S-4/A 1 ds4a.htm AMENDMENT NO. 2 TO FORM S-4 Amendment No. 2 to Form S-4
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As filed with the Securities and Exchange Commission on June 17, 2008

Registration No. 333-150263

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 2
TO

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Goodman Global, Inc.

(Exact Name of Registrant as Specified in its Charter)

SEE TABLE OF ADDITIONAL REGISTRANTS

 

Delaware   3585   20-1932219

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

5151 San Felipe, Suite 500

Houston, Texas 77056

(713) 861-2500

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Ben D. Campbell

Executive Vice President, Secretary and General Counsel

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

With a copy to:

William B. Brentani

Simpson Thacher & Bartlett LLP

2550 Hanover Street

Palo Alto, California 94304

Tel: (650) 251-5000

 

 

Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement becomes effective.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

 

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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TABLE OF ADDITIONAL REGISTRANT GUARANTORS

 

Exact Name of Registrant Guarantor, as Specified in its Charter

   State or Other
Jurisdiction of
Incorporation or
Organization
   I.R.S.
Employer
Identification
Number
  

Address, Including Zip
Code and Telephone
Number, Including Area
Code of Registrant
Guarantor’s Principal
Executive Offices

Goodman Global Holdings, Inc.

   Delaware    20-1932202   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Appliance Holding Company

   Texas    76-0677025   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Distribution, Inc.

   Texas    76-0309878   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Distribution Southeast, Inc.

   Florida    59-0773846   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Holding Company

   Texas    76-0342022   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Quietflex Holding Company

   Delaware    76-0681233   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Sales Company

   Texas    76-0353690   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman II Holdings Company, L.L.C.

   Delaware    —     

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Manufacturing I LLC

   Delaware    20-1961086   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Manufacturing II LLC

   Delaware    20-1961186   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Holding Company, L.L.C.

   Delaware    —     

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Canada, L.L.C.

   Delaware    —     

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Nitek Acquisition Company, L.P.

   Texas    76-0580801   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Quietflex Manufacturing Company, L.P.

   Texas    76-0681290   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Manufacturing Company, L.P.

   Texas    76-0423371   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

Goodman Company, L.P.

   Delaware    39-1904835   

5151 San Felipe, Suite 500

Houston, Texas 77056

Tel: (713) 861-2500

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JUNE 17, 2008

PRELIMINARY PROSPECTUS

LOGO

Goodman Global, Inc.

Offer to Exchange

$500,000,000 aggregate principal amount of its 13.50%/14.00% Senior Subordinated Notes due 2016, wholly and unconditionally guaranteed by each subsidiary guarantor named herein, which have been registered under the Securities Act of 1933, for any and all of its outstanding 13.50%/14.00% Senior Subordinated Notes due 2016, wholly and unconditionally guaranteed by each subsidiary guarantor named herein.

 

 

We are conducting the exchange offer in order to provide you with an opportunity to exchange your unregistered notes for freely tradable notes that have been registered under the Securities Act.

The Exchange Offer

 

   

We will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradable.

 

   

You may withdraw tenders of outstanding notes at any time prior to the expiration date of the exchange offer.

 

   

The exchange offer expires at 5:00 p.m., New York City time, on July 17, 2008 unless extended. We do not currently intend to extend the expiration date.

 

   

The exchange notes to be issued in the exchange offer will not be a taxable event for U.S. federal income tax purposes.

 

   

The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be freely tradable.

Results of the Exchange Offer

 

   

The exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. We do not plan to list the notes on a national market.

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

Each broker-dealer that receives exchange notes for its own account pursuant to an exchange offer must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of exchange notes received in exchange for outstanding notes where such outstanding notes were acquired as a result of market-making activities or other trading activities. In addition, all dealers effecting transactions in the exchange notes may be required to deliver a prospectus.

 

 

See “Risk Factors” beginning on page 16 for a discussion of certain risks that you should consider before participating in the exchange offer.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the exchange notes to be distributed in the exchange offer or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is June 18, 2008.


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TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   16

Forward-Looking Statements

   30

The Transactions

   31

Use of Proceeds

   33

Capitalization

   34

Unaudited Pro Forma Condensed Financial Data

   35

Selected Historical Consolidated Financial Data

   40

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   42

Business

   60

Management

   74

Executive Compensation

   79

Security Ownership of Certain Beneficial Owners

   99

Certain Relationships and Related Party Transactions

   101

Description of Other Indebtedness

   106

Description of Notes

   109

The Exchange Offer

   163

Material U.S. Federal Income Tax Consequences

   173

Certain ERISA Considerations

   179

Plan of Distribution

   181

Legal Matters

   182

Experts

   182

Where You Can Find More Information

   182

Index to Consolidated Financial Statements

   F-1

 

 

You should rely only on the information contained in this prospectus or in any related free writing prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights information about our business from this prospectus. This summary does not contain all of the information that you should consider before investing in the notes. You should read the entire prospectus, including the financial data and related notes, before making an investment decision. Unless the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “the company” and “Goodman” refer to Goodman Global, Inc. and its consolidated subsidiaries and its predecessors.

Our Company

We are the second largest domestic manufacturer of heating, ventilation and air conditioning, or HVAC, products for residential and light commercial use based on unit sales. Our activities include engineering, manufacturing, assembling, marketing and distributing an extensive line of HVAC and related products. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brand names. The Goodman® brand is one of the leading HVAC brands in North America and caters to the large segment of the market that is price sensitive and desires reliable and low-cost climate comfort, while our premium Amana® brand includes enhanced features such as higher efficiency and quieter operation. The Quietflex® brand is a recognized brand of flexible duct. For the year ended December 31, 2007, we generated net sales of $1,935.7 million, a 7.9% increase as compared to prior year net sales. For the three months ended March 31, 2008, we generated net sales of $364.9 million, a 4.1% decrease as compared to the three months ended March 31, 2007.

We sell our products through a North American distribution network with more than 850 total distribution points comprised of approximately 150 company-operated distribution centers and over 700 independent distributor locations. For each of the year ended December 31, 2007 and the three months ended March 31, 2008, approximately 60% of our net sales were made through company-operated distribution centers and our direct sales force with the remainder made through independent distributors. Our company-operated distribution centers in key states such as Texas, Florida, California, Arizona and Nevada provide us direct access to large and fast growing regions in North America and enable us to maintain a significant amount of market intelligence and control over how our products are distributed. Our independent distributors, many of which have multiple locations and most of which exclusively sell our products, enable us to more fully serve other major sales areas and complement our broad distribution network. We offer our independent distributors incentives to promote our brands, which allow them to provide dealers with our products at attractive prices while meeting their own profit targets. We believe that our growth is attributable to our strategy of providing quality, value-priced products through an extensive, growing and loyal distribution network.

As of March 31, 2008, we operated three manufacturing and assembly facilities in Texas, two in Tennessee, one in Arizona and one in Florida totaling approximately two million square feet. Since 1982, our unit volume sales and market share have grown to surpass all but one of our competitors in the residential and light commercial HVAC sector.

The Transactions

On October 21, 2007, Chill Holdings, Inc. (which we refer to as Parent), Chill Acquisition, Inc., a subsidiary of Parent (which we refer to as Merger Sub), and Goodman Global, Inc. entered into an agreement and plan of merger (the Merger Agreement) pursuant to which Merger Sub merged with and into Goodman Global, Inc. on February 13, 2008. These transactions are referred to in this prospectus as the Merger. Merger Sub was incorporated on October 15, 2007 (Inception) for the purpose of acquiring Goodman and did not have any operations prior to February 13, 2008 other than in connection with the Goodman acquisition. At the effective time of the Merger on February 13, 2008, each share of Goodman Global, Inc. common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Goodman

 

 

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Global, Inc. or any of its subsidiaries, owned by Merger Sub, Parent or any direct or indirect wholly-owned subsidiary of Parent or held by stockholders who were entitled to and who properly exercised appraisal rights under Delaware law) was converted into the right to receive $25.60 in cash, without interest. In addition, all options to acquire Goodman Global, Inc. common stock issued pursuant to Goodman’s equity plans, whether or not vested, became fully vested as of the time immediately prior to the Merger and were cancelled and converted into cash payments, without interest, equal to the product of (1) the number of shares of Goodman Global, Inc. common stock subject to each option as of the effective time of the Merger multiplied by (2) the excess, if any, of $25.60 over the exercise price per share of common stock subject to such option (other than in the case of certain options held by members of our senior management who exchanged a portion of their vested options for new vested options in Parent). Immediately prior to the effective time of the Merger, each outstanding share of our restricted stock under Goodman Global, Inc.’s 2006 Incentive Award Plan was vested in full and was converted into the right to receive the merger consideration at the effective time of the Merger, less any amounts required to be withheld or deducted under applicable tax laws.

As described below and in “The Transactions” and “Certain Relationships and Related Party Transactions,” members of our management made $36.1 million of equity investments in the company through the acquisition of common stock of Parent. In addition, members of our management rolled certain existing Goodman Global, Inc. options into Parent options. Members of our management who made equity investments are referred to collectively in this prospectus as the Management Participants.

Investment funds affiliated with Hellman & Friedman LLC invested approximately $1,114.7 million in equity securities of Parent in connection with the Merger. In addition, investment funds affiliated with GSO (the GSO Equity Entities), investment funds affiliated with Farallon Capital Partners, L.P. (the Farallon Equity Entities) and investment funds affiliated with AlpInvest Partners (AlpInvest), along with certain other investors that the GSO Equity Entities syndicated their investments to (collectively, the Fund Co-Investors), invested approximately $127.5 million in equity securities of Parent in connection with the Merger. All of these investment funds are referred to in this prospectus as the Investors. Further, there were approximately $36.1 million of investments in equity securities of Parent through the acquisition of its common stock by the Management Participants.

On January 10, 2008, we commenced cash tender offers to purchase Goodman Global Holdings, Inc.’s outstanding 7- 7/8% Senior Subordinated Notes due 2010 ($400 million aggregate principal amount outstanding) and Floating Rate Notes due 2010 ($179.3 million aggregate principal amount outstanding) (together, the Existing Notes) and solicitations of consents from the holders of the Existing Notes with respect to amendments to the indentures governing the Existing Notes that would eliminate substantially all of the restrictive covenants contained in the indentures and in the Existing Notes and also eliminate certain events of default, certain covenants relating to mergers and certain conditions to legal defeasance and covenant defeasance, but would not eliminate, among other things, certain repurchase obligations in respect of the Existing Notes. On January 24, 2008, the holders of a majority in aggregate principal amount of each series of the Existing Notes had validly tendered, and not validly withdrawn, their Existing Notes and consented to, and not withdrawn their consents relating to, the amendments to the indentures with respect to the Existing Notes. On January 25, 2008, we executed the proposed amendments to the indentures for the Existing Notes, which amendments became operative immediately prior to the Merger. On February 13, 2008, we accepted the tenders, made payments to holders of the Existing Notes of the tender offer consideration and consent payments, called for redemption, deposited the redemption payment with the trustee in respect of untendered Existing Notes and discharged the indentures governing the Existing Notes.

In addition, on February 13, 2008, we repaid the $76.1 million outstanding under our then-existing credit facility and the $11.5 million outstanding under our then-existing revolving loan and swing note.

On February 13, 2008, Merger Sub issued and sold $500.0 million of notes, which are the subject of the exchange offer for exchange notes described in this prospectus, and borrowed (1) $800.0 million under a new

 

 

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senior secured term credit agreement with Barclays Capital and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) $105.0 million under a new asset-based revolving credit agreement with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto.

The Merger, the repurchase of the Existing Notes, the repayment of the existing credit facility, revolver and swing note and the fees and expenses relating to the Transactions (as defined below) were financed by borrowings under our new senior secured term credit agreement, our new asset-based revolving credit agreement, the issuance of the notes, the equity investments described above and Goodman’s cash on hand at the closing of the Merger.

The initial offering of the notes, the initial borrowings under our new senior secured term credit agreement and asset-based revolving credit agreement, the tender offers and consent solicitations with respect to the Existing Notes, the repayment of Goodman’s then-existing credit facility, revolver and swing note, the equity investment by the Investors and the Management Participants, the Merger and the other related transactions are collectively referred to in this prospectus as the Transactions. For a more complete description of the Transactions, see “The Transactions,” “Certain Relationships and Related Party Transactions,” “Description of Other Indebtedness” and “Description of Notes.”

Recent Developments

On April 21, 2008, Charles Carroll retired as President and Chief Executive Officer of Goodman and Parent, but remains as Chairman of the Board of Directors of both Goodman and Parent. Effective April 21, 2008, David Swift joined Goodman and Parent as President and Chief Executive Officer and became a member of each of Goodman’s and Parent’s Board of Directors. Prior to joining us, Mr. Swift was President of Whirlpool North America, where he also served on its board of directors. Before joining Whirlpool, Mr. Swift served as President of Eastman Kodak Company’s Professional Group. Before becoming President of Kodak’s Professional Group, Mr. Swift served as the Chairman and President of Kodak’s Greater Asian Region based in Shanghai, China.

The Sponsors

All of our outstanding common stock is directly owned by Chill Intermediate Holdings, Inc., which in turn is directly owned by Chill Holdings, Inc., which is majority owned and controlled by funds affiliated with Hellman & Friedman LLC. The Sponsors refer collectively to Hellman & Friedman LLC and its affiliates.

Hellman & Friedman LLC (H&F) is a leading private equity investment firm with offices in San Francisco, New York and London. H&F focuses on investing in superior business franchises and serving as a value-added partner to management in select industries including media, financial services, professional services, vertical software and information services and healthcare. Since its founding in 1984, H&F has raised and, through its affiliated funds, managed over $16 billion of committed capital and is currently investing its sixth partnership, Hellman & Friedman Capital Partners VI L.P., with over $8 billion of committed capital. Other recent investments include: Catalina Marketing Corporation, Kronos Incorporated, Sheridan Healthcare, Inc., Gaztransport & Technigaz S.A.S., Emdeon Business Services, IRIS Software Group Limited, Grosvenor Capital Management, L.P., LPL Holdings, Inc., DoubleClick, Inc., The Nasdaq Stock Market, Inc. and Texas Genco LLC.

 

 

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Corporate Information

Chill Acquisition, Inc. was incorporated under the laws of Delaware on October 15, 2007. Goodman Global, Inc. was incorporated under the laws of Delaware in 2004. On February 13, 2008, Chill Acquisition, Inc. merged with and into Goodman Global, Inc. with Goodman Global, Inc. continuing as the surviving corporation. Our principal executive offices are located at 5151 San Felipe, Suite 500, Houston, Texas 77056 and our telephone number is (713) 861-2500. Our website address is http://www.goodmanglobal.com. Information contained on or accessible through our website does not constitute a part of this prospectus.

Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brand names. Amana® is a trademark of Maytag Corporation and is used under license to Goodman Company, L.P.

Market, Ranking and Industry Data

Unless otherwise indicated, information contained in this prospectus concerning the HVAC industry or market refers to the residential and light commercial sector within the domestic HVAC industry. Our general expectations concerning these industries and their segments and our market position and market share within these industries and their segments are derived from data from various third-party sources. In addition, this prospectus presents similar information based on management estimates. Such estimates are derived from third-party sources as well as data from our internal research and on assumptions made by us, based on such data and our knowledge of the HVAC industry, which we believe to be reasonable. Although we are not aware of any misstatements regarding any industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those described in “Risk Factors.”

 

 

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The Exchange Offer

In this prospectus, the term “outstanding notes” refers to the 13.50%/14.00% Senior Subordinated Notes due 2016. The term “exchange notes” refers to the 13.50%/14.00% Senior Subordinated Notes due 2016, as registered under the Securities Act of 1933, as amended (the Securities Act). The term “notes” refers collectively to the outstanding notes and the exchange notes. On February 13, 2008, Chill Acquisition, Inc., to be merged with and into Goodman Global, Inc., issued $500,000,000 aggregate principal amount of 13.50%/14.00% Senior Subordinated Notes due 2016 in a private placement.

 

General

In connection with the private placement, Chill Acquisition, Inc., to be merged with and into Goodman Global, Inc., entered into a registration rights agreement with the purchasers in which they agreed, among other things, to deliver this prospectus to you and to obtain the effectiveness of the exchange offer registration statement within 270 days after the date of original issuance of the outstanding notes. You are entitled to exchange in the exchange offer your outstanding notes for exchange notes, which are identical in all material respects to the outstanding notes except:

 

   

the exchange notes have been registered under the Securities Act;

 

   

the exchange notes are not entitled to any registration rights that are applicable to the outstanding notes under the registration rights agreement; and

 

   

the liquidated damages provisions of the registration rights agreement are no longer applicable.

 

The exchange offer

We are offering to exchange $500,000,000 aggregate principal amount of 13.50%/14.00% Senior Subordinated Notes due 2016, which have been registered under that Securities Act for any and all of its existing 13.50%/14.00% Senior Subordinated Notes due 2016.

Outstanding notes may be exchanged only in denominations of $2,000 and in integral multiples of $1,000 in excess thereof.

 

Resale

Based on an interpretation by the staff of the Securities and Exchange Commission (the SEC) set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offer in exchange for outstanding notes may be offered for resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

   

you are acquiring the exchange notes in the ordinary course of your business; and

 

   

you have not engaged in, do not intend to engage in and have no arrangement or understanding with any person to participate in a distribution of the exchange notes.

If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a

 

 

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result of market-making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes. See “Plan of Distribution.”

Any holder of outstanding notes who:

 

   

is our affiliate;

 

   

does not acquire exchange notes in the ordinary course of its business; or

 

   

tenders its outstanding notes in the exchange offer with the intention to participate, or for the purpose of participating, in a distribution of exchange notes

cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling (available July 2, 1993), or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

 

Expiration date

The exchange offer will expire at 5:00 p.m., New York City time, on July 17, 2008, unless extended by us. We do not currently intend to extend the expiration of the exchange offer.

 

Withdrawal

You may withdraw the tender of your outstanding notes at any time prior to the expiration of the exchange offer. We will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the exchange offer.

 

Conditions to the exchange offer

The exchange offer is subject to customary conditions, which we may waive. See “The Exchange Offer—Conditions to the Exchange Offer.”

 

Procedures for tendering outstanding notes

If you wish to participate in the exchange offer, you must complete, sign and date the accompanying letter of transmittal, or a facsimile of such letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must then mail or otherwise deliver the letter of transmittal, or a facsimile of such letter of transmittal, together with the outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal.

If you hold outstanding notes through The Depository Trust Company (DTC) and wish to participate in the exchange offer, you must comply with the Automated Tender Offer Program procedures of DTC by which you will agree to be bound by the letter of transmittal.

 

 

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If you are a beneficial owner whose outstanding notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding notes, you should promptly contact the registered holder and instruct the registered holder to tender on your behalf. If you wish to tender the outstanding notes yourself, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either have the outstanding notes registered in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

   

you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

   

you do not have arrangement or understanding with any person or entity to participate in the distribution of the exchange notes;

 

   

you are not engaged in, and do not intend to engage in, a distribution of the exchange notes;

 

   

you are acquiring the exchange notes in the ordinary course of your business; and

 

   

if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes.

 

Special procedures for beneficial owners

If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

 

Guaranteed delivery procedures

If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents, or you cannot comply with the procedures under DTC’s Automated Tender Offer Program for transfer of book-entry interests, prior to the expiration date, you must tender your outstanding notes

 

 

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according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offer—Guaranteed Delivery Procedures.”

 

Effect on holders of outstanding notes

As a result of the making of, and upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offer, we will have fulfilled a covenant under the registration rights agreement. Accordingly, there will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreement. If you do not tender your outstanding notes in the exchange offer, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the indenture, except we will not have any further obligation to you to provide for the exchange and registration of the outstanding notes and related guarantees under the registration rights agreement. To the extent that outstanding notes are tendered and accepted in the exchange offer, the trading market for outstanding notes could be adversely affected.

 

Consequences of failure to exchange

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offer, we do not intend to register the outstanding notes under the Securities Act, except as otherwise required by the registration rights agreement.

 

United States federal income tax consequences of the exchange offer

The exchange of outstanding notes in the exchange offer will not be a taxable event for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences—Exchange Offer.”

 

Use of proceeds

We will not receive any cash proceeds from the issuance of exchange notes in the exchange offer. See “Use of Proceeds.”

 

Exchange agent

Wells Fargo Bank, National Association is the exchange agent for the exchange offer. The addresses and telephone numbers of the exchange agent are set forth in the section captioned “The Exchange Offer—Exchange Agent.”

 

 

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The Exchange Notes

The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Notes” section of this prospectus contains more detailed descriptions of the terms and conditions of the outstanding notes and the exchange notes. The exchange notes will have terms identical in all material respects to the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and liquidated damages for failure to observe certain obligations in the registration rights agreement.

 

Issuer

Goodman Global, Inc.

 

Securities offered

$500.0 million aggregate principal amount of 13.50%/14.00% Senior Subordinated Notes due 2016.

 

Maturity

The exchange notes will mature on February 15, 2016.

 

Interest rate

The exchange notes will bear interest at a rate of 13.50% per annum, provided that Goodman Global, Inc. may, at its option, elect to pay interest in any interest period at a rate of 14.00%, per annum, in which case up to 3.0% per annum may be paid by issuing additional notes (PIK notes) under the indenture on the same terms and conditions as the existing notes, provided that Goodman Global, Inc. may not make any interest payment with PIK notes after the first HYDO Determination Date (as defined below) to the extent such interest payment in PIK notes would cause the accrued and unpaid interest and original issue discount on the notes to exceed the amount described in clause (b) of the definition of HYDO Redemption Amount, as defined in “Description of Notes—Principal, Maturity, Interest and HYDO Redemption.”

If we elect to pay interest in PIK notes, we will increase the principal amount of each note or issue new notes to holders of the notes on the relevant record date in an amount equal to the amount of PIK interest for the applicable interest period (rounded up to the nearest $1,000, for notes registered in the name of DTC or its nominee).

 

Interest payment dates

February 15 and August 15, beginning on August 15, 2008. Interest will accrue from the later of the issue date of the outstanding notes or the last interest payment date relating to the outstanding notes.

 

Ranking

The exchange notes will be our unsecured, senior subordinated obligations and will:

 

   

be subordinated in right of payment to our existing and future Senior Indebtedness (as defined in the indenture governing the notes), including our senior secured term credit agreement and asset-based revolving credit agreement;

 

   

rank equally in right of payment to all of our future senior subordinated debt;

 

 

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be effectively subordinated in right of payment to all of our existing and future secured debt (including our senior secured term credit agreement and asset-based revolving credit agreement), to the extent of the value of the assets securing such debt, and be structurally subordinated to all obligations of each of our subsidiaries that is not a guarantor of the notes; and

 

   

rank senior in right of payment to all of our future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the notes.

Similarly, the note guarantees will be unsecured senior subordinated obligations of the guarantors and will:

 

   

be subordinated in right of payment to all of the applicable guarantor’s existing and future Senior Indebtedness, including such guarantor’s guarantees under our senior secured credit term agreement and asset-based revolving credit agreement;

 

   

rank equally in right of payment to all of the applicable guarantor’s future senior subordinated debt;

 

   

be effectively subordinated in right of payment to all of the applicable guarantor’s existing and future secured debt (including such guarantor’s guarantees under our senior secured term credit agreement and asset-based revolving credit agreement), to the extent of the value of the assets securing such debt, and be structurally subordinated to all obligations of any subsidiary of a guarantor if that subsidiary is not also a guarantor of the notes; and

 

   

rank senior in right of payment to all of the applicable guarantor’s future subordinated debt and other obligations that are, by their terms, expressly subordinated in right of payment to the notes.

 

  As of March 31, 2008, we and the guarantors had total indebtedness of $1,377.6 million, of which $800.0 million was secured indebtedness, excluding approximately $35.0 million of issued and outstanding letters of credit and up to $156.4 million of undrawn commitments for revolving credit loans under our asset-based revolving credit agreement.
 

 

Guarantees

Each of our subsidiaries that guarantees the obligations under our senior secured credit facilities will initially jointly, severally and unconditionally guarantee the exchange notes on an unsecured senior subordinated basis.

 

Optional redemption

Prior to February 15, 2011, we will have the option to redeem some or all of the exchange notes for cash at a redemption price equal to 100% of their principal amount, plus a make-whole premium (as described in “Description of Notes—Optional Redemption”), plus accrued and unpaid interest to the redemption date. Beginning on February 15, 2011, we may redeem some or all of the exchange notes at the redemption prices listed under “Description of Notes—Optional

 

 

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Redemption” plus accrued interest on the exchange notes to the date of redemption.

 

Optional redemption after certain equity offerings

At any time (which may be more than once) before February 15, 2011, we may choose to redeem up to 40% of the notes at a redemption price equal to 113.5% of the principal amount thereof with proceeds that we or our parent company raise in one or more equity offerings, as long as at least 60% of the aggregate principal amount of the notes issued remains outstanding afterwards. See “Description of Notes—Optional Redemption.”

 

HYDO redemption

If the Notes would otherwise constitute “applicable high yield discount obligations” within the meaning of Section 163(i)(l) of the Internal Revenue Code of 1986, as amended (the Code), on each, HYDO Determination Date (as defined in “Description of Notes—Principal, Maturity, Interest and HYDO Redemption”), the Issuer will be required to redeem for cash a portion of each Note then outstanding equal to the HYDO Redemption Amount (each such redemption, a “HYDO Redemption”), as defined below. The redemption price for the portion of each Note redeemed pursuant to any HYDO Redemption will be 100% of the principal amount of such portion plus any accrued interest thereon on the date of redemption. “HYDO Redemption Amount” means, as of each HYDO Determination Date, the excess, if any, of (a) the aggregate amount of accrued and unpaid interest and all accrued and unpaid “original issue discount” (as defined in Section 1273(a)(1) of the Code) with respect to the Notes over (b) and amount equal to the product of (i) the “issue price” (as defined in Sections 1273(b) and 1274(a) of the Code) of the Notes multiplied by (ii) the “yield to maturity” (as defined in the Treasury Regulation Section 1.1272-1(b)(1)(i)) of the Notes. No partial redemption or repurchase of the Notes prior to any HYDO Determination Date pursuant to any other provision of the Indenture will alter the Issuer’s obligation to make any HYDO Redemption with respect to any Notes that remain outstanding on such HYDO Redemption Date. Please see, “Description of Notes—Principal, Maturity, Interest and HYDO Redemption.”

 

Change of control offer

Upon the occurrence of a change of control, you will have the right, as holders of the exchange notes, to require us to repurchase some or all of your exchange notes at 101% of their principal amount, plus accrued and unpaid interest to the repurchase date. See “Description of Notes—Repurchase at the Option of Holders—Change of Control.”

We may not be able to pay you the required price for exchange notes you present to us at the time of a change of control, because:

 

   

we may not have enough funds at that time; or

 

   

terms of our other indebtedness may prevent us from making such payment.

 

 

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Your right to require us to repurchase your notes upon the occurrence of a change of control will be suspended during any time that the notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services.

 

Certain indenture provisions

The indenture governing the exchange notes will contain covenants limiting our ability and the ability of our restricted subsidiaries to:

 

   

incur additional debt or issue certain capital stock;

 

   

pay dividends on or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens on certain assets to secure certain debt;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

enter into certain transactions with our affiliates; and

 

   

designate our subsidiaries as unrestricted subsidiaries.

These covenants are subject to a number of important limitations and exceptions. See “Description of Notes.” Most of these covenants will cease to apply to the notes during any period in which the notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s.

 

No public market

The exchange notes will be freely transferable but will be a new issue of securities. There is no established trading market for the notes and the notes will not be listed on any securities exchange. Accordingly, an active market or liquidity may not develop for the exchange notes.

Risk Factors

You should carefully consider all the information in the prospectus prior to exchanging your outstanding notes. In particular, we urge you to carefully consider the factors set forth under the heading “Risk Factors.”

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

Set forth below is summary historical consolidated financial data and summary unaudited pro forma condensed financial data of our business, at the dates and for the periods indicated. The historical data for the three months ended March 31, 2007 and 2008 have been derived from the unaudited historical consolidated financial statements of Goodman Global, Inc. included elsewhere in this prospectus. The historical data for the fiscal years ended December 31, 2005, 2006 and 2007 have been derived from the audited historical consolidated financial statements of Goodman Global, Inc. included elsewhere in this prospectus. The historical data for the fiscal years ended December 31, 2003 and 2004 have been derived from the audited consolidated financial statements of Goodman Global, Inc., not included in this prospectus. The 2004 and condensed 2008 financial data are a combination of the previous transaction’s predecessor and successor company statements disclosed in our consolidated financial statements and therefore represent non-GAAP measures.

The summary unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2007 has been prepared to give effect to the Transactions as if they had occurred on January 1, 2007. The summary unaudited pro forma condensed consolidated statement of income for the three months ended March 31, 2008 has been prepared to give effect to the Transactions as if they had occurred on January 1, 2008. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The summary unaudited pro forma combined financial data do not purport to represent what our results actually would have been if the Transactions had occurred at any date, and such data do not purport to project the results of operations for any future period.

The Merger will be accounted for using purchase accounting. The final purchase price allocation is dependent on, among other things, the finalization of asset and liability valuations. As of the date of this prospectus, we have not completed the valuation studies necessary to estimate the fair values of the assets acquired and liabilities assumed and the related allocation of purchase price. We have allocated the total estimated purchase price (calculated as described in the notes to the Unaudited Pro Forma Condensed Financial Data) to the assets acquired and liabilities assumed based on preliminary estimates of their fair values. A final determination of these fair values will reflect our consideration of a final valuation prepared by third-party appraisers. This final valuation will be based on the actual net tangible and intangible assets that existed as of the closing of the Merger. Any final adjustment will change the allocations of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a material change to the unaudited pro forma condensed consolidated financial statements, including a material change to amortizable intangible assets and goodwill.

 

 

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The summary historical consolidated and unaudited pro forma financial data should be read in conjunction with “The Transactions,” “Unaudited Pro Forma Condensed Financial Data,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Year Ended December 31,     Three Months
Ended March 31,
    Pro Forma
Year Ended

December 31,
2007
    Pro Forma
Three Months

Ended March 31,
2008
 
    2003     2004(1)     2005     2006     2007     2007     2008(1)      
    (in thousands, except for ratios)  
Consolidated statement of income data:            

Sales, net(2)

  $ 1,192,671     $ 1,317,580     $ 1,565,406     $ 1,794,753     $ 1,935,690     $ 380,274     $ 364,867     $ 1,935,690     $  364,867  

Cost of goods sold

    915,272       1,024,426       1,243,408       1,374,774       1,462,776       303,262       305,415       1,510,767       329,411  

Selling, general and administrative expenses

    147,687       220,551       170,077       205,894       210,613       45,926       92,908       210,613       49,969  

Depreciation and amortization expense

    14,851       18,887       37,717       32,641       35,119       8,311       10,726       53,478      
13,387
 
                                                                       

Operating profit (loss)

    114,861       53,716       114,204       181,444       227,182       22,775       (44,182 )     160,832      
(27,900
)

Interest expense, net

    26,081       12,478       74,213       77,825       68,378       16,907       76,679       170,014    

 

41,006

 

Other (income) expense, net

    (331 )     (1,406 )     (706 )     5,264       (2,752 )     (1,127 )     (487 )     (2,752 )     (487 )
                                                                       

Earnings (loss) before income taxes

    89,111       42,644       40,697       98,355       161,556       6,995       (120,374 )     (6,430 )  

 

(68,419

)

Provision for (benefit from) income taxes(3)

    1,745       (5,049 )     15,817       34,188       60,177       2,364       (37,142 )     (4,498 )  

 

(17,139

)

                                                                       

Net income (loss)

  $ 87,366     $ 47,693     $ 24,880     $ 64,167     $ 101,379     $ 4,631     $ (83,232 )   $ (1,932 )   $
(51,280
)
                                                                       

Statement of cash flows data:

 

         

Net cash (used in) provided by operating activities

  $ 150,807     $ (18,558 )   $ 105,519     $ 53,724     $ 204,217     $ 2,425     $ (41,269 )    

Net cash used in investing activities

    (811 )     (1,477,622 )     (24,957 )     (39,343 )     (14,181 )     (5,009 )     (1,945,637 )    

Net cash (used in) provided by financing activities

    (167,856 )     1,494,677       (60,639 )     (26,591 )     (182,650 )     (875 )     (1,983,858 )    

Other financial data:

 

         

Capital expenditures

  $ 16,801     $ 27,772     $ 28,806     $ 39,383     $ 26,416     $ 10,282     $ 4,978      

Ratio of earnings to fixed charges(4)

    4.2x       3.8x       1.5x       2.2x       3.2x       1.4x       —   (5)     —   (5)     —   (5)

 

 

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    As of December 31,   As of March 31,
    2003   2004   2005   2006   2007   2007   2008
    (in thousands)
Consolidated balance sheet data:              

Cash and cash equivalents

  $ 5,359   $ 3,856   $ 23,779   $ 11,569   $ 18,955   $ 8,110   $ 15,907

Total assets

    615,558     1,544,595     1,621,537     1,623,971     1,567,617     1,663,941     3,073,390

Total debt

    213,244     1,024,135     961,375     838,050     655,425     837,175     1,377,621

Redeemable preferred stock

    —       225,000     225,570     —       —       —       —  

Shareholders’ equity

    150,279     102,719     107,815     521,085     622,106     526,461     1,264,821

 

(1) The financial information for these periods reflects the combined presentation of the successor and predecessor company financial statements and is therefore an unaudited non-GAAP financial measure.
(2) Sales are presented net of certain rebates paid to customers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements appearing elsewhere in this prospectus.
(3) The 2003 and 2004 consolidated statements of income represent our tax provision calculated based on our previous status when incorporated under Subchapter S of the Code, with substantially all corporate earnings taxed at the shareholder level. For comparability purposes, if we had been incorporated under Subchapter C of the Code and used a pro forma tax rate of 38.5% as a C corporation, the provision for income taxes and net income would have been as set forth below:

 

     Year Ended December 31,
         2003            2004    
     (in thousands)

Provision for income taxes

   $ 34,308    $ 16,418

Net income

     54,803      18,226

 

(4) For purposes of calculating the ratio of earnings to fixed charges, “earnings” represents income before taxes less capitalized interest, plus amortization of capitalized interest and fixed charges. “Fixed charges” include interest expense (including amortization of debt issuance costs), capitalized interest, and the portion of operating rental expense which management believes is representative of the interest component of rent expense.
(5) For the three months ended March 31, 2008 (unaudited), the pro forma year ended December 31, 2007 and the pro forma three months ended March 31, 2008, earnings were not adequate to cover fixed charges by $120.4 million, $6.4 million and $68.4 million, respectively.

