identifies the bases for that determination and (2) the
Company, at the written direction of the Required Board Majority,
shall deliver to the Employee a Notice of Termination for Cause to
which a copy of that resolution, certified as being true and correct
by the secretary or any assistant secretary of the Company, is
attached. Cause of the type referred to in clause (a) of the
preceding sentence is a "Type I Cause," while Cause of the type
referred to in clause (b) of the preceding sentence is a "Type II
Cause." For purposes of determining whether a Type II Cause has
occurred, no act or failure to act on the part of the Employee shall
be considered "deliberate and intentional" unless it is taken or
omitted to be taken by the Employee in bad faith or without a
reasonable belief that the Employee's act or omission was in the best
interests of the Company.
"Change of Control" means the occurrence of any of the
following events that occurs after the Effective Date: (a) any Person
becomes an Acquiring Person; (b) at any time the then Continuing
Directors cease to constitute a majority of the members of the Board;
(c) a merger of the Company with or into, or a sale by the Company of
its properties and assets substantially as an entirety to, another
Person occurs and, immediately after that occurrence, any Person,
other than an Exempt Person, together with all Affiliates and
Associates of such Person, shall be the Beneficial Owner of
twenty-five percent (25%) or more of the total voting power of the
then outstanding Voting Shares of the Person surviving that
transaction (in the case or a merger or consolidation) or the Person
acquiring those properties and assets substantially as an entirety.
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<PAGE> 5
"Change of Control Payment" means at any time the amount equal
to three (3) times the Employee's then highest Base Salary during the
term of this Agreement.
"Code" means the Internal Revenue Code of 1986.
"Common Stock" means the common stock of the Company.
"Company" means (a) American Residential Services, Inc., a
Delaware corporation, and (b) any Person that assumes the obligations
of "the Company" hereunder, by operation of law, pursuant to Section
9(D)(iii) or otherwise.
"Compensation Plan" means any compensation arrangement, plan,
policy, practice or program established, maintained or sponsored by
the Company or any subsidiary of the Company, or to which the Company
or any subsidiary of the Company contributes, on behalf of any
Executive Officer or any member of the family of any Executive
Officer, (a) including (i) any "employee pension benefit plan" (as
defined in Section 3(2) of ERISA) or other "employee benefit plan" (as
defined in Section 3(3) of ERISA), (ii) any other retirement and
savings plan, including any supplemental benefit arrangement relating
to any plan intended to be qualified under Section 401(a) of the Code
or whose benefits are limited by the Code or ERISA, (iii) any
"employee welfare plan" (as defined in Section 3(1) of ERISA), (iv)
any arrangement, plan, policy, practice or program providing for
severance pay, deferred compensation or insurance benefit, (v) any
Incentive Plan and (vi) any arrangement, plan, policy, practice or
program (A) authorizing and providing for the payment or reimbursement
of expenses attributable to first-class air travel and first-class
hotel occupancy while on travel or (B) providing for the payment of
business luncheon and country club dues, long-distance charges, mobile
phone monthly air time or other recurring monthly charges or any other
fringe benefit, allowance or accommodation of employment, but (b)
excluding any compensation arrangement, plan, policy, practice or
program to the extent it provides for annual base salary.
"Compensation Committee" means the committee of the Board to
which the Board has delegated duties respecting the compensation of
Executive Officers and the administration of Incentive Plans, if any,
intended to qualify for the Exchange Act Rule 16b-3 exemption.
"Compensation Year" means any calendar year.
"Confidential Information" means, with respect to the Company
or any subsidiary of the Company, all trade secrets and other
confidential, nonpublic and/or proprietary information of that Person,
including information derived from reports, investigations, research,
work in progress, codes, marketing and sale programs, customer lists,
records of customer service requirements, capital expenditure
projects, cost summaries, pricing
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<PAGE> 6
formulae, contract analyses, financial information, projections,
confidential filings with any governmental authority and all other
confidential, nonpublic concepts, methods of doing business, ideas,
materials or information prepared or performed for, by or on behalf of
that Person.
"CPI" means for any period the Consumer Price Index for All
Urban Consumers--All Items Index for Houston, Texas (or any
substantially similar index published for the same area), as published
by the United States Department of Labor, Bureau of Labor Statistics
(or its successor) for that period.
"Continuing Director" means at any time any individual who
then (a) is a member of the Board and was a member of the Board as of
the Effective Date or whose nomination for his first election, or that
first election, to the Board following that date was recommended or
approved by a majority of the then Continuing Directors (acting
separately or as a part of any action taken by the Board or any
committee thereof) and (b) is not an Acquiring Person, an Affiliate or
Associate of an Acquiring Person or a nominee or representative of an
Acquiring Person or of any such Affiliate or Associate.
"Disability" of the Employee means the Employee has been
determined (which determination shall be final and binding on all
Persons, absent manifest error), as a result of a physical or mental
illness or personal injury he has incurred (including illness or
injury resulting from any substance abuse), by a Qualified Physician
(who may be the doctor treating or otherwise acting as the Employee's
doctor in connection with the illness or injury in question) selected
by the Employee with the consent of the Company, or by the Company
with the consent of the Employee (which consent shall not be
unreasonably withheld in either case), to be unable to perform, at the
time of that determination and, in all reasonable medical likelihood,
indefinitely thereafter, the normal duties then most recently
assigned, under and in accordance with the terms hereof, to the
Employee while on Active Status; provided that, the determination
whether the Employee has incurred a Disability shall be made by a
majority of three (3) Qualified Physicians, (a) one (1) of whom shall
be selected by the Employee, (b) one (1) of whom shall be selected by
the Company and (c) the remaining one (1) of whom shall be selected by
the Qualified Physicians selected by the Employee and the Company
pursuant to clauses (a) and (b) of this proviso and the fees and
expenses of whom will be shared and paid in equal amounts by the
Employee and the Company, if: (1)(A) the Company has reasonably
withheld its consent to the Qualified Physician, if any, selected by
the Employee or (B) the Employee has reasonably withheld his consent
to the Qualified Physician, if any, selected by the Company and (2)
the Qualified Physicians selected by the Employee and the Company
disagree as to whether the Employee has incurred a Disability. For
purposes of this definition, if the Employee is unable by reason of
illness or injury to give an informed consent to the performance of
the treatment of that illness or injury, a Qualified Physician
selected by any Person who is authorized by applicable law to give
that consent will be deemed to have been selected by the Employee.
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<PAGE> 7
"Effective Date" means March 4, 1998.
"ERISA" means the Employee Retirement Income Security Act of
1974.
"Employment" means the salaried employment of the Employee by
the Company or a subsidiary of the Company hereunder.
"Exchange Act" means the Securities Exchange Act of 1934.
"Executive Officer" means any of the chairman of the board,
the chief executive officer, the chief operating officer, the chief
financial officer, the president, any executive or senior vice
president or the general counsel of the Company.
"Exempt Person" means (a) (1) the Company, any subsidiary of
the Company, any employee benefit plan of the Company or of any
subsidiary of the Company and (2) any Person organized, appointed or
established by the Company for or pursuant to the terms of any such
plan or for the purpose of funding any such plan or funding other
employee benefits for employees of the Company or any subsidiary of
the Company and (b) the Employee, any Affiliate or Associate of the
Employee or any group (as that term is used in Exchange Act Rule
13d-5(b)) of which the Employee or any Affiliate or Associate of the
Employee is a member.
