-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ie8g/TeWYR6jJicm3CPMTEb6Y1Jo2Typdtu8jiv+wM9J+HbHBBcF2xgnPfbxR0+w a6b+aNy+3P9AfaekRVzUKg== 0000950129-99-001330.txt : 19990403 0000950129-99-001330.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950129-99-001330 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RESIDENTIAL SERVICES INC CENTRAL INDEX KEY: 0001014187 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 760484996 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11849 FILM NUMBER: 99583647 BUSINESS ADDRESS: STREET 1: POST OAK TOWER 5051 WESTHEIMER STREET 2: STE 725 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7135990100 MAIL ADDRESS: STREET 1: 5051 WESTHEIMER STREET 2: STE 725 CITY: HOUSTON STATE: TX ZIP: 77056 10-K405 1 AMERICAN RESIDENTIAL SERVICES, INC. - 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO.: 1-11849 AMERICAN RESIDENTIAL SERVICES, INC. (Exact name of Registrant as specified in its charter) 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)
(713) 599-0100 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: 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
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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I
PAGE ---- 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
i 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 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 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 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 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 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 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 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 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 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 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:
HIGH LOW ------ ------ 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
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 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.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1994 1995 1996 1997 1998 ------- ------- -------- -------- -------- 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
- --------------- (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 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 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 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):
YEAR ENDED DECEMBER 31 ---------------------------------------------------------- 1996 1997 1998 ---------------- ---------------- ---------------- 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)% ======== ===== ======== ===== ======== =====
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 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 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 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 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 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 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):
ESTIMATED FAIR VALUE AT DECEMBER 31, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 -------- --------- --------- --------- --------- ---------- ---------- --------------- 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%
21 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE ---- 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
22 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 26 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ------------------- 1997 1998 ASSETS -------- -------- 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 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 24 27 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1997 1998 -------- -------- -------- 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) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 25 28 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL --------------- PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ------ ------ ---------- --------- ------------- 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 ====== === ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 26 29 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1997 1998 -------- --------- -------- 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)
The accompanying notes are an integral part of these consolidated financial statements. 27 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 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 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:
DECEMBER 31, PAYMENTS DECEMBER 31, 1997 ADDITIONS AND OTHER 1998 ------------ --------- --------- ------------ 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 ======= ====== ======= =======
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 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.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------ 1996 1997 1998 ------------------------ ------------------------ ------------------------ RESIDENTIAL COMMERCIAL RESIDENTIAL COMMERCIAL RESIDENTIAL COMMERCIAL OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS OPERATIONS ----------- ---------- ----------- ---------- ----------- ---------- 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
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- REVENUES 1996 1997 1998 -------- --------- --------- --------- Total revenues from reportable segments..................... $150,330 $381,576 $505,562 Other revenues.............................................. -- 69 -- -------- -------- -------- Total consolidated revenues....................... $150,330 $381,645 $505,562 ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- PROFIT OR LOSS 1996 1997 1998 -------------- --------- --------- --------- 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) ======== ======== ========
31 34 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, ------------------- ASSETS 1997 1998 ------ -------- -------- Total assets for reportable segments........................ $318,031 $352,176 Corporate assets............................................ 17,260 30,041 -------- -------- Total consolidated assets......................... $335,291 $382,217 ======== ========
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 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 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:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 1998 ----- ------ ------ 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 ===== ====== ======
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 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 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.