 

 

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RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offer. The risks described below are not the only risks facing us. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In such a case, the trading price of the exchange notes could decline or we may not be able to make payments of interest and principal on the exchange notes and you may lose all or part of your original investment.

Risks Relating to the Exchange Offer, the Notes and our Indebtedness

There may be adverse consequences if you do not exchange your outstanding notes.

If you do not exchange your outstanding notes for exchange notes in the exchange offer, you will continue to be subject to restrictions on transfer of your outstanding notes as set forth in the prospectus distributed in connection with the private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Prospectus Summary—The Exchange Offer” and “The Exchange Offer” for information about how to tender your outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the outstanding amount of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the outstanding notes due to a reduction in liquidity.

Our substantial indebtedness could adversely affect our business and prevent us from fulfilling our obligations under the notes.

We have a substantial amount of indebtedness. As of March 31, 2008, we and the guarantors had total indebtedness of $1,377.6 million, excluding approximately $35.0 million of issued and outstanding letters of credit and up to $156.4 million of undrawn commitments for revolving credit loans under our asset-based revolving credit agreement (of which $500.0 million consisted of the notes and the balance consisted of indebtedness under our senior secured credit facilities). Our substantial indebtedness may have important consequences to you, including:

 

   

making it more difficult for us to satisfy our obligations with respect to the notes;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby limiting cash flow available to fund our working capital, capital expenditures or other general corporate requirements;

 

   

exposing us to the risk of interest rate increases on our variable rate borrowings, including borrowings under our new senior secured credit facilities;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business and the industry;

 

   

placing us at a competitive disadvantage compared to our competitors with less indebtedness; and

 

   

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, other general corporate requirements and acquisitions.

Our pro forma cash interest expense for the three months ended March 31, 2008 would have been $41.0 million. At March 31, 2008, we had $1,377.6 million of indebtedness under our senior secured credit facilities, which as of such date accrued interest at a weighted average floating rate of 7.2%. A 0.125% increase in this floating rate would increase our interest expense on a pro forma basis for the three months ended March 31, 2008 by $1.1 million.

 

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Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our senior secured credit facilities and the indenture governing the notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness or issue certain preferred shares;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell or transfer assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

   

enter into certain transactions with our affiliates.

In addition, under our asset-based revolving credit agreement, when (and for as long as) the combined availability under our asset-based revolving credit agreement is less than a specified amount for a certain period of time, or if a payment or bankruptcy event of default has occurred and is continuing, funds deposited into any of our depository accounts will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the asset-based revolving credit agreement and to cash collateralize letters of credit issued thereunder.

Under our senior secured credit facilities we will also be required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios.

The failure to comply with any of these covenants would cause a default under our debt instruments. A default, if not waived, could result in acceleration of the outstanding indebtedness under such debt instruments, in which case such indebtedness would become immediately due and payable. In addition, a default or acceleration of indebtedness under the notes or our senior secured credit facilities could result in a default or acceleration of other indebtedness we may incur with cross-default or cross-acceleration provisions. If any default occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be available on terms that are acceptable to us. Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take.

Despite current indebtedness levels, we and our subsidiaries may still be able to incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. For example, under our asset-based revolving credit agreement, as of March 31, 2008, we had an additional $156.4 million of undrawn commitments that, if drawn, would further increase our leverage. The terms of the indenture governing the notes does not fully prohibit us or our subsidiaries from doing so. Our senior secured credit facilities also permit additional borrowing indebtedness and all or a portion of such additional indebtedness could rank senior to the notes and the subsidiary guarantees. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

To service all of our indebtedness, including the notes, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance. This, to a certain extent, is subject to prevailing economic and competitive

 

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conditions and to certain financial, business, regulatory and other factors beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our asset-based revolving credit agreement in an amount sufficient to enable us to service our debt, including the notes, or to fund our other liquidity needs. For example, in the three months ended March 31, 2008, we had a net loss of $83.2 million and negative net cash used in operating activities of $41.3 million. Our net loss was primarily as a result of $49.8 million of expense related to the extinguishment of our predecessor company’s outstanding debt, $42.9 million of general and administrative expenses, $24.8 million of amortization of the inventory step-up incurred as a result of purchase accounting and $2.5 million of amortization of identifiable intangible assets and increased depreciation, in each case, in connection with the Transactions, as well as our increased interest expense relating to the debt we incurred in connection with the Transactions. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt, including the notes, or sell certain of our assets on or before the maturity of our debt. We may not be able to restructure or refinance any of our debt, including the notes, on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.

In addition, if our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets or seek additional capital. These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our senior secured credit facilities and the indenture governing the notes restricts our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

Your right to receive payments on the notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other Senior Indebtedness and any of our future Senior Indebtedness.

The notes and the guarantees will be general unsecured obligations that will be junior in right of payment to all of our and such guarantors’ existing and future Senior Indebtedness (as defined in the indenture governing the notes). As of December 31, 2007, after giving effect to the Transactions as if the Transactions had been consummated as of such date, we would have had approximately $800.0 million of senior indebtedness under our senior secured term credit agreement and $105.0 million under our asset-based revolving credit agreement and an additional $156.4 million in undrawn commitments under our asset-based revolving credit agreement, after giving effect to $35.0 million of letters of credit issued and outstanding as of March 31, 2008. The indenture governing the notes offered hereby will permit us and the guarantors to incur substantial additional Senior Indebtedness in the future.

We may not pay principal, premium, if any, interest or other amounts on account of the notes in the event of a payment default or certain other defaults in respect of certain of our Senior Indebtedness, including debt under our senior secured credit facilities, unless the Senior Indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to our Senior Indebtedness, we may not be permitted to pay any amount on account of the notes for a designated period of time.

Because of the subordination provisions in the notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the notes until we have made all payments in cash on our Senior Indebtedness and all letters of credit our credit facilities have been terminated or cash collateralized. We cannot assure you that sufficient assets will remain after all these payments have been made to make any payments on the notes, including payments of principal or interest when due.

 

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Your right to receive payments on the notes is effectively subordinated to the rights of our existing and future secured creditors. Further, the guarantees of these notes are effectively subordinated to all our guarantors’ existing and future secured indebtedness.

Holders of our secured indebtedness and the secured indebtedness of the guarantors will have claims that are prior to your claims as holders of the notes to the extent of the value of the assets securing that other indebtedness. Notably, we and certain of our subsidiaries, including the guarantors, are parties to the new credit facility, which will be secured by liens on substantially all of our assets and the assets of the guarantors. The notes will be effectively subordinated to all that secured indebtedness. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization, or other bankruptcy proceeding, holders of secured indebtedness will have prior claim to those of our assets that constitute their collateral. Holders of the notes will participate ratably with all holders of our unsecured indebtedness that is deemed to be of the same class as the notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor, in our remaining assets. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the notes. As a result, holders of the notes may receive less, ratably, than holders of secured indebtedness.

As of March 31, 2008, the aggregate amount of our secured indebtedness and the secured indebtedness of our subsidiaries was $1,377.6 million, excluding approximately $35.0 million of issued and outstanding letters of credit and up to $156.4 million of undrawn commitments for revolving credit loans under our asset-based revolving credit agreement. We will be permitted to borrow substantial additional indebtedness, including secured indebtedness, in the future under the terms of the indenture governing the notes.

We may not have access to the cash flow and other assets of our subsidiaries that may be needed to make payment on the notes.

Although a significant portion of our business is conducted through our subsidiaries, none of our subsidiaries is obligated to make funds available to us for payment on the notes. Accordingly, our ability to make payments on the notes is dependent in part on the earnings and the distribution of funds from our subsidiaries. Our subsidiaries will be permitted under the terms of the indenture governing the notes to incur additional indebtedness that may severely restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. We cannot assure you that the agreements governing future indebtedness of our subsidiaries will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on these notes when due.

Claims of noteholders will be structurally subordinated to claims of creditors of all of our non-guarantor subsidiaries.

The notes initially are guaranteed on a senior basis by our existing U.S. subsidiaries that are obligors under our senior secured credit facilities. The notes are not guaranteed by our non-U.S. subsidiaries. However, the historical consolidated financial statements and the pro forma condensed financial data included in this prospectus include all of our domestic and foreign subsidiaries. Our non-guarantor subsidiaries generated approximately 3% of our pro forma net sales for the year ended December 31, 2007, and as of December 31, 2007, our non-guarantor subsidiaries held approximately 1% and 4% of our total assets and tangible assets, respectively, on a pro forma basis. In addition, we will have the ability to designate certain of our subsidiaries as unrestricted subsidiaries pursuant to the terms of the indenture governing the notes, and any subsidiary so designated will not be a subsidiary guarantor of the notes.

Our non-guarantor subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that we or the subsidiary guarantors have to receive any assets of any of the non-guarantor subsidiaries upon the liquidation or reorganization of those subsidiaries, and the consequent rights of noteholders to realize proceeds from the sale of any of those subsidiaries’ assets,

 

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will be effectively structurally subordinated to the claims of those subsidiaries’ creditors, including trade creditors and holders of debt of that subsidiary.

The lenders under our senior secured credit facilities will have the discretion to release the guarantors under the senior secured credit facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the notes.

Any guarantee of the notes will be released without action by, or consent of, any holder of the notes or the trustee under the indenture governing the notes offered hereby, if the related guarantor is no longer a guarantor of obligations under our senior secured credit facilities or any other indebtedness. See “Description of Notes.” The lenders under our senior secured term credit agreement and our asset-based revolving credit agreement will have the discretion to release the guarantees under the applicable credit agreement in a variety of circumstances. You will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of holders of the notes.

Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors.

Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

 

   

received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee;

 

   

was insolvent or rendered insolvent by reason of such incurrence;

 

   

was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or

 

   

intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.

In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.

The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:

 

   

the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all of its assets;

 

   

if the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

   

it could not pay its debts as they become due.

On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of these notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

 

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If we default on our obligations to pay our indebtedness, we may not be able to make payments on the notes.

Any default under the agreements governing our indebtedness, including a default under our senior secured credit facilities, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness (including covenants in the new senior secured credit facilities and the indenture governing the notes), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit facilities and the indentures. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest. The lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the new senior secured credit facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

We may not be able to purchase the notes upon a change of control offer required by the indentures.

Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at a price equal to 101% of their principal amount plus accrued and unpaid interest, if any, to the date of repurchase. However, it is possible that we will not have sufficient funds available at the time of such change of control event to make the required repurchase of notes that are tendered upon a change of control event. In addition, our new senior secured credit facilities contain restrictions that limit our ability to repurchase notes that are tendered upon a change of control event.

Accordingly, we may not be able to satisfy our obligations to purchase the notes unless we are able to refinance or obtain waivers under our new senior secured credit facilities. Our failure to repurchase the notes upon a change of control would cause a default under the indentures governing the notes and a cross default under our senior secured credit facilities. The senior secured credit facilities also provide that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions.

Certain important corporate events, such as leveraged recapitalizations that would increase the level of our indebtedness, would not constitute a “Change of Control” under the indentures. See “Description of Notes—Repurchase at the Option of Holders.”

An active trading market may not develop for the notes.

The notes are a new issue of securities, there is no established trading market for the notes and the notes will not be listed on any securities exchange. The liquidity of any market for the notes will depend upon various factors, including:

 

   

the number of holders of the notes;

 

   

the interest of securities dealers in making a market for the notes;

 

   

the overall market for high yield securities;

 

   

our financial performance or prospects; and

 

   

the prospects for companies in our industry generally.

Accordingly, an active market or liquidity may not develop for the notes. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of

 

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securities similar to the notes. The market for the notes, if any, may be subject to similar disruptions. Any such disruptions may adversely affect you as a holder of the notes. In addition, the notes may trade at a discount, depending upon prevailing interest rates, the market for similar notes, our performance and other factors.

The trading price of the notes may be volatile.

The trading price of the notes could be subject to significant fluctuation in response to, among other factors, changes in our operating results, interest rates, the market for non-investment grade securities, general economic conditions and securities analysts’ recommendations, if any, regarding our securities.

United States persons will be required to pay U.S. federal income tax on the notes even if we do not pay cash interest.

None of the interest payments on the notes will be “qualified stated interest” for U.S. federal income tax purposes, even if we never exercise the option to pay pay-in-kind, or PIK, interest, because the notes provide us with the option to pay cash interest or PIK interest for any interest payment period, subject to certain limitations. Consequently, the notes will be treated as issued with “original issue discount” for U.S. federal income tax purposes, and U.S. holders (as defined in “Material U.S. Federal Income Tax Consequences”) will be required to include the original issue discount in gross income on a constant yield to maturity basis, regardless of whether interest is paid currently in cash. See “Material U.S. Federal Income Tax Consequences.”

Risks Relating to our Business

Changes in weather patterns and seasonal fluctuations may adversely affect our operating results.

Weather fluctuations may adversely affect our operating results and our ability to maintain our sales volume. Our operations may be adversely affected by unseasonably warm weather in the months of November to February and unseasonably cool weather in the months of May to August, which has the effect of diminishing customer demand for heating and air conditioning and decreasing our sales volumes. Many of our operating expenses are fixed and cannot be reduced during periods of decreased demand for our products. Accordingly, our results of operations will be negatively impacted in quarters with lower sales due to such weather fluctuations. In addition, our sales volumes and operating results in certain regions can be negatively impacted during inclement weather conditions in these regions. For example, during the summer of 2004, several hurricanes and other tropical weather systems struck the southeastern United States resulting in an estimated $6.2 million reduction in our operating profit for 2004.

In addition, our quarterly results may vary significantly. Although there is demand for our products throughout the year, in each of the past three years approximately 56% to 58% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production occurs in the first and the second quarters in anticipation of our peak sales quarters. Therefore, quarterly comparisons of our sales 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 expected results for a full year.

Increased competition and technological changes and advances may reduce our market share and our future sales.

The production and sale of HVAC equipment by manufacturers is highly competitive. According to industry sources, the top five domestic manufacturers (including us) represented over 80% of the unit sales in the U.S. residential and light commercial HVAC market in 2007. Our four largest competitors in this market are Carrier Corporation (a division of United Technologies Corporation), Trane Inc., Lennox International, Inc. and Rheem Manufacturing Company. Several of our competitors may have greater financial and other resources than we have. A number of factors affect competition in the HVAC industry, including an increasing emphasis on the development of more efficient HVAC products. Existing and future competitive pressures may materially and

 

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adversely affect our business, financial condition or results of operations, including pricing pressure if our competitors improve their cost structure. In addition, our company-operated distribution centers face competition from independent distributors and dealers owned by our competitors, some of whom may be able to provide their products or services at lower prices than we can. We may not be able to compete successfully against current and future competition; current and future competitive pressures faced by us may adversely affect our profitability and performance.

There is currently an effort underway in the United States by several companies to purchase independent distributors and dealers and consolidate them into large enterprises. These consolidated enterprises may be able to exert pressure on us to reduce prices. Additionally, these new enterprises tend to emphasize their company name, rather than the brand of the manufacturer, in their promotional activities, which could lead to dilution of the importance and value of our brand names. Future price reductions and any brand dilution caused by the consolidation among HVAC distributors and dealers could have an adverse effect on our business, financial condition and results of operations.

Significant increases in the cost of raw materials and components have, and may continue to, increase our operating costs. In addition, a decline in our relationships with key suppliers may have an adverse effect on our business.

Our operations depend on the supply of various raw materials and components, including steel, copper, aluminum, refrigerants, motors and compressors, from domestic and foreign suppliers. We do not enter into long-term supply contracts for many of our raw materials and component requirements. However, our suppliers may discontinue providing products to us at attractive prices, and we may be unable to obtain such products in the future from these or other providers on the scale and within the time frames we require. If a key supplier were unable or unwilling to meet our supply requirements, we could experience supply interruptions and/or cost increases which (to the extent that we are not able to find alternate suppliers or pass these additional costs onto our customers) could adversely affect our results of operations and financial condition. To the extent any of our suppliers experiences a shortage of components that we purchase, we may not receive shipments of those components and, if we were unable to obtain substitute components on a timely basis, our production would be impaired. For example, in the second quarter of 2004 we experienced supply interruptions for steel, copper and aluminum. Historically, these supply interruptions have resulted in periodic production disruptions and higher transportation costs.

Since 2004, commodity prices have risen significantly to levels well above prices seen in the prior decade. These commodity cost increases negatively affected our net income in 2004. Effective September 2004, we increased prices by up to 5% on a majority of our products in response to these increases in commodity costs. Effective January 2005, we further increased prices up to 7% on the majority of our products. Commodity costs have continued to increase. To help address the rise in commodity costs, we implemented price increases effective in April 2006, October 2006 and January 2008 and, most recently, we announced that effective July 1, 2008 we will raise prices by up to an additional 5% on the majority of our products. However, these price increases may reduce demand for our products. A continued high level of commodity prices or a further increase in commodity prices could have a material adverse effect on our results of operations. In addition, we may not be able to further increase the price of our products or reduce our costs to offset the higher commodity prices.

To enhance stability in the cost of major raw material commodities, such as copper and aluminum used in the manufacturing process, we have and may continue to enter into commodity arrangements. We generally do not enter commodity hedges extending beyond eighteen months. During 2006 and 2007, we entered into commodity hedges for both aluminum and copper. During 2007, we entered into swaps for a portion of our aluminum and copper supply which expire by December 31, 2008. The notional value of commodity swaps outstanding as of March 31, 2008 and December 31, 2007 and 2006 were $69.9 million, $143.3 million and $87.1 million, respectively. A 10% change in the price of commodities hedged would change the fair value of the

 

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hedge contracts by approximately $8.5 million as of March 31, 2008, $6.9 million as of December 31, 2007 and $4.3 million as of December 31, 2006.

We continue to monitor and evaluate the prices of our principal raw materials and may decide to enter into additional hedging contracts in the future.

Our business could be hurt by economic downturns.

Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. A decline in economic activity in the United States could materially affect our financial condition and results of operation. Sales in the residential and commercial new construction market correlate closely to the number of new homes and buildings that are built, which in turn is influenced by factors such as interest rates, inflation, availability of financing, consumers’ spending habits and confidence, employment rates and other macroeconomic factors over which we have no control. For example, we believe approximately 20% to 25% of our sales is for residential new construction, with the balance attributable to repair, retrofitting and replacement units. With the current downturn in residential new construction activity, we are seeing a decline in the volume of products we sell into this market. Any decline in economic activity as a result of these factors typically results in a decline in new construction and replacement purchases, which would result in a decrease in our sales volume and profitability.

A decline in our relations with our key distributors may adversely affect our business.

Our operations also depend upon our ability to maintain our relations with our independent distributors. While we generally enter into contracts with our independent distributors, these contracts typically last for one to two years and can be terminated by either party upon 30 days’ notice. If our key distributors are unwilling to continue to sell our products or if our key distributors merge with or are purchased by a competitor, we could experience a decline in sales. If we are unable to replace such distributors or otherwise replace the resulting loss of sales, our business and results of operations could be adversely affected. For the three months ended March 31, 2008, approximately 40% of our net sales were made through our independent distributors.

Damage or injury caused by our products could result in material liabilities associated with product recalls or reworks.

In the event we produce a product that is alleged to contain a design or manufacturing defect, we could be required to incur costs involved to recall or rework that product. In September 2004, we initiated a voluntary corrective action plan, or CAP, regarding a discontinued design of certain Amana®, Trane® and American Standard® brand PTAC units manufactured by one of our subsidiaries. A PTAC is a single unit heating and air conditioning system used primarily in hotel and motel rooms, apartments, schools, assisted living facilities and hospitals. Under the CAP, we will provide a new thermal limit switch to commercial and institutional PTAC owners. Installation of these switches will be at the commercial or institutional owners’ expense, except in special and limited circumstances (e.g., financial hardship). Pursuant to the CAP, we will pay the cost of installing the replacement switch for any individual homeowner having a PTAC unit in his/her residence. We have established a reserve relating to the CAP in an amount that we believe is appropriate, which amounted to $2.6 million as of December 31, 2004, the year in which the CAP was implemented. The costs required to recall or rework any defective products could be material, which may have a material adverse effect on our business. In addition, our reputation for safety and quality is essential to maintaining our market share. Any recalls or reworks may adversely affect our reputation as a manufacturer of quality, safe products and could have a material adverse effect on our results of operations.

We may incur material costs as a result of product liability or warranty claims that would negatively affect our profitability.

The development, manufacture, sale and use of our products involve a risk of product liability and warranty claims, including allegations of personal injury and property damage arising from fire, soot, mold and carbon

 

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monoxide. We currently carry insurance and maintain reserves for potential product liability claims. However, our insurance coverage may be inadequate if such claims do arise and any liability not covered by insurance could have a material adverse effect on our business. To date, we have been able to obtain insurance in amounts we believe to be appropriate to cover such liability. However, our insurance premiums may increase in the future as a consequence of conditions in the insurance business generally or our situation in particular. Any such increase could result in lower profits or cause the need to reduce our insurance coverage. In addition, a future claim may be brought against us, which would have a material adverse effect on us. Any product liability claim may also include the imposition of punitive damages, the award of which, pursuant to certain state laws, may not be covered by insurance. Our product liability insurance policies have limits that if exceeded, may result in material costs that would have an adverse effect on our future profitability. In addition, warranty claims are not covered by our product liability insurance. Any product liability or warranty issues may adversely affect our reputation as a manufacturer of safe, quality products and could have a material adverse effect on our business.

Our financial results may be adversely impacted by higher than expected tax rates, exposure to additional income tax liabilities and the adoption of new accounting pronouncements regarding income tax accounting.

Our effective tax rate is highly dependent upon the geographic composition of our earnings and tax regulations governing each region. We are subject to income taxes in multiple jurisdictions within the United States and Canada, and significant judgment is required to determine our tax liabilities. Our effective tax rate as well as the actual tax ultimately payable could be adversely affected by changes in the split of earnings between jurisdictions with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability.

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement No. 109 (SFAS 109), on January 1, 2007. As a result of the implementation of FIN 48, we recognized an adjustment in the liability for unrecognized income tax benefits of $1.1 million, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. In addition, at January 1, 2007 we reclassified $18.2 million from deferred taxes to other long-term liabilities. At March 31, 2008, we had $33.9 million of unrecognized tax benefits, of which $2.5 million would impact the effective tax rate at recognition.

The cost of complying with laws relating to the protection of the environment and worker safety may be significant.

We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial, municipal and local laws and regulations, such as those relating to the protection of human health and the environment, including those limiting the discharge of pollutants into the environment and those regulating the treatment, storage, disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials. Certain environmental laws and regulations impose strict, joint and several liabilities on potentially responsible parties, including past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which hazardous wastes or materials were disposed or released. As such, we may be obligated to pay for greater than our share, or even all, of the liability involved, without regard to whether we knew of, or caused, such disposal or release. We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of such sites, including sites where we have, or may have, disposed of our waste. See “Business—Regulation.”

We believe that we are in substantial compliance with applicable environmental laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. Nonetheless, we expect to incur expenses to maintain such compliance and it is possible that more stringent environmental laws and regulations, or more vigorous enforcement or a new interpretation of existing laws and regulations, could require us to incur

 

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additional costs and penalties. Further, existing or future circumstances, such as the discovery of new or materially different environmental conditions, could cause us to incur additional costs that could have a material adverse effect on our business, financial condition or results of operations.

We are also subject to various laws and regulations relating to health and safety. In October 2004, we reached an agreement with OSHA to resolve certain matters identified during an OSHA inspection at our Houston Furnace and Cooling plants. We did not admit any violations of the Occupational Safety and Health Act or OSHA standards, but we did agree, among other things, to address certain issues identified by OSHA during its inspection and to pay OSHA a penalty of $277,000. We paid the penalty and are currently conducting certain actions required by this settlement. We expect to continue to make capital expenditures at these and other facilities to improve worker health and safety. Expenditures at these and any other facilities to assure compliance with OSHA standards could be significant, and we may become subject to additional liabilities relating to our facilities in the future. In addition, future inspections at these or other facilities may result in additional actions by OSHA.

Our products are also subject to international, federal, state, provincial and local laws and regulations. We are required to maintain our products in compliance with applicable current laws and regulations, and any changes which affect our current or future products could have a negative impact on our business and could result in additional compliance costs.

Effective January 23, 2006, U.S. federal regulations mandated an increase in the minimum SEER from 10 to 13 for central air conditioners and heat pumps manufactured in the United States. On November 19, 2007, the U.S. Department of Energy issued new regulations increasing the minimum annual fuel utilization efficiency, or AFUE, for several types of residential furnaces. These regulations apply to furnaces manufactured for sale in the U.S. or imported into the U.S., on and after November 19, 2015. On December 19, 2007, federal legislation was enacted authorizing the U.S. Department of Energy to study the establishment of regional efficiency standards for furnaces and air conditioners. We anticipate that the U.S. Department of Energy will consider establishing regional standards for heating and air conditioners during future rulemaking. We have established processes that we believe will allow us to offer products that meet or exceed new standards in advance of implementation. The required efficiency levels for our products may be further increased in the future by the relevant regulatory authorities. Any future changes in required efficiency levels or other government regulations could adversely affect our industry and our business.

We also currently use a refrigerant that the EPA is in the process of phasing out. See “Business—Regulation.” To the extent that our competitors are not subject to EPA regulations or continue to use such refrigerants following completion of the EPA phase-out, we may suffer a competitive disadvantage.

Labor disputes with our employees could interrupt our operations and adversely affect our business.

We are a party to a collective bargaining agreement with the International Association of Machinists and Aerospace Workers and Affiliates that, as of March 31, 2008, represented approximately 16% of our employees. This agreement covers all hourly employees at our manufacturing facility in Fayetteville, Tennessee and is scheduled to expire in December 2009. If we are unable to successfully negotiate acceptable terms with this union, our operating costs could increase as a result of higher wages or benefits paid to union members, or if we fail to reach an agreement with the union, our operations could be disrupted. Either event could have a material adverse effect on our business. In addition, there have been in the past, and may be in the future, attempts to unionize our non-union facilities. If employees at our non-union facilities unionize in the future, our operating costs could increase.

Our business operations could be significantly disrupted if we lose members of our management team.

Our success depends to a significant degree upon the continued contributions of our executive officers and key employees, both individually and as a group. For example, we have longstanding relationships with most of

 

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our independent distributors. In many cases, these relationships have been formed over a period of years through personal networks involving our key personnel. The loss of these personnel could potentially disrupt these longstanding relationships and adversely affect our business. We have employment-related agreements with 12 members of our senior management. Our future performance will be substantially dependent on our ability to retain and motivate our management. The loss of the services of any of our executive officers or key employees could prevent us from executing our business strategy. Charles Carroll retired as our President and Chief Executive Officer effective April 21, 2008, the date on which our new President and Chief Executive Officer, David Swift, commenced employment. Mr. Carroll remains as Chairman of our and our Parent’s Board of Directors. No assurance can be given that our business operations and customer relationships will not be adversely affected by Mr. Carroll’s retirement.

We may be adversely affected by any natural or man-made disruptions to our distribution and manufacturing facilities.

We are a manufacturing company that is heavily dependent on our manufacturing and distribution facilities in order to maintain our business and remain competitive. Any serious disruption to a significant portion of our distribution or manufacturing facilities resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could materially impair our ability to manufacture and distribute our products to customers. Moreover, we could incur significantly higher costs and longer lead times associated with manufacturing or distributing our products to our customers during the time that it takes for us to reopen or replace damaged facilities. Many of our facilities are located at or near Houston, Texas, which is in close proximity to the Gulf of Mexico. This region is particularly susceptible to natural disruptions, as evidenced by the hurricanes in 2004 and 2005. If any of these events were to occur, our financial condition, results of operations and cash flows could be materially adversely affected.

If we are unable to access funds generated by our subsidiaries we may not be able to meet our financial obligations.

Because we conduct our operations through our subsidiaries, we depend on those entities for dividends, distributions and other payments to generate the funds necessary to meet our financial obligations. Legal and contractual restrictions in certain agreements governing current and future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. All of our subsidiaries are separate and independent legal entities and have no obligation whatsoever to pay any dividends, distributions or other payments to us.

Our business operations could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.

Our products are marketed primarily under the Goodman®, Amana® and Quietflex® brand names and, as such, we are dependent on those brand names. Failure to protect these brand names and other intellectual property rights or prevent their unauthorized use by third parties could adversely affect our business. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent competitors from copying or reverse engineering our products, or from developing and marketing products that are substantially equivalent to or superior to our own. In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights. Any such claim, even if it is without merit, could be expensive and time-consuming; could cause us to cease making, using or selling certain products that incorporate the disputed intellectual property; could require us to redesign our products, if feasible; could divert management time and attention; and could require us to enter into costly royalty or licensing arrangements.

 

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The interests of our controlling stockholder may differ from the interests of the holders of the notes.

As of May 31, 2008, Hellman & Friedman LLC (H&F) and its affiliates owned, in the aggregate, approximately 87.2% of Parent’s common stock and Parent indirectly owns all of our common stock. In addition, H&F and its affiliates, by virtue of their ownership of our Parent’s common stock and their voting rights under a stockholders agreement, control the vote, in connection with substantially all matters subject to Parent stockholder approval. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” As a result of this ownership and the terms of a stockholders agreement, H&F is entitled to elect directors with majority voting power in our Parent’s Board of Directors, to appoint new management and to approve actions requiring the approval of the holders of our Parent’s outstanding voting shares as a single class, including adopting most amendments to our certificate of incorporation and approving mergers or sales of all or substantially all of our Parent’s assets. H&F, through its control of Parent and us, also controls all of our subsidiary guarantors.

The interests of H&F and its affiliates may differ from yours in material respects. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of H&F and its affiliates, as equity holders, might conflict with your interests as a note holder. H&F and its affiliates may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to you as a note holder, including the incurrence of additional indebtedness. Additionally, the indenture governing the notes permits us to pay certain advisory fees, dividends or make other restricted payments under certain circumstances, and H&F may have an interest in our doing so.

H&F and its affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. You should consider that the interests of H&F and its affiliates may differ from yours in material respects.

The requirements of publicly filing periodic and other reports in compliance with the federal securities laws may strain our resources and distract management.

Under Section 404 of the Sarbanes-Oxley Act, we will be required to include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K, and our independent public accountants auditing our financial statements will be required to attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply to our Annual Report on Form 10-K for our fiscal year ending December 31, 2009.

Previously, in connection with our 2006 year-end close, it was determined that some of our predecessor’s commodity derivatives did not qualify for hedge accounting and, as a result, we restated the prior quarters of 2006 to reflect the changes in fair value of those derivatives in other (income) expense, net, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not then effective for this reason.

If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting in future years, the trading price of the notes may decline.

We may lose the right to use the Amana® brand name which may have an adverse effect on our business.

Under an agreement between the Amana Society and Amana Refrigeration, Inc., Amana Refrigeration, Inc. agreed that it would discontinue the use of the Amana® brand name in its corporate name or in connection with

 

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any other business enterprise if it were ever to abandon manufacturing operations in Amana, Iowa. Maytag Corporation purchased the Amana appliance business in July 2001 and now controls the manufacturing operations in Amana, Iowa. Subsequently, Maytag was acquired by Whirlpool Corporation in March 2006. We maintained the right to use the Amana name and trademark under a license agreement with Maytag. Prior to a cessation of such operation or following a decision by Maytag to not maintain trademark registrations for the Amana name, Maytag has agreed to consult with us and provide reasonable assistance to us so that we may register the Amana name as a trademark. However, we have no control over Maytag’s decision to continue operations at that facility, and if such operations are discontinued, it is possible that a claim could be made that we thereby lost the right to use the Amana name in connection with our business, which loss could have a material adverse effect on our business.

 

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FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this prospectus under the headings “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements such as we believe that we have sufficient liquidity to fund our business operations for at least the next twelve months. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, these forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those discussed in this prospectus under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Some of the key factors that could cause actual results to differ from our expectations are:

 

   

changes in weather patterns and seasonal fluctuations;

 

   

changes in customer demand relating to the 13 Seasonal Energy Efficiency Rating, or SEER, federally mandated minimum efficiency standards;

 

   

the maturation of our new company-operated distribution centers;

 

   

increased competition and technological changes and advances;

 

   

increases in the cost of raw materials and components;

 

   

our relations with our independent distributors; and

 

   

damage or injury caused by our products.

Although forward-looking statements reflect management’s good faith beliefs, they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions in the regions in which we do business; general industry conditions, including competition and product, raw material and energy prices; the realization of expected tax benefits; changes in exchange rates and currency values; capital expenditure requirements; access to capital markets and the risks and uncertainties described in “Risk Factors.” Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this prospectus are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

 

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THE TRANSACTIONS

On October 21, 2007, Chill Holdings Inc. (which we refer to as Parent), Chill Acquisition, Inc., a subsidiary of Parent (which we refer to as Merger Sub), and Goodman Global, Inc. entered into an agreement and plan of merger (the Merger Agreement) pursuant to which Merger Sub merged with and into Goodman Global, Inc. on February 13, 2008. These transactions are referred to in this prospectus as the Merger. Merger Sub was incorporated on October 15, 2007 (Inception) for the purpose of acquiring Goodman Global, Inc. and did not have any operations prior to February 13, 2008 other than in connection with the Goodman acquisition.

Effect of the Merger on Goodman Global, Inc. Common Stock. At the effective time of the Merger on February 13, 2008, each share of Goodman Global, Inc. common stock issued and outstanding immediately prior to the effective time of the Merger (other than shares held in treasury by Goodman or any of its subsidiaries, owned by Merger Sub, Parent or any direct or indirect wholly-owned subsidiary of Parent or held by stockholders who were entitled to and who properly exercised appraisal rights under Delaware law) was converted into the right to receive $25.60 in cash, without interest.

