<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K
(Mark one)
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NO.: 1-11849
AMERICAN RESIDENTIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
(713) 599-0100
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------- ---------------------------------------------
Common Stock, par value $.001 per share New York Stock Exchange
Rights to Purchase Series A Junior New York Stock Exchange
Participating Preferred Stock
</TABLE>
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, 1999, there were 15,887,704 shares of common stock, par
value $.001 per share, of the Registrant issued and outstanding, 14,754,248 of
which, having an aggregate market value of $79,304,083, 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
None.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Business............................................ 1
General................................................... 1
ServiceMaster's Proposed Acquisition of the Company....... 2
Industry Overview......................................... 2
Business Strategy......................................... 2
Residential Services...................................... 3
Commercial Maintenance Services........................... 4
Operations................................................ 4
Sales and Marketing....................................... 5
Hiring, Training and Safety............................... 5
Intellectual Property..................................... 5
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
Item 2. Properties.......................................... 10
Item 3. Legal Proceedings................................... 10
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 11
Item 6. Selected Financial Data............................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 13
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk............................................... 21
Item 8. Financial Statements and Supplementary Data......... 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 49
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................ 49
Item 11. Executive Compensation............................. 53
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 57
Item 13. Certain Relationships and Related Transactions..... 58
PART IV
Item 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K....................................... 59
</TABLE>
i
<PAGE> 3
PART I
ITEM 1. BUSINESS.
GENERAL
Formation, Initial Public Offering and Acquisitions
American Residential Services, Inc. ("ARS" and, collectively with its
subsidiaries, the "Company") is a 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,
refrigeration, 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 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 a leading national provider of residential
services and commercial maintenance services, the Company undertook an
aggressive acquisition program through 1998 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, 1998, the Company acquired an
additional 98 businesses providing either residential services or commercial
maintenance services or both (collectively with the Founding Companies, the
"Acquired Businesses").
Operating Results and Debt Compliance Issues
The Company has incurred losses since its IPO in September 1996, and in
1997 and 1998 reported special charges of $24.2 million and $4.3 million,
respectively, as a result of, among others, decisions to reduce overhead and
consolidate or eliminate certain operations. Additionally, in the fourth quarter
of 1998, the Company discontinued its air-conditioned tent rental business and
recorded a $3.1 million loss, net of tax, on disposal. Furthermore, the
Company's credit facility contains financial covenants which are computed based
on the Company's consolidated financial position and operating results. During
1998, the Company was required to obtain, and did obtain, waivers from its
lenders as a result of the Company's failure to comply with certain financial
covenants of the credit facility. On March 31, 1999, the required lenders under
the credit facility agreed to waive the covenant violations and amend certain
provisions of the credit facility. See "Item 7 -- Management Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion.
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.
SERVICEMASTER'S PROPOSED ACQUISITION OF THE COMPANY
On March 22, 1999, ARS entered into an Agreement and Plan of Merger (the
"Merger Agreement") with The ServiceMaster Company ("ServiceMaster") and a
wholly-owned subsidiary of ServiceMaster. The Merger Agreement provides for the
acquisition of ARS for a price of $5.75 per share in cash pursuant to a tender
offer (the "Tender Offer") by the ServiceMaster subsidiary for all outstanding
shares of ARS Common Stock, par value $.001 per share, including the associated
Preferred Stock Purchase Rights (the
1
<PAGE> 4
"Rights") (collectively, the "ARS Shares"). The Tender Offer, which commenced on
March 29, 1999, is currently scheduled to expire at 11:59 p.m., New York City
time, on April 26, 1999 (but may be extended under certain circumstances).
Completion of the Tender Offer is subject to certain conditions, including
a minimum of 52% of the outstanding shares of ARS's common stock being validly
tendered and not withdrawn prior to the expiration of the Tender Offer,
compliance with certain financial and other covenants, no material adverse
change having occurred and the expiration of all applicable waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Assuming
successful completion of the Tender Offer, all ARS Shares not tendered and
purchased in the Tender Offer will be converted into the right to receive the
price per share paid pursuant to the Tender Offer in cash pursuant to a merger
of ARS with the ServiceMaster subsidiary as contemplated by the Agreement (the
"Merger").
The Tender Offer for all of the outstanding ARS Shares aggregates
approximately $92.0 million which is approximately $40.0 million below the
Company's historical cost basis in its net assets (total stockholders' equity)
of $132.0 million as of December 31, 1998. The proposed acquisition will be
accounted for by ServiceMaster using the purchase method of accounting, which
requires an allocation of the purchase price to the assets acquired and
liabilities assumed based on fair value as determined by ServiceMaster. The
Company's consolidated financial statements have been prepared on the historical
cost basis of accounting in accordance with generally accepted accounting
principles which may be greater or less than the fair value of the assets and
liabilities as determined by ServiceMaster.
ServiceMaster's Schedule 14D-1 and related Tender Offer documents
(including the Offer to Purchase and Letter of Transmittal), and ARS's Schedule
14D-9, in each case filed with the Securities and Exchange Commission on March
29, 1999, provide additional information with regard to the terms, conditions
and termination events relating to the Tender Offer and the Merger.
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. The Company 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.
BUSINESS STRATEGY
To enhance its market position as a national provider of residential
services and commercial maintenance services, the Company has implemented a
national operating strategy directed toward enhancing internal revenue growth
and profitability and achieving cost efficiencies. Historically, the Company has
also emphasized growth through acquisitions. However, in November 1998, the
Company announced that it was significantly slowing its acquisition activity and
since that time has effectively deactivated its acquisition program. As a
result, the Company does not expect to acquire any material businesses in 1999.
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
2
<PAGE> 5
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. Additionally, 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.
Various factors may affect the extent to which the Company's internal
growth strategies will be successful. See "Factors That May Affect Future
Results."
Acquisition Strategy. Through November 1998, the Company implemented an
aggressive acquisition program that targeted large metropolitan and high-growth
suburban areas with attractive demographics. The Company's acquisition strategy
historically involved entering new geographic markets and expanding within
existing markets for residential services and commercial maintenance services.
Since the IPO and the acquisitions of the Founding Companies and through
December 31, 1998, the Company has acquired 98 businesses, including 18 acquired
in 1998, which provide residential services, commercial maintenance services or
both. Since November 15, 1998, the Company has been required to obtain the prior
written consent of its lenders under its credit facility prior to consummating
any material acquisition. See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In addition to that restriction, in November 1998, the Company
announced that it was significantly slowing its acquisition activity and since
that time has effectively deactivated its acquisition program. The Company
believes that this emphasis will allow the Company's management to better focus
on integrating those operations previously acquired by the Company.
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. 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 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 the Company 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. The homebuilding
industry is affected significantly by changes in general and local economic
conditions, such as employment and income
3
<PAGE> 6
levels, the 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, Nevada, Texas, Virginia
and the Washington, D.C. metropolitan area. Through AMS, the Company intends to
offer various commercial maintenance service capabilities, including refrigerant
retrofit capabilities, building automation services, remote monitoring,
refrigeration maintenance, 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 four geographic regions for its residential services operations
and one geographic region for its commercial maintenance services operations. In
the third quarter of 1998, the Company reduced its number of residential regions
from seven to four and its number of commercial maintenance regions from two to
one. A regional vice president, a regional controller and other support staff
generally 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.
These centers 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. These personnel 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 of 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 its purchasing of equipment and other supplies, the
Company is reducing the number of OEMs and
4
<PAGE> 7
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 mail-outs, 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 additional 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.
The Company has numerous customers. No single customer accounted for more
than 10% of its revenues during 1998.
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.
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 any other
additional businesses that may be subsequently acquired will continue to use
their
5
<PAGE> 8
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 31, 1999, the Company had approximately 5,000 employees, of
which approximately 700 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 its 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 this 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 than
in the first and fourth quarters. Accordingly, the Company expects its revenues
and operating results generally will be lower in its first and fourth quarters
than in its second and third 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 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 than the Company. Moreover, in the
residential services market, many homeowners have traditionally relied on
individual persons or small repair
6
<PAGE> 9
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. 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 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.
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 ("CFCs") and certain other refrigerants. Clean Air Act
regulations require the certification of service technicians involved in the
service or repair of systems, equipment and appliances containing these
refrigerants and also regulate the containment and recycling of these
refrigerants. These requirements have increased the Company's training expenses
and expenditures for containment and recycling equipment. The Clean Air Act is
intended to ultimately eliminate the use of CFCs in the United States and
require alternative refrigerants to be used in replacement HVAC systems. The
implementation of the Clean Air Act restrictions has also increased the cost of
CFCs in recent years and is expected to continue to increase such costs in the
future. As a result, the Company expects the number of conversions of existing
HVAC systems that use CFCs to systems using alternative refrigerants to
increase. The Company's operations in certain areas 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 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 1998 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
7
<PAGE> 10
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 and is provided in accordance with the provisions
of the Private Securities Litigation Reform Act. 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. The Company
cannot provide assurance that it 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. 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.
While the Company does not expect to acquire any material businesses in
1999, the Company's historical acquisition strategy, when and if fully or
partially reactivated at a future date, is expected to present 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 that 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.
As consideration for future acquisitions, the Company may use various
combinations of its Common Stock, cash, convertible notes or other debt
securities, when and if the Company's acquisition program is fully or partially
redirected. The extent to which the Company 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 is limited by restrictions in its Credit Facility and by the extent
to which the Company 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, service and installation personnel and
leverage its relationships with existing customers to provide them services
currently obtained from others.
8
<PAGE> 11
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 that (i) the residential services and commercial maintenance
services sectors of its industry are subject to rapid consolidation, (ii) only a
few other public companies currently 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.
The Company's balance sheet at December 31, 1998 includes an intangible
asset, "goodwill", that represents 60% of total assets and 174% of stockholders'
equity. Goodwill is recorded when the Company pays more for a business than the
fair value of the tangible and separately measurable intangible net assets.
Generally accepted accounting principles require the Company to amortize
goodwill and all other intangible assets over the period benefited. The
Company's management has determined that period to be no less than 40 years. If
it turns out that the period should have been shorter, earnings reported in
periods in the early years after the closing of an acquisition would be
overstated and, in later years, the Company would be burdened by a continuing
charge against earnings, without the benefit to income that the Company believed
it would attain when the Company agreed on the purchase price. It is possible
that earnings reported in later years might also be significantly reduced if
management determines then that the remaining balance of goodwill is impaired
and writes off the balance of such impaired goodwill. The Company's management
believes that there is no persuasive evidence that any material portion of such
goodwill is impaired at such date.
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 routing
business activities. Based on the progress the Company has made in addressing
its year 2000 issues and the Company's plans to complete its compliance program,
the Company does not foresee significant risks associated with its Year 2000
compliance at this time. Although the Company does not anticipate any material
adverse effect from Year 2000 failures, there is no guarantee of total
compliance. Specific factors that give rise to uncertainty include failure to
identify all susceptible systems, non-compliance by third parties whose systems
and operations impact the Company, a possible loss of technical resources to
perform the work and other similar uncertainties. Year 2000 non-compliance could
result in material disruption of the Company's operations, an interruption in
its ability to collect amounts due from customers, loss of accurate accounting
records or any number of other difficulties. Depending on length of
non-compliance and system
9
<PAGE> 12
failure, any or all of these situations could have material adverse impact on
the Company's results of operations and financial position.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT
ON FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
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 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.
10
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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 1, 1999, there were 15,887,704 shares of
Common Stock outstanding, held by approximately 290 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, 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
Year ended December 31, 1998:
First Quarter............................................. 16.06 8.25
Second Quarter............................................ 11.88 7.75
Third Quarter............................................. 11.19 2.69
Fourth Quarter............................................ 4.63 2.56
Year Ended December 31, 1999:
First Quarter (through March 30, 1999).................... 5.50 1.81
</TABLE>
The last reported sale of the Common Stock on the NYSE (as reported on the
Composite Transactions Reporting System) on March 30, 1999 was $5.38.
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 9 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.
11
<PAGE> 14
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, 1998, the
Company acquired 98 businesses, 24 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 9 remaining Pooled Businesses are not significant to prior
historical periods, and their results and the results of the other 74 acquired
businesses accounted for under the purchase method of accounting through
December 31, 1998 have been included in the consolidated results of the Company
beginning on their respective dates of acquisition. As used in this discussion,
the "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, 1998. 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 and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere in this
Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $81,125 $97,686 $150,330 $381,645 $505,562
Gross profit............................ 19,938 25,304 41,270 106,131 116,293
Selling, general and administrative
expenses(1).......................... 16,992 19,914 37,632 80,742 103,310
Special charge and other costs(2)(3).... -- -- -- 24,194 4,315
Income from continuing operations....... 2,946 5,390 3,638 1,195 8,668
Interest expense(1)..................... (355) (356) (5,479) (7,469) (13,405)
Interest income and other expense,
net.................................. 611 209 609 1,063 877
Net income (loss)....................... $ 1,916 $ 3,155 $ (3,035) $ (4,701) $ (7,861)
======= ======= ======== ======== ========
Basic and diluted net income (loss) per
share................................... $ 0.47 $ 0.77 $ (0.48) $ (0.33) $ (0.50)
======= ======= ======== ======== ========
Shares used in computing net income (loss)
per share............................... 4,085 4,085 6,277 14,330 15,702
======= ======= ======== ======== ========
BALANCE SHEET DATA:
Working capital......................... $ 2,249 $ 1,284 $ 19,175 $ 27,608 $ 39,082
Total assets............................ 21,854 25,243 211,624 335,291 382,217
Total debt, including current portion... 4,882 4,557 56,063 136,371 174,350
Stockholders' equity.................... 4,029 5,479 116,251 134,563 131,972
</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
12
<PAGE> 15
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.
(3) For the year ended December 31, 1998, special charge and other costs of
$4,315 related to termination and severance costs, and future lease
commitments on abandonment of certain operating facilities. 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.
INTRODUCTION
Formation, Initial Public Offering and Acquisitions
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. Between then and December 31, 1998, the Company acquired
an additional 98 businesses (collectively with the Founding Companies, the
"Acquired Businesses"), of which 13 were acquired in the fourth quarter of 1996
(the "1996 Acquisitions"), 67 were acquired in 1997 and 18 were acquired in
1998. Each of the Acquired Businesses operated as separate, independent
businesses prior to its acquisition by the Company. The success of the Company
depends, in part, on the extent to which the Company is able to effectively
integrate the Acquired Businesses and those that it may acquire in the future,
if any. 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.
Operating Results and Debt Compliance Issues
The Company has incurred losses since its IPO in September 1996 and in 1997
and 1998 reported special charges of $24.2 million and $4.3 million,
respectively, as a result of, among others, decisions to reduce overhead and
consolidate or eliminate certain operations as discussed further below.
Additionally, in the fourth quarter of 1998, the Company discontinued its
air-conditioned tent rental business and recorded a $3.1 million loss, net of
tax, on disposal. The Company's future success is dependent upon a number of
factors which include, among others, the ability to manage growth, the ability
to integrate operations, the reliance on acquisition financing, the ability to
attract and retain qualified management and employees, the ability to maintain
compliance with its credit facility and risks associated with competition,
seasonality and quarterly
13
<PAGE> 16
fluctuations. Management's plan to improve the Company's future operating
performance include (1) the implementation of a company-wide accounting and
operating information system which will provide management increased
capabilities related to budgeting, pricing and managing construction jobs and
managing inventories, (2) the implementation of improved credit and collection
policies at all Company locations, (3) the implementation of an incentive plan
based upon each individual district's operating results in comparison to budget,
(4) cost reductions achieved through the elimination of the market development
department, headcount reductions and the restructuring of the Company's regional
reporting structure and (5) the allocation of additional responsibilities to
those managers who have generated positive results since the Company's
inception.
ServiceMaster's Proposed Acquisition of the Company
On March 22, 1999, ARS entered into the Merger Agreement with ServiceMaster
and a wholly-owned subsidiary of ServiceMaster. The Merger Agreement provides
for the acquisition of ARS for a price of $5.75 per share in cash pursuant to
the Tender Offer by the ServiceMaster subsidiary for all outstanding ARS Shares.
The Tender Offer, which commenced on March 29, 1999, is currently scheduled to
expire at 11:59 p.m., New York City time, on April 26, 1999 (but may be extended
under certain circumstances).
Completion of the Tender Offer is subject to certain conditions, including
a minimum of 52% of the outstanding shares of ARS's common stock being validly
tendered and not withdrawn prior to the expiration of the Tender Offer,
compliance with certain financial and other covenants, no material adverse
change having occurred and the expiration of all applicable waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Assuming
successful completion of the Tender Offer, all ARS shares not tendered and
purchased in the Tender Offer will be converted into the right to receive the
price per share paid pursuant to the Tender Offer in cash pursuant to a merger
of ARS with the ServiceMaster subsidiary as contemplated by the Agreement (the
"Merger").
The Tender Offer for all of the outstanding ARS Shares aggregates
approximately $92.0 million which is approximately $40.0 million below the
Company's historical cost basis in its net assets (total stockholders' equity)
of $132.0 million as of December 31, 1998. The proposed acquisition will be
accounted for by ServiceMaster using the purchase method of accounting, which
requires an allocation of the purchase price of the purchase price to the assets
acquired and liabilities assumed based on fair value as determined by
ServiceMaster. The Company's consolidated financial statements have been
prepared on the historical cost basis of accounting in accordance with generally
accepted accounting principles which may be greater or less than the fair value
of the assets and liabilities as determined by ServiceMaster.
ServiceMaster's Schedule 14D-1 and related Tender Offer documents
(including the Offer to Purchase and Letter of Transmittal), and ARS's Schedule
14D-9, in each case filed with the Securities and Exchange Commission on March
29, 1999, provide additional information with regard to the terms, conditions
and termination events relating to the Tender Offer and the Merger.
14
<PAGE> 17
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
----------------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................... $150,330 100.0% $381,645 100.0% $505,562 100.0%
Cost of services...................... 109,060 72.6 275,514 72.2 389,269 77.0
-------- ----- -------- ----- -------- -----
Gross profit.......................... 41,270 27.4 106,131 27.8 116,293 23.0
Selling, general & administrative
expenses............................ 37,632 25.0 80,742 21.2 103,310 20.4
Special charge and other costs........ -- 0.0 24,194 6.3 4,315 0.9
-------- ----- -------- ----- -------- -----
Income from operations................ 3,638 2.4 1,195 0.3 8,668 1.7
Interest expense...................... (5,479) (3.6) (7,469) (2.0) (13,405) (2.7)
Interest income and other expenses,
net................................. 609 0.4 1,063 0.3 877 0.2
-------- ----- -------- ----- -------- -----
Pretax loss before discontinued
operations and extraordinary item... (1,232) (0.8) (5,211) (1.4) (3,860) (0.8)
Provision (benefit) for income
taxes............................... 1,803 1.2 (829) (0.2) 60 0.0
-------- ----- -------- ----- -------- -----
Net loss before discontinued
operations and extraordinary item... (3,035) (2.0) (4,382) (1.2) (3,920) (0.8)
Discontinued operations, net of tax... -- 0.0 (319) (0.1) (3,641) (0.7)
-------- ----- -------- ----- -------- -----
Net loss before extraordinary item.... (3,035) (2.0) (4,701) (1.3) (7,561) (1.5)
Extraordinary item, net of tax........ -- 0.0 -- 0.0 (300) (0.1)
-------- ----- -------- ----- -------- -----
Net Loss.............................. $ (3,035) (2.0)% $ (4,701) (1.3)% $ (7,861) (1.6)%
======== ===== ======== ===== ======== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues -- Revenues increased $124.0 million, or 32.5%, from $381.6
million for the year ended December 31, 1997 to $505.6 million for the year
ended December 31, 1998. Approximately $116.2 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 remaining
increase in revenue was from increases in commercial maintenance repair and
replacement services in Virginia, Maryland, Washington D.C. and southern
California offset by decreases in residential construction and maintenance
repair and replacement services in South Carolina, Florida and Indiana.
Cost of services -- Cost of services increased $113.8 million, or 41.3%,
from $275.5 million for the year ended December 31, 1997 to $389.3 million for
the year ended December 31, 1998, 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,
decreased from 27.8% for the year ended December 31, 1997 to 23.0% for the year
ended December 31, 1998. The decrease in gross profit in 1998 was primarily
attributable to lower demand for the Company's higher margin residential
maintenance, repair and replacement services in the southeastern, midwest and
southwestern United States and increased revenues from commercial maintenance
repair and replacement to services.
Selling, general and administrative expenses -- Selling, general and
administrative expenses increased $22.6 million, or 28.0%, from $80.7 million
for the year ended December 31, 1997 to $103.3 million for the year ended
December 31, 1998. The increase was primarily attributable to the 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.
15
<PAGE> 18
Special charge and other costs -- During 1998, the Company continued the
review of operations that was initiated during the fourth quarter of 1997. As a
result of this continued effort, the Company recorded a special charge of $4.3
million related to payroll for termination and severance costs, related to
former officers and employees that were terminated as a result of the Company's
continued headcount reduction initiative and future lease commitments on
abandonment of certain operating facilities. For additional discussion of the
1997 special charge and other costs, see "Year Ended December 31, 1997 Compared
to Year Ended December 31, 1996 -- Special charge and other costs".
Interest expense -- Interest expense increased 79.5% from $7.5 million for
the year ended December 31, 1997 to $13.4 million for the year ended December
31, 1998. This increase was attributable to the use of debt financing to fund
the cash portion of the purchase price paid for certain Acquired Businesses at
various times during 1998.
Interest income and other expense, net -- Interest income and other
expense, net, decreased by $0.2 million during 1998.
Provision (benefit) for income taxes -- For the year ended December 31,
1997, the Company recorded a benefit for income taxes of $0.8 million, as
compared to a provision for income taxes of $0.1 million for the year ended
December 31, 1998. The $0.9 million change in income taxes from the year ended
December 31, 1997 to the year ended December 31, 1998 was the result of a
smaller pretax loss in 1998 as compared to 1997 adjusted for the effect of
non-deductible goodwill on certain of the Acquired Businesses. See Note 13 of
Notes to Consolidated Financial Statements of the Company for further discussion
of the tax provision.
Discontinued operations, net of tax -- During the fourth quarter of 1998,
the Company approved the disposition of the air-conditioned tent rental
business, which was acquired in a previous acquisition in 1997 and provides HVAC
services primarily for sporting events. The historical financial statements of
the Company have been restated for the effect of the disposition with the
revenues, cost of services, selling, general and administrative expenses and
other income for fiscal 1997 and 1998 included in the statement of operations
under the caption discontinued operations. Included in the loss for 1998 are net
losses from operations of $0.5 million and net losses related to disposition of
the business of $3.1 million, net of tax, related to the write down of fixed
assets and writeoff of goodwill associated with the initial acquisition.
Extraordinary item, net of tax -- During the second quarter of 1998, the
Company renegotiated its revolving credit facility. As a result, the Company
wrote off deferred loan costs of $0.3 million, net of tax.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues -- Revenues increased $231.3 million, or 153.9%, from $150.3
million for the year ended December 31, 1996 to $381.6 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 $166.4 million, or 152.5%,
from $109.1 million for the year ended December 31, 1996 to $275.5 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 $43.1 million, or 114.6%, from $37.6 million
for the year ended December 31, 1996 to $80.7 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
16
<PAGE> 19
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 21.2% for the year
ended December 31, 1997, as compared to 22.8% for the year ended December 31,
1996.
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 $0.8 million, as
compared to a provision for income taxes of $1.8 million recorded for the year
ended December 31, 1996. See Note 13 of the Notes to Consolidated Financial
Statements of the Company for further discussion of the tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1998, net cash provided by operating
activities was $0.9 million, compared to $12.1 million net cash used in
operating activities during the year ended December 31, 1997. This change was
primarily attributable to (i) improved collection efforts in accounts
receivable, resulting in an improvement in cash flow of $9.8 million from a use
of cash of $10.5 million at December 31, 1997 to a use of cash of $0.7 million
at December 31, 1998, (ii) reductions in the level of inventory on hand
resulting in an improvement in cash flow of $5.1 million from a use of cash of
$2.3 million at December 31, 1997 to a source of cash of $2.8 million at
December 31, 1998, and (iii) better controls over disbursements resulting in an
improvement in working capital of $9.6 million from a use of cash of $15.7
million at December 31, 1997 to a use of cash of $6.1 million at December 31,
1998. The improvements in working capital were offset by a reduction in non-cash
components of the special charge and other costs and the non-cash portion of the
discontinued operation of $12.7 million from a source of cash of $19.4 million
at December 31, 1997 to a source of cash of $6.7 million at December 31, 1998.
During 1998, aggregate capital expenditures totaled $9.2 million (exclusive of
acquisitions) and net borrowings of debt amounted to $25.0 million. The Company
17
<PAGE> 20
anticipates capital expenditures (exclusive of acquisitions) of approximately
$10.0 million during 1999, 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 1999.
In the second quarter of 1998, the Company negotiated a new secured credit
facility (the "Credit Facility") with a syndicate of commercial banks and an
insurance company which increased the Company's maximum borrowing capacity from
$100.0 million under the Company's previous credit facility to $165.0 million.
The Credit Facility was comprised of a $115.0 million three-year revolving
credit facility (the "Revolving Credit") and a $50.0 million five-year term loan
(the "Term Loan"). The Company used the proceeds of the Term Loan and the
borrowings under the Revolving Credit to repay the outstanding borrowings under
its prior $100.0 million credit facility. Subject to certain limitations, the
Company may use borrowings under the Revolving Credit for general corporate
purposes, funding the purchases of businesses and the refinancing of
indebtedness, capital expenditures and working capital.
At the Company's option, loans under the Revolving Credit bore interest at
a designated variable base rate plus a margin ranging from 0 to 75 basis points
or at the London Interbank Offered Rate ("LIBOR") plus a margin ranging from 125
to 275 basis points. The margin varied with the ratio of the Company's total
debt to its pro forma trailing 12-month earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The margin was reset on a quarterly
basis. Commitment fees of 25 to 50 basis points per annum were payable on the
unused portion of the Revolving Credit. The Revolving Credit will terminate and
all amounts borrowed, if any, will be due and payable on June 30, 2001. The
Revolving Credit also contained a $5.0 million sub-limit for standby letters of
credit.
The $50.0 million Term Loan consisted of two $25.0 million tranches. One
tranche bore interest at a fixed rate of 8.96% while the other tranche bore
interest at the variable LIBOR rate plus a fixed margin of 325 basis points.
Beginning April 2000, the Company is required to make quarterly principal
payments of approximately $3.6 million on the Term Loan. The final payment on
the Term Loan is due on July 1, 2003.
The Credit Facility requires the consent of the lenders for acquisitions
exceeding a certain level of cash consideration, prohibits the payment of cash
dividends by ARS, limits the incurrence of other indebtedness (other than
approved subordinated indebtedness) and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA limits and minimum fixed charge and
interest coverage ratios.
During 1998, the Company was required to obtain, and did obtain, waivers
from its lenders as a result of the Company's failure to comply with certain
financial covenants of the Credit Facility. On March 31, 1999, the required
lenders under the Credit Facility agreed to waive the covenant violations and
amend certain provisions of the Credit Facility (the "Amendment"). Under the
Amendment, the Company's maximum borrowing capacity decreased from $165.0
million to $145.0 million and is comprised of a $95.0 million revolving credit
facility (the "Amended Revolving Credit") and a $50.0 million term loan (the
"Amended Term Loan").
At the Company's option, loans under the Amended Revolving Credit bear
interest at a designated variable base rate plus a margin of 150 basis points or
at the London Interbank Offered Rate ("LIBOR") plus a margin of 350 basis
points. Commitment fees of 75 basis points per annum are payable on the unused
portion of the Amended Revolving Credit. The maturity date of the Amended
Revolving Credit remains June 30, 2001 and all amounts borrowed, if any, will be
due and payable on this date. The Amended Revolving Credit also contains a $10.0
million sub-limit for standby letters of credit.