"Good Reason" for the Employee's termination of his Employment
means: (a) any violation hereof in any material respect by the
Company; (b) either (1) a failure of the Company to continue in effect
any Compensation Plan in which the Employee was participating or (2)
the taking of any action by the Company which would adversely affect
the Employee's participation in or materially reduce the Employee's
benefits under, any such Compensation Plan, unless (A) in the case of
either subclause (1) or (2) of this clause, there is substituted a
comparable Compensation Plan that is at least economically equivalent,
in terms of the benefit offered to the Employee, to the Compensation
Plan being ended or in which the Employee's participation is being
adversely affected or the Employee's benefits are being materially
reduced or (B) in the case of that subclause (1), the failure, or in
the case of that subclause (2), the taking of action, adversely
affects Executive Officers generally; or (c) the assignment to the
Employee of duties inconsistent in any material respect with the
Employee's then current positions (including status, offices, titles
and reporting requirements), authority, duties or responsibilities or
any other action by the Company which results in a material diminution
in those positions, authority, duties or responsibilities.
"Incentive Plan" means any compensation arrangement, plan,
policy, practice or program established, maintained or sponsored by
the Company or any subsidiary of the Company, or to which the Company
or any subsidiary of the Company contributes, on behalf of any
Executive Officer and which provides for incentive, bonus or other
performance-
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<PAGE> 8
based awards of cash, securities or the phantom equivalent of
securities, including any stock option, stock appreciation right and
restricted stock plan, but excluding any plan intended to qualify as a
plan under any one or more of Sections 401(a), 401(k) or 423 of the
Code.
"Nonterminating Party" means the Employee or the Company, as
the case may be, to which the Terminating Party delivers a Notice of
Termination.
"Notice of Termination" to or from the Employee means a
written notice that: (a) to the extent applicable, sets forth in
reasonable detail the facts and circumstances claimed to provide a
basis for termination of the Employee's Employment, and if the
Termination Date is other than the date of receipt of the notice, (b)
sets forth that Termination Date.
"Outside Director" means at any time a member of the Board at
that time who is not then an employee of the Company or any subsidiary
of the Company.
"Part-time Employment Effective Date" means, (a) if the
Company elects pursuant to any applicable provision hereof to
terminate the Employee's Employment other than for Cause or (b) if the
Employee elects pursuant to the applicable provision hereof to
terminate his Employment for Good Reason or by reason of his
Disability, the date the Nonterminating Party receives the Terminating
Party's Notice of Termination.
"Part-time Employment Period" means the period of time which
begins on the Part-time Employment Effective Date and ends on the
first to occur of (a) the third (3rd) anniversary of that Part-time
Employment Effective Date, (b) the termination by the Company of the
Employee's Employment for Type I Cause or (c) the death or Retirement
of the Employee.
"Person" means any natural person, sole proprietorship,
corporation, partnership of any kind having a separate legal status,
limited liability company, business trust, unincorporated organization
or association, mutual company, joint stock company, joint venture,
estate, trust, union or employee organization or governmental
authority.
"Qualified Physician" means, in the case of any determination
whether the Employee has sustained a Disability, a physician (a)
holding an M.D. degree from a medical school located in the United
States and having a national reputation in the United States as a
leading medical school, (b) specializing and board- certified in the
treatment of the injury or illness that has or may have caused that
Disability, (c) licensed to practice that speciality in the State of
Texas or the state in which the Employee then is domiciled and (d)
having admission privileges to one or more private hospitals located
in the Texas Medical Center in Houston, Texas or in a hospital of
comparable reputation in the state in which the Employee then is
domiciled.
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<PAGE> 9
"Required Board Majority" means at any time a majority of the
members of the Board at that time which includes at least a majority
of the Outside Directors at that time.
"Retirement" of the Employee means the Employee terminates his
Employment on or after the date he has attained age 65.
"Securities Act" means the Securities Act of 1933.
"Terminating Party" means the Employee or the Company, as the
case may be, who or which terminates the Employee's Employment by
means of a Notice of Termination.
"Termination Date" means: (a) if the Employee's Employment is
terminated by reason of the Employee's death or Retirement, the date
of that death or Retirement; (b) if the Employee's Employment is
terminated by reason of the Employee's giving a Notice of Termination
following a Change of Control pursuant to Section 5(B)(i)(b), the
first date on which the Company pays to the Employee in full the
amounts owed to the Employee pursuant to Section 5(B)(iii); (c) if the
Employee's Employment is terminated by reason of the Employee's giving
a Notice of Termination without Good Reason and other than for
Disability pursuant to Section 5(B)(i)(c), the elapse of the thirtieth
(30th) day after the Company receives that notice; (d) if the
Employee's Employment is terminated by the Company at any time for
Type I Cause or, prior to the Part-time Employment Effective Date, at
any time for Type II Cause, the date the Employee receives the
Company's Notice of Termination for Cause; and (e) if the Employee's
Employment is terminated for any other reason, at the expiration of
the Part-time Employment Period.
"Type I Cause" means Cause of the type referred to in clause
(a) of the definition of Cause herein.
"Type II Cause" means Cause of the type referred to in clause
(b) of the definition of Cause herein.
"Voting Shares" means: (a) in the case of any corporation,
stock of that corporation of the class or classes having general
voting power under ordinary circumstances to elect a majority of that
corporation's board of directors; and (b) in the case of any other
entity, equity interests of the class or classes having general voting
power under ordinary circumstances equivalent to the Voting Shares of
a corporation.
B. Other Definitional Provisions. (i) Except as otherwise
specified herein, all references herein to any statute defined or referred to
herein, including the Code, ERISA and the Exchange Act, shall be deemed
references to that statute or any successor statute, as the same may have been
or may be amended or supplemented from time to time, and any rules or
regulations promulgated thereunder.
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<PAGE> 10
(ii) When used in this Agreement, the words "herein,"
"hereof" and "hereunder" and words of similar import shall refer to this
Agreement as a whole and not to any provision of this Agreement, and the word
"Section" refers to a Section of this Agreement unless otherwise specified.
(iii) Whenever the context so requires, the singular number
includes the plural and vice versa, and a reference to one gender includes each
other gender and the neuter.
(iv) The word "including" (and, with correlative meaning,
the word "include") means including, without limiting the generality of any
description preceding such word, and the words "shall" and "will" are used
interchangeably and have the same meaning.
2. EMPLOYMENT
A. On the terms and subject to the conditions
hereinafter set forth, and beginning as of the Effective Date, the Company will
employ the Employee as a Senior Vice President and the Employee will serve in
the Company's employ in that position. The Employee shall perform such duties,
and have such powers, authority, functions, duties and responsibilities for the
Company and corporations affiliated with the Company as are commensurate and
consistent with his employment as a Senior Vice President of the Company. The
Employee also shall have such additional powers, authority, functions, duties
and responsibilities as may be assigned to him by the Board; provided that,
without the Employee's written consent, such additional powers, authority,
functions, duties and responsibilities shall not be inconsistent or interfere
with, or detract from, those herein vested in, or otherwise then being
performed for the Company by, the Employee.