Treatment of Goodman Global Inc. Stock Options and Restricted Stock. All options to acquire Goodman common stock issued pursuant to Goodman’s equity plans, whether or not vested, became fully vested as of the time immediately prior to the Merger and were cancelled and converted into cash payments, without interest, equal to the product of (1) the number of shares of Goodman Global, Inc. common stock subject to each option as of the effective time of the Merger multiplied by (2) the excess, if any, of $25.60 over the exercise price per share of common stock subject to such option (other than in the case of certain options held by members of our senior management who exchanged a portion of their vested options for new vested options in Parent). Immediately prior to the effective time of the Merger, each outstanding share of our restricted stock under Goodman Global, Inc.’s 2006 Incentive Award Plan vested in full and was converted into the right to receive the merger consideration at the effective time of the Merger, less any amounts required to be withheld or deducted under applicable tax laws.

Management Investment. As described below and in “Certain Relationships and Related Party Transactions,” members of our management made $36.1 million of equity investments in the company through the acquisition of common stock of Parent. In addition, members of our management rolled certain existing Goodman Global, Inc. options into Parent options. Members of our management who made equity investments are referred to collectively in this prospectus as the Management Participants.

Equity Financing. Investment funds affiliated with Hellman & Friedman LLC invested approximately $1,114.7 million in equity securities of Parent in connection with the Merger. In addition, investment funds affiliated with GSO (the GSO Equity Entities), investment funds affiliated with Farallon Capital Partners, L.P., (the Farallon Equity Entities) and investment funds affiliated with AlpInvest Partners (AlpInvest), along with certain other investors that the GSO Equity Entities syndicated their investments to (collectively, the Fund Co-Investors), invested approximately $127.5 million in equity securities of Parent in connection with the Merger. All of these investment funds are referred to in this prospectus as the Investors. Further, there were approximately $36.1 million of investments in equity securities of Parent through the acquisition of its common stock by the Management Participants.

Debt Tenders and Consent Solicitations. On January 10, 2008, we commenced cash tender offers to purchase Goodman Global Holdings, Inc.’s outstanding 7-7/8% Senior Subordinated Notes due 2010 ($400 million aggregate principal amount outstanding), and Floating Rate Notes due 2010 ($179.3 million aggregate principal amount outstanding) (together, the Existing Notes) and solicitations of consents from the holders of the Existing Notes with respect to amendments to the indentures governing the Existing Notes that would eliminate substantially all of the restrictive covenants contained in the indentures and in the Existing Notes and also eliminate certain events of default, certain covenants relating to mergers and certain conditions to legal defeasance and covenant defeasance, but would not eliminate, among other things, certain repurchase obligations in respect of the Existing Notes. On January 24, 2008, the holders of a majority in aggregate principal amount of

 

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each series of the Existing Notes had validly tendered, and not validly withdrawn, their Existing Notes and consented to, and not withdrawn their consents relating to, the amendments to the indentures with respect to the Existing Notes. On January 25, 2008, we executed the proposed amendments to the indentures for the Existing Notes, which amendments became operative immediately prior to the Merger. On February 13, 2008, we accepted the tenders and made payment to holders of the Existing Notes the tender offer consideration and consent payment, and called for redemption and deposited the redemption payment with the trustee in respect of untendered Existing Notes, and discharged the indentures governing the Existing Notes.

Reimbursement of Other Indebtedness. In addition, on February 13, 2008, we fully reimbursed the $76.1 million outstanding under our then-existing credit facility and $11.5 million outstanding under our then-existing revolving loan and swing note.

Debt Financing. On February 13, 2008, Merger Sub issued and sold $500.0 million of notes, which are the subject of the exchange offer for exchange notes described in this prospectus, and borrowed (1) $800.0 million under a new senior secured term credit agreement with Barclays Capital and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) $105.0 million under a new asset-based revolving credit agreement with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto.

The Merger, the repurchase of the Existing Notes, the repayment of the existing credit facility, revolver and swing note and the fees and expenses relating to the Transactions, were financed by borrowings under Goodman’s new senior secured term credit agreement, Goodman’s new asset-based revolving credit agreement, the issuance of the notes, the equity investments and participations described above, as well as Goodman’s cash on hand at the closing of the Merger.

The initial offering of the notes, the initial borrowings under Goodman’s senior secured term credit agreement and asset-based revolving credit agreement, the tender offers and consent solicitations with respect to the Existing Notes, the reimbursement of Goodman’s then-existing credit facility, revolver and swing note, the equity investment and participations by the Investors and the Management Participants, the Merger and the other related transactions are collectively referred to in this prospectus as the Transactions. For a more complete description of the Transactions, see “Certain Relationships and Related Party Transactions,” “Description of Other Indebtedness” and “Description of Notes.”

 

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USE OF PROCEEDS

We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offer. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes. The outstanding notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2008. The information in this table should be read in conjunction with “The Transactions,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

     As of March 31,
2008
     (in millions)

Cash and cash equivalents

   $ 15.9
      

Debt:

  

Existing credit facility

     —  

Existing notes

     —  

Senior secured term credit agreement(1)

     800.0

Asset-based revolving credit agreement(2)

     108.6

13.50%/14.00% notes

     500.0
      

Total debt

     1,408.6

Shareholders’ equity

     1,264.8
      

Total capitalization

   $ 2,673.4
      

 

(1) In connection with the Transactions, we entered into a senior secured term credit agreement with a six year maturity under which we borrowed an aggregate of $800.0 million in term loans.
(2) In connection with the Transactions, we entered into an asset-based revolving credit agreement with a seven year maturity, which provided for revolving credit loans of up to $300.0 million, subject to borrowing base availability. In connection with the Transactions, we borrowed $105.0 million under this agreement. As of March 31, 2008, pursuant to our asset-based revolving credit agreement, we had $35.0 million of issued and outstanding letters of credit and additional undrawn commitments for revolving credit loans of up to $156.4 million.

 

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UNAUDITED PRO FORMA CONDENSED FINANCIAL DATA

The following unaudited pro forma condensed financial data has been developed by applying pro forma adjustments to the historical audited and unaudited consolidated financial statements of Goodman Global, Inc., our predecessor, appearing elsewhere in this prospectus. The unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2007 and the three months ended March 31, 2007 have been prepared to give effect to the Transactions as if they had occurred on January 1, 2007. The unaudited pro forma condensed consolidated statement of income for the three months ended March 31, 2008 has been prepared to give effect to the Transactions as if they had occurred on January 1, 2008.

The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial data is presented for informational purposes only. The unaudited pro forma condensed consolidated financial data does not purport to represent what our results of operations or financial condition would have been had the Transactions actually occurred on the dates indicated and they do not purport to project our results of operations or financial condition for any future period or as of any future date. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information contained in “The Transactions,” “Selected Historical Consolidated Financial Data,” “Management’s Discussions and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated financial statements.

The Merger will be accounted for using purchase accounting. The final purchase price allocation is dependent on, among other things, the finalization of asset and liability valuations. As of the date of this prospectus, we have not completed the valuation studies necessary to estimate the fair values of the assets acquired and liabilities assumed and the related allocation of purchase price. We have allocated the total estimated purchase price, calculated as described in the notes to the Unaudited Pro Forma Condensed Consolidated Financial Data, to the assets acquired and liabilities assumed based on preliminary estimates of their fair values. A final determination of these fair values will reflect our consideration of a final valuation prepared by third-party appraisers. This final valuation will be based on the actual net tangible and intangible assets that existed as of the closing of the Merger. Any final adjustment will change the allocations of purchase price, which could affect the fair value assigned to the assets and liabilities and could result in a material change to the unaudited pro forma condensed consolidated financial statements, including a material change to amortizable intangible assets and goodwill.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Year Ended December 31, 2007

 

     Historical     Adjustments for
the Transactions
          Pro Forma  
     (in thousands)  

Sales

   $ 1,935,690     $ —         $ 1,935,690  

Costs of goods sold

     1,462,776       47,991     (a )     1,510,767  

Selling, general and administrative expenses

     210,613       —           210,613  

Depreciation expense

     26,254       7,308     (b )     33,562  

Amortization expense

     8,865       11,051     (c )     19,916  
                          

Operating profit

     227,182       (66,350 )       160,832  

Interest expense

     68,378       101,636     (d )     170,014  

Other (income) expense

     (2,752 )     —           (2,752 )
                          

Earnings (loss) before income taxes

     161,556       (167,986 )       (6,430 )

Provision (benefit) for income taxes

     60,177       (64,675 )   (e )     (4,498 )
                          

Net income (loss)

   $ 101,379     $ (103,311 )     $ (1,932 )
                          

 

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Data.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

For the Three Months Ended March 31, 2007

 

     Historical     Adjustments for
the Transactions
          Pro Forma  
     (in thousands)  

Sales

   $ 380,274     $ —         $ 380,274  

Cost of goods sold

     303,262       47,991     (a )     351,253  

Selling, general and administrative expenses

     45,926       —           45,926  

Depreciation Expense

     6,095       1,827     (b )     7,922  

Amortization Expense

     2,216       2,763     (c )     4,979  
                          

Operating profit (loss)

     22,775       (52,581 )       (29,806 )

Interest expense

     16,907       25,704     (d )     42,611  

Other (income) expense

     (1,127 )     —           (1,127 )
                          

Earnings (loss) before income taxes

     6,995       (78,285 )       (71,290 )

Provision (benefit) for income taxes

     2,364       (30,140 )   (e )     (27,776 )
                          

Net income (loss)

   $ 4,631     $ (48,145 )     $ (43,514 )
                          

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME

For the Three Months Ended March 31, 2008

 

     As reported(1)     Adjustments for
the Transactions
          Pro Forma  
    

(in thousands)

 

Sales

   $ 364,867     $ —         $ 364,867  

Cost of goods sold

     305,415       23,996     (a )     329,411  

Selling, general and administrative expenses

     92,908       (42,939 )   (f )     49,969  

Depreciation Expense

     6,995       1,413     (b )     8,408  

Amortization Expense

     3,731       1,248     (c )     4,979  
                          

Operating profit (loss)

     (44,182 )     16,282         (27,900 )

Interest expense

     76,679       (35,673 )   (d )     41,006  

Other (income) expense

     (487 )     —           (487 )
                          

Earnings (loss) before income taxes

     (120,374 )     51,955         (68,419 )

Provision (benefit) for income taxes

     (37,142 )     20,003     (e )     (17,139 )
                          

Net income (loss)

   $ (83,232 )   $ 31,952       $ (51,280 )
                          

 

(1) As reported period is a combination of the period ended February 13, 2008 (predecessor company) and the period ended March 31, 2008 (successor company).

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

 

(a) Represents the adjustment to record inventory at the estimated fair market value and the resulting impact to cost of goods sold as the inventory was sold.

 

(b) Represents the adjustment to reflect the depreciation resulting from the fair value adjustments to property, plant and equipment that were acquired.

 

(c) Represents the adjustment to reflect the amortization resulting from the fair value adjustments to the amortizable intangible assets that were acquired.

 

(d) Represents the interest expense adjustment related to the incurrence of increased indebtedness after retirement of our predecessor company’s indebtedness, such new debt consisting of $500.0 million of the outstanding notes, $800.0 million of term loans under the senior secured term credit agreement and $105.0 million of revolving credit loans under the asset-based revolving credit agreement (but does not give effect to subsequent borrowings). The adjustment assumes annual amortization of debt issuance costs and original issue discount of approximately $10.0 million and $7.5 million, respectively. Assuming a weighted average floating rate of 9.3%, a 0.125% increase in the floating rate would increase our interest expense on a pro forma basis for the year ended December 31, 2007 and three months ended March 31, 2008 by $1.1 million and $0.3 million, respectively. For the three months ended March 31, 2008, interest expense includes $35.7 million of prepayment penalties associated with the retirement of our predecessor company’s indebtedness.

 

(e) Reflects the estimated tax effect using a statutory rate of 38.5% on the historical results of operations on a pro forma basis.

 

(f) Reflects the elimination of the transaction related expenses incurred by our predecessor company.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

Set forth below is summary historical consolidated financial data of our business, at the dates and for the periods indicated. The historical data for the fiscal years ended December 31, 2005, 2006 and 2007 have been derived from our audited historical consolidated financial statements included elsewhere in this prospectus. The historical data for the fiscal years ended December 31, 2003 and 2004 have been derived from the audited consolidated financial statements of Goodman Global, Inc., not included in this prospectus. The historical data for the three months ended March 31, 2007 and 2008 have been derived from the unaudited historical consolidated financial statements of Goodman Global, Inc. included elsewhere in this prospectus.

The summary historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. The 2004 financial data is a combination of the previous transaction’s predecessor and successor company statements disclosed in our consolidated financial statements.

 

    Predecessor     Successor  
    Year Ended December 31,     Three Months
Ended
March 31,
    January 1 to
February 13,
    February 14
to

March 31,
 
    2003     2004(1)     2005     2006     2007     2007     2008     2008  
    (in thousands, except for ratios)        

Consolidated statement of income data:

               

Sales, net(2)

  $ 1,192,671     $ 1,317,580     $ 1,565,406     $ 1,794,753     $ 1,935,690     $ 380,274     $ 147,137     $ 217,730  

Cost of goods sold

    915,272       1,024,426       1,243,408       1,374,774       1,462,776       303,262       115,714       189,701  

Selling, general and administrative expenses

    147,687       220,551       170,077       205,894       210,613       45,926       65,616       27,292  

Depreciation and amortization expense

    14,851       18,887       37,717       32,641       35,119       8,311       3,835       6,891  
                                                               

Operating profit

    114,861       53,716       114,204       181,444       227,182       22,775       (38,028 )     (6,154 )

Interest expense, net

    26,081       12,478       74,213       77,825       68,378       16,907       56,176       20,503  

Other (income) expense, net

    (331 )     (1,406 )     (706 )     5,264       (2,752 )     (1,127 )     (347 )     (140 )
                                                               

Earnings before income taxes

    89,111       42,644       40,697       98,355       161,556       6,995       (93,857 )     (26,517 )

Provision for (benefit from) income taxes(3)

    1,745       (5,049 )     15,817       34,188       60,177       2,364       (27,815 )     (9,327 )
                                                               

Net income

  $ 87,366     $ 47,693     $ 24,880     $ 64,167     $ 101,379     $ 4,631     $ (66,042 )   $ (17,190 )
                                                               

Statement of cash flows data:

               

Net cash (used in) provided by operating activities

  $ 150,807     $ (18,558 )   $ 105,519     $ 53,724     $ 204,217     $ 2,425     $ (42,689 )   $ 1,420  

Net cash used in investing activities

    (811 )     (1,477,622 )     (24,957 )     (39,343 )     (14,181 )     (5,009 )     (3,508 )     (1,942,129 )

Net cash (used in) provided by financing activities

    (167,856 )     1,494,677       (60,639 )     (26,591 )     (182,650 )     (875)       36,671       1,947,187  

Other financial data:

               

Capital expenditures

  $ 16,801     $ 27,772     $ 28,806     $ 39,383     $ 26,416     $ 10,282       3,409       1,569  

Ratio of earnings to fixed charges(4)

    4.2x       3.8x       1.5x       2.2x       3.2x       1.4x       —   (5)     —   (5)

 

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    Predecessor   Successor
    As of December 31,   As of March 31,
    2003   2004   2005   2006   2007   2007   2008
    (in thousands)

Consolidated balance sheet data:

             

Cash and cash equivalents

  $ 5,359   $ 3,856   $ 23,779   $ 11,569   $ 18,955   $ 8,110   $ 15,907

Total assets

    615,558     1,544,595     1,621,537     1,623,971     1,567,617     1,663,941     3,073,390

Total debt

    213,244     1,024,135     961,375     838,050     655,425     837,175     1,377,621

Redeemable preferred stock

    —       225,000     225,570     —       —       —       —  

Shareholders’ equity

  $ 150,279   $ 102,719   $ 107,815   $ 521,085   $ 622,106   $ 526,461   $ 1,264,821

 

(1) The financial information for these periods reflects the combined presentation of the successor and predecessor company financial statements and are therefore unaudited non-GAAP financial measures.
(2) Sales are presented net of certain rebates paid to customers. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to consolidated financial statements appearing elsewhere in this prospectus.
(3) The 2003 and 2004 consolidated statements of income represent our tax provision calculated based on our previous status when incorporated under Subchapter S of the Code, with substantially all corporate earnings taxed at the shareholder level. For comparability purposes, if we had been incorporated under Subchapter C of the Code and used a pro forma tax rate of 38.5% as a C corporation, the provision for income taxes and net income would have been as set forth below:

 

     Year Ended December 31,
         2003            2004    
     (in thousands)

Provision for income taxes

   $ 34,308    $ 16,418

Net income

     54,803      18,226

 

(4) For purposes of calculating the ratio of earnings to fixed charges, “earnings” represents income before taxes less capitalized interest, plus amortization of capitalized interest and fixed charges. “Fixed charges” include interest expense (including amortization of debt issuance costs), capitalized interest, and the portion of operating rental expense which management believes is representative of the interest component of rent expense.
(5) For the period January 1, 2008 to February 13, 2008 and the period February 14, 2008 to March 31, 2008, earnings were not adequate to cover fixed charges by $93.9 million and $26.5 million, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial condition includes the predecessor periods prior to the consummation of the transactions. We refer to the operations of both the predecessor and the successor as ours, unless specifically stated otherwise. You should read the following discussion and analysis in conjunction with our financial statements and related notes included above. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under “Risk Factors.”

Overview

We participate in the HVAC industry. We are the second largest domestic manufacturer of residential and light commercial heating and air conditioning products based on unit sales. Founded in 1975 as a manufacturer of flexible duct, we expanded into the broader HVAC manufacturing market in 1982. Since then, we have expanded our product offerings and maintained our core competency of manufacturing high-quality products at low costs. Our growth and success can be attributed to our strategy of providing a quality, competitively priced product that is designed to be reliable and easy-to-install.

Acquisition by Chill Holdings, Inc. and Related Events

On October 21, 2007, Chill Holdings, Inc. (which we refer to as Parent), Chill Acquisition, Inc., a subsidiary of Parent (which we refer to as Merger Sub), and Goodman Global, Inc. entered into an agreement and plan of merger (the Merger Agreement) pursuant to which Merger Sub merged with and into Goodman Global, Inc. on February 13, 2008. These transactions are referred to in this prospectus as the Merger. Merger Sub was incorporated on October 15, 2007 (Inception) for the purpose of acquiring Goodman Global, Inc. and did not have any operations prior to February 13, 2008 other than in connection with the Goodman acquisition. Chill Holdings, Inc., our Parent, is controlled by investment funds affiliated with Hellman & Friedman LLC, and other stockholders include investment funds affiliated with GSO, Farallon Capital Partners, and AlpInvest Partners, along with certain other investors that GSO syndicated their investments to, as well as certain members of management. For a more complete description of the Transactions, see “The Transactions,” “Certain Relationships and Related Party Transactions,” “Description of Other Indebtedness” and “Description of Notes.” When we refer to the Transactions, we are referring to the foregoing and not the 2004 Transactions as defined below.

The Merger is being accounted for under the purchase method of accounting. Accordingly, the results of operations will be included in the consolidated financial statements from the acquisition date and are not reflected in our 2007 consolidated financial statements. Goodman has allocated the purchase price to the acquired assets and liabilities assumed at their estimated fair market value considering a number of factors. The excess of the cost of the acquisition over the fair value of the net assets acquired is recorded as goodwill. The increase in basis of the assets will result in non-cash charges in future periods, principally related to the step-up in the value of inventory, property, plant and equipment and intangible assets. The initial purchase price allocation made by Goodman is preliminary and subject to change for a period of one year following the acquisition.

2004 Transactions

On December 23, 2004, we were acquired by affiliates of Apollo Management, L.P., our senior management and certain trusts associated with members of the Goodman family (the 2004 Transactions). In connection with the 2004 Transactions, the seller sold all of its equity interest in its subsidiaries as well as substantially all of its assets and liabilities for $1,477.5 million plus a working capital adjustment of $29.8 million. The 2004 Transactions were financed with the net proceeds of a private offering of senior unsecured notes, borrowings under our senior secured credit facilities and $477.5 million of equity contributions by affiliates of Apollo, the Goodman family trusts and certain members of senior management, which consisted of $225.0 million of our

 

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Series A Preferred Stock and $252.5 million of our common stock. As part of the equity contribution, the Goodman family trusts and members of senior management invested approximately $101.0 million and $18.2 million, respectively. In exchange for the equity contribution, affiliates of Apollo, the Goodman family trusts and certain members of our senior management received a combination of our common stock and our Series A Preferred Stock.

The 2004 Transactions were recorded as of December 23, 2004, in accordance with Statement of Financial Accounting Standard, or “SFAS,” No. 141, Business Combinations, and Emerging Issues Task Force, or “EITF,” 88-16, Basis in Leveraged Buyout Transactions. As such, the acquired assets and assumed liabilities were recorded at fair value for the interests acquired and estimates of assumed liabilities by the new investors and at the carrying basis for continuing investors. The acquired assets and assumed liabilities were assigned new book values in the same proportion as the residual interests of the continuing investors and the new interests acquired by the new investors. Under EITF 88-16, we revalued the net assets at the acquisition date to the extent of the new investors’ ownership of 79%. The remaining 21% ownership was accounted for at the continuing investors’ carrying basis of the company. An adjustment of $144.6 million to record this effect was included as a reduction of shareholders’ equity. The excess of the purchase price over the historical basis of the net assets acquired was applied to adjust net assets to their fair market values to the extent of the new investors’ 79% ownership, with the remainder of $391.3 million allocated to goodwill. The increase in basis of the assets will result in non-cash charges in future periods, principally related to the step-up in the value of property, plant and equipment and intangible assets.

On April 11, 2006, Goodman Global, Inc. completed the initial public offering of its common stock. Goodman Global, Inc. offered 20.9 million shares and selling shareholders sold an additional 6.1 million shares, which included 3.5 million shares sold by selling shareholders pursuant to the exercise of the underwriters’ over-allotment option. Before expenses, Goodman Global, Inc. received proceeds of approximately $354.5 million. These proceeds were used to redeem all of Goodman Global, Inc.’s outstanding Series A Preferred Stock including associated accrued dividends, to satisfy a $16.0 million fee resulting from the termination of Goodman Global, Inc.’s management agreement with Apollo and to redeem $70.7 million of Goodman’s subsidiary’s floating rate notes. On February 13, 2008 in connection with the Transactions, Goodman Global, Inc.’s common stock was deregistered and its senior subordinated 7-7/8% notes due 2012 and its senior floating rates notes due 2012 were repurchased and redeemed, and Goodman Global, Inc. issued $500.0 million aggregate principal amount of 13.5%/14.0% senior subordinated notes due 2016.

Markets and Sales Channels

We manufacture and market an extensive line of heating, ventilation and air conditioning products for the residential and light commercial markets primarily in the United States and Canada. These products include split-system air conditioners and heat pumps, gas furnaces, package units, air handlers, package terminal air conditioners, evaporator coils and accessories. Essentially all of our products are manufactured and assembled at facilities in Texas, Tennessee, Florida and Arizona, and are distributed through over 850 distribution points across North America.

Our products are manufactured and marketed primarily under the Goodman®, Amana® and Quietflex® brand names. We position the Goodman® brand as a leading residential and light commercial HVAC brand in North America and as the preferred brand for quality HVAC equipment at low prices. Our premium Amana® branded products include enhanced features such as higher efficiency and quieter operation. The Amana brand is positioned as the “great American brand” that outlasts the rest, highlighting durability and long-life. Quietflex® branded products include flexible duct products that are used primarily in residential HVAC markets.

Our customer relationships include independent distributors, installing contractors or “dealers,” national homebuilders and other national accounts. We sell to dealers primarily through our network of independent distributors and company-operated distribution centers. We sell to some of our independent distribution channel under inventory consignment arrangements. We focus the majority of our marketing on dealers who install

 

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residential and light commercial HVAC products. We believe that the dealer is the key participant in a homeowner’s purchasing decision as the dealer is the primary contact for the end user. Given the strategic importance of the dealer, we remain committed to enhancing profitability for this segment of the supply chain while allowing our distributors to achieve their own profit goals. We believe the ongoing focus on the dealer creates loyalty and mutually beneficial relationships between distributors, dealers and us.

Weather, Seasonality and Business Mix

Weather patterns have historically impacted the demand for HVAC products. For example, hot weather in the spring season causes existing older units to fail earlier in the season, driving customers to accelerate replacement of a unit, which might otherwise be deferred in the case of a late season failure. Similarly, unseasonably mild weather diminishes customer demand for both commercial and residential HVAC replacement and repairs. Weather also impacts installation during periods of inclement weather as fewer units are installed due to dealers being delayed or forced to shut down their operations.

Although there is demand for our products throughout the year, in each of the past three years approximately 56% to 58% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production occurs in the first and the second quarters in anticipation of our peak sales quarters.

We believe approximately 20% to 25% of our sales is for residential new construction, with the balance attributable to repair, retrofitting and replacement units. With the current downturn in residential new construction activity, we are seeing a decline in the volume of products we sell into this market.

Costs

The principal elements of cost of goods sold in our manufacturing operations are component parts, raw materials, factory overhead, labor, transportation costs and warranty. The principal component parts, which, depending on the product, can approach up to 41% of our cost of goods sold, are compressors and motors. We believe that we have good relationships with quality component suppliers. The principal raw materials used in our processes are steel, copper and aluminum. In total, we spent over $302.7 million in 2007 on these raw materials and their cost variability can have a material impact on our results of operations. Shipping and handling costs associated with sales are recorded at the time of the sale. Warranty expense, which is also recorded at the time of sale, is estimated based on historical trends such as incident rates, replacement costs and other factors. We believe our warranty expense, which equaled 2.3% of our net sales in 2007, is less than or equal to the industry average.

In 2004 and 2005, our cost of goods sold reflects a short-term increase as a result of the purchase accounting treatment of the step-up in basis of inventory as a result of the 2004 Transactions. As a result of these adjustments to our asset basis, during the nine days following the Acquisition in 2004 and the year ended December 31, 2005, our cost of goods sold was increased by $4.4 million and $39.6 million in the fourth quarter of 2004 and the first quarter of 2005, respectively, as we recognized the non-cash increase in our inventory value. In 2008, our cost of goods sold reflects a short-term increase as a result of the purchase accounting treatment of the step-up in basis in inventory as a result of the Transactions. As a result of these adjustments, the cost of goods sold of our successor company was increased by $24.0 million in the first quarter of 2008.

Our selling, general and administrative expenses consist of costs incurred to support our marketing, distribution, engineering, information systems, human resources, finance, purchasing, risk management, legal and tax functions. We have historically operated at relatively low levels of selling, general and administrative expense as a percentage of sales compared to other large industry participants. Savings from this lean overhead structure allow us to offer an attractive value proposition to our distributors and support our low-priced philosophy throughout the distribution system. In 2004, our selling, general and administrative expenses were negatively affected by approximately $68.8 million of expenses related to the 2004 Transactions. In addition, in

 

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2006, our selling, general and administrative expenses were negatively impacted by $16.1 million of transaction costs related to our April 2006 initial public offering. In 2008, our predecessor company’s selling, general and administrative expenses were negatively affected by approximately $42.9 million of expenses related to the Transactions.

Depreciation expense is primarily impacted by capital expenditure levels. Prior to the 2004 Transactions, we used the double declining depreciation method for equipment, which results in higher depreciation expense in the early years of an asset’s life. Following the 2004 Transactions, equipment is depreciated on a straight line over the assets’ remaining useful lives. Under the rules of purchase accounting, in December 2004 and February 2008 we adjusted the value of our assets and liabilities to their respective estimated fair values, to the extent of the new investors’ ownership, with any excess of the purchase price over the fair market value of the net assets acquired allocated to goodwill. As a result of these adjustments to our asset basis, our depreciation and amortization expenses increased.

Interest expense, net consists of interest expense, interest income and gains or losses on the related interest rate derivative instruments. In 2008, our predecessor company’s interest expense, net included a $49.8 million charge related to the Transactions and the related extinguishment of our predecessor company’s outstanding debt. In addition, interest expense includes the amortization of the financing costs associated with the Transactions.

Other income, net consists of gains and losses on the disposals of assets and miscellaneous income or expenses.

Critical Accounting Policies and Estimates

Preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Many of the estimates require us to make significant judgments and assumptions. Actual results could differ from our estimates and could have a significant impact on our consolidated results of operations, financial position and cash flows. We consider the estimates used to account for warranty liabilities, self-insurance reserves and contingencies, rebates and the impairment of long-lived assets and goodwill as our most significant judgments.

We base many of our assumptions on our historical experience, recent trends and forecasts. We develop our forecasts based upon current and historical operating performance, expected industry and market trends, and expected overall economic conditions. Our assumptions about future experience, cash flows and profitability require significant judgment since actual results have fluctuated in the past and are expected to continue to do so.

Warranties

We offer a variety of parts warranties on our products. Provisions for warranties are made at the time revenues are recognized. These reserves are based on estimations derived from historical failure rates, estimated service costs and historical trends. In addition, when new products are introduced, we consult with engineering, manufacturing and quality control personnel to determine the initial warranty expense. On a quarterly basis, we reevaluate the estimated liability related to the installed units still under warranty based on updated failure rates and will, at times, adjust our warranty reserve. We do not discount this liability when making this calculation.

We also sell extended service contracts for certain of our products with terms of up to 10 years. Revenues from extended warranty contracts are deferred and amortized on a straight-line basis over the terms of the contracts. Expenses relating to obtaining and servicing these contracts are expensed as incurred.

Income taxes

The owner prior to the 2004 Transactions, and most of its subsidiaries, historically elected S corporation or partnership status for income tax purposes. Accordingly, most income prior to December 2004 was taxed directly

 

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to the previous owner’s shareholders. The previous owner typically made cash distributions to its shareholders to pay those taxes. Following the 2004 Transactions, we became taxable at the corporate level and we began recording an income tax obligation at a rate comparable to the federal and state statutory rates, which was approximately 38.5%. As a result of the 2004 Transactions, there was a significant step-up in the book basis of our assets. We believe that for a majority of the step-up in basis, we will receive tax deductions, significantly reducing our cash tax payments from what they would have been without such deductions. It is also expected that a substantial portion of the goodwill recorded in the 2004 acquisition will be deductible for income tax purposes.

At March 31, 2008, we had a valuation allowance of $3.4 million against certain net operating loss carryforwards. We believe that the remaining deferred tax assets at March 31, 2008, amounting to $49.2 million, are realizable through carrybacks, future reversals of existing taxable temporary differences, and future taxable income. Uncertainties that affect the ultimate realization of deferred tax assets include the risk of not having future taxable income. These factors have been considered in determining the valuation allowances. As of March 31, 2008, we had deferred tax liabilities of $182.9 primarily related to the non-deductibility of the step-up in basis of the assets to fair value in accordance with purchase accounting related to the Transactions.

As noted below under the heading “Recent Accounting Pronouncements,” we adopted FIN 48 effective January 1, 2007. FIN 48 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results. The accounting treatment for recorded tax assets associated with our tax positions reflect our judgment that it is more likely than not that our positions will be respected and the recorded assets will be realized. However, if such positions are challenged, then, to the extent they are not sustained, the expected benefits of the recorded assets and tax positions will not be fully realized.

Self Insurance Reserves and Contingencies

We self-insure worker’s compensation, product liability, general liability, vehicle liability, group health and physical damage up to certain stop-loss amounts. We work with our claims administrator to estimate our self-insurance expenses and liabilities. The expense and liabilities are determined based on historical company claims information, as well as industry factors and trends in the level of such claims and payments. Our self-insurance reserves, calculated on an undiscounted basis, as of December 31, 2006 and December 31, 2007, represent the best estimate of the future payments to be made on incurred claims reported and unreported for 2007 and prior years. We maintain safety and injury prevention programs that are designed to improve the work environment, and as a result, reduce the incident rate and severity of our various self-insured risks. Actual payments for claims reserved may vary depending on various factors including the development and ultimate settlement of reported and unreported claims. Non-routine litigation and other uninsured contingencies require significant judgment and not all risks are insured.

Rebates and Advertising Co-op Expenditures

We offer multiple rebate programs to our national accounts, dealers and builders as inducement to encourage utilization of Goodman® and Amana® branded equipment across replacement and new construction markets. These rebates are part of our volume and new construction incentive programs. In addition, we offer a variety of rebate programs to our independent distributors to encourage distributors to pass on lower equipment costs to dealers in order to drive market share expansion.

Rebates are accrued based on sales. For certain rebates, the accrual rate is impacted by estimates of the customer’s ability to reach targeted purchase levels. Rebates paid or credited to independent distributors, dealers and homebuilders are netted against revenues in accordance with the provisions of EITF Number 01-9, Accounting for Consideration Given to a Customer (Including a Reseller of the Vendor’s Products).

 

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Co-op marketing expenditures are funds reserved for cooperative marketing programs between us and our distributors. These expenditures are reflected in selling costs because they are based on an annual marketing plan whereby the distributor commits to spending the funds on marketing and advertising our products.

Impairment of Long-lived Assets other than Intangibles

We conduct periodic reviews for idle and under-utilized equipment and facilities and review business plans for possible impairment implications. If an impairment were detected, these costs would be expensed in the same period. Historically, no significant impairment charges have been recorded.

Impairment of Goodwill

Goodwill is the excess cost of an acquired company over the amounts assigned to assets acquired and liabilities assumed. Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized, but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would indicate the carrying amount could be impaired. Impairment testing for goodwill is done at the reporting unit level, which is one level below the business segment level. Under the criteria set forth by SFAS No. 142, we have two reporting units based on the structure in place as of December 23, 2004. Goodwill was allocated to these reporting units based on the net assets acquired. An impairment charge generally would be recognized when the carrying amount of the reporting unit exceeds the estimated fair market value of the reporting unit. We performed our annual test as of October 1, 2007 and determined that no impairment exists.

Identifiable Intangible Assets

The values assigned to amortizable intangible assets are amortized to expense over their estimated useful lives and are reviewed for potential impairment. The estimated useful lives are based on an evaluation of the circumstances surrounding each asset, including an evaluation of events that may have occurred that would cause the useful life to be decreased. In the event the useful life would be considered to be shortened, or if the asset’s future value were deemed to be impaired, an appropriate amount would be charged to amortization expense. Future operating results and residual values could therefore reasonably differ from our current estimates and could require a provision for impairment in a future period. Indefinite lived intangible assets are reviewed in accordance with SFAS No. 142, Goodwill and other Intangibles by comparison of the fair market value with its carrying amount.

The values assigned to our identifiable intangible assets were determined using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefits. This approach was considered appropriate, as the inherent value of these intangible assets is their ability to generate current and future income. The key assumption in using this approach is the identification of the revenue streams attributable to these assets based on budgeted future revenues.