Pursuant to the Amendment, the interest rates on the $50.0 million Term
Loan consisting of two $25.0 million tranches were revised. One tranche bears
interest at a fixed rate of 9.96% while the other tranche bears interest at the
variable LIBOR rate plus a fixed margin of 425 basis points. As previously
provided, beginning April 2000, the Company is required to make quarterly
principal payments of approximately $3.6 million on the Amended Term Loan. The
final payment on the Amended Term Loan remains July 1, 2003.
18
<PAGE> 21
In addition to waiving certain financial covenant violations during 1998,
the Amendment substantially revised the financial covenants throughout 1999 and,
in general, reduced the Company's required level of operating performance to
comply with the financial covenants. The financial covenants beginning March 31,
2000 will remain in accordance with the financial covenants previously
established in the Credit Facility. Management believes the Company can comply
with the amended financial covenants during 1999. However, no assurances of
compliance can be provided, and compliance will require improved Company
operating performance compared to 1998.
The Credit Facility restricts the cash consideration (including assumed
debt) that the Company may pay for a business to be acquired if ARS does not
generate a specified minimum level of EBITDA. The Company did not meet such
minimum level of EBITDA for the periods ended September 30, 1998 and December
31, 1998. As a result, effective as of November 15, 1998, the Company was
required to begin obtaining the prior written consent of the lenders under the
Credit Facility prior to consummating an acquisition in which the amount of cash
consideration (including assumed debt) that the Company would pay exceeds one
times the historical adjusted EBITDA of the acquired business. Virtually all of
the Company's acquisitions to date have involved consideration (including
assumed debt) in excess of one times the acquired business' historical adjusted
EBITDA. Pursuant to the Amendment, such EBITDA covenant is superseded by a
prohibition through March 31, 2000 on the Company's ability to make business
acquisitions.
The Company's subsidiaries have guaranteed the repayment of all amounts
under the Credit Facility and the Company has pledged the accounts receivable,
inventory and stock of its operating subsidiaries as collateral for the
repayment of 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 Credit Facility.
As of December 31, 1998, the Company's outstanding borrowings under the Credit
Facility were $110.2 million, bearing interest at a weighted average rate of
8.7%. At March 31, 1999, the Company's outstanding borrowings under the Credit
Facility were $116.0 million, bearing interest at a weighted average rate of
8.2%.
ARS also has outstanding $55.0 million aggregate principal amount of its
7 1/4% Convertible Subordinated Notes due 2004 (the "7 1/4% Notes"). The 7 1/4%
Notes are unsecured obligations of ARS and are convertible at $25.50 per share,
subject to an adjustment in certain events, into an aggregate of 2,156,863
shares of Common Stock. 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. In the event of a change in control of the Company, as defined
in the indenture governing the 7 1/4% Notes, the holders of the 7 1/4% Notes
have the right to require the Company to repurchase the 7 1/4% Notes. The
proposed Tender Offer, if successful, would constitute a change of control of
the Company under the indenture.
As of December 31, 1998, ARS also had outstanding $7.49 million aggregate
principal amount of Series A Notes. The Series A Notes are unsecured obligations
of ARS and the outstanding Series A Notes are convertible into an aggregate of
600,333 shares of Common Stock. As of December 31, 1998, the weighted average
price per share at which the outstanding Series A Notes are convertible into
Common Stock was $12.64 per share and the weighted average interest rate payable
on the outstanding Series A Notes was 7.42% per annum. In the event of a change
in control of the Company, as defined in the indenture governing the Series A
Notes, the holders of the Series A Notes have the right to require the Company
to repurchase the Series A Notes. The proposed Tender Offer, if successful,
would constitute a change of control of the Company under the indenture.
STOCKHOLDERS' RIGHTS PLAN
In August 1996, the Company adopted a stockholders' rights plan (the
"Rights Plan"). The Rights Plan provides for a dividend distribution of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's common stock. The establishment of the Rights Plan may deter coercive
takeover tactics and prevent an acquirer from gaining control of the Company
without offering a fair price to all of the Company's stockholders. The Rights
will expire on June 30, 2006.
19
<PAGE> 22
Each Right entitles stockholders to buy one one-hundredth (a "Fractional
Share") of a newly issued share of Series A Junior Participating Preferred Stock
of the Company at an exercise price of $40 per Fractional Share. The Rights are
exercisable only if a person or group acquires beneficial ownership of 15
percent or more of the Company's common stock or commences a tender or exchange
offer which, if consummated, would result in that person or group owning 15
percent or more of the Company's common stock. However, the Rights will not
become exercisable if the Company's common stock is acquired pursuant to an
offer for all shares which a majority of the board of directors determines to be
fair to and otherwise in the best interests of the Company and its stockholders.
If, following an acquisition of 15 percent or more of the Company's common
stock, the Company is acquired by that person or group in a merger or other
business combination transaction, each Right would then entitle its holder to
purchase common stock of the acquiring company having a value of twice the
exercise price. The effect will be to entitle the Company's stockholders to buy
stock in the acquiring company at 50 percent of its market price.
The Company may redeem the Rights at $.01 per Right at any time on or prior
to the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.
The Rights Plan was amended on March 22, 1999, and pursuant to this
amendment, the Rights did not become exercisable in connection with the
execution of the Merger Agreement and will not become exercisable upon the
consummation of the Tender Offer or the Merger contemplated thereby.
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 routing
business activities.
The Company recognizes the need to ensure that its operations will not be
adversely affected by Year 2000 software failures. Therefore, in 1997 the
Company began examining the Year 2000 issue in an effort to minimize the
disruptions to the Company's business and potential Company liabilities that
could result from Year 2000 software failures. The Company has engaged both
employees and outside experts to identify Year 2000 compliance problems, to
assist in developing estimates and to complete necessary remediation work,
including the reprogramming, replacement and testing of software for Year 2000
compliance.
The Company currently has a plan in place to modify or replace portions of
its administrative and operating software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter,
providing management with consistent operations and financial information
throughout the Company. The Company currently estimates that this process should
be completed during the fourth quarter of 1999.
The Company also has initiated efforts to evaluate the status of Year 2000
readiness of certain of its material vendors and third parties with which it
conducts business. While the Company has received assurances in some cases that
such persons' systems will be Year 2000 compliant, there can be no guarantee
that Year 2000 problems originating with third parties whose systems affect the
Company will not occur. Year 2000 interruptions in customers' operations could
result in reduced sales, increased inventory or receivable levels and cash flow
reductions. The Company is also reviewing its building and utility systems
(elevators, lights, phones, etc.) for the impact of Year 2000. Many of the
systems in this area are believed to already be Year 2000 compliant.
The Company has spent approximately $0.6 million through 1998 to identify
and correct potential year 2000 software problems. Costs to be incurred in 1999
to correct Year 2000 problems, as well as to upgrade or replace the Company's
information systems in general, are estimated to be approximately $8.2 million.
The Company does not expect costs relating to Year 2000 remediation to have a
material adverse effect on its results of operations or financial conditions.
20
<PAGE> 23
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plans to complete its compliance program, the Company
does not foresee significant risks associated with its Year 2000 compliance at
this time. Because the Company plans to address any significant Year 2000 issues
before being affected by them, it has not developed a comprehensive contingency
plan. However, if the Company identifies significant risks related to its Year
2000 compliance or its progress deviates from the anticipated program, the
Company will develop contingency plans as necessary. Furthermore, although the
Company does not anticipate any material adverse effect from Year 2000 failures,
there is no guarantee of total compliance. Specific factors that give rise to
uncertainty include failure to identify all susceptible systems, non-compliance
by third parties whose systems and operations impact the Company, a possible
loss of technical resources to perform the work and other similar uncertainties.
Year 2000 non-compliance could result in material disruption of the Company's
operations, an interruption in its ability to collect amounts due from
customers, loss of accurate accounting records or any number of other
difficulties. Depending on the length of non-compliance and system failure, any
or all of these situations could have a material adverse impact on the Company's
results of operations and financial position.
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT
ON FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT.
INFLATION
Due to the relatively low levels of inflation experienced in 1996, 1997 and
1998, inflation did not have a significant effect on the results of the Company
in those periods.
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."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the Company to
significant market risk. The Company's exposure to market risk for changes in
interest rates relates primarily to its long-term debt obligations. The
Company's long-term debt obligations include borrowings under the Credit
Facility, which totaled $110.2 million as of December 31, 1998. Of the $110.2
million, $60.2 million was outstanding under the Revolving Credit and $50.0
million was outstanding under the Term Loan. The Revolving Credit matures on
June 30, 2001 and the Term Loan matures on July 1, 2003 (see "Liquidity and
Capital Resources"). The weighted average interest rate of the $110.2 million of
outstanding indebtedness was 8.70% at December 31, 1998. The Company also has
outstanding $55.00 million aggregate principal amount of 7 1/4% Notes which
mature in 2004, $7.5 million aggregate principal amount of Series A Notes which
mature in 2004 and $1.7 million of miscellaneous debt instruments which mature
at various dates.
The following table sets forth the average interest rate for the scheduled
maturities of the Company's long-term debt obligations as of December 31, 1998
($ in thousands):
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
AT DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
-------- --------- --------- --------- --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED RATE DEBT:
Amount................... $1,069.0 $11,112.0 $14,442.0 $14,322.0 $10,716.0 $62,489.0 $114,150.0 $81,150.0
Average interest rate.... 8.5% 8.64% 8.64% 8.64% 8.64% 7.27% 7.89%
VARIABLE RATE DEBT:
Amount................... $ -- $ -- $60,200.0 $ -- $ -- $ -- $ 60,200.0 $60,200.0
Average interest rate.... -- -- 8.75% -- -- -- 8.00%
</TABLE>
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.................. 23
Consolidated Balance Sheets............................... 24
Consolidated Statements of Operations..................... 25
Consolidated Statements of Stockholders' Equity........... 26
Consolidated Statements of Cash Flows..................... 27
Notes to Consolidated Financial Statements................ 28
</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, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. 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, 1997
and 1998, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1999
23
<PAGE> 26
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
ASSETS -------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,190 $ 4,843
Accounts receivable --
Trade, net of allowance of $2,315 and $5,057........... 47,364 67,713
Other.................................................. 8,685 8,333
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 5,337 9,372
Inventories............................................... 17,847 16,202
Prepaid expenses and other current assets................. 3,138 8,867
Net assets held for resale................................ 425 --
Investment in discontinued operations..................... 4,791 343
-------- --------
Total current assets.............................. 92,777 115,673
PROPERTY AND EQUIPMENT, net................................. 32,975 30,117
GOODWILL, net............................................... 203,567 230,136
OTHER NONCURRENT ASSETS..................................... 5,972 6,291
-------- --------
Total assets...................................... $335,291 $382,217
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,284 $ 1,069
Accounts payable and accrued expenses..................... 53,387 60,909
Unearned revenue on service and warranty contracts........ 6,001 6,857
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 4,497 7,756
-------- --------
Total current liabilities......................... 65,169 76,591
LONG-TERM DEBT, net of current maturities................... 135,087 173,281
UNEARNED REVENUE ON SERVICE AND WARRANTY CONTRACTS.......... 472 373
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;
15,321,322 and 15,887,704 shares issued and
outstanding............................................ 15 16
Additional paid-in-capital................................ 152,983 158,252
Retained deficit.......................................... (18,435) (26,296)
-------- --------
Total stockholders' equity........................ 134,563 131,972
-------- --------
Total liabilities and stockholders' equity........ $335,291 $382,217
======== ========
</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,
------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES.................................................... $150,330 $381,645 $505,562
COST OF SERVICES............................................ 109,060 275,514 389,269
-------- -------- --------
Gross profit.............................................. 41,270 106,131 116,293
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 34,276 80,742 103,310
SPECIAL CHARGE AND OTHER COSTS (Note 2)..................... -- 24,194 4,315
COMPENSATION EXPENSE RELATED TO PURCHASE OF EHC (Note 1).... 3,356 -- --
-------- -------- --------
INCOME FROM OPERATIONS...................................... 3,638 1,195 8,668
OTHER INCOME (EXPENSE):
Financing fees related to purchase of EHC (Note 1)........ (4,818) -- --
Interest expense.......................................... (661) (7,469) (13,405)
Interest income........................................... 118 227 181
Other..................................................... 491 836 696
-------- -------- --------
LOSS BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM........................................ (1,232) (5,211) (3,860)
PROVISION (BENEFIT) FOR INCOME TAXES........................ 1,803 (829) 60
-------- -------- --------
LOSS BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY
ITEM...................................................... (3,035) (4,382) (3,920)
DISCONTINUED OPERATIONS (Note 3) --
Loss from discontinued operations, net of income tax
benefit of $172 and $239 for 1997 and 1998,
respectively........................................... -- (319) (495)
Loss on disposition, net of income tax benefit of $665 for
1998................................................... -- -- (3,146)
-------- -------- --------
NET LOSS BEFORE EXTRAORDINARY ITEM.......................... (3,035) (4,701) (7,561)
EXTRAORDINARY ITEM -- Loss on refinancing revolving credit
facility, net of income tax benefit of $260 for 1998...... -- -- (300)
-------- -------- --------
NET LOSS.................................................... $ (3,035) $ (4,701) $ (7,861)
======== ======== ========
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE
5)........................................................ 6,277 14,330 15,702
======== ======== ========
LOSS PER SHARE BEFORE DISCONTINUED OPERATIONS AND
EXTRAORDINARY ITEM........................................ $ (0.48) $ (0.31) $ (0.25)
DISCONTINUED OPERATIONS..................................... -- (0.02) (0.23)
EXTRAORDINARY ITEM.......................................... -- -- (0.02)
-------- -------- --------
NET LOSS PER SHARE (NOTE 5)................................. $ (0.48) $ (0.33) $ (0.50)
======== ======== ========
</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, 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
1998 Acquisitions....................... 561 1 5,180 -- 5,181
Exercise of stock options............... 6 -- 89 -- 89
Net loss................................ -- -- -- (7,861) (7,861)
------ --- -------- -------- --------
BALANCE, December 31, 1998................ 15,888 $16 $158,252 $(26,296) $131,972
====== === ======== ======== ========
</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,
-------------------------------
1996 1997 1998
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (3,035) $ (4,701) $ (7,861)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities --
Depreciation and amortization........................... 3,233 10,224 12,454
Non-cash portion of special charge and other costs...... -- 19,430 2,878
Non-cash portion of discontinued operations............. -- -- 3,811
Non-cash portion of extraordinary item.................. -- -- 560
Taxes on acquired S corporations........................ 1,811 530 --
Stock portion of compensation and financing fees related
to purchase of EHC.................................... 6,276 -- --
Deferred income tax benefit............................. (667) (3,989) (1,698)
Gain on sale of property and equipment.................. (77) (352) (377)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................ (2,421) (10,518) (661)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (92) (3,256) (2,871)
Inventories........................................ (96) (2,286) 2,843
Prepaid expenses and other current assets.......... (1,141) (373) (3,103)
Investment in discontinued operations.............. -- (2,832) 637
Other noncurrent assets............................ (60) (102) 828
Increase (decrease) in --
Accounts payable and accrued expenses.............. (1,095) (15,681) (6,126)
Unearned revenue on service and warranty
contracts........................................ 82 (612) 522
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 358 1,929 (998)
Other, net.............................................. (127) 455 70
-------- --------- --------
Net cash provided by (used in) operating
activities....................................... 2,949 (12,134) 908
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property and equipment............. 635 959 5,180
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.............................................. (3,831) (1,171) --
Additions to property and equipment....................... (258) (10,182) (9,174)
Cash paid for acquisitions, net of cash acquired.......... (44,458) (43,227) (18,945)
-------- --------- --------
Net cash used in investing activities.............. (47,912) (58,474) (22,939)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 43,457 223,873 124,012
Principal payments of long-term debt...................... (42,734) (154,691) (98,989)
Proceeds from issuances of Common Stock, net of offering
costs................................................... 60,631 485 90
Distributions to stockholders of Founding Companies....... (6,031) -- --
S corporation dividends paid by Restated Businesses....... (2,569) (3,746) --
Other, net................................................ (680) (107) (3,429)
-------- --------- --------
Net cash provided by financing activities.......... 52,074 65,814 21,684
-------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 7,111 (4,794) (347)
CASH AND CASH EQUIVALENTS, beginning of period.............. 2,873 9,984 5,190
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 9,984 $ 5,190 $ 4,843
======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 823 $ 6,078 $ 11,113
Cash paid (received) for income taxes, net.............. 518 7,449 (1,035)
</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
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS AND ORGANIZATION:
Formation and Initial Public Offering
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.
Acquisitions
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.
In 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").
During 1998, the Company acquired 18 businesses (the "1998 acquisitions"),
of which 17 were accounted for in accordance with the purchase method of
accounting and one was accounted for under the pooling of interests method of
accounting of which the historical financial statements were not retroactively
restated as the effect thereof was not material to the historical financial
statements. For information regarding the Pooled Businesses and the 1996, 1997
and 1998 Acquisitions, see Note 6.
Operating Results and Debt Compliance Issues
The Company has incurred losses since its IPO in September 1996, and for
the years ended December 31, 1997 and 1998 reported special charges of $24,194
and $4,315, respectively, as a result of, among others, decisions to reduce
overhead and consolidate or eliminate certain operations. Additionally, in
28
<PAGE> 31
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the fourth quarter of 1998, the Company discontinued its air-conditioned tent
rental business and recorded a $3,146 loss, net of taxes, on disposal. See Notes
2 and 3 below for further discussion. As further discussed in Note 9, a credit
facility, which is a source of working capital for the Company's operations,
contains financial covenants which are computed based on the Company's
consolidated financial position and operating results. During 1998, the Company
was required to obtain, and did obtain, waivers from its lenders as a result of
the Company's failure to comply with certain financial warrants of the credit
facility. On March 31, 1999, the required lenders under the credit facility
agreed to waive the covenant violations and amend certain provisions of the
credit facility through March 31, 2000. See Note 9 for further discussion.
Factors That May Affect Future Results
The Company's future success is dependent upon a number of factors which
include, among others, the ability to manage growth, the ability to integrate
operations, the reliance on acquisition financing, the ability to attract and
retain qualified management and employees, the ability to maintain compliance
with its credit facility and risks associated with competition, seasonality and
quarterly fluctuations.
ServiceMaster's Proposed Acquisition of the Company
On March 22, 1999, ARS entered into an Agreement and Plan of Merger (the
"Merger Agreement") with The ServiceMaster Company ("ServiceMaster") and a
wholly-owned subsidiary of ServiceMaster. The Merger Agreement provides for the
acquisition of ARS for a price of $5.75 per share in cash pursuant to a tender
offer (the "Tender Offer") by the ServiceMaster subsidiary for all outstanding
shares of ARS Common Stock, par value $.001 per share, including the associated
Preferred Stock Purchase Rights (the "Rights" -- see Note 16) (collectively, the
"ARS Shares"). The Tender Offer, which commenced on March 29, 1999, is currently
scheduled to expire at 11:59 p.m., New York City time, on April 26, 1999 (but
may be extended under certain circumstances).
Completion of the Tender Offer is subject to certain conditions, including
a minimum of 52% of the outstanding shares of ARS's common stock being validly
tendered and not withdrawn prior to the expiration of the Tender Offer,
compliance with certain financial and other covenants, no material adverse
change having occurred and the expiration of all applicable waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Assuming
successful completion of the Tender Offer, all ARS shares not tendered and
purchased in the Tender Offer will be converted into the right to receive the
price per share paid pursuant to the Tender Offer in cash pursuant to a merger
of ARS with the ServiceMaster subsidiary as contemplated by the Merger Agreement
(the "Merger").
The Tender Offer for all of the outstanding ARS Shares aggregates
approximately $92,000, which is approximately $40,000 below the Company's
historical cost basis in its net assets (total stockholders' equity) of $132,000
as of December 31, 1998. The proposed acquisition will be accounted for by
ServiceMaster using the purchase method of accounting, which requires an
allocation of the purchase price to the assets acquired and liabilities assumed
based on fair value as determined by ServiceMaster. The Company's consolidated
financial statements have been prepared on the historical cost basis of
accounting in accordance with generally accepted accounting principles which may
be greater or less than the fair value of the assets and liabilities as
determined by ServiceMaster.
ServiceMaster's Schedule 14D-1 and related Tender Offer documents
(including the Offer to Purchase and Letter of Transmittal), and ARS's Schedule
14D-9, in each case filed with the Securities and Exchange Commission on March
29, 1999, provide additional information with regard to the terms, conditions
and termination events relating to the Tender Offer and the Merger.
29
<PAGE> 32
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 per share.
During 1998, the Company continued the review of operations that was
initiated in the fourth quarter of 1997. As a result of this continued effort,
the Company recorded a special charge and other costs of $4,315 related
primarily to severance costs related to former officers and employees that were
terminated as a result of the Company's continued headcount reduction initiative
and future lease commitments on abandonment of certain operating facilities.
This charge reduced net income by $2,589 (net of tax), or $0.17 per share.
The components of the accrued liability balance resulting from the $24,194
special charge recorded in 1997, the $4,315 special charge recorded in 1998 and
the related payments and other transactions occurring during 1998 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, PAYMENTS DECEMBER 31,
1997 ADDITIONS AND OTHER 1998
------------ --------- --------- ------------
<S> <C> <C> <C> <C>
Future lease commitments......................... $ 6,561 $ 342 $(1,065) $ 5,838
Termination and severance costs.................. 5,201 3,973 (4,434) 4,740
Write-down of retail appliance business.......... 4,221 -- (4,221) --
------- ------ ------- -------
Total.................................. $15,983 $4,315 $(9,720) $10,578
======= ====== ======= =======
</TABLE>
At December 31, 1998, approximately $3,484 of the accrued expenses related
to the special charge and other costs are expected to be paid and reversed in
1999, with the remaining amounts to be paid and reversed through 2011.
3. DISCONTINUED OPERATIONS:
The Company has approved a plan to discontinue the Company's
air-conditioned tent rental business (the "Rental Business"). The Rental
Business was acquired in a previous acquisition completed in 1997 and provided
HVAC services primarily for sporting events. As a result of this decision, the
Company recorded a Loss on Disposal in the fourth quarter which reduced net
income by $3,146 (net of tax), or $0.20 per share. The historical consolidated
results of operations of the Company have been restated to report the operations
of the Rental Business as Discontinued Operations for all periods disclosed. The
remaining net realizable value of the Rental Business assets which are being
held for disposal and are expected to be disposed of within one year are
classified under the caption Investment in Discontinued Operations in the
consolidated balance sheets as of December 31, 1997 and 1998, and the operating
results are included under the caption Loss from Discontinued Operations, net of
tax, in the consolidated statements of operations for years 1997 and 1998.
30
<PAGE> 33
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SEGMENT DISCLOSURE:
In July 1997, Statements of Financial Accounting Standards ("SFAS") No.
131, "Disclosures About Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 requires certain financial and supplementary information to
be disclosed on an annual and interim basis for each reportable segment of an
enterprise. SFAS No. 131 was first effective January 1, 1998.
The Company has two reportable segments: residential operations and
commercial operations. Residential operations focus on providing (i)
comprehensive maintenance, repair and replacement services for heating,
ventilation and air condition ("HVAC"), plumbing, electrical, indoor air quality
and other services in homes and other small commercial buildings and (ii) new
installations of those systems in homes and small commercial facilities under
construction. Commercial operations provides comprehensive maintenance, repair,
replacement, reconfiguration and monitoring services for HVAC, plumbing,
refrigeration, 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.
The Company's reportable segments are strategic business units that offer
similar products but to a different customer base. They are managed separately
as each operation requires a different approach to marketing strategies and
require a different level of technical skills within field operations. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that corporate expenses, such
as the salaries, rent, utilities, interest expense and income taxes are not
allocated between the segments in the Company's evaluation of segment profit or
loss.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1996 1997 1998
------------------------ ------------------------ ------------------------
RESIDENTIAL COMMERCIAL RESIDENTIAL COMMERCIAL RESIDENTIAL COMMERCIAL
OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $111,542 $38,788 $313,784 $ 67,792 $381,078 $124,484
Segment operating income......... 5,929 1,552 11,432 6,898 17,819 10,383
Depreciation..................... 1,583 190 4,685 814 5,161 999
Assets........................... 197,086 10,607 275,067 42,964 275,335 76,841
Capital expenditures............. 3,803 205 5,199 397 5,441 748
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
REVENUES 1996 1997 1998
-------- --------- --------- ---------
<S> <C> <C> <C>
Total revenues from reportable segments..................... $150,330 $381,576 $505,562
Other revenues.............................................. -- 69 --
-------- -------- --------
Total consolidated revenues....................... $150,330 $381,645 $505,562
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
PROFIT OR LOSS 1996 1997 1998
-------------- --------- --------- ---------
<S> <C> <C> <C>
Total segment operating income for reportable segments...... $ 7,481 $ 18,330 $ 28,202
Corporate expenses.......................................... (3,843) (17,135) (19,534)
Interest expense............................................ (5,479) (7,469) (13,405)
Interest income and other................................... 609 1,063 877
-------- -------- --------
Loss before income taxes, discontinued operations and
extraordinary item........................................ $ (1,232) $ (5,211) $ (3,860)
======== ======== ========
</TABLE>
31
<PAGE> 34
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
ASSETS 1997 1998
------ -------- --------
<S> <C> <C>
Total assets for reportable segments........................ $318,031 $352,176
Corporate assets............................................ 17,260 30,041
-------- --------
Total consolidated assets......................... $335,291 $382,217
======== ========
</TABLE>
5. 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 investments 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, 1997 and 1998, accumulated
amortization of goodwill was approximately $5,080 and $10,736, respectively.
32
<PAGE> 35
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company periodically evaluates the recoverability of intangibles
resulting from business acquisitions and measures the amount of impairment, if
any, by assessing current and future levels of income and cash flows on an
undiscounted basis as well as other factors, such as business trends and
prospects and market and economic conditions. This evaluation is performed at
each of the Company's district locations. Any resulting impairment is recognized
in the consolidated statements of operations.
Debt Issue Costs
Debt issue costs related to the Company's Credit Facility and 7 1/4% notes
(see Note 9) are included in other noncurrent assets and are amortized to
interest expense over the scheduled maturity of the debt. As of December 31,
1997 and 1998, accumulated amortization of debt issue costs was approximately
$654 and $937, 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 SFAS No. 123, "Accounting for Stock-Based
Compensation," are effective for transactions entered into in fiscal years
beginning in 1996. 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 10 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
33
<PAGE> 36
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the underlying assets or liabilities are recovered or settled.
Certain of the Restated Businesses were S corporations for income tax
purposes prior to their acquisition by the Company. Accordingly, any income tax
liabilities for the periods prior to their respective acquisition dates are the
responsibility of their respective former stockholders. For purposes of these
consolidated financial statements, federal and state income taxes 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.
Earnings Per Share
The following table summarizes weighted average shares outstanding for each
of the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997 1998
----- ------ ------
<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 1,268
Weighted average portion of shares issued to the remaining
stockholders of the Founding Companies.................... 472 1,884 1,884
Weighted average portion of shares sold in the Offering..... 1,204 4,830 4,830
Weighted average portion of shares awarded to certain
employees and consultants................................. 10 40 40
Weighted average portion of shares issued in the 1996
Acquisitions.............................................. 188 1,282 1,282
Weighted average portion of shares issued in the 1997
Acquisitions.............................................. -- 926 1,895
Weighted average portion of shares issued in the 1998
Acquisitions.............................................. -- -- 375
Weighted average shares attributable to stock options
exercised in 1997......................................... -- 15 37
Weighted average shares attributable to stock options
exercised in 1998......................................... -- -- 6
----- ------ ------
Basic and diluted weighted average shares
outstanding..................................... 6,277 14,330 15,702
===== ====== ======
</TABLE>
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the year.
Diluted EPS is computed in the same manner as fully
34
<PAGE> 37
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Common stock equivalents are excluded in the calculation of weighted
average shares outstanding as the Company reported a net loss in each of the
years presented.