B. The Employee shall not, at any time during his
Employment, engage in any other activities unless those activities do not
interfere materially with the Employee's duties and responsibilities for the
Company at that time, except that the Employee shall be entitled, subject to
the provisions of Section 7, (a) to continue with such activities as the
Employee has carried on prior to the Effective Date, including making and
managing his personal investments and participating in other business or civic
activities and (b) to serve on corporate or other business, civic or charitable
boards or committees and trade association or similar boards or committees.
3. TERM OF EMPLOYMENT
Subject to the provisions of Section 5, the term of the
Employee's Employment shall be for a continually renewing term of three (3)
years commencing on the Effective Date and renewing each day thereafter for an
additional day without any further action by either the Company or the
Employee, it being the intention of the parties that there shall be
continuously a remaining term of three (3) years' duration of the Employee's
Employment until an event has occurred as described in, or one of the parties
shall have made an appropriate election pursuant to, the provisions of Section
5. When the Termination Date shall have occurred and the Company shall have
paid to the Employee all the applicable amounts Section 5 provides the Company
shall pay as a result of the
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<PAGE> 11
termination of the Employee's Employment, including all amounts accruing during
the Part-time Employment Period, if any, this Agreement will terminate and have
no further force or effect, except that Sections 4(C), 8, 9, 10 and 11 shall
survive that termination indefinitely and Section 7 shall survive for the
period of time provided for therein.
4. COMPENSATION
A. Base Salary. A Base Salary shall be payable to
the Employee by the Company as a guaranteed minimum annual amount hereunder
for each Compensation Year during the period from the Effective Date to the
first to occur of the Part-time Employment Effective Date or the Termination
Date. That Base Salary shall be payable in the intervals consistent with the
Company's normal payroll schedules (but in no event less infrequently than
semi-monthly), shall be payable initially at the annual rate of $170,000 and
shall be increased (but not decreased or adjusted other than as provided in
Section 5) as follows:
(i) on the first and each subsequent anniversary of the
Effective Date, by the same percentage increase (if any) in the CPI
for the twelve (12) month period immediately preceding such
anniversary;
(ii) on the first and each subsequent anniversary of the
Effective Date, by such additional amount as shall be determined in
the sole discretion of the Compensation Committee, but only in such
form and to such extent as the Compensation Committee may from time to
time approve, as evidenced by the written minutes or records of the
Compensation Committee and its written notices of such determinations
or approvals to the Employee; and
(iii) if the Employee relocates from a state without a
personal income tax at the time of his relocation to a state having a
personal income tax, or if the Employee resides in a state without a
personal income tax on the date hereof which subsequently adopts a
personal income tax, then, in either case, the Base Salary in effect
at the time of such relocation or adoption, as applicable, shall
immediately be increased by the amount equal to the Base Salary
immediately prior to this increase multiplied by seventy percent (70%)
of the highest personal income tax rate of such state; for example, if
the Employee relocates from a state without a personal income tax to a
state having a personal income tax and the highest rate of that tax is
six percent (6%) when the Base Salary is $170,000, then the Base
Salary will be increased by $7,140 (computed at 70% x 6% x $170,000).
Effective as of the Part-time Employment Effective Date, the Base Salary
theretofore in effect shall be adjusted as provided in Section 5(E).
B. Other Compensation. The Employee shall be entitled
to participate in all Compensation Plans from time to time in effect while he
remains on Active Status, regardless of
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whether the Employee is an Executive Officer. All awards to the Employee under
all Incentive Plans shall take into account the Employee's positions with and
duties and responsibilities to the Company and its subsidiaries.
C. Tax Indemnity. Should any of the payments of Base
Salary, other incentive or supplemental compensation, benefits, allowances,
awards, payments, reimbursements or other perquisites, or any other payment in
the nature of compensation, singly, in any combination or in the aggregate,
that are provided for hereunder to be paid to or for the benefit of the
Employee be determined or alleged to be subject to an excise or similar purpose
tax pursuant to Section 4999 of the Code, or any successor or other comparable
federal, state or local tax law by reason of being a "parachute payment"
(within the meaning of Section 280G of the Code), the Company shall pay to the
Employee such additional compensation as is necessary (after taking into
account all federal, state and local taxes payable by the Employee as a result
of the receipt of such additional compensation) to place the Employee in the
same after-tax position (including federal, state and local taxes) he would
have been in had no such excise or similar purpose tax (or interest or
penalties thereon) been paid or incurred. The Company hereby agrees to pay
such additional compensation within the earlier to occur of (i) five (5)
business days after the Employee notifies the Company that the Employee intends
to file a tax return taking the position that such excise or similar purpose
tax is due and payable in reliance on a written opinion of the Employee's tax
counsel (such tax counsel to be chosen solely by the Employee) that it is more
likely than not that such excise tax is due and payable or (ii) twenty-four
(24) hours of any notice of or action by the Company that it intends to take
the position that such excise tax is due and payable. The costs of obtaining
the tax counsel opinion referred to in clause (i) of the preceding sentence
shall be borne by the Company, and as long as such tax counsel was chosen by
the Employee in good faith, the conclusions reached in such opinion shall not
be challenged or disputed by the Company. If the Employee intends to make any
payment with respect to any such excise or similar purpose tax as a result of
an adjustment to the Employee's tax liability by any federal, state or local
tax authority, the Company will pay such additional compensation by delivering
its cashier's check payable in such amount to the Employee within five (5)
business days after the Employee notifies the Company of his intention to make
such payment. Without limiting the obligation of the Company hereunder, the
Employee agrees, in the event the Employee makes any payment pursuant to the
preceding sentence, to negotiate with the Company in good faith with respect to
procedures reasonably requested by the Company which would afford the Company
the ability to contest the imposition of such excise or similar purpose tax;
provided, however, that the Employee will not be required to afford the Company
any right to contest the applicability of any such excise or similar purpose
tax to the extent that the Employee reasonably determines (based upon the
opinion of his tax counsel) that such contest is inconsistent with the overall
tax interests of the Employee.
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5. TERMINATION, PART-TIME EMPLOYMENT PERIOD, DISABILITY AND DEATH
A. Termination of Employment by the Company. (i) The
Company shall be entitled, if acting at the direction of the Required Board
Majority, to terminate the Employee's Employment (a) at any time for Type I
Cause or (b) at any time prior to the Part-time Employment Effective Date for
Type II Cause or for any Business Reason. If the Employee is neither a member
of the Board nor an Executive Officer, the Company shall be entitled, if acting
at the direction of the chief executive officer of the Company, to terminate
the Employee's Employment at any time prior to the Part-time Employment Date
for any Business Reason. The Company's termination of the Employee's
Employment for Cause will be effective on the date the Company delivers a
Notice of Termination for Cause to the Employee pursuant to this Section
5(A)(i)(together, in the case of a termination for Type II Cause, with the
certified resolution referred to in clause (b) of the definition herein of
Cause), while the Company's termination of the Employee's Employment for a
Business Reason will be effective on the third (3rd) anniversary of the date
the Company delivers a Notice of Termination for a Business Reason to the
Employee pursuant to this Section 5(A)(i).
(ii) If the Company terminates the Employee's Employment
for Cause, the Company promptly thereafter, and in any event within five (5)
business days thereafter, shall pay the Employee his Base Salary to and
including the Termination Date and the amount of all compensation previously
deferred by the Employee (together with any accrued interest or earnings
thereon), in each case to the extent not theretofore paid, and, when that
payment is made, the Company shall, notwithstanding Section 3, have no further
or other obligations hereunder to the Employee.