At the time of the 2004 Transactions, we assigned a value of approximately $11.0 million to a particular renewable sales contract. During the fourth quarter of 2005, a decision was made not to renew this agreement before its expiration. As a result, the net balance of this intangible, approximately $10.3 million, was taken as a charge to the income statement in December 2005. We do not believe the expiration of the agreement had a material effect on us.

 

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Results of Operations

The following table sets forth, as a percentage of net sales, our statement of operations data for the years ended December 31, 2005, 2006 and 2007 and the three months ended March 31, 2007 and 2008:

 

     Year Ended December 31,      Three Months
Ended March 31,
 
     2005      2006      2007      2007      2008(1)  

Consolidated statement of operations data:

              

Sales, net

   100.0 %    100.0 %    100.0 %    100.0 %    100.0 %

Cost of goods sold

   79.4      76.6      75.6      79.7      83.7  

Selling, general and administrative expenses

   10.9      11.5      10.9      12.1      25.5  

Depreciation and amortization expense

   2.4      1.8      1.8      2.2      2.9  
                                  

Operating profit

   7.3      10.1      11.7      6.0      (12.1 )

Interest expense, net

   4.7      4.3      3.5      4.4      21.0  

Other (income) expense, net

   —        0.3      (0.1 )    (0.3 )    (0.1 )
                                  

Earnings before taxes

  

 

2.6

 

  

 

5.5

 

  

 

8.3

 

  

 

1.8

 

  

 

(33.0

 

)

Provision for income taxes

   1.0      1.9      3.1      0.6      (10.2 )
                                  

Net income

   1.6      3.6      5.2      1.2      (22.8 )

 

(1) The financial information for these periods reflects the combined presentation of the successor and predecessor company financial statements and are therefore unaudited non-GAAP financial measures.

Three Months Ended March 31, 2008 Compared to March 31, 2007

Sales, net. Net sales for the three months ended March 31, 2008 were $364.9 million, a $15.4 million, or 4.1%, decrease from $380.3 million for the three months ended March 31, 2007. Sales volume for the three months ended March 31, 2008 was 7.4% lower than the same period in the previous year, primarily as a result of the continuing decline in the residential new construction market and the mild weather conditions throughout much of the United States. The decline in sales volume was partially offset by pricing-related gains, due to the shift to a higher proportion of higher priced, higher SEER cooling products. Our sales volume decline was partially offset by the contribution from two new company-operated distribution centers that were opened during the first three months of 2008 and the continuing benefit from the 59 (net) company-operated distribution centers that were opened from January 1, 2004 through December 31, 2007.

Cost of goods sold. Cost of goods sold for the three months ended March 31, 2008, was $305.4 million, a $2.1 million, or 0.7% increase from $303.3 million for the three months ended March 31, 2007. Cost of goods sold increased as a result of the purchase accounting treatment of the step-up in basis of inventory related to the Transactions. During the period following the Transactions, our cost of goods sold increased by $24.0 million as we recognized the non-cash increase in our inventory value. Excluding the effect of the amortization of the inventory step up, cost of goods sold as a percentage of net sales decreased from 79.7% for the three months ended March 31, 2007 to 77.1% for the three months ended March 31, 2008. This decrease in cost of goods sold as a percentage of net sales was due to cost-reducing product design modifications and increased productivity and efficiencies in our factories.

Selling, general and administrative expense. Selling, general and administrative expense for the three months ended March 31, 2008, was $92.9 million, a $47.0 million increase from $45.9 million for the three months ended March 31, 2007. Selling general and administrative expense for the three months ended March 31, 2008 was negatively affected by $42.9 million of expenses related to the Transactions. The increase in selling, general and administrative was also driven by the net addition of 13 new company-operated distribution centers opened since March 31, 2007 and additional company-operated sales personnel.

Depreciation and amortization expense. Depreciation and amortization expense for the three months ended March 31, 2008, was $10.7 million, a $2.4 million or 29.1% increase from $8.3 million for the three months ended March 31, 2007. The increase was primarily due to $2.5 million in amortization of identifiable intangible assets and increased depreciation recorded as part of the Transactions.

 

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Operating (loss) profit. Operating loss for the three months ended March 31, 2008, was $44.2 million, a $67.0 million decrease from $22.8 million operating profit reported for the three months ended March 31, 2007. Operating profit for the three months ended March 31, 2008 was negatively impacted by the $24.0 million amortization of the inventory step up and the $42.9 million transaction-related expenses discussed above. In addition, operating loss increased due to the 7.4% decline in sales volume, offset by pricing-related gains, due to the shift to a higher proportion of higher priced, higher SEER cooling products and cost-reducing product design modifications, increased productivity and efficiencies in our factories and lower commodity costs.

Interest expense, net. Interest expense, net for the three months ended March 31, 2008, was $76.7 million, an increase of $59.8 million from $16.9 million reported for the three months ended March 31, 2007. Interest expense, net for the three months ended March 31, 2008 included a charge of $49.8 million related to the Transactions and the related extinguishment of our predecessor company’s outstanding debt. Additionally, interest expense, net increased due to increases in the amount of debt outstanding and higher interest rates. The outstanding debt balance as of March 31, 2008 was $1,377.6 million compared to $837.2 million as of March 31, 2007.

Other (income) expense, net. Other income for the three months ended March 31, 2008, was $0.5 million, a net change of $0.6 million from $1.1 million reported for the three months ended March 31, 2007. The change in other (income) expense, net is primarily due to $0.1 million and $0.7 million net gains from asset dispositions during the three months ended March 31, 2008 and March 31, 2007, respectively.

Provision for income taxes. The income tax benefit for the three months ended March 31, 2008, was $37.1 million, an increase of $39.5 million compared to the tax provision of $2.4 million for the same period in 2007. The net tax benefit was due to the pre-tax loss during the three months ended March 31, 2008 resulting from expenses related to the Transactions and higher interest expense. The effective tax rate for the three months ended March 31, 2008 and March 31, 2007 was 30.9% and 33.8%, respectively.

Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Sales, net. Net sales for the year ended December 31, 2007 were $1,935.7 million, a $140.9 million, or 7.9%, increase from $1,794.8 million for the year ended December 31, 2006. This increase was primarily due to approximately 6% growth in sales volume and favorable product mix including the continued shift to higher priced, higher SEER cooling products. In addition, we benefited from our April 1 and October 1, 2006 price increases, which added approximately 2% to 2007 sales dollars as compared to the prior year. Our sales volume benefited from seven new company-operated distribution centers that were opened in 2006 and 13 in 2007 on a net basis, and the maturing of the 39 company-operated distribution centers opened in 2004 and 2005.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2007, was $1,462.8 million, an $88.0 million, or 6.4%, increase from $1,374.8 million for the year ended December 31, 2006. This increase primarily relates to higher sales volume and higher commodity costs associated with copper and aluminum. Cost of goods sold as a percentage of net sales decreased from 76.6% for the year ended December 31, 2006 to 75.6% for the year ended December 31, 2007. This decrease in cost of goods sold as a percentage of net sales was due to cost-reducing product design modifications, increased productivity and efficiencies in our factories and the two price increases implemented in 2006, partially offset by higher commodity costs.

Selling, general and administrative expense. Selling, general and administrative expense for the year ended December 31, 2007, were $210.6 million, a $4.7 million, or 2.3%, increase from $205.9 million for the year ended December 31, 2006. As a percentage of net sales, selling, general and administrative expense were 10.9% and 11.5% for the years ended December 31, 2007 and December 31, 2006, respectively. Selling, general and administrative expense for the year ended December 31, 2006 included IPO-related expenses associated with the termination of the management agreement with Apollo and the acceleration of stock options totaling $16.1 million. Excluding these non-recurring IPO-related expenses, selling, general and administrative expense for the

 

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year ended December 31, 2007 increased in dollars and as a percentage of net sales from the year ended December 31, 2006. This increase was primarily due to our continued investment in several of our key growth initiatives, increased incentive compensation expenses, and the additional costs of operating as a public company. These key growth initiatives included costs for expansion of our company-operated distribution network, including our sales manager training program and an increase in our dealer recruitment activities.

Depreciation and amortization expense. Depreciation and amortization expense for the year ended December 31, 2007, were $35.1 million, a $2.5 million or 7.6% increase from $32.6 million for the year ended December 31, 2006. The increase was primarily due to higher depreciation expense related to capital expenditures associated with the transition to the federally mandated 13 SEER minimum efficiency requirements and capacity expansion at our production facilities.

Operating profit. Operating profit for the year ended December 31, 2007, was $227.2 million, a $45.8 million, or 25.2%, increase from $181.4 million reported for the year ended December 31, 2006. Operating profit for the year ended December 31, 2006 was negatively impacted by the $16.1 million IPO-related expenses discussed above. In addition, operating profit increased during the year ended December 31, 2007, as compared to the prior year, due to higher gross profit as a result of the growth in sales volume with an increased proportion of sales from higher SEER products, the 2006 price increases, cost-reducing product design modifications and increased productivity and efficiencies in our factories, partially offset by higher selling, general and administrative expenses, higher commodity costs and depreciation.

Interest expense, net. Interest expense, net for the year ended December 31, 2007, was $68.4 million, a decrease of $9.4 million or 12.1% from $77.8 million reported for the year ended December 31, 2006. Interest expense, net for 2006 included a $1.4 million premium paid for the early pay-down of debt and the acceleration of $2.3 million of deferred financing costs as the result of the early debt pay-down using a portion of the proceeds from our initial public offering. In addition, interest expense, net decreased due to the lower amount of debt outstanding and more interest income. The outstanding long-term debt balance as of December 31, 2007 was $655.4 million compared to $838.1 million as of December 31, 2006.

Other (income) expense, net. Other (income) expense for the year ended December 31, 2007, was $2.7 million of income, a net change of $8.0 million from $5.3 million of expense reported for the year ended December 31, 2006. The change in other (income) expense, net is primarily due to a $6.0 million charge taken in 2006 for unrealized losses resulting from the change in fair market value of some of our commodity derivatives that did not qualify for hedge accounting treatment and $2.0 million net gain from asset dispositions recognized in 2007.

Provision for income taxes. The income tax provision for the year ended December 31, 2007, was $60.2 million, an increase of $26.0 million compared to the tax provision of $34.2 million for the same period in 2006. The effective tax rate for the year ended December 31, 2007 and December 31, 2006 was 37.3% and 34.8%, respectively. The increase in the effective tax rate is due to the impact of recently enacted higher Texas state taxes, the effect of FIN 48, and the expiration of the 2006 benefits from the Extraterritorial Income Exclusion (the amount of extraterritorial income, gross income of the taxpayer attributable to foreign trading gross receipts, that is excluded from gross income for the tax year), net of the benefit of the increased Domestic Production Activities Deduction (the deduction from taxable income attributable to domestic production activities) for 2007.

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

Sales, net. Net sales for the year ended December 31, 2006 were $1,794.8 million, a $229.4 million, or 14.7%, increase from $1,565.4 million for the year ended December 31, 2005. Approximately 85% of the sales increase was driven by the shift to a higher proportion of higher priced 13-and-higher SEER products. As a result of the federal mandated 13 SEER efficiency that went into effect January 23, 2006, we experienced a shift to higher efficiency products beginning in the first quarter of 2006. The remainder of the sales increase was

 

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attributable to our April 1 and October 1, 2006 price increases. Our equipment volume was consistent with the prior year as the mild seasonal weather in the late summer and early winter and a second half slow down in residential new construction was offset by the contribution from new company-operated distribution centers that were opened in 2006 and 2005, seven and 17 respectively, and the maturing of the 22 company-operated distribution centers opened in 2004. Finally, the increase in the sales of our other non-equipment products was offset by the impact of unfavorable product line mix.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2006, was $1,374.8 million, a $131.4 million, or 10.6%, increase from $1,243.4 million for the year ended December 31, 2005. Cost of goods sold increased primarily due to a high sales mix of 13-and-higher SEER products, which have higher unit costs than lower SEER products, and an escalation in new material costs. In addition, 2005 was affected by the non-recurring, non-cash expense of $39.6 million as a result of the purchase accounting treatment of the step-up in basis of inventory. Cost of goods sold as a percentage of net sales decreased from 79.4% for the year ended December 31, 2005 to 76.6% for the year ended December 31, 2006. Excluding the impact of the inventory valuation step-up, costs of goods sold as a percentage of net sales for the year ended December 31, 2005 was 76.9%, relatively consistent with the ratio for the year ended December 31, 2006.

Selling, general and administrative expense. Selling, general and administrative expense for the year ended December 31, 2006, were $205.9 million, a $35.8 million, or 21.1%, increase from $170.1 million for the year ended December 31, 2005. Selling, general and administrative expense for the year ended December 31, 2006 were negatively affected by $16.1 million of expenses related to our April 1, 2006 initial public offering. These expenses consisted of costs associated with the termination of the management agreement with Apollo and the acceleration of stock options. Excluding the IPO related expenses, selling, general and administrative expense for the year ended December 31, 2006 increased $19.7 million, or 11.6%. Selling, general and administrative expense for 2006 increased as a result of opening and operating new company-operated distribution centers and higher sales volumes. As a percentage of sales, excluding the IPO related expenses, selling, general and administrative expense in 2006 were 10.5% of net sales compared to 10.9% of net sales for 2005.

Depreciation and amortization expense. Depreciation and amortization expense for the year ended December 31, 2006, were $32.6 million, a $5.1 million decrease from $37.7 million for the year ended December 30, 2005. Impacting 2005 was a $10.3 million impairment charge in the fourth quarter for the remaining value of a non-renewed sales contract. Excluding this charge, depreciation and amortization increased $5.2 million over the year ended December 31, 2005. The increase was primarily due to higher depreciation expense related to recent capital expenditures associated with the transition to the federal mandated 13 SEER minimum efficiency requirements and capacity expansion at our production facilities. Additionally, depreciation expense for the period increased as a result of the step-up in cost basis of the assets and resetting of asset lives in conjunction with the 2004 Transactions.

Operating profit. Operating profit for the year ended December 31, 2006, was $181.4 million, a $67.2 million, or 58.8%, increase from $114.2 million reported for the year ended December 31, 2005. Operating profit for the year ended December 31, 2005 was negatively impacted by the $39.6 million non-recurring, non-cash charge incurred in connection with the step-up in inventory basis, as described above. The remaining increase in operating profit was due primarily to higher revenues from the increased proportion of 13-and-higher SEER products sold and the price increases mentioned above, partially offset by higher selling, general, and administrative expenses, including $16.1 million of costs associated with our IPO, and higher cost of goods sold.

Interest expense, net. Interest expense, net for the year ended December 31, 2006, was $77.8 million, an increase of $3.6 million from $74.2 million reported for the year ended December 31, 2005. Interest expense, net was higher in 2006 due to the $1.4 million premium paid for the early pay-down of debt using a portion of the proceeds from our initial public offering. In addition, as a result of our debt pay-down, we accelerated the amortization of $3.9 million of deferred financing costs. Adding to the increase were higher interest rates on our floating rate debt outstanding. These increases were partially offset by lower outstanding revolving credit facility balances and interest earned on cash balances.

 

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Other (income) expense, net. Other (income) expense for the year ended December 31, 2006 was expense of $5.3 million, a net change of $6.0 million from income of $0.7 million reported for the year ended December 31, 2005. This increase in other expense primarily represents the change in fair value of certain of our commodity derivatives that did not qualify for hedge accounting treatment.

Provision for income taxes. The income tax provision for the year ended December 31, 2006 was $34.2 million, an increase of $18.4 million compared to the tax provision of $15.8 million for the same period in 2005. The effective tax rate for the year ended December 31, 2006 and December 31, 2005 was 34.8% and 38.9%, respectively. The effective tax rate was lower primarily as a result of three items. First, recent federal legislative changes permitted us to take a deduction for qualified domestic production activity income. Second, we qualified and computed the exclusion of foreign sales income. Finally, the mix of sales, payroll, and property in the various jurisdictions favorably impacted our state tax rate.

Liquidity and Capital Resources

As of March 31, 2008, we had cash and cash equivalents of $15.9 million and working capital of $419.2 million, excluding current maturities of long-term debt of $11.6 million and $156.4 million of undrawn commitments for revolving credit loans under our asset-based revolving credit agreement. We have funded, and expect to continue to fund, operations through cash flows generated by operating activities and borrowings under our asset-based revolving credit agreement. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our asset-based revolving credit agreement, will be adequate to meet our short-term and long-term liquidity needs over the next 12 to 24 months. Our future liquidity requirements will be for working capital, capital expenditures, debt service and general corporate purposes.

Operating activities

For the three months ended March 31, 2008, we used $41.3 million of cash from operations compared to $2.4 million provided from operations for the three months ended March 31, 2007. Cash from operations for the three months ended March 31, 2008 was impacted by approximately $78.6 million of expenses related to the Transactions. Additionally, cash from operations decreased due to higher interest expense associated with debt incurred in connection with the Transactions and increased inventory levels as a result of preparation for the upcoming cooling season. Cash from operations for the three months ended March 31, 2007 was impacted by lower net income and higher accounts receivable as a result of the timing of our sales in the quarter.

For the year ended December 31, 2007 we generated $204.2 million of cash from operations compared to $53.7 million and $105.5 million of cash generated from operations in 2006 and 2005, respectively. Cash flow from operations in 2007 increased due to higher net income as well as lower inventory levels resulting from improved production attainment, reduction in cooling SKU’s, improved order cycle times and higher sales, offset by an increase in accounts receivable. Cash flow from operations in 2006 was negatively impacted by higher inventory as a result of the industry shift to more costly 13-and-higher SEER products and increased commodity costs. Also affecting 2006 cash flow from operations were decreases in accounts payable offset by an increase in accounts receivable. Cash flow from operations in 2005 increased from 2004 primarily due to higher net income generated from our higher sales volume, partially offset by higher interest expense associated with the debt incurred in connection with our 2004 Transactions.

Investing activities

For the three months ended March 31, 2008, cash used in investing activities was $1,945.6 million compared to $5.0 million for the three months ended March 31, 2007. This usage was primarily due to $1,940.6 million of cash relating to the Transactions. Capital expenditures were $5.0 million and $10.3 million for the three months ended March 31, 2008 and 2007, respectively. For the three months ended March 31, 2007, these capital

 

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expenditures were offset by proceeds of $5.3 million from the sale of a building and associated land used in our company-operated distribution network.

For the year ended December 31, 2007 cash used in investing activities was $14.2 million compared to $39.3 million and $25.0 million in 2006 and 2005, respectively. Capital expenditures totaled $26.4 million, $39.4 million and $28.8 million in 2007, 2006 and 2005, respectively. The capital expenditures for the year ended December 31, 2007 were offset by $12.2 million of proceeds from the sale of three buildings and associated land used in our company operated distribution network.

Financing activities

For the three months ended March 31, 2008, cash provided by financing activities was $1,983.9 million compared to $0.9 million in cash used from financing activities for the three months ended March 31, 2007. For the three months ended March 31, 2008, we extinguished our predecessor company debt and received proceeds of $1,373.0 million from long-term debt, net of original issue discount and $1,278.2 million in equity contributions in connection with the Transactions. In addition, for the three months ended March 31, 2008, we borrowed $15.1 million under our revolving credit facility, of which $11.5 million was repaid as a result of the 2008 Transaction. These increases were partially offset by deferred financing costs of $44.5 million and equity issuance costs of $7.7 million associated with the Transactions. Financing activities for the three months ended March 31, 2007 included the payment of long-term debt of $0.9 million.

In 2007, we used $182.7 million in cash from financing activities, compared to $26.6 million and $60.6 million in cash used in financing activities in 2006 and 2005, respectively. During 2007, we repaid $182.6 million of our long-term debt. In April 2006 as a result of our initial public offering, we received proceeds of $354.5 million, redeemed $255.2 million of preferred stock and accrued dividends, and paid $2.5 million in transaction costs. Also during 2006, we repaid $123.3 million of our long-term debt. During 2005, we repaid $24.1 million of indebtedness under our revolving credit facility and repaid $38.6 million of indebtedness under our long-term debt facility.

Post-2008 Transactions

Our primary sources of liquidity are expected to continue to be cash flow from operations and borrowings under our asset-based revolving credit agreement. We also expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.

We incurred substantial indebtedness in connection with the Transactions. On March 31, 2008, we had $1,377.6 million of indebtedness outstanding (excluding approximately $35.0 million of issued and outstanding letters of credit) and $156.4 million of undrawn commitments for revolving credit loans under our asset-based revolving credit agreement.

In connection with the 2004 Transactions, we issued $250.0 million in aggregate principal amount of our floating rate notes and $400.0 million in aggregate principal amount of our fixed rate notes and entered into the senior secured credit facilities consisting of a term loan in the principal amount of $350.0 million and a revolving credit facility in an aggregate amount of up to $175.0 million. As of December 31, 2007, we had no revolver borrowings outstanding and the ability to borrow up to $141.7 million of additional indebtedness under our revolving credit facility. The borrowings under the revolving credit facility were available to fund our working capital requirements, capital expenditures and for other general corporate purposes. Borrowings under the term loan were due and payable in quarterly installments. The term loan amortization payments due before the stated maturity date were nominal.

On January 10, 2008, we commenced cash tender offers to purchase our outstanding $400.0 million aggregate principal amount of fixed rate notes outstanding and our $179.3 million aggregate principal amount of

 

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floating rate note outstanding (together, the Existing Notes) and solicitations of consents from the holders of the Existing Notes with respect to amendments to the indentures governing the Existing Notes that would eliminate substantially all of the restrictive covenants contained in the indentures and in the Existing Notes and also eliminate certain events of default, certain covenants relating to mergers and certain conditions to legal defeasance and covenant defeasance, but would not eliminate, among other things, certain repurchase obligations in respect of the Existing Notes. On February 13, 2008, we accepted the tenders and made payment to holders of the Existing Notes the tender offer consideration and consent payment, and called for redemption and deposited the redemption payment with the trustee in respect of untendered Existing Notes, and discharged the indentures governing the Existing Notes. In addition, on February 13, 2008, we repaid the $76.1 million outstanding under our then-existing credit facility and $11.5 million outstanding under our then-existing revolving loan and swing note.

On February 13, 2008, Merger Sub issued and sold $500.0 million of notes, which are the subject of the exchange offer for exchange notes described in this prospectus, and borrowed (1) $800.0 million under a new senior secured term credit agreement with Barclays Capital and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) $105.0 million under a new asset-based revolving credit agreement with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto. See “Description of Other Indebtedness” and “Description of the Notes” for a description of the terms of such financings.

The Merger, the repurchase of the Existing Notes, the repayment of the existing credit facility, revolver and swing note and the fees and expenses relating to the Transactions, were financed by borrowings under our new senior secured term credit agreement, our new asset-based revolving credit agreement, the issuance of the notes, as well as the equity investments described under “The Transactions” and Goodman’s cash on hand at the closing of the Merger.

For the years ended December 31, 2005, 2006 and 2007, we spent $28.8 million, $39.4 million and $26.4 million, respectively, on capital expenditures primarily to enhance our products and information technology systems. In 2006, our existing production capacity was increased in certain areas to meet our current growth expectations, and tooling and modifications were required to prepare for the growth expected to result from the change in minimum SEER standards.

Our ability to make scheduled payments of principal of, to pay the interest on, or to refinance our indebtedness or to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our asset-based revolving credit agreement in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. For example, in the three months ended March 31, 2008, we had a net loss of $83.2 million and negative net cash used in operating activities of $41.3 million. Our net loss was primarily as a result of $49.8 million of expense related to the extinguishment of our predecessor company’s outstanding debt, $42.9 million of general and administrative expenses, $24.8 million of amortization of the inventory step-up incurred as a result of purchase accounting and $2.5 million of amortization of identifiable intangible assets and increased depreciation, in each case, in connection with the 2008 Transactions, as well as our increased interest expense relating to the debt we incurred in connection with the Transactions. As of March 31, 2008, we had total contractual obligations due within one year of $146.2 million, and $156.4 million of undrawn commitments for loans under our asset-based revolving credit agreement. While we currently expect that our net cash provided by operating activities will, together with future borrowings under our asset-based revolving credit agreement, be sufficient to meet our total contractual obligations over the next twelve months, if we are unable to meet our debt obligations or fund our other liquidity needs, we may need

 

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to restructure or refinance all or a portion of our debt or sell certain of our assets on or before the maturity of our debt. We may not be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.

Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our asset-based revolving credit agreement, will be adequate to meet our short-term and long-term liquidity needs over the next 12 to 24 months. Our future liquidity requirements will be for working capital, capital expenditures and general corporate purposes.

As a holding company, our investments in our operating subsidiaries constitute substantially all of our operating assets. Consequently, our subsidiaries will conduct all of our consolidated operations and own substantially all of our operating assets. Our principal source of the cash we need to pay our obligations and to repay the principal amount of our obligations is the cash that our subsidiaries generate from their operations and their borrowings. Our subsidiaries are not obligated to make funds available to us. The terms of our senior secured credit facilities and our indentures governing the fixed rate notes and floating rate notes significantly restrict our subsidiaries from paying dividends and otherwise transferring assets to us. Our subsidiaries will be permitted under the terms of the senior credit facilities and our indentures governing the fixed rate notes and floating rate notes to incur additional indebtedness that may severely restrict or prohibit the making of distributions, the payment of dividends or the making of loans by such subsidiaries to us. If we consummate an acquisition, our debt service requirements could increase. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.

Financial Covenant Compliance

Under our new senior secured term credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests, including a minimum interest coverage ratio and a maximum total leverage ratio. In addition, under our new asset-based revolving credit agreement, we are required to satisfy and maintain, in certain circumstances, a minimum fixed charge coverage ratio. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will be able to meet those ratios and tests as required. A breach of any of these covenants would result in a default (which, if not cured, could mature into an event of default) and in certain cases an immediate event of default under our senior secured term credit agreement and our senior secured asset-based revolving credit agreement. Upon the occurrence of an event of default under such agreements, all amounts outstanding under such agreements could be declared to be (or could automatically become) immediately due and payable and all commitments to extend further credit could be terminated.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, is a non-GAAP financial measure used to determine our compliance with certain covenants contained in our senior secured term credit agreement and our asset-based revolving credit agreement. Covenant EBITDA represents EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under our senior secured credit agreements. We believe that the presentation of Covenant EBITDA is appropriate to provide additional information to investors regarding our compliance with the financial covenants under such agreements. The breach of financial covenants in such agreements (i.e., those that require the maintenance of ratios based on Covenant EBITDA) would result in an event of default under such agreements, in which case the lenders could elect to declare all amounts borrowed thereunder due and payable. Any such acceleration would also result in a default under the indenture governing the notes. Additionally, under our debt agreements and instruments, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Covenant EBITDA.

Covenant EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While

 

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Covenant EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Covenant EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Covenant EBITDA in our senior secured term credit agreement and our asset-based revolving credit agreement allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating GAAP net income. Our senior secured term credit agreement requires that Covenant EBITDA be calculated for the most recent four fiscal quarters. As a result, Covenant EBITDA can be disproportionately affected by a particularly strong or weak quarter and may not be comparable to Covenant EBITDA for any subsequent four-quarter period or any complete fiscal year.

The following is a reconciliation of net income, which is a GAAP measure of our operating results, to Covenant EBITDA as defined in our debt agreements and instruments.

 

     Year Ended December 31,    Twelve Months
Ended March 31,

2008
     2005    2006    2007   
     (in millions)

Net income

   $ 24.9    $ 64.2    $ 101.4    $ 13.5

Add:

           

Provision for income taxes

     15.8      34.2      60.2      20.7

Interest expense, net

     74.2      77.8      68.8      128.2

Depreciation and amortization expense

     37.7      32.6      35.1      37.5
                           

EBITDA

     152.6      208.8      265.5      199.9

Add:

           

Inventory valuation step-up

     39.6      —        —        24.0

Transaction-related charges and expenses

     —        16.1      —        42.9

Monitoring fees

     2.0      0.6      —        —  

Non-cash impairment charges

     —        —        1.6      1.6

Non-cash stock option expense

     —        —        2.1      3.8

Other non-cash expenses

     —        —        0.8      1.7
                           

Covenant EBITDA

   $ 194.2    $ 225.5    $ 270.0    $ 273.9
                           

Our required covenant ratios as of March 31, 2008, were as follows:

 

     Ratio

Senior secured credit facilities (1)

  

Minimum Covenant EBITDA to consolidated interest expense ratio

   1.55x

Maximum consolidated total debt to Adjusted EBITDA ratio

   6.80x

Minimum Covenant EBITDA to fixed charges ratio

   1.0x

Senior subordinated notes (2)

  

Minimum Covenant EBITDA to fixed charges ratio required to incur additional indebtedness pursuant to ratio provision

   2.00x

 

(1)

Our senior secured term credit agreement requires us to maintain a Covenant EBITDA to interest expense ratio starting at a minimum of 1.55 to 1.00 for the periods ending March 31, 2008 and June 30, 2008 and stepping up over time to 1.60 to 1.00 for each subsequent period through December 31, 2008, further increasing to 1.65 to 1.00 for each period through June 30, 2009, 1.80 to 1.00 by the end of the fiscal year ending December 31, 2009, 2.10 to 1.00 by the end of the fiscal year ending December 31, 2010, 2.50 to 1.00 by the end of the fiscal year ending December 31, 2011, 3.20 to 1.00 by the end of the fiscal year ending December 31, 2012, until it reaches 4.15 to 1.00 by the end of the fiscal year ending December 31, 2013. Interest expense is defined in the senior secured term credit agreement as consolidated cash interest expense less cash interest income and is further adjusted for certain non-cash interest expenses and other

 

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items. Again beginning with the one-quarter period ending March 31, 2008, we are also required to maintain a total debt to Covenant EBITDA ratio starting at a maximum of 6.80 to 1.00 for the period ending March 31, 2008 and June 30, 2008 and stepping down over time to 6.25 to 1.00 for each subsequent period through December 31, 2008, decreasing to 5.75 to 1.00 by the end of the fiscal year ending December 31, 2009, 4.75 to 1.00 by the end of the fiscal year ending December 31, 2010, 4.00 to 1.00 by the end of the fiscal year ending December 31, 2011, 3.10 to 1.00 by the end of the fiscal year ending December 31, 2012 until it reaches 2.40 to 1.00 by the end of the fiscal year ending December 31, 2013. Total debt is defined in the senior secured term credit agreement as consolidated total debt other than certain indebtedness and is reduced by the amount of cash and cash equivalents on our balance sheet. In addition, our asset-based revolving credit agreement requires us to maintain a Covenant EBITDA to fixed charges ratio at a minimum of 1.00 to 1.00 when excess availability under the asset-based revolving credit agreement is less than $30.0 million. Fixed charges is defined in the asset-based revolving credit agreement as the sum of consolidated cash interest expense, scheduled payments of principal of indebtedness and cash dividends paid on any preferred or disqualified capital stock. Failure to satisfy these ratio requirements would constitute a default under the senior secured credit facilities. If our lenders failed to waive any such default, our repayment obligations under the senior secured credit facilities could be accelerated, which would also constitute a default under the indenture governing the notes.

(2) Our ability to incur additional indebtedness and make certain restricted payments under the indenture governing the notes, subject to specified exceptions, is tied to a Covenant EBITDA to fixed charges ratio of at least 2.0x, except that we may incur certain indebtedness and make certain restricted payments and certain permitted investments without regard to the ratio. Covenant EBITDA, as defined in the indenture governing the notes, is substantially similar to the definition of such term in the senior secured credit agreements. Fixed charges is defined in the indenture governing the notes as consolidated interest expense and tax-effected dividends payable on any preferred or disqualified capital stock, as adjusted for acquisitions.

Recent Accounting Pronouncements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS No. 157 on our Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.

Effective January 1, 2008, we also adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. As we have not elected the fair value option for any of our assets and liabilities, the adoption of SFAS No. 159 had no impact on our consolidated financial statements.

 

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Contractual Obligations and Commitments

The following table reflects our contractual obligations and commercial commitments as of March 31, 2008. Commercial commitments include lines of credit, guarantees and other potential cash outflows resulting from a contingent event that requires our performance pursuant to a funding commitment.

 

     Payments due by period
     Total    Less than 1    2 to 3    4 to 5    More than 5
     (in millions)

Term loans

   $ 800.0    $ 8.0    $ 16.0    $ 16.0    $ 760.0

Revolving credit loans

     105.0      —        —        —        105.0

13.50%/14.00% notes

     500.0      —        —        —        500.0

Operating leases

     101.0      25.0      39.4      21.1      15.5

Related party payments

     1.4      0.2      0.4      0.4      0.4

Interest payments

     932.3      107.4      263.6      261.2      300.1

Self insurance

     8.4      4.4      2.6      1.2      0.2

Pension payments

     16.0      1.2      2.6      2.9      9.3
                                  

Total contractual obligations

   $ 2,464.1    $ 146.2    $ 324.6    $ 302.8    $ 1,690.5
                                  

Excluded from the foregoing contractual obligations table are open purchase orders at March 31, 2008 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements and other contracts without express funding requirements.

Contingencies

Various claims, lawsuits and administrative proceedings with respect to commercial, product liability and environmental matters are pending or threatened against us and our subsidiaries arising from the ordinary course of business. We are also subject to various regulatory and compliance obligations.

Off-Balance Sheet Liabilities

As part of the equity contribution associated with the sale of the Amana Appliance business in July 2001, Goodman Global, Inc. agreed to indemnify Maytag for certain product liability, product warranty, and environmental claims. In light of these potential liabilities, Goodman purchased insurance that we expect will shield us from incurring material costs for such potential claims. Other than the matters disclosed in “Legal Proceedings” and in Note 11 to the notes to our audited financial statements included in this prospectus, Goodman does not have any off-balance sheet arrangements.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in interest rates, foreign exchange rates and commodity prices. A discussion of our primary market risks are presented below.

Interest Rate Risk

We are subject to interest rate and related cash flow risk in connection with borrowings under our senior secured credit facilities totaling $905.0 million at March 31, 2008. To reduce the risk associated with fluctuations in the interest rate of our floating rate debt, on May 12, 2008 we entered into a two-year interest rate cap with a notional amount of $150 million. The cap rate is 7%.