New Accounting Pronouncements
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
changes in equity of an entity during the reporting period, including net income
and charges directly to equity, which are excluded from net income. For the
years ended December 31, 1998 and 1997, there are no material differences
between the Company's "traditional" and "comprehensive" net income.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and requires
the reporting of selected information about operating segments in interim
financial reports issued to stockholders. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company has adopted the provisions of SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended December 31, 1998. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefit plans. The
adoption of this standard does not apply to the Company as the Company does not
provide pension or other postretirement benefits to its employees.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. The Company is evaluating SFAS No. 133 and
the impact on existing accounting policies and financial reporting disclosures.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Development or Obtained for Internal Use." The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company is
required to, and will adopt SOP 98-1 by the first quarter of fiscal 1999 and
believes that adoption will not have a material effect on its consolidated
financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998, and the
Company expects to adopt the new standard in January 1999. The adoption of this
standard is not expected to have a material effect on the Company's consolidated
financial position or result of operations.
35
<PAGE> 38
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. 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.
Purchases
In addition to the acquisitions of the Restated Businesses, the Company
acquired 83 residential services and commercial maintenance services businesses
from October 1, 1996 through December 31, 1998 for an aggregate consideration of
$109,305 in cash, 3,763,453 shares of Common Stock and promissory notes in the
principal amount of $9,264. Of these acquisitions, 74 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 nine 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, 1998 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, 1997 and 1998. The unaudited pro
forma data presented below consists of the income statement data as presented in
these consolidated financial statements plus the income statement data for the
1997 Acquisitions and the 1998 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, 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues........................................... $550,458 $563,159
======== ========
Net income (loss) before discontinued operations
and extraordinary item........................... $ 1,881 $ (2,154)
======== ========
Basic and diluted net income (loss) per share
before discontinued operations and extraordinary
item............................................. $ 0.12 $ (0.14)
======== ========
</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) adjustments for pro forma
goodwill amortization expense using a 40-year estimated life, (iii) 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 (iv) adjustments to the federal and state income tax provisions based on pro
forma operating results. Basic and diluted net income (loss) per share for 1997
and 1998 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.
36
<PAGE> 39
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED USEFUL ------------------
LIVES IN YEARS 1997 1998
---------------- ------- -------
<S> <C> <C> <C>
Land and land improvements........................ -- $ 2,287 $ 474
Buildings and leasehold improvements.............. 5-40 12,829 11,434
Transportation equipment.......................... 5 18,191 20,541
Machinery and equipment........................... 5-7 9,230 13,450
Furniture and fixtures............................ 5-10 5,120 9,023
------- -------
47,657 54,922
Less -- accumulated depreciation.................. 14,682 24,805
------- -------
Property and equipment, net....................... $32,975 $30,117
======= =======
</TABLE>
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Balance at beginning of year........................... $1,343 $2,315
Additions charged to costs and expenses.............. 511 4,239
Deductions for uncollectible receivables written
off............................................... (999) (2,935)
Allowance for doubtful accounts at acquisition
dates............................................. 1,460 1,438
------ ------
Balance at end of year................................. $2,315 $5,057
====== ======
</TABLE>
Other receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Tax receivable......................................... $2,900 $2,799
Vendor receivables..................................... 1,955 2,675
Notes receivable....................................... 1,543 341
Other receivables...................................... 2,287 2,518
------ ------
$8,685 $8,333
====== ======
</TABLE>
At December 31, 1997 and 1998, approximately $391 and $543, respectively,
included in notes and other receivables above represent unsecured notes
receivables with former owners of the Acquired Businesses.
The Company also has long-term unsecured notes receivables, included in
other noncurrent assets, with former owners of the Acquired Business totaling
$349 and $453 at December 31, 1997 and 1998, respectively.
37
<PAGE> 40
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Accounts payable, trade.................................. $18,173 $27,608
Special charge and other costs (see Note 2).............. 15,983 10,578
Accrued compensation and benefits........................ 8,035 9,998
Accrued insurance........................................ 3,016 2,473
Other accrued expenses................................... 8,180 10,252
------- -------
$53,387 $60,909
======= =======
</TABLE>
Installation contracts in progress are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
------- --------
<S> <C> <C>
Costs incurred on contracts in progress................ $41,676 $118,825
Estimated earnings, net of losses...................... 12,594 27,118
------- --------
54,270 145,943
Less -- Billings to date............................... 53,430 144,327
------- --------
$ 840 $ 1,616
======= ========
</TABLE>
The following are included in the accompanying consolidated balance sheets
under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- -------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 5,337 $ 9,372
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (4,497) (7,756)
------- -------
$ 840 $ 1,616
======= =======
</TABLE>
9. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1998
-------- --------
<S> <C> <C>
Credit Facility (see below)............................ $ 79,200 $110,200
7 1/4% Notes (see below)............................... 55,000 55,000
Series A Notes (see below)............................. -- 7,489
Other.................................................. 2,171 1,661
-------- --------
136,371 174,350
Less -- Current maturities............................. 1,284 1,069
-------- --------
$135,087 $173,281
======== ========
</TABLE>
38
<PAGE> 41
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility
In the second quarter of 1998, the Company negotiated a new secured credit
facility (the "Credit Facility") with a syndicate of commercial banks and an
insurance company which increased the Company's maximum borrowing capacity from
$100,000 under the Company's previous credit facility to $165,000. The Credit
Facility was comprised of a $115,000 three-year revolving credit facility (the
"Revolving Credit") and a $50,000 five-year term loan (the "Term Loan"). The
Company used the proceeds of the Term Loan and borrowings under the Revolving
Credit to repay the outstanding borrowings under its prior $100,000 credit
facility. Subject to certain limitations, the Company may use borrowings under
the Revolving Credit for general corporate purposes, funding the purchases of
businesses and the refinancing of indebtedness, capital expenditures and working
capital. As a result of the negotiated Credit Facility, the Company wrote off
approximately $300 (net of tax) of deferred loan costs.
At the Company's option, loans under the Revolving Credit bore interest at
a designated variable base rate plus a margin ranging from 0 to 75 basis points
or at the London Interbank Offered Rate ("LIBOR") plus a margin ranging from 125
to 275 basis points. The margin varied with the ratio of the Company's total
debt to its pro forma trailing 12-month earnings before interest, taxes,
depreciation and amortization ("EBITDA"). The margin was reset on a quarterly
basis. Commitment fees of 25 to 50 basis points per annum were payable on the
unused portion of the Revolving Credit. The Revolving Credit will terminate and
all amounts borrowed, if any, will be due and payable on June 30, 2001. The
Revolving Credit also contained a $5,000 sub-limit for standby letters of
credit.
The $50,000 Term Loan consisted of two $25,000 tranches. One tranche bore
interest at a fixed rate of 8.96% while the other tranche bore interest at the
variable LIBOR rate plus a fixed margin of 325 basis points. Beginning April
2000, the Company is required to make quarterly principal payments of
approximately $3,600 on the Term Loan. The final payment on the Term Loan is due
July 1, 2003.
The Credit Facility requires the consent of the lenders for acquisitions
exceeding a certain level of cash consideration, prohibits the payment of cash
dividends by ARS, limits the incurrence of other indebtedness (other than
approved subordinated indebtedness) and requires the Company to comply with
certain financial covenants, including a minimum net worth requirement, maximum
senior and total debt to pro forma EBITDA limits and minimum fixed charge and
interest coverage ratios.
Amendment to Credit Facility
During 1998, the Company was required to obtain, and did obtain, waivers
from its lenders as a result of the Company's failure to comply with certain
financial covenants of the Credit Facility. On March 31, 1999, the required
lenders under the Credit Facility agreed to waive the covenant violations and
amend certain provisions of the Credit Facility (the "Amendment"). Under the
Amendment, the Company's maximum borrowing capacity decreased from $165,000 to
$145,000 and is comprised of a $95,000 revolving credit facility (the "Amended
Revolving Credit") and a $50,000 term loan (the "Amended Term Loan").
At the Company's option, loans under the Amended Revolving Credit bear
interest at a designated variable base rate plus a margin of 150 basis points or
at LIBOR plus a margin of 350 basis points. Commitment fees of 75 basis points
per annum are payable on the unused portion of the Amended Revolving Credit. The
maturity date of the Amended Revolving Credit remains June 30, 2001 and all
amounts borrowed, if any, will be due and payable on this date. The Amended
Revolving Credit also contains a $10,000 sub-limit for standby letters of
credit.
Pursuant to the Amendment, the interest rates on the $50,000 Amended Term
Loan consisting of two $25,000 tranches were revised. One tranche bears interest
at a fixed rate of 9.96% while the other tranche bears interest at the variable
LIBOR rate plus a fixed margin of 425 basis points. As previously provided,
39
<PAGE> 42
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
beginning April 2000, the Company is required to make quarterly principal
payments of approximately $3,600 on the Amended Term Loan. The final payment on
the Amended Term Loan remains July 1, 2003.
In addition to waiving certain financial covenant violations during 1998,
the Amendment substantially revised the financial covenants throughout 1999 and,
in general, reduced the Company's required level of operating performance to
comply with the financial covenants. The financial covenants beginning March 31,
2000 will remain in accordance with the financial covenants previously
established in the Credit Facility. Management believes the Company can comply
with the amended financial covenants during 1999. However, no assurances of
compliance can be provided, and compliance will require improved Company
operating performance compared to 1998.
The Credit Facility restricts the cash consideration (including assumed
debt) that the Company may pay for a business to be acquired if ARS does not
generate a specified minimum level of EBITDA. The Company did not meet such
minimum level of EBITDA for the periods ended September 30, 1998 and December
31, 1998. As a result, effective as of November 15, 1998, the Company was
required to begin obtaining the prior written consent of the lenders under the
Credit Facility prior to consummating an acquisition in which the amount of cash
consideration (including assumed debt) that the Company would pay exceeds one
times the historical adjusted EBITDA of the acquired business. Virtually all of
the Company's acquisitions to date have involved consideration (including
assumed debt) in excess of one times the acquired business' historical adjusted
EBITDA. Pursuant to the Amendment, such EBITDA covenant is superseded by a
prohibition through March 31, 2000 on the Company's ability to make business
acquisitions.
The Company's subsidiaries have guaranteed the repayment of all amounts
under the Credit Facility and the Company has pledged the accounts receivable,
inventory and stock of its operating subsidiaries as collateral for the
repayment of 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 Credit Facility.
As of December 31, 1998, the Company's outstanding borrowings under the Credit
Facility were $110,200, bearing interest at a weighted average rate of 8.7%. At
March 31, 1999, the Company's outstanding borrowings under the Credit Facility
were $116,000, bearing interest at a weighted average rate of 8.2%.
At December 31, 1998, the prime rate was 7.75% and the LIBOR rate for the
30-day, 60-day, 90-day and 180-day interest periods was 5.07%.
7 1/4% Convertible Subordinated Notes
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. 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. In the event of a change of control of the Company, as defined in the
indenture governing the 7 1/4% Notes, the holders of the 7 1/4% Notes have the
right to require the Company to repurchase the 7 1/4% Notes. The proposed Tender
Offer, if successful, would constitute a change of control of the Company under
the indenture. ARS used substantially all the net proceeds from the sale of the
7 1/4% Notes to repay indebtedness outstanding under the Credit Facility.
Series A Notes
As of December 31, 1998, ARS also had outstanding $7,489 aggregate
principal amount of Series A Notes. The Series A Notes are unsecured obligations
of ARS and the outstanding Series A Notes are convertible into an aggregate of
600,333 shares of Common Stock. As of December 31, 1998, the weighted
40
<PAGE> 43
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
average price per share at which the outstanding Series A Notes are convertible
into Common Stock was $12.64 per share and the weighted average interest rate
payable on the outstanding Series A Notes was 7.4% per annum. In the event of a
change in control of the Company, as defined in the indenture governing the
Series A Notes, the holders of the Series A Notes have the right to require the
Company to repurchase the Series A Notes. The proposed Tender Offer, if
successful, would constitute a change of control of the Company under the
indenture.
The aggregate maturities of long-term debt as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999......................................... $ 1,069
2000......................................... 11,112
2001......................................... 74,642
2002......................................... 14,322
2003......................................... 10,716
Thereafter...................................... 62,489
--------
$174,350
========
</TABLE>
Management estimates that the fair value of its debt obligations under the
Credit Facility and other miscellaneous debt obligations approximates the
historical value at December 31, 1998 and March 31, 1999. Management estimates
that the fair value of its debt obligations under the 7 1/4 Notes is
approximately $22,000 and $49,500 at December 31, 1998, and March 30, 1999,
respectively.
10. 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 (2,385,380 shares at December 31, 1998). 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 (1,590,253 shares as of December
31, 1998). In general, the terms of the option awards (including vesting
schedules) issued under the Plans will be established by the Compensation
Committee.
In March 1998, the Board of Directors and the Compensation Committee of the
Board of Directors approved a program whereby the Company offered certain
non-officer employees of the Company the ability to exchange a total of 711,700
existing stock options at that date, with exercise prices ranging from $15.00 to
$25.75, for a lesser number of newly issued stock options with an exercise price
of $11.00 per share. The offer terminated on April 30, 1998. Substantially all
employees eligible under the program elected to exchange their eligible options,
resulting in 572,050 newly issued options.
41
<PAGE> 44
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the Plans for the three years
ended December 31, 1996, 1997 and 1998:
<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 $ 8.00 - $25.75 $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
Granted....................................... 585,985 $ 5.00 - $15.53 $ 7.88
Granted in options repricing.................. 572,050 $11.00 $11.00
Exercised..................................... (6,000) $15.00 $15.00
Forfeited and canceled........................ (365,013) $ 5.00 - $25.75 $19.84
Forfeited in option repricing................. (706,400) $15.00 - $25.75 $19.02
---------
Outstanding at December 31, 1998................ 2,888,861
=========
1997 1998
Options exercisable at year end................. 609,420 1,281,371
Weighted average fair value of options
granted....................................... $ 12.87 $ 3.74
Weighted average fair value of options granted
in repricing.................................. -- $ 4.71
Weighted average remaining contractual life in
years......................................... 9.31 7.95
</TABLE>
Unexercised options expire at various dates from January 2006 through
December 2008.
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,
1997 and 1998 would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
Net loss:
As reported............................................... $(3,035) $(4,701) $ (7,861)
Pro forma................................................. $(4,010) $(6,334) $(11,592)
Diluted net loss per share:
As reported............................................... $ (0.48) $ (0.33) $ (0.50)
Pro forma................................................. $ (0.64) $ (0.44) $ (0.74)
</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 was estimated on the date of grant
using the Black-Scholes option pricing model, with the following weighted
average assumptions used for grants in 1996, 1997 and 1998: dividend yield of 0%
for each year; expected volatility of 32.19%, 46.51% and 29.79%, risk-free
interest rate of 6.72%, 6.39%, and 5.50%; and expected lives of 10 years,
respectively.
42
<PAGE> 45
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant in the option repricing was estimated
on the date of grant using the Black-Scholes option pricing model, with the
following weighted average assumptions used: dividend yield of 0%, expected
volatility of 29.13%, risk-free interest rate of 5.65% and expected lives of
8.79 years.
Stock Warrant
During 1996, the Company issued a warrant to purchase 100,000 shares of
Common Stock exercisable at $15.00 per share. The warrant is exercisable, in
whole or in part, at any time until September 27, 2001. The number of shares
represented by the warrant is subject to adjustment for stock dividends, stock
splits and similar events.
11. AVAILABLE 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, 1998, the Company had issued
5,441,203 shares of Common Stock and approximately $7,489 principal amount of
Series A Notes pursuant to the registration statements.
In the event of a change of control of ARS, or deferral in the indenture
governing the Series A Notes, the holders of the Series A Notes have the right
to require ARS to repurchase the Series A Notes. The proposed Tender Offer, if
successful, would constitute a change of control of ARS under the Indenture.
12. 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>
1999.......................................... $10,598
2000.......................................... 8,990
2001.......................................... 8,438
2002.......................................... 7,323
2003.......................................... 5,909
Thereafter.................................... 19,563
-------
$60,821
=======
</TABLE>
Rental expense for the years ended December 31, 1996, 1997, and 1998 was
approximately $1,769, $6,947, and $10,852, respectively. Included in these
amounts are rental expenses and commissions paid to related parties of
approximately $482, $3,115, and $4,526 for the years ended December 31, 1996,
1997 and 1998, respectively.
43
<PAGE> 46
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES:
Federal and state income tax provisions (benefits) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Federal --
Current................................................. $1,958 $ 2,785 $ 1002
Deferred................................................ (524) (3,430) (1,349)
State --
Current................................................. 512 374 599
Deferred................................................ (143) (558) (192)
------ ------- ------
$1,803 $ (829) $ 60
====== ======= ======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% for 1996 and 35%
for 1997 and 1998 to income before income tax as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Tax benefit at the statutory rate........................ $ (419) $(1,824) $(3,138)
Increase (decrease) resulting from --
State income taxes..................................... 207 (184) 407
Nondeductible expenses................................. 97 738 1,775
Federal tax benefit reported after net loss from
continuing operations............................... -- -- 1,164
Nondeductible costs related to purchase of EHC......... 1,740 -- --
Other.................................................. 178 441 (148)
------ ------- -------
$1,803 $ (829) $ 60
====== ======= =======
</TABLE>
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,
-----------------
1997 1998
------- -------
<S> <C> <C>
Accruals and reserves not deductible until paid........... $(3,995) $(3,807)
Net changes in accounting methods......................... 1,151 920
Depreciation and amortization............................. 897 970
Other..................................................... (293) (1,968)
------- -------
Net deferred income tax assets.................. $(2,240) $(3,885)
======= =======
</TABLE>
44
<PAGE> 47
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets --
Current................................................. $ 1,033 $ 3,474
Long-term............................................... 8,494 8,296
------- -------
Total........................................... 9,527 11,770
------- -------
Deferred tax liabilities --
Current................................................. 372 309
Long-term............................................... 6,915 7,576
------- -------
Total........................................... 7,287 7,885
------- -------
Net deferred income tax assets.................. $(2,240) $(3,885)
======= =======
</TABLE>
The net current deferred tax assets as of December 31, 1997 and 1998 are
$661 and $3,165, respectively, and are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets. The net
long-term deferred tax assets as of December 31, 1997 and 1998 are $1,579 and
$720, respectively, and are included in other noncurrent assets in the
accompanying consolidated balance sheets.
14. 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 maintains a broad range of insurance coverage, including
employees' medical coverage, business auto liability, general liability,
commercial property, workers' compensation and general umbrella. At December 31,
1997, the Company maintained company-wide self-insurance retention programs for
a portion of its employees' medical claims. During 1998, the company-wide
self-insurance retention program for employees' medical claims expired, and the
coverage was transferred to various regional or local medical coverage plans,
some of which were self-insurance retention programs. An accrual for insurance
claims under the self-insurance retention programs has been recorded based upon
management's estimate of the Company's potential costs in satisfying the
self-insurance retention for claims occurring through December 31, 1998. These
accruals are based on known facts and historical trends, and management believes
such accruals to be adequate.
Employment Agreements
The Company has entered into various employment agreements in the ordinary
course of business. In the event of a change in control of the Company, certain
of the employment agreements provide for payments aggregating approximately
$4,100 to a total of eight active employees. Within five business days after the
date the Company receives the employee's notice of termination by reason of that
change of control, the Company is obligated to pay to the employee a cash lump
sum amount equal to the change of control payments totaling $4,100 in the
aggregate for all eight employees.
45
<PAGE> 48
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. EMPLOYEE BENEFIT PLANS:
Prior to the Offering, Atlas maintained a defined contribution
profit-sharing plan that covered substantially all employees. Atlas's
contributions for the nine months ended September 30, 1996 were $35.
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, $551 and $784 in 1996, 1997 and 1998,
respectively. The Company also may make additional discretionary contributions.
16. STOCKHOLDERS' RIGHTS PLAN
In August 1996, the Company adopted a stockholders' rights plan (the
"Rights Plan"). The Rights Plan provides for a dividend distribution of one
preferred stock purchase right ("Right") for each outstanding share of the
Company's common stock. The establishment of the Rights Plan may deter coercive
takeover tactics and may prevent an acquirer from gaining control of the Company
without offering a fair price to all of the Company's stockholders. The Rights
will expire on June 30, 2006.
Each Right entitles stockholders to buy one one-hundredth of a newly issued
share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $40 per fractional share. The Rights are exercisable only if a
person or group acquires beneficial ownership of 15 percent or more of the
Company's common stock or commences a tender or exchange offer which, if
consummated, would result in that person or group owning 15 percent or more of
the Company's common stock. However, the Rights will not become exercisable if
the Company's common stock is acquired pursuant to an offer for all shares which
a majority of the board of directors determines to be fair to and otherwise in
the best interests of the Company and its stockholders. If, following an
acquisition of 15 percent or more of the Company's common stock, the Company is
acquired by that person or group in a merger or other business combination
transaction, each Right would then entitle its holder to purchase common stock
of the acquiring company having a value of twice the exercise price. The effect
will be to entitle the Company's stockholders to buy stock in the acquiring
company at 50 percent of its market price.
The Company may redeem the Rights at $.01 per Right at any time on or prior
to the tenth business day following the acquisition of 15 percent or more of its
common stock by a person or group or commencement of a tender offer for such 15
percent ownership.
The Rights Plan was amended on March 22, 1999, and pursuant to this
amendment, the Rights did not become exercisable in connection with the
execution of the Merger Agreement and will not become exercisable upon the
consummation of the Tender Offer or the Merger contemplated thereby.
46
<PAGE> 49
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA:
The following table contains selected restated quarterly financial data
from the consolidated statements of income for each quarter of fiscal 1997 and
1998. In the fourth quarter of 1998, the Company approved a plan for the
disposition of the air-conditioned tent rental business and elected to treat
this as a discontinued operation. As such, the results for 1997 and 1998 have
been restated with the effect of this operation presented as a discontinued
operation. The Company believes this information reflects all normal recurring
adjustments necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter are not necessarily indicative
of the results for any future period.
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- -----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS REPORTED FOR THE QUARTER ENDED:
Revenue........................... $70,908 $92,373 $109,500 $109,737 $101,080 $130,550 $138,750 $136,536
Gross Profit...................... 20,023 27,946 30,300 28,024 25,052 34,377 32,606 24,326
Net Income/(Loss) before
Discontinued Operations and
Extraordinary Item.............. 1,560 5,100 3,588 (14,949) 95 3,518 765 (8,507)
Net Income/(Loss) before
Extraordinary Item.............. 1,560 5,100 3,588 (14,949) 95 3,518 765 (11,939)
Net Income/(Loss)................. $ 1,560 $ 5,100 $ 3,588 $(14,949) $ 95 $ 3,218 $ 765 $(11,939)
======= ======= ======== ======== ======== ======== ======== ========
Basic Weighted Average Shares
Outstanding..................... 13,389 13,825 14,811 15,299 15,363 15,657 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Basic Income/(Loss) Per Share
before Discontinued Operations
and Extraordinary Item.......... $ 0.12 $ 0.37 $ 0.24 $ (0.98) $ 0.01 $ 0.23 $ 0.05 $ (0.54)
Discontinued Operations........... -- -- -- -- -- -- -- (0.21)
Extraordinary Item................ -- -- -- -- -- (0.02) -- --
------- ------- -------- -------- -------- -------- -------- --------
Basic Net Income/(Loss) Per
Share........................... $ 0.12 $ 0.37 $ 0.24 $ (0.98) $ 0.01 $ 0.21 $ 0.05 $ (0.75)
======= ======= ======== ======== ======== ======== ======== ========
Diluted Weighted Average Shares
Outstanding..................... 13,901 14,216 15,262 15,299 15,440 15,735 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Diluted Income/(Loss) Per Share
before Discontinued Operations
and Extraordinary Item.......... $ 0.11 $ 0.36 $ 0.24 $ (0.98) $ 0.01 $ 0.22 $ 0.05 $ (0.54)
Discontinued Operations........... -- -- -- -- -- -- -- (0.21)
Extraordinary Item................ -- -- -- -- -- (0.02) -- --
------- ------- -------- -------- -------- -------- -------- --------
Diluted Net Income/(Loss) Per
Share........................... $ 0.11 $ 0.36 $ 0.24 $ (0.98) $ 0.01 $ 0.20 $ 0.05 $ (0.75)
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
47
<PAGE> 50
AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- -----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DISCONTINUED OPERATIONS FOR THE
QUARTER ENDED:
Revenue........................... $ -- $ 484 $ 326 $ 63 $ 483 $ 544 $ 327 $ --
Gross Profit...................... -- 152 29 (18) 5 106 (43) --
Net Loss from Discontinued
Operations...................... $ -- $ (42) $ (144) $ (133) $ (86) $ (7) $ (116) $ --
======= ======= ======== ======== ======== ======== ======== ========
Basic Weighted Average Shares
Outstanding..................... 13,389 13,825 14,811 15,299 15,363 15,657 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Basic Loss Per Share from
Discontinued Operations......... $ -- $ -- $ (0.01) $ (0.01) $ (0.01) $ -- $ (0.01) $ --
======= ======= ======== ======== ======== ======== ======== ========
Diluted Weighted Average Shares
Outstanding..................... 13,901 14,216 15,262 15,299 15,440 15,735 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Diluted Loss Per Share from
Discontinued Operations......... $ -- $ -- $ (0.01) $ (0.01) $ (0.01) $ -- $ (0.01) $ --
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- -----------------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS RESTATED FOR DISCONTINUED
OPERATIONS FOR THE QUARTER
ENDED:
Revenue........................... $70,908 $91,889 $109,174 $109,674 $100,597 $130,006 $138,423 $136,536
Gross Profit...................... 20,023 27,794 30,271 28,042 25,047 34,271 32,649 24,326
Net Income/(Loss) before
Discontinued Operations and
Extraordinary Item.............. 1,560 5,142 3,732 (14,816) 181 3,525 881 (8,507)
Net Income before Extraordinary
Item............................ 1,560 5,100 3,588 (14,949) 95 3,518 765 (11,939)
Net Income........................ $ 1,560 $ 5,100 $ 3,588 $(14,949) $ 95 $ 3,218 $ 765 $(11,939)
======= ======= ======== ======== ======== ======== ======== ========
Basic Weighted Average Shares
Outstanding..................... 13,389 13,825 14,811 15,299 15,363 15,657 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Basic Income/(Loss) Per Share
before Discontinued Operations
and Extraordinary Item.......... $ 0.12 $ 0.37 $ 0.25 $ (0.97) $ 0.02 $ 0.23 $ 0.06 $ (0.54)
Discontinued Operations........... -- -- (0.01) (0.01) (0.01) -- (0.01) (0.21)
Extraordinary Item................ -- -- -- -- -- (0.02) -- --
------- ------- -------- -------- -------- -------- -------- --------
Net Income/(Loss) Per Share....... $ 0.12 $ 0.37 $ 0.24 $ (0.98) $ 0.01 $ 0.21 $ 0.05 $ (0.75)
======= ======= ======== ======== ======== ======== ======== ========
Diluted Weighted Average Shares
Outstanding..................... 13,901 14,216 15,262 15,299 15,440 15,735 15,884 15,900
======= ======= ======== ======== ======== ======== ======== ========
Diluted Income/(Loss) Per Share
before Discontinued Operations
and Extraordinary Item.......... $ 0.11 $ 0.36 $ 0.25 $ (0.97) $ 0.02 $ 0.22 $ 0.06 $ (0.54)
Discontinued Operations........... -- -- (0.01) (0.01) (0.01) -- (0.01) (0.21)
Extraordinary Item................ -- -- -- -- -- (0.02) -- --
------- ------- -------- -------- -------- -------- -------- --------
Net Income/(Loss) Per Share....... $ 0.11 $ 0.36 $ 0.24 $ (0.98) $ 0.01 $ 0.20 $ 0.05 $ (0.75)
======= ======= ======== ======== ======== ======== ======== ========
</TABLE>
Earnings per share are computed independently for each of the quarters
presented; therefore, the sum of the quarterly earnings per share may not equal
annual earnings per share.