(iii) If the Company terminates the Employee's Employment
for a Business Reason, the respective rights and obligations of the Company and
the Employee during the Part-time Employment Period will be as set forth in
Section 5(E).
B. Termination of Employment by the Employee. (i) The
Employee shall be entitled to terminate his Employment (a) for a Good Reason at
any time within one hundred eighty (180) days after the facts or circumstances
constituting that Good Reason first exist and are known to the Employee, (b) by
reason of a Change of Control at any time within three hundred sixty-five (365)
days after that Change of Control occurs (provided, however, that the Employee
shall not be entitled to terminate his Employment by reason of that Change of
Control if it occurs (1) during the thirty (30) day period following the
Company's receipt of the Employee's Notice of Termination without Good Reason
and other than for Disability pursuant to this Section 5(B)(i), (2) after (A)
the receipt by the Nonterminating Party of the Terminating Party's Notice of
Termination pursuant to Section 5(C) or (B) the Employee's receipt of the
Company's Notice of Termination for a Business Reason (other than in connection
with that Change of Control) pursuant to Section 5(A) or (3) more than three
hundred sixty-five (365) days after the Company's receipt of the Employee's
Notice of Termination for Good Reason pursuant to this Section 5(B)(i)) or (c)
without Good Reason and other
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<PAGE> 14
than for Disability at any time. The Employee's termination of his Employment
for Good Reason will be effective on the third (3rd) anniversary of the date
the Employee delivers a Notice of Termination for Good Reason to the Company
pursuant to this Section 5(B)(i). The Employee's termination of his
Employment by reason of a Change of Control will be effective on the first date
on which the Change of Control Payment shall have been paid in full to the
Employee. The Employee's termination of his Employment without Good Reason and
other than for Disability will be effective on the thirtieth (30th) day
following the Employee's delivery of a Notice of Termination without Good
Reason and other than for Disability pursuant to this Section 5(B)(i).
(ii) If the Employee terminates his Employment for Good
Reason, the respective rights and obligations of the Company and the Employee
during the Part-time Employment Period will be as set forth in Section 5(E ).
(iii) If the Employee terminates his Employment by reason
of a Change of Control, the Company shall pay to the Employee in a cash lump
sum within five (5) business days after the date the Company receives the
Employee's Notice of Termination by reason of that Change of Control the amount
equal to the sum of (a) the portion of the Base Salary to and including the
Termination Date which has not yet been paid, (b) all compensation previously
deferred by the Employee (together with any accrued interest and earnings
thereon), (c) any accrued but unpaid vacation pay and (d) the Change of Control
Payment.
(iv) If the Employee terminates his Employment without
Good Reason and other than for Disability, the Company shall pay to the
Employee, in a cash lump sum within five (5) business days after the
Termination Date, the amount equal to the sum of (a) the portion of the Base
Salary to and including the Termination Date which has not yet been paid, (b)
all compensation previously deferred by the Employee (together with any accrued
interest and earnings thereon) which has not yet been paid, (c) any accrued but
unpaid vacation pay and (d) the amount equal to fifty percent (50%) of the Base
Salary being paid for the Compensation Year in which the Company receives the
Employee's Notice of Termination without Good Reason and other than for
Disability; provided, however, that if the Employee terminates his Employment
without Good Reason and other than for Disability within six (6) months of the
theretofore scheduled final day of the Part-time Employment Period, the amount
payable pursuant to clause (d) of this sentence shall be the amount determined
pursuant to that clause multiplied by a fraction the numerator of which is the
number of days from and excluding the date the Company receives the Notice of
Termination to and including that final day and the denominator of which is one
hundred eighty-two (182). For purposes of this Section 5(B)(iv), if the
anniversary of the Effective Date in the Compensation Year in which the Company
receives the Notice of Termination without Good Reason and other than for
Disability has not occurred on or prior to the date of that receipt, the Base
Salary for that Compensation Year will be calculated on the assumption that no
increase in the amount thereof would be made effective as of that anniversary
pursuant to Section 4(A) or 5(E)(i), as applicable.
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C. Termination by Reason of Disability. If the Employee
incurs any Disability while on Active Status, either the Employee or the
Company may terminate the Employee's Employment effective on the third (3rd)
anniversary of the date the Nonterminating Party receives a Notice of
Termination from the Terminating Party pursuant to this Section 5(C). If the
Employee's Employment is terminated by reason of the Employee's Disability, the
respective rights and obligations of the Company and the Employee during the
Part-time Employment Period will be as set forth in Section 5(E).
D. Termination of Employment by Death. The Employee's
Employment shall terminate automatically at the time of his death. If the
Employee's Employment is terminated by reason of the Employee's death, the
Company shall pay to the Person the Employee has designated in a written notice
delivered to the Company as his beneficiary entitled to such payment, if any,
or to the Employee's estate, as applicable, in a cash lump sum within thirty
(30) days after the Termination Date, the amount equal to the sum of (i) the
portion of the Base Salary through the end of the month in which the
Termination Date occurs which has not yet been paid, (ii) all compensation
previously deferred by the Employee (together with any accrued interest or
earnings thereon) which has not yet been paid, (iii) any accrued but unpaid
vacation pay (if the Employee dies while on Active Status) and (iv) (a) if the
Employee dies while on Active Status, the product of (1) the Base Salary being
paid for the Compensation Year in which he dies multiplied by (2) three (3) or
(b) if the Employee dies during the Part-time Employment Period, the product of
(1) one-twelfth (1/12th) of the Base Salary being paid for the Compensation
Year in which the Employee dies multiplied by (2) the number of whole and
partial calendar months in the period beginning with the first calendar month
after the calendar month in which he dies and ending with the last calendar
month in which the Termination Date would have occurred if the Employee's
Employment were to have continued to the end of the Part-time Employment
Period. For purposes of this Section 5(D), if the anniversary of the Effective
Date in the Compensation Year in which the Employee dies has not occurred on or
before the Termination Date, the Base Salary for that Compensation Year will be
calculated on the assumption that no increase in the amount thereof would be
made effective as of that anniversary pursuant to Section 4(A) or 5(E)(i), as
applicable.
E. Employee's Rights During the Part-time Employment
Period. (i) The Company shall pay the Employee a Base Salary, in the
intervals consistent with the Company's normal payroll schedules (but in no
event less frequently than semi-monthly) from the Part-time Employment
Effective Date to and including the Termination Date in the amounts determined
from time to time as follows: Effective as of the Part-time Employment
Effective Date, the Base Salary payable by the Company to the Employee for the
period from and including that date to and excluding the third (3rd)
anniversary of that date shall be as follows:
(a) if the Part-time Employment Effective Date occurs as
a result of the receipt by the Nonterminating Party of a Notice of
Termination for a Business Reason pursuant to Section 5(A) or a Notice
of Termination for Good Reason pursuant to Section 5(B)(i), the amount
equal to the Average Annual Cash Compensation of the Employee
determined as of
15
<PAGE> 16
the Part-time Employment Effective Date; and (b) if the Part-time
Employment Effective Date occurs as a result of the receipt by the
Nonterminating Party of a Notice of Termination for Disability
pursuant to Section 5(C), the amount equal to the amount by which (1)
seventy-five percent (75%) of the Average Annual Cash Compensation of
the Employee determined as of the Part-time Employment Effective Date
exceeds (2) the aggregate amount of periodic payments the Employee
receives during the twelve (12) months beginning on that date under
Compensation Plans then in effect and providing for the payment to the
Employee solely as a result or on account of disability; and
(b) on the first and each subsequent anniversary of the
Part-time Employment Effective Date, the Base Salary payable pursuant
to this Section 5(E) shall be increased (but not decreased) by the
same percentage increase (if any) in the CPI for the twelve (12) month
period immediately preceding that anniversary.