 

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For debt existing prior to the closing of the Transactions, we entered into interest rate swaps that effectively converted a portion of our variable-rate debt to fixed-rate debt. Under these swaps, we paid a specified fixed interest rate and received the variable rate applicable to the underlying debt. The interest rate swaps were designated as cash flow hedges of the underlying debt. The fair value of the swap was recorded in other assets or liabilities with a corresponding increase or decrease in other comprehensive income. The cash flow hedge was 100% effective and therefore there was no effect on current earnings from hedge ineffectiveness. In February 2005, we entered into two interest rate hedges to offset our interest rate risk. We entered into a two-year hedge with a notional amount of $150.0 million and a three-year hedge with a notional amount of $100.0 million. During the first quarter of 2007, the interest rate swap with a notional amount of $150.0 million matured based on its terms and the interest rate swap with a notional amount of $100.0 million matured based on its terms during the first quarter of 2008. The aggregate notional value (the value of the underlying debt) of interest rate swaps outstanding as of December 31, 2007 and December 31, 2006 was $100.0 million and $250.0 million, respectively. Including that $100.0 million, as of December 31, 2007, approximately 24% of our $655.4 million total debt bore interest at variable rates based upon the London Interbank Offered Rate (LIBOR). A 10% change in swap rates would have changed the fair market value of the interest rate swaps by an immaterial amount as of December 31, 2007 and approximately $0.5 million as of December 31, 2006.

Foreign Currency Exchange Rate Risk

We conduct our business primarily in the United States. We have limited sales in Canada, which are transacted in Canadian dollars. Other export sales, primarily to Latin America and the Middle East, are transacted in United States dollars. Therefore, we have only minor exposure to changes in foreign currency exchange rates. Sales outside the United States have not exceeded 5% in any of the three years ended December 31, 2005, 2006 or 2007. Approximately 1% of our total assets are outside the United States. There has been minimal impact on our commodity costs operations due to currency fluctuations.

Commodity Price Risk

We are subject to price risk as it relates to our principal raw materials: copper, aluminum and steel. In 2007, we spent over $302.7 million on these raw materials compared to $357.0 million in 2006, with the decrease driven by lower commodity costs. Cost variability of raw materials can have a material impact on our results of operations. To enhance stability in the cost of major raw material commodities, such as copper and aluminum used in the manufacturing process, we have and may continue to enter into commodity derivative arrangements. Maturity dates of the contracts are scheduled to coincide with market purchases of the commodity. Cash proceeds or payments between the derivative counter-party and us at maturity of the contracts are recognized as an adjustment to the cost of the commodity purchased, to the extent the hedge is effective. Charges or credits resulting from ineffective hedges are recognized in income immediately. We generally do not enter commodity hedges extending beyond eighteen months. During 2006 and 2007, we entered into commodity hedges for both aluminum and copper. During 2007, we entered into swaps for a portion of our aluminum and copper supply which expire by December 31, 2008. The notional value of commodity swaps outstanding as of March 31, 2008, December 31, 2007 and 2006 were $69.9 million, $143.3 million and $87.1 million, respectively. The change in the notional value was due to the timing of when we entered into the underlying commodity swap agreements. A 10% change in the price of commodities hedged would change the fair value of the hedge contracts by approximately $8.5 million, $6.9 million and $4.3 million as of March 31, 2008, December 31, 2007 and December 31, 2006, respectively.

We continue to monitor and evaluate the prices of our principal raw materials and may decide to enter into hedging contracts in the future.

 

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BUSINESS

Our History

Harold Goodman founded our business in 1975 with the intention to design and manufacture a product that would simplify the installation of central air conditioning. Our first product offering was flexible duct which offered several benefits over the standard metal duct that was predominantly used at the time. We expanded on the success of this initial product and entered the air conditioning equipment distribution business in 1980 and then the air conditioning equipment manufacturing business in 1982. Since our beginning, we have experienced rapid, mostly organic growth, yet maintained our core competency of manufacturing quality products at low costs that we believe provide a profitable and compelling value proposition for installing contractors, which we refer to throughout this prospectus as “dealers,” while allowing distributors to achieve their profit goals. In 1984, we began manufacturing heat pumps and introduced our first gas furnaces in 1985, light commercial package units in 1988 and commercial air conditioning products in 1990. In 1997, we acquired the appliance and HVAC manufacturing operations of Amana Refrigeration, Inc. from Raytheon Company. This acquisition provided us a line of premium branded appliance and HVAC products. An affiliate by common ownership controlled the brand name and the appliance operations of Amana. The non-HVAC operations of Amana were sold to Maytag Corporation in 2001. Our management team has more than 100 years of industry and related experience. During the past five years, our management team has strengthened our balance sheet by reducing inventory, decreasing costs, improving productivity and increasing customer satisfaction and market share.

On December 23, 2004, Apollo Management, L.P., or “Apollo,” through its affiliate, Frio Holdings LLC, acquired our business from Goodman Global Holdings, Inc., a Texas corporation, and following a reorganization, we operated as Goodman Global, Inc.

On February 13, 2008, Chill Acquisition, Inc., a Delaware corporation formed on October 15, 2007, merged with and into Goodman Global, Inc., with Goodman Global, Inc. as the surviving corporation, now a subsidiary of Chill Holdings, Inc., a Delaware corporation formed on October 12, 2007 by affiliates of Hellman & Friedman LLC. See “The Transactions.”

General

We are the second largest domestic manufacturer of heating, ventilation and air conditioning, or HVAC, products for residential and light commercial use based on unit sales. Our activities include engineering, manufacturing, assembling, marketing and distributing an extensive line of HVAC and related products. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brand names. The Goodman® brand is one of the leading HVAC brands in North America and caters to the large segment of the market that is price sensitive and desires reliable and low-cost climate comfort, while our premium Amana® brand includes enhanced features such as higher efficiency and quieter operation. The Quietflex® brand is a recognized brand of flexible duct.

We sell our products through a North American distribution network with more than 850 total distribution points comprised of approximately 150 company-operated distribution centers and over 700 independent distributor locations. For the year ended December 31, 2007 and the three months ended March 31, 2008, approximately 60% of our net sales were made through company-operated distribution centers and our direct sales force with the remainder made through independent distributors. Our company-operated distribution centers in key states such as Texas, Florida, California, Arizona and Nevada provide us direct access to large and fast growing regions in North America and enable us to maintain a significant amount of market intelligence and control over how our products are distributed. Our independent distributors, many of which have multiple locations and most of which exclusively sell our products, enable us to more fully serve other major sales areas and complement our broad distribution network. We offer our independent distributors incentives to promote our

 

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brands, which allow them to provide dealers with our products at attractive prices while meeting their own profit targets. We believe that our growth is attributable to our strategy of providing quality, value-priced products through an extensive, growing and loyal distribution network.

We operate three manufacturing and assembly facilities in Houston, Texas, two in Tennessee, one in Arizona, and one in Florida, totaling approximately two million square feet. Since 1982, our unit volume sales and market share have grown to surpass all but one of our competitors in the residential and light commercial HVAC sector. Approximately 4% of our 2007 and first quarter 2008 net sales and approximately 1% of our total assets as of December 31, 2007 and March 31, 2008 were outside the United States.

Industry

The U.S. residential and light commercial HVAC industry is estimated at approximately $8.3 billion in annual sales and approximately 8.2 million units shipped in 2007. The top five domestic manufacturers represent over 80% of unit sales. Overall, the industry is characterized by relatively stable long-term growth, a well-established, fragmented distribution system and significant challenges for new entrants. We believe the market shares of the large, incumbent industry participants have been relatively stable in recent years, although we have continued to gain market share.

Stable, Long-Term Industry Growth. On a unit basis, the HVAC industry has grown at a compounded annual growth rate of approximately 2.9% over the last 20 years, driven primarily by increased central air conditioning penetration in both existing and new homes. According to the U.S. Census Bureau, in 2006, the latest year for which statistics are available, 89% of new single-family homes completed were equipped with central air conditioning, up from 70% in 1985, and 91% of multi-family units completed were equipped with air conditioning, up from 88% in 1985. In the U.S. Census Bureau’s South Region, which accounted for 57% of housing units completed, air conditioning was installed in approximately 99% of new single-family homes. The U.S. Census Bureau reported 2.0 million privately-owned housing units were completed during 2006 and the percentage of homes completed with greater than 2,400 square feet increased to approximately 44% in 2006 from approximately 17% in 1985.

Prior to the 1980s, HVAC unit shipments were strongly correlated to new housing construction. As the overall housing base expanded due to increased new home sales and central air conditioning increased its penetration into homes, the HVAC industry became more driven by replacement demand. As older units within the large base of existing homes approach the end of their useful lives, they will need to be replaced by newer and more efficient models, creating a relatively stable base of demand for HVAC products. We estimate that replacement products currently account for approximately 70% of industry sales.

Highly Fragmented Customer Base. HVAC manufacturers sell to a highly fragmented two-tier distribution system, as no single distributor represents a large share of industry-wide HVAC sales. Additionally, the distributors’ customer base is a fragmented group of independent dealers across the country that buy HVAC units from distributors and install them for the ultimate end user. There is limited pricing transparency to the end user due to this tiered distribution system.

We believe that dealers become increasingly loyal as they become accustomed to the installation and service of a particular product and brand. Therefore, dealers prefer distributors that continue to carry a specific manufacturer’s product and prefer product lines that do not change dramatically so that retraining is not required. If a distributor changes the brand of products it carries, that distributor risks alienating dealers who have customized their operations to maximize their efficiency in sourcing and installing the discontinued brand. This distributor/dealer dynamic further encourages independent distributors to continue carrying a specific manufacturer’s products.

Significant Challenges for New Entrants. The HVAC industry is characterized by a fragmented distribution system, high switching costs for distributors and dealers and the need for sufficient production volume to

 

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generate economies of scale. Distributors and dealers are unlikely to switch manufacturers as a result of expenses associated with inventory stocking, marketing material and personnel training requirements. Distributors and dealers also value an established brand with an extensive history to ensure reliable warranty coverage for the end user. As manufacturers build scale, they benefit from a broader distribution network and more efficient manufacturing.

We believe domestic manufacturers represented over 90% of unit shipments in 2006, as competition from foreign manufacturers has remained limited. Foreign manufacturers are presented with logistical challenges, due to the expense of shipping HVAC products, as well as other business challenges resulting from differences in consumer preferences for single room HVAC systems abroad versus central systems domestically. Additionally, labor costs represent a small percentage of our total costs of goods sold, making it less economical to capitalize on overseas labor efficiencies, particularly given the added cost of transporting products from outside North America. While foreign competition is limited, HVAC manufacturers do source a significant amount of their components overseas which serves to reduce costs of goods sold and increase margins.

Products

We manufacture and market an extensive line of HVAC products for residential and light commercial use. These products include split-system air conditioners and heat pumps, gas furnaces, packaged units, air handlers, Package Terminal Air Conditioners/Heat Pumps, or “PTACs,” evaporator coils, flexible duct and accessories. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brands.

Our principal HVAC products are outlined in the following table and summarized below.

 

    

Size(1)

  

Efficiency(2)

Product line

     

Split systems:

     

Air conditioners

   1.5 to 10 Tons    13 to 18 SEER

Heat pumps

   1.5 to 10 Tons    13 to 18 SEER

Gas furnaces

   45,000–140,000 BTUH    80 to 96% AFUE

Packaged units(3):

     

Gas/electric

   2 to 10 Tons    13 to 15 SEER

Electric/electric (A/C)

   2 to 10 Tons    13 SEER

Electric/electric (heat pump)

   2 to 10 Tons    13 to 15 SEER

Air handlers

   1.5 to 5 Tons    NA

PTAC(3):

     

A/C & electric heat coil

   7,000 to 15,000 BTUH    9.5 to 12.8 EER

Heat pump

   7,000 to 15,000 BTUH    9.3 to 12.8 EER

Evaporator coils

   1.5 to 5 Tons    NA

Flexible duct

   3” to 22”    R–4.2, 6, 8

 

(1) Based on cooling tons of thousands of British Thermal Units Per Hour (BTUH). 12,000 BTUH = 1 ton.
(2) Measure of a product’s efficiency used to rate it comparatively and to calculate energy usage and cost: SEER—Seasonal Energy Efficiency Rating; AFUE—Annual Fuel Utilization Efficiency; EER—Energy Efficiency Rating. R-value is a comparative measure of thermal resistance used to quantify insulating properties.
(3) Products with commercial product characteristics and certain other products are not subject to the 13 SEER minimum efficiency standards.

Split-system air conditioners and heat pump units. A split-system air conditioner consists of an outdoor unit that contains a compressor and heat transfer coils and an indoor heat transfer unit with ducting to move air

 

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throughout the structure. A split-system heat pump is similar to a split-system air conditioner, but also includes a device that reverses the flow of refrigerant and thus heats when heating is required and cools when cooling is required.

Gas Furnaces. A gas furnace is typically used with a ducting system to heat indoor air. Furnaces use a natural gas-fueled burner and a heat exchanger to heat air and a blower to move the heated air throughout a structure through ducting.

Packaged units. A packaged unit consists of a condensing unit and an evaporator coil combined with a gas or electric heat source in a single, self-contained unit. It is typically placed outside of the structure on a ground slab or roof.

Air handlers. An air handler is a blower device used in connection with heating and cooling applications to move air throughout the indoor comfort control system.

Package terminal air conditioners. A PTAC is a single unit heating and air conditioning system used primarily in hotel and motel rooms, apartments, schools, assisted living facilities and hospitals.

Evaporator coils. An evaporator coil is a key component of the indoor section of a split-system air conditioner or heat pump unit. An evaporator coil is comprised of a heat transfer surface of copper tubes surrounded by aluminum fins in which compressed gas is permitted to expand and absorb heat, thereby cooling the air around it.

Other. Other products include flexible duct and other HVAC related products and accessories.

Distribution Network

We sell our products through a North American distribution network with more than 850 total distribution points comprised of approximately 150 company-operated distribution centers and over 700 independent distributor locations. For the year ended December 31, 2007 and the three months ended March 31, 2008, approximately 60% of our net sales were made through company-operated distribution centers and our direct sales force while the remaining 40% of our net sales were made through our independent distributors. Our distribution strategy consists of maintaining broad geographic coverage and strong distributor and dealer relationships.

We operate company-operated distribution centers in key growth states such as Texas, Florida, California, Arizona and Nevada. This strategy provides us direct access to large and fast growing regions in North America and allows us to maintain a significant amount of control over the distribution of our products. Our company-operated distribution center network provides us with considerable operational flexibility by giving us (i) direct access to dealers which provides us continuous, real-time information regarding their preferences and needs, (ii) better control over inventory through direct information flow which allows us to market our full line of products in our company-operated distribution centers, (iii) the ability to manage margins at our discretion, (iv) an additional channel in which to conduct market tests of new products and (v) the ability to introduce new products broadly and quickly. Our company-operated distribution centers employ a low-cost distribution strategy to provide competitive pricing. Since the beginning of 2004 through March 31, 2008, we added 61 net new company-operated distribution centers across North America, resulting in an approximate 66% increase in our company-operated distribution center base. We expect to continue to seek opportunities to expand our company-operated distribution center footprint in targeted North American markets.

We regularly perform market analyses to determine new distribution locations based on whether a given market is either under-served or has poor independent distributor representation. Once an under-served or poorly represented market is identified, we evaluate whether to look for a new independent distributor, open a company-operated distribution center or acquire the under-performing independent distributors.

 

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We maintain an extensive independent distributor network, which provides us access to major sales areas not addressed by our company-operated distribution centers. We have maintained longstanding relationships with our leading distributors. We seek to effectively align the incentives of our independent distributors, while avoiding expensive brand marketing campaigns, through the following programs:

 

   

Mark-up Rebate Programs: We offer distributor rebates that are inversely related to the distributor’s markup, thus motivating distributors to meet certain pricing targets to the dealers. This program is structured to encourage distributors to pass on lower equipment costs to dealers in order to drive market share expansion while preserving the distributors’ margins. Through this program we are able to encourage low final prices of our products to the ultimate consumer.

 

   

Inventory Consignment: We provide inventory on consignment to many of our independent distributors. This strategy positions finished goods from our factories directly in the market to be sold as demand requires. Under the consignment program, we carry the cost of appropriate finished goods inventories until they are sold by the distributors, which substantially reduces their investment in inventory and allows us to more easily develop new distributor relationships. We also benefit from reduced warehousing costs.

 

   

New Dealer Program: We offer a program through which dealers tour our manufacturing and research facilities, are educated on our products, review our quality control process and meet with our engineers and management. This interaction allows us to provide visual reinforcement of the quality and care taken in the manufacture of our products. The program also provides us with the opportunity to garner direct feedback from dealers on end user receptivity to current products, as well as gauge the dealers’ interest in future products ahead of a broader product introduction.

Our independent distributor network provides us market access where we do not employ company-operated distribution centers. Independent distributors are typically selected and retained on the basis of (i) a demonstrated ability to meet or exceed performance targets, (ii) a solid financial position and (iii) operating with a low-cost structure and competitive pricing. Our selection process coupled with our incentive programs, which make switching costs high, has resulted in a low distributor turnover rate. Since the beginning of 2004, we added approximately 200 new independent distributor locations through the addition of new distributors or the expansion of existing distributors.

We also seek to broaden our customer base by developing new customer relationships with national homebuilders and further developing our customer relationships with large national and regional homebuilders. We believe these relationships will increase sales and continue to add credibility and visibility to our brand names and products.

Manufacturing

We operate three manufacturing and assembly facilities in Houston, Texas, two in Tennessee, one in Arizona and one in Florida, totaling approximately two million square feet. At all of our manufacturing facilities, we focus on low-cost production techniques and technology to continually reduce manufacturing costs while improving product quality. Our low-cost design is one of the key drivers of our value proposition. We believe we have sufficient capacity to achieve our business goals for the foreseeable future without the need for further expansion.

Our manufacturing process strategy is to minimize raw materials, component and in-process inventory levels. To achieve this goal, we have standardized many of the production components (e.g., heat exchangers, compressors and coils), which enables us to quickly retool our facilities in order to meet the demand for various products. In addition, we employ a demand flow manufacturing process which coordinates the production of each component thereby reducing raw materials and in-process inventories. We utilize a mix of automated and manual processes to help ensure efficiency and lower costs.

 

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Given the high level of industry competitiveness, product quality is key to maintaining a leading market position. The quality assurance process begins with the supplier. Incoming supply shipments are tested to ensure procured items meet engineering specifications. Purchased components are tested for quality before they enter production lines and are continuously tested as they progress through the manufacturing process. During fabrication, several audits are performed to ensure a quality product and process. We test paint application, electrical integrity, leak status, and controls in addition to conducting run tests under normal and moisture controlled conditions. In order to further monitor product quality, each manufactured finished good includes a customer questionnaire card bearing two quality inspection stamps or signatures. The installing dealer generally completes the questionnaire cards. Accompanying each product are parts warranties that provide terms which generally last longer than do those of our competitors.

We operate two logistics centers, the Houston Logistics Center (a freestanding center) and the Fayetteville Center (a logistics center in the Fayetteville, Tennessee facility). The manufacturing plants feed finished products into these two logistics centers for deployment into the distribution channels. As the distribution network provides point of sale information, these logistics centers deploy products into the marketplace as demand dictates. The Quietflex® branded product is distributed to customers from Quietflex-related manufacturing and assembly facilities located in Houston, Texas, Phoenix, Arizona, Groveland, Florida and Dayton, Tennessee.

Raw Materials and Purchased Components

We purchase most of our components, such as compressors, motors, capacitors, valves and control systems, from third-party suppliers. In order to maintain low input costs, we also manufacture select components when it is deemed cost effective. We also manufacture heat transfer surfaces and heat exchangers for our units.

Our primary raw materials are steel, copper and aluminum, all of which are purchased from third parties. In 2007, we spent over $302.7 million on these raw materials, compared to $357.0 million in 2006, with the decrease driven by lower commodity costs. Cost variability of raw materials can have a material impact on our results of operations. Despite rising raw material prices since 2004, we believe that our manufacturing efficiencies result in unit costs that compare favorably to those of our competitors. We expect to benefit if raw material prices decline from their current levels which are high compared to historical averages. To help address the rise in commodity costs, we implemented price increases effective April 2006, October 2006 and January 2008, and, most recently, we announced that effective July 1, 2008 we will raise prices by an additional 5% on the majority of our products.

In order to enhance raw material price stability, we monitor principal raw material prices and strategically enter into commodity forward contracts and hedges for the purchase of certain raw materials. We entered into commodity hedges for both aluminum and copper for 2005, 2006, 2007 and 2008, the notional value of which substantially increased in 2007. Our procurement initiatives include leveraging our buying power on a global basis to improve purchasing efficiency, reducing the number of suppliers and improving supplier logistics. While we typically concentrate our purchases for a particular material or component with one or two suppliers, alternative suppliers are available and have been identified if we need to procure key raw materials and components.

Where feasible, we solicit bids for our material and component needs from multiple suppliers. Supplier selection is based primarily on cost, quality and delivery requirements. For example, as part of our process in selecting suppliers, we test the supplier’s products to ensure compliance with our specifications and strict quality guidelines. After selecting suppliers, we execute short- and long-term agreements by which we seek to ensure availability and delivery of requisite supplies. As products arrive at our facilities, they are randomly tested to ensure continued compliance with our strict specifications and quality guidelines. We also work with suppliers to develop effective components with lower part counts and easier assembly, resulting in improved quality and reduced costs. We cooperate with suppliers to identify opportunities to substitute lower-cost materials without compromising quality, durability or safety.

 

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In 2007, our top ten suppliers accounted for approximately 69% of our supply expenditures. We believe we have strong and longstanding relationships with many of our suppliers.

See “Risk Factors—Risks Related to our Business—Significant increases in the cost of raw materials and components have, and may continue to, increase our operating costs. In addition, a decline in our relationships with key suppliers may have an adverse effect on our business.”

Sales and Marketing

Our strategy is to maintain a lean sales and marketing staff, focused primarily on traditional products, in order to derive the greatest value from our marketing budget while minimizing overhead costs. Our longstanding distributor relationships, low turnover rates and company-operated distribution center footprint allow us to implement our sales and marketing strategy with a modest corporate staff. Our corporate sales and marketing staff monitors market information, develops programming and provides distributors with the promotional materials they need to sell our products. We review the need for additional sales and marketing staff as business opportunities arise.

Our primary HVAC products are marketed under the Goodman®, Amana® and Quietflex® brand names. Our Goodman® branded products cater to the large segment of the market that is price sensitive and desires reliable and low cost comfort. We position the Goodman® brand as the top selling residential and light commercial HVAC brand in North America and as the preferred brand for quality HVAC equipment at low prices. Our premium Amana® branded products include enhanced features such as higher efficiency and quieter operation and generally longer warranties. The Amana brand is positioned as the “great American brand” that outlasts the rest, highlighting durability and long-life. The Quietflex® brand is a recognized brand of flexible duct. Our products and brands are marketed for their quality, low cost, ease of installation, superior warranty and reliability.

Weather and Seasonality

Weather patterns have historically impacted the demand for HVAC products. For example, hot weather in the spring season causes existing older units to fail earlier in the season, driving customers to accelerate replacement of a unit, which might otherwise be deferred in the case of a late season failure. Similarly, unseasonably mild weather diminishes customer demand for both commercial and residential HVAC replacement and repairs. Weather also impacts installation during periods of inclement weather as fewer units are installed due to dealers being delayed or forced to shut down their operations.

Although there is demand for our products throughout the year, in each of the past three years approximately 56% to 58% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production occurs in the first and the second quarters in anticipation of our peak sales quarters.

Customers

Our customers consist primarily of (1) distributors who supply independent dealers who install our products for the ultimate end user and (2) independent dealers when selling through our company-operated distribution centers. We also sell PTAC products directly to the light commercial sector, including hotels, motels and assisted living facilities.

We have a diverse and fragmented customer base in key regions throughout the United States. In 2007, no independent distributor accounted for more than 10% of our net sales. We believe the loss of any single distributor would not have a material effect on our business and operations. Our top ten independent distributors accounted for approximately 30% of our net sales in 2007. Our sales, marketing and distribution strategy focuses on keeping prices low to the dealer, while allowing distributors to achieve their profit goals.

 

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Research and Development

We maintain an engineering and research and development staff whose duties include testing and improving existing product lines and developing new products. Company-sponsored research and development expense was $8.8 million, $8.8 million and $9.1 million for the years ended December 2005, 2006 and 2007, respectively. Research and development is conducted at our facilities in Houston, Texas, Fayetteville, Tennessee and Dayton, Tennessee. Research and development is focused on maintaining product competitiveness by improving the cost of manufacture, safety characteristics, reliability and performance while ensuring compliance with governmental standards. The engineering staff focuses its cost reduction efforts on standardization, size and weight reduction, the application of new technology and improving production techniques. Our engineering staff maintains close contact with marketing and manufacturing personnel to ensure that their efforts are in line with market trends and are compatible with manufacturing processes.

Information Systems

We use software packages from major publishers to support business operations: MAPICS for manufacturing, order processing, payroll and finance; PkMS for logistics center operation; Kronos for time and attendance reporting; and Mincron for company-operated distribution operations. The major business systems operate on an IBM AS/400 computer. In recent years, we have improved our systems by installing the current version of MAPICS to improve service and data accuracy, converting Quietflex operations to use MAPICS, implementing a bar code-based control system at our Houston Logistics Center and Fayetteville Logistics Center, and completing the installation of Mincron into our company-operated distribution centers. Our company-operated distribution centers provide us with significant, real-time information that allows us to monitor the trends in our business and to rapidly respond to changes in the markets we serve to capitalize on potential growth opportunities. We developed and use a custom application system that computes optimal replenishment quantities of equipment and parts into our company-operated distribution centers.

Independent distributors make use of our systems through Internet-based portals. This service gives distributors access to data, such as replacement part lists, and systems, such as the consigned inventory accounting function. Consumers make use of our Internet-based systems to obtain general and product-specific information and register products for warranty coverage. We also link our systems with those of our suppliers in order to manage the procurement of materials on a real-time basis. Each night, the programs recalculate component requirements, allowing faster notification of schedule changes to suppliers which greatly reduces our working capital requirements.

Competition

The production and sale of HVAC equipment by manufacturers is highly competitive. HVAC manufacturers primarily compete on the basis of price, depth of product line, product efficiency and reliability, product availability and warranty coverage. According to industry sources, the top five domestic manufacturers represented over 80% of the unit sales in the United States residential and light commercial HVAC market in 2006. Based on unit sales, we are the second-largest domestic manufacturer of HVAC equipment for residential and light commercial use. Our four largest competitors in this market are Carrier Corporation (a division of United Technologies Corporation), Trane Inc., Lennox International, Inc. and Rheem Manufacturing Company. A number of factors affect competition in the HVAC market, including the development and application of new technologies and an increasing emphasis on the development of more efficient HVAC products. In addition, new product introductions are an important factor in the market categories in which our products compete. Some of our competitors are large and have significantly greater financial, marketing and technical resources than we do. Although we believe we have been able to compete successfully in our markets to date, there can be no assurance that we will be able to do so in the future.

 

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Patents and Trademarks

We hold a number of patents relating to the design and manufacture of our heating and air conditioning products. We generally endeavor to obtain patent protection for technology that we develop and will enforce such protection as appropriate. Our existing patents generally expire between 2009 and 2014. In connection with the marketing of our products, we have obtained trademark protection for all of our brand names. The trademark registration for these names have an initial term of 10 years, which are renewable for additional 10-year terms so long as the names are still being used by us for the purpose for which they were registered. We have a license to use the Amana brand name and related trademark in connection with our HVAC business. The Amana trademark is controlled by Whirlpool Corporation (subsequent to its acquisition of Maytag) which markets appliances under the Amana brand name. As part of the sale of the Amana appliance business to Maytag in 2001, we entered into a trademark license agreement with Maytag. The trademark license agreement expires in July 2011, with renewal terms available for a total of an additional 15 years. In addition, we possess a wide array of proprietary technology and know-how. We believe that our patents, trademarks, trade names, service marks and other proprietary rights are important to the development and conduct of our business as well as the marketing of our products. We vigorously protect these rights.

Employees

As of March 31, 2008, we had 4,944 full-time employees (3,925 hourly and 1,019 salaried employees). Of those, 3,102 employees were directly involved in manufacturing processes (assembly, fabrication, maintenance, quality assurance and forklift operations) at our seven manufacturing and assembly facilities. Our only unionized workforce is at our Fayetteville, Tennessee manufacturing facility, which we acquired with the 1997 acquisition of Amana. The 806 Fayetteville hourly employees are represented by the International Association of Machinist and Aerospace Workers. Although the Fayetteville facility has been unionized since the 1960s, there have been no work stoppages or strikes at the plant since 1978. The current contract will expire on December 5, 2009. We believe we have good relations with our employees.

Regulation

We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial and local laws and regulations.

Environmental Refrigeration Regulation. In 1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol addresses the use of certain ozone depleting substances, including hydrochlorofluorocarbons, or “HCFCs,” a refrigerant commonly used for air conditioning and refrigeration equipment. The 1990 amendments to the Clean Air Act implement the Montreal Protocol and have been used by the U.S. Environmental Protection Agency, or “EPA,” to accelerate the phase-out of HCFCs between 2010 and 2020.

The EPA is authorized under the Clean Air Act to promulgate regulations to accelerate the statutory phase-out schedule for any Class II substance, which includes HCFC-22. Various groups have proposed that the EPA phase-out Class II substances, including HCFC-22, substantially earlier than under the schedule provided by the Clean Air Act. It is uncertain whether the EPA will take action to accelerate the phase-out of HCFC-22.

Some cooling products that we manufacture contain HCFC-22. This refrigerant is sealed inside the condensing unit or evaporator coil and is expected to remain within the unit throughout the operating life of the system without leakage to the atmosphere. We believe that our operations materially comply with all current EPA regulations relating to refrigerants. In addition, we do not believe that either the Clean Air Act and its HCFC implementing regulations as currently in effect or any reasonably anticipated accelerated phase-out of HCFC-22 will have a material adverse impact on our business, financial condition or results of operations.

We currently use a substitute refrigerant in some of our air conditioning and heat pump products. This substitute refrigerant, HFC-410A, is a mixture of hydrofluorocarbons that the EPA has determined do not

 

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contribute to the depletion of the ozone layer and therefore are not subject to phase-out mandates. We manufacture and sell some of our air conditioning and heat pump equipment incorporating the HFC-410A refrigerant, and have done so for over five years. Equipment using the new refrigerant requires higher pressure compressors, larger condensing and evaporative areas, and seals resistant to the mixture. Although we are unable to predict the full extent of modifications that may be necessary to our manufacturing processes or the costs associated with the use of alternative refrigerants as we transform all manufacturing lines to make products using HFC-410A refrigerant by 2010, we do not expect that either will have a material adverse effect on us or the industry unless the phase-out is accelerated more rapidly than is currently anticipated under the Clean Air Act.

Efficiency Standards. We are subject to international, federal, state, provincial and local laws and regulations concerning the energy efficiency of our products, including, among others, the National Appliance Energy Conservation Act of 1987, as amended, or “NAECA,” the Canadian Energy Efficiency Act and regulations promulgated under these acts. Energy efficiency in air conditioning products is measured by Seasonal Energy Efficiency Ratio, or SEER. A higher SEER indicates a lower amount of energy is required for the same amount of cooling capacity. Typical systems range from 10 SEER to 23 SEER, with 14 SEER and higher considered to be premium efficiency systems. Effective January 23, 2006, the U.S. federal minimum efficiency standard for central air conditioners and heat pumps manufactured in the United States increased from 10 SEER to 13 SEER under NAECA, a change we actively supported. We believe such a standard is beneficial to the environment and that our value oriented cost structure and manufacturing expertise has allowed us to capture additional market share as a result of this change. On November 19, 2007, the U.S. Department of Energy issued new regulations increasing the minimum annual fuel utilization efficiency, or AFUE, for several types of residential furnaces. These regulations apply to furnaces manufactured for sale in the U.S. or imported into the U.S., on and after November 19, 2015. On December 19, 2007, federal legislation was enacted authorizing the U.S. Department of Energy to study the establishment of regional efficiency standards for furnaces and air conditioners. We anticipate that the U.S. Department of Energy will consider establishing regional standards for heating and air conditioners during future rulemakings. We have established processes that we believe will allow us to offer products that meet or exceed new standards in advance of implementation.

Other Environmental, Health and Safety Matters. We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial and local environmental and health and safety laws and regulations, including, among others, NAECA, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental, Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Toxic Substances Control Act, the Canadian Energy Efficiency Act, and regulations promulgated under these acts. Many of these laws and regulations relate to the protection of human health and the environment, including those limiting the discharge of pollutants into the environment and those regulating the treatment, storage or disposal and remediation of releases of, and exposure to, hazardous wastes and hazardous materials. We believe that we are in substantial compliance with applicable environmental, health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations. Certain environmental laws and regulations impose strict, joint and several liability on potentially responsible parties, including past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which hazardous wastes or materials were disposed or released. As such, we may be obligated to pay for greater than our share, or even all, of the liability involved, without regard to whether we knew of, or caused, such disposal or release. We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of such sites, including sites where we have, or may have, disposed of our waste.

As required by a March 15, 2001 Consent Order with the Florida Department of Environmental Protection, or “FDEP,” Goodman Distribution Southeast, Inc., or “GDI Southeast,” our wholly-owned subsidiary, is investigating and pursuing, under FDEP oversight, the delineation of groundwater contamination at and around the GDI Southeast facility in Fort Pierce, Florida. Remediation has not yet begun. The ultimate cost for this remediation cannot be predicted with certainty due to the variables relating to the contamination and the appropriate remediation methodology, the evolving nature of remediation technologies and governmental

 

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regulations, and the inability to determine the extent to which contribution will be available from other parties, all of which factors are taken into account to the extent possible in estimating potential liability. We have reserved approximately $0.7 million as of March 31, 2008, for this matter. It is reasonably possible that the costs could substantially exceed this amount, although we do not believe that this matter is likely to have a material adverse effect on our business or financial condition, or results of operation.

We believe that this contamination predated GDI Southeast’s involvement with the Fort Pierce facility and that GDI Southeast has not caused or contributed to the contamination. Accordingly, the Company is pursuing litigation against former owners of the Fort Pierce facility in an attempt to recover its costs. At this time, we cannot estimate probable recoveries from this litigation.