48
<PAGE> 51
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Class III -- Terms Expiring at the 1999 Annual Meeting
Nolan Lehmann, age 54, has been a director of the Company since September
1996. He has been the President and a director of Equus Capital Management
Corporation ("ECMC") since its formation in 1983 and of Equus II since its
formation in 1991 (see "Security Ownership of Certain Beneficial Owners and
Management"). Prior thereto, Mr. Lehmann was employed by Service Corporation
International, where he held various positions, including Vice
President -- Regional Manager and Vice President -- Corporate Development. Mr.
Lehmann currently serves as a director of a number of public and private
companies, including Allied Waste Industries, Inc., Brazos Sportswear, Inc.,
Drypers Corporation and Paracesus Healthcare Corp.
Don Jordan, age 66, has been a director of the Company since September,
1998. Mr. Jordan has been a director of Reliant Energy, formerly known as
Houston Industries Incorporated ("Reliant"), since 1977 and of its subsidiary,
Houston Lighting & Power ("HL&P") since 1974. Mr. Jordan is Chairman and Chief
Executive Officer of Reliant and Chairman and Chief Executive Officer of HL&P.
Mr. Jordan also serves as an advisory director of Texas Commerce Bank National
Association and a director of BJ Services Company, Inc.
Bobby Shackouls, age 48, has been a director of the Company since June,
1998. Mr. Shackouls has been the President and Chief Executive Officer of
Burlington Resources Inc. ("BRI") from December 1995 through July 1997. Since
October 1994, Mr. Shackouls has been President and Chief Executive Officer of
Burlington Resources Oil & Gas Company (formerly known as Meridian Oil Inc.), a
wholly owned subsidiary of BRI. From June 1993 to October 1994, Mr. Shackouls
was Executive Vice President and Chief Operating Officer of Meridian Oil Inc.
From July 1991 to May 1993, Mr. Shackouls was President and Chief Operating
Officer of Torch Energy Advisors, Inc. Mr. Shackouls has been a director of BRI
since 1995.
Class I -- Terms Expiring at the 2000 Annual Meeting
Elliot Sokolow, age 56, has been a Senior Vice President of the Company and
Director of Operations of the Company's residential operations since January
1998 and a director of the Company since September 1996. Mr. Sokolow 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., a subsidiary of
the Company, in 1970 and served as its President from 1977 until June 1997. Mr.
Sokolow served as national president of the Air Conditioning Contractors of
America ("ACCA") in 1992 and 1993.
Thomas N. Amonett, age 55, has been President and Chief Executive Officer
of the Company since October 1997 and a director of the Company since September
1996. Mr. Amonett served as President and Chief Executive Officer of Weatherford
Enterra, Inc., a diversified international energy service and manufacturing
company, from July 1996 until 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.), a company engaged in plastics manufacturing and other
activities. 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 Pool Energy Services, Inc.
49
<PAGE> 52
Class II -- Terms Expiring at the 2001 Annual Meeting
Howard S. Hoover, Jr., age 60, 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.
Frank N. Menditch, age 47, has been a Senior Vice President of the Company
since September 1997 and Regional Vice President -- Northern Region since
September 1998. In addition, Mr. Menditch was Director of Operations of the
Company's commercial maintenance services operations from January 1998 through
September 1998. He has also served as a director of the Company since September
1996. Mr. Menditch 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. He was President of General Heating
& Air Conditioning Company, Inc. ("General Heating"), from 1983 to 1997. Mr.
Menditch is a past president of the National Capitol Chapter of the ACCA and of
the Metro Washington Heat Pump Association.
Robert J. Cruikshank, age 68, has been a director of the Company since
September 1996. He is primarily engaged in managing his personal investments in
Houston. Prior to his retirement in 1993, he was a Senior Partner in the
accounting firm of Deloitte & Touche LLP. Mr. Cruikshank currently serves as a
director of Reliant, MAXXAM Inc., Kaisier Aluminum Corporation, Compass
Bank-Houston, Texas Biotechnology Corporation and Weingarten Realty Investors.
Randall B. Hale, age 36, has been a director of the Company since September
1996. He has been a Vice President of ECMC and Equus II since 1992 and a
director of ECMC since February 1996. ECMC is the investment advisor for Equus
II, a closed-end investment fund. See "Security Ownership of Certain Beneficial
Owners and Management." Mr. Hale currently serves as an officer or director of
several private businesses and is a director and Chairman of the Board of Brazos
Sportswear, Inc. From 1985 to 1992, he was employed by the accounting firm of
Arthur Andersen LLP. Mr. Hale is a Certified Public Accountant.
EXECUTIVE OFFICERS
The following table sets forth certain information as of March 30, 1999
concerning each of the executive officers and other officers of ARS:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas N. Amonett.................... 55 President and Chief Executive Officer*
Harry O. Nicodemus, IV............... 51 Senior Vice President, Treasurer, Chief
Financial Officer and Chief Accounting Officer
John D. Held......................... 36 Senior Vice President, General Counsel and
Secretary
Frank N. Menditch.................... 47 Senior Vice President, Regional Vice
President -- Northern Region*
Elliot Sokolow....................... 56 Senior Vice President, Director of
Operations -- Residential Services*
Ed Dunn.............................. 40 Senior Vice President, Director of
Operations -- Commercial Maintenance Services
Elliott Ettlinger.................... 48 Vice President -- Plumbing Operations
Terri L. Hardt....................... 38 Vice President -- Retail Sales and Service
Howard C. Menditch................... 46 Vice President -- National Accounts
Jennifer L. Tweeton.................. 37 Vice President -- Investor Relations
</TABLE>
- ---------------
* Also serves as a director of the Company.
50
<PAGE> 53
Thomas N. Amonett has been President and Chief Executive Officer since
October 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 Pool Energy Services, Inc.
Harry O. Nicodemus, IV has served as Senior Vice President, Chief Financial
Officer and Chief Accounting Officer since September 1997 and as Treasurer since
December 1998. Prior thereto, he served as Vice President, Chief Financial
Officer and Chief Accounting Officer of the Company since 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
Browning-Ferris, Industries, a waste services company, 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, 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
has been Regional Vice President -- Northern Region since September 1998. Mr.
Menditch served as Director of Operations of the Company's commercial
maintenance services operations from January 1998 through September 1998. He has
also served as a director of the Company since September 1996. Mr. Menditch
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, one of the
Founding Companies, from 1983 to 1997. He is a past president of the National
Capitol Chapter of Air Conditioning Contractors of America ("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 June 1997. Mr. Sokolow served as
national president of ACCA in 1992 and 1993.
Ed Dunn has been a Senior Vice President since December 1998 and Director
of Operations of the Company's commercial maintenance operations since September
1998. Prior thereto, he was a Regional Vice President-Eastern Region of the
Company's Commercial maintenance operations since January 1998. Prior thereto,
he was President of EMD Mechanical Specialists, one of the Acquired Businesses.
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
51
<PAGE> 54
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. 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. 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. 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 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and persons holding more than 10% of a registered class of
the Company's equity securities to file with the SEC and the New York Stock
Exchange initial reports of ownership, reports of changes in ownership and
annual reports of ownership of Common Stock and other equity securities of the
Company. Such directors, officers and stockholders are also required to furnish
the Company with copies of all such filed reports.
Based solely on review of the copies of such reports furnished to the
Company and written representations that no other reports were required during
1998, the Company believes that all Section 16(a) reporting requirements related
to the Company's directors and executive officers were timely fulfilled during
1998.
52
<PAGE> 55
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
EXECUTIVE COMPENSATION
The following table sets forth information regarding aggregate cash
compensation, restricted stock and stock option awards and other compensation
earned by the Company's Chief Executive Officer, and its five other most highly
compensated executive officers for services rendered to the Company during 1996,
1997 and 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -----------------------
COMPENSATION RESTRICTED SHARES
NAME AND --------------------- STOCK UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) AWARDS OPTIONS COMPENSATION(2)
------------------ ---- -------- -------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Thomas N. Amonett (3)........... 1998 $148,833 $ 0 -- 0 $1,053
President and Chief 1997 -- -- -- 280,675 --
Executive Officer 1996 -- -- -- 0 --
Howard S. Hoover, Jr (4)........ 1998 $178,200 $ 0 -- 0 $ 806
Chairman of the Board 1997 $175,000 $ 78,904 -- 31,400 $1,116
1996 $160,000 $ 26,970 -- 150,000 $ 498
Frank N. Menditch............... 1998 $173,100 $ 0 -- 0 $1,558
Senior Vice President,
Regional 1997 $165,000 $ 0 -- 26,500 $2,273
Vice President-Northern Region 1996 $ 39,452(5) $ 0 -- 50,000 $ 375
Elliot Sokolow.................. 1998 $173,100 $ 0 -- 0 $1,731
Senior Vice President,
Director of 1997 $156,522 $ 0 -- 18,700 $2,200
Residential Operations 1996 $ 24,518(6) $ 0 -- 50,000 $ 0
John D. Held.................... 1998 $170,000 $ 0 -- 7,500 $1,673
Senior Vice President, 1997 $150,000 $ 58,679 -- 27,800 $1,661
General Counsel and Secretary 1996 $ 99,230(7) $100,220(8) -- 75,000 $ 685
Harry O. Nicodemus, IV.......... 1998 $170,000 $ 0 7,500 $1,677
Senior Vice President,
Treasurer, 1997 $112,981(9) $ 0 -- 71,500 $ 529
Chief Financial Officer, and 1996 0 $ 0 -- 0 $ 0
Chief Accounting Officer
</TABLE>
- ---------------
(1) Except as stated in Note (8) below, represents aggregate cash bonus awards
relating to Company performance in 1996, which were paid in one quarterly
installment in 1996 and three quarterly installments in 1997. The Company
did not pay any bonuses to executive officers in 1997 or 1998 relating to
individual or Company performance for 1997 or 1998.
(2) Represents: (i) matching contributions by the Company under the Company's
401(k) plan during 1998 for the executive officers named in the above table
in the amounts of $673 for Mr. Amonett; $806 for Mr. Hoover; $1,558 for Mr.
Menditch; $1,734 for Mr. Sokolow; $1,673 for Mr. Held; and $1,677 for Mr.
Nicodemus, and (ii) $308 of premium cost for life insurance coverage under
an executive life insurance program provided to Mr. Amonett. This executive
life insurance program was terminated in 1998.
(3) On October 31, 1997, the Board of Directors appointed Mr. Amonett as
President and Chief Executive Officer. Mr. Amonett received options to
purchase up to 250,000 shares of Common Stock at an exercise price of $14.75
per share, which become exercisable in annual increments of 20% beginning
one year from the grant date and expire on October 31, 2007. In lieu of
receipt of his base salary through May 31, 1998, Mr. Amonett received
additional options to purchase up to 30,675 shares of Common Stock at an
53
<PAGE> 56
exercise price of $14.75 per share, which became exercisable in full on June
1, 1998 and expire on October 31, 2002. The information reflected in the
table above does not include director's fees paid to Mr. Amonett in 1996 and
1997, options to purchase up to 10,000 shares of Common Stock granted on
September 27, 1996, or options to purchase 5,000 shares of Common Stock,
granted on July 1, 1997, in each case while Mr. Amonett was a Nonemployee
Director of the Company. See "Directors -- Remuneration."
(4) Effective as of January 1, 1999, Mr. Hoover became a part-time non-officer
employee of the Company and serves as non-executive Chairman of the Board of
Directors of the Company. See " Employment Agreements."
(5) Salary earned in 1996 from the date of commencement of Mr. Menditch's
employment with the Company in September 1996.
(6) Salary earned in 1996 from date of commencement of Mr. Sokolow's employment
with the Company in September 1996.
(7) Salary earned in 1996 from the date of commencement of Mr. Held's employment
with the Company in March 1996.
(8) Of this amount, $80,000 represents 5,333 shares of Common Stock awarded to
Mr. Held under an incentive plan when the IPO closed, valued at the initial
IPO price to the public of $15 per share.
(9) Salary earned in 1997 from date of commencement of Mr. Nicodemus' employment
with the Company in January 1997.
OPTION GRANTS
The following table sets forth information regarding the options granted
during 1998 to the executive officers named in the Summary Compensation Table.
All of the options listed below were granted July 20, 1998, become exercisable
in annual increments of 20% of the total number of shares subject thereto
beginning July 20, 1999 and become fully exercisable on July 20, 2003.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
PERCENT
OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OPTIONS ASSUMED ANNUAL RATE OF STOCK
OF SHARES GRANTED PRICE APPRECIATION FOR OPTION
UNDERLYING TO TERM(1)
OPTIONS EMPLOYEES EXERCISE EXPIRATION -----------------------------
NAME GRANTED IN 1998 PRICE PRICE 5% 10%
---- ---------- --------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas Amonett......... 0 N/A N/A N/A N/A N/A
Howard S. Hoover,
Jr. ................. 0 N/A N/A N/A N/A N/A
Frank Menditch......... 0 N/A N/A N/A N/A N/A
Elliot Sokolow......... 0 N/A N/A N/A N/A N/A
John D. Held........... 7,500 .86% $9.59 07/20/08 $117,158 $186,555
Hank Nicodemus......... 7,500 .86% $9.59 07/20/08 $117,158 $186,555
</TABLE>
- ---------------
(1) Calculated on the basis of the indicated rate of appreciation in the value
of the Common Stock, compounded annually from the fair market value on the
grant date, from the grant date to the end of the option term.
54
<PAGE> 57
AGGREGATE OPTION EXERCISES AND HOLDINGS AND YEAR-END VALUES
The following table presents information regarding options exercised during
1998 and options outstanding at December 31, 1998 for each of the executive
officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS HELD AT
SHARES YEAR-END FISCAL YEAR-END(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas N. Amonett........ -- -- 89,009 206,666 $ 0 $ 0
Howard S. Hoover, Jr..... -- -- 156,280 25,120 $ 0 $ 0
Frank N. Menditch........ -- -- 35,300 41,200 $ 0 $ 0
Elliot Sokolow........... -- -- 33,740 34,960 $ 0 $ 0
John D. Held............. -- -- 79,560 28,240 $ 0 $ 0
Hank Nicodemus........... -- -- 15,800 63,200 $ 0 $ 0
</TABLE>
- ---------------
(1) Value is calculated on the basis of the market value of the Company's Common
Stock at the time of exercise, less the exercise price, multiplied by the
number of shares underlying the options exercised.
(2) The closing price for the Common Stock as listed on the New York Stock
Exchange on December 31, 1998 was $3.25. All options outstanding held by
individuals in the above table had exercise prices greater than $3.25.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Amonett, Sokolow,
Menditch, Held and Nicodemus. Each of these agreements (i) provides for an
annual minimum base salary, (ii) entitles the employee to participate in all the
Company's compensation plans (as defined) in which executive officers of the
Company participate and (iii) has a continuous three-year term subject to the
right of either party to terminate the employee's employment at any time. If the
employee's employment is terminated by the Company without cause (as defined) or
by the employee with good reason (as defined), the employee will be entitled,
during each of the years in the three-year period beginning on the termination
date, to (i) periodic payments equal to his average annual cash compensation (as
defined) from the Company, including bonuses, if any, during the two years (or
such shorter period of employment) preceding the termination date and (ii)
continued participation in all the Company's compensation plans (other than the
granting of new awards under the incentive plan or any other performance-based
plan). Except in the case of a termination for cause, any stock options
previously granted to the employee under the incentive plan that have not been
exercised and are outstanding as of the time immediately prior to the date of
his termination will remain outstanding (and continue to become exercisable
pursuant to their respective terms) until exercised or the expiration of their
term, whichever is earlier. If a change of control (as defined) of the Company
occurs, the employee may terminate his employment at any time during the 365-day
period following that event and receive a lump sum payment equal to three times
his highest annual base salary under the agreement (plus such amounts as may be
necessary to hold the employee harmless from the consequences of any resulting
excise or other similar purpose tax relating to "parachute payments" under the
Internal Revenue Code of 1986, as amended). Each employment agreement contains a
covenant limiting competition with the Company for a period of one year
following termination of employment.
The Company also had an employment agreement with terms substantially the
same as those described above with Mr. Hoover through December 31, 1998. In
settlement of the Company's obligations to Mr. Hoover under that agreement,
effective as of January 1, 1999 Mr. Hoover became a part-time non-officer
employee of the Company and the Company will pay Mr. Hoover $180,000 per annum
until December 31, 2001. In addition, the Company will provide Mr. Hoover an
office, certain administrative services and other items to which he would
otherwise be entitled under his employment agreement until December 31, 2001.
The Company also has employment agreements with other executive officers of
the Company.
55
<PAGE> 58
DIRECTORS' REMUNERATION
The Company currently pays each director who is not a Company employee (a
"Nonemployee Director") a fee of $1,500 for each Board meeting attended and
$1,000 for each Board committee meeting attended (except for committee meetings
held on the same day as Board meetings). It does not pay any additional
compensation to its employees for serving as directors, but will reimburse all
directors for out-of-pocket expenses they incur in connection with attending
meetings of the Board or Board committees or otherwise in their capacity as
directors.
Each Nonemployee Director is also automatically granted options to purchase
up to 5,000 shares of Common Stock pursuant to the Company's 1996 Incentive Plan
(the "1996 Incentive Plan") on the first business day of the month following the
date of which each annual meeting of the Company's stockholders is held (the
"Annual Grant"). The 1996 Plan also provides that, if a Nonemployee Director is
elected after such date otherwise than by election at an annual meeting of
stockholders, such Nonemployee Director shall automatically be granted on the
date of his election to the Board, options to purchase shares of Common Stock
equal to the product of (i) 10,000 and (ii) a fraction, the numerator of which
is the number of days between the date of election of such Nonemployee Director
and the next scheduled award date for an Annual Grant, and the denominator of
which is 365 (the "Pro Rata Grant"). All options in the Annual Grant and the Pro
Rate Grant (i) have a ten-year term, (ii) have an exercise price per share equal
to the fair market value of a share of Common Stock on the date of grant and
(iii) become exercisable in 33 1/3% annual increments beginning on the first
anniversary of the date of grant.
In connection with such grants to Nonemployee Directors, on July 1, 1998,
each Nonemployee Director, other than Mr. Jordan who joined the Board after the
1998 annual grant date, was granted options to purchase 5,000 shares of Common
Stock with an exercise price of $10.81 per share. In 1998, two new directors
joined the Board and accordingly received option grants for their respective
portions of the Pro Rata Grant. Mr. Shackouls was granted options to acquire 795
shares of Common Stock on June 2, 1998, the date of his election to the Board,
with an exercise price of $11.25 and Mr. Jordan was granted options to acquire
7,124 shares of Common Stock on September 15, 1998, the date of his election to
the Board, with an exercise price of $5.44 per share.
56
<PAGE> 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 30, 1999, the "beneficial
ownership" (as defined by the SEC) of the Common Stock of (i) each person or
group known to the Company to beneficially own more than 5% of its outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) the
executive officers of the Company named in the Summary Compensation Table, and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
----------------------
NAME NUMBER PERCENT
---- --------- -------
<S> <C> <C>
Consolidation Experts, LP
Consolidation Experts, LLC
C. Clifford Wright, Jr.
William P. McCaughey
Ronald R. McCann
Wes Lewis
A. Jefferson Walker
Rosario P. Schembari
c/o Consolidation Experts, LP (2)
5051 Westheimer Road, Suite 1890
Houston, Texas 77056-5604................................. 1,450,797 8.8%
Equus II Incorporated(3)
2929 Allen Parkway, 25th Floor
Houston, Texas 77019...................................... 1,225,000 7.7%
Howard S. Hoover, Jr........................................ 313,751 2.0%
Frank N. Menditch........................................... 259,860 1.6%
Elliot Sokolow.............................................. 302,761 1.9%
Thomas N. Amonett........................................... 91,185 *
John D. Held................................................ 85,218 *
Harry O. Nicodemus, IV...................................... 24,082 *
Nolan Lehmann............................................... 12,334 *
Robert J. Cruikshank........................................ 10,334 *
Randall B. Hale............................................. 9,334 *
Bobby Shackouls............................................. 0 *
Don Jordan.................................................. 0 *
All executive officers and directors as a group (12
persons)(1) 1,576,347 9.7%
</TABLE>
- ---------------
* Less than 1%
(1) The shares beneficially owned include shares issuable upon exercise of
outstanding options that are exercisable within 60 days of April 1, 1999 as
follows: Mr. Hoover -- 156,280 shares; Mr. Menditch -- 35,300; Mr.
Sokolow -- 33,740 shares; Mr. Held -- 79,560 shares; Mr. Amonett -- 89,009
shares; Mr. Nicodemus -- 22,800 shares; Mr. Lehmann -- 8,344 shares; Mr.
Cruikshank -- 8,344 shares; Mr. Hale -- 8,344 shares; Mr. Shackouls -- 0
shares; Mr. Jordan -- 0 shares and all current executive officers and
directors as a group -- 442,891 shares. Shares held by executive officers
through the Company's 401(k) plan are reflected as of December 31, 1998, and
additional shares may have accumulated since that date.
(2) Based on a Schedule 13D dated January 14, 1999. The Schedule 13D indicates
that the reporting persons have, in the aggregate, sole voting power and
sole dispositive power as to 929,676 shares.
(3) Based on a Schedule 13D dated March 9, 1998. That Schedule 13D indicates
that the 1,225,000 shares reported as beneficially owned include 100,000
shares obtainable on exercise of a warrant exercisable at $15.00 per share.
The Schedule 13D indicates that the reporting person has sole voting and
sole
57
<PAGE> 60
dispositive power with respect to all 1,225,000 shares. Nolan Lehmann, a
director of the Company, is the President and a director of Equus II and
Randall B. Hale, a director of the Company, is a Vice President of Equus II,
and thus each may be deemed to be the beneficial owner of the shares held by
Equus II. Mr. Lehmann and Mr. Hale each disclaim beneficial ownership of all
of those shares.
Except as otherwise indicated, the address of each person listed in the
above table is c/o American Residential Services, Inc., Post Oak Tower, Suite
725, 5051 Westheimer Road, Houston, Texas 77056-5604. All persons listed have
sole voting and investment power with respect to their shares unless otherwise
indicated.
The proposed Tender Offer, if successful, would constitute a change of
control of the Company under the indentures relating to the 7 1/4% Notes and the
Series A Notes.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In 1998, American Residential Services of South Carolina, Inc. ("ARS of
South Carolina"), a subsidiary of the Company, leased certain office and
warehouse space under three leases from a partnership in which Gorden H.
Timmons, a former officer and director of the Company during a portion of 1998,
owns a 90% equity interest. The expiration dates of the three leases range from
month-to-month to 2006. Aggregate annual 1998 rentals under the three leases
totaled $254,200.
In March 1998, the Company sold an office and warehouse property owned by
ARS of South Carolina in Charleston, South Carolina to a company in which Mr.
Timmons owns a 50% equity interest. The sales price was $1,755,000, which was
paid in full at the closing. Immediately after the sale, ARS of South Carolina
leased the property from Mr. Timmons' company under a triple-net seven-year
lease, effective April 1, 1998. The aggregate annual rent to be paid by ARS of
South Carolina under that lease is $155,625 and is not subject to increase
during the seven-year term of the lease. The sale of the property and the terms
of the lease were reviewed and approved by the Company's Board of Directors in
March 1998 (with Mr. Timmons abstaining from voting). In making its
determination to approve the sale and lease transactions, the Board of Directors
reviewed the reports of an independent real estate appraisal firm which showed
that the sales price was slightly higher than the appraised fair market value of
the property, net of commissions, and the annual lease rental amount was
slightly lower than the fair market value of the property.
American Residential Services of Virginia, Inc., a subsidiary of the
Company, leases office and warehouse space under four leases from a limited
partnership owned by Frank N. Menditch, his brothers and trusts for the benefit
of their children. Aggregate annual 1998 rentals under the leases, which expire
in 2005, totaled $531,500 and will increase a minimum of 4% each year during the
terms of the leases.
American Residential Services of Florida, Inc. ("ARS of Florida"), a
subsidiary of the Company, leases its principal office and warehouse space under
two triple-net leases, one of which was entered into in 1998 from a limited
partnership in which Elliot Sokolow owns an 80% interest. The aggregate annual
rent paid by ARS of Florida in 1998 under the previously existing lease was
$271,400, which will increase 5% per year during the term of the lease. In
December 1998, ARS of Florida leased additional property contiguous to its
existing facility from Mr. Sokolow's partnership under a second lease. Both
leases will expire in May 2005. The annual rent to be paid by ARS of Florida
under the second lease is $124,900 and is subject to increase 3% per year during
the term of the lease. The terms of the new lease were reviewed and approved by
the Company's Board of Directors in December 1998 (with Mr. Sokolow abstaining
from voting). In making its determination to approve the lease transaction, the
Board of Directors reviewed the report of an independent real estate appraisal
firm, which showed that the annual lease rental amount was equal to the fair
rental value of the property. The aggregate annual 1998 rentals under both
leases was $281,800.
58
<PAGE> 61
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 -- Amended and Restated Bylaws of ARS (Form 8-K/A dated
February 8, 1999, Ex. No. 3.1).
*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 -- 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).
*4.7 -- 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).
*4.8 -- 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).
*4.9 -- Amended and Restated Secured Revolving and Term Loan
Agreement dated July 2, 1998 among ARS, NationsBank, N.A.
and other parties designated therein. (Form 10-Q for
quarter ended June 30, 1998, Ex. 4.1).
</TABLE>
59
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.10 -- 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. (Form 10-K for the year
ended 1997, Ex. 10.2).
+*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. (Form 10-K for
the year ended 1997, Ex. 10.4).
+*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). Ex. 10.3).
+*10.7 -- Employment Agreement dated as of March 4, 1998 between
ARS and Harry O. Nicodemus, IV. (Form 10-K for the year
ended 1997, Ex. 10.8)
+*10.8 -- 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 April 15, 1996 between
ARS and Michael Mamaux (Form S-1, Reg. No. 333-06195, Ex.
10.7).
+*10.11 -- Employment Agreement dated as of June 13, 1996 between
ARS and Elliot Sokolow (Form S-1, Reg. No. 333-06195, Ex.
10.8).
+10.12 -- Employment Agreement dated as of December 1, 1998 between
ARS and Ed Dunn.
+10.13 -- Amendment to Employment Agreement dated as of December 1,
1998 between ARS and Teri Hardt.
+10.14 -- Amended and Restated Employment Agreement dated as of
December 1, 1998 between ARS and Elliott Ettlinger.
+*10.15 -- Employment Agreement dated as of June 13, 1996 between
ARS and Gorden H. Timmons (Form S-1, Reg. No. 333-06195,
Ex. 10.10).
+*10.16 -- Employment Agreement dated as of June 13, 1996 between
ARS and Frank N. Menditch (Form S-1, Reg. No. 333-06195,
Ex. 10.12).
+*10.17 -- Form of Indemnification Agreement between ARS and each of
its directors and executive officers (Form S-1, Reg. No.
333-06195, Ex. 10.15).
+*10.18 -- Executive Supplemental Disability Plan of ARS (Form S-1,
Reg. No. 333-06195, Ex. 10.16).
+*10.19 -- Executive Supplemental Life Insurance Plan of ARS (Form
S-1, Reg. No. 333-06195, Ex. 10.17).
+*10.20 -- ARS Deferred Compensation Plan (Form S-1, Reg. No.
333-06195, Ex. 10.18).
*10.21 -- Agreement and Plan of Reorganization dated as of November
13, 1998 by and among ARS, Beach Acquisition, LLC; T.A.
Beach Corp; and the Stockholders named therein (including
Standard Provisions for Business Combinations) (Form 8-K
dated November 25, 1998, Exs. 2.1 and 2.2).