(ii) (a) The Employee shall continue to participate in all
Compensation Plans from time to time in effect during the Part-time Employment
Period, provided, however, that: (1) the Employee shall not be entitled to
receive any new award or grant under any Incentive Plan, and any such new award
or grant shall be at the sole discretion of the Compensation Committee or the
Board, as applicable, with respect to that Incentive Plan; and (2) if (A) the
terms of any such plan preclude the Employee's continued participation therein
or (B) his continued participation in any such plan would or reasonably could
be expected to disqualify that plan under the Code, the Employee shall not be
entitled to participate in that plan, but the Company instead shall provide the
Employee with the after-tax equivalent of the benefits that would have been
provided to the Employee were he a participant in that plan.
(b) For purposes of determining eligibility (including
years of service) for retirement benefits payable under any Compensation Plan,
the Employee shall be deemed to have retired at the Termination Date.
(iii) Subject to the provisions of Section 7, the Employee
shall not be (A) prevented from accepting other employment or engaging in (and
devoting substantially all his time to) other business activities or (B)
required to perform any regular duties for the Company (except to provide such
services consistent with the Employee's educational background, experience and
prior positions with the Company as may be acceptable to the Employee) or to
seek or accept additional employment with any other Person. If the Employee,
at his discretion, shall accept any such additional employment or engage in any
such other business activity there shall be no offset, reduction or effect upon
any rights, benefits or payments to which the Employee is entitled pursuant to
this Agreement. Furthermore, the Employee shall have no obligation to account
for, remit, rebate or pay over to the Company any compensation or other amounts
earned or derived in connection with such additional employment or business
activity. The Employee shall, however, make himself generally available for
special projects or to consult with the Company and its employees at such times
and at such places as may be reasonably requested by the Company and which
shall be
16
<PAGE> 17
reasonably satisfactory to the Employee and consistent with the Employee's
regular duties and responsibilities in the course of his then new occupation or
other employment, if any.
(iv) Unless and until the Employee shall have sustained a
Disability, the Company shall continue to provide the Employee with either the
same or, at the Company's election, at a different location within thirty-five
(35) miles of the Employee's principal residence, in any case reasonably
acceptable to the Employee, alternate but comparable office space, furnishings,
facilities, reserved parking, supplies, services, equipment, secretarial and
administrative assistance that are in each case at least commensurate with the
size and quality of that which were provided to the Employee during the
Compensation Year immediately preceding the Part-time Employment Effective Date
pursuant to Section 6(C), but in no event less than are being furnished or
provided on the date hereof. The Company and Employee may mutually agree upon
an equivalent monthly cash allowance in lieu of the Employee being provided all
or any part of these items.
(v) The Employee shall remain entitled to the benefits of
Section 4(C).
F. Return of Property. On termination of the Employee's
Employment, however brought about, the Employee (or his representatives) shall
promptly deliver and return to the Company all the Company's property that is
in the possession or under the control of the Employee.
G. Stock Options. Notwithstanding any provision of this
Agreement to the contrary: (i) except in the case of a termination of the
Employee's Employment for Cause, all stock options previously granted to the
Employee under Incentive Plans that have not been exercised and are outstanding
as of the time immediately prior to the Termination Date shall, notwithstanding
any contrary provision of any applicable Incentive Plan, remain outstanding
(and continue to become exercisable pursuant to their respective terms) until
exercised or the expiration of their term, whichever is earlier; and (ii) in
the case of a termination of the Employee's Employment for Cause, all stock
options previously granted to the Employee under Incentive Plans that have not
been exercised and are outstanding as of the time immediately prior to the
Termination Date shall, notwithstanding any contrary provision of any
applicable Incentive Plan, remain outstanding and continue to be exercisable
until exercised or the date that is ten (10) days after the Termination Date,
whichever is earlier. No stock option previously granted to the Employee under
any Incentive Plan shall, notwithstanding any contrary provision of that
Incentive Plan, expire or fail to become exercisable or, if exercisable, cease
to be exercisable by reason of either (i) the occurrence of the Employee's
Part-time Employment Effective Date or (ii) the Employee's service during the
Employee's Part-time Employment Period being less than full-time.
6. OTHER EMPLOYEE RIGHTS
A. Paid Vacation; Holidays. The Employee shall be
entitled to not less than four (4) weeks of annual vacation and all legal
holidays during which times his applicable compensation shall be paid in full.
17
<PAGE> 18
B. Business Expenses. The Employee is authorized to
incur, and will be entitled to receive prompt reimbursement for, all reasonable
expenses incurred by the Employee in performing his duties and carrying out his
responsibilities hereunder, including business meal, entertainment and travel
expenses, provided that the Employee complies with the applicable policies,
practices and procedures of the Company relating to the submission of expense
reports, receipts or similar documentation of those expenses. The Company
shall either pay directly or promptly reimburse the Employee for such expenses
not more than twenty (20) days after the submission to the Company by the
Employee from time to time of an itemized accounting of such expenditures for
which direct payment or reimbursement is sought. Unpaid reimbursements after
such twenty (20) day period shall accrue interest in accordance with Section
9(K).
C. Support. While on Active Status, the Employee shall
be provided by the Company with office space, furnishings, and facilities,
reserved parking, secretarial and administrative assistance, supplies and other
support equipment (including a computer, facsimile machine and photocopier).
D. No Forced Relocation. The Employee shall not be
required to move his principal place of residence from the Houston, Texas area
or to perform regular duties that could reasonably be expected to require
either such move against his wish or to spend amounts of time each week outside
the Houston, Texas area which are unreasonable in relation to the duties and
responsibilities of the Employee hereunder, and the Company agrees that, if it
requests the Employee to make such a move and the Employee declines that
request, (i) that declination shall not constitute any basis for a
determination that Type II Cause exists and (ii) no animosity or prejudice will
be held against Employee.
7. COVENANT NOT TO COMPETE
A. The Employee recognizes that in each of the highly
competitive businesses in which the Company is engaged, personal contact is of
primary importance in securing new customers and in retaining the accounts and
goodwill of present customers and protecting the business of the Company. The
Employee, therefore, agrees that during the term of his Employment and for a
period of one (1) year after the Termination Date, he will not, within fifty
(50) miles of the geographic location in which the he has devoted substantial
attention at such location to the material business interests of the Company:
(i) accept employment or render service to any Person that is engaged in a
business directly competitive with the business then engaged in by the Company
or (ii) enter into or take part in or lend his name, counsel or assistance to
any business, either as proprietor, principal, investor, partner, director,
officer, employee, consultant, advisor, agent, independent contractor, or in
any other capacity whatsoever, for any purpose that would be competitive with
the business of the Company.