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 -------- -------- (UNAUDITED) 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) ======== ========
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 39 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
DECEMBER 31, ESTIMATED USEFUL ------------------ LIVES IN YEARS 1997 1998 ---------------- ------- ------- 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 ======= =======
8. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Activity in the Company's allowance for doubtful accounts consists of the following:
DECEMBER 31, ---------------- 1997 1998 ------ ------ 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 ====== ======
Other receivables consist of the following:
DECEMBER 31, ---------------- 1997 1998 ------ ------ 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 ====== ======
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 40 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accounts payable and accrued expenses consist of the following:
DECEMBER 31, ------------------ 1997 1998 ------- ------- 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 ======= =======
Installation contracts in progress are as follows:
DECEMBER 31, -------------------- 1997 1998 ------- -------- 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 ======= ========
The following are included in the accompanying consolidated balance sheets under the following captions:
DECEMBER 31, ------------------- 1997 1998 ------- ------- 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 ======= =======
9. LONG-TERM DEBT: Long-term debt consists of the following:
DECEMBER 31, --------------------- 1997 1998 -------- -------- 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 ======== ========
38 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 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 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:
YEAR ENDING DECEMBER 31, ------------ 1999......................................... $ 1,069 2000......................................... 11,112 2001......................................... 74,642 2002......................................... 14,322 2003......................................... 10,716 Thereafter...................................... 62,489 -------- $174,350 ========
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 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:
WEIGHTED AVERAGE EXERCISE EXERCISE SHARES PRICE PRICE --------- --------------- -------- Outstanding at December 31, 1995................ -- -- -- Granted....................................... 1,554,500 $ 8.00 - $23.75 $13.09 Exercised..................................... -- -- -- Forfeited and canceled........................ (50,000) $15.00 $15.00 --------- Outstanding at December 31, 1996................ 1,504,500 $ 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
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:
1996 1997 1998 ------- ------- -------- 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)
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 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:
YEAR ENDING DECEMBER 31, ------------ 1999.......................................... $10,598 2000.......................................... 8,990 2001.......................................... 8,438 2002.......................................... 7,323 2003.......................................... 5,909 Thereafter.................................... 19,563 ------- $60,821 =======
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 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:
YEAR ENDED DECEMBER 31, ------------------------- 1996 1997 1998 ------ ------- ------ 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 ====== ======= ======
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:
YEAR ENDED DECEMBER 31, -------------------------- 1996 1997 1998 ------ ------- ------- 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 ====== ======= =======
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:
DECEMBER 31, ----------------- 1997 1998 ------- ------- 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) ======= =======
44 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:
DECEMBER 31 ----------------- 1997 1998 ------- ------- 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) ======= =======
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 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 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.
1997 1998 --------------------------------------- ----------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- -------- -------- -------- -------- -------- -------- 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) ======= ======= ======== ======== ======== ======== ======== ========
47 50 AMERICAN RESIDENTIAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 1998 --------------------------------------- ----------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- -------- -------- -------- -------- -------- -------- 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) $ -- ======= ======= ======== ======== ======== ======== ======== ========
1997 1998 --------------------------------------- ----------------------------------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- -------- -------- -------- -------- -------- -------- 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) ======= ======= ======== ======== ======== ======== ======== ========
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 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 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:
NAME AGE POSITION - ---- --- -------- 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
- --------------- * Also serves as a director of the Company. 50 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 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 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
LONG-TERM COMPENSATION AWARDS ANNUAL ----------------------- COMPENSATION RESTRICTED SHARES NAME AND --------------------- STOCK UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS(1) AWARDS OPTIONS COMPENSATION(2) ------------------ ---- -------- -------- ---------- ---------- --------------- 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
- --------------- (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 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.
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% ---- ---------- --------- -------- ---------- ----------- ----------- 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
- --------------- (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 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:
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 ---- ----------- ----------- ----------- ------------- ----------- ------------- 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
- --------------- (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 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 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.
SHARES BENEFICIALLY OWNED(1) ---------------------- NAME NUMBER PERCENT ---- --------- ------- 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%
- --------------- * 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 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 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.
EXHIBIT NUMBER DESCRIPTION ------- ----------- *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).
59 62
EXHIBIT NUMBER DESCRIPTION ------- ----------- 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).
60 63
EXHIBIT NUMBER DESCRIPTION ------- ----------- *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.
- --------------- * 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 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.
SIGNATURE TITLE --------- ----- /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
62 65 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- *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)
63 66
EXHIBIT NUMBER DESCRIPTION ------- ----------- +*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.