We are also subject to various laws and regulations relating to worker health and safety. For example, in 2004, we entered into an agreement with the Occupational Safety and Health Administration, or “OSHA,” pursuant to which we are conducting certain corrective actions identified during an OSHA inspection of two of our facilities and paid a $277,000 penalty. We paid the penalty and are currently conducting certain actions required by this settlement. We expect to continue to make capital expenditures at these and other facilities to improve worker health and safety. Expenditures at these and any other facilities to assure compliance with OSHA standards could be significant, and we may become subject to additional liabilities relating to our facilities in the future. In addition, future inspections at these or other facilities may result in additional actions by OSHA.

Although we do expect to incur expenses related to environmental, health and safety laws and regulations, based on information presently known to us, we believe that the future cost of complying with such laws and regulations and any liabilities associated with environmental, health and safety obligations will not have a material adverse effect on our business, financial condition or results of operation. However, we cannot assure you that future events, including new or stricter environmental or health and safety laws and regulations, related damage or penalty claims, the discovery of previously unknown environmental or health and safety conditions requiring investigation or remediation, or more vigorous enforcement or a new interpretation of existing environmental or health and safety laws and regulations, would not require us to incur additional costs that could be material.

Florida Office of Insurance Regulation. One of our subsidiaries, AsureCare Corp., a Florida corporation, is licensed as a service warranty association and regulated by the Florida Office of Insurance Regulation. As a Florida-domestic service warranty association, AsureCare Corp. is subject to regulation as a specialty insurer under certain provisions of the Florida Insurance Code. Under applicable Florida law, no person can acquire, directly or indirectly, more than 10% of the voting securities of a service warranty association or its controlling company, including Goodman Global, Inc., without the written approval of the Florida Office of Insurance Regulation. Accordingly, any person who acquires, directly or indirectly, 10% or more of our common stock, must first file an application to acquire control of a specialty insurer or its controlling company, and obtain the prior written approval of the Florida Office of Insurance Regulation. The application must be filed with the Florida Office of Insurance Regulation no later than five days after any form of tender offer or exchange offer is proposed, or no later than five days after the acquisition of securities or ownership interest if no tender offer or exchange offer is involved.

The Florida Office of Insurance Regulation may disapprove an acquisition of beneficial ownership of 10% or more of our voting securities by any person who refuses to apply for and obtain regulatory approval of such acquisition. In addition, if the Florida Office of Insurance Regulation determines that any person has acquired 10% or more of our voting securities without complying with the applicable suitability provisions, it may order that person to cease the acquisition and divest itself of any shares of such voting securities which may have been acquired in violation of the applicable Florida law. The Florida Office of Insurance Regulation may also take disciplinary action against AsureCare Corp.’s license if it finds that an acquisition made in violation of the applicable Florida law would render the further transaction of its business hazardous to its customers, creditors, stockholders or the public.

 

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Properties

As of December 31, 2007, we owned four manufacturing facilities, one research and development facility and eight Company-operated distribution facilities. We also leased three manufacturing and assembly facilities, two distribution/logistics facilities, 146 Company-operated distribution facilities and one office location. From time to time, we also lease temporary warehouse space when required due to manufacturing cycles. We believe that our facilities are suitable for their present and intended purposes and are adequate for our current and expected level of operations. We do not anticipate any significant difficulties in renewing or relocating our leased facilities as our leases expire.

Our headquarters and material operating, manufacturing and distribution facilities are shown in the following table:

 

Location

  

Use

   Owned/Leased     Approximate
Square Footage

Houston, TX

   Split Systems    Owned     518,000

Houston, TX

   Flexible Duct, Fiberglass Insulation and Mat Materials    Owned     400,000

Houston, TX

   Heating and Air Handler Products    Owned     230,000

Houston, TX

   Research and Development    Owned     142,907

Houston, TX

   Corporate Headquarters    Leased (1)   51,000

Houston, TX

   Logistics Center    Leased (2)   969,843

Fayetteville, TN

   Furnaces, Package Units, PTAC, Split Systems and Logistics Center    Owned     780,000

Dayton, TN

   Air Handlers / Coils & Duct    Leased (3)   159,000

Tolleson, AZ

   Flexible Duct    Leased (4)   72,597

Groveland, FL

   Flexible Duct    Leased (5)   65,100

 

(1) Our current lease commenced on July 1, 2007 and expires September 30, 2014.
(2) Our Logistics Center is leased under three leases. Two of our Logistics Center leases covering 700,039 square feet will expire September 30, 2014. On June 29, 2007, we entered into a third lease covering an additional 269,804 square feet for a term of 95 months. This lease commenced on April 1, 2008.
(3) Our lease expires on December 31, 2010. We have an option to purchase the facility upon the expiration of the lease for $206,400.
(4) Our lease expires on October 27, 2016.
(5) Our lease expires on June 4, 2014.

Legal Proceedings

In addition to the matters described below, from time to time we are involved in various routine legal proceedings. These primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and results of operations.

On October 26, 2007 a putative class action was filed on behalf of all similarly situated stockholders of Goodman Global, Inc. in the Harris County District Court, Houston, Texas, referred to as Call4U, Ltd. v. Carroll, Case Number 2007-66888 (“Call4U”). A similar case, Pipefitters Local No. 636 Defined Benefit Plan vs. Goodman Global, Inc., was later filed and then consolidated with the Call4U, Ltd. case. The lawsuits named as defendants Goodman Global, Inc., all of its directors and Hellman & Friedman LLC, and assert claims for breach of fiduciary duty against the directors and aiding and abetting such breaches against Hellman & Friedman LLC. The complaint sought an injunction restraining the closing of the merger, reimbursement of associated attorneys’ and experts’ fees and other relief. On January 4, 2008, Goodman Global, Inc. entered into a memorandum of

 

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understanding (“MOU”) setting out an agreement in principal to settle all claims in the litigation, which settlement is subject to certain conditions precedent, including court approval.

In October 2003, the Consumer Product Safety Commission staff issued a preliminary determination that a discontinued design of certain Package Terminal Air Conditioner/Heat Pump (PTAC) units manufactured by one of our subsidiaries presents a substantial product hazard under the Consumer Product Safety Act, requiring corrective action. In September of 2004, we implemented a voluntary corrective action plan (CAP) under which we will provide a new thermal limit switch to commercial/institutional PTAC owners. We have established a reserve relating to the CAP in an amount we believe is appropriate. Installation of the switch will be at the commercial/institutional owners’ expense, except in special and limited circumstances (e.g., financial hardship, etc.). Under the CAP, we agreed to pay the cost of installing the replacement switch for any individual homeowner having a PTAC unit in their residence. In April 2007, the CPSC staff informed us that it was closing its file with regard to the PTAC CAP.

The costs required to recall or rework any defective products could be substantial, which may have a material adverse effect on our business. In addition, our reputation for safety and quality is essential to maintaining our market share. Any recall or rework may adversely affect our reputation as a manufacturer of quality, safe products and could have a material adverse effect on our results of operations.

In December 2001, over 70 Hispanic workers filed suit against certain of our subsidiaries in the U.S. District Court for the Southern District of Texas alleging employment discrimination, retaliation, and violations of the Fair Labor Standards Act. The Equal Employment Opportunity Commission intervened in the lawsuit on the plaintiffs’ behalf. Our insurers agreed to defend us against these allegations and indemnify the Company for any pecuniary losses incurred. On January 23, 2007, the Court approved a settlement which resolved the claims alleged in the lawsuit. The settlement did not have a material adverse effect on our business. The settlement resolved the litigation and resulted in a dismissal of the lawsuit and release of all claims alleged.

Pursuant to a March 15, 2001 Consent Order with the Florida Department of Environmental Protection (FDEP), our subsidiary, Goodman Distribution Southeast, Inc. (GDI Southeast) (formerly Pioneer Metals Inc.) is continuing to investigate and pursue, under FDEP oversight, the delineation of groundwater contamination at and around the GDI Southeast facility in Fort Pierce, Florida. Remediation has not begun. The contamination was discovered through environmental assessments conducted in connection with a Company subsidiary’s acquisition of the Fort Pierce facility in 2000, and was reported to FDEP, giving rise to the Consent Order.

The ultimate cost for the investigation, remediation and monitoring of the site cannot be predicted with certainty due to the variables relating to the contamination and the appropriate remediation methodology, the evolving nature of remediation technologies and governmental regulations, and the inability to determine the extent to which contribution will be available from other parties. All of these factors are taken into account to the extent possible in estimating potential liability. A reserve appropriate for the probable remediation costs, which are reasonably susceptible to estimation, has been established.

Based on analyses of currently available information we have reserved approximately $0.7 million as of March 31, 2008 in accordance with SFAS No. 5, Accounting for Contingencies, although it is possible that costs could exceed this amount. Management believes any liability arising from potential environmental obligations is not likely to have a material adverse effect on our liquidity or financial position, as such obligations could be satisfied over a period of years. Nevertheless, future developments could require material increases in the recorded reserve amount.

We believe this contamination predated GDI Southeast’s involvement with the Fort Pierce facility and GDI Southeast’s operation at this location has not caused or contributed to the contamination. Accordingly, we are pursuing litigation against former owners of the Fort Pierce facility in an attempt to recover our costs. At this time we cannot estimate probable recoveries from this litigation.

 

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We are party to a number of other pending legal and administrative proceedings and are subject to various regulatory and compliance obligations. We believe that these proceedings and obligations will not have a materially adverse effect on our consolidated financial condition, cash flows, or results of operations. To the extent required, we have established reserves that we believe to be adequate based on current evaluations and our experience in these types of matters. Nevertheless, an unexpected outcome in any such proceeding could have a material adverse impact on our consolidated results of operations in the period in which it occurs. Moreover, future adverse developments could require material changes in the recorded reserve amounts.

 

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MANAGEMENT

The following table provides information regarding our executive officers and directors:

 

Name

   Age   

Position

David L. Swift

   50   

President, Chief Executive Officer and Director

Lawrence M. Blackburn

   53   

Executive Vice President, Chief Financial Officer and Director

Ben D. Campbell

   51   

Executive Vice President, Secretary and General Counsel

Donald R. King

   51   

Executive Vice President, Human Resources

Peter H. Alexander

   70   

Senior Vice President, Independent Distribution

Samuel G. Bikman

   39   

Senior Vice President, Logistics and Business Development

Gary L. Clark

   45   

Senior Vice President, Marketing

James L. Mishler

   53   

Senior Vice President and President of Company Owned Distribution

Terrance M. Smith

   58   

Senior Vice President and Chief Information Officer

William L. Topper

   51   

Senior Vice President, Operations

Mark M. Dolan

   48   

Vice President, Corporate Controller and Treasurer

Ardee Toppe

   44   

Vice President and President and General Manager of Quietflex

Charles A. Carroll

   58   

Chairman and Director

Philip U. Hammarskjold

   43   

Director

Robert B. Henske

   47   

Director

Erik Ragatz

   35   

Director

Saloni K. Saraiya

   29   

Director

Mr. David L. Swift joined us on April 21, 2008 as President, Chief Executive Officer and Director. From November 2001 to July 2007, Mr. Swift was President of Whirlpool North America where he also served on its Board of Directors. From December 2000 to November 2001, Mr. Swift served as President of Eastman Kodak Company’s Professional Group. From December 1996 to December 2000, he served as the Chairman and President of Kodak’s Greater Asian Region based in Shanghai, China.

Mr. Lawrence M. Blackburn joined us in September 2001 after having served as Vice President and Chief Financial Officer of Amana Appliances from February 2000 to July 2001. Mr. Blackburn became a Director on April 21, 2008. From April 1983 to August 1999, Mr. Blackburn was with Newell Rubbermaid, Inc. and previously Rubbermaid, Inc., where he had most recently been President and General Manager of its wholly owned subsidiary, Little Tikes Commercial Play Systems, Inc.

Mr. Ben D. Campbell joined us in November 2000 as Executive Vice President, Secretary and General Counsel. Mr. Campbell served as Assistant General Counsel of Centex Corporation from 1998 to 2000 and Senior Group Counsel for J.C. Penney Company, Inc. from 1988 to 1998. Prior to that time, he was a partner in the law firm of Baker, Mills & Glast P.C. in Dallas, Texas.

Mr. Donald R. King joined us in November 2000 as Executive Vice President, Human Resources. Prior to joining Goodman, Mr. King was Vice President, Human Resources for the Americas Region of Halliburton Company. Mr. King has over 25 years of experience that spans a variety of industries and Fortune 100 companies, including Ryder Systems, Inc., Aetna Insurance Company, The Prudential Insurance Company of America and Phillips Petroleum Company.

Mr. Peter H. Alexander has been with the Goodman family of companies for over 20 years in numerous executive level positions with us and Amana. All Amana and Goodman sales personnel responsible for independent distribution, national accounts and residential new construction report to Mr. Alexander.

Mr. Samuel G. Bikman joined us in January 2002 from Compaq, where he was responsible for Worldwide Logistics. The Customer Service, Production Scheduling, Logistics, PTAC Sales and International Sales teams all report to Mr. Bikman.

 

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Mr. Gary L. Clark joined us in April 2002 after four years at Rheem and 14 years at Carrier, where he led their Residential Product marketing efforts. Prior to that time, Mr. Clark worked in the contracting business.

Mr. James L. Mishler joined us in September 2003. Mr. Mishler has over 25 years of marketing, sales, service, distribution, operations and general management experience in the highly competitive major appliance and HVAC industries. Some of his previous affiliations have been with Whirlpool, Frigidaire and Lennox.

Mr. Terrance M. Smith joined us in March 2003. Mr. Smith has over 30 years of business and information technology experience. In his last position, Mr. Smith was the Vice President of Information Systems for Cooper Industries, Ltd.

Mr. William L. Topper joined us in April 2002 after 28 years with Electrolux (Frigidaire), where he had responsibility for all Domestic Refrigeration Production.

Mr. Mark Dolan joined us in April 2005 after 12 years with Lennox, where he held several senior financial and operations positions. Mr. Dolan was previously with PricewaterhouseCoopers.

Mr. Ardee Toppe was appointed President and General Manager of Quietflex in January of 2005. Mr. Toppe joined us in April 2003 as Vice President, Corporate Controller and Treasurer. Prior to joining Goodman, Mr. Toppe spent approximately three years with Dayton Superior, a construction supply company, most recently as the Vice President and General Manager of the Dur-O-Wal division. Previously he held various financial roles with Clopay, Allied Signal, and Eveready Battery Company (Energizer).

Mr. Charles A. Carroll joined us in September 2001 and was our President and Chief Executive Officer until his retirement on April 21, 2008. Mr. Carroll remains as Chairman of our and our Parent’s Board of Directors. Before joining us, Mr. Carroll served as President and Chief Executive Officer of Amana Appliances from January 2000 to July 2001, when substantially all of the assets of Amana Appliances were acquired by Maytag Corporation. From 1971 to March 1999, Mr. Carroll was employed by Rubbermaid, Inc. where, from 1993, he held the position of President and Chief Operating Officer.

Mr. Philip U. Hammarskjold became one of our directors on February 13, 2008, as well as of Parent. Mr. Hammarskjold joined Hellman & Friedman LLC in 1992, became a partner in January 1996, and has served as a Managing Director of Hellman & Friedman LLC since January 1998. Mr. Hammarskjold also serves as a director of Emdeon Business Services, GeoVera Insurance Holdings, Ltd., AlixPartners LLP and Catalina Marketing Corporation.

Mr. Robert B. Henske became one of our directors on February 13, 2008, as well as of Parent, and is a member of its Audit Committee and Compensation Committee. Mr. Henske has served as a Managing Director of Hellman & Friedman LLC since July 2007. From May 2005 until July 2007, he served as Senior Vice President and General Manager of the Consumer Tax Group of Intuit Inc. He was Intuit’s Chief Financial Officer from January 2003 to September 2005. Prior to joining Intuit, he served as Senior Vice President and Chief Financial Officer of Synopsys, Inc., a supplier of electronic design automation software, from May 2000 until January 2003. From January 1997 to May 2000, Mr. Henske was at Oak Hill Capital Management, a Robert M. Bass Group private equity investment firm, where he was a partner. Mr. Henske also serves on the board of directors of VeriFone, Inc. and Activant Solutions, Inc. Mr. Henske also serves as Chairman of the Board of Activant Solutions, Inc. and is or has been a member of the Board of Directors of VeriFone, Inc., Williams Scotsman, Grove Worldwide, Reliant Building Products and American Savings Bank.

Mr. Erik Ragatz became one of our directors on February 13, 2008, as well as of Parent, Chill Holdings, Inc., and is a member of its Audit Committee and Compensation Committee. Mr. Ragatz is a Managing Director at Hellman & Friedman LLC. Prior to joining Hellman & Friedman in 2001, Mr. Ragatz was a vice-president with Pacific Equity Partners in Sydney, Australia and an associate with Bain Capital in Boston, Massachusetts.

 

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Mr. Ragatz also worked as a management consultant for Bain & Company in San Francisco, California. Mr. Ragatz is also currently serving as a director of Sheridan Holdings, Inc.

Ms. Saloni K. Saraiya became one of our directors on February 13, 2008, as well as of Parent, and is a member of Parent’s Audit Committee. Ms. Saraiya is a Principal at Hellman & Friedman LLC. Prior to joining Hellman & Friedman in 2006, Ms. Saraiya worked in the Private Equity Group at The Blackstone Group and at Columbia House Company, both in New York.

Code of Ethics

We have adopted a Code of Business Conduct and Ethics applicable to all employees, executive officers and directors of Goodman and each of its subsidiaries, including Goodman’s principal executive officer, principal financial officer, principal accounting officer and controller, and persons performing similar functions.

The purpose of the Code of Ethics is: (1) to deter wrongdoing; (2) to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (3) to promote full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with the SEC or otherwise communicate to the public; (4) to promote compliance with applicable governmental laws, rules and regulations; (5) to promote prompt internal reporting of violations of the code to an appropriate person; and (6) to promote accountability for adherence to the Code.

We will provide a copy of the Code of Business Conduct and Ethics without charge to any person upon request by contacting Goodman’s Corporate Secretary at our executive office. The Code of Business Conduct and Ethics is available on Goodman’s website at www.goodmanglobal.com.

Committees of the Board

Our Board of Directors currently has one standing committee, the Audit Committee.

Audit Committee

Membership

The Audit Committee currently consists of three directors, Messrs. Erik Ragatz (Chairman) and Robert B. Henske and Ms. Saloni K. Saraiya. All were appointed to the Audit Committee in 2008. Our Board of Directors has determined that Robert B. Henske has accounting or related financial management expertise and qualifies as an independent audit committee financial expert as defined under the SEC’s rules and regulations.

Responsibilities

The Audit Committee assists our Board of Directors in fulfilling its oversight and monitoring responsibilities by overseeing and evaluating:

 

   

the conduct of our accounting and financial reporting process and the integrity of the financial statements that will be provided to stockholders and others;

 

   

the review of Goodman Global, Inc.’s internal audit function;

 

   

Goodman Global, Inc.’s compliance with applicable laws and regulations;

 

   

the functioning of our systems of internal accounting and financial controls and

 

   

the engagement, compensation, performance, qualifications and independence of our independent auditors.

 

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The independent auditors have unrestricted access and report directly to the Audit Committee. The Audit Committee meets privately with management and the independent auditors and may meet with our personnel as it deems necessary.

Charter

The Board of Directors has adopted a charter for the Audit Committee, a copy of which is available on our website www.goodmanglobal.com.

Compensation Committee

Membership

While we do not have a compensation committee, Parent’s Compensation Committee is comprised of two members of our Board of Directors, Messrs. Robert B. Henske (Chairman) and Erik Ragatz.

Authority

Parent’s Committee has authority delegated by the Board to fulfill its purposes, and may delegate some or all or its authority to subcommittees when it deems appropriate. Parent’s Committee reviews the performance of Goodman’s executive officers and key employees and makes recommendations to the Board of Directors regarding the compensation of executive officers and other compensation arrangements. Parent’s Board reviews and takes action on the Committee’s recommendations. Parent’s Committee also administers Goodman’s incentive plans and programs.

Meetings

Parent’s Compensation Committee meetings are regularly attended by our President and Chief Executive Officer and the Executive Vice President, Human Resources. On a regular basis, the Compensation Committee also meets in executive session. Our Executive Vice President of Human Resources supports Parent’s Compensation Committee in its duties and, along without management with our President and Chief Executive Officer, may be delegated authority to fulfill certain administrative duties regarding the compensation programs.

Responsibilities

Parent’s Committee’s responsibilities under its charter are to:

 

   

review and approve corporate goals and objectives relevant to the compensation of our CEO;

 

   

evaluate the performance of the CEO in light of such goals and objectives; and recommend to the Board the annual compensation, including salary, bonus, incentive and equity compensation, of the CEO;

 

   

evaluate the performance and review the compensation of all other executive officers and key employees;

 

   

recommend to Parent’s Board the financial and other performance targets in connection with annual bonuses, performance vesting options issued under the 2008 Stock Incentive Plan and other performance based compensation plans, as applicable;

 

   

administer Parent’s 2008 Stock Incentive Plan and any other stock-based plans;

 

   

administer Parent’s 2008 Annual Incentive Compensation Plan and any other incentive-based plans; and

 

   

recommend to Parent’s Board, for our CEO and our other executive officers and key employees, all benefits, option or stock award grants and perquisites, employment agreements, severance arrangements and change-in-control agreements.

 

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Charter

Parent’s Board of Directors has adopted a charter for the Compensation Committee, a copy of which is available on our website www.goodmanglobal.com.

Compensation Consultant

For 2007, our Compensation Committee engaged Hewitt Associates (the Compensation Consultant) to provide an assessment of its compensation programs and to advise the Compensation Committee. Under its charter, the Compensation Committee has the sole authority to engage the Compensation Consultant and to determine the consultant’s fees and expenses.

Compensation Committee Interlocks and Insider Participation

Compensation decisions are made by the board of directors and compensation committee of Chill Holdings, Inc., our parent. Parent’s board has appointed Messrs. Henske and Ragatz, who are also members of our Board of Directors, to serve on Parent’s compensation committee. None of our executive officers has served as a member of the compensation committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of our company or members of our compensation committee.

Messrs. Henske and Ragatz are managing directors of Hellman & Friedman LLC. As of May 31, 2008, affiliates of Hellman & Friedman LLC control approximately 87.2% of the outstanding common stock of Chill Holdings, Inc. See “Certain Relationships and Related Party Transactions.”

 

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EXECUTIVE COMPENSATION

Summary Compensation Table

The following tables set forth the aggregate compensation during 2007 awarded to, earned by, or paid to the chief executive officer, the chief financial officer and our three most highly compensated executive officers other than the chief executive officer and the chief financial officer who were serving as executive officers at the end of the last completed fiscal year. The foregoing does not address the compensation of Mr. David L. Swift, our current President and Chief Executive Officer, as he joined effective April 21, 2008. See “Certain Relationships and Related Party Transactions—Agreements with our New President and Chief Executive Officer.”

 

Name and Principal Position

   Year    Salary
($)
    Option
Awards

($) (1)
   Non-Equity
Incentive Plan
Compensation

($) (2)
   Total
($)

Charles A. Carroll

   2007    $ 1,064,084 (4)   $ 963,419    $ 2,306,008    $ 4,333,511

Former President and Chief Executive Officer (3)

   2006      1,004,166       799,319      1,347,591      3,151,076

Lawrence M. Blackburn

   2007      443,106 (5)   $ 523,514      751,608      1,718,228

Executive Vice President and Chief Financial Officer

   2006      426,900       477,707      436,955      1,341,562

Ben D. Campbell

   2007      358,399 (6)     204,898      607,873      1,171,170

Executive Vice President, Secretary and General Counsel

   2006      346,152       185,252      354,358      885,762

Donald R. King

   2007      323,800 (7)     204,898      549,246      1,077,944

Executive Vice President, Human Resources

   2006      311,927       185,252      319,287      816,466

William L. Topper

   2007      368,102 (8)     133,196      624,395      1,125,693

Senior Vice President, Operations

   2006      355,650       110,209      364,044      829,903

 

(1) The amounts in this column reflect the expense recognized for financial statement reporting purposes for the year ended December 31, 2007, in accordance with FAS 123(R), of outstanding stock options granted in 2004, 2005 and 2007. The assumptions used in calculating these amounts under FAS 123(R) are set forth in Note 2 to our audited financial statements included elsewhere in this prospectus.
(2) Amounts listed under the column “Non-Equity Incentive Plan Compensation” constitute annual incentive payments earned in 2007 and paid in November 2007 and February 2008.
(3) Charles Carroll retired as our President and Chief Executive Officer effective April 21, 2008, the date on which our new President and Chief Executive Officer, David Swift, commenced employment. Mr. Carroll remains as Chairman of our and our Parent’s Board of Directors.
(4) The executive’s annualized base salary was $1,015,000 until March 1, 2007, when the base salary was increased to $1,073,900 per year.
(5) The executive’s annualized base salary was $432,000 until April 1, 2007, when the base salary was increased to $446,800 per year.
(6) The executive’s annualized base salary was $349,400 until April 1, 2007, when the base salary was increased to $361,350 per year.
(7) The executive’s annualized base salary was $315,700 until April 1, 2007, when the base salary was increased to $326,500 per year.
(8) The executive’s annualized base salary was $358,900 until April 1, 2007, when the base salary was increased to $371,170 per year.

 

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Grants of Plan-Based Awards for Fiscal Year 2007

 

          Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards
     

Name

   Grant
Date
   Threshold
($)
   Target
($)
   Maximum
($) (1)
    All other
Option
Awards:
Number of
Securities
Underlying
Options
   Exercise
Price of
Options
Awards
   Grant
Date
Fair
Value of
Option
Awards

Charles A. Carroll

   May 7, 2007    $ 399,032    $ 1,064,084    $ 5,122,500        200,000    $ 19.16    $ 7.90

Lawrence M. Blackburn

   May 7, 2007      110,775      332,325      1,717,013     90,000      19.16      7.90

Ben D. Campbell

   May 7, 2007      89,591      268,772      1,388,657     35,000      19.16      7.90

Donald R. King

   May 7, 2007      80,950      242,850      1,254,725     35,000      19.16      7.90

William L. Topper

   May 7, 2007      92,026      276,077      1,426,399     25,000      19.16      7.90

 

(1) Amounts earned for 2007 were between the Target Plus and Superior level specified under the 2007 Bonus Program. Amounts shown in the table as Maximum payout reflect the excellence plus level specified under the 2007 Bonus Program. The potential payout of annual cash incentive to an executive officer under the 2007 Bonus Program could exceed the excellence level if approved by the Board. The annual payout for each executive officer was capped at $3,750,000.

As shown in the Summary Compensation Table, the primary elements of compensation of the named executive officers (or NEOs) are cash in the form of base salary and incentive bonus. For 2007, amounts paid as performance-based cash compensation exceeded base salary.

The amounts shown in the Grants of Plan-Based Awards Table represent payouts at the threshold, target and highest specified (excellence plus) levels for the annual cash incentives earned by the NEOs in 2007. The potential payouts were performance-driven, based on achievement of pre-established EBITDA levels, and therefore completely at risk. If threshold levels of performance were not met, then the payout could have been zero. If our EBITDA performance exceeded the level corresponding to the highest specified payout (the excellence plus level), the Board had the discretion to award an amount greater than the highest specified payout; provided that no individual could receive an amount in excess of $3,750,000 annually. A portion of the annual incentive compensation for 2007 was paid in November 2007 and the remainder upon the closing of the merger, and reflected performance above the target level but below the maximum, or excellence plus, level.

 

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Outstanding Equity Awards at Fiscal Year-End 2007

 

     Option Awards

Name

   Number of
Securities
Underlying
Unexercised
Options

(#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options

(#)
Unexercisable
   Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options

(#)
   Option
Exercise
Price
($)
   Option
Expiration
Date

Charles A. Carroll

              

2004(1)

   1,046,479    168,786    135,029    $ 5.28    12/23/14

2005(2)

   37,903    37,900    —        14.52    12/29/15

2007(3)

   50,000    150,000    —        19.16    5/7/17

Lawrence M. Blackburn

              

2004(1)

   597,987    96,449    77,159      5.28    12/23/14

2005(2)

   37,903    37,900    —        14.52    12/29/15

2007(3)

   22,500    67,500    —        19.16    5/7/17

Ben D. Campbell

              

2004(1)

   224,247    36,168    28,934    $ 5.28    12/23/14

2005(2)

   18,951    18,950    —        14.52    12/29/15

2007(3)

   8,750    26,250    —        19.16    5/7/17

Donald R. King

              

2004(1)

   224,247    36,167    28,934    $ 5.28    12/23/14

2005(2)

   18,951    18,950    —        14.52    12/29/15

2007(3)

   8,750    26,250    —        19.16    5/7/17

William L. Topper

              

2004(1)

   119,598    19,290    15,432    $ 5.28    12/23/14

2005(2)

   18,951    18,950    —        14.52    12/29/15

2007(3)

   6,250    18,750    —        19.16    5/7/17

 

(1) 77.5% of the shares subject to these options were fully vested and exercisable as of December 31, 2007. The remaining 22.5% of the shares subject to these options would have vested annually over a one-year period beginning on December 31, 2007 as follows: (a) 12.5% of the shares would have fully vested on December 31, 2008; and (b) 10% of the shares would have vested to the extent Goodman Global, Inc. achieved certain annual performance measures, such that this 10% would have fully vested on December 31, 2008. If Goodman Global, Inc. did not achieve these performance measures, this portion of the options would have become fully vested on December 23, 2012. All of the outstanding options accelerated in connection with the closing of the merger on February 13, 2008.
(2) 50% of the shares subject to these options were fully vested and exercisable as of December 31, 2007. The remaining 50% of the shares subject to these options would have vested in equal installments annually over a two-year period beginning on December 22, 2008, such that 100% of the shares subject to these options would have fully vested on December 22, 2009. All of these options accelerated in connection with the closing of the merger on February 13, 2008.
(3) 25% of these time vesting options were vested as of December 31, 2007; they would have vested in equal 25% installments on each of the next three anniversaries of the grant date. All of these options accelerated in connection with the closing of the merger on February 13, 2008.

Option Exercises

None of our NEOs exercised options in 2007.

 

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New Employment Agreements

Charles Carroll

In connection with the closing of the merger on February 13, 2008, Merger Sub entered into a new employment agreement with Charles Carroll under which Mr. Carroll continued to serve as the Chief Executive Officer of Goodman Global, Inc. until June 30, 2008, or, if earlier, the date on which a suitable replacement commenced employment as our next Chief Executive Officer. Charles Carroll retired as our President and Chief Executive Officer effective April 21, 2008, the date on which our new President and Chief Executive Officer, David Swift, commenced employment. Mr. Carroll’s employment agreement provides that he will remain as the Chairman of our Board after his service as our Chief Executive Officer ends, unless otherwise agreed. In the event Mr. Carroll is no longer serving as the Chairman of the Board, the agreement also provides that Mr. Carroll will be given the opportunity to serve as a non-executive employee for the period ending no earlier than June 30, 2010.

While employed as our Chief Executive Officer, Mr. Carroll received a base salary at the annual rate of $1,073,900 and became eligible to earn a pro-rata annual bonus (based on the number of days Mr. Carroll served as our Chief Executive Officer) in a target amount equal to 100% of his base salary as Chief Executive Officer, with a maximum bonus opportunity equal to 481.4% of his base salary. For the period effective April 21, 2008 his base salary will be at the annual rate of $150,000 and he will no longer be entitled to participate in our annual bonus program. During his service with us in any capacity, Mr. Carroll will be entitled to participate in our employee benefit plans on the same basis as those plans are generally made available to other similarly situated executives. Mr. Carroll’s employment agreement was amended effective May 29, 2008 to provide that Mr. Carroll will be entitled to continued participation in the Company’s group health plans until he reaches the age of 65, or if later, the qualifying age under Medicare, irrespective of his continued employment, provided he pays the premium up to the amount that would have been payable if such coverage were provided under COBRA.

In the event Mr. Carroll is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his base salary, plus one times his target bonus, over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid under the bonus program, and post-termination health insurance coverage. Pursuant to the employment agreement, Mr. Carroll has agreed not to disclose our confidential information at any time, and, for the period during which he provides services to us and for the two-year period thereafter, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

In the event that any payment or benefit to be received under the employment agreement will trigger the imposition of an excise tax (“Excise Tax”) under Section 4999 of the Internal Revenue Code of 1986, as amended (the Code), then all payments will be reduced to the extent necessary so that the Excise Tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the Excise Tax that would be imposed on such amounts.

Lawrence Blackburn

On February 13, 2008, Merger Sub also entered into a new employment agreement with Lawrence Blackburn, pursuant to which Mr. Blackburn will continue to serve as our and our Parent’s Chief Financial Officer and as our and our Parent’s Executive Vice-President. Mr. Blackburn became a Director of us and our Parent on April 21, 2008. Mr. Blackburn’s employment agreement has an initial term of four years, which will renew for additional one-year periods until either party provides notice of non-renewal at least 180 days prior to the end of the then-current term. The agreement provides that while employed as our and our Parent’s Chief Financial Officer, Mr. Blackburn will receive a base salary at the annual rate of $446,800, subject to annual review and adjustment, and will be eligible to earn an annual bonus in a target amount equal to 75% of his base salary, with a maximum bonus opportunity equal to 387.5% of his base salary. The agreement further provides that during his employment with us, Mr. Blackburn will be entitled to participate in our employee benefit plans on the same basis as those plans are generally made to other similarly situated executives.

 

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In the event Mr. Blackburn is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his then-applicable base salary, plus one-times his target bonus, payable over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid had Mr. Blackburn’s employment not terminated. Pursuant to his employment agreement, Mr. Blackburn has agreed not to disclose our confidential information at any time and, for the period during which he is employed by us and for a two-year period following termination of his employment, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

In the event that any payment or benefit to be received under the employment agreement will trigger the imposition of Excise Tax, then all payments will be reduced to the extent necessary so that the Excise Tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the Excise Tax that would be imposed on such amounts.

New Severance Agreements

In connection with the closing of the merger on February 13, 2008, Merger Sub also entered into individual severance agreements with our other named executive officers, Messrs. Topper, Campbell and King. Each severance agreement has an initial term of four years and renews automatically for additional one-year periods until either party provides notice of non-renewal at least 90 days prior to the end of the then-current term. Each agreement provides for the payment of an annual base salary (currently $385,670 for Topper, $375,450 for Campbell, and $339,200 for King), subject to annual review and adjustment, and each agreement also provides that the executive will be eligible to earn an annual bonus in a target amount equal to 75% of the executive’s base salary, with a maximum bonus opportunity in an amount equal to 387.5% of the executive’s base salary.