B. If the provisions of this Section 7 are violated in
any material respect, the Company shall be entitled, upon application to any
court of proper jurisdiction, to a temporary
18
<PAGE> 19
restraining order or preliminary injunction (without the necessity of posting
any bond with respect thereto) to restrain and enjoin the Employee from that
violation. If the provisions of this Section 7 should ever be deemed to exceed
the time, geographic or occupational limitations permitted by the applicable
law, the Employee and the Company agree that such provisions shall be and are
hereby reformed to the maximum time, geographic or occupational limitations
permitted by the applicable law.
8. CONFIDENTIAL INFORMATION
A. The Employee acknowledges that he has had and will
continue to have access to various Confidential Information. The Employee
agrees, therefore, that he will not at any time, either while employed by the
Company or afterwards, knowingly make any independent use of, or knowingly
disclose to any other person (except as authorized by the Company) any
Confidential Information. Confidential Information shall not include (i)
information that becomes known to the public generally through no fault of the
Employee, (ii) information required to be disclosed by law or legal process or
the order of any governmental authority under color of law, provided, that
prior to disclosing any information pursuant to this clause (ii), the Employee
shall, if possible, give prior written notice thereof to the Company and
provide the Company with the opportunity to contest such disclosure, or (iii)
the Employee reasonably believes that such disclosure is required in connection
with the defense of a lawsuit against the Employee. In the event of a breach
or threatened breach by the Employee of the provisions of this Section 8(A)
with respect to any Confidential Information, the Company shall be entitled to
a temporary restraining order and a preliminary and permanent injunction
(without the necessity of posting any bond in connection therewith) restraining
the Employee from disclosing, in whole or in part, that Confidential
Information. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedy for that breach or threatened breach,
including the recovery of damages.
B. The Employee shall disclose promptly to the Company
any and all conceptions and ideas for inventions, improvements, and valuable
discoveries, whether patentable or not, which are conceived or made by the
Employee solely or jointly with any other Person or Persons during the period
of his Employment and which pertain primarily to the material business
activities of the Company, and the Employee hereby assigns and agrees to assign
all his interests therein to the Company or to its nominee; whenever requested
to do so by the Company, the Employee shall execute any and all applications,
assignments or other instruments which the Company shall deem necessary to
apply for and obtain Letters of Patent of the United States or any foreign
country or to otherwise protect the Company's interest therein. These
obligations shall (i) continue beyond the Termination Date with respect to
inventions, improvements, and valuable discoveries, whether patentable or not,
conceived, made or acquired by the Employee during the period of his Employment
and (ii) be binding upon the Employee's assigns, executors, administrators and
other legal representatives.
19
<PAGE> 20
9. GENERAL PROVISIONS
A. Severability. If any one or more of the provisions
of this Agreement shall, for any reason, be held or found by final judgment of
a court of competent jurisdiction to be invalid, illegal or unenforceable in
any respect, (i) such invalidity, illegality or unenforceability shall not
affect any other provisions of this Agreement, (ii) this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein (except that this clause (ii) shall not prohibit any
modification allowed under Section 7(B)) and (iii) if the effect of a holding
or finding that any such provision is invalid, illegal or unenforceable is to
modify to the Employee's detriment, reduce or eliminate any compensation,
reimbursement, payment, allowance or other benefit to the Employee intended by
the Company and Employee in entering into this Agreement, the Company shall,
within thirty (30) days after the date of such finding or holding, negotiate
and expeditiously enter into an agreement with the Employee which contains
alternative provisions (reasonably acceptable to the Employee) that will
restore to the Employee (to the extent lawfully permissible) substantially the
same economic, substantive and income tax benefits and legal rights the
Employee would have enjoyed had such provision been upheld as legal, valid and
enforceable.
B. Nonexclusivity of Rights. Nothing herein shall
prevent or limit the Employee's continuing or future participation in any
Compensation Plan or, subject to Section 9(N), limit or otherwise affect such
rights as the Employee may have under any other contract or agreement with the
Company. Vested benefits and other amounts to which the Employee is or becomes
entitled to receive under any Compensation Plan on or after the Termination
Date shall be payable in accordance with that Compensation Plan, except as
expressly modified hereby.
C. Full Settlement. The Company's obligations to make
the payments provided for in, and otherwise to perform its undertakings in,
this Agreement shall not be affected by any right of set-off, counterclaim,
recoupment, defense or other action, claim or right the Company may have
against the Employee or others. In no event shall the Employee be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Employee under any provision hereof, and those amounts
shall not be reduced, regardless of whether the Employee obtains other
employment or becomes self-employed.
D. Successors. (i) This Agreement is personal to the
Employee and, without the prior written consent of the Company, is not
assignable by the Employee otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit and be enforceable by
the Employee's legal representatives acting in their capacities as such
pursuant to applicable law.
(ii) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns. If the Employee is
not an Executive Officer, but is an officer of a subsidiary of the Company, the
Company shall be entitled to assign all its obligations hereunder to that
subsidiary and treat the Employee as an employee of that subsidiary for all
20
<PAGE> 21
purposes, but the Company shall remain liable for the full, timely performance
of all the obligations so assigned as if the assignment had not been made.
(iii) The Company shall require any successor (direct or
indirect and whether by purchase, merger, consolidation, share exchange or
otherwise) to the business, properties and assets of the Company substantially
as an entirety expressly to assume and agree to perform this Agreement in the
same manner and to the same extent the Company would have been required to
perform it had no such succession taken place.
E. Amendments; Waivers. This Agreement may not be
amended or modified except by a written agreement executed and delivered by the
parties hereto or their respective successors or legal representatives acting
in their capacities as such pursuant to applicable law.
F. Notices. All notices and other communications under
this Agreement shall be in writing and shall be given by hand delivery or by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the appropriate Person at the address of such Person set forth
below (or at such other address as such Person may designate by written notice
to each other party in accordance herewith):
(a) if to the Employee, addressed as follows:
Harry O. Nicodemus, IV
1810 Crutchfield
Katy, Texas 77449
; and
(b) if to the Company, addressed as follows:
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer
Houston, Texas 77056-5604
Attn: Corporate Secretary
G. No Waiver. The failure of the Company or the
Employee to insist on strict compliance with any provision of, or to assert any
right under, this Agreement (including the right of the Employee to terminate
his Employment for Good Reason or by reason of a Change of Control pursuant to
Section 5(B) (i)) shall not be deemed a waiver of that provision or of any
other provision of or right under this Agreement.
21
<PAGE> 22
H. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT
REFERENCE TO ANY PRINCIPLES OF CONFLICTS OF LAWS.
I. Jurisdiction and Venue. The Company irrevocably
consents with respect to any action, suit or other legal proceeding pertaining
directly to this Agreement or to the interpretation or enforcement of any of
the Employee's rights hereunder to service of process in the State of Texas and
hereby waives any right to contest or oppose receipt of such service of
process. The Company irrevocably (i) agrees that any such action, suit or
other legal proceeding may be brought in the courts of such state or in the
courts of the United States sitting in such state, (ii) consents to the
jurisdiction of each such court in any such action, suit or other legal
proceeding and (iii) waives any objection it may have to the laying of venue of
any such action, suit or other legal proceeding in any of such courts.
J. Headings. The headings of Sections and subsections
hereof are included solely for convenience of reference and shall not control
the meaning or interpretation of any of the provisions of this Agreement.