- --------------- * 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 EX-10.12 2 EMPLOYMENT AGREEMENT - ED DUNN 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 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 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 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 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 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 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 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 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 EX-10.13 3 AMENDMENT TO EMPLOYMENT AGTMT. - TERI HARDT 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 EX-10.14 4 AMENDED EMPLOYMENT AGMT. - ELLIOTT ETTLINGER 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 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 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 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 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 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 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 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 EX-10.24 5 AMEND. #2 TO 1997 EMPLOYEE INCENTIVE PLAN 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. EX-10.25 6 AMEND. #2 TO 1996 INCENTIVE PLAN 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. EX-10.26 7 FIRST AMEND. TO LOAN AGREEMENT DATED 3/31/99 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 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 23 SCHEDULE II I. FOR THE REVOLVING LOANS: A. For the period prior to March 31, 1999, and after March 31, 2000:
- -------------------------------------------------------------------------------- A B C D Total Consolidated LIBOR Margin Base Rate Revolving Funded Debt to Margin Commitment Fee Consolidated EBITDA Ratio - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
B. For the period beginning March 31, 1999 through March 31, 2000:
- ------------------------------------------------------------------------- A B C LIBOR Margin Base Rate Margin Revolving Commitment Fee - ------------------------------------------------------------------------- 3.50% 1.50% 0.75% - -------------------------------------------------------------------------
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 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) $ --------------------------------
A-1 25 B. FIXED CHARGE COVERAGE RATIO (tested quarterly beginning 6/30/98) 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) $ --------------------------------
A-2 26 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)
C. CONSOLIDATED FUNDED DEBT TO CONSOLIDATED PRO FORMA EBITDA RATIO (tested quarterly beginning 6/30/98) 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)
D. SENIOR CONSOLIDATED FUNDED DEBT TO Consolidated Pro Forma EBITDA RATIO (tested quarterly beginning 6/30/98) 1. Consolidated Funded Debt of Borrower (line C.1) $ -------------------------------- 2. Approved Subordinated Debt of Borrower $ -------------------------------- 3. Senior Consolidated Funded Debt of Borrower --------------------------------
A-3 27 (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)
E. ADDITIONAL PERMITTED DEBT 1. Additional Debt under (g) of $ -------------------------------- defn. of Permitted Debt (not to exceed $10,000,000)
F. CAPITAL EXPENDITURES 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)
G. CONSOLIDATED GAAP EBITDA TO CONSOLIDATED INTEREST EXPENSE RATIO 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)
H. SENIOR CONSOLIDATED FUNDED DEBT TO TOTAL CAPITALIZATION RATIO 1. Senior Consolidated Funded Debt (line D.3) $ --------------------------------
A-4 28 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)
I. INTEREST HEDGE AGREEMENTS 1. Amount of Interest Rate Swaps $ -------------------------------- (Max. of $25MM)
J. CONSOLIDATED GAAP EBITDA (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)
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 EX-21.1 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC. (AS OF MARCH 25, 1999)
- ------------------------------------------------------------------------------- COMPANY STATE - ------------------------------------------------------------------------------- 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.) - -------------------------------------------------------------------------------
2 SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC. (AS OF MARCH 25, 1999) - ------------------------------------------------------------------------------- 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) - -------------------------------------------------------------------------------
3 SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC. (AS OF MARCH 25, 1999) - ------------------------------------------------------------------------------- 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.) - -------------------------------------------------------------------------------
4 SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC. (AS OF MARCH 25, 1999) - ----------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------
5 SUBSIDIARIES OF AMERICAN RESIDENTIAL SERVICES, INC. (AS OF MARCH 25, 1999) - ----------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------
EX-23.1 9 CONSENT OF ARTHUR ANDERSEN LLP 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 EX-27 10 FINANCIAL DATA SCHEDULE
5 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. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 4,843 0 72,770 5,057 16,202 115,673 54,922 24,805 382,217 76,545 0 0 0 16 131,956 382,217 505,562 505,562 389,269 389,269 107,625 0 13,405 (3,830) 60 (3,920) (3,641) (300) 0 (7,861) (0.50) (0.50)
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