The severance agreements also provide that if the executive is terminated by us without “cause” or resigns for “good reason,” we will provide the executive with payments totaling one times the executive’s then-applicable base salary, plus one times his bonus, payable over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid had the executive’s employment not terminated. Each severance agreement further provides that the executive will not disclose our confidential information at any time and, for the period during which the executive is employed by us and for a period following termination of employment, the executive will not compete with us, interfere with our business, or solicit or hire our employees or customers.

Potential Payments Upon Termination or Change in Control under Pre-Existing Agreements

As of the end of the 2007 fiscal year, we had the pre-existing employment agreements in place for Messrs. Carroll and Blackburn. As amended in 2006, each employment agreement provided that the executive would receive an amount equal to two times base salary and annual target bonus following the executive’s termination of employment by Goodman Global, Inc. without “cause” or by the executive for “good reason,” as provided in the agreements, in addition to a pro-rated annual bonus for the year of termination. In the event of a change of control, Messrs. Carroll and Blackburn could resign for good reason and receive these amounts if the purchaser did not assume these severance provisions and if executive did not accept employment with such purchaser. Additionally, Mr. Carroll’s employment agreement, as amended, provided that, following Mr. Carroll’s termination of employment, Mr. Carroll and his eligible dependents would receive continued group health benefits through Mr. Carroll’s attainment of age 65.

We had also entered into severance agreements with each of Ben D. Campbell, Donald R. King and William L. Topper, as well as with certain other of our executive officers. These severance agreements were in effect as of the end of the 2007 fiscal year. These severance agreements provided that the executive would receive an amount equal to his current base salary plus annual target bonus following the executive’s termination of employment by Goodman Global, Inc. without “cause” or by the executive for “good reason.”

 

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Under the applicable agreement, the amounts that would have been payable on termination would have been payable for two years in the case of Messrs. Carroll and Blackburn and for one year in the case of the other named executive officers subject to severance agreements. Generally, the amounts would have been paid monthly, except that payment was required in a lump sum within 30 days if the executive were to have been terminated without cause or terminated his employment for good reason within two years following a change of control.

Payment of these amounts would have terminated under the agreements if the executive engaged in a competitive business, recruited or solicited employees, disclosed non-public information of Goodman, or disparaged Goodman, and was therefore subject to the executive’s compliance with these provisions. The provisions regarding non-competition and non-solicitation of employees could have been altered or waived with the prior written consent of the Board or Parent’s Compensation Committee.

As summarized above, following the closing of the merger, our named executive officers entered into new employment or new severance agreements, as applicable, and agreed to terminate the employment and severance agreements that were in place prior to the closing.

The amounts payable to the NEOs upon termination of employment (including termination following a change of control) are summarized in the table below, calculated on the basis of the agreements and arrangements that were in effect as of December 31, 2007 taking into account acceleration of vesting of all outstanding equity awards as contemplated by the merger agreement and the right to receive a pro-rated annual bonus.

Potential Payments on Change of Control or Severance

 

    Severance and Change of Control

Name

  Trigger   Salary $   Bonus $   Pro-rated
Annual
Bonus
  Medical
Benefits
  Change of
Control
Vesting (1)
  Total

Charles A. Carroll

  Termination   $ 2,147,800   $ 2,147,800   $ 2,306,008   $ —     $ 7,038,235   $ 13,639,843

Lawrence M. Blackburn

  Termination     893,600     670,200     751,608     —       4,086,598     6,402,006

Ben D. Campbell

  Termination     361,350     271,013     607,873     —       1,584,969     2,825,205

Donald R. King

  Termination     326,500     244,875     549,246     —       1,584,969     2,705,590

William L. Topper

  Termination     371,170     278,378     624,395     —       959,500     2,233,443

 

(1) The amounts in this column reflect vesting of time-vested options and performance-vested options held by Messrs. Carroll, Blackburn, Campbell, King and Topper upon a change of control, as if a change of control had occurred and the options had vested as of December 31, 2007, based upon our stock price at year-end.

Equity Compensation Plan Information

The following table provides information as of December 31, 2007 with respect to the shares of our common stock that could have been issued under our equity compensation plans as in effect on December 31, 2007.

 

Plan Category

  Number of
Securities to be
Issued Upon Exercise
of Outstanding

Options, Warrants
and Rights(1)
   Weighted
Average Exercise
Price of
Outstanding
Options, Warrants
and Rights(1)
   Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plans

Equity compensation plans approved by security holders

  5,212,875    $ 8.25    1,437,676

Equity compensation plans not approved by security holders(2)

  —        —      —  
           

Total

  5,212,875    $ 8.25    1,437,676
           

 

(1)

Includes 4,539,319 outstanding options issued under the 2004 Plan, 668,000 options to purchase common stock issued under the 2006 Incentive Award Plan, and 5,556 shares of restricted stock issued to our

 

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directors. Because restricted stock awards have no exercise price, they are not included in the weighted average exercise price calculation.

(2) All of our equity compensation plans were approved by our stockholders.

Director Compensation

 

Name

   Fees Earned
or
Paid in Cash
($)(1)
   Stock
Awards
($)(5)
    Option
Awards

($)(6)
   Non-Equity
Incentive Plan
Compensation
($)
   All Other
Compensation
($)
   Total
($)

David Bechhofer (2)

   $ 68,932    $ 47,314     —      —      —      $ 116,246

Jeffrey Benjamin (2)

     52,000      47,314     —      —      —        99,314

Laurence M. Berg (10)

     57,000      —       —      —      —        57,000

Anthony M. Civale (10)

     50,000      —       —      —      —        50,000

John B. Goodman (10)

     60,298      —       —      —      —        60,298

John J. Hannan (3)(9)

     51,000      17,571 (7)   —      —      —        68,564

Steven Martinez (10)

     57,000      —       —      —      —        57,000

David W. Oskin (9)

     84,995      14,966 (8)   —      —      —        99,953

James H. Schultz (3)(9)

     73,173      17,571 (7)   —      —      —        90,737

Michael D. Weiner (9)

     55,493      14,966 (8)   —      —      —        70,451

Charles A. Carroll (4)

     —        —       —      —      —        —  

 

(1) Fees earned or paid in cash consists of the following amounts: (a) an annual retainer of $40,000, paid quarterly, (b) Board and Committee meeting fees of $2,000 for each meeting attended by a director in person and $1,000 for each meeting held telephonically, and (c) $10,000 paid to the Chairman of the Audit Committee.
(2) Messrs. Bechhofer and Benjamin were appointed to the Board of Directors in February 2007 and therefore received no compensation with respect to 2006.
(3) Messrs. Hannan and Schultz were appointed to the Board of Directors in June 2006 and received retainer amounts on a quarterly basis thereafter.
(4) Mr. Carroll is our President and Chief Executive Officer and receives no additional compensation for serving as a director. Mr. Carroll’s compensation is described above under “Executive Compensation—Summary Compensation Table.”
(5) The amounts in this column reflect the expense recognized for financial statement reporting purposes for the year ended December 31, 2007, in accordance with FAS 123(R). The assumptions used in calculating these amounts under FAS 123(R) are set forth in Note 2 to our audited financial statements included elsewhere in this prospectus.
(6) Stock options issued to Messrs. Berg, Civale, Goodman and Martinez in 2005 vested immediately. Accordingly, no amounts were recognized with respect to these options for financial statement reporting purposes for the year ended December 31, 2007, in accordance with FAS 123(R).
(7) A restricted stock grant of 2,778 shares of common stock was made on June 30, 2006. These shares vested on June 30, 2007. These shares have an aggregate grant date fair value of $42,170 under FAS 123(R).
(8) A restricted stock grant of 2,778 shares of common stock was made on April 21, 2006. These shares will vest on April 11, 2007. These shares have an aggregate grant date fair value of $59,866 under FAS 123(R).
(9) The aggregate number of restricted stock awards outstanding and held by each of Messrs. Hannan, Oskin, Schultz and Weiner was 11,112 shares at December 31, 2007.
(10) The aggregate number of stock options outstanding and held by each of Messrs. Berg, Civale, Goodman and Martinez was 121,284 options at December 31, 2007.

 

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Agreements with our New President and Chief Executive Officer

Mr. Swift entered into an employment agreement with us (the Employment Agreement), effective as of April 21, 2008, pursuant to which Mr. Swift commenced serving as our and our Parent’s President and Chief Executive Officer and as a member of our and our Parent’s Board of Directors. Mr. Swift’s employment agreement has an initial term of five years, which will renew for additional one-year periods until either party provides notice of non-renewal at least 180 days prior to the end of the then-current term. Mr. Swift’s employment and related agreements are described in the section entitled “Certain Relationships and Related Party Transactions—Agreements with our New President and Chief Executive Officer.”

Discussion of Director Compensation

Following our initial public offering in April 2006, non-employee directors received an annual retainer fee of $40,000, which is paid quarterly following appointment or election to the Board. In addition, the Chairman of the Audit Committee received an additional annual fee of $10,000. Non-employee directors received a fee of $2,000 for each board or committee meeting attended in person and a fee of $1,000 for attendance at a Board or committee meeting held telephonically. In February 2007, each of Messrs. Bechhofer and Benjamin received restricted stock awards under our 2006 Incentive Award Plan upon their appointment to the Board of Directors that were valued at $50,000. These restricted stock awards would have vested on the first anniversary of such director’s appointment to our Board of Directors if they had not been accelerated earlier upon the consummation of the Merger.

All directors are reimbursed for reasonable out-of-pocket expenses incurred in attending meetings of the Board or committees and for other reasonable expenses incurred in connection with service on the Board and any committees. Each director will be fully indemnified by us for actions associated with being a member of our Board to the extent permitted under Delaware law, as provided in our amended and restated certificate of incorporation, our amended and restated bylaws and the indemnification agreements by and between us and each of our directors.

Employee directors such as Mr. Carroll, Mr. Swift and Mr. Blackburn do not receive compensation for service on our Board or committees. Mr. Carroll’s compensation as our CEO is described in the Summary Compensation Table for NEOs.

Compensation Discussion and Analysis

Our executive compensation program, including with respect to our named executive officers, is overseen and administered by the Compensation Committee of our Parent’s Board of Directors (Parent’s Board). Our Named Executive Officers are (1) our current chief executive officer, (2) our current chief financial officer, (3) each of our three other most highly compensated executive officers who were serving as executive officers at the end of December 31, 2007.

For 2007, our Board of Directors appointed a compensation committee consisting of Messrs. Martinez, Berg, Goodman and Oskin. None of our executive officers has served as a member of our Compensation Committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of our company or member of our Compensation Committee. Following the consummation of the merger, a new Compensation Committee of Chill Holdings, Inc., our Parent, was established, consisting of Erik D. Ragatz and Robert B. Henske.

For the 2007 fiscal year, the compensation committee included three independent directors as determined under the standards of the NYSE. The compensation committee administered Goodman Global, Inc.’s 2004 Stock Option Plan and 2006 Incentive Award Plan. The compensation committee reviewed the performance of our executive officers and key employees for 2007 and made recommendations to our Board regarding the

 

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compensation of our executive officers and other compensation arrangements. The Board reviewed and took action on the basis of the recommendations of the compensation committee.

Compensation committee meetings were regularly attended by the President and Chief Executive Officer and the Executive Vice President, Human Resources. On a regular basis, the compensation committee also met in executive session. The Executive Vice President of Human Resources supported the compensation committee in its duties and, along with the President and Chief Executive Officer, was delegated authority to fulfill certain administrative duties regarding the compensation programs. Our Chief Executive Officer provided recommendations to our compensation committee and participated in discussions and evaluations regarding the compensation of the other NEOs.

Objectives of Compensation Programs

In 2007, we compensated our senior executives, including the five most highly compensated executive officers (the named executive officers, or NEOs), at levels we believed to be competitive within the HVAC industry and companies from similar durable goods manufacturing businesses of comparable revenue ranges. Our primary objective for executive compensation in 2007 was to ensure our ability to continue to retain our senior level executives, as well as to attract, retain and motivate the management team required to lead the Company in achieving its vision and mission while supporting our core values in a highly competitive marketplace.

Our business strategy depends to a significant degree upon its executive officers and key employees and their relationships with distributors. Therefore, we seek to retain our senior executives over the long-term and believe that continuity of management is in the best interests of our shareholders.

We designed our executive compensation programs to provide a competitive base salary for our NEOs as well as cash and long-term equity incentives. Our executive compensation for 2007 was determined after our IPO, and we determined executive compensation with a view to each NEO’s past compensation levels as well as our future business strategy. The total compensation and benefits package provided to our NEOs in 2007 was designed to be competitive and to exceed median market compensation for talented and experienced senior executives.

Compensation paid to our former President and Chief Executive Officer was materially greater than the compensation paid to our other NEOs to reflect the primary differences in the scope of job responsibility and to include his role as Chairman of the Board. Compensation payable to our new President and Chief Executive Officer continues to be materially different from the compensation paid to our other NEOs to reflect those same differences in the scope of job responsibility, although Mr. Swift does not also serve in the capacity of Chairman. Our pay practices are reflective of competitive market data, which reflect competitive pay practices found among companies in our specific industry as well as general industry. In 2007, we engaged Hewitt Associates, an outside consultant, to assist us with compiling competitive market data.

Compensation Philosophy

Our overall compensation philosophy is to use straightforward compensation programs that offer appropriate incentives to our executives, while providing transparency to our shareholders. In implementing this philosophy, we have not emphasized perquisites, personal benefits, defined benefit plans or supplemental plans for executives. For 2007, our executive compensation emphasized cash and equity compensation, and consisted primarily of the following:

 

   

base salary to provide stable income to our NEOs during the current year,

 

   

annual performance-based cash incentives tied to our profitability, which bonus awards were granted under our stockholder-approved 2006 Incentive Award Plan, and

 

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equity awards in the form of additional stock options which were granted under the 2006 Incentive Award Plan to provide retention benefits and long-term incentives to continue to build share price and shareholder value.

For 2007, as for prior years, our former Compensation Committee emphasized a mix of base salary and cash incentives. Equity grants that were made prior to our 2006 IPO continued to vest. A significant proportion of each NEO’s compensation for 2007 was “at risk” incentive compensation that depended upon our profitability for the year. In addition, additional option grants were made in May 2007 in order to encourage the achievement of long-term business objectives that enhance stock price and shareholder value on a continuing basis.

Competitive Analysis

For 2007, our compensation committee had engaged Hewitt Associates (the “Compensation Consultant”) to provide an assessment of our compensation programs. The compensation committee reviewed a report prepared by the Compensation Consultant regarding executive compensation paid by a selected group of companies against which our compensation committee believed we compete for executive talent and stockholder investment. Our compensation committee considered composite measures of executive compensation derived from three comparator groups with comparable revenue ranges: durable goods manufacturers, general industrial companies and companies with significant venture capital investors. The twenty-one companies selected by the Compensation Consultant for purposes of this competitive market analysis were as follows: W.W. Grainger, Inc., Avery Dennison Corporation, USG Corporation, Temple-Inland Inc., Cooper Industries, Inc., BorgWarner Inc., Armstrong World Industries, Inc., Lennox International Inc., Vulcan Materials Company, Steelcase Inc., Walter Industries, Inc., Packaging Corporation of America, Donaldson Company, Inc., Sauer-Danfoss Inc., H. B. Fuller Company, Tupperware Corporation, Valmont Industries, Inc., Brady Corporation, Milacron Inc., Graco Inc. and Andersen Corporation (the “Peer Companies”).

The compensation of each of the NEOs was compared against competitive market ranges derived from the compensation programs of the Peer Companies for executives with comparable positions and job responsibilities. As noted above, the analysis was prepared by the Compensation Consultant and reviewed by the compensation committee. As noted above, the compensation components reviewed for each position were base salary, annual cash bonus and long-term incentives and benefits, both individually and in the aggregate. Although the survey data was used as a important measure for determining competitive levels of compensation for our NEOs, our compensation committee did not benchmark the compensation of our NEOs against the Peer Companies. Rather, the survey data was used as a guide, such that the compensation committee exercised its discretion in setting both the individual compensation components and the total pay of each of our NEOs at levels that were commensurate with their specific position and job responsibilities, taking into account the need to retain and motivate our NEOs to achieve superior levels of performance. The compensation of our NEOs was set at levels that were above the 50th percentile (and in some cases above the 75th percentile) as compared to the Peer Companies.

Compensation Programs

Design of Compensation Programs. Our compensation programs in 2007 were designed to effectively retain our NEOs and continue to build the Company in a stable management environment as well as attract, retain and motivate highly talented individuals to lead the Company in achieving its vision and mission in a very competitive marketplace. Specifically,

 

   

base salary was designed at levels to attract, retain and motivate employees capable of managing Goodman’s operation as a public company,

 

   

annual cash incentives based on pre-determined performance targets were designed to reward execution of Goodman’s strategy and achievement of profitability objectives, and

 

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equity awards in the form of stock options (which were granted in May 2007 under our shareholder-approved 2006 Incentive Award Plan) were designed to provide additional retention benefits and long-term incentives to build share price and shareholder value.

Impact of Performance on Compensation. A significant proportion of each NEO’s compensation in 2007 was “at risk” and depended on our performance. On February 5, 2007, the Board adopted our 2007 Performance Bonus Award Program under the 2006 Incentive Award Plan (the “2007 Bonus Program”). Under the 2007 Bonus Program, each NEO’s annual cash incentives were tied to pre-established EBITDA targets which were designed to emphasize profitability. The EBITDA targets provided incentives to increase revenues and also to control costs, to the degree that costs were within the control of the executive officers. As discussed in greater detail below under the heading “Annual Cash Incentive and Description of Performance Metrics,” cash incentive compensation earned by the NEOs in 2007 exceeded target plus levels established under the 2007 Bonus Program, based on our EBITDA for the year.

With respect to equity-based incentive awards, any increase to the stock price as a result of the efforts of the NEOs to improve Goodman’s performance also increased the value of the NEOs’ stock options, and therefore rewarded the NEOs for contributing to shareholder value. In addition, half of the stock options granted to our NEOs in 2004 are performance-based options, for which vesting could be accelerated depending on Goodman’s achievement of annual EBITDA and ROIC targets, as determined by our Board of Directors (see further description of these performance metrics below.)

Elements of Compensation

As discussed above, compensation paid or awarded to the NEOs during 2007 included base salary, an annual cash incentive award and stock options, and as further described below.

Base salary of the NEOs

Each NEO received a significant portion of his total compensation in the form of base salary. The salary component was designed to provide the executives with a stable income and to attract and retain talented and experienced executives capable of managing our operations and strategic growth as a public company.

We determined the salary for each NEO based on the salary of comparable positions in the marketplace and adjusted this amount to reflect the individual’s experience, performance, potential contributions to us and ability to meet our anticipated future needs. The base salary for Mr. Carroll and the other NEOs was increased effective as of March 1 and April 1, 2007, respectively, based on our annual review of these factors by our Compensation Committee and our Board (see “Executive Compensation—Summary Compensation Table” for a summary of the actual increases provided to each of our NEOs.) Base salaries where determined utilizing the market study prepared by the Compensation Consultant, as discussed in the section entitled “Competitive Analysis” above. The base salaries for 2007 were set after review of the market range for comparable positions at the Peer Companies, but also taking into consideration notable differences in the corresponding responsibilities of each our NEOs and other competitive factors, including total compensation opportunity.

In connection with the merger, the NEOs as well as other of our executive officers negotiated new employment arrangements with our controlling stockholders, which became effective on February 13, 2008, upon the closing of the merger. Pursuant to those arrangements, the salaries and the executive positions of each of our NEOs and generally remained unchanged for the 2008 fiscal year, as they were viewed to be competitive for the current year and were sufficient to continue to retain the senior management team going forward.

 

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Annual Cash Incentive and Description of Performance Metrics

Cash Incentive Awards. A significant proportion of each NEO’s cash compensation was paid as a cash incentive award under the 2007 Bonus Program and depended upon Goodman’s profitability, as measured by EBITDA for the 2007 fiscal year. The bonus payment was “at risk” and was designed to reward the executives for reaching pre-established levels of profitability. Awards were structured to be paid based on achieving levels threshold, target, target plus, superior, excellence or excellence plus levels for EBITDA, which comprised 95.2%, 100%, 104%, 108%, 112% and 116% of the target, respectively. We set the EBITDA goals at levels that reflected our internal business plan at the time the awards were established. The EBITDA target level for our cash incentive award was set at $250 million for 2007 and required a challenging but achievable level of financial performance. The highest specified level, excellence plus (at EBITDA of $290 million for 2007), represented truly exceptional performance beyond reasonably likely levels of achievement, and we have never achieved this level of performance. Historically, we have generally achieved performance between the target and target plus levels.

In setting the range of bonus awards to our NEOs, we considered the potential bonuses available for comparable positions in the marketplace and the total compensation payable for such comparable positions, including other elements of compensation and perquisites provided. The range of payouts was based on a multiple of each NEO’s base salary for the 2007 fiscal year. The range of payouts in dollars, assuming EBITDA goals were met at threshold, target or excellence plus levels for 2007, is indicated in the Grants of Plan-Based Awards Table.

The table below summarizes the possible bonus opportunities and actual bonuses paid in 2007 for our NEOs as a percentage of base salary based on the level of achievement of an EBITDA goal of $250.0 million:

 

     Threshold
Level
    Target
Level
    Target
Plus Level
    Superior
Level
    Excellence
Level
    Excellence
Plus Level
    Actual  
     As a percentage of EBITDA Target of $250.0 million  
     95.2 %     100.0 %     104.0 %     108.0 %     112.0 %     116.0 %     106.0 %
     (in $ millions)  
   $ 238.0     $ 250.0     $ 260.0     $ 270.0     $ 280.0     $ 290.0     $ 265.1  
     Bonus Opportunity as a percentage of base salary  

NEO

              

Charles A. Carroll

     37.5 %     100.0 %     162.5 %     268.8 %     375.1 %     481.4 %     216.7 %

Lawrence M. Blackburn

     25.0       75.0       125.0       212.5       300.0       387.5       169.6  

Ben D. Campbell

     25.0       75.0       125.0       212.5       300.0       387.5       169.6  

Donald R. King

     25.0       75.0       125.0       212.5       300.0       387.5       169.6  

William L. Topper

     25.0       75.0       125.0       212.5       300.0       387.5       169.6  

In 2007, we achieved EBITDA of $265.1 million, which was greater than the target plus level but less than the superior level. As a result, Mr. Carroll was awarded a bonus of 216.7% of his base compensation or $2,306,008, Mr. Blackburn was awarded a bonus in an amount equal to 169.6% of his base compensation, or $751,608 and our other NEOs were likewise awarded a bonus equal to 169.6% of their base compensation, or $624,395, $607,873 and $549,246 respectively for each of Messrs. Topper, Campbell and King.

On March 12, 2008, Parent’s Board adopted a new bonus plan arrangement for our NEOs for the 2008 fiscal year. The structure of the bonus program for 2008 is generally similar to the structure for the 2007 fiscal year, except that Mr. Carroll’s annual bonus payment will be pro-rated through April 21, 2008, the date his retirement as President and Chief Executive Officer became effective. As was the case for 2007, awards for 2008 are structured to be paid based on achieving a threshold, target, target plus, superior, excellence or excellence plus level of performance, which comprises 93.1%, 100%, 106.9%, 110.3%, 113.8% and 117.2% of the EBITDA target, respectively.

 

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In 2008, the range of possible bonus opportunities are expressed as a percentage of base salary with incrementally higher payout opportunities at the foregoing EBITDA performance levels of threshold, target, and maximum which are expressed as a percentage of the plan target award. The ranges of bonus opportunities for our NEOs were determined based on market data provided by our external consultant for comparable positions in the external marketplace, using the 75th percentile as a guideline, as well internal equity differentiation based on the scope and complexity of each position. The table below summarizes the range of bonus opportunities for 2008 for our NEOs as a percentage of base salary, based on the level of achievement of an EBITDA goal:

     Threshold
Level
    Target
Level
    Target
Plus Level
    Superior
Level
    Excellence
Level
    Excellence
Plus Level
 
   As a percentage of EBITDA Target  
   93.1 %   100.0 %   106.9 %   110.3 %   113.8 %   117.2 %
     Bonus Opportunity as a percentage of base salary  

NEO

            

David L. Swift

   35.6 %   95.0 %   154.4 %   255.4 %   356.3 %   457.3 %

Lawrence M. Blackburn

   25.0     75.0     125.0     212.5     212.5     212.5  

Ben D. Campbell

   25.0     75.0     125.0     212.5     212.5     212.5  

Donald R. King

   25.0     75.0     125.0     212.5     212.5     212.5  

William L. Topper

   25.0     75.0     125.0     212.5     212.5     212.5  

Charles A. Carroll (1)

   37.5     100.0     162.5     268.8     268.8     268.8  

 

(1) To be pro rated through April 21, 2008, the effective date of Mr. Carroll’s retirement as our and our Parent’s President and Chief Executive Officer.

Bonus opportunities for our President and Chief Executive Officer are materially different from the opportunities for our other NEOs to reflect the primary differences in the scope of job responsibility. In addition, the bonus opportunities of Mr. Carroll, our former President and Chief Executive Officer, were intended to reflect his additional role as Chairman of the Board. These pay practices are reflective of competitive market data, which reflects competitive pay practices found among companies in our specific industry as well as general industry.

Parent’s 2008 Annual Incentive Compensation Plan has been filed as an exhibit to the registration statement relating to this prospectus. Pursuant to the bonus award agreements, each of our NEOs agreed that the maximum payout available for the 2008 year will not exceed the payout available at the superior level of performance under the 2008 Annual Incentive Compensation Plan.

Performance Metrics. Two financial metrics are commonly referenced in defining company performance for compensation of NEOs. The primary metrics used are EBITDA and, to a lesser extent, ROIC. These metrics and their use in annual and long-term incentive programs are described below.

 

   

EBITDA: EBITDA as used in our executive compensation programs through 2007 was equal to consolidated net income before interest, taxes, depreciation and amortization as reflected in Goodman’s audited consolidated financial statements for such period. Consolidated net income was determined in accordance with generally accepted accounting principles except that gains and losses from extraordinary, unusual or nonrecurring items could be excluded in the discretion of the Compensation Committee of the Board. EBITDA was used as the performance metric for purposes of the annual cash incentive award for 2007 and for accelerated vesting of one-half of the stock options granted to NEOs in 2004. For 2008, a similar approach has been utilized except that the EBITDA metric was generally made consistent with the definition of EBITDA in our credit arrangements.

 

   

ROIC: Return on Invested Capital (ROIC) measures stockholder value creation. It is a non-GAAP measure that supplements traditional accounting measures to evaluate a return on the capital invested in the business. We adopted ROIC as a performance measure under our bonus program and equity

 

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incentive program as an incentive for senior management to improve our earnings through the efficient allocation of capital. ROIC was a compensation metric used, together with EBITDA, for accelerating vesting of one-half of the stock options granted in 2004. The ROIC metric has not been used in structuring the executive compensation arrangements for the 2008 fiscal year.

The performance metrics established by our Compensation Committee for each calendar year are based upon assumptions about the future business of our company as of the date the goal is established. The annual cash incentive plan provides that in the event that, after the date the performance metrics are fixed, the Compensation Committee determines, in its sole discretion after consultation with our Chief Executive Officer, that any unusual event, unusual or nonrecurring transaction or certain other extraordinary events affecting our company occur, such that an adjustment is determined by the Compensation Committee to be appropriate, then the Compensation Committee may adjust the performance metrics to reflect the projected effect of such transactions or events. Except as required by applicable law, there is no policy that would allow us or our Parent to recover awards or payments paid if the company performance metrics upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment.

Discretionary Bonuses. In addition, our Parent’s Chief Executive Officer has the discretion to pay to some or all of the participants in the cash bonus plan (other than the Chief Executive Officer) for a calendar year incentive compensation in an aggregate amount not to exceed $750,000, without regard to EBITDA or ROIC for such year and to allocate the amount of such incentive compensation among the participants and employees who do not formally participate in the cash bonus plan, as the Chief Executive Officer and/or the Board of Directors determines in his or its discretion. In 2007, none of our NEOs received any portion of the discretionary bonus pool.

Long-Term Incentives—Stock Options

During the 2007 fiscal year, we made equity awards to our management team under our stockholder-approved 2006 Incentive Award Plan. We granted 385,000 stock options to our NEOs in 2007. Each NEO also continued to vest stock option grants made in December 2004 and in December 2005 under the 2004 Stock Option Plan, before our initial public offering. These earlier stock options were designed to reward the NEO for improving our performance and, as a result, increasing stock price for the benefit of shareholders. Half of the stock options granted in 2004 were performance-based options, for which vesting could be accelerated by our achievement of annual EBITDA and ROIC targets established in 2004. Our Board accelerated 20% of the total performance-based options previously granted to our NEOs in connection with the completion of our initial public offering in 2006. These pre-determined EBITDA and ROIC targets were based on revenue and expense assumptions about the future business of Goodman as of the date the options were granted and were subject to adjustment by the Board in some circumstances (see description above of these financial metrics). For the 2004 performance-based options, the pre-established ROIC performance target of 12.8% was met in 2007. In addition, we achieved 2007 EBITDA of $265.1 million. As a consequence, an additional 20% of the performance-vested options granted to our NEOs vested for the 2007 fiscal year.

In the event that, after the date the performance metrics were set in 2004 under the 2004 Stock Option Plan, the Compensation Committee determined, in its sole discretion after consultation with our Chief Executive Officer, that any unusual event, unusual or nonrecurring transaction or certain other extraordinary events affecting our company occurred, such that an adjustment was determined by the Compensation Committee to be appropriate, then the Compensation Committee could adjust the performance metrics to reflect the projected effect of such transactions or events or could decide to vest or accelerate performance-based options. Except as required by applicable law, there is no policy that would allow us or our Parent to recover awards if the company performance metrics upon which they were based are restated or otherwise adjusted in a manner that would reduce the size of an award.

Option Grants in 2004: In December 2004, we granted non-qualified options to purchase our common stock to certain management employees. The exercise price of these options was $5.28 per share (which was equal to

 

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the purchase price paid in the acquisition of Goodman in that year). All or a portion of the options could have become vested and exercisable earlier than scheduled upon certain sales of the assets or capital stock of Goodman (see “Option Acceleration in Connection with Merger,” below).

 

   

One-half of the options granted to management employees were time vesting options that would have become vested and exercisable in equal annual installments on each December 31 beginning in 2005 and ending in 2008, subject to continued employment.

 

   

The other half of the options granted to management employees were performance vesting options that would have become vested and exercisable on the eighth anniversary of the date of grant, subject to continued employment. However, an installment of 20% of each performance vesting option (i.e., 10% of the total shares subject to the non-qualified stock option) was eligible to become vested and exercisable with respect to each of the fiscal years 2005 through 2008 if we attained certain financial performance targets tied to EBITDA and ROIC (the financial metrics described above). As a result of the completion of our initial public offering, 10% of the options vested, and the Board of Directors determined that vesting requirements were met with respect to 2005, 2006 and 2007.

Option Grants in 2005. In December 2005, we granted additional non-qualified stock options to our NEOs and to certain management employees at an exercise price of $14.52 per share. These options were all time vesting options that generally would have become vested and exercisable in four equal annual installments on each December 22, beginning in 2006 and ending in 2009, subject to continued employment. The maximum term of these options was ten years.

Option Grants in 2007. In 2007, as part of the annual review of our equity compensation program, long-term incentive awards in the form of stock option grants were made to our NEOs on the basis of their job responsibilities and potential for individual contribution, with reference to the levels of total compensation (total cash compensation plus the value of long-term incentives and other benefits) for executives at the Peer Companies. In granting these option awards, the compensation committee also considered the size and value of previous equity grants made to each of our NEOs, as well as the level of total cash compensation provided through each executive’s base salary and bonus opportunity. As with the determination of base salaries and annual cash incentives, the compensation committee exercised its judgment and discretion in view of the criteria discussed above in the section entitled “Competitive Analysis” and its general policies.

In light of the above, we granted additional non-qualified stock options to our NEOs and to certain management employees in May 2007 an exercise price of $19.16 per share, which was the closing price of our common stock in the date before the date of grant. All of the 2007 grants were time-vesting options, which vested in equal annual installments of 25% over a four-year period.

Option Acceleration in Connection with the Merger. All of the outstanding time vesting options granted in 2004 and 2005 automatically accelerated in full upon the closing of the merger; additionally, our Board exercised its discretion to accelerate the remaining unvested portion of the performance vesting options, as well as the time vesting options granted in 2007. Other than options that were subject to option rollover agreements (see “Equity Contribution Agreements,” below), all of the options outstanding at the time of the merger were canceled and converted into the right to receive an amount in cash, less applicable tax withholding and without interest, equal to the product of (x) the number of shares of our common stock subject to each option as of the effective time of the merger multiplied by (y) the excess of the merger consideration over the exercise price per share of common stock under such option. On February 13, 2008, Parent’s Board adopted a new equity incentive plan to replace our two pre-existing equity incentive plans, as described in greater detail below under “New Equity Incentive Arrangements.”

Personal Benefits and Perquisites

The NEOs did not receive any perquisites and personal benefits in 2007 other than those broadly available to all employees. We emphasize cash compensation and equity compensation, and therefore perquisites and personal benefits constituted an immaterial portion of each NEO’s total compensation.

 

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Historical Employment Agreements

Employment Agreements. Through the closing of the Merger, we had employment agreements in place with Messrs. Carroll and Blackburn. The employment agreements each had an initial term of three years, with automatic extensions of one year each unless notice was given by either party at least 180 days prior to expiration.

 

   

The employment agreements provided for the payment of an annual base salary for Mr. Carroll and Mr. Blackburn, and for annual target bonuses that were payable in the event that certain financial and other performance targets were met.

 

   

Under the agreements, the executives were each granted a non-qualified stock option under the 2004 Stock Option Plan to purchase shares of our common stock.

 

   

As amended in 2006, each of the employment agreements provided that the executive would receive an amount equal to two times base salary and annual target bonus following the executive’s termination of employment under certain circumstances, as well as a pro-rated annual bonus for the year of termination.

 

   

Each of the employment agreements also contained restrictive covenants providing that the executive would be subject to certain non-competition and non-solicitation restrictions for two years following the executive’s termination of employment.