</TABLE>
60
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*10.22 -- Agreement and Plan of Merger dated as of March 22, 1999
by and among ARS, The ServiceMaster Company and SVM-M9
Acquisition Corporation (Form 8-K dated March 22, Ex.
2.1)
*10.23 -- Amendment No. 1 to Rights Agreement dated as of March 22,
1999 between ARS and Chase Mellon Shareholder Services,
L.L.C. (Form 8-K dated March 22, Ex. 4.1)
+10.24 -- Amendment No. 2 to ARS 1997 Employee Incentive Plan.
+10.25 -- Amendment No. 2 to ARS 1996 Incentive Plan.
10.26 -- First Amendment to Amended and Restated Loan Agreement
dated March 31, 1999 by and among ARS, NationsBank, N.A.
and the other parties designated therein.
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 1998, the Company filed the following Current Reports on Form 8-K
(i)Form 8-K dated May 27, 1998 to report the acquisition by the Company of
Freestate Electrical Service Company and Freestate Electrical Construction
Company (collectively, "Freestate"), (ii) Form 8-K/A dated July 24, 1998 to file
financial information for Freestate, (iii) Form 8-K dated September 25, 1998 to
report that the Company expected earnings for the quarter ended September 30,
1998 were expected to be significantly below earnings for the same period last
year and consensus analyst estimates, and (iv) Form 8-K dated November 25, 1998
to report the acquisition by the Company of T.A. Beach Corp.
In 1999, the Company filed a Current Report on Form 8-K/A dated February 8,
1999 to file financial information for T.A. Beach Corporation, and a Current
Report on Form 8-K dated March 22, 1999 to report the execution and delivery of
an Agreement and Plan of Merger with The ServiceMaster Company.
61
<PAGE> 64
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, 1999
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,
1999 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, Treasurer, Chief
- ----------------------------------------------------- Financial Officer and Chief Accounting
Harry O. Nicodemus, IV Officer (Principal Financial Officer and
Principal Accounting Officer)
/s/ HOWARD S. HOOVER, JR. Chairman of the Board
- -----------------------------------------------------
Howard S. Hoover, Jr.
/s/ ROBERT J. CRUIKSHANK Director
- -----------------------------------------------------
Robert J. Cruikshank
/s/ RANDALL B. HALE Director
- -----------------------------------------------------
Randall B. Hale
/s/ DON JORDAN Director
- -----------------------------------------------------
Don Jordan
/s/ NOLAN LEHMANN Director
- -----------------------------------------------------
Nolan Lehmann
/s/ FRANK N. MENDITCH Senior Vice President and Director
- -----------------------------------------------------
Frank N. Menditch
/s/ BOBBY SHACKOULS Director
- -----------------------------------------------------
Bobby Shackouls
/s/ ELLIOT SOKOLOW Senior Vice President and Director
- -----------------------------------------------------
Elliot Sokolow
</TABLE>
62
<PAGE> 65
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 -- Amended and Restated Bylaws of ARS (Form 8-K/A dated
February 8, 1999, Ex. No. 3.1).
*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 -- 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).
*4.7 -- 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).
*4.8 -- 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).
*4.9 -- Amended and Restated Secured Revolving and Term Loan
Agreement dated July 2, 1998 among ARS, NationsBank, N.A.
and other parties designated therein. (Form 10-Q for
quarter ended June 30, 1998, Ex. 4.1).
4.10 -- 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. (Form 10-K for the year
ended 1997, Ex. 10.2).
+*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. (Form 10-K for
the year ended 1997, Ex. 10.4).
+*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). Ex. 10.3).
+*10.7 -- Employment Agreement dated as of March 4, 1998 between
ARS and Harry O. Nicodemus, IV. (Form 10-K for the year
ended 1997, Ex. 10.8)
</TABLE>
63
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+*10.8 -- 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 April 15, 1996 between
ARS and Michael Mamaux (Form S-1, Reg. No. 333-06195, Ex.
10.7).
+*10.11 -- Employment Agreement dated as of June 13, 1996 between
ARS and Elliot Sokolow (Form S-1, Reg. No. 333-06195, Ex.
10.8).
+10.12 -- Employment Agreement dated as of December 1, 1998 between
ARS and Ed Dunn.
+10.13 -- Amendment to Employment Agreement dated as of December 1,
1998 between ARS and Teri Hardt.
+10.14 -- Amended and Restated Employment Agreement dated as of
December 1, 1998 between ARS and Elliott Ettlinger.
+*10.15 -- Employment Agreement dated as of June 13, 1996 between
ARS and Gorden H. Timmons (Form S-1, Reg. No. 333-06195,
Ex. 10.10).
+*10.16 -- Employment Agreement dated as of June 13, 1996 between
ARS and Frank N. Menditch (Form S-1, Reg. No. 333-06195,
Ex. 10.12).
+*10.17 -- Form of Indemnification Agreement between ARS and each of
its directors and executive officers (Form S-1, Reg. No.
333-06195, Ex. 10.15).
+*10.18 -- Executive Supplemental Disability Plan of ARS (Form S-1,
Reg. No. 333-06195, Ex. 10.16).
+*10.19 -- Executive Supplemental Life Insurance Plan of ARS (Form
S-1, Reg. No. 333-06195, Ex. 10.17).
+*10.20 -- ARS Deferred Compensation Plan (Form S-1, Reg. No.
333-06195, Ex. 10.18).
*10.21 -- Agreement and Plan of Reorganization dated as of November
13, 1998 by and among ARS, Beach Acquisition, LLC; T.A.
Beach Corp; and the Stockholders named therein (including
Standard Provisions for Business Combinations) (Form 8-K
dated November 25, 1998, Exs. 2.1 and 2.2).
*10.22 -- Agreement and Plan of Merger dated as of March 22, 1999
by and among ARS, The ServiceMaster Company and SVM-M9
Acquisition Corporation (Form 8-K dated March 22, Ex.
2.1)
*10.23 -- Amendment No. 1 to Rights Agreement dated as of March 22,
1999 between ARS and Chase Mellon Shareholder Services,
L.L.C. (Form 8-K dated March 22, Ex. 4.1)
+10.24 -- Amendment No. 2 to ARS 1997 Employee Incentive Plan.
+10.25 -- Amendment No. 2 to ARS 1996 Incentive Plan.
10.26 -- First Amendment to Amended and Restated Loan Agreement
dated March 31, 1999 by and among ARS, NationsBank, N.A.
and the other parties designated therein.
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.
64
<PAGE> 1
EXHIBIT 10.12
FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This First Amended and Restated Employment Agreement dated and
effective as of December 1, 1998 (this "Agreement") is entered into by and
between American Residential Services, Inc., a Delaware corporation (the
"Company" or "ARS"), and Edward M. Dunn (the "Employee"). This Agreement amends
and restates in its entirety the Employment Agreement dated May 27, 1997 between
AMS American Mechanical Services of Maryland, Inc., a subsidiary of the Company,
and Employee.
1. Employment. On the terms and subject to the conditions set forth
herein, the Company hereby employs the Employee and the Employee hereby accepts
employment with the Company.
2. Duties and Responsibilities. Subject to the other provisions hereof
and to the power of the board of directors of the Company (the "Board") to
manage the business and affairs of the Company and to elect and remove its
officers and other managers, the Company will employ the Employee as a Senior
Vice President, and the Employee will perform the duties, functions and services
as are customarily or otherwise reasonably incidental to that position and such
other duties, functions and services as the Board or the President of the
Company (the "President") from time to time may request. The Employee will
report directly to the Chief Executive Officer of the Company or to such other
person as the Board may from time to time determine.
3. Compensation and Other Employee Benefits. As compensation for the
Employee's services hereunder during the Employment Term (as defined in Section
4), the Company will:
(a) during the Employment Term (as defined in Section 4), pay to the
Employee an annual base salary (the "Base Salary"), subject to such withholdings
or other deductions as may be required by applicable laws or regulations, of
$173,100 in accordance with the then current payroll policies of the Company,
which Base Salary will be subject to increase (but not decrease) at the
discretion of the Board; and
(b) subject to the right of the Company to amend or terminate any
employee benefit, compensation or welfare plan, (i) afford the Employee the
right to participate in (A) such medical and dental plans as the Company makes
available to its exempt salaried employees generally during the Employment Term
and (B) any employee and/or group benefit plans that the Company makes available
to its exempt salaried employees generally during the Employment Term
(including, without limitation, disability, accident, medical, life insurance
and hospitalization plans) and (ii) subject to the requirements of the business
expense reimbursement policies and procedures of the Company as in effect from
time to
Dunn - First Amended Employment Agreement
1
<PAGE> 2
time, reimburse the Employee for the reasonable out-of-pocket expenses he incurs
in the course of performing his duties hereunder.
4. Term. The term of the Employee's Employment under this Agreement
(the "Employment Term") will be for a term commencing on the effective date
hereof and ending, without the necessity of further action by any person, on May
27, 2001; provided, that the Company and the Employee may extend the Employment
Term for one or more additional periods by their mutual written consent signed
by each of them. As used herein, "Employment" means the employment of the
Employee as an exempt salaried employee of the Company or any other subsidiary
of the Company, and the transfer of the Employee's Employment from (a) the
Company or any other subsidiary of the Company or (b) from any subsidiary of the
Company to the Company will not constitute a termination of the Employee's
Employment for purposes of Section 6.
5. Competition and Confidentiality. (a) The Employee acknowledges
that: (i) the Company, the Company's subsidiaries and other businesses the
Company controls (alone or in common with one or more other persons, entities or
organizations) or hereafter acquires (collectively, the "ARS Group") are engaged
in the business of providing (A) comprehensive maintenance, repair and
replacement services for heating, ventilating and air conditioning, plumbing,
electrical, indoor air quality and other systems and major appliances in
personal residences and commercial, industrial and institutional facilities
(including, in the case of those facilities, building automation, lighting,
remote monitoring and refrigerant retrofitting services) and (B) new
installations of those systems and appliances in those residences and facilities
under construction (including the design and building of retrofit systems for
major expansion or renovation projects relating to those residences and
facilities)(collectively, the "Business"); (ii) the ARS Group conducts the
Business throughout the United States; (iii) the Employee's work for the Company
has given and will continue to give the Employee the trade secrets of and other
confidential information concerning the Company and the other members of the ARS
Group; (iv) the Employee's covenants in this Section 5 are essential to protect
the Business and the goodwill of the ARS Group; and (v) the Employee has the
means to support himself and his dependents other than by engaging in the
Business in contravention of this Section 5, and this Section 5 will not impair
his ability to provide that support. Accordingly, the Employee covenants that he
will not, at any time during the Employment Term or the period of 730
consecutive days after the first to occur of the expiration of the Employment
Term or the termination of the Employee's Employment pursuant to Section 6(a),
(c), (d), (e) or (f) (the "Post-employment Restricted Period"): (i) accept
employment with or render service to any person, firm or corporation that is
engaged in a business directly competitive with the Business, in any case in any
Territory surrounding any service facility of the ARS Group (the "Territory"
surrounding any service facility means (A) the city, town or village in which
that service facility is located, (B) the county or parish in which that service
facility is located, (C) the counties or parishes contiguous to the county or
parish in which that service facility is located, (D) the area located within 50
miles of that service facility, (E) the area located within 100 miles of that
service area and (F) the area in which that service facility regularly provides
services at the locations of its customers); (ii) directly or indirectly own,
finance or control, or participate in the ownership or control of, or be
connected as a principal, agent, representative, consultant, advisor, investor,
owner, partner, financier, manager or joint
Dunn - First Amended Employment Agreement
2
<PAGE> 3
venturer with, or permit his name to be used by or in connection with, any
business or enterprise directly competitive with the Business (provided,
however, that the Employee may invest as an investor in the voting securities of
any person that is a reporting company under the Securities Exchange Act of
1934, as amended, so long as (A) the aggregate amount of those securities the
Employee owns directly or indirectly is less than five percent of the total
outstanding voting securities of that person and (B) the Employee has no other
affiliation with that person); (iii) call on, solicit or perform services for,
directly or indirectly, or aid, directly or indirectly, any other person, entity
or organization (other than a member of the ARS Group) in calling on, soliciting
or performing services for, directly or indirectly, any person that at that time
is, or at any time within one year prior to that time was, a customer of any
member of the ARS Group or any prospective customer that had or, to the
knowledge of the Employee, was about to receive a business proposal from any
member of the ARS Group, for the purpose of soliciting or selling any product or
service in competition with the ARS Group; (iv) accept (otherwise than on behalf
of a member of the ARS Group), directly or indirectly, the business of any
person that at that time is, or at any time prior to that time was, a customer
of any member of the ARS Group, or request, advise or suggest to any such person
that such person curtail, cancel or withdraw its business from the ARS Group; or
(v) otherwise than on behalf of any member of the ARS Group, solicit the
employment of, or induce or advise to leave the employ by any member of the ARS
Group of, any person who at that time is employed on a full- or part-time basis
by any member of the ARS Group. Notwithstanding the foregoing, if the Employment
Term expires pursuant to Section 4 and the Employee's Employment thereafter
continues on an at-will basis for a period of more than 365 consecutive days,
then the Post-employment Restricted Period will end on the 366th day following
the subsequent termination of the Employee's Employment.
(b) The Employee acknowledges: (i) the ARS Group has a legitimate
business interest in the protection of its Confidential Information (as
hereinafter defined); and (ii) the ARS Group's Confidential Information is a
valuable asset worthy of and subject to protection by the ARS Group.
Accordingly, the Employee covenants that: (i) during the Employment Term and
thereafter, the Employee will keep confidential all Confidential Information of
the ARS Group which is known to him and, except with the specific prior written
consent of the general counsel of the Company or as required to be disclosed by
law or the order of any agency, court or other governmental authority, not
disclose that Confidential Information to any person except members of the ARS
Group and their employees, accountants, counsel and other designated
representatives. "Confidential Information" of the ARS Group means all know-how,
trade secrets and other confidential or nonpublic information prepared for, by
or on behalf of, or in the possession of, any member of the ARS Group, including
(i) nonpublic Proprietary Information (as hereinafter defined), (ii) other
information derived from reports, investigations, research, studies, work in
progress, codes, marketing, sales or service programs, capital expenditure
projects, cost summaries, equipment, product or system designs or drawings,
pricing or other formulae, contract analyses, financial information,
projections, customer lists, agreements with vendors, joint venture agreements,
confidential filings with any agency, court or other governmental authority and
(iii) all other concepts, methods, techniques and processes of doing business,
ideas or information that can be used in the operation of a business or other
enterprise and is sufficiently valuable, or potentially valuable, and secret to
afford an actual or
Dunn - First Amended Employment Agreement
3
<PAGE> 4
potential economic advantage over others. Confidential Information of the ARS
Group does not include any information: (i) that currently is generally
available to and generally known by the public or, through no fault of the
Employee, hereafter becomes generally available to and generally known by the
public. "Proprietary Information" means all the following that (i) relates to or
is used or useful in the Business or any logical extension thereof or results
from the Employee's work for the Company or any other member of the ARS Group
and (ii) is conceived or created by the Employee, either alone or in
collaboration with any other person or persons, at any time and in any place on
or after the date of this Agreement and prior to the termination of the
Employee's Employment for any reason: all conceptions and ideas for inventions,
improvements or valuable discoveries, whether or not patentable, all trade
secrets, all works of authorship (including illustrations, writings, computer
programs and software) and all other business or technical information.
(c) The Employee will promptly disclose to the Company as it becomes
available to the Employee all Proprietary Information and hereby assigns to the
Company all his right, title and interest in all Proprietary Information
available to him at the date of this Agreement. The Employee covenants and
agrees that the Employee will: (i) assign to the Company or its designee all his
right, title and interest in all Proprietary Information that hereafter becomes
available to him; and (ii) whenever requested by the Company to do so, execute
and deliver such applications, assignments, licenses or other documents, and
perform such other acts, as the Company may consider necessary to protect the
rights, title and interest of the Company or its designee in all Proprietary
Information assigned or to be assigned by the Employee pursuant to this Section
5(c).
(d) At any time at the request of the Company and promptly on the
termination of the Employee's Employment for any reason without the requirement
of any request therefor, the Employee will deliver to the Company all the
following then in the Employee's possession or subject to disposition by the
Employee: (i) the originals and all copies of all Confidential Information; (ii)
the originals and all copies of all Proprietary Information; (iii) the originals
and all copies of all books, business forms, drawings, files, lists, memoranda,
notebooks, notes, records and other documents (including all thereof stored in
computer memories or on disks, on microfiche or by any other means) which relate
to the Business or any member of the ARS Group, whether compiled, made or
prepared by the Employee or by any other person; and (iv) all devices,
equipment, tools and other tangible property owned or leased by any member of
the ARS Group.
(e) It is expressly understood and agreed that each of the parties
consider the restrictions contained in Section 5 to be reasonable for the
purpose of preserving for the ARS Group the good will, proprietary rights and
going business value of the Company. It is the desire and intent of each of the
parties that the covenants and agreements of the Employee in Sections 5(a), (b),
(c) and (d) (the "Restrictive Covenants") be enforced to the fullest extent
permissible under all applicable laws and public policies. Accordingly, if any
particular portion of any Restrictive Covenant is adjudicated to be invalid or
unenforceable, that Restrictive Covenant will be deemed amended (i) to reform
the particular portion to provide for such maximum restrictions as will be valid
and enforceable or, if that is not possible, then (ii) to delete therefrom the
portion thus
Dunn - First Amended Employment Agreement
4
<PAGE> 5
adjudicated to be invalid or unenforceable. The Restrictive Covenants will inure
to the benefit of any successor or successors to ARS, the Company and each other
member of the ARS Group.
(f) The Employee acknowledges that (i) the Restrictive Covenants are
expressly for the benefit of the Company and the other members of the ARS Group,
(ii) one or more of the members of the ARS Group would be irreparably injured by
a violation of any of the Restrictive Covenants and (iii) the members of the ARS
Group would have no adequate remedy at law in the event of such violation.
Therefore, the Employee acknowledges and agrees that injunctive relief, specific
performance or any other appropriate equitable remedy (without any bond or other
security being required) are appropriate remedies to enforce compliance by the
Employee with the Restrictive Covenants.
6. Termination of Employment. (a) For Due Cause. If the Company has
Due Cause (as hereinafter defined) to terminate the Employee's Employment, the
Company will be entitled to terminate the Employee's Employment at any time by
delivering written notice of that termination to the Employee, in which event
(i) that termination will be effective immediately on the delivery of that
notice, (ii) the Company will pay to the Employee his Base Salary accrued and
unpaid to the date of that termination and (iii) all the rights and benefits the
Employee may have under the employee benefit, bonus and/or stock option plans
and programs of the Company, if any, will be determined in accordance with the
terms and conditions of those plans and programs. "Due Cause" means: (i) the
Employee has committed a willful serious act, such as fraud, embezzlement or
theft, against any member of the ARS Group, intending to enrich himself at the
expense of the Company or that member; (ii) the Employee has been convicted of a
felony (or entered a plea of nolo contendre to a felony charge); (iii) the
Employee has engaged in conduct that has caused demonstrable and serious injury,
monetary or otherwise, to any member of the ARS Group; (iv) the Employee, in
carrying out his duties hereunder, has been guilty of gross neglect or gross
misconduct; (v) the Employee has (A) refused to carry out his duties hereunder
in gross dereliction of those duties and, after receiving written notice to such
effect from the Company, (B) failed to cure the existing problem within five
days; or (vi) the Employee has materially breached this Agreement and has not
remedied that breach within five days after receipt of written notice from the
Company that the breach has occurred.
(b) Death. If the Employee dies, (i) the Employee's Employment will
terminate on the date of his death, (ii) the Company will pay to the Employee's
estate the Employee's Base Salary accrued and unpaid through the end of the
month in which he dies and (iii) all rights and benefits the Employee (or his
estate) may have under the employee benefit, bonus and/or stock option plans and
programs of the Company, if any, will be determined in accordance with the terms
and conditions of those plans and programs.
(c) Disability. If the Employee suffers a Disability (as hereinafter
defined), (i) the Employee's Employment will terminate on the date on which the
Company determines that Disability has occurred, (ii) the Company will pay to
the Employee his Base Salary accrued and unpaid through the end of the month in
which is employment is terminated because of that Disability
Dunn - First Amended Employment Agreement
5
<PAGE> 6
and (iii) all the rights and benefits the Employee may have under the employee
benefit, bonus and/or stock option plans and programs of the Company, if any,
will be determined in accordance with the terms and conditions of those plans
and programs. "Disability" means the inability or incapacity (by reason of a
medically determinable physical or mental impairment) of the Employee to perform
the essential functions of the job then assigned to him hereunder for a period
that can be reasonably expected to last more than 120 days. That inability or
incapacity will be documented to the reasonable satisfaction of the Company by
appropriate correspondence from registered physicians reasonably satisfactory to
the Company.
(d) Voluntary Termination. The Employee may voluntarily terminate his
Employment at any time by providing at least 30 days' prior written notice to
the Company, in which event, subject to the provisions of Section 6(f), (i) the
Company will pay to the Employee his Base Salary accrued and unpaid to the date
his Employment terminates and (ii) all the rights and benefits the Employee may
have under the employee benefit, bonus and/or stock option plans and programs of
the Company, if any, will be determined in accordance with the terms and
conditions of those plans and programs.
(e) Change of Control. For purposes of this Agreement, "Change of
Control" means an acquisition of securities in which a person or entity other
than the Company or its subsidiaries, together with all affiliates or associates
of such person or entity, becomes the beneficial owner of fifty percent (50%) or
more of the then outstanding shares of common stock of the Company as a result
of such acquisition; provided, however, that such Change of Control does not
occur solely as a result of a reduction in the number of shares of common stock
outstanding due to a repurchase of common stock of the Company by the Company or
its subsidiaries. For purposes of this Agreement, the Change of Control will be
deemed to occur on the effective date on which such person or entity acquires
beneficial ownership of at least one share greater than fifty percent (50%) of
the then outstanding shares of common stock of the Company. If, at any time
within three-hundred sixty-five (365) days after a Change in Control occurs,
the Company terminates the Employee's Employment for any reason other than Due
Cause or the Employee's Disability, or if the Employee voluntarily terminates
his Employment following a decrease in his Base Salary to which he has not
consented in writing, then the Employee may, at his option, tender to the
Company a signed and dated Change of Control Termination Notice specifying the
factual basis of the Change of Control and the basis for Employee's termination
or decrease in Base Salary. If the Company does not dispute in writing the
factual basis of such Change of Control Termination Notice within fifteen (15)
days of Company's receipt thereof, then: (i) the Employee's Employment shall
terminate effective as of the fifteenth (15th) day after the date of the Change
of Control Termination Notice; (ii) within forty-five (45) days after the
Company's receipt of such Change of Control Termination Notice, the Company will
pay to the Employee one lump sum payment equal to two times Employee's highest
annual Base Salary hereunder, and; (iii) all the rights and benefits the
Employee may have under the employee benefit, bonus and/or stock option plans
and programs of the Company, if any, will be determined in accordance with the
terms and conditions of those plans and programs.
Dunn - First Amended Employment Agreement
6
<PAGE> 7
(f) Other Terminations. The Company will be entitled to terminate the
Employee's Employment at any time for any reason. Except as otherwise provided
for in Section 6(e) hereof, if the Company terminates the Employee's Employment
for any reason other than Due Cause or the Employee's Disability, or if the
Employee voluntarily terminates his Employment following a decrease in his Base
Salary to which he has not consented in writing, (i) the Company will pay to the
Employee his Base Salary in accordance with the then current payroll policies of
the Company to the expiration of the Employment Term but only for so long as the
Employee is in strict compliance with Section 5 of this Agreement and (ii) all
the rights and benefits the Employee may have under the employee benefit, bonus
and/or stock option plans and programs of the Company, if any, will be
determined in accordance with the terms and conditions of those plans and
programs.
7. No Conflicts. The Employee represents and warrants that the
Employee is under no contractual or other restrictions or obligations that will
(a) limit Employee's activities on behalf of the Company or (b) prohibit or
inhibit disclosure or use by the Employee of any information in possession of
the Employee which directly or indirectly relates to the operation or business
of the Company or the services to be rendered by the Employee, under this
Agreement or otherwise.
8. Notices. All notices, requests, demands and other communications
given under or by reason of this Agreement must be in writing and will be deemed
given when delivered in person or when mailed, by certified mail (return receipt
requested), postage prepaid, addressed as follows (or to such other address as a
party may specify by notice pursuant to this provision):
(a) If to the Company:
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer Road
Houston, Texas 77056-5604
Attn: General Counsel
(b) If to the Employee:
Edward M. Dunn
17518 Wood Camp
Mount Airy, Maryland 21771
9. Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws (other than the rules governing conflicts
of laws) of the State of Texas.
Dunn - First Amended Employment Agreement
7
<PAGE> 8
10. Additional Instruments. The Employee and the Company will execute
and deliver any and all additional instruments and agreements that may be
necessary or proper to carry out the purposes of this Agreement.
11. Entire Agreement and Amendments. This Agreement contains the entire
agreement of the Employee and the Company relating to the matters contained
herein and supersedes all prior agreements and understandings, oral or written,
between the Employee and the Company with respect to the subject matter hereof.
This Agreement may not be amended or modified except by an agreement in writing
signed by the party against whom enforcement of any waiver or modification is
sought.
12. Headings. The headings of Sections and subsections hereof are
included solely for convenience of reference and will not control the meaning or
interpretation of any of the provisions hereof.
13. 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.
14. Separability. If any provision of this Agreement is rendered or
declared illegal, invalid or unenforceable by reason of any existing or
subsequently enacted legislation or by the final judgment of any court of
competent jurisdiction, the Employee and the Company will promptly meet and
negotiate substitute provisions for those rendered or declared illegal or
unenforceable to preserve the original intent of this Agreement to the extent
legally possible, but all other provisions of this Agreement shall remain in
full force and effect.
15. Assignments. The Company may assign this Agreement to any person or
entity succeeding to all or substantially all the business interests of the
Company by merger or otherwise. The rights and obligations of the Employee under
this Agreement are personal to him, and none of those rights, benefits or
obligations will be subject to voluntary or involuntary alienation, assignment
or transfer, except as otherwise contemplated hereby.
16. Effect of Agreement. Subject to the provisions of Section 15 with
respect to assignments, this Agreement will be binding on the Employee and his
heirs, executors, administrators, legal representatives and assigns and on the
Company and its successors and assigns, except as otherwise contemplated hereby.
The Employee acknowledges that the provisions of Section 5 are for the benefit
of ARS and the other members of the ARS Group, in addition to the Company.
17. Execution. This Agreement may be executed in multiple counterparts,
each of which will be deemed an original and all of which will constitute one
and the same agreement.
Dunn - First Amended Employment Agreement
8
<PAGE> 9
18. Waiver of Breach. The waiver by either party to this Agreement of a
breach of any provision of the Agreement by the other party will not operate or
be construed as a waiver by the waiving party of any subsequent breach by the
other party.
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement effective as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC. EMPLOYEE
By:
-------------------------- --------------------------
Thomas Amonett Edward M. Dunn
President
ARS AMERICAN MECHANICAL SERVICES
OF MARYLAND, INC. (Joined in solely for the
purpose of the amendment and restatement set forth
in the recitals herein)
By:
--------------------------
John D. Held
Vice President
Dunn - First Amended Employment Agreement
9
<PAGE> 1
EXHIBIT 10.13
EMPLOYMENT AGREEMENT AMENDMENT
This Employment Agreement Amendment ("Amendment") dated and effective
as of December 1, 1998 is entered into by and between American Residential
Services, Inc., a Delaware corporation (the "Company") and Terri L. Hardt (the
"Employee").
WHEREAS, the Company and the Employee are parties to that certain
Employment Agreement dated as of April 28, 1997, (the "Employment Agreement"),
and;
WHEREAS, the Company and Employee desire to amend Section 4 of the
Employment Agreement, entitled Term.
NOW, THEREFORE, in consideration of the premises and covenants
contained herein and for such other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the Company and Employee hereby
agree as follows:
1. Section 4 of the Employment Agreement, entitled Term, is hereby
amended by replacing the entirety thereof with the following text:
4. Term.
The term of the Employee's employment under this
Agreement shall commence on the date of this Agreement and
shall end, without the necessity of any further action by any
person, on April 28, 2000. Such term is referred to herein as
the "Employment Term".
2. All terms and conditions of the Employment Agreement which are
unaffected by this Amendment shall remain in full force and effect.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Amendment effective as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC. EMPLOYEE
- ------------------------------- --------------------------
John D. Held Terri L. Hardt
Senior Vice President
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This First Amended and Restated Employment Agreement dated and
effective as of December 1, 1998 (this "Agreement") is entered into by and
between American Residential Services, Inc., a Delaware corporation (the
"Company" or "ARS"), and Elliot F. Ettlinger (the "Employee"). This Agreement
amends and restates in its entirety the Employment Agreement dated February 21,
1997 between Employee and American Residential Services of Florida, Inc.
(successor by merger to Larry Teague and Sons Plumbing, Inc.), a Florida
corporation and wholly-owned subsidiary of the Company.
1. Employment. On the terms and subject to the conditions set forth
herein, the Company hereby employs the Employee and the Employee hereby accepts
employment with the Company.
2. Duties and Responsibilities. Subject to the other provisions hereof
and to the power of the board of directors of the Company (the "Board") to
manage the business and affairs of the Company and to elect and remove its
officers and other managers, the Company will employ the Employee as a Vice
President-Plumbing Operations, and the Employee will perform the duties,
functions and services as are customarily or otherwise reasonably incidental to
that position and such other duties, functions and services as the Board or the
President of the Company (the "President") from time to time may request. The
Employee will report directly to the Director of Residential Operations of the
Company or to his designee.
3. Compensation and Other Employee Benefits. As compensation for the
Employee's services hereunder during the Employment Term (as defined in Section
4), the Company will:
(a) during the Employment Term (as defined in Section 4), pay to the
Employee an annual base salary (the "Base Salary"), subject to such withholdings
or other deductions as may be required by applicable laws or regulations, of
$150,000 in accordance with the then current payroll policies of the Company,
which Base Salary will be subject to increase (but not decrease) at the
discretion of the Board; and
(b) subject to the right of the Company to amend or terminate any
employee benefit, compensation or welfare plan, (i) afford the Employee the
right to participate in (A) such medical and dental plans as the Company makes
available to its exempt salaried employees generally during the Employment Term
and (B) any employee and/or group benefit plans that the Company makes available
to its exempt salaried employees generally during the Employment Term
(including, without limitation, disability, accident, medical, life insurance
and hospitalization plans) and (ii) subject to the requirements of the business
Ettlinger - First Amended Employment Agreement
1
<PAGE> 2
expense reimbursement policies and procedures of the Company as in effect from
time to time, reimburse the Employee for the reasonable out-of-pocket expenses
he incurs in the course of performing his duties hereunder.
4. Term. Subject to the provisions of Section 6 herein, the term of
the Employee's Employment under this Agreement (the "Employment Term") shall be
for a continually renewing term of one (1) year commencing on December 1, 1998
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
Company and the Employee that there shall be continuously a remaining term of
one (1) years' duration of the Employee's Employment until an event has occurred
as described in, or either the Company or the Employee shall have made an
appropriate election pursuant to, the provisions of Section 6 herein. Upon the
date of this Agreement's termination, this Agreement shall have no further force
or effect, except that Section 6 herein shall survive for the period(s) of time
provided for therein. As used herein, "Employment" means the employment of the
Employee as an exempt salaried employee of the Company or any other subsidiary
of the Company, and the transfer of the Employee's Employment from (a) the
Company or any other subsidiary of the Company or (b) from any subsidiary of the
Company to the Company will not constitute a termination of the Employee's
Employment for purposes of Section 6.
5. Competition and Confidentiality. (a) The Employee acknowledges
that: (i) the Company, the Company's subsidiaries and other businesses the
Company controls (alone or in common with one or more other persons, entities or
organizations) or hereafter acquires (collectively, the "ARS Group") are engaged
in the business of providing (A) comprehensive maintenance, repair and
replacement services for heating, ventilating and air conditioning, plumbing,
electrical, indoor air quality and other systems and major appliances in
personal residences and commercial, industrial and institutional facilities
(including, in the case of those facilities, building automation, lighting,
remote monitoring and refrigerant retrofitting services) and (B) new
installations of those systems and appliances in those residences and facilities
under construction (including the design and building of retrofit systems for
major expansion or renovation projects relating to those residences and
facilities)(collectively, the "Business"); (ii) the ARS Group conducts the
Business throughout the United States; (iii) the Employee's work for the Company
has given and will continue to give the Employee the trade secrets of and other
confidential information concerning the Company and the other members of the ARS
Group; (iv) the Employee's covenants in this Section 5 are essential to protect
the Business and the goodwill of the ARS Group; and (v) the Employee has the
means to support himself and his dependents other than by engaging in the
Business in contravention of this Section 5, and this Section 5 will not impair
his ability to provide that support. Accordingly, the Employee covenants that he
will not, at any time during the Employment Term or the period of 730
consecutive days after the first to occur of the expiration of the Employment
Term or the termination of the Employee's Employment pursuant to Section 6(a),
(c), (d) or (e) (the "Post-employment Restricted Period"): (i) accept employment
with or render service to any person, firm or corporation that is engaged in a
business directly competitive with the Business, in any case in any Territory
surrounding any service facility of the ARS Group (the "Territory" surrounding
any service facility means (A) the city, town or village in which that service
facility is located, (B) the county or parish
Ettlinger - First Amended Employment Agreement
2
<PAGE> 3
in which that service facility is located, (C) the counties or parishes
contiguous to the county or parish in which that service facility is located,
(D) the area located within 50 miles of that service facility, (E) the area
located within 100 miles of that service area and (F) the area in which that
service facility regularly provides services at the locations of its customers);
(ii) directly or indirectly own, finance or control, or participate in the
ownership or control of, or be connected as a principal, agent, representative,
consultant, advisor, investor, owner, partner, financier, manager or joint
venturer with, or permit his name to be used by or in connection with, any
business or enterprise directly competitive with the Business (provided,
however, that the Employee may invest as an investor in the voting securities of
any person that is a reporting company under the Securities Exchange Act of
1934, as amended, so long as (A) the aggregate amount of those securities the
Employee owns directly or indirectly is less than five percent of the total
outstanding voting securities of that person and (B) the Employee has no other
affiliation with that person); (iii) call on, solicit or perform services for,
directly or indirectly, or aid, directly or indirectly, any other person, entity
or organization (other than a member of the ARS Group) in calling on, soliciting
or performing services for, directly or indirectly, any person that at that time
is, or at any time within one year prior to that time was, a customer of any
member of the ARS Group or any prospective customer that had or, to the
knowledge of the Employee, was about to receive a business proposal from any
member of the ARS Group, for the purpose of soliciting or selling any product or
service in competition with the ARS Group; (iv) accept (otherwise than on behalf
of a member of the ARS Group), directly or indirectly, the business of any
person that at that time is, or at any time prior to that time was, a customer
of any member of the ARS Group, or request, advise or suggest to any such person
that such person curtail, cancel or withdraw its business from the ARS Group; or
(v) otherwise than on behalf of any member of the ARS Group, solicit the
employment of, or induce or advise to leave the employ by any member of the ARS
Group of, any person who at that time is employed on a full- or part-time basis
by any member of the ARS Group.
(b) The Employee acknowledges: (i) the ARS Group has a legitimate
business interest in the protection of its Confidential Information (as
hereinafter defined); and (ii) the ARS Group's Confidential Information is a
valuable asset worthy of and subject to protection by the ARS Group.
Accordingly, the Employee covenants that: (i) during the Employment Term and
thereafter, the Employee will keep confidential all Confidential Information of
the ARS Group which is known to him and, except with the specific prior written
consent of the general counsel of the Company or as required to be disclosed by
law or the order of any agency, court or other governmental authority, not
disclose that Confidential Information to any person except members of the ARS
Group and their employees, accountants, counsel and other designated
representatives. "Confidential Information" of the ARS Group means all know-how,
trade secrets and other confidential or nonpublic information prepared for, by
or on behalf of, or in the possession of, any member of the ARS Group, including
(i) nonpublic Proprietary Information (as hereinafter defined), (ii) other
information derived from reports, investigations, research, studies, work in
progress, codes, marketing, sales or service programs, capital expenditure
projects, cost summaries, equipment, product or system designs or drawings,
pricing or other formulae, contract analyses, financial information,
projections, customer lists, agreements with vendors, joint venture agreements,
confidential filings with any agency, court or other governmental authority and
(iii) all other concepts, methods, techniques and
Ettlinger - First Amended Employment Agreement
3
<PAGE> 4
processes of doing business, ideas or information that can be used in the
operation of a business or other enterprise and is sufficiently valuable, or
potentially valuable, and secret to afford an actual or potential economic
advantage over others. Confidential Information of the ARS Group does not
include any information: (i) that currently is generally available to and
generally known by the public or, through no fault of the Employee, hereafter
becomes generally available to and generally known by the public. "Proprietary
Information" means all the following that (i) relates to or is used or useful in
the Business or any logical extension thereof or results from the Employee's
work for the Company or any other member of the ARS Group and (ii) is conceived
or created by the Employee, either alone or in collaboration with any other
person or persons, at any time and in any place on or after the date of this
Agreement and prior to the termination of the Employee's Employment for any
reason: all conceptions and ideas for inventions, improvements or valuable
discoveries, whether or not patentable, all trade secrets, all works of
authorship (including illustrations, writings, computer programs and software)
and all other business or technical information.
(c) The Employee will promptly disclose to the Company as it becomes
available to the Employee all Proprietary Information and hereby assigns to the
Company all his right, title and interest in all Proprietary Information
available to him at the date of this Agreement. The Employee covenants and
agrees that the Employee will: (i) assign to the Company or its designee all his
right, title and interest in all Proprietary Information that hereafter becomes
available to him; and (ii) whenever requested by the Company to do so, execute
and deliver such applications, assignments, licenses or other documents, and
perform such other acts, as the Company may consider necessary to protect the
rights, title and interest of the Company or its designee in all Proprietary
Information assigned or to be assigned by the Employee pursuant to this Section
5(c).
(d) At any time at the request of the Company and promptly on the
termination of the Employee's Employment for any reason without the requirement
of any request therefor, the Employee will deliver to the Company all the
following then in the Employee's possession or subject to disposition by the
Employee: (i) the originals and all copies of all Confidential Information; (ii)
the originals and all copies of all Proprietary Information; (iii) the originals
and all copies of all books, business forms, drawings, files, lists, memoranda,
notebooks, notes, records and other documents (including all thereof stored in
computer memories or on disks, on microfiche or by any other means) which relate
to the Business or any member of the ARS Group, whether compiled, made or
prepared by the Employee or by any other person; and (iv) all devices,
equipment, tools and other tangible property owned or leased by any member of
the ARS Group.
(e) It is expressly understood and agreed that each of the parties
consider the restrictions contained in Section 5 to be reasonable for the
purpose of preserving for the ARS Group the good will, proprietary rights and
going business value of the Company. It is the desire and intent of each of the
parties that the covenants and agreements of the Employee in Sections 5(a), (b),
(c) and (d) (the "Restrictive Covenants") be enforced to the fullest extent
permissible under all applicable laws and public policies. Accordingly, if any
particular portion of any Restrictive Covenant is adjudicated to be invalid or
unenforceable, that Restrictive Covenant will be deemed
Ettlinger - First Amended Employment Agreement
4
<PAGE> 5
amended (i) to reform the particular portion to provide for such maximum
restrictions as will be valid and enforceable or, if that is not possible, then
(ii) to delete therefrom the portion thus adjudicated to be invalid or
unenforceable. The Restrictive Covenants will inure to the benefit of any
successor or successors to ARS, the Company and each other member of the ARS
Group.
(f) The Employee acknowledges that (i) the Restrictive Covenants are
expressly for the benefit of the Company and the other members of the ARS Group,
(ii) one or more of the members of the ARS Group would be irreparably injured by
a violation of any of the Restrictive Covenants and (iii) the members of the ARS
Group would have no adequate remedy at law in the event of such violation.
Therefore, the Employee acknowledges and agrees that injunctive relief, specific
performance or any other appropriate equitable remedy (without any bond or other
security being required) are appropriate remedies to enforce compliance by the
Employee with the Restrictive Covenants.
6. Termination of Employment. (a) For Due Cause. If the Company has
Due Cause (as hereinafter defined) to terminate the Employee's Employment, the
Company will be entitled to terminate the Employee's Employment at any time by
delivering written notice of that termination to the Employee, in which event
(i) that termination will be effective immediately on the delivery of that
notice, (ii) the Company will pay to the Employee his Base Salary accrued and
unpaid to the date of that termination and (iii) all the rights and benefits the
Employee may have under the employee benefit, bonus and/or stock option plans
and programs of the Company, if any, will be determined in accordance with the
terms and conditions of those plans and programs. "Due Cause" means: (i) the
Employee has committed a willful serious act, such as fraud, embezzlement or
theft, against any member of the ARS Group, intending to enrich himself at the
expense of the Company or that member; (ii) the Employee has been convicted of a
felony (or entered a plea of nolo contendre to a felony charge); (iii) the
Employee has engaged in conduct that has caused demonstrable and serious injury,
monetary or otherwise, to any member of the ARS Group; (iv) the Employee, in
carrying out his duties hereunder, has been guilty of gross neglect or gross
misconduct; (v) the Employee has (A) refused to carry out his duties hereunder
in gross dereliction of those duties and, after receiving written notice to such
effect from the Company, (B) failed to cure the existing problem within five
days; or (vi) the Employee has materially breached this Agreement and has not
remedied that breach within five days after receipt of written notice from the
Company that the breach has occurred.
(b) Death. If the Employee dies, (i) the Employee's Employment will
terminate on the date of his death, (ii) the Company will pay to the Employee's
estate the Employee's Base Salary accrued and unpaid through the end of the
month in which he dies and (iii) all rights and benefits the Employee (or his
estate) may have under the employee benefit, bonus and/or stock option plans and
programs of the Company, if any, will be determined in accordance with the terms
and conditions of those plans and programs.
(c) Disability. If the Employee suffers a Disability (as hereinafter
defined), (i) the Employee's Employment will terminate on the date on which the
Company determines that
Ettlinger - First Amended Employment Agreement
5
<PAGE> 6
Disability has occurred, (ii) the Company will pay to the Employee his Base
Salary accrued and unpaid through the end of the month in which is employment is
terminated because of that Disability and (iii) all the rights and benefits the
Employee may have under the employee benefit, bonus and/or stock option plans
and programs of the Company, if any, will be determined in accordance with the
terms and conditions of those plans and programs. "Disability" means the
inability or incapacity (by reason of a medically determinable physical or
mental impairment) of the Employee to perform the essential functions of the job
then assigned to him hereunder for a period that can be reasonably expected to
last more than 120 days. That inability or incapacity will be documented to the
reasonable satisfaction of the Company by appropriate correspondence from
registered physicians reasonably satisfactory to the Company.
(d) Voluntary Termination. The Employee may voluntarily terminate his
Employment at any time by providing at least 30 days' prior written notice to
the Company, in which event, subject to the provisions of Section 6(e), (i) the
Company will pay to the Employee his Base Salary accrued and unpaid to the date
his Employment terminates and (ii) all the rights and benefits the Employee may
have under the employee benefit, bonus and/or stock option plans and programs of
the Company, if any, will be determined in accordance with the terms and
conditions of those plans and programs.
(e) Other Terminations. The Company will be entitled to terminate the
Employee's Employment at any time for any reason. If the Company terminates the
Employee's Employment for any reason other than Due Cause or the Employee's
Disability, or if the Employee voluntarily terminates his Employment following a
decrease in his Base Salary to which he has not consented in writing, (i) the
Company will pay to the Employee his Base Salary in accordance with the then
current payroll policies of the Company to the expiration of the Employment Term
but only for so long as the Employee is in strict compliance with Section 5 of
this Agreement and (ii) all the rights and benefits the Employee may have under
the employee benefit, bonus and/or stock option plans and programs of the
Company, if any, will be determined in accordance with the terms and conditions
of those plans and programs.
7. No Conflicts. The Employee represents and warrants that the
Employee is under no contractual or other restrictions or obligations that will
(a) limit Employee's activities on behalf of the Company or (b) prohibit or
inhibit disclosure or use by the Employee of any information in possession of
the Employee which directly or indirectly relates to the operation or business
of the Company or the services to be rendered by the Employee, under this
Agreement or otherwise.
8. Notices. All notices, requests, demands and other communications
given under or by reason of this Agreement must be in writing and will be deemed
given when delivered in person or when mailed, by certified mail (return receipt
requested), postage prepaid, addressed as follows (or to such other address as a
party may specify by notice pursuant to this provision):
Ettlinger - First Amended Employment Agreement
6
<PAGE> 7
(a) If to the Company:
American Residential Services, Inc.
Post Oak Tower, Suite 725
5051 Westheimer Road
Houston, Texas 77056-5604
Attn: General Counsel
(b) If to the Employee:
Elliot F. Ettlinger
1230 Ocean Blvd.
Atlantic Beach, Florida 32203
9. Governing Law. This Agreement will be governed by and construed in
accordance with the substantive laws (other than the rules governing conflicts
of laws) of the State of Texas.
10. Additional Instruments. The Employee and the Company will execute
and deliver any and all additional instruments and agreements that may be
necessary or proper to carry out the purposes of this Agreement.
11. Entire Agreement and Amendments. This Agreement contains the entire
agreement of the Employee and the Company relating to the matters contained
herein and supersedes all prior agreements and understandings, oral or written,
between the Employee and the Company with respect to the subject matter hereof.
This Agreement may not be amended or modified except by an agreement in writing
signed by the party against whom enforcement of any waiver or modification is
sought.
12. Headings. The headings of Sections and subsections hereof are
included solely for convenience of reference and will not control the meaning or
interpretation of any of the provisions hereof.
13. 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.
14. Separability. If any provision of this Agreement is rendered or
declared illegal, invalid or unenforceable by reason of any existing or
subsequently enacted legislation or by the final judgment of any court of
competent jurisdiction, the Employee and the Company will promptly meet and
negotiate substitute provisions for those rendered or declared illegal or
unenforceable to preserve the original intent of this Agreement to the extent
legally possible, but all other provisions of this Agreement shall remain in
full force and effect.
Ettlinger - First Amended Employment Agreement
7
<PAGE> 8
15. Assignments. The Company may assign this Agreement to any person or
entity succeeding to all or substantially all the business interests of the
Company by merger or otherwise. The rights and obligations of the Employee under
this Agreement are personal to him, and none of those rights, benefits or
obligations will be subject to voluntary or involuntary alienation, assignment
or transfer, except as otherwise contemplated hereby.
16. Effect of Agreement. Subject to the provisions of Section 15 with
respect to assignments, this Agreement will be binding on the Employee and his
heirs, executors, administrators, legal representatives and assigns and on the
Company and its successors and assigns, except as otherwise contemplated hereby.
The Employee acknowledges that the provisions of Section 5 are for the benefit
of ARS and the other members of the ARS Group, in addition to the Company.
17. Execution. This Agreement may be executed in multiple counterparts,
each of which will be deemed an original and all of which will constitute one
and the same agreement.
18. Waiver of Breach. The waiver by either party to this Agreement of a
breach of any provision of the Agreement by the other party will not operate or
be construed as a waiver by the waiving party of any subsequent breach by the
other party.
IN WITNESS WHEREOF, the Employee and the Company have executed this
Agreement effective as of the date first above written.
AMERICAN RESIDENTIAL SERVICES, INC. EMPLOYEE
By:
------------------------------- --------------------------
Thomas Amonett Elliot F. Ettlinger
President
AMERICAN RESIDENTIAL SERVICES
OF FLORIDA, INC. (Joined in solely for the
purpose of the amendment and restatement set forth
in the recitals herein)
By:
-------------------------------
John D. Held
Vice President
Ettlinger - First Amended Employment Agreement
8
<PAGE> 1
EXHIBIT 10.24
AMERICAN RESIDENTIAL SERVICES, INC.
AMENDMENT NO. 2 TO 1997 EMPLOYEE INCENTIVE PLAN
The following definitions are added to paragraph 2 of the 1997 Employee
Incentive Plan:
"Parent Corporation" means the direct or indirect owner of 100% of the
capital stock of a corporation.
"Substitute Awards" means, in the event of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the grant of a Substitute Option or
Substitute SAR.
"Substitute Option" means a right to purchase a specified number of
shares of capital stock of a Transaction Party at a specified price.
"Substitute SAR" means a right to receive payment, in cash or capital
stock of a Transaction Party equal to the excess of the fair market
value or other specified valuation of a specified number of shares of
capital stock of such Transaction Party on the date the right is
exercised over a specified strike price, in each case, as determined by
the Committee.
"Transaction Party" means a corporation which is a party to a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation with the Company, or such corporation's
Parent Corporation or Subsidiary.
The last sentence of paragraph 14(b) of the 1997 Employee Incentive Plan is
hereby amended in its entirety as follows:
In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board
will be authorized to issue or assume Awards by means of substitution
of new Awards or Substitute Awards, as appropriate, for previously
issued Awards or to assume previously issued Awards as part of such
adjustment.
<PAGE> 1
EXHIBIT 10.25
AMERICAN RESIDENTIAL SERVICES, INC.
AMENDMENT NO. 2 TO 1996 INCENTIVE PLAN
The following definitions are added to paragraph 3 of the 1996 Incentive Plan:
"Parent Corporation" means the direct or indirect owner of 100% of the
capital stock of a corporation.
"Substitute Awards" means, in the event of a corporate merger,
consolidation, acquisition of property or stock, separation,
reorganization or liquidation, the grant of a Substitute Option or
Substitute SAR.
"Substitute Option" means a right to purchase a specified number of
shares of capital stock of a Transaction Party at a specified price.
"Substitute SAR" means a right to receive payment, in cash or capital
stock of a Transaction Party equal to the excess of the fair market
value or other specified valuation of a specified number of shares of
capital stock of such Transaction Party on the date the right is
exercised over a specified strike price, in each case, as determined by
the Committee.
"Transaction Party" means a corporation which is a party to a corporate
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation with the Company, or such corporation's
Parent Corporation or Subsidiary.
The last sentence of paragraph 15(b) of the 1996 Incentive Plan is hereby
amended in its entirety as follows:
In the event of a corporate merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation, the Board
will be authorized to issue or assume Awards by means of substitution
of new Awards or Substitute Awards, as appropriate, for previously
issued Awards or to assume previously issued Awards as part of such
adjustment.
<PAGE> 1
FIRST AMENDMENT TO AMENDED AND RESTATED SECURED
REVOLVING AND TERM LOAN AGREEMENT
This First Amendment to Amended and Restated Secured Revolving and Term
Loan Agreement (this "FIRST AMENDMENT") is made and entered into as of the 31st
day of March, 1999, by and among AMERICAN RESIDENTIAL SERVICES, INC., a Delaware
corporation ("BORROWER"); each of the Subsidiaries of Borrower; NATIONSBANK,
N.A., as the Agent, a Revolving Lender, the Swing Line Lender, and the Issuing
Lender; BANK BOSTON, N.A., as the Documentation Agent and a Revolving Lender,
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, as the Term Lender; and the other
lending institutions which are a party to this First Amendment.
W I T N E S S E T H:
WHEREAS, pursuant to that certain Amended and Restated Secured
Revolving and Term Loan Agreement (the "LOAN AGREEMENT") dated July 2, 1998,
Lenders (as that term is defined in the Loan Agreement and is hereafter used)
agreed to make certain loans to Borrower upon the terms and conditions therein
contained; and
WHEREAS, Borrower and Lenders desire to modify and amend certain terms
and provisions of the Loan Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Borrower and Lenders agree as
follows:
1. Defined Terms. Hereinafter, words and terms used herein which are
defined in the Loan Agreement are used herein as defined therein, except as
specifically modified by the terms of this First Amendment.
2. Conditions Precedent. The obligations of Agent, the Swing Line
Lender, the Issuing Lender, the Documentation Agent, the Term Lender, and the
other Lenders under this First Amendment, and the effectiveness of the
amendments to the Loan Agreement set forth herein, are subject to the full,
complete, and timely satisfaction of each of the following conditions precedent:
(a) Agent shall have received and approved a fully executed
original of this First Amendment, executed by Authorized Officers of
Borrower and each Subsidiary of Borrower and by each Lender;
(b) Agent shall have received an upfront closing fee equal to
$287,500.00 as independent pro rata consideration for each Revolving
Lender's agreement to enter into this First Amendment and an upfront
<PAGE> 2
closing fee equal to $125,000.00, as independent consideration for the
Term Lender's agreement to enter into this First Amendment;
(c) Borrower shall have agreed to cooperate fully, in a manner
satisfactory to Agent, with an independent third party consultant,
engaged by Agent (at Borrower's sole cost and expense) to review and
analyze for Agent, on behalf of Lenders, the validity of Borrower's
business plan for its fiscal year ending on December 31, 1999, in a
manner and scope determined by Agent;
(d) Borrower shall have reimbursed Agent and Lenders for all
their reimbursable costs and expenses (including without limitation,
attorneys' fees) incurred in connection with the preparation,
negotiation, and execution of this First Amendment and the transaction
described herein, and have paid Agent for all other amounts then due
and owing by Borrower to Lenders under the Loan Agreement and the
Notes;
(e) The representations and warranties contained in Article VI
of the Loan Agreement shall be true and unbreached and no Event of
Default shall have occurred and be then existing (after giving effect
to this First Amendment); and
(f) All legal matters incident to the consummation of the
transactions contemplated under this First Amendment shall be
satisfactory to Messrs. Gardere Wynne Sewell & Riggs, L.L.P. special
counsel for Agent and Lenders (including without limitation, delivery
to Agent of all organizational documents and Subsidiary tax
identification numbers required by Agent and its counsel).
The Agent shall, upon satisfaction of the foregoing conditions precedent,
execute and deliver to Borrower a written confirmation that such conditions have
been fully, completely and timely satisfied, and the amendments in Article 3
hereof, and the waivers in Article 6 hereof, are in full force and effect.
3. Amendments to Loan Agreement. Upon the full and complete
satisfaction of each of the conditions precedent listed in Section 2, the Loan
Agreement is amended and modified as follows:
3.1 The definitions of the following terms set forth in Section 1.1 of
the Loan Agreement are deleted in their entirety and the following are
substituted in place thereof:
-2-
<PAGE> 3
"FIXED RATE" means, for Term Loan A, a fixed rate per annum equal to
9.96%.
"INTEREST PERIOD" means, with respect to any LIBOR Rate Loan:
(a) for each calendar month beginning prior to April 1, 2000,
each one month period commencing on the first Business Day of a
calendar month; and
(b) thereafter, with respect to the borrowing, conversion, or
continuations of a LIBOR Rate Loan on or after April 1, 2000, each
period commencing on the last day of the period applicable to such
LIBOR Rate Loan and ending one (1), two (2), three (3), or six (6)
months thereafter, as selected by Borrower in its Rate Designation
Notice pursuant to Section 2.4(e);
provided, that the foregoing provisions are subject to the following:
(i) Borrower may not select an Interest Period
ending on a date later than the applicable Maturity Date;
(ii) any Interest Period that would otherwise end on
a day that is not a Business Day shall be extended to the next
succeeding Business Day, unless the result of such extension
would be to extend such Interest Period into another calendar
month, in which event such Interest Period shall end on the
immediately preceding Business Day;
(iii) any Interest Period which begins on the last
Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in a calendar month at the
end of such Interest Period) shall end on the last Business
Day of the calendar month in which it would have ended if
there were a numerically corresponding day in such calendar
month; and
(iv) no more than five (5) Interest Periods may be in
effect at any time for the Revolving Loan and no more than
four (4) Interest Periods may be in effect at any time for
Term Loan B, provided each Term Loan B tranche shall be in an
amount greater than $1,000,000.00.
-3-
<PAGE> 4
"LIBOR MARGIN" means (a) for the Revolving Loans (i) for the period
from the Closing Date until the initial Reset Date, 2.75%; and (ii) for
any subsequent period beginning with the initial Reset Date, to but not
including, the next Reset Date to occur, if the Consolidated Funded
Debt to Consolidated EBITDA Ratio calculated as of the last day of
Borrower's fiscal quarter immediately preceding the particular Reset
Date is within a range set forth in Column A in Schedule II, the
applicable per annum percentage shall be, subject to adjustment
pursuant to Section 7.12, as set forth for that range in column B in
Schedule II; and (b) for Term Loan B, 4.25%.
"PERMITTED INVESTMENTS" means:
(a) securities with maturities of one (1) year or less from
the date of acquisition issued or fully guaranteed or insured by the
United States Government or any agency thereof;
(b) certificates of deposit and Eurodollar time deposits with
maturities of one (1) year or less from the date of acquisition and
overnight bank deposits of any commercial bank (i) having capital and
surplus in excess of $500,000,000.00 or (ii) which has a short-term
commercial paper rating which satisfies the requirements set forth in
clause (d) of this definition;
(c) repurchase obligations of any commercial bank satisfying
the requirements of clause (b) of this definition, having a term of not
more than thirty (30) days with respect to securities issued, fully
guaranteed or insured by the United States Government or any agency
thereof;
(d) commercial paper rated P-1 by Moody's Investors Service,
Inc. or A-1 by Standard & Poor's Ratings Group on the date of
acquisition;
(e) securities with maturities of one (1) year or less from
the date of acquisition insured or fully guaranteed by any state,
commonwealth or territory of the United States or by any political
subdivision or taxing authority of such state, commonwealth or
territory;
(f) securities with maturities of one (1) year or less from
the date of acquisition backed by standby letters of credit issued by
any commercial bank satisfying the requirements of clause (b) of this
definition;
-4-
<PAGE> 5
(g) shares of money market mutual or similar funds which
invest primarily in assets satisfying the requirements of clauses (a)
through (f) of this definition;
(h) time deposits and certificates of deposit in any Lender
and other investments, securities and products offered by any Lender
(including Eurodollar deposits);
(i) loans, advances, extensions of credit and capital
contributions to, and purchases of the Capital Stock of or other
interests in, Subsidiaries of Borrower; and
(j) Acquired Businesses having an Acquisition Date prior to
March 31, 1999, or after March 31, 2000.
"REVOLVING LOAN TOTAL COMMITMENT AMOUNT" means (a) at any time prior to
April 1, 2000, an amount equal to $95,000,000.00; and (b) at any time
thereafter, $115,000,000.00.
3.2 Section 2.1(b) of the Loan Agreement is deleted in its entirety and
the following is substituted in place thereof:
Letters of Credit. Subject to and upon the terms, covenants, and
conditions of this Agreement, the Issuing Lender shall issue Letters of
Credit for the account of Borrower on its behalf or on behalf of any of
its Subsidiaries from time to time for any of the purposes for which
Borrower can obtain a Revolving Loan; provided, that (i) each Letter of
Credit shall be issued on a Business Day, (ii) after the issuance of
any Letter of Credit, (A) the Letter of Credit Exposure, plus the
aggregate outstanding principal balance of the Revolving Loans, plus
the outstanding principal balance of the Swing Line Loans, must be less
than or equal to the Revolving Loan Total Commitment Amount, and (B)
the Letter of Credit Exposure shall not exceed $10,000,000.00, and
(iii) when issued, such Letter of Credit must have an expiry date no
later than the earlier of one (1) year after the issuance date thereof
and four (4) Business Days prior to the Revolving Maturity Date. If the
Agent issues any Letters of Credit with expiration dates that
automatically extend unless the Agent gives notice that the expiration
date will not so extend, the Agent will give such notice of non-renewal
before the time necessary
-5-
<PAGE> 6
to prevent such automatic extension if before such required notice date
(i) the expiration date of such Letter of Credit if so extended would
be later than four (4) Business Days before the Revolving Maturity
Date, (ii) the Revolving Commitments shall have terminated pursuant to
the terms hereof, (iii) a Default or an Event of Default has occurred
and is continuing, or (iv) the Agent is so directed by Borrower.
3.3 The following subparagraph is added to and made a part of Section
2.6 of the Loan Agreement:
(d) Restructuring Fee. Borrower agrees (if the condition
subsequent hereinafter contained is not satisfied) to pay to
the Agent (i) for the account of each Revolving Lender
(ratably in accordance with their respective Revolving Loan
Percentages) a non-refundable restructuring fee (the
"REVOLVING LOAN RESTRUCTURING FEE") on such Revolving Lender's
Revolving Loan Percentage of the average daily Revolving
Commitment during the period beginning April 1, 1999, and
concluding on March 31, 2000 at a per annum rate equal to 2.0%
(0.5% per fiscal quarter of Borrower), calculated on the basis
of a 360-day year for the actual number of days elapsed,
payable in arrears on the first Business Day of each calendar
quarter, commencing July 1, 1999, with a final payment of such
Revolving Loan Restructuring Fee being due and payable on
April 1, 2000, and (ii) for the account of the Term Lender a
non- refundable restructuring fee (the "TERM LOAN
RESTRUCTURING FEE" on the average daily outstanding balances
of the Term Loan during the period beginning April 1, 1999 and
concluding on March 31, 2000 at a per annum rate equal to 2.0%
(0.5% per fiscal quarter of Borrower), calculated on the basis
of a 360-day year for the actual number of days elapsed,
payable in arrears on the first Business Day of each calendar
quarter, commencing July 1, 1999, with a final payment of such
Term Loan Restructuring Fee being due and payable on April 1,
2000; provided, however that the foregoing Revolving Loan
Restructuring Fee and Term Loan Restructuring Fee shall not be
accrued, due, or payable in the event that, prior to June 30,
1999, Borrower has paid Lenders the outstanding balance of
each Revolving Loan and the Term Loan and all other amounts
then owing under the Loan Agreement (including, without
limitation, all amounts due and payable as a result of the
prepayment of the Term Loan), as a result of such payment or
otherwise, and has canceled each Lender's Revolving
-6-
<PAGE> 7
Commitment (and as a result thereof no Lender has any further
funding or other commitment under the Loan Agreement).
3.4 Sections 3.2(a) and (b) of the Loan Agreement are deleted in their
entirety and the following are substituted in place thereof:
(a) Revolving Loans and Swing Line Loans. Interest on the Revolving
Loans and the Swing Line Loans shall be due and payable as it accrues
on the first Business Day of each calendar month, commencing on the
first Business Day of April, 1999, and continuing on the first Business
Day of each successive calendar month thereafter, until the first
Business Day of April, 2000, whereafter, with respect to the portion of
the Revolving Loans which are Variable Rate Loans, such accrued unpaid
interest shall be due and payable on the first Business Day of each
October, January, April and July thereafter, and from and after April
1, 2000, with respect to the portion of the Revolving Loans which are
LIBOR Rate Loans, on the Interest Adjustment Date of each LIBOR Rate
Loan and, if applicable, 90 days after the commencement of a LIBOR Rate
Loan if that date is prior to the Interest Adjustment Date for the
LIBOR Rate Loan, in each case until the Revolving Maturity Date. All
outstanding principal of the Revolving Notes and the Swing Line Note,
together with all accrued and unpaid interest thereon and other amounts
owed with respect thereto, shall be due and payable in full on the
earlier to occur of (i) the Revolving Maturity Date or (ii) the date on
which the Revolving Loans and the Swing Line Loans become due and
payable pursuant to Section 9.2.
(b) Term Loan. Interest on Term Loan A shall be due and
payable as it accrues on the first Business Day of each calendar month,
commencing on the first Business Day of April, 1999, and continuing on
the first Business Day of each successive calendar month thereafter,
until the first Business Day of April, 2000, whereafter such accrued
unpaid interest shall be due and payable on the first Business Day of
each October, January, April and July thereafter. Interest on Term Loan
B shall be due and payable as it accrues on the first Business Day of
each calendar month, commencing on the first Business Day of April,
1999, and continuing on the first Business Day of each successive
calendar month thereafter, until the first Business Day of April, 2000,
whereafter such accrued and unpaid interest shall be due and payable on
each Interest Adjustment Date and if applicable, 90 days after the
commencement of the Interest Period to which the Interest Adjustment
Date relates if that date is prior to that Interest Adjustment Date. In
-7-
<PAGE> 8
addition to interest then due, beginning on the first Business Day of
April, 2000, and continuing on the first Business Day of each
successive July, October, January and April thereafter until the Term
Maturity Date, equal quarterly installments of principal, in the amount
of $3,571,428.57, each, shall be due and payable and applied pro rata
among Term Loan A and Term Loan B. All outstanding principal of each
Term Note, together with accrued and unpaid interest thereon and other
amounts owed with respect thereto, shall be due and payable on the
earlier to occur of (i) the Term Maturity Date, or (ii) the date on
which the Term Loan becomes due and payable pursuant to Section 9.2.
3.5 The following subsection is added to and made a part of Section
7.12 of the Loan Agreement to follow subsection (e) thereof:
Notwithstanding the foregoing, or anything else to the contrary in this
Agreement, Borrower shall not acquire an Acquired Business having an
Acquisition Date during the period commencing on March 31, 1999, and
ending on March 31, 2000.
3.6 The date "November 30, 1999" shall be substituted for "June 30,
1999" wherever it appears throughout Section 7.13 of the Loan Agreement so as to
amend Section 7.13 as aforesaid.
3.7 Section 8.1 of the Loan Agreement is deleted in its entirety and
the following is substituted in place thereof:
Financial Covenants.
(a) Consolidated Net Worth. Borrower shall not permit
Consolidated Net Worth to be less than the Required Minimum at the end
of any fiscal quarter of Borrower. For purposes of this subsection,
"REQUIRED MINIMUM" shall initially mean an amount equal to
$128,104,000.00. At the end of each fiscal quarter (beginning with the
fiscal quarter ending on June 30, 1998), the Required Minimum shall be
adjusted by adding to the Required Minimum calculated as of the end of
the immediately preceding fiscal quarter, an amount equal to (i) the
greater of (x) seventy-five percent (75%) of the Consolidated Net
Income of Borrower for the calendar quarter ending on the date as of
which compliance with this covenant is being measured, or (y) $0; (ii)
proceeds (net of reasonable and customary transaction costs) received
by Borrower during such fiscal quarter from its sale or issuance of any
equity securities of, or any other additions to capital by, Borrower or
its
-8-
<PAGE> 9
Subsidiaries (other than mandatorily redeemable Capital Stock and other
equity instruments the consideration for which is classified otherwise
than as a part of Borrower's Consolidated Net Worth determined in
accordance with GAAP); plus (iii) one hundred percent (100%) of the
stockholder's equity of any Entity acquired in an acquisition for which
Borrower uses the pooling of interest method of accounting in
accordance with GAAP.
(b) Fixed Charge Coverage Ratio. Borrower shall not permit the
Fixed Charge Coverage Ratio (i) at the end of any fiscal quarter of
Borrower ending prior to December 31, 1999, to be less than .85 to 1.0,
and (ii) at the end of any fiscal quarter of Borrower ending on or
after December 31, 1999, to be less than 1.1 to 1.0.
(c) Consolidated Funded Debt to Consolidated Pro Forma EBITDA
Ratio. Borrower shall not permit the Consolidated Funded Debt to
Consolidated Pro Forma EBITDA Ratio to be greater than (i) 8.0 to 1.0
at the end of the fiscal quarter of Borrower ending on September 30,
1999, (ii) 5.25 to 1.0 at the end of any fiscal quarter of Borrower
ending on or after December 31, 1999, and prior to March 31, 2000, and
(iii) 3.75 to 1.0 at the end of any fiscal quarter of Borrower ending
on or after March 31, 2000.
(d) Senior Consolidated Funded Debt to Consolidated Pro Forma
EBITDA Ratio. Borrower shall not permit the Senior Consolidated Funded
Debt to Consolidated Pro Forma EBITDA Ratio to be greater than (i) 4.25
to 1.0 at the end of the fiscal quarter of Borrower ending on March 31,
1999, (ii) 5.75 to 1.0 at the end of the fiscal quarter of Borrower
ending on June 30, 1999, (iii) 5.25 to 1.0 at the end of the fiscal
quarter of Borrower ending on September 30, 1999, (iv) 3.50 to 1.0 at
the end of any fiscal quarter of Borrower ending on or after December
31, 1999, and prior to March 31, 2000, and (v) 2.75 to 1.0 at the end
of any fiscal quarter of Borrower ending on or after March 31, 2000.
(e) Consolidated GAAP EBITDA to Consolidated Interest Expense
Ratio. Borrower shall not permit the ratio of the Consolidated GAAP
EBITDA of Borrower to the Consolidated Interest Expense of Borrower at
the end of any fiscal quarter of Borrower to be less than 1.5 to 1.0.
(f) Senior Consolidated Funded Debt to Total Capitalization
Ratio. Borrower shall not permit the Senior Consolidated Funded Debt to
Total Capitalization Ratio at the end of any fiscal quarter of Borrower
to be greater than .55 to 1.0.
-9-
<PAGE> 10
(g) Consolidated GAAP EBITDA. Borrower shall not permit its
Consolidated GAAP EBITDA to be less than (i) $5,000,000.00 for the
period beginning on January 1, 1999, and ending on March 31, 1999, (ii)
$15,800,000.00 for the period beginning on January 1, 1999, and ending
on June 30, 1999, (iii) $28,000,000.00 for the period beginning on
January 1, 1999, and ending on September 30, 1999, and (iv)
$35,000,000.00 for the period beginning on January 1, 1999, and ending
on or after December 31, 1999.
3.8 Schedule II to the Loan Agreement is deleted in its entirety and
the Schedule II attached to this First Amendment is substituted in place
thereof.
3.9 Exhibit A to the Loan Agreement is deleted in its entirety and the
Exhibit "A" attached to this First Amendment is substituted in place thereof.
4. Year 2000. In addition to the representations and warranties and
covenants and agreements made in the Loan Agreement, Borrower represents and
warrants to, and agrees with, Lender as follows:
(a) Borrower has (i) begun analyzing the operations of
Borrower and its Subsidiaries and Affiliates that could be adversely
affected by failure to become Year 2000 compliant (that is, that
computer applications, imbedded microchips and other systems will be
able to perform date-sensitive functions prior to and after December
31, 1999) and (ii) developed a plan for becoming Year 2000 compliant in
a timely manner, the implementation of which is on schedule in all
material respects. Borrower reasonably believes that it will become
Year 2000 compliant for its operations and those of its subsidiaries
and affiliates on a timely basis except to the extent that a failure to
do so would not reasonably be expected to have a material adverse
effect upon the financial condition of Borrower;
(b) Borrower reasonably believes any suppliers and vendors
that are material to the operations of Borrower or its Subsidiaries and
Affiliates will be Year 2000 compliant for their own computer
applications except to the extent that a failure to do so could not
reasonably be expected to have a material adverse effect upon the
financial condition of Borrower; and
-10-
<PAGE> 11
(c) Borrower will promptly notify Agent and each Lender in the
event Borrower determines that any computer application which is
material to the operations of Borrower, its Subsidiaries or any of its
material vendors or suppliers will not be fully Year 2000 compliant on
a timely basis, except to the extent that such failure would not
reasonably be expected to have a material adverse effect upon the
financial condition of Borrower.
5. Joinder. Each Subsidiary of Borrower joins in the execution and
delivery of this First Amendment to (a) evidence that the Subsidiary Guaranty,
Security Agreement, and other Loan Documents executed by each of them remain in
full force and effect, and are not limited or impaired by the execution and
delivery of this First Amendment, or the occurrence of any other event, and (ii)
to join in and be bound by the releases and other agreements made in Sections 5,
7, 9, and 11 of this First Amendment.
6. Release. Borrower and each of the Subsidiaries on their own behalf
and on behalf of their predecessors, successors and assigns (collectively, the
"RELEASING PARTIES"), hereby acknowledge and stipulate that as of the date of
this Agreement, none of the Releasing Parties has any claims or causes of action
of any kind whatsoever against Agent or any Lender or any of their officers,
directors, employees, agents, attorneys, or representatives, or against any of
their respective predecessors, successors, or assigns. Each of the Releasing
Parties hereby forever releases, remises, discharges and holds harmless Agent
and each Lender and all of their officers, directors, employees, agents,
attorneys and representatives, and all of their respective predecessors,
successors, and assigns, from any and all claims, causes of action, demands, and
liabilities of any kind whatsoever, whether direct or indirect, fixed or
contingent, liquidated or nonliquidated, disputed or undisputed, known or
unknown, which any of the Releasing Parties has or may acquire in the future
relating in any way to any event, circumstance, action, or failure to act from
the beginning of time through the date of this Agreement.
7. Waiver. Borrower has failed to comply with the terms of Section
8.1(c) of the Loan Agreement (Consolidated Funded Debt to Consolidated Pro Forma
EBITDA) and Section 8.1(d) of the Loan Agreement (Senior Consolidated Funded
Debt to Consolidated Pro Forma EBITDA), for any period ending on or prior to
December 31, 1998. At the request of Borrower, upon and subject to the full and
complete satisfaction of each condition precedent listed in Section 2, Agent and
each Lender waive compliance by Borrower with the foregoing described covenants
for such period. The waiver contained in this First Amendment is specifically
limited to a waiver of the foregoing described covenants for the period set
forth herein and the Agent and each Lender agree that Borrower's failure to
comply with such covenants during the periods
-11-
<PAGE> 12
provided for in the preceding sentence, shall not constitute an Event of Default
or a Default. This waiver shall not constitute a waiver of either (a) any
further violation of the foregoing described covenants beyond such period (as
amended hereby), or (ii) any violation (except as expressly described above for
the periods described above) of any other provision of the Loan Agreement, or
any Event of Default thereunder, whether now existing or occurring after the
date of this First Amendment, or (iii) of any right of Agent and Lenders to
require strict compliance with the Loan Agreement, as hereby amended. Agent and
each Lender specifically reserves all of the rights and remedies they may have
under the Loan Agreement or otherwise as the result of any such violation or
Event of Default. This First Amendment constitutes the only evidence of Agent's
and Lenders' waiver of compliance by Borrower with the above described
covenants.
8. ARBITRATION. (a) ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE
PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO
THE LOAN AGREEMENT (AS HEREBY AMENDED) OR ANY RELATED AGREEMENTS OR INSTRUMENTS,
INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE
DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT
(OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW). THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND
MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS FIRST AMENDMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THE LOAN
AGREEMENT (AS HEREBY AMENDED) APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
(b) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
CITY OF THE BORROWER'S DOMICILE AT THE TIME OF THIS FIRST AMENDMENT'S EXECUTION
AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS
UNABLE OR LEGALLY PRECLUDED FROM ADMIN ISTERING THE ARBITRATION, THEN THE
AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE
COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR
SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COM MENCEMENT OF
SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
(c) RESERVATION OF RIGHTS. NOTHING IN THIS FIRST AMENDMENT
SHALL BE DEEMED TO (i) LIMIT THE APPLICABILITY OF ANY
-12-
<PAGE> 13
OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED
IN THE LOAN AGREEMENT (AS HEREBY AMENDED); OR (II) BE A WAIVER BY AGENT OR ANY
LENDER OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY
SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF AGENT OR ANY
LENDER (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF,
OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO
OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED
TO) INJUNCTIVE RELIEF, WRIT OR POSSESSION OR THE APPOINTMENT OF A RECEIVER.
AGENT AND EACH LENDER MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR
MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES
SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN
ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING
RESORT TO SUCH REMEDIES.
9. NO CONTROL BY LENDERS. BORROWER AGREES AND ACKNOWLEDGES THAT ALL OF
THE COVENANTS AND AGREEMENTS PROVIDED FOR AND MADE BY BORROWER IN THIS FIRST
AMENDMENT, THE LOAN AGREEMENT, AND IN THE OTHER LOAN DOCUMENTS ARE THE RESULT OF
EXTENSIVE AND ARMS-LENGTH NEGOTIATIONS AMONG BORROWER, AGENT, AND LENDERS.
AGENT'S AND LENDERS' RIGHTS AND REMEDIES PROVIDED FOR IN THE LOAN AGREEMENT AND
IN THE OTHER LOAN DOCUMENTS ARE INTENDED TO PROVIDE AGENT AND LENDERS WITH A
RIGHT TO OVERSEE BORROWER'S ACTIVITIES AS THEY RELATE TO THE LOAN TRANSACTIONS
PROVIDED FOR IN THE LOAN AGREEMENT, WHICH RIGHT IS BASED ON AGENT'S AND LENDERS'
VESTED INTEREST IN BORROWER'S ABILITY TO PAY THE NOTES AND PERFORM THE OTHER
OBLIGATIONS. NONE OF THE COVENANTS OR OTHER PROVISIONS CONTAINED IN THE LOAN
AGREEMENT SHALL, OR SHALL BE DEEMED TO, GIVE AGENT OR ANY LENDER THE RIGHT OR
POWER TO EXERCISE CONTROL OVER, OR OTHERWISE IMPAIR, THE DAY-TO-DAY AFFAIRS,
OPERATIONS, AND MANAGEMENT OF BORROWER; PROVIDED THAT IF AGENT OR ANY LENDER
BECOMES THE OWNER OF ANY STOCK OF ANY ENTITY, WHICH ENTITY OWNS AN INTEREST IN
BORROWER OR ANY SUBSIDIARY, WHETHER THROUGH FORECLOSURE OR OTHERWISE, AGENT AND
EACH SUCH LENDER THEREAFTER SHALL BE ENTITLED TO EXERCISE SUCH LEGAL RIGHTS AS
IT MAY HAVE BY BEING A SHAREHOLDER OF SUCH ENTITY.
-13-
<PAGE> 14
10. Lien Continuation: Miscellaneous. The liens granted in the Loan
Documents are hereby ratified and confirmed as continuing to secure the payment
of the Notes. Nothing herein shall in any manner diminish, impair or extinguish
the Notes, as may be modified and increased under the Loan Agreement or the
liens securing the Notes. The liens granted in the Loan Documents are not
waived. Borrower ratifies and acknowledges the Loan Documents as valid,
subsisting, and enforceable and agrees that the indebtedness evidenced by the
Notes is just, due, owing and unpaid, and is subject to no offsets, deductions,
credits, charges or claims of whatsoever kind or character, and further agrees
that all offsets, credits, charges and claims of whatsoever kind or character
are fully settled and satisfied.
11. Representations and Warranties. The representations and warranties
made by Borrower in Article VI of the Loan Agreement are true and correct as of
the date of this First Amendment.
12. Miscellaneous.
12.1 Preservation of the Loan Agreement. Except as specifically amended
and modified by the terms of this First Amendment, all of the terms, provisions,
covenants, warranties, and agreements contained in the Loan Agreement and in the
other Loan Documents shall remain in full force and effect (any irreconcilable
conflicts or inconsistencies between the terms of this First Amendment and the
Loan Agreement, or any other Loan Document, shall be governed and controlled by
this First Amendment).
12.2 Counterparts. This First Amendment may be executed in two or more
counterparts, and it shall not be necessary that any one of the counterparts be
executed by all of the parties hereto. Each fully or partially executed
counterpart shall be deemed an original, but all such counterparts taken
together shall constitute but one and the same instrument.
12.3 NO ORAL AGREEMENTS. THIS WRITTEN AGREEMENT AND THE OTHER WRITTEN
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NOT UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
-14-
<PAGE> 15
IN WITNESS WHEREOF, the parties have executed this First Amendment as
of the date first above written.
BORROWER:
AMERICAN RESIDENTIAL SERVICES,
INC., a Delaware corporation
By:
-------------------------------
Harry O. Nicodemus, IV
Senior Vice President
LENDERS:
NATIONSBANK, N.A., a national
banking association, as Agent for
Lenders, Swing Line Lender,
Revolving Lender, and Issuing Lender
By:
-------------------------------
Richard Nichols,
Vice President
BANKBOSTON, N.A., as Documentation
Agent and Revolving Lender
By:
-------------------------------
Norris C. Locke,
Vice President
NATIONAL CITY BANK OF KENTUCKY,
as Revolving Lender
By:
------------------------------
Donald R. Pullen, Jr.,
Vice President
-15-
<PAGE> 16
PARIBAS, as Revolving Lender
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
GUARANTY FEDERAL BANK, F.S.B., as
Revolving Lender
By:
------------------------------
Mark Wayne,
Vice President
THE FUJI BANK LIMITED, New York
Branch, as Revolving Lender
By:
-------------------------------
Greg Parten,
Vice President
CREDIT LYONNAIS NEW YORK
BRANCH, as Revolving Lender
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA, as Term Lender
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
AMERICAN MECHANICAL SERVICES
COMPANY, LLC, a Delaware limited
liability company
-16-
<PAGE> 17
AMERICAN MECHANICAL SERVICES OF
ARIZONA, INC., a Arizona corporation
AMERICAN MECHANICAL SERVICES OF
CALIFORNIA, INC., a California
corporation
AMERICAN MECHANICAL SERVICES OF
COLORADO, INC., a Colorado corporation
AMERICAN MECHANICAL SERVICES OF
GEORGIA, INC., a Georgia corporation
AMERICAN MECHANICAL SERVICES OF
HOUSTON, INC., a Delaware corporation
AMS MECHANICAL SERVICES , INC., a
Indiana corporation
AMERICAN MECHANICAL SERVICES OF
IOWA, INC., a Iowa corporation
AMERICAN MECHANICAL SERVICES OF
KENTUCKY, INC., a Kentucky corporation
AMERICAN MECHANICAL SERVICES OF
MICHIGAN, INC., a Michigan corporation
AMERICAN MECHANICAL SERVICES
OF MISSOURI, INC., a Missouri
corporation
AMERICAN MECHANICAL SERVICES OF
MONTANA, INC., a Montana corporation
AMERICAN MECHANICAL SERVICES
NEBRASKA, INC., a Nebraska corporation
AMERICAN MECHANICAL SERVICES OF
NEVADA, INC., a Nevada corporation
By:
------------------------------------
John D. Held, Vice President
-17-
<PAGE> 18
AMERICAN MECHANICAL SERVICES OF
NEW HAMPSHIRE, INC., a New
Hampshire corporation
AMERICAN MECHANICAL SERVICES OF
NEW MEXICO, INC., a New Mexico
corporation
AMERICAN MECHANICAL SERVICES OF
NORTH CAROLINA, INC., a North
Carolina corporation
AMERICAN MECHANICAL SERVICES OF
SACRAMENTO, INC., a California
corporation
AMERICAN MECHANICAL SERVICES OF
TENNESSEE, INC., a Tennessee
corporation
AMERICAN MECHANICAL SERVICES OF
TEXAS, INC., a Delaware Corporation
AMERICAN MECHANICAL SERVICES OF
WASHINGTON, INC., a Washington
corporation
AMS AMERICAN MECHANICAL
SERVICES OF MARYLAND, INC., a
Maryland corporation
AMS AMERICAN MECHANICAL
SERVICES OF VIRGINIA, INC., a
Virginia corporation
AMS AMERICAN MECHANICAL
SERVICES OF WEST VIRGINIA, INC.,
a West Virginia corporation
AMERICAN RESIDENTIAL SERVICES OF
COLORADO, INC., a Colorado corporation
By:
------------------------------------
John D. Held, Vice President
-18-
<PAGE> 19
AMERICAN RESIDENTIAL SERVICES OF
FLORIDA, INC., a Florida corporation
AMERICAN RESIDENTIAL SERVICES OF
GEORGIA, INC., a Georgia corporation
AMERICAN RESIDENTIAL SERVICES OF
ILLINOIS, INC., an Illinois corporation
ILLINOIS HEATING & AIR
CONDITIONING, INC., an Illinois
corporation
AMERICAN RESIDENTIAL SERVICES OF
INDIANA, INC., a Indiana corporation
AMERICAN RESIDENTIAL SERVICES OF
KENTUCKY, INC., a Kentucky corporation
AMERICAN RESIDENTIAL SERVICES OF
MAINE, INC., a Maine corporation
AMERICAN RESIDENTIAL SERVICES OF
MARYLAND, INC., a Maryland corporation
AMERICAN RESIDENTIAL SERVICES OF
MICHIGAN, INC., a Michigan corporation
AMERICAN RESIDENTIAL SERVICES OF
MISSOURI, INC., a Missouri corporation
AMERICAN RESIDENTIAL SERVICES OF
MONTANA, INC., a Montana corporation
AMERICAN RESIDENTIAL SERVICES OF
NEBRASKA, INC., a Nebraska corporation
AMERICAN RESIDENTIAL SERVICES OF
NEVADA, INC., a Nevada corporation
By:
------------------------------------
John D. Held, Vice President
-19-
<PAGE> 20
AMERICAN RESIDENTIAL SERVICES OF
NEW HAMPSHIRE, INC., a New
Hampshire corporation
AMERICAN RESIDENTIAL SERVICES OF
NEW MEXICO, INC., a New Mexico
corporation
AMERICAN RESIDENTIAL SERVICES OF
NORTH CAROLINA, INC., a North
Carolina corporation
AMERICAN RESIDENTIAL SERVICES OF
PENNSYLVANIA, INC., a Pennsylvania
corporation
AMERICAN RESIDENTIAL SERVICES OF
SOUTH CAROLINA, INC., a South
Carolina corporation
AMERICAN RESIDENTIAL SERVICES OF
TENNESSEE, INC., a Tennessee
corporation
AMERICAN RESIDENTIAL SERVICES OF
VIRGINIA, INC., a Virginia corporation
AMERICAN RESIDENTIAL SERVICES OF
WASHINGTON, INC., a Washington
corporation
AMERICAN RESIDENTIAL SERVICES OF
WEST VIRGINIA, INC., a West Virginia
corporation
ARS AMERICAN RESIDENTIAL SERVICES
OF ARIZONA, INC., a Arizona corporation
A.K. LANDAN, INC., a California
corporation
By:
------------------------------------
John D. Held, Vice President
-20-
<PAGE> 21
ARS AMERICAN RESIDENTIAL SERVICES
OF CALIFORNIA, INC., a California
corporation
ARS AMERICAN RESIDENTIAL SERVICES
OF OKLAHOMA, INC., a Oklahoma
corporation
ARS AMERICAN RESIDENTIAL SERVICES
OF RHODE ISLAND, INC., a Rhode Island
corporation
ARS AMERICAN RESIDENTIAL SERVICES
OF TEXAS, INC., a Delaware corporation
ADCOT, INC., a Texas corporation
ARS ENERGY SERVICES COMPANY,
a Delaware corporation
ARS RESIDENTIAL HOLDING COMPANY,
a Delaware corporation
ARS RESIDENTIAL MANAGEMENT
COMPANY, a Delaware corporation
ARS SPECIAL EVENTS, INC., a
Delaware corporation
ASI HASTINGS ACQUISITION, a
California corporation
CAPE FEAR HEATING & AIR
CONDITIONING OF WILMINGTON, INC.,
a North Carolina corporation
MAIO MARKETING SYSTEMS, INC.,
a California corporation
NORTH AMERICAN ELECTRICAL
SERVICES, LLC, a Delaware corporation
By:
-----------------------------------
John D. Held, Vice President
-21-
<PAGE> 22
FREESTATE ELECTRICAL SERVICE
COMPANIES, INC., a Maryland
corporation
SUBURBAN ELECTRICAL SERVICE, INC.,
a North Carolina corporation
WESTERNAIR MANUFACTURER
SERVICE, INC., a Nevada corporation
By:
------------------------------------
John D. Held, Vice President
-22-
<PAGE> 23
SCHEDULE II
I. FOR THE REVOLVING LOANS:
A. For the period prior to March 31, 1999, and after March 31, 2000:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
A B C D
Total Consolidated LIBOR Margin Base Rate Revolving
Funded Debt to Margin Commitment Fee
Consolidated
EBITDA Ratio
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than or equal to 1.25% 0% 0.25%
1.5 to 1.0
- --------------------------------------------------------------------------------
Greater than 1.5 to 1.50% 0% 0.30%
1.0, but less than or
equal to 2.0 to 1.0
- --------------------------------------------------------------------------------
Greater than 2.0 to 1.75% 0.125% 0.35%
1.0, but less than or
equal to 2.5 to 1.0
- --------------------------------------------------------------------------------
Greater than 2.5 to 2.00% .25% 0.40%
1.0, but less than or
equal to 3.0 to 1.0
- --------------------------------------------------------------------------------
Greater than 3.0 to 2.50% .50% 0.45%
1.0, but less than or
equal to 3.5 to 1.0
- --------------------------------------------------------------------------------
Greater than 3.5 to 2.75% 0.75% 0.50%
1.0
- --------------------------------------------------------------------------------
</TABLE>
B. For the period beginning March 31, 1999 through March 31, 2000:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
A B C
LIBOR Margin Base Rate Margin Revolving Commitment Fee
- -------------------------------------------------------------------------
<S> <C> <C>
3.50% 1.50% 0.75%
- -------------------------------------------------------------------------
</TABLE>
<PAGE> 24
EXHIBIT A
FORM OF COMPLIANCE CERTIFICATE
This certificated dated as of , is prepared pursuant to
Section 7.1(c) of that certain Amended and Restated Secured Revolving and Term
Loan Agreement dated July 2, 1998 (as amended from time to time, the "Loan
Agreement"), among American Residential Services, Inc., a Delaware corporation
("Borrower"), NationsBank, N.A. as Agent, Issuing Lender, and Swing Line Lender
and BankBoston, N.A., as Documentation Agent, The Prudential Insurance Company
of America, as Term Lender, and the lending institutions designated as "Lenders"
on Schedule 1 thereof. Unless otherwise defined in this certificate, capitalized
terms shall have the meaning given to them in the Loan Agreement.
Borrower hereby certifies (a) that no Event of Default has occurred or
is continuing, (b) all of the representations and warranties made by Borrower in
the Loan Agreement are true and correct in all material respects on the date of
this certificate as if made on this date (except for all such representations
and warranties that speak as of a particular date), and that as of ___________,
the following amounts and calculations were true and correct.
A. CONSOLIDATED NET WORTH
(tested quarterly beginning 6/30/98
<TABLE>
<S> <C>
1. Consolidated Net Worth of Borrower $
(as of date of calculation) --------------------------------
2. Required Minimum (Prior Fiscal Quarter) $
--------------------------------
3. Reported Consolidated Net Income of $
--------------------------------
Borrower for Fiscal Quarter $ X .75
--------------------------------
$
--------------------------------
(not to be less than zero)
4. Net proceeds of equity sales for Fiscal
Quarter $
--------------------------------
5. Stockholders Equity of any acquired Entity (poolings only) and
capital additions attributable to Common Stock issued in
purchase transactions $
--------------------------------
6. Required Minimum (sum of A.2, A.3, A.4 and
A.5) $
--------------------------------
</TABLE>
A-1
<PAGE> 25
B. FIXED CHARGE COVERAGE RATIO
(tested quarterly beginning 6/30/98)
<TABLE>
<S> <C>
1. Consolidated GAAP EBITDA of Borrower (four calendar quarters
preceding date of calculation)
a. Borrower's Consolidated Net Income
(before income Taxes) $
--------------------------------
b. Borrower's Depreciation $
--------------------------------
c. Borrower's Amortization $
--------------------------------
d. Borrower's Consolidated Interest $
Expense --------------------------------
e. Borrower's Other Non-Cash Expense $
--------------------------------
f. Cash portion of "Special charge and
other costs" (for quarter ended
December 31, 1997) $
--------------------------------
g. Non-Cash Income $
--------------------------------
h. Consolidated GAAP EBITDA Sum of
(a) - (f), minus (g) $
--------------------------------
2. Rental Expense (four fiscal quarters preceding
date of calculation) $
--------------------------------
3. Cash Tax Expense of Borrower (four fiscal
quarter period preceding date of calculation) $
--------------------------------
4. Consolidated Interest Expense of Borrower (Excluding fee
amortization) (four fiscal quarter period preceding date of
calculation) $
--------------------------------
5. Consolidated Current Maturities of Borrower (scheduled during
for fiscal quarters following
date of calculation) $
--------------------------------
6. Capital Expenditures (four fiscal quarters
preceding date of calculation) $
--------------------------------
</TABLE>
A-2
<PAGE> 26
<TABLE>
<S> <C>
7. Ratio of B.1(h), plus B.2, minus B.3 to sum
of B.4, plus B.2, plus B.5, plus B.6 ---------------------------------
(Required Min. .85X prior
to 12/31/99;1.1X
thereafter)
</TABLE>
C. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED PRO FORMA EBITDA
RATIO
(tested quarterly beginning 6/30/98)
<TABLE>
<S> <C>
1. Consolidated Funded Debt of Borrower $
--------------------------------
2. Consolidated GAAP EBITDA of Borrower
(line B.1.h) $
--------------------------------
3. Aggregate of Consolidated Pro Forma EBITDA of each Acquired
Business with Acquisition Date in 12 month period preceding
date of calculation (for the portion of such period
preceding the Acquisition Date) $
--------------------------------
(results based upon
attached certificate)
4. Consolidated Pro Forma EBITDA of Borrower
(sum of line C.2 plus line C.3) $
--------------------------------
5. Ratio of line C.1 to line C.4
--------------------------------
(Required Max. 8.00X
on 9/30/99; 5.25X from
and after 12/31/99 and
prior to 3/31/00; 3.75X
from and after 3/31/00)
</TABLE>
D. SENIOR CONSOLIDATED FUNDED DEBT TO Consolidated Pro Forma EBITDA
RATIO
(tested quarterly beginning 6/30/98)
<TABLE>
<S> <C>
1. Consolidated Funded Debt of Borrower
(line C.1) $
--------------------------------
2. Approved Subordinated Debt of Borrower $
--------------------------------
3. Senior Consolidated Funded Debt of Borrower
--------------------------------
</TABLE>
A-3
<PAGE> 27
<TABLE>
<S> <C>
(line D.1 minus line D.2) $
--------------------------------
4. Consolidated Pro Forma EBITDA of Borrower
(line C.4) $
--------------------------------
5. Ratio of line D.3 and line D.4
--------------------------------
(Required Max. 4.25X on
3/31/99; 5.75X on
6/30/99, 5.25X on
9/30/99; 3.50X from and
after 12/31/99 and prior
to 3/31/00; 2.75X from
and after 3/31/00)
</TABLE>
E. ADDITIONAL PERMITTED DEBT
<TABLE>
<S> <C>
1. Additional Debt under (g) of $
--------------------------------
defn. of Permitted Debt (not to exceed
$10,000,000)
</TABLE>
F. CAPITAL EXPENDITURES
<TABLE>
<S> <C>
1. Capital Expenditures (fiscal year
to date) $
--------------------------------
2. Consolidated Net Worth of Borrower $
--------------------------------
end of prior fiscal year (line A.1) X .10
--------------------------------
$
--------------------------------
(not to be less than line F.1)
</TABLE>
G. CONSOLIDATED GAAP EBITDA TO CONSOLIDATED INTEREST EXPENSE
RATIO
<TABLE>
<S> <C>
1. Consolidated GAAP EBITDA (line B.1.g) $
--------------------------------
2. Consolidated Interest Expense (line B.1.d) $
--------------------------------
3. Ratio of G.1 to G.2 $
--------------------------------
(Required min. of 1.5X)
</TABLE>
H. SENIOR CONSOLIDATED FUNDED DEBT TO TOTAL CAPITALIZATION RATIO
<TABLE>
<S> <C>
1. Senior Consolidated Funded Debt (line D.3) $
--------------------------------
</TABLE>
A-4
<PAGE> 28
<TABLE>
<S> <C>
2. Consolidated Net Worth (line A.1) $
--------------------------------
3. Certain Capital Stock and other equity $
--------------------------------
4. Ratio of H.1 to H.1 plus H.2 plus H.3 $
--------------------------------
(Required max. of .55X)
</TABLE>
I. INTEREST HEDGE AGREEMENTS
<TABLE>
<S> <C>
1. Amount of Interest Rate Swaps $
--------------------------------
(Max. of $25MM)
</TABLE>
J. CONSOLIDATED GAAP EBITDA
<TABLE>
<S> <C>
(1999 fiscal year to date) $
--------------------------------
(Required Min. of $5MM
on 3/31/99; $15.8MM
on 6/30/99; $28MM on
9/30/99; and $35MM on
12/31/99)
</TABLE>
THE FOREGOING REPRESENTATIONS AND STATEMENTS ARE TRUE AND CORRECT IN
ALL MATERIAL RESPECTS AS OF THE DATE HEREOF.
American Residential Services, Inc.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Date:
------------------------------
A-5
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 25, 1999)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
COMPANY STATE
- -------------------------------------------------------------------------------
<S> <C>
American Mechanical Services Company, LLC Delaware
- -------------------------------------------------------------------------------
AMS American Mechanical Services of Alaska, Inc. Alaska
- -------------------------------------------------------------------------------
American Mechanical Services of Arizona, Inc. (d/b/a Arizona Air Arizona
Mechanix; PRESCO; Phoenix Refrigeration and Energy
Services; AMSCO; American Mechanical Services)
- -------------------------------------------------------------------------------
American Mechanical Services of Arkansas, Inc. Arkansas
- -------------------------------------------------------------------------------
American Mechanical Services of California, Inc. (d/b/a Charter California
Mechanical Systems; Tri-Pacific Heating, Inc.;
Anderson Air Conditioning)
- -------------------------------------------------------------------------------
American Mechanical Services of Colorado, Inc. (d/b/a Continental Colorado
Mechanical Systems; Trautman & Shreve Service, Inc.;
Colorado Chiller Maintenance, Inc.; Mile Hi Mechanical,
Inc.; American Mechanical Services; Weather Engineering
& Manufacturing, Inc.)
- -------------------------------------------------------------------------------
American Mechanical Services of Connecticut, Inc. Connecticut
- -------------------------------------------------------------------------------
AMS American Mechanical Services of Delaware, LLC
- -------------------------------------------------------------------------------
American Mechanical Services of Delaware, Inc. Delaware
- -------------------------------------------------------------------------------
American Mechanical Services of District of Columbia, Inc. District of
Columbia
- -------------------------------------------------------------------------------
American Mechanical Services of Georgia, Inc. Georgia
- -------------------------------------------------------------------------------
American Mechanical Services of Houston, Inc. (d/b/a Enterprise Delaware
Commercial-Industrial Mechanical, Inc.; American
Mechanical Services; Commercial Control & Services)
- -------------------------------------------------------------------------------
American Mechanical Services of Idaho, Inc. Idaho
- -------------------------------------------------------------------------------
American Mechanical Services of Illinois, Inc. Illinois
- -------------------------------------------------------------------------------
AMS Mechanical Services, Inc. (d/b/a American Mechanical Services) Indiana
- -------------------------------------------------------------------------------
American Mechanical Services of Iowa, Inc. Iowa
- -------------------------------------------------------------------------------
American Mechanical Services of Kentucky, Inc. Kentucky
- -------------------------------------------------------------------------------
American Mechanical Services of Louisiana, Inc. Louisiana
- -------------------------------------------------------------------------------
American Mechanical Services of Maine, Inc. Maine
- -------------------------------------------------------------------------------
AMS American Mechanical Services of Maryland, Inc.(d/b/a Murray Maryland
Service Company; EMD Mechanical Specialists; Quality
Control Service Company; H.R.E.; AMS American Mechanical
Services, Inc.)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 25, 1999)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
American Mechanical Services of Michigan, Inc. Michigan
- -------------------------------------------------------------------------------
American Mechanical Services of Mississippi, Inc. Mississippi
- -------------------------------------------------------------------------------
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 Nevada, Inc. (d/b/a Jack Sons Nevada
Refrigeration; Four Seasons Heating)
- -------------------------------------------------------------------------------
American Mechanical Services of New Hampshire, Inc. New Hampshire
- -------------------------------------------------------------------------------
American Mechanical Services of New Jersey, Inc. New Jersey
- -------------------------------------------------------------------------------
American Mechanical Services of New Mexico, Inc. New Mexico
- -------------------------------------------------------------------------------
American Mechanical Services of North Carolina, Inc. North Carolina
- -------------------------------------------------------------------------------
American Mechanical Services of North Dakota, Inc. North Dakota
- -------------------------------------------------------------------------------
American Mechanical Services of Ohio, Inc. Ohio
- -------------------------------------------------------------------------------
American Mechanical Services of Oregon, Inc. Oregon
- -------------------------------------------------------------------------------
American Mechanical Services of Sacramento, Inc. (d/b/a California
Engineered Air Systems; American Mechanical Services)
- -------------------------------------------------------------------------------
AMS American Mechanical Services of South Dakota, Inc. South Dakota
- -------------------------------------------------------------------------------
American Mechanical Services of Tennessee, Inc. Tennessee
- -------------------------------------------------------------------------------
American Mechanical Services of Texas, Inc. (d/b/a Texas Delaware
Mechanical Systems; American Mechanical Services)
- -------------------------------------------------------------------------------
American Mechanical Services of Utah, Inc. Utah
- -------------------------------------------------------------------------------
American Mechanical Services of Vermont, Inc. Vermont
- -------------------------------------------------------------------------------
AMS American Mechanical Services of Virginia, Inc. (d/b/a Virginia
Keenan Mechanical Services)
- -------------------------------------------------------------------------------
American Mechanical Services of Washington, Inc. Washington
- -------------------------------------------------------------------------------
AMS American Mechanical Services of West Virginia, Inc. West Virginia
- -------------------------------------------------------------------------------
American Mechanical Services of Wisconsin, Inc. Wisconsin
- -------------------------------------------------------------------------------
American Mechanical Services of Wyoming, Inc. Wyoming
- -------------------------------------------------------------------------------
American Residential Services of Alabama, Inc. Alabama
- -------------------------------------------------------------------------------
ARS American Residential Services of Arizona, Inc. (d/b/a Arizona
Russett Service Corporation; Temp-Rite Engineering;
Eastside Cooling and Heating)
- -------------------------------------------------------------------------------
American Residential Services of Arkansas, Inc. Arkansas
- -------------------------------------------------------------------------------
ARS American Residential Services of California, Inc. (d/b/a California
Southcoast Heating and Air Conditioning, Inc.; Torrey
Pines Plumbing; Arrow Air Conditioning Company; Condor
Service Company; Anderson Air Conditioning; Coast
Plumbing, Inc.; Maio Plumbing, Heating & Air, Inc.;
Pro Heating & Air, Inc.)
- -------------------------------------------------------------------------------
A. K. Landan, Inc. (d/b/a Allied Plumbing, Heating & Air California
Conditioning)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 25, 1999)
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------
American Residential Services of Colorado, Inc. (d/b/a Snake 'N' Colorado
Rooter; Belcon Mechanical, Inc., Apple Plumbing and
Heating, Inc.; American Residential Services; Kelly's
HVAC, Inc)
- -------------------------------------------------------------------------------
American Residential Services of Connecticut, Inc. Connecticut
- -------------------------------------------------------------------------------
American Residential Services of District of Columbia, Inc. District of
Columbia
- -------------------------------------------------------------------------------
American Residential Services of Florida, Inc. (d/b/a Florida Florida
Heating & Air Conditioning, Inc.; DeMoss Air
Conditioning Service; Alvarez Taylor Plumbing and 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; Picky Pender Plumbing, Inc.;
Watts Air Conditioning & Heating; American Residential
Services; Central Heating Company; Certified Heating &
Coolings; Air Associates, Inc; Tropic Air Conditioning,
Inc.; All Air & Heating, Inc.; Maxwell Plumbing
Contractors; Maxwell Plumbing)
- -------------------------------------------------------------------------------
American Residential Services of Georgia, Inc. (d/b/a Sundance Georgia
Plumbing Corporation)
- -------------------------------------------------------------------------------
American Residential Services of Idaho, Inc. Idaho
- -------------------------------------------------------------------------------
American Residential Services of Illinois, Inc. (d/b/a Ross Illinois
Heating & Cooling Inc.; Kranz Mechanical Corporation;
Kranz Heating & Cooling; Anderson Heating & Cooling
Company; American Residential Services)
- -------------------------------------------------------------------------------
Illinois Heating & Air Conditioning, Inc. (d/b/a Kranz Illinois
Heating & Cooling)
- -------------------------------------------------------------------------------
American Residential Services of Indiana, Inc. (d/b/a Dial One Indiana
Meridian & Hoosier, Inc.; Barclay-Holland, Inc.; Korte
Electric, Inc.; USA Heating & Air Conditioning, Inc.;
Sagamore Heating & Cooling, Inc., A-1 Plumbing,
Heating & Cooling, Inc., DH Plumbing; DH Heating and
Air Conditioning, Hession Plumbing Company, Inc.;
Godby Brothers, Inc)
- -------------------------------------------------------------------------------
American Residential Services of Iowa, Inc. Iowa
- -------------------------------------------------------------------------------
American Residential Services of Kentucky, Inc. Kentucky
- -------------------------------------------------------------------------------
American Residential Services of Maine, Inc. Maine
- -------------------------------------------------------------------------------
American Residential Services of Maryland, Inc. (d/b/a Wachter & Maryland
Norwood; John C. Dorsey; American Residential
Services, Inc.)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 4
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 25, 1999)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
American Residential Services of Michigan, Inc. (d/b/a Energy Michigan
Concepts, Inc.; Andy's Statewide Heating & Cooling;
Adex Heating & Cooling, Inc.; Quality Air of Holland,
Inc.; Manne Electric Company; Andy's Statewide;
American Residential Services)
- -----------------------------------------------------------------------------------
American Residential Services of Mississippi, Inc. Mississippi
- -----------------------------------------------------------------------------------
American Residential Services of Missouri, Inc. (d/b/a American Missouri
Residential Services)
- -----------------------------------------------------------------------------------
American Residential Services of Montana, Inc. Montana
- -----------------------------------------------------------------------------------
American Residential Services of Nebraska, Inc. (d/b/a Aksarben Nebraska
Heating & Air Conditioning)
- -----------------------------------------------------------------------------------
American Residential Services of Nevada, Inc. (d/b/a Cool Valley Nevada
Air, Inc.; Air West Air Conditioning-Heating; Racee
Air Conditioning & Heating Company; Economy Air
Conditioning; Lang; Southtown; A.K. Chadwell Discount
Plumbing; Day and Night Air Conditioning Services; Air
West Air Conditioning Service; Air West Air
Conditioning/Heating & Refrigeration; Economy A/C,
Refrigeration; Lang Refrigeration; Racee Air West)
- -----------------------------------------------------------------------------------
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 North Carolina
Heating & Air Conditioning, Inc.; Burrage Enterprises;
Wood & Son Heating & Air Conditioning, Inc.; Moore Air
Conditioning; Moore Air Conditioning Company, Inc.;
Electro-Temp; Central Comfort Company, Inc.; Bingham
Heating and Air Conditioning Company, Inc.; Sherwood
Services, Inc.)
- -----------------------------------------------------------------------------------
American Residential Services of North Dakota, Inc. North Dakota
- -----------------------------------------------------------------------------------
ARS American Residential Services of Oklahoma, Inc. (d/b/a Oklahoma
Advanced AirCo & Heating, Inc.; ARS American
Residential Services)
- -----------------------------------------------------------------------------------
American Residential Services of Oregon, Inc. Oregon
- -----------------------------------------------------------------------------------
American Residential Services of Pennsylvania, Inc. (d/b/a Pennsylvania
Automatic Controls Service; American Residential
Services)
- -----------------------------------------------------------------------------------
ARS American Residential Services of Rhode Island, Inc. Rhode Island
- -----------------------------------------------------------------------------------
American Residential Services of South Carolina, Inc South Carolina
- -----------------------------------------------------------------------------------
American Residential Services of South Dakota, Inc. South Dakota
- -----------------------------------------------------------------------------------
American Residential Services of Tennessee, Inc. (d/b/a American Tennessee
Residential Services)
- -----------------------------------------------------------------------------------
ARS American Residential Services of Texas, Inc. (d/b/a Crown Delaware
Services, Inc.; McCannics; West Houston Services,
Inc.; American Residential Services; Osgood Heating
and Air Conditioning)
- -----------------------------------------------------------------------------------
Adcot, Inc. Texas
- -----------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC.
(AS OF MARCH 25, 1999)
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------
American Residential Services of Utah, Inc. Utah
- -----------------------------------------------------------------------------------
American Residential Services of Virginia, Inc. (d/b/a Keenan Virginia
Heating & Cooling)
- -----------------------------------------------------------------------------------
American Residential Services of Vermont, Inc. Vermont
- -----------------------------------------------------------------------------------
American Residential Services of Washington, Inc. Washington
- -----------------------------------------------------------------------------------
American Residential Services of West Virginia, Inc. West Virginia
- -----------------------------------------------------------------------------------
American Residential Services of Wisconsin, Inc. Wisconsin
- -----------------------------------------------------------------------------------
American Residential Services of Wyoming, Inc. Wyoming
- -----------------------------------------------------------------------------------
ARS Energy Services Company Delaware
- -----------------------------------------------------------------------------------
ARS Residential Holding Company Delaware
- -----------------------------------------------------------------------------------
ARS Residential Management Company Delaware
- -----------------------------------------------------------------------------------
ARS Special Events, Inc. (d/b/a ARS Special Events; American Delaware
Residential Services)
- -----------------------------------------------------------------------------------
ASI Hastings Acquisition California
- -----------------------------------------------------------------------------------
Cape Fear Heating & Air Conditioning of Wilmington, Inc.(d/b/a North Carolina
American Residential Services)
- -----------------------------------------------------------------------------------
Elcor Electric Company (d/b/a American Mechanical Services) California
- -----------------------------------------------------------------------------------
Maio Marketing Systems, Inc. California
- -----------------------------------------------------------------------------------
North American Electrical Services, LLC Delaware
- -----------------------------------------------------------------------------------
Freestate Electrical Companies, Inc. (d/b/a Freestate Maryland
Electrical Construction Company, Inc.; Freestate
Electrical Service Company)
- -----------------------------------------------------------------------------------
Suburban Electric Service, Inc. North Carolina
- -----------------------------------------------------------------------------------
T.A. Beach Corporation Maryland
- -----------------------------------------------------------------------------------
Westland Heating and Air Conditioning, Inc. California
- -----------------------------------------------------------------------------------
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 31, 1999 (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,
1998 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-3 (No. 333-31815), Form S-3
(No. 333-27785) and Forms S-8 (Nos. 333-13299, 333-33479, 333-44913 and
333-67989).
ARTHUR ANDERSEN LLP
Houston, Texas
March 31, 1999
<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>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,843
<SECURITIES> 0
<RECEIVABLES> 72,770
<ALLOWANCES> 5,057
<INVENTORY> 16,202
<CURRENT-ASSETS> 115,673
<PP&E> 54,922
<DEPRECIATION> 24,805
<TOTAL-ASSETS> 382,217
<CURRENT-LIABILITIES> 76,545
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 131,956
<TOTAL-LIABILITY-AND-EQUITY> 382,217
<SALES> 505,562
<TOTAL-REVENUES> 505,562
<CGS> 389,269
<TOTAL-COSTS> 389,269
<OTHER-EXPENSES> 107,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,405
<INCOME-PRETAX> (3,830)
<INCOME-TAX> 60
<INCOME-CONTINUING> (3,920)
<DISCONTINUED> (3,641)
<EXTRAORDINARY> (300)
<CHANGES> 0
<NET-INCOME> (7,861)
<EPS-PRIMARY> (0.50)
<EPS-DILUTED> (0.50)
</TABLE>