K. Interest. If any amounts required to be paid or
reimbursed to the Employee hereunder are not so paid or reimbursed at the times
provided herein (including amounts required to be paid by the Company pursuant
to Sections 6 and 10, those amounts shall accrue interest compounded daily at
the annual percentage rate which is three percentage points (3%) above the
interest rate announced by Texas Commerce Bank National Association, Houston,
Texas (or its successor), from time to time, as its Base Rate (or prime lending
rate), from the date those amounts were required to have been paid or
reimbursed to the Employee until those amounts are finally and fully paid or
reimbursed; provided, however, that in no event shall the amount of interest
contracted for, charged or received hereunder exceed the maximum non-usurious
amount of interest allowed by applicable law.
L. Publicity. The Company agrees with the Employee
that, except to the extent required by law or legal process (including the
Exchange Act and the Securities Act), it will not make or publish, without the
prior written consent of the Employee, any written or oral statement concerning
the terms of the Employee's employment relationship with the Company and will
not, if a Notice of Termination is given by either the Company or the Employee
for any reason, publish or cause to be published any statement concerning the
Employee, including his work-related performance or the reasons or basis for
the giving of that Notice of Termination.
M. Tax Withholding. Notwithstanding any other provision
hereof, the Company may withhold from amounts payable hereunder all Federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
22
<PAGE> 23
N. Entire Agreement. The Company and the Employee (i)
acknowledge that this Agreement amends and restates the Employment Agreement
dated as of April 1, 1997 between the Company and the Employee and (ii) agree
that this Agreement supersedes all prior written and oral agreements between
them with respect to the Employment of the Employee by the Company.
10. INTENDED BENEFITS TO EMPLOYEE; PAYMENT OF EXPENSES; RESOLUTION OF
DISPUTES
A. Intended Benefits; Payment of Expenses. In entering
into this Agreement the Company intends that the Employee receive without
reduction or delay all the intended benefits of this Agreement and that those
benefits, and the terms and conditions hereof, be construed in a manner most
favorable to the Employee; the Company, therefore, agrees that it will strive
expeditiously and in good faith to construe and resolve in the Employee's favor
and to his benefit any ambiguities or uncertainties that may be created by the
express language hereof. If, however, at any time during the term hereof or
afterwards: (i) there should exist a dispute or conflict between the Employee
and the Company or another Person as to the validity, interpretation or
application of any term or condition hereof, or as to the Employee's
entitlement to any benefit intended to be bestowed hereby, which is not
resolved to the satisfaction of the Employee, (ii) the Employee must (A) defend
the validity of this Agreement, (B) contest any determination by the Company
concerning the amounts payable (or reimbursable) by the Company to the Employee
or (C) determine in any tax year of the Employee the tax consequences to the
Employee of any amounts payable (or reimbursable) under Section 4(C) or
4(B)(iii), or (iii) the Employee must prepare responses to an Internal Revenue
Service ("IRS") audit of, or otherwise defend, his personal income tax return
for any year the subject of any such audit, or an adverse determination,
administrative proceedings or civil litigation arising therefrom that is
occasioned by or related to an audit by the IRS of the Company's income tax
returns, then the Company hereby unconditionally agrees: (a) on written demand
of the Company by the Employee, to provide sums sufficient to advance and pay
on a current basis (either by paying directly or by reimbursing the Employee)
not less than thirty (30) days after a written request therefor is submitted by
the Employee, the Employee's out of pocket costs and expenses (including
attorney's fees, expenses of investigation, travel, lodging, copying, delivery
services and disbursements for the fees and expenses of experts, etc.) incurred
by the Employee in connection with any such matter; (b) the Employee shall be
entitled, upon application to any court of competent jurisdiction, to the entry
of a mandatory injunction without the necessity of posting any bond with
respect thereto which compels the Company to pay or advance such costs and
expenses on a current basis; and (c) the company's obligations under this
Section 10(A) will not be affected if the Employee is not the prevailing party
in the final resolution of any such matter.
B. Resolution of Disputes. If a dispute of any type
referred to in Section 10(A) arises between the Company and the Employee and
they fail to resolve that dispute by direct negotiation, the Company and the
Employee agree that the next step taken to resolve that dispute, prior to
either party initiating any litigation to resolve that dispute (not including
any litigation that may be required to enforce the Employee's rights to the
payment or advancement of expenses and
23
<PAGE> 24
legal fees on a current basis pursuant to Section 10(A)) shall be to submit the
dispute to an agreed Alternative Dispute Resolution ("ADR") process, to which
process the parties shall strive diligently in good faith to agree within ten
(10) business days after either party has given written notice to the other
party that it is unable to concur in the other party's final proposed
negotiated resolution of the dispute. If the Company and the Employee are
unable to agree in writing to an acceptable ADR process within that ten (10)
business day period, then the parties shall submit to a mandatory ADR process
by making joint application to the then Chief United States Federal District
Judge in the Southern District of Texas for the selection of an ADR process for
the parties. The parties shall diligently in good faith participate in the ADR
process chosen by that judge. If the parties are unable to resolve their
dispute after diligent good faith participation in the ADR process, then either
party shall be free to initiate such litigation as that party deems appropriate
under the circumstances. Under no circumstances shall the Employee be
obligated to pay for the cost of any ADR process or to pay or reimburse the
Company for any attorneys' fees, costs or other expenses incurred by the
Company in connection with any process undertaken by the Employee to resolve
disputes under this Agreement. As used in this Section 10, the term
"Employee" includes, if the Employee has died or become incompetent as a matter
of applicable law, the Employee's legal representative acting in his capacity
as such under applicable law.
11. INDEMNIFICATION
The Employee shall be indemnified by the Company to the
maximum extent permitted by the law of Delaware, the state of the Company's
incorporation, and the law of the state of incorporation of any subsidiary of
the Company of which the Employee is a director or an officer or employee, as
the same may be in effect from time to time.
24
<PAGE> 25
IN WITNESS WHEREOF, the parties have executed and delivered
this Agreement as of the day and year indicated above.
AMERICAN RESIDENTIAL SERVICES, INC.
By: /s/ THOMAS N. AMONETT
-------------------------------------
Thomas N. Amonett
President and Chief Executive Officer
EMPLOYEE
/s/ HARRY O. NICODEMUS, IV
----------------------------------------
HARRY O. NICODEMUS, IV
Employee's Permanent Address:
1810 Crutchfield
Katy, Texas 77449
25
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 30, 1998)
<TABLE>
<CAPTION>
COMPANY STATE
<S> <C>
Air Control Heating and Air Conditioning, Inc. California
American Mechanical Services Company, LLC Delaware
American Mechanical Services of Arizona, Inc. (d/b/a Arizona Air Mechanix; Arizona
PRESCO; Phoenix Refrigeration and Energy Services Corp.; AMSCO)
American Mechanical Services of California, Inc. (d/b/a Charter Mechanical California
Systems; Tri-Pacific Heating, Inc.)
American Mechanical Services of Colorado, Inc. (d/b/a Continental Mechanical Colorado
Systems; Trautman & Shreve Service, Inc.; Colorado Chiller Maintenance,
Inc.; Mile Hi Mechanical)
Weather Engineering & Manufacturing, Inc. Colorado
American Mechanical Services of Houston, Inc. (d/b/a Enterprise Commercial- Delaware
Industrial Mechanical, Inc.; American Mechanical Services; Commercial
Control & Services
American Mechanical Services of Indiana, Inc. (d/b/a American Mechanical Indiana
Services)
American Mechanical Services of Missouri, Inc. Missouri
American Mechanical Services of Montana, Inc. Montana
American Mechanical Services of Nebraska, Inc. Nebraska
American Mechanical Services of New Hampshire, Inc. New Hampshire
American Mechanical Services of New Mexico, Inc. New Mexico
American Mechanical Services of Texas, Inc. (d/b/a Texas Mechanical Systems; Delaware
American Mechanical Services)
AMS American Mechanical Services of Maryland, Inc. (d/b/a Murray Service Maryland
Company; EMD Mechanical Specialists; Quality Control Service Company;
H.R.E.)
American Mechanical Services of Sacramento, Inc. (d/b/a Engineered Air California
Systems; American Mechanical Services)
AMS American Mechanical Services of Virginia, Inc. (d/b/a Keenan Mechanical) Virginia
American Mechanical Services of Washington, Inc. Washington
American Residential Services of Colorado, Inc. (d/b/a Snake 'N' Rooter; Belcon Colorado
Mechanical, Inc.)
American Residential Services of Florida, Inc. (d/b/a Florida Heating & Air Florida
Conditioning, Inc.; DeMoss Air Conditioning Service; Alvarez Taylor
Plumbing & Air Conditioning; Jim's Air Conditioning; Busby Heating and
Cooling; Climatic Corporation of Vero Beach; Sasso Air Conditioning;
Ted's Plumbing; Bradley Air Conditioning; Bass Plumbing; Larry Teague &
Sons Plumbing; Sun Country Cooling; Watts Air Conditioning & Heating,
Inc.; Bradley DeMoss Air Conditioning Co.;)
Leon's Air Conditioning, Inc. Florida
American Residential Services of Georgia, Inc. (d/b/a Sundance Plumbing Corporation) Georgia
American Residential Services of Illinois, Inc. (d/b/a Ross Heating & Cooling Inc.; Illinois
Kranz Mechanical Corporation; Kranz Heating & Cooling, Inc.; Anderson
Heating & Cooling Company)
Illinois Heating & Air Conditioning, Inc. Illinois
</TABLE>
<PAGE> 2
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 30, 1998)
<TABLE>
<CAPTION>
COMPANY STATE
<S> <C>
American Residential Services of Indiana, Inc. (d/b/a Dial One Meridian & Hoosier, Indiana
Inc.; Barclay-Holland, Inc.; Korte Electric, Inc.; USA Heating & Air
Conditioning, Inc.; Sagamore Heating & Cooling, Inc.)
Barclay-Holland, Inc. Indiana
American Residential Services of Maryland, Inc. (d/b/a Wachter & Norwood; John C. Maryland
Dorsey)
American Residential Services of Michigan, Inc. (d/b/a Energy Concepts, Inc.; Michigan
Andy's Statewide Heating & Cooling; Adex Heating & Cooling, Inc.;
Quality Air of Holland, Inc.; Manne Electric Company)
American Residential Services of Missouri, Inc. Missouri
American Residential Services of Montana, Inc. Montana
American Residential Services of Nebraska, Inc. (d/b/a Aksarben Heating & Air Nebraska
Conditioning)
American Residential Services of Nevada, Inc. (d/b/a Cool Valley Air; Air West Air Nevada
Conditioning-Heating; Racee Air Conditioning & Heating Company; Economy
Air Conditioning; Lang; Southtown; A.K. Chadwell Discount Plumbing)
American Residential Services of New Hampshire, Inc. New Hampshire
American Residential Services of New Mexico, Inc. New Mexico
American Residential Services of North Carolina, Inc. (d/b/a Metro Heating & Air North Carolina
Conditioning; Burrage Enterprises; Wood & Son Heating & Air
Conditioning; Moore Air Conditioning; Electro-Temp; Central Comfort
Company, Inc.)
American Residential Services of Pennsylvania, Inc. (d/b/a Automatic Controls Pennsylvania
Service)
American Residential Services of South Carolina, Inc. (d/b/a Atlas Services, Inc.; South Carolina
Dean Heating & Air Conditioning)
American Residential Services of Virginia, Inc. (d/b/a Keenan Heating & Cooling) Virginia
American Residential Services of Washington, Inc. Washington
Apple Plumbing & Heating, Inc. Colorado
ARS American Residential Services of Arizona, Inc. (d/b/a Russett Service Arizona
Corporation; Temp-Rite Engineering; Eastside Cooling and Heating)
ARS American Residential Services of California, Inc. (d/b/a Southcoast Heating and California
Air Conditioning, Inc.; Torrey Pines Plumbing; Arrow Air Conditioning
Company; Condor Service Company; Anderson Air Conditioning; Coast
Plumbing, Inc.)
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 & Oklahoma
Heating, Inc.)
ARS American Residential Services of Rhode Island, Inc. Rhode Island
ARS American Residential Services of Texas, Inc. (d/b/a Crown Services; McCannics; Delaware
West Houston Services, Inc.)
Service Enterprise Holdings, LLC Texas
Adcot, Inc. (d/b/a A-ABC Appliances) Texas
ARS Energy Services Company Delaware
ARS Residential Holding Company Delaware
ARS Residential Management Company Delaware
Cape Fear Heating & Air Conditioning of Wilmington, Inc. (d/b/a American North Carolina
Residential Services)
General Heating & Air Conditioning Company, Inc. (d/b/a Fireplace Wholesalers, Inc.) Delaware
Hession Plumbing Company, Inc. Indiana
Jack Sons Refrigeration, Inc. Nevada
J & G Holding Corporation Georgia
</TABLE>
<PAGE> 3
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 30, 1998)
<TABLE>
<CAPTION>
COMPANY STATE
<S> <C>
Maio Marketing, Inc. Delaware
Maio Marketing Systems, Inc. California
Maio Plumbing, Heating & Air, Inc. California
Pro-Formance, Inc. (d/b/a Pro-Heating) California
Suburban Electric Service, Inc. North Carolina
Westernair Manufacturer Service, Inc. Nevada
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 18, 1998 (and to all references to our firm) included in or
made a part of this Annual Report on Form 10-K for the year ended December 31,
1997 of American Residential Services, Inc. (the "Company") and to the
incorporation by reference of such report (and to all references to our firm) in
the Company's registration statements on Form S-4 (No. 333-31815), Form S-3 (No.
333-27785) and Forms S-8 (Nos. 333-13299, 333-33479 and 333-44913).
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN RESIDENTIAL SERVICES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,190
<SECURITIES> 0
<RECEIVABLES> 49,698
<ALLOWANCES> 2,315
<INVENTORY> 17,847
<CURRENT-ASSETS> 88,285
<PP&E> 50,882
<DEPRECIATION> 15,354
<TOTAL-ASSETS> 335,313
<CURRENT-LIABILITIES> 65,191
<BONDS> 135,087
0
0
<COMMON> 15
<OTHER-SE> 134,548
<TOTAL-LIABILITY-AND-EQUITY> 335,313
<SALES> 382,518
<TOTAL-REVENUES> 382,518
<CGS> 276,225
<TOTAL-COSTS> 276,225
<OTHER-EXPENSES> 81,405
<LOSS-PROVISION> 511
<INTEREST-EXPENSE> 7,469
<INCOME-PRETAX> (5,702)
<INCOME-TAX> (1,001)
<INCOME-CONTINUING> 694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,701)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
</TABLE>