 

   

Additionally, Mr. Carroll’s employment agreement, as amended, provided that, following Mr. Carroll’s termination of employment under certain circumstances, Mr. Carroll and his eligible dependents would receive continued group health benefits until Mr. Carroll reached age 65, or the qualifying age under Medicare, if later.

Severance Agreements. Through the closing of the Merger, we had severance agreements with several of our executive officers, including Ben D. Campbell, Donald R. King and William L. Topper.

 

   

The severance agreements generally had an initial term of two years with automatic extensions of one year each unless notice was given by either party at least 90 days prior to expiration of the term.

 

   

As amended in 2006, each severance agreement provided for the payment of one times base salary plus an annual target bonus following the executive’s termination of employment under certain circumstances.

Non-Competition Agreements. Through the closing of the Merger, we had non-competition agreements with a number of our executive officers, including Ben D. Campbell, Donald R. King and William L. Topper. These non-competition agreements provided that each executive would be subject to certain non-solicitation and non-competition restrictions for a period of two years following the executive’s termination of employment.

 

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Transaction Bonus and Equity Rollover Incentive

Upon the consummation of the Merger, certain members of senior management received transaction bonuses equal to 75% of their current base salary, totaling more than $3,202,110 in the aggregate. The transaction bonuses paid to our named executive officers are set forth in the table below. In addition, certain members of senior management were given a “rollover” incentive bonus payment equal to 100% of their current base salary, totaling not more than $4,269,480 in the aggregate. The rollover incentive bonuses paid to our named executive officers are also set forth in the table below.

 

Executive Officers:

   Transaction Bonus Paid
Upon Consummation of
the Merger
   Equity Rollover Incentive
Paid Upon Consummation
of the Merger

Charles A. Carroll

   $ 805,425    $ 1,073,900

Lawrence M. Blackburn

     335,100      446,800

Ben D. Campbell

     271,013      361,350

Donald R. King

     244,875      326,500

William L. Topper

     278,378      371,170

New Employment and Severance Arrangements

Upon the consummation of the Merger, Merger Sub entered into new employment agreements with Messrs. Carroll and Blackburn, and new severance agreements with all our executive officers, including Ben D. Campbell, Donald R. King and William L. Topper. In general, the agreements provided for substantially similar levels of base salary and bonus opportunities, and similar severance provisions as compared with the employment and severance agreements in effect prior to the closing of the merger. The specific terms of the new agreements are set forth above under “Executive Compensation—New Employment Agreements” and “Executive Compensation—New Severance Agreements,” respectively.

Equity Contribution Agreements

Prior to the closing of the merger, Parent entered into equity contribution agreements with each of our named executive officers. Pursuant to the terms of these agreements, each executive committed to acquire shares of common stock of Chill Holdings, Inc., our Parent, at closing, by either transferring the number of shares of Goodman Global, Inc. common stock having a value equal to an agreed upon amount ($10,000,000 in the case of Carroll, $8,771,000 in the case of Mr. Blackburn, $3,736,000 in the case of Mr. Campbell, $2,405,000 in the case of Mr. Topper, and $3,687,000 in the case of Mr. King) or using cash proceeds from the transaction equal to 90% of such agreed upon amount. At closing, each of the executives purchased that number of shares of Parent stock with the values indicated below at $25.60 per share, which was the price other stockholders paid per share of Goodman Global, Inc. common stock in the Merger.

 

Executive

   Value of Shares Rolled

Charles A. Carroll

   $ 10,000,000

Lawrence M. Blackburn

     8,718,208

Ben D. Campbell

     3,736,000

Donald R. King

     3,687,000

William L. Topper

     2,405,000

The shares so acquired by each of our NEOs are subject to the terms and conditions of the Management Stockholders Agreement, described under the section entitled “Certain Relationships and Related Party Transactions—Management Stockholders Agreement.” To the extent that an executive did not own a sufficient number of shares to cover his committed amount, each of the equity contribution agreements also provided that the executive would be able to satisfy such shortfall by rolling over options to acquire shares of our common stock into options to acquire shares of common stock of Parent. As Mr. Blackburn did not have a sufficient number of shares to cover his committed amount, he entered into an option rollover agreement with Parent at

 

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closing, pursuant to which he rolled over an option to acquire shares of our common stock having an intrinsic value of approximately $53,000 (i.e., the excess of the value of the shares subject to the option over the aggregate exercise price for such shares), into an option to acquire shares of Parent common stock having substantially the same intrinsic value. The exercise price for each rollover option was set at $2.07 per share, such that Mr. Blackburn received an option over 6,659 shares of Parent common stock. The rollover options, which became vested in full at closing, are generally subject to the same terms and conditions under which they were originally granted; however, any shares acquired pursuant to the exercise of such options will be subject to the terms of the Management Stockholders Agreement.

Timing of Equity Awards

Equity awards were granted to our NEOs in December 2005 before our IPO, and no grants were made in 2006. For 2007, our practice was to make any grants of equity awards during the period after the release of earnings, with an exercise price equal to the closing market price on the day before the grant. Options under the new equity incentive plan, described below, were granted at closing at an exercise price of $10.00 per share, which is equal to the price at which our current stockholders subscribed for common stock of Parent at closing.

New Equity Incentive Plan

The following is a summary of the material terms and conditions of the 2008 Chill Holdings, Inc. Stock Incentive Plan (the “2008 Plan”). This summary is qualified in its entirety by reference to the terms of the 2008 Plan, a copy of which is attached as exhibit the registration statement relating to this prospectus.

The Board of Directors of Parent adopted the 2008 Plan on February 13, 2008; the Plan obtained stockholder approval on the same date. The 2008 Plan is a comprehensive incentive compensation plan which permits us to grant equity-based compensation awards to employees and consultants of Parent and its subsidiaries. The purpose of the plan is to attract, motivate and retain such persons, to encourage stock ownership by such persons, thereby aligning their interest with those of our stockholders and to provide compensation opportunities to reward superior performance.

Awards under the 2008 Plan may be in the form of stock options (either incentive stock options or non-qualified stock options) or other stock-based awards, including restricted stock purchase awards, restricted stock units and stock appreciation rights. The following is a summary of the principal types of awards available under the plan.

Stock Options. Stock options represent the right to purchase shares of Parent common stock within a specified period of time at a specified price. The exercise price for a stock option will be not less than 100% of the fair market value of the common stock on the date of grant. Stock options will have a maximum term of ten years from the date of grant. Stock options granted may include those intended to be “incentive stock options” within the meaning of Section 422 of the Code.

Restricted Stock and Restricted Stock Units. Restricted stock is a share of Parent common stock that is subject to a risk of forfeiture or other restrictions that will lapse subject to the recipient’s continued service or the attainment of performance goals. Restricted stock units represent the right to receive shares of Parent common stock in the future, with the right to cash or future delivery of the shares also subject to the recipient’s continued service or the attainment of performance goals.

Stock Appreciation Rights. Stock appreciation rights entitle the holder upon exercise to receive shares of Holdings common stock having a value equal to the excess of (i) the value of the number of shares with respect to which the right is being exercised (which value is based on fair market value at the time of such exercise) over (ii) the exercise price applicable to such shares. The exercise price for a stock appreciation right will be not less than 100% of the fair market value of Parent common stock on the date of grant.

 

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Other Stock-Based Awards. Parent’s Compensation Committee will be authorized to grant awards in the form of other stock-based awards, as deemed to be consistent with the purposes of the 2008 Plan. Such awards may be settled in cash, shares or a combination of cash and shares.

The maximum number of shares reserved for the grant or settlement of awards under the 2008 Plan is 6,734,923 shares of Parent, subject to adjustment in the event of an extraordinary dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar corporate transaction. Any shares subject to awards which are cancelled, forfeited, reacquired or repurchased before vesting under the 2008 Plan will again be available for grants under the 2008 Plan. In the event of a change in control, Parent’s Compensation Committee will have the discretion to accelerate all outstanding awards, cancel awards for fair value, provide for the issuance of substitute awards and/or provide award holders an opportunity to exercise their awards prior to the occurrence of the change in control transaction.

Parent’s Compensation Committee administers the 2008 Plan. Parent’s Compensation Committee has the ability to: select individuals to receive awards; select the types of awards to be granted; determine the terms and conditions of the awards, including the number of shares, the purchase price of the awards, and restrictions and performance goals relating to any award; establish the time when the awards and/or restrictions become exercisable, vest or lapse; determine whether options will be incentive stock options; and make all other determinations deemed necessary or advisable for the administration of the plan. Parent’s Compensation Committee may grant awards which, in the event of a “change in control” of Parent, become fully vested and exercisable.

Under the 2008 Plan, awards are generally non-transferable other than by will or by the laws of descent and distribution.

Parent’s Board of Directors may amend or discontinue the 2008 Plan, but no amendment or discontinuation will be made that would materially impair the rights of a participant under any award granted without such participant’s consent. In addition, stockholder approval may be required with respect to certain amendments due to the requirements of applicable law. The 2008 Plan, unless sooner terminated by Parent’s Board of Directors, will remain in effect through the tenth anniversary of its adoption.

All options under the 2008 Plan have been granted at a strike price equal to $10.00 per share, which is the subscription price for each share of Parent common stock paid by our current controlling stockholders at closing. Options granted under the 2008 Plan to our NEOs have generally consisted of both time vesting and performance vesting options, except that only time vesting options were granted to Mr. Carroll in light of the nature of his ongoing employment relationship with us, since he is expected to continue to serve as our CEO only until a replacement is found.

The following non-qualified (i.e., non-statutory) option grants were made to our NEOs on February 13, 2008:

 

Named Executive Officer

   Time-vesting Options    Performance-vesting Options

Charles A. Carroll

   431,035    —  

Lawrence M. Blackburn

   581,897    387,932

Ben D. Campbell

   202,048    134,698

Donald R. King

   202,048    134,698

William L. Topper

   202,048    134,698

For all of our NEOs except Mr. Carroll, the time vesting options will vest as to 25% of the award on the first anniversary of the grant date (February 13, 2008), and on each of the following three anniversaries thereafter, subject to the optionholder’s provision of continued services. With respect to Mr. Carroll’s options, the first grant of 269,397 options vests in equal installments of 33-1/3% on June 30 of each of 2008, 2009 and 2010, provided

 

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that Mr. Carroll continues to provide services to us. Additionally, Mr. Carroll received a second time vesting award of 161,638 options, which award will vest as to 25% on each of the first four anniversaries of the closing date, so long as Mr. Carroll continues to serve as Chairman of our Board. The performance vesting options granted to each of our named executive officers except Mr. Carroll will vest as to 20% of the option if pre-established EBITDA performance targets are achieved or exceeded in each of our fiscal years 2008 through 2012 inclusive. The EBITDA targets were established in a similar manner as described above under the heading “Annual Cash Incentive and Description of Performance Metrics—Performance Metrics,” and are based on the “Consolidated EBITDA” as such term is defined under our credit agreements. The EBITDA targets were established based on our operating business plan over the next five years and were designed to represent a challenging but achievable level of performance. In the event that a performance target is missed in a given fiscal year, but the performance target for the following fiscal year is achieved, the tranche of the performance option that did not vest during the preceding fiscal year will also become vested. The performance targets are subject to adjustment under certain circumstances such as corporate acquisitions and divestitures. Under the terms of the option grant agreements, both time vesting and performance vesting options will accelerate in full upon the occurrence of a change in control transaction. All of the options have a 10-year term and may be exercised by way of a “cashless exercise” unless such exercise would result in adverse accounting treatment or would be prohibited by the terms of applicable financing arrangements.

Impact of Tax and Accounting Rules

Section 162(m). Section 162(m) of the Code, places a limit of $1,000,000 on the amount of compensation that may be deducted by us in any year with respect to the NEOs unless the compensation is performance-based compensation as described in Section 162(m) and the related regulations, as well as pursuant to a plan approved by our stockholders. A small portion of the salary that was paid to our CEO in 2007 was not deductible for tax purposes because it exceeded this limit and therefore is not qualified under Code Section 162(m). Cash incentives paid with respect to 2007 were granted under the stockholder-approved 2006 Incentive Award Plan and were fully deductible for purposes of 162(m).

For purposes of 2007 bonus award EBITDA calculation. Although a portion of the salary of the CEO was not deductible for purposes of Section 162(m), our Compensation Committee considered that the importance of a stable base salary for the CEO outweighed our cost of the non-deductible compensation. We had qualified certain compensation paid to senior executives for deductibility under Section 162(m), including certain annual cash incentive payments and certain compensation expense related to performance-based options granted in 2004.

FAS 123(R). Options granted in 2004 and 2005 before the IPO, as well as options granted after our IPO, resulted in compensation expense to us under FAS 123(R), and additional compensation expense will be recognized on account of the acceleration of all unvested options at closing of the merger. New options granted in 2008 will likewise result in ongoing compensation expense to us under FAS 123(R).

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

We are a wholly owned subsidiary of Chill Holdings, Inc., which we refer to as Parent, which indirectly owns all of our issued and outstanding capital stock through its direct ownership of all of the issued and outstanding capital stock of Chill Intermediate Holdings, Inc. All of Parent’s issued and outstanding capital stock is owned by funds affiliated with Hellman & Friedman LLC, investment funds affiliated with GSO (the GSO Equity Entities), investment funds affiliated with Farallon Capital Partners, L.P. (the Farallon Equity Entities) and investment funds affiliated with AlpInvest Partners (AlpInvest), along with certain other investors that the GSO Equity Entities syndicated their investments to, which we collectively refer to as the Investors, and certain members of our management, whom we refer to as the Management Participants.

The Investors are able to control all actions by the board of directors of Parent by virtue of their being able to appoint a majority of the directors and their rights under the stockholders agreement to which they and Parent are parties. In addition, as a result of the voting and transfer provisions of the stockholders agreement, the Investors may be deemed to constitute a group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934. Accordingly, each of the members of this group may be deemed to beneficially own all of the shares of Parent common stock held by the Investors and the Management Participants. Each of the Investors disclaims any beneficial ownership of shares of Parent common stock held by the other Investors and the Management participants. See “Certain Relationships and Related Party Transactions.”

All of our issued and outstanding shares of capital stock have been pledged as collateral to the lenders under the senior secured term credit facilities described under “Description of Other Indebtedness.” If we were to default on our senior secured credit facilities, the lenders could foreclose on these shares of our common stock, which would result in a change of control.

The following table sets forth as of May 31, 2008 certain information regarding the beneficial ownership of the voting securities of Parent by each person who beneficially owns more than five percent of Parent common stock, and by the directors and executive officers of us and Parent, individually, and by the directors and executive officers of us and Parent as a group.

 

    Beneficial Ownership of
Parent Common Stock

Name of Beneficial Owner

  Number of
Shares
   Percentage

5% Stockholders:

    

Funds affiliated with Hellman & Friedman LLC(1)

  111,465,213    87.2

Farallon Equity Entities (2)

  10,000,000    7.8

Directors and Executive Officers:

    

David L. Swift(3)(10)

  —      —  

Lawrence M. Blackburn(3)(4)

  878,479    *

Ben D. Campbell(3)

  373,601    *

Donald R. King(3)

  368,701    *

Peter H. Alexander(3)

  110,000    *

Samuel G. Bikman(3)

  211,415    *

Gary L. Clark(3)(5)

  178,296    *

James L. Mishler(3)(6)

  192,670    *

Terrance M. Smith(3)(7)

  152,484    *

William L. Topper(3)

  240,501    *

Mark M. Dolan(3)

    

Ardee Toppe(3)(8)

  42,213    *

Charles A. Carroll(3)(9)

  1,089,799    *

Philip U. Hammarskjold(1)

  111,465,213    87.2

Robert B. Henske(1)

  111,465,213    87.2

Erik Ragatz(1)

  111,465,213    87.2

Saloni K. Saraiya(1)

  111,465,213    87.2

All directors and officers as a group (11)

  115,303,372    90.2

 

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* Indicates ownership of less than 1%.
(1) Consists of 62,365,698 shares held by Hellman & Friedman Capital Partners VI, L.P. (“HFCP VI”), 32,555,251 shares held by H&F Chill Partners, L.P. (“H&F Chill”), 16,287,805 shares held by Hellman & Friedman Capital Partners VI (Parallel), L.P. (“HFCP VI (Parallel)”), 230,418 shares held by Hellman & Friedman Capital Executives VI, LP (“HFCE VI”), and 26,041 shares held by Hellman & Friedman Capital Associates VI, LP (“HFCA VI,” and together with HFCP VI, H&F Chill, HFCP VI (Parallel) HFCE VI and HFCA VI, the “H&F Entities”). Hellman & Friedman Investors VI, L.P. (“H&F VI”) is the general partner of HFCP VI, HFCP VI (Parallel), HFCE VI and HFCA VI, and the managing member of H&F Chill GP LLC, which is the general partner of H&F Chill. Hellman & Friedman LLC is the general partner of H&F VI. The investment decisions of each of the H&F Entities are made by the investment committee of Hellman & Friedman LLC, which exercises voting and dispositive power over these shares. Messrs. Hammarskjold, Henske and Ragatz are managing directors and Ms. Saraiya is a principal of H&F VI. Messrs. Hammarskjold, Henske and Ragatz and Ms. Saraiya disclaim beneficial ownership of these shares except to the extent of their individual pecuniary interest in these entities. The address for the H&F Entities, Messrs. Hammarskjold, Henske and Ragatz and Ms. Saraiya is One Maritime Plaza, 12th Floor, San Francisco, California 94111.

 

(2) Consists of 3,975,000 shares held by Farallon Capital Partners, L.P., 4,950,000 held by Farallon Capital Institutional Partners, L.P., 550,000 shares held by Farallon Capital Institutional Partners II, L.P., 350,000 shares held by Farallon Capital Institutional Partners III, L.P. and 175,000 shares held by Tinicum Partners, L.P. The address for the Farallon Equity Entities is One Maritime Plaza, Suite 2100, San Francisco, California 94111.

 

(3) The address of this individual is c/o Goodman Global, Inc., 5151 San Felipe, Houston, Texas, 77056.

 

(4) Includes 6,659 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(5) Includes 9,160 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(6) Includes 40,916 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(7) Includes 50,164 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(8) Includes 31,950 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(9) Includes 89,799 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

(10) Mr. Swift and Parent agreed that Mr. Swift shall purchase that number of shares of Parent’s common stock having an aggregate value equal to $1,000,000, at the time and on the terms described in the share subscription agreement, which Mr. Swift and Parent will enter into pursuant to the terms of Mr. Swift’s employment agreement.

 

(11) Includes 138,849 shares subject to options that are exercisable within 60 days of May 31, 2008.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Agreements Related to the Merger

Goodman Global, Inc. and Merger Sub entered into several related party agreements in contemplation of the Merger, to which we succeeded by operation of law as a result of the Merger.

Merger Agreement

As a result of the merger, certain members of senior management received transaction bonuses equal to 75% of their current base salary, totaling not more than $3,202,110 in the aggregate. The transaction bonuses payable to our named executive officers are set forth in the table below. In addition, certain members of senior management were given a “rollover” incentive bonus payment equal to 100% of their current base salary, totaling not more than $4,269,480 in the aggregate. The rollover incentive bonuses payable to our named executive officers are also set forth in the table below.

 

     Transaction
Bonus Paid Upon
Consummation
of the Merger
   Equity Rollover
Incentive Paid Upon
Consummation of
the Merger

Executive Officers:

     

Charles A. Carroll

   $ 805,425    $ 1,073,900

Lawrence M. Blackburn

     335,100      446,800

Ben D. Campbell

     271,013      361,350

Donald R. King

     244,875      326,500

William L. Topper

     278,378      371,170

Stockholders Agreement

In connection with the closing of the Merger, Chill Holdings, Inc., or Parent, Chill Acquisition, Inc., or Merger Sub, and each of the following: funds affiliated with Hellman & Friedman LLC, which we refer to as the Hellman & Friedman Investors, funds affiliated with GSO Capital Partners, which we refer to as the GSO Equity Entities, funds affiliated with Farallon Partners, which we refer to as the Farallon Equity Entities, funds affiliated with AlpInvest Partners which we refer to as AlpInvest along with certain other investors that the GSO Equity Entities syndicated their investments to (collectively, the Fund Co-Investors) (collectively, the Investors) and certain members of our management, whom we refer to as the Management Participants, entered into a stockholders agreement that generally contains the following provisions:

Board of Directors. The stockholders agreement requires that, until an initial public offering of shares of Parent’s common stock, the parties that beneficially own shares of Parent’s common stock will vote those shares to elect a board of directors of Parent comprised of the following persons:

 

   

the chief executive officer of Parent and

 

   

the remaining board members designated by the Hellman & Friedman Investors, with at least one of such designees being designated by Hellman & Friedman Capital Executives VI, L.P. for so long as it owns any share equivalents.

After an initial public offering of Parent’s common stock, the Hellman & Friedman Investors and their affiliates will have the right to nominate the number of individuals for election to the board of directors that is equal to the product of the percentage of Parent’s share equivalents held by the Hellman & Friedman Investors and their affiliates, multiplied by the number of directors then on the board, rounded up to the nearest whole number.

For as long as the Hellman & Friedman Investors are entitled to nominate an individual for election to the board of directors, Parent is required to nominate such individual for election as a director as part of the slate that

 

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is included in the proxy statement or consent solicitation relating to such election and provide the highest level of support for the election of such individual as it provides to any other individual standing for election as part of Parent’s slate.

Indemnification. We generally are required to indemnify and hold harmless each of the stockholders that is party to the stockholders agreement, together with its partners, stockholders, members, affiliates, directors, officers, fiduciaries, controlling persons, employees and agents from any losses arising out of either of the following, subject to limited exceptions:

 

   

the stockholder’s or its affiliate’s ownership of share equivalents or other equity securities of Parent or its ability to control or influence Parent, or

 

   

the business, operations, properties, assets or other rights or liabilities of Parent or any of its subsidiaries.

Participation Rights. Subject to specified exceptions, until an initial public offering, Parent may not issue securities or debt securities, a post closing issuance, without permitting each Investor the opportunity to purchase a pro rata share of the securities being issued, based on the Investor’s respective ownership of share equivalents at that time.

Transfer Provisions and Registration Rights. The stockholders agreement also contains (1) transfer restrictions applicable to the share equivalents held by Parent, the Investors and the Management Participants, (2) tag-along rights in favor of the Hellman & Friedman Investors and each eligible tag-along Investor, (3) drag-along rights in favor of the Hellman & Friedman Investors, and (4) certain registration rights (including customary indemnification) and Rule 144 sale provisions applicable to the Investors and their affiliates and the Management Participants.

Management Stockholders Agreement

The common stock and options in Parent issued to the initial Management Participants, each of whom entered into an equity contribution agreement, are subject to a management stockholders agreement, which generally contains the following provisions:

 

   

transfer restrictions, including rights of first refusal in favor of Parent or its designee,

 

   

repurchase rights in favor of Parent or its designee,

 

   

put rights in favor of the Management Participants,

 

   

piggyback registration rights in favor of the Management Participants,

 

   

tag-along rights in favor of the Management Participants with respect to sales by the Hellman & Friedman Investors, and

 

   

drag-along rights in favor of the Hellman & Friedman Investors.

Subscription Agreement

In connection with the Merger, Parent entered into a subscription agreement with each of the following: funds affiliated with the Hellman & Friedman Investors, GSO Equity Entities, Farallon Equity Entities, AlpInvest, and the Fund Co-Investors, each a “Subscriber,” which set forth the terms of the sale and purchase of the subscription securities. Under the subscription agreement, the Subscribers were also required to enter into the stockholders agreement, described above.

Exchange and Registration Rights Agreement

Merger Sub, prior to the Merger, entered into a registration rights agreement with funds affiliated with GSO Capital Partners, funds affiliated with Farallon Partners, funds affiliated with AlpInvest Partners and funds

 

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affiliated with the Fund Co-Investors (the Purchasers), pursuant to which the we were required to file this registration statement and deliver to the Purchasers the exchange notes registered hereunder, in exchange for the initial notes tendered by the Purchasers. Under the agreement, Goodman Global, Inc. and each guarantor, jointly and severally, agreed to indemnify and hold harmless each holder and controlling person against any losses, claims, damages, liabilities, costs and reasonable expenses (Losses), if any Losses are based upon any untrue statement of material fact in any registration statement, prospectus or in any amendment or supplement thereto, in any preliminary prospectus or any free-writing prospectus or “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or any omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading.

Indemnification of Directors and Officers

Pursuant to the closing of the Merger, Parent entered into indemnification agreements with Messrs. Alexander, Bikman, Blackburn, Campbell, Carroll, Clark, King, Mishler, Smith, Toppe and Topper. Parent agreed that, for a period of six years following the effective time of the Merger, it will indemnify each of the directors and officers of our predecessor to the fullest extent permitted by Delaware law against claims arising out of or pertaining to the fact that the person was an officer or director of our predecessor or any of our subsidiaries prior to the Merger. The certificate of incorporation of the surviving corporation provides that we will indemnify each of our directors and officers to the fullest extent permitted by law for claims arising by reason of the fact that he or she is a director, officer or employee of us, or of any of our subsidiaries. On March 6, 2008, Goodman Global, Inc. entered into indemnification agreements with our directors, Messrs. Carroll, Henske and Ragatz and Ms. Saraiya, with similar terms as described above.

Employment and Severance Agreements

In connection with the closing of the Merger, Merger Sub entered into a new employment agreement with Charles Carroll on February 13, 2008, under which Mr. Carroll would continue as the Chief Executive Officer of Goodman Global, Inc. until June 30, 2008 or, if earlier, the date on which his replacement commenced employment. Mr. Carroll retired as our President and Chief Executive Officer and our new President and Chief Executive Officer, David Swift, joined us on April 21, 2008. On February 13, 2008, Merger Sub also entered into a new employment agreement with Lawrence Blackburn pursuant to which Mr. Blackburn continues to serve as our Chief Financial Officer. In connection with the closing, Merger Sub also entered into individual severance agreements with our other executive officers. See “Executive Compensation—New Employment Agreements” and “Executive Compensation—New Severance Agreements.”

Equity Contribution Agreements

Certain members of senior management, including our named executive officers, have entered into equity contribution agreements with Parent. Pursuant to the equity contribution agreements, at the effective time of the Merger, each executive contributed to Parent a portion of the shares of Goodman Global, Inc. common stock he then held in exchange for shares of Parent common stock having an equivalent value based on the price per share our current controlling shareholders paid for their shares of Parent common stock. To the extent that an executive did not hold a sufficient number of shares of Goodman Global, Inc. common stock at the effective time of the Merger to contribute the specific value described in his equity contribution agreement, he contributed a sufficient number of vested options to purchase shares of Goodman Global, Inc. common stock in exchange for vested options for Parent stock so that the total value of the shares of Goodman Global, Inc. common stock and vested options to purchase shares of Goodman Global, Inc. common stock contributed to Parent was equal to the value the executive agreed to contribute in his equity contribution agreement. These options were contributed pursuant to the terms of option rollover agreements dated as of February 13, 2008. The aggregate value of Goodman (predecessor) stock contributed for common stock of Chill Holdings, Inc. by all members of senior management, including our named executive officers pursuant to the equity contribution agreements, was $36.1 million. See “Compensation Discussion and Analysis—Equity Contribution Agreements.”

 

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In addition, Messrs. Blackburn, Clark, Mishler, Smith and Toppe entered into option rollover agreements to “roll” options over Goodman Global, Inc. common stock in exchange for new Parent options to purchase shares of Parent equity, at an exercise price per share calculated on the basis of a ratio of the price paid for each share of Goodman Global, Inc. common stock in the Merger over the price per share of Parent common stock paid by our current controlling stockholders. Although the intrinsic value of the shares rolled varied for each executive, the terms of these option rollover agreements are identical to the terms summarized at “Compensation Discussion and Analysis—Equity Contribution Agreements.” Each member of senior management who contributed his existing equity for new equity in Parent or invested in additional equity in Parent was required to become a party to a management stockholders’ agreement, the terms of which are summarized at “Compensation Discussion and Analysis.”

Agreements with our New President and Chief Executive Officer

Employment Agreement

Mr. Swift entered into an employment agreement with us (the Employment Agreement), effective as of April 21, 2008, pursuant to which Mr. Swift commenced serving as our and our Parent’s President and Chief Executive Officer, and as a member of our and our Parent’s Board of Directors. Mr. Swift’s employment agreement has an initial term of five years, which will renew for additional one-year periods until either party provides notice of non-renewal at least 180 days prior to the end of the then-current term. The following description is only a summary of the material provisions of the Employment Agreement with Mr. Swift, does not purport to be complete and is qualified in its entirety by reference to the provisions of that agreement, including the definitions therein of certain terms used below.

Salary and Bonus. The Employment Agreement provides that while employed as our President and Chief Executive Officer, Mr. Swift will receive a base salary at the annual rate of $950,000, subject to annual review and adjustment, and will be eligible to earn an annual bonus in a target amount equal to 95% of his base salary, with a maximum bonus opportunity equal to 457.33% of his base salary. The Employment Agreement also required us to pay Mr. Swift an initial cash signing bonus of $850,000; we are also obligated to pay Mr. Swift a tax gross-up payment equal to the federal income, state income and employment taxes imposed on the initial signing bonus. If Mr. Swift remains employed with us through the Stage 2 Date (as defined below), then we will pay Mr. Swift an additional cash bonus in an amount which we cannot determine at this time, plus a tax gross-up payment on such additional cash bonus. Mr. Swift is also entitled to participate in Goodman’s employee benefit plans on the same basis as those plans are generally made available to other similarly situated executives.

In the event that any payment or benefit to be received under the Employment Agreement will trigger the imposition of excise tax under Section 4999 of the Code, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

Equity Participation. Mr. Swift’s equity participation in Parent, Goodman and any of their subsidiaries will be pursuant to the 2008 Plan, described in the section entitled “Executive Compensation—New Equity Incentive Plan,” option award agreements issued under the 2008 Plan, the Management Stockholders Agreement, described in the section above entitled “Management Stockholders Agreement,” and any contribution or subscription agreements relating to the equity of Parent or Goodman. On April 21, 2008, Mr. Swift and Parent entered into both a time-vesting stock option agreement and a performance-vesting stock option agreement. In addition, Goodman and Mr. Swift agreed that on the Stage 2 Date, Mr. Swift and Parent will enter into a share subscription agreement, providing that Mr. Swift shall purchase that number of shares of Parent’s common stock, par value $0.01 per share, having an aggregate value equal to $1,000,000, on the terms described in the share subscription agreement.

The options are subject to the provisions of the 2008 Plan, as well as the terms of the applicable award agreement. Pursuant to the performance-vesting stock option agreement, Mr. Swift was granted an option to

 

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purchase 673,492 shares at an exercise price of $10.00 per share, vesting in five equal installments (of 20% each) of the shares covered by the option on December 31 of each calendar year 2008 through 2012, subject to the satisfaction of certain performance targets for each such year. Pursuant to the time-vesting stock option agreement, Mr. Swift was granted an option to purchase 1,010,239 shares at an exercise price of $10.00 per share. The time-vesting option vests in four equal installments (of 25% each) on April 21 of each calendar year 2009 through 2012, subject to Mr. Swift’s continuous service with us. In the event of a change in control, both the time-vesting options and the performance-vesting options shall, subject to certain conditions, accelerate and immediately become fully vested and exercisable immediately prior to the effective date of the change in control.

Relocation Arrangements. We agreed with Mr. Swift that an agent acting as a representative for us will purchase Mr. Swift’s residential property in St. Joseph, Michigan (the Property) for a purchase price of $1,150,000 and simultaneous with such purchase, the agent will enter into a lease agreement to lease the Property to Mr. Swift and his spouse. The Property will be listed by the agent for sale. Our prior consent will be required to accept any purchase offer, and Mr. Swift’s and our prior consent will be required to accept any purchase offer for the Property received prior to July 31, 2008 for a price less than $1,700,000. The date of closing of the sale of the Property by the agent to an unaffiliated third party shall be the Stage 2 Date and the purchase price shall be the Stage 2 Price.

We also agreed with Mr. Swift that the purchase price paid for the Property was calculated as the average of two third-party appraisals, and such amount represented the good faith belief of both Mr. Swift and us as to the fair market value of the Property. Mr. Swift and Goodman also agreed that to the extent that the Stage 2 Price is less than $1,000,000, Mr. Swift will indemnify us for the amount of such loss.

Pursuant to the Employment Agreement, we are required to pay or reimburse Mr. Swift for relocation costs incurred in connection with his permanent move to Houston, Texas. We will also pay or reimburse Mr. Swift up to an aggregate amount of $10,000 for reasonable legal fees incurred in connection with the negotiation of the Employment Agreement.

Termination Arrangements. In the event that Mr. Swift is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his base salary, plus two times his target bonus, over the two-year period following such termination, as well as a prorated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid under the bonus program. In the event that prior to April 21, 2009, Mr. Swift is terminated by us with “cause” or he resigns without “good reason,” Mr. Swift must repay both the initial cash signing bonus and additional cash bonus, as well as any tax gross up paid pursuant thereto. Pursuant to the Employment Agreement, Mr. Swift has agreed not to disclose our confidential information at any time, and, for the period during which he provides services to us and for the two-year period thereafter, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

Indemnification Agreement

Mr. Swift and Goodman each also entered into an Indemnification Agreement on substantially the same terms as those of the Indemnification Agreements between our Parent and the directors and officers described above. The Indemnification Agreement by and between Goodman and Mr. Swift does not supersede, limit or alter any of the rights and obligations of either party as set forth in the Employment Agreement and any equity agreements between our Parent and Mr. Swift.

Joinder to the Management Stockholders Agreement

Mr. Swift and Goodman each executed a joinder to the Management Stockholders Agreement (the Joinder), described in the section entitled “Certain Relationships and Related Party Transactions—Management Stockholders Agreement.” Pursuant to the Joinder, Mr. Swift will share the same rights and obligations as the Initial Management Investors, as defined in the Management Stockholders Agreement.

 

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DESCRIPTION OF OTHER INDEBTEDNESS

Senior Secured Credit Facilities

Overview

In connection with the Transactions, we and Chill Intermediate Holdings, Inc. entered into (1) a senior secured term credit agreement with Barclays Capital and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) an asset-based revolving credit agreement with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto. We refer to these facilities as the senior secured credit facilities.

The senior secured credit facilities provide senior secured financing in the amount of up to $1.1 billion, consisting of: