SERVICE EXPERTS INC, S-4, 1996-09-19

SERVICE EXPERTS INC
S-4, 1996-09-19
MISCELLANEOUS REPAIR SERVICES

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 19, 1996

REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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SERVICE EXPERTS, INC.
(Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S> <C> <C>
DELAWARE 7623 62-1639453
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>

1134 MURFREESBORO ROAD
NASHVILLE, TENNESSEE 37217
(615) 391-4600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)

ALAN R. SIELBECK
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
SERVICE EXPERTS, INC.
1134 MURFREESBORO ROAD
NASHVILLE, TENNESSEE 37217
(615) 391-4600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPY TO:

J. CHASE COLE, ESQ.
WALLER LANSDEN DORTCH & DAVIS,
A PROFESSIONAL LIMITED LIABILITY COMPANY
2100 NASHVILLE CITY CENTER
511 UNION STREET
NASHVILLE, TENNESSEE 37219
(615) 244-6380

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after the effective date of this Registration Statement.
---------------------
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. / /

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C>
Common Stock ($.01 par value per share)(3), Common Stock
Warrants and Debt Securities................................. $50,000,000 $17,242
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</TABLE>

(1) The amount to be registered is the same as the proposed maximum aggregate
offering price.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933 as
amended.
(3) Includes shares of Common Stock to be resold upon exercise of Common Stock
Warrants and conversion of Debt Securities issued pursuant to this
Registration Statement.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2

PROSPECTUS
$50,000,000

[LOGO] SERVICE EXPERTS LOGO(R)

COMMON STOCK, COMMON STOCK WARRANTS AND DEBT SECURITIES
---------------------

This Prospectus relates to the offer by Service Experts, Inc., a Delaware
corporation (the "Company"), of shares of the Company's Common Stock, $.01 par
value per share ("Common Stock"), warrants to purchase Common Stock ("Common
Stock Warrants") and the shares of Common Stock issued thereunder upon the
exercise of such Common Stock Warrants, or debt securities ("Debt Securities"),
and the shares of Common Stock issued thereunder upon the conversion thereof,
with a collective aggregate offering price of up to $50,000,000 on terms to be
determined at the time of any such offering. The Company may offer Common Stock,
Common Stock Warrants, or Debt Securities (collectively, "Securities") from time
to time in connection with the acquisitions of the assets or stock of heating,
ventilating and air conditioning ("HVAC") service and replacement businesses.
The consideration for the acquisition of the assets or stock of such entities
may consist of cash, the assumption of liabilities, Securities, or any
combination thereof, as determined pursuant to arms-length negotiations between
the Company and the sellers of the assets or stock to be acquired. The
Securities may be offered in such amounts, at such prices and on such terms to
be set forth in a supplement to this Prospectus (a "Prospectus Supplement") or
post-effective amendment (a "Post-Effective Amendment"), and will include, where
applicable: (i) in the case of Common Stock, the specific number of shares and
issuance price per share, (ii) in the case of Common Stock Warrants, the
duration, offering price, exercise price and detachability, and (iii) in the
case of Debt Securities, the specific title, aggregate principal amount, form,
authorized denomination, maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for any sinking fund payments and terms, if
any for conversion into Common Stock.

Common Stock issued pursuant to this Prospectus and any applicable
Prospectus Supplement or Post-Effective Amendment to acquire the assets or stock
of individual HVAC service and replacement businesses, as described above, may
be reoffered pursuant hereto by the holders thereof (the "Selling Stockholders")
from time to time in transactions on the Nasdaq Stock Market's National Market
(the "Nasdaq National Market"), in negotiated transactions, through the writing
of options on Securities, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices relating to the prevailing market prices, or negotiated prices. The
Selling Stockholders may effect such transactions by selling the Common Stock to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Stockholders
or the purchasers of shares from whom such broker-dealer may act as agent or to
whom they may sell as principal or both. See "Selling Stockholders".

The Company will not receive any part of the proceeds from the resale by
the Selling Stockholders of any Common Stock thereof pursuant hereto. The
Company will bear all expenses (other than selling discounts and commissions and
fees and expenses of the Selling Stockholders) in connection with the
registration of the Common Stock being reoffered by the Selling Stockholders.
The terms for the issuance of Securities may include provisions for the
indemnification of the Selling Stockholders for certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
---------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 8 THROUGH 11.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY AND ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF SECURITIES
UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.

September 19, 1996
<PAGE> 3

AVAILABLE INFORMATION

The Company has filed a Registration Statement on Form S-4, including
amendments thereto, if any, with respect to the Securities (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission"). This
Prospectus and any accompanying Prospectus Supplement do not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus and any accompanying
Prospectus Supplement concerning the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or as previously filed with the Commission and
incorporated herein by reference. For further information with respect to the
Company and the Securities, reference is made to the Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected by
anyone without charge at the Commission's principal office at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon payment of certain fees
prescribed by the Commission.

The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, as well as the following Commission Regional Offices:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains an Internet Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, and the address of such site is
http://www.sec.gov. The Company's Common Stock is listed on the Nasdaq National
Market, and such reports, proxy statements and other information can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., located at 1735 K Street, N.W., Washington, D.C. 20549, at prescribed
rates.

2
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Simultaneously with the closing of its initial public offering, which occurred
on August 21, 1996 (the "IPO"), the Company acquired, in separate transactions,
12 HVAC service and replacement businesses and Contractor Success Group, Inc.
("CSG") (collectively, the "Subsidiaries") in exchange for shares of Common
Stock and cash (the "Combination"). Unless the context otherwise requires, all
references herein to the "Company" or "Service Experts" shall mean Service
Experts, Inc., a Delaware corporation, and the Subsidiaries. The term "Service
Centers" refers to HVAC service and replacement businesses owned and operated by
the Company.

THE COMPANY

Simultaneously with the completion of its IPO, the Company purchased all of
the outstanding capital stock of the Subsidiaries. Management believes that the
Company is one of the leading providers of residential HVAC services and
replacement equipment in the United States. The Company's 1995 pro forma net
revenues were approximately $59.7 million and 1995 pro forma cost of goods sold
was approximately $36.1 million resulting in a gross margin of approximately
$23.6 million. The Subsidiaries have experienced compounded annual revenue
growth of approximately 31.6% from 1991 to 1995. Prior to the Combination, each
of the Subsidiaries operated independently and was not under common control or
management; accordingly, such results may not be comparable to or indicative of
the Company's future performance. See "Summary Combined Financial Data."

The Service Centers install, service and maintain central air conditioners,
furnaces and heat pumps, primarily in existing homes. Management estimates that
in 1995 over 80% of the Company's pro forma net revenue was derived from
replacing, maintaining and servicing HVAC equipment at existing residences and
commercial businesses and less than 20% was derived from installing new
equipment at newly constructed homes and businesses. The Company focuses on the
service and replacement segment of the HVAC industry rather than the new
construction segment because management believes that the service and
replacement segment exposes the Company to less credit risk and offers higher
margins as a result of opportunities for more attractive pricing because of
customers' demands for immediate, convenient and reliable service.

CSG was formed in 1991 to offer HVAC companies proprietary products as well
as marketing, management, educational and advisory services not available from
industry trade associations. CSG currently has over 270 members serving distinct
market areas of the United States. Management estimates that the aggregate
annual revenues of the CSG members not owned by the Company are in excess of
$500 million. CSG seeks to provide its members with a competitive advantage over
other HVAC contractors in each member's market area by enabling members to
operate their businesses with a higher degree of professionalism and by
providing proven marketing and operational strategies designed for the HVAC
industry. All of the Service Centers are members of CSG and operate in
accordance with its recommended methods and procedures.

The market for HVAC services and replacement equipment is large and
growing. Management estimates, based on industry information, that the market
for the service and replacement of HVAC systems in existing homes is
approximately $24 billion annually. The installation and replacement segment of
the industry has increased in size as a result of the aging of the installed
base of residential systems, the introduction of new, energy efficient systems
and the upgrading of existing homes to central air conditioning.

The residential HVAC industry is highly fragmented, and management believes
that this creates an opportunity for further acquisitions of HVAC businesses.
Management believes these businesses are typically closely held, single-center
operations that serve a limited geographic area. The businesses are heavily
dependent upon referrals to generate businesses. In many cases, these businesses
are operated by service technicians who lack the business and marketing
expertise to expand their businesses, increase their profitability and compete
effectively with larger operators.

3
<PAGE> 5

Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. The
Company is implementing an aggressive acquisition strategy which targets for
acquisition as "hubs" CSG members that are geographically desirable, financially
stable, experienced in the industry and CSG operating methods and characterized
by strong management. The Company also plans to increase market presence through
acquisitions of other HVAC businesses that have long operating histories, large
customer bases, experienced management and present opportunities to reduce
overhead expenses or dispose of fixed assets to improve profitability. In
addition, management believes that it will be able to improve the financial
performance of acquired companies through the implementation of the methods and
procedures developed by CSG.

The Company's principal executive offices are located at 1134 Murfreesboro
Road, Nashville, Tennessee 37217, and its telephone number is (615) 391-4600.

4
<PAGE> 6

SUMMARY COMBINED FINANCIAL DATA

The following table presents summary combined financial and operating data
of the combined AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. ("Acquiror"). Prior to the Combination, each of the
Subsidiaries operated independently and was not under common control or
management and some were not taxable entities; accordingly, the data may not be
comparable to or indicative of post-combination results. The following should be
read with the historical financial statements, the Pro Forma Combining Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. As a result
of the adoption of Securities and Exchange Commission Staff Accounting Bulletin
No. 97 ("SAB 97") on July 31, 1996, the presentation of financial information of
the Company reflects AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. as the acquiror of the other Subsidiaries because the
stockholders of these companies received the largest ownership interest in the
Company of any Subsidiary pursuant to the Combination. Notwithstanding this
presentation, the Combination has been accounted for using the historical cost
basis of the Subsidiaries in accordance with Securities and Exchange Commission
Staff Accounting Bulletin No. 48 ("SAB 48").

COMBINED ACQUIROR

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1995(1)(2) 1995 1996 1996(1)(2)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.......... $10,292,295 $14,298,906 $16,452,622 $59,651,163 $ 7,671,638 $ 8,634,712 $32,204,438
Cost of goods sold... 7,280,075 10,245,039 11,122,350 36,095,710 5,316,352 5,741,935 19,498,220
Gross margin......... 3,012,220 4,053,867 5,330,272 23,555,453 2,355,286 2,892,777 12,706,218
Selling, general and
administrative
expenses........... 2,908,741 3,786,221 4,591,636 15,670,975 2,252,947 3,024,184 8,632,488
Income (loss) from
operations......... 103,479 267,646 738,636 7,884,478 102,339 (131,407) 4,073,730
Interest (expense)
income, net........ (69,637) (64,541) (53,963) 256,206 (30,703) (28,621) 140,396
Pro forma net income
(loss)(3).......... 88,746 162,129 423,354 5,201,787 55,709 (93,087) 2,733,337
Pro forma net income
per share(4)....... $ 0.67 $ 0.35
Pro forma weighted
average shares
outstanding(4)..... 7,710,234 7,710,234
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
-------------------------
PRO FORMA
AS ADJUSTED
1996 1996(2)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................................. $ 1,101,872 $11,181,890
Total assets................................................................ 5,028,844 26,925,452
Total debt.................................................................. 43,901 --
Stockholders' equity........................................................ 1,676,424 16,211,966
</TABLE>

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(1) The Combination was accounted for using the historical cost basis of the
combined subsidiaries, in accordance with SAB 48.
(2) Pro forma, as adjusted, gives effect to the Combination as if such
Combination had occurred as of January 1, 1995. In addition, the pro forma
information is based on certain assumptions and adjustments. See notes to
the Pro Forma Combining Financial Statements.
(3) Historical net income and income tax expense have been omitted because these
amounts are not meaningful as a result of the different tax status of the
Combined Acquiror and Subsidiaries. Pro forma net income represents the
effect of taxing the entities under Subchapter C of the Internal Revenue
Code.
(4) The computation of pro forma net income per share is based upon 7,710,234
weighted average shares of Common Stock outstanding, which includes (i)
4,527,010 shares distributed to the shareholders of the Subsidiaries, (ii)
1,462,100 shares held by existing stockholders of Service Experts, Inc. and
(iii) 1,721,124 shares sold in the IPO to cover the cash portion of the
distribution to be paid to the stockholders of the Subsidiaries, debt to be
paid at closing, and associated costs of the IPO on shares used for the
distribution and the paydown of debt.

5
<PAGE> 7

CERTAIN INDIVIDUAL SUBSIDIARIES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C>
CONTRACTOR SUCCESS GROUP, INC.
Net revenue........................................ $ 2,414,497 $ 2,740,976 $ 3,229,558 $1,570,089 $1,693,636
Cost of goods sold................................. 466,196 414,938 615,245 263,124 300,528
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 1,948,301 2,326,038 2,614,313 1,306,965 1,393,108
Selling, general and administrative expenses(1).... 1,224,819 1,456,424 1,339,221 537,366 732,524
----------- ----------- ----------- ----------- -----------
Income from operations............................. 723,482 869,614 1,275,092 769,599 660,584
Interest (expense) income, net..................... 118,004 104,537 115,295 49,092 61,869
Pro forma net income(2)............................ 555,749 602,151 861,187 480,061 454,696
HARDWICK AIR MASTERS, INC.
Net revenue........................................ $ 3,989,626 $ 4,797,873 $ 6,377,285 $2,964,718 $3,877,541
Cost of goods sold................................. 2,986,702 3,418,062 4,556,146 2,083,397 2,856,457
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 1,002,924 1,379,811 1,821,139 881,821 1,021,084
Selling, general and administrative expenses(1).... 917,796 1,310,967 1,577,312 742,156 778,801
----------- ----------- ----------- ----------- -----------
Income from operations............................. 85,128 68,844 243,827 139,165 242,283
Interest (expense) income, net..................... (57,064) (68,947) (71,587) (32,423 ) (51,526 )
Net income......................................... 35,217 8,319 138,060 83,281 127,940
NORRELL HEATING & AIR CONDITIONING, INC.
Net revenue........................................ $ 3,274,267 $ 3,508,903 $ 4,265,726 $1,971,802 $2,047,437
Cost of goods sold................................. 2,285,621 2,436,732 2,852,690 1,334,641 1,406,695
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 988,646 1,072,171 1,413,036 637,161 640,742
Selling, general and administrative expenses(1).... 992,486 1,071,992 1,383,949 686,185 587,754
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... (3,840) 179 29,087 (49,024 ) 52,988
Interest (expense) income, net..................... 10,360 17,949 26,772 6,673 22,313
Net income (loss).................................. 34,527 27,088 79,550 (2,260 ) 75,643
VISION HOLDING COMPANY, INC.(3)
Net revenue........................................ $ 2,792,574 $ 3,525,119 $ 4,261,485 $2,008,262 $2,309,356
Cost of goods sold................................. 1,751,998 2,400,309 2,738,022 1,385,883 1,542,173
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 1,040,576 1,124,810 1,523,463 622,379 767,183
Selling, general and administrative expenses(1).... 771,085 847,319 1,093,175 475,393 483,353
----------- ----------- ----------- ----------- -----------
Income from operations............................. 269,491 277,491 430,288 146,986 283,830
Interest (expense) income, net..................... (14,518) (58,068) (49,919) (28,859 ) (28,234 )
Net income......................................... 189,957 163,388 261,881 89,307 142,732
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
Net revenue........................................ $ 3,532,089 $ 3,715,214 $ 4,232,962 $1,904,167 $2,551,967
Cost of goods sold................................. 2,031,910 2,113,176 2,271,332 1,106,727 1,293,770
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 1,500,179 1,602,038 1,961,630 797,440 1,258,197
Selling, general and administrative expenses(1).... 1,859,319 1,468,513 1,652,784 765,863 855,268
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... (359,140) 133,525 308,846 31,577 402,929
Interest (expense) income, net..................... 17,007 32,677 21,142 7,061 13,712
Pro forma net income (loss)(2)..................... (190,963) 95,174 187,629 18,908 222,961
ROLF COAL AND FUEL CORP.
Net revenue........................................ $ 3,036,009 $ 3,977,013 $ 4,104,580 $2,161,613 $2,448,305
Cost of goods sold................................. 1,516,213 1,940,213 1,866,607 1,058,267 949,703
----------- ----------- ----------- ----------- -----------
Gross margin....................................... 1,519,796 2,036,800 2,237,973 1,103,346 1,498,602
Selling, general and administrative expenses(1).... 1,568,095 1,941,143 2,142,778 1,290,320 1,528,166
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... (48,299) 95,657 95,195 (186,974 ) (29,564 )
Interest (expense) income, net..................... (13,576) (7,560) (2,043) (20,159 ) (19,867 )
Net income (loss).................................. (19,954) 69,952 44,107 (143,177 ) (15,481 )
</TABLE>

6
<PAGE> 8

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(1) Includes bad debt expense.
(2) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
(3) 1993 represents period from March 1, 1993 through December 31, 1993.
(4) Air Experts, a United Services Co., Inc., Arrow Heating & Air Conditioning,
Inc., Brand Heating & Air Conditioning, Inc., Coastal Air Conditioning
Service, Inc., Gilley's Heating & Cooling, Inc., and Service Experts of Palm
Springs, Inc.
(5) The selected financial data above represents the six smallest (by revenue)
Subsidiaries which have been combined for the period from January 1, 1993
through June 30, 1996 except for the following Subsidiaries which are
included from the date operations commenced as follows: Air Experts, a
United Services Co., Inc. -- January 1, 1994; Arrow Heating & Air
Conditioning, Inc. -- January 29, 1993; and Service Experts of Palm Springs,
Inc. -- October 15, 1993.

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<PAGE> 9

RISK FACTORS

In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby and any accompanying
Prospectus Supplement or Post-Effective Amendment, as applicable. This
discussion also identifies important cautionary factors that could cause the
Company's actual results to differ materially from those projected in forward
looking statements of the Company made by, or on behalf of the Company. In
particular, the Company's forward looking statements, including those regarding
the successful integration of the businesses of the Subsidiaries, the effective
implementation of the Company's operating strategy, the availability of
additional HVAC businesses for acquisition, the adequacy of the Company's
capital resources and other statements regarding trends relating to various
revenue and expense items, could be affected by a number of risks and
uncertainties including those described below.

ABSENCE OF COMBINED OPERATING HISTORY; PRIOR SUBSIDIARY OPERATING LOSSES AND
DEFICITS

The Company was incorporated in March 1996 in connection with its IPO.
Simultaneously with the closing of the IPO, the Company consummated the
acquisition of the Subsidiaries. The Company did not conduct any operations of
the Subsidiaries as a combined entity until the Combination was consummated.
Accordingly, there can be no assurance that the Company will be able to
integrate successfully the businesses of the Subsidiaries or to operate
profitably. There can be no assurance that the Company's management group will
be able to effectively manage the combined entity and effectively implement the
Company's operating and acquisition strategies. Failure to integrate
successfully the Subsidiaries and to implement the Company's operating and
acquisition strategies could have a material adverse effect on the Company's net
revenue and earnings. See "The Company -- Strategy." In addition, certain
Subsidiaries have experienced operating losses and working capital deficits in
the last several years. For the six months ended June 30,1996, AC Service &
Installation Co., Inc./Donelson Air Conditioning Company, Inc., Rolf Coal and
Fuel Corp., Coastal Air Conditioning Service, Inc. and Brand Heating & Air
Conditioning, Inc. had operating losses of $131,407, $29,564, $136,899 and
$221,905, respectively. At June 30, 1996 and December 31, 1995, Air Experts, a
United Services Co., Inc., had working capital deficits of $71,965 and $245,381,
respectively. There can be no assurance that such operating losses and working
capital deficits will not continue. See the historical financial statements of
the Subsidiaries and the notes thereto appearing elsewhere in this Prospectus.

RISKS ASSOCIATED WITH EXPANSION

The success of the Company's acquisition strategy will depend on a number
of factors, including (i) the Company's ability to locate existing HVAC service
and replacement businesses for acquisitions and to successfully integrate the
operations of companies acquired in the future into the Company's operations and
(ii) the availability of adequate financing to develop or acquire additional
HVAC service and replacement businesses. The Company plans to incur indebtedness
and to issue, from time to time, additional debt or equity securities, including
the issuance of Securities in connection with the types of transactions
identified on the cover page of this Prospectus. There can be no assurance that
the Company's acquisition strategy will be successful, that modifications to the
Company's strategy will not be required, that the Company will be able to
effectively manage and enhance the profitability of additional Service Centers
or that the Company will be able to obtain adequate financing on reasonable
terms to develop or acquire additional HVAC service businesses. See "The
Company -- Strategy."

COMPETITION

The HVAC service and replacement industry is highly competitive. The
Company's Service Centers compete with other full-service HVAC businesses
primarily on the basis of quality, reliability, customer service and price. In
certain markets, the Company competes with utility companies which have access
to capital, personnel, marketing and technological resources that are equal to
or greater than those of the Company. Because of the fragmented nature of the
industry and relatively low barriers to entry, additional competitors, including
companies that offer other home improvement services in addition to HVAC
services,

8
<PAGE> 10

may emerge that have greater access than the Company to capital, personnel and
technological resources. There can be no assurance that the Company will be able
to compete successfully with such competitors.

DEPENDENCE ON KEY PERSONNEL

The success of the Company is dependent upon the continued services of the
Company's senior management, particularly upon its Chairman of the Board and
Chief Executive Officer, Alan R. Sielbeck, and its President and Chief Operating
Officer, James D. Abrams. The loss of the services of Messrs. Sielbeck, Abrams
or any of the Company's senior management would have a material adverse effect
upon the Company's business and prospects. See "Management."

LABOR AVAILABILITY

The timely provision of high-quality service by the Service Centers
requires an adequate supply of skilled labor. In addition, the operating costs
of each Service Center may be adversely affected by high turnover in skilled
positions. Accordingly, the Company's ability to increase productivity and net
earnings is limited to a degree by its ability to employ the skilled laborers
necessary to meet the Company's service requirements. There can be no assurance
that the Company will be able to maintain an adequate skilled labor force
necessary to efficiently operate its Services Centers or that the Company's
labor expenses will not increase as a result of a shortage in the supply of
skilled workers.

SEASONAL AND CYCLICAL NATURE OF THE INDUSTRY

The HVAC service industry generally experiences increased demand during the
summer and winter months. The Company may, in certain periods, be affected by
these seasonal trends. The residential HVAC service and replacement industry
historically has been highly cyclical and is influenced by many of the same
national and regional economic and demographic factors which affect demand for
durable consumer goods, including consumer confidence, interest rates,
availability of financing, regional population and employment trends, and
general economic conditions. There can be no assurance that the HVAC service and
replacement industry will not experience future declines or that such declines
will not have a material adverse affect on the Company. See "The Company -- HVAC
Service and Replacement Industry."

CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS

Directors, officers and 5% stockholders of the Company beneficially own
approximately 43.0% of the outstanding Common Stock. See "Principal
Stockholders." Accordingly, these persons will have substantial influence over
the affairs of the Company, including the ability to influence the election of
directors and other matters requiring stockholder approval.

CONFLICTS OF INTEREST

Certain executive officers of the Company are owners of HVAC companies that
are not affiliated with the Company. While such executive officers have agreed
to devote their full time efforts to the operations of the Company, there can be
no assurance that they will not periodically devote time and attention to the
operations of HVAC companies that are not affiliated with the Company. Currently
none of the unaffiliated companies owned by such executive officers are located
in geographic areas served by the Company. There can be no assurance that the
Company will not enter the markets served by these companies in the future. See
"Management" and "Certain Transactions."

ABSENCE OF INTEGRATED OPERATING SYSTEMS

The Company is implementing and integrating certain information and
operating systems of the Subsidiaries. The Company may experience delays,
complications and expenses in implementing, integrating and operating such
systems, any of which could have a material adverse effect on the Company's
operations, net revenue and earnings. See "The Company -- Services and
Operations."

9
<PAGE> 11

REGULATION

HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, laws and regulations implementing the Clean Air
Act, as amended, relating to minimum energy efficiency standards of HVAC systems
and the production, servicing and disposal of certain ozone depleting
refrigerants used in such systems. In connection with the entry into new
markets, the Company may become subject to compliance with additional
regulations, and there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future.

Various local, state and federal laws and regulations, including, but not
limited to, laws and regulations implementing the Clean Air Act, as amended,
impose licensing standards on technicians who service heating and air
conditioning units. While the installers and technicians employed by the Service
Centers are duly certified by applicable local, state and federal agencies and
have been able to meet or exceed such standards to date, there can be no
assurance that they will be able to meet future standards.

In some states, warranties provided for in the Company's service agreements
may be deemed insurance contracts by applicable state insurance regulatory
agencies thereby subjecting the Company and the service agreements to the
insurance laws and regulations of such state.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws and Delaware law may make a change in the control of the Company more
difficult to effect, even if a change in control were in the stockholders'
interest. Section 203 of the Delaware General Corporation Law would prevent an
"interested stockholder" (defined in Section 203, generally, as a person owning
15% or more of the Company's outstanding voting stock) from engaging in a
"business combination" (as defined in Section 203) with the Company for three
years following the date such person became an interested stockholder unless
certain conditions, including approval by the Company's Board of Directors, are
met. The Company's Restated Certificate of Incorporation and Bylaws include
certain super-majority voting requirements and, in addition, the Company's
Restated Certificate of Incorporation allows the Board to determine the terms of
the preferred stock which may be issued by the Company without approval of the
holders of the Common Stock. The ability of the Company to issue preferred stock
in such manner could enable the Board to prevent changes in management and
control of the Company. The Board of the Company is divided into three classes
of directors, with directors being elected for staggered three-year terms. Such
staggered terms may affect the ability of the holders of the Common Stock to
change control of the Company. See "Description of Capital Stock -- Anti-
Takeover Provisions." In addition, certain provisions of the employment
agreements between the Company and the executive officers of the Company may
make a change of control more difficult. Pursuant to these employment
agreements, upon a change in control of the Company, each executive officer
shall be paid as severance pay such officer's base salary for the remaining term
of the employment agreement. See "Management -- Employment Agreements."

VOLATILITY OF MARKET PRICE

From time to time, there may be significant volatility in the market price
of the Common Stock. Quarterly operating results of the Company, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.

10
<PAGE> 12

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market could adversely affect the market price for the Common Stock. The number
of shares of Common Stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"), and lock-up agreements under which the holders of such shares have agreed
not to sell or otherwise dispose of any of their shares for a period of 180 days
after August 16, 1996 without the prior written consent of Equitable Securities
Corporation on behalf of the underwriters of the IPO. On the date of this
Prospectus, no shares other than the 2,587,500 shares sold in the IPO are
eligible for sale. A total of 3,502,158 additional shares are subject to lock-up
agreements and will be eligible for sale subject to the volume and holding
period limitations of Rule 144 beginning two years after August 16, 1996.

11
<PAGE> 13

SELECTED COMBINED FINANCIAL DATA

Simultaneously with, and as a condition to, the closing of the IPO, the
Company acquired the Subsidiaries. The Combination was accounted for using the
historical cost basis of the Subsidiaries, in accordance with SAB 48. As a
result of the adoption of SAB 97 on July 31, 1996, the presentation of financial
information of the Company reflects the combined AC Service & Installation Co.,
Inc. and Donelson Air Conditioning Company, Inc. as the acquiror of the other
Subsidiaries because the stockholders of these companies received the largest
ownership interest in the Company pursuant to the Combination.

Prior to the Combination, each of the Subsidiaries operated independently
and was not under common control or management and some were not taxable
entities; accordingly, the data may not be comparable to or indicative of
post-combination results. Management believes that a combined presentation of
financial information is most meaningful to investors' understanding of the
results of operations, financial condition and cash flows of the Subsidiaries.
The Company has adopted a December 31 fiscal year and has obtained audits for
all of the Subsidiaries' financial statements for the years ended December 31,
1993, 1994 and 1995, or from the date operations commenced if subsequent to
January 1, 1993.

The Selected Combined Financial Data for the fiscal years ended December
31, 1993, 1994 and 1995 (except for pro forma amounts) have been derived from
the financial statements of the combined AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc. which have been audited by Ernst & Young
LLP, independent auditors. The Selected Combined Financial Data for the six
months ended June 30, 1995 and 1996 have been derived from unaudited combined
financial statements that appear elsewhere in this Prospectus. The Selected
Combined Financial Data for the fiscal years ended December 31, 1991 and 1992
have been derived from unaudited combined financial statements not included
elsewhere in this Prospectus. The unaudited combined financial statements have
been prepared on the same basis as the audited combined financial statements
and, in the opinion of management, contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the combined
financial position and combined results of operations for the periods presented.
The pro forma data gives effect to the Combination and distributions to the
stockholders of the Subsidiaries. The pro forma data, as adjusted, gives effect
to the sale of the shares of Common Stock in the IPO and the application of the
net proceeds thereof and the consummation of the Combination, as if each
transaction had occurred at the beginning of the periods presented. In addition,
the pro forma information is based on available information and certain
assumptions and adjustments. See notes to the Pro Forma Combining Financial
Statements. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the historical financial statements of the Subsidiaries, including the related
notes thereto, that appear elsewhere in this Prospectus.

The selected financial data presented for each of the Subsidiaries for the
years ended December 31, 1993, 1994 and 1995, or from the date operations
commenced if subsequent to January 1, 1993, have been derived from the audited
financial statements of each of these companies that have been audited by Ernst
& Young LLP, independent auditors. The selected financial data presented for
each of the Subsidiaries for the six months ended June 30, 1995 and 1996 have
been derived from the unaudited financial statements of each of these companies
that appear elsewhere in this Prospectus. The selected financial data presented
for each of the Subsidiaries for the years ended December 31, 1991 and 1992, or
from the date operations commenced if subsequent to January 1, 1991, have been
derived from the unaudited financial statements of each of these companies not
included elsewhere in this Prospectus. The unaudited financial statements have
been prepared on the same basis as the audited financial statements, and in the
opinion of the Subsidiaries' management, contain all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial position and results of operations for the periods presented. The
selected financial data of the Subsidiaries have been presented as follows:

- Combined AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc., including pro forma information
- Contractor Success Group, Inc.
- Hardwick Air Masters, Inc.
- Norrell Heating & Air Conditioning, Inc.
- Vision Holding Company, Inc.
- Comerford's Heating and Air Conditioning, Inc.
- Rolf Coal and Fuel Corp.
- All remaining Subsidiaries are included on a combined basis and include
the following:
- Air Experts, a United Services Co., Inc.
- Arrow Heating & Air Conditioning, Inc.
- Brand Heating & Air Conditioning, Inc.
- Coastal Air Conditioning Service, Inc.
- Gilley's Heating & Cooling, Inc.
- Service Experts of Palm Springs, Inc.

12
<PAGE> 14

COMBINED ACQUIROR(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------------------------------- -------------------------
PRO FORMA
AS ADJUSTED(2)(3)
1991 1992 1993 1994 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net revenue... $ 5,781,768 $ 8,197,690 $10,292,295 $14,298,906 $16,452,622 $59,651,163 $ 7,671,638 $ 8,634,712
Cost of goods
sold........ 3,977,827 5,991,098 7,280,075 10,245,039 11,122,350 36,095,710 5,316,352 5,741,935
----------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
Gross
margin...... 1,803,941 2,206,592 3,012,220 4,053,867 5,330,272 23,555,453 2,355,286 2,892,777
Selling,
general and
administrative
expenses.... 1,602,061 2,163,084 2,908,741 3,786,221 4,591,636 15,670,975 2,252,947 3,024,184
----------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
Income (loss)
from
operations... 201,880 43,508 103,479 267,646 738,636 7,884,478 102,339 (131,407)
Other income
(expense):
Interest
expense... (21,917) (36,026) (74,631) (71,600) (77,149) -- (32,698) (40,484)
Interest
income.... 7,846 16,613 4,994 7,059 23,186 256,206 1,995 11,863
Other income
(expense).. (51,751) 26,662 68,450 17,065 25,569 298,736 21,101 20,855
----------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
(65,822) 7,249 (1,187) (47,476) (28,394) 554,942 (9,602) (7,766)
Income (loss)
before
tax......... 136,058 50,757 102,292 220,170 710,242 8,439,420 92,737 (139,173)
Pro forma
income tax
expense(4)... 34,681 17,845 13,546 58,041 286,888 3,237,633 37,028 (46,086)
----------- ----------- ----------- ----------- ----------- ----------------- ----------- -----------
Pro forma net
income
(loss)(4)... $ 101,377 $ 32,912 $ 88,746 $ 162,129 $ 423,354 $ 5,201,787 $ 55,709 $ (93,087)
========== ========== ========== ========== ========== =============== ========== ==========
Pro forma net
income per
share(5).... $ 0.67
Pro forma
weighted
average
shares
outstanding(5) 7,710,234

PRO FORMA
AS ADJUSTED(2)(3)
1996
-----------------
<S> <C>
INCOME STATEME
DATA:
Net revenue... $32,204,438
Cost of goods
sold........ 19,498,220
-----------------
Gross
margin...... 12,706,218
Selling,
general and
administrative
expenses.... 8,632,488
-----------------
Income (loss)
from
operations... 4,073,730
Other income
(expense):
Interest
expense... --
Interest
income.... 140,396
Other income
(expense).. 112,944
-----------------
253,340
Income (loss)
before
tax......... 4,327,070
Pro forma
income tax
expense(4)... 1,593,733
-----------------
Pro forma net
income
(loss)(4)... $ 2,733,337
===============
Pro forma net
income per
share(5).... $ 0.35
Pro forma
weighted
average
shares
outstanding(5) 7,710,234
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
---------------------------
DECEMBER 31, PRO FORMA
---------------------------------------------------------- AS ADJUSTED(3)
1991 1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Working
capital..... $ 527,905 $ 870,155 $ 758,049 $ 614,770 $1,182,653 $ 1,101,872 $ 11,181,890
Total
assets...... 1,507,497 2,796,279 3,313,115 3,931,581 4,569,910 5,028,844 26,925,452
Total debt.... 356,982 1,163,006 1,141,709 1,070,812 1,289,602 43,901 --
Stockholders'
equity...... 471,858 940,514 921,060 1,100,104 1,728,658 1,676,424 16,211,966
</TABLE>

13
<PAGE> 15

- ---------------

(1) The selected financial data above includes AC Service & Installation Co.,
Inc., from the period January 1, 1991 through June 30, 1996 and Donelson Air
Conditioning Company, Inc. from the period beginning December 2, 1991
through June 30, 1996.
(2) The Combination was accounted for using historical cost basis of the
Combined Subsidiaries, in accordance with SAB 48. Accordingly, the Company
will record the net assets acquired at the Subsidiaries' historical cost
basis.
(3) Pro forma information gives effect to the Combination prior to the IPO. Pro
forma data, as adjusted, gives effect to the IPO, the sale of the shares of
Common Stock offered thereby and the application of the net proceeds
therefrom as if such sale had occurred at the beginning of the periods
presented. See the notes to the Pro Forma Combining Financial Statements.
(4) Historical net income and income tax expense have been omitted because these
amounts are not meaningful due to the different tax status of the Combined
Acquiror and Subsidiaries. Pro forma net income represents the effect of
taxing the entity under Subchapter C of the Internal Revenue Code.
(5) The computation of pro forma net income per share is based upon 7,710,234
weighted average shares of Common Stock outstanding, which includes (i)
4,527,010 shares distributed to the stockholders of the Subsidiaries, (ii)
1,462,100 shares outstanding held by existing stockholders of Service
Experts, Inc. and (iii) 1,721,124 shares sold in the IPO to cover the cash
portion of the distribution to be paid to the stockholders of the
Subsidiaries, debt to be paid at closing, and associated costs of the
offering on shares used for the distribution and the paydown of debt.

14
<PAGE> 16

CONTRACTOR SUCCESS GROUP, INC.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue....................... $1,105,805 $2,445,839 $2,414,497 $2,740,976 $3,229,558 $1,570,089 $1,693,636
Cost of goods sold................ 341,823 195,161 466,196 414,938 615,245 263,124 300,528
----------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin...................... 763,982 2,250,678 1,948,301 2,326,038 2,614,313 1,306,965 1,393,108
Selling, general and
administrative expenses......... 397,106 1,422,338 1,224,819 1,456,424 1,339,221 537,366 732,524
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations............ 366,786 828,340 723,482 869,614 1,275,092 769,599 660,584
Interest (expense) income,
net............................. -- 101,341 118,004 104,537 115,295 49,092 61,869
Pro forma net income(2)........... 226,276 576,402 555,749 602,151 861,187 480,061 454,696
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 35,613 $ 337,829 $ 314,315 $ 418,050 $ 250,703 $ 527,301
Total assets.................. 42,449 795,452 788,063 995,212 1,410,691 1,174,821
Total debt.................... -- 1,658 5,295 5,835 263,277 --
Stockholders' equity.......... 42,449 736,044 660,821 784,972 731,159 986,612
</TABLE>

- ---------------

(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.

HARDWICK AIR MASTERS, INC.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue..................... $2,595,495 $3,007,132 $3,989,626 $4,797,873 $6,377,285 $2,964,718 $3,877,541
Cost of goods sold.............. 1,975,923 2,315,556 2,986,702 3,418,062 4,556,146 2,083,397 2,856,457
----------- ----------- ---------- ---------- ---------- ---------- ----------
Gross margin.................... 619,572 691,576 1,002,924 1,379,811 1,821,139 881,821 1,021,084
Selling, general and
administrative expenses....... 563,099 720,758 917,796 1,310,967 1,577,312 742,156 778,801
----------- ----------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations... 56,473 (29,182 ) 85,128 68,844 243,827 139,165 242,283
Interest (expense) income,
net........................... (49,607 ) (40,493 ) (57,064) (68,947) (71,587) (32,423) (51,526)
Net income (loss)............... 32,060 (31,175 ) 35,217 8,319 138,060 83,281 127,940
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
----------- ----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $ 36,209 $ 87,376 $ (114,513) $ (32,955) $ 164,691 $ 288,063
Total assets................ 812,860 935,769 1,398,397 1,494,644 1,979,439 2,394,270
Total debt.................. 323,226 351,278 520,662 473,094 607,237 441,867
Stockholders' equity........ 101,471 70,296 105,513 113,832 251,892 596,849
</TABLE>

15
<PAGE> 17

NORRELL HEATING & AIR CONDITIONING, INC.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue................. $2,010,678 $2,752,019 $3,274,267 $3,508,903 $4,265,726 $1,971,802 $2,047,437
Cost of goods sold.......... 1,262,311 1,963,704 2,285,621 2,436,732 2,852,690 1,334,641 1,406,695
----------- ----------- ---------- ---------- ---------- ---------- ----------
Gross margin................ 748,367 788,315 988,646 1,072,171 1,413,036 637,161 640,742
Selling, general and
administrative expenses... 745,321 781,042 992,486 1,071,992 1,383,949 686,185 587,754
----------- ----------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................ 3,046 7,273 (3,840) 179 29,087 (49,024) 52,988
Interest (expense) income,
net....................... (2,171 ) 3,251 10,360 17,949 26,772 6,673 22,313
Net income (loss)........... 16,716 22,702 34,527 27,088 79,550 (2,260) 75,643
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------ JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ (43,564) $ (6,634) $ 23,270 $ 46,105 $ 171,001 $ 350,460
Total assets.................. 431,936 514,769 770,727 776,738 1,594,242 1,318,443
Total debt.................... 40,000 -- -- -- -- --
Stockholders' equity.......... 138,275 120,977 155,504 177,812 268,300 343,943
</TABLE>

VISION HOLDING COMPANY, INC.

<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED SIX MONTHS ENDED
MARCH 1, 1993 DECEMBER 31, JUNE 30,
THROUGH ----------------------- -----------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue....................................... $ 2,792,574 $3,525,119 $4,261,485 $2,008,262 $2,309,356
Cost of goods sold................................ 1,751,998 2,400,309 2,738,022 1,385,883 1,542,173
----------------- ---------- ---------- ---------- ----------
Gross margin...................................... 1,040,576 1,124,810 1,523,463 622,379 767,183
Selling, general and administrative expenses...... 771,085 847,319 1,093,175 475,393 483,353
----------------- ---------- ---------- ---------- ----------
Income from operations............................ 269,491 277,491 430,288 146,986 283,830
Interest (expense) income, net.................... (14,518) (58,068) (49,919) (28,859) (28,234)
Net income........................................ 189,957 163,388 261,881 89,307 142,732
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1993 1994 1995 1996
----------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 188,308 $ 46,537 $ 348,606 $ 518,707
Total assets...................................... 1,883,541 1,952,778 2,128,703 2,582,475
Total debt........................................ 1,091,136 906,688 783,431 763,648
Stockholders' equity.............................. 209,557 372,945 634,826 777,558
</TABLE>

16
<PAGE> 18

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,748,734 $2,542,455 $3,532,089 $3,715,214 $4,232,962 $1,904,167 $2,551,967
Cost of goods sold................. 944,305 1,555,190 2,031,910 2,113,176 2,271,332 1,106,727 1,293,770
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 804,429 987,265 1,500,179 1,602,038 1,961,630 797,440 1,258,197
Selling, general and administrative
expenses......................... 859,036 857,398 1,859,319 1,468,513 1,652,784 765,863 855,268
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (54,607) 129,867 (359,140) 133,525 308,846 31,577 402,929
Interest (expense) income,
net.............................. 39,375 23,470 17,007 32,677 21,142 7,061 13,712
Pro forma net income (loss)(1)..... 1,984 98,982 (190,963) 95,174 187,629 18,908 222,961
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 629,897 $ 709,011 $ 316,350 $ 466,420 $ 655,395 $ 738,022
Total assets....................... 786,820 1,127,656 1,633,407 1,277,526 1,348,321 1,614,829
Total debt......................... -- -- -- 43,185 31,699 47,805
Stockholders' equity............... 722,077 840,627 542,391 717,884 851,038 922,765
</TABLE>

- ---------------

(1) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.

ROLF COAL AND FUEL CORP.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $2,880,070 $2,860,888 $3,036,009 $3,977,013 $4,104,580 $2,161,613 $2,448,305
Cost of goods sold................. 1,539,195 1,527,438 1,516,213 1,940,213 1,866,607 1,058,267 949,703
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 1,340,875 1,333,450 1,519,796 2,036,800 2,237,973 1,103,346 1,498,602
Selling, general and administrative
expenses......................... 1,269,951 1,361,967 1,568,095 1,941,143 2,142,778 1,290,320 1,528,166
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 70,924 (28,517) (48,299) 95,657 95,195 (186,974) (29,564)
Interest (expense) income, net..... (16,881) (16,113) (13,576) (7,560) (2,043) (20,159) (19,867)
Net income (loss).................. 40,045 (33,836) (19,954) 69,952 44,107 (143,177) (15,481)
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 123,514 $ 182,473 $ 205,142 $ 110,102 $ 93,231 $ 55,633
Total assets....................... 794,309 760,296 761,224 1,031,011 1,405,081 1,312,853
Total debt......................... 278,000 175,518 83,424 118,148 39,037 151,277
Stockholders' equity............... 285,544 251,708 231,754 301,706 345,813 300,332
</TABLE>

17
<PAGE> 19

ALL REMAINING SUBSIDIARIES(1)(2)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................... $3,746,174 $4,641,432 $6,592,940 $12,052,834 $16,866,945 $7,940,353 $8,711,484
Cost of goods sold............... 2,454,816 3,101,999 4,193,584 7,949,692 10,193,651 4,996,687 5,406,959
---------- ---------- ---------- ----------- ----------- ---------- ----------
Gross margin..................... 1,291,358 1,539,433 2,399,356 4,103,142 6,673,294 2,943,666 3,304,525
Selling, general and
administrative expenses........ 1,224,871 1,489,548 2,077,692 3,526,100 5,065,741 2,337,681 3,157,645
---------- ---------- ---------- ----------- ----------- ---------- ----------
Income from operations........... 66,487 49,885 321,664 577,042 1,607,553 605,985 146,880
Interest (expense) income,
net............................ (29,664) (29,540) (39,852) (65,873) (88,393) (32,036) (40,929)
Pro forma net income(3).......... 8,624 7,732 190,060 298,226 970,385 387,713 145,975
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 261,100 $ 226,982 $ 602,539 $ 319,557 $ 1,317,893 $1,100,260
Total assets.................. 1,028,014 1,219,557 1,866,168 3,709,972 4,992,214 5,779,951
Total debt.................... 376,446 697,147 482,866 1,173,567 1,081,892 1,087,904
Stockholders' equity.......... 462,303 456,511 732,384 1,214,560 2,463,709 2,388,133
</TABLE>

- ---------------

(1) Air Experts, a United Services Co., Inc., Arrow Heating & Air Conditioning,
Inc., Brand Heating & Air Conditioning, Inc., Coastal Air Conditioning
Service, Inc., Gilley's Heating & Cooling, Inc., and Service Experts of Palm
Springs, Inc.
(2) The selected financial data above represents the six smallest (by revenue)
Subsidiaries which have been combined for the period from January 1, 1991
through June 30, 1996 except for the following Subsidiaries which are
included from the date operations commenced as follows: Air Experts, a
United Services Co., Inc. -- January 1, 1994; Arrow Heating & Air
Conditioning, Inc. -- January 29, 1993; Service Experts of Palm Springs,
Inc. -- October 15, 1993.
(3) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.

18
<PAGE> 20

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

The following discussion should be read in conjunction with the information
contained in the combined Financial Statements and Pro Forma Combining Financial
Information, including the Notes thereto, and the other financial information
appearing elsewhere in this Prospectus. As a result of the adoption of SAB 97 on
July 31, 1996, the presentation of financial information reflects the combined
AC Service & Installation Co., Inc. and Donelson Air Conditioning Company, Inc.
as the acquiror of the other Subsidiaries because the stockholders of these
companies received the largest ownership interest in the Company of any
Subsidiary pursuant to the Combination.

COMBINED SUBSIDIARIES

Overview

Simultaneously with the completion of the IPO, the Company acquired all of
the outstanding capital stock of the Subsidiaries. Management believes that the
Subsidiaries, on an individual basis, generally have been successful by
implementing the strategies and recommendations of CSG. All of the Service
Centers are members of CSG and operate in accordance with its recommended
methods and procedures. Management further believes that certain efficiencies
are being derived from the consolidation of the Subsidiaries. These efficiencies
include centralized negotiation of contracts with major suppliers and insurance
carriers, consolidation of certain accounting and administration functions,
implementation of a more efficient cash management system and consolidation of
employee benefits programs. A portion of any operating efficiencies will be
offset by increased general and administrative expenses at the Company's
corporate headquarters. There can be no assurance that the Company will be able
to integrate successfully the businesses of the Subsidiaries or to operate
profitably. In addition, there can be no assurance that management will be able
to effectively manage the combined entity and effectively implement the
Company's operating and acquisition strategies. Failure to integrate
successfully the Subsidiaries and to implement the Company's operating and
acquisition strategies could have a material adverse effect on the Company's net
revenue and earnings.

The Subsidiaries have been managed throughout the periods presented as
independent private companies, and, as such, their results of operations reflect
different tax structures which have influenced, among other things, their
historical levels of owner's compensation. These owners and certain key
employees have agreed to certain reductions in their compensation in connection
with the Combination. These reductions equaled approximately $3.5 million based
upon 1995 actual compensation expense.

Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. The
Company is implementing an aggressive acquisition strategy which targets for
acquisition as "hubs" CSG members with strong management that are within a
desirable geographic area, financially stable, experienced in the industry and
familiar with CSG operating methods. The Company also plans to increase its
market presence through acquisitions of other HVAC businesses that have long
operating histories, large customer bases, experienced management and who
present opportunities to reduce overhead expenses or dispose of fixed assets to
improve profitability. In addition, management believes that it will be able to
improve the financial performance of acquired companies through the
implementation of the methods and procedures developed by CSG. There can be no
assurance the Company's acquisition strategy will be successful, that
modifications to the Company's strategy will not be required or that the Company
will be able to obtain adequate financing on reasonable terms to develop or
acquire additional HVAC service businesses.

The Company has a $10 million unsecured revolving credit facility and an
additional $10 million unsecured discretionary revolving credit facility with
SunTrust Bank, Nashville, N.A. available through September 10, 1998 (together,
the "Credit Facilities"). Borrowings under the Credit Facilities bear interest
at a variable rate equal to the 30-day LIBOR, as such rate changes from time to
time, plus a variable margin of from 125 to 250 basis points depending on the
Company's funded debt to EBIDTA ratio determined on a quarterly basis. The
Credit Facilities impose customary restrictions on the Company with respect to
the

19
<PAGE> 21

maintenance of certain financial ratios and specified net worth, the incurrence
of indebtedness, the sale of assets, consolidations, mergers and the payments of
dividends.

AC SERVICE & INSTALLATION CO., INC. AND DONELSON AIR CONDITIONING COMPANY, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............... $10,292 100.0% $14,299 100.0% $16,453 100.0% $7,671 100.0% $8,635 100.0%
Cost of goods sold........ 7,280 70.7 10,245 71.6 11,122 67.6 5,316 69.3 5,742 66.5
------- ----- ------- ----- ------- ----- ------ ----- ------ ------
Gross margin.............. 3,012 29.3 4,054 28.4 5,331 32.4 2,355 30.7 2,893 33.5
Selling, general and
administrative
expenses................ 2,909 28.3 3,786 26.5 4,592 27.9 2,253 29.4 3,024 35.0
------- ----- ------- ----- ------- ----- ------ ----- ------ ------
Income (loss) from
operations.............. $ 103 1.0% $ 268 1.9% $ 739 4.5% $ 102 1.3% $ (131) (1.5)%
======== ===== ======== ===== ======== ===== ====== ===== ====== ======
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $1.0 million, or 12.6%, from $7.7
million for the six months ended June 30, 1995 to $8.7 million for the six
months ended June 30, 1996. The increase in net revenue is primarily
attributable to promotion of service contracts and increased advertising.

Cost of Goods Sold. Cost of goods sold increased $426,000, or 8.0%, from
$5.3 million for the six months ended June 30, 1995 to $5.7 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 69.3% for the six months ended June 30, 1995 to 66.5% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to the promotion of higher margin service contracts and
volume purchasing discounts.

Gross Margin/Profit. Gross margin increased $537,000, or 22.8%, from $2.4
million for the six months ended June 30, 1995 to $2.9 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
increased 2.8% from 30.7% for the six months ended June 30, 1995 to 33.5% for
the six months ended June 30, 1996. The increase as a percentage of net revenue
was primarily attributable to the promotion of higher margin service contracts
and volume purchasing discounts.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $771,000, or 34.2%, from $2.2 million for the
six months ended June 30, 1995 to $3.0 million for the six months ended June 30,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 29.4% for the six months ended June 30, 1995 to 35.0%
for the six months ended June 30, 1996. The increase as a percentage of net
revenue was primarily attributable to an increase in compensation expense
resulting from special S corporation distributions in anticipation of the
Combination.

Income (Loss) from Operations. Income from operations decreased $233,000,
or 228.4%, from $102,000 for the six months ended June 30, 1995 to ($131,000)
for the six months ended June 30, 1996. As a percentage of net revenue, income
from operations decreased from 1.3% for the six months ended June 30, 1995 to
(1.5)% for the six months ended June 30, 1996.

20
<PAGE> 22

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $2.2 million, or 15.1%, from $14.3
million in 1994 to $16.5 million in 1995. The increase in net revenue was
primarily attributable to promotion of service contracts and increased
advertising.

Cost of Goods Sold. Cost of goods sold increased $877,000, or 8.6%, from
$10.2 million in 1994 to $11.1 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 71.6% in 1994 to 67.6% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on more
profitable products, improved employee training and volume purchasing discounts.

Gross Margin/Profit. Gross margin increased $1.3 million, or 31.5%, from
$4.0 million for the twelve months ended December 31, 1994 to $5.3 million for
the twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 4.0% from 28.4% for the twelve months ended December 31, 1994
to 32.4% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to the emphasis on more
profitable products, improved employee training and volume purchasing discounts.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $805,000, or 21.3%, from $3.8 million in 1994
to $4.6 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 26.5% in 1994 to 27.9% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
management personnel added to support recent growth.

Income from Operations. Income from operations increased $471,000, or
176.0%, from $268,000 in 1994 to $739,000 in 1995. As a percentage of net
revenue, income from operations increased from 1.9% in 1994 to 4.5% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $4.0 million, or 38.9%, from $10.3
million in 1993 to $14.3 million in 1994. The increase in net revenue was
primarily attributable to the implementation of a 24-hour service policy,
promotion of service contracts and increased advertising.

Cost of Goods Sold. Cost of goods sold increased $2.9 million, or 40.7%,
from $7.3 million in 1993 to $10.2 million in 1994. As a percentage of net
revenue, cost of goods sold increased slightly from 70.7% in 1993 to 71.6% in
1994.

Gross Margin/Profit. Gross margin increased $1.0 million, or 34.6%, from
$3.0 million for the twelve months ended December 31, 1993 to $4.0 million for
the twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin decreased .9% from 29.3% for the twelve months ended December 31, 1993 to
28.4% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $877,000, or 30.2%, from $2.9 million in 1993
to $3.8 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 28.3% in 1993 to 26.5% in 1994. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of these expenses.

Income from Operations. Income from operations increased $165,000, or
158.6%, from $103,000 in 1993 to $268,000 in 1994. As a percentage of net
revenue, income from operations increased from 1.0% in 1993 to 1.9% in 1994.

21
<PAGE> 23

Liquidity and Capital Resources

The following table sets forth selected information from the combined
statement of cash flows of AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities... $ 548 $ 264 $ 579 $ 179 $ 783
Net cash used in investing activities............ (242) (504) (613) (468) (42)
Net cash provided by (used in) financing
activities..................................... (221) 63 219 291 (448)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................... $ 85 $(177) $ 185 $ 2 $ 293
===== ===== ===== ===== =====
</TABLE>

From 1993 through the six months ended June 30, 1996, AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. generated
$2.2 million in net cash from operating activities. During this period, $1.9
million was generated from net income plus noncash charges, and working capital
did not require any net cash. Cash used in investing activities was primarily
attributable to the purchase and replacement of service and delivery trucks.
Cash used in financing activities consists primarily of payments on long-term
debt and the proceeds from notes payable to stockholders.

CONTRACTOR SUCCESS GROUP, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................................. $2,414 100.0% $2,741 100.0% $3,229 100.0% $1,570 100.0% $1,694 100.0%
Cost of goods sold.......................... 466 19.3 415 15.2 615 19.1 263 16.8 301 17.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin................................ 1,948 80.7 2,326 84.8 2,614 80.9 1,307 83.2 1,393 82.3
Selling, general and administrative
expenses.................................. 1,225 50.7 1,456 53.1 1,339 41.5 537 34.2 732 43.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations...................... $ 723 30.0% $ 870 31.7% $1,275 39.5% $ 770 49.0% $ 661 39.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. CSG derives its net revenue from initial membership fees,
quarterly dues from members and from sales of proprietary products. Net revenue
increased $124,000, or 7.9%, from $1.6 million for the six months ended June 30,
1995 to $1.7 million for the six months ended June 30, 1996. The increase in net
revenue was primarily attributable to expanding the number of licensed
territories and increased marketing of new products.

Cost of Goods Sold. Cost of goods sold increased $37,000, or 14.2%, from
$263,000 for the six months ended June 30, 1995 to $301,000 for the six months
ended June 30, 1996. As a percentage of net revenue, cost of goods sold
increased from 16.8% for the six months ended June 30, 1995 to 17.7% for the six
months ended June 30, 1996. The increase as a percentage of net revenue was
primarily attributable to the product mix.

Gross Margin/Profit. Gross margin increased $86,000, or 6.6%, from $1.3
million for the six months ended June 30, 1995 to $1.4 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
remained relatively flat decreasing .9% from 83.2% for the six months ended June
30, 1995 to 82.3% for the six months ended June 30, 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $195,000, or 36.3%, from $537,000 for the six
months ended June 30, 1995 to $732,000 for the six months

22
<PAGE> 24

ended June 30, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 34.2% for the six months ended June 30,
1995 to 43.3% for the six months ended June 30, 1996. The increase as a
percentage of net revenue was primarily attributable to increases in legal,
rental, travel, printing and promotional expenses.

Income from Operations. Income from operations decreased $109,000, or
14.2%, from $770,000 for the six months ended June 30, 1995 to $661,000 for the
six months ended June 30, 1996. As a percentage of net revenue, income from
operations decreased from 49.0% for the six months ended June 30, 1995 to 39.0%
for the six months ended June 30, 1996.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $489,000, or 17.8%, from $2.7 million
in 1994 to $3.2 million in 1995. The increase in net revenue was primarily
attributable to expanding the number of licensed territories and increased
marketing of new products.

Cost of Goods Sold. Cost of goods sold increased $200,000, or 48.3%, from
$415,000 in 1994 to $615,000 in 1995. As a percentage of net revenue, cost of
goods sold increased from 15.2% in 1994 to 19.1% in 1995. The increase as a
percentage of net revenue was primarily attributable to costs associated with
several new products produced during 1995.

Gross Margin/Profit. Gross margin increased $300,000, or 12.4%, from $2.3
million for the twelve months ended December 31, 1994 to $2.6 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin decreased 4.0% from 84.9% for the twelve months ended December 31, 1994
to 80.9% for the twelve months ended December 31, 1995. The decrease as a
percentage of net revenue is attributable to the costs associated with several
new products produced during 1995.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $117,000, or 8.0%, from $1.5 million in 1994
to $1.3 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 53.1% in 1994 to 41.5% in 1995. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of CSG's expenses.

Income from Operations. Income from operations increased $405,000, or
46.6%, from $870,000 in 1994 to $1.3 million in 1995. As a percentage of net
revenue, income from operations increased from 31.7% in 1994 to 39.5% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $326,000, or 13.5%, from $2.4 million
in 1993 to $2.7 million in 1994. The increase in net revenue was primarily
attributable to expanding the number of territories licensed and increased
marketing of proprietary products.

Cost of Goods Sold. Cost of goods sold decreased $51,000, or 11.0%, from
$466,000 in 1993 to $415,000 in 1994. As a percentage of net revenue, cost of
goods sold decreased from 19.3% in 1993 to 15.2% in 1994. The decrease as a
percentage of net revenue was primarily attributable to the increase in net
revenue and the relatively fixed nature of CSG's expenses.

Gross Margin/Profit. Gross margin increased $378,000, or 19.4%, from $1.9
million for the twelve months ended December 31, 1993 to $2.3 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin increased 4.2% from 80.7% for the twelve months ended December 31, 1993
to 84.9% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $231,000, or 18.9%, from $1.2 million in 1993
to $1.5 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 50.7% in 1993 to 53.1% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.

23
<PAGE> 25

Income from Operations. Income from operations increased $147,000, or
20.2%, from $723,000 in 1993 to $870,000 in 1994. As a percentage of net
revenue, income from operations increased from 30.0% in 1993 to 31.7% in 1994.

Liquidity and Capital Resources

The following table sets forth selected information from CSG's statement of
cash flows (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.......... $ 995 $ 1,063 $ 1,552 $ 773 $ 437
Net cash used in investing activities................... (34) (10) (127) (120) (8)
Net cash used in financing activities................... (957) (1,014) (1,290) (328) (511)
----- ------- ------- ----- -----
Increase in cash and cash equivalents................... $ 4 $ 39 $ 135 $ 325 $ 82
====== ======== ======== ====== ======
</TABLE>

From 1993 through the six months ended June 30, 1996, CSG generated $4.0
million in net cash from operating activities. During this period, $4.2 million
was generated from net income plus non-cash charges. Cash used in investing
activities was primarily attributable to the purchase and replacement of office
equipment and other property and equipment. Cash used in financing activities
consists primarily of distributions to stockholders. From 1993 through the six
months ended June 30, 1996, CSG distributed $3.8 million to stockholders.

HARDWICK AIR MASTERS, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................. $3,990 100.0% $4,798 100.0% $6,377 100.0% $2,965 100.0% $3,878 100.0%
Cost of goods sold........... 2,987 74.9 3.418 71.2 4,556 71.4 2,083 70.3 2,856 73.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin................. 1,003 25.1 1,380 28.8 1,821 28.6 882 29.7 1,022 26.3
Selling, general and
administrative expenses.... 918 23.0 1,311 27.4 1,577 24.8 742 25.0 779 20.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations....... $ 85 2.1% $ 69 1.4% $ 244 3.8% $ 140 4.7% $ 243 6.2%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $913,000, or 30.8%, from $3.0 million
for the six months ended June 30, 1995 to $3.9 million for the six months ended
June 30, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $773,000, or 37.1%, from
$2.1 million for the six months ended June 30, 1995 to $2.9 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
increased from 70.3% for the six months ended June 30, 1995 to 73.7% for the six
months ended June 30, 1996.

Gross Margin/Profit. Gross margin increased $140,000, or 15.9%, from
$900,000 for the six months ended June 30, 1995 to $1.0 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
decreased 3.4% from 29.7% for the six months ended June 30, 1995 to 26.3% for
the six months ended June 30, 1996.

24
<PAGE> 26

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $37,000, or 4.9%, from $742,000 for the six
months ended June 30, 1995 to $779,000 for the six months ended June 30, 1996.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 25.0% for the six months ended June 30, 1995 to 20.1% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to the increase in net revenue and the relatively fixed
nature of these expenses.

Income from Operations. Income from operations increased $103,000, or
74.1%, from $140,000 for the six months ended June 30, 1995 to $243,000 for the
six months ended June 30, 1996. As a percentage of net revenue, income from
operations increased from 4.7% for the six months ended June 30, 1995 to 6.2%
for the six months ended June 30, 1996.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $1.6 million, or 32.9%, from $4.8
million in 1994 to $6.4 million in 1995. The increase in net revenue was
primarily attributable to increased advertising, sales training and a focus on
providing customers a complete service package, resulting in higher average
revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $1.2 million, or 33.3%,
from $3.4 million in 1994 to $4.6 million in 1995. As a percentage of net
revenue, cost of goods sold remained relatively constant at 71.4%.

Gross Margin/Profit. Gross margin increased $441,000, or 32.0%, from $1.4
million for the twelve months ended December 31, 1994 to $1.8 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin was relatively flat decreasing .2% from 28.8% for the twelve months ended
December 31, 1994 to 28.6% for the twelve months ended December 31, 1995.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $266,000, or 20.3%, from $1.3 million in 1994
to $1.6 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.4% in 1994 to 24.8% in 1995. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of these expenses.

Income from Operations. Income from operations increased $175,000, or
254.2%, from $69,000 in 1994 to $244,000 in 1995. As a percentage of net
revenue, income from operations increased from 1.4% in 1994 to 3.9% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $808,000, or 20.3%, from $4.0 million
in 1993 to $4.8 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $431,000, or 14.4%, from
$3.0 million in 1993 to $3.4 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 74.9% in 1993 to 71.2% in 1994. The decrease
as a percentage of net revenue was primarily attributable to increased emphasis
on higher margin products and services.

Gross Margin/Profit. Gross margin increased $377,000, or 37.6%, from $1.0
million for the twelve months ended December 31, 1993 to $1.4 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin increased 3.7% from 25.1% for the twelve months ended December 31, 1993
to 28.8% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $393,000, or 42.8%, from $918,000 in 1993 to
$1.3 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 23.0% in 1993 to 27.4% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.

25
<PAGE> 27

Income from Operations. Income from operations decreased $16,000, or
19.1%, from $85,000 in 1993 to $69,000 in 1994. As a percentage of net revenue,
income from operations decreased from 2.1% in 1993 to 1.4% in 1994.

Liquidity and Capital Resources

The following table sets forth selected information from the statement of
cash flows of Hardwick Air Masters, Inc. (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- ------------
1993 1994 1995 1995 1996
----- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 60 $154 $ 133 $ 67 $336
Net cash used in investing activities.............. (192) (90) (290) (172) (37)
Net cash provided by (used in) financing
activities....................................... 169 (48) 134 95 (241)
----- ---- ----- ----- ----
Increase (decrease) in cash and cash equivalents... $ 37 $ 16 $ (23) $ (10) $ 58
===== ==== ===== ===== ====
</TABLE>

From 1993 through the six months ended June 30, 1996, Hardwick Air Masters,
Inc. generated $683,000 in net cash from operating activities. During this
period, $833,000 was generated from net income plus non-cash charges, and was
reduced by $150,000 of cash used to fund increases in working capital. Cash used
in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks. Cash provided by (used in) financing
activities consists primarily of proceeds from long-term debt.

NORRELL HEATING & AIR CONDITIONING, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................. $3,274 100.0% $3,509 100.0% $4,266 100.0% $1,972 100% $2,048 100%
Cost of goods sold........... 2,286 69.8 2,437 69.4 2,853 66.9 1,335 67.7 1,407 68.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin................. 988 30.2 1,072 30.6 1,413 33.1 637 32.3 641 31.3
Selling, general and
administrative expenses.... 992 30.3 1,072 30.6 1,384 32.4 686 34.8 588 28.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations................. $ (4) (0.1)% $ 0 0.0% $ 29 0.7% $ (49) (2.5)% $ 53 2.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $76,000, or 3.8%, from $2.0 million for
the six months ended June 30, 1995 to $2.1 million for the six months ended June
30, 1996.

Cost of Goods Sold. Cost of goods sold increased $72,000, or 5.4%, from
$1.3 million for the six months ended June 30, 1995 to $1.4 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
increased from 67.7% for the six months ended June 30, 1995 to 68.7% for the six
months ended June 30, 1996.

Gross Margin/Profit. Gross margin increased $4,000, or .6%, from $637,000
for the six months ended June 30, 1995 to $641,000 for the six months ended June
30, 1996. As a percentage of net revenue, gross margin decreased 1.0% from 32.3%
for the six months ended June 30, 1995 to 31.3% for the six months ended June
30, 1996.

26
<PAGE> 28

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $98,000, or 14.3%, from $686,000 for the six
months ended June 30, 1995 to $588,000 for the six months ended June 30, 1996.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 34.8% for the six months ended June 30, 1995 to 28.7% for the six
months ended June 30, 1996.

Income from Operations. Income from operations increased $102,000, or
208.1%, from $(49,000) for the six months ended June 30, 1995 to $53,000 for the
six months ended June 30, 1996. As a percentage of net revenue, income from
operations increased from (2.5)% for the six months ended June 30, 1995 to 2.6%
for the six months ended June 30, 1996.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $757,000, or 21.6%, from $3.5 million
in 1994 to $4.3 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $416,000, or 17.1%, from
$2.4 million in 1994 to $2.9 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 69.4% in 1994 to 66.9% in 1995. The decrease
as a percentage of net revenue was primarily attributable to a focus on higher
margin products and services.

Gross Margin/Profit. Gross margin increased $341,000, or 31.8%, from $1.1
million for the twelve months ended December 31, 1994 to $1.4 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 2.5% from 30.6% for the twelve months ended December 31, 1994
to 33.1% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to a focus on higher margin
products and services.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $312,000, or 29.1%, from $1.1 million in 1994
to $1.4 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 30.6% in 1994 to 32.4% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.

Income from Operations. Income from operations increased $29,000 from $0
in 1994 to $29,000 in 1995. As a percentage of net revenue, income from
operations increased from 0.0% in 1994 to 0.7% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $235,000, or 7.2%, from $3.3 million in
1993 to $3.5 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $151,000, or 6.6%, from
$2.3 million in 1993 to $2.4 million in 1994. As a percentage of net revenue,
cost of goods sold was relatively unchanged at 69.4%.

Gross Margin/Profit. Gross margin increased $84,000, or 8.4%, from $1.0
million for the twelve months ended December 31, 1993 to $1.1 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin increased .4% from 30.2% for the twelve months ended December 31, 1993 to
30.6% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly to $1.1 million in 1994.

Income (Loss) from Operations. Income (loss) from operations increased
$4,000 from ($4,000) in 1993 to $0 in 1994.

27
<PAGE> 29

Liquidity and Capital Resources

The following table sets forth selected information from the statement of
cash flows of Norrell Heating & Air Conditioning, Inc. (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------ -----------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities........ $310 $ 27 $639 $292 $(63)
Net cash provided by (used in) investing activities... (80) (85) (56) (61) 45
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalents...... $230 $(58) $583 $231 $(18)
==== ==== ==== ==== ====
</TABLE>

From 1993 through the six months ended June 30, 1996, Norrell Heating & Air
Conditioning, Inc. generated $913,000 in net cash from operating activities.
During this period, $475,000 was generated from net income plus non-cash
charges, and was enhanced by $438,000 of cash from reductions in working
capital. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.

VISION HOLDING COMPANY, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- ---------------------------------
1993(1) 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............. $2,792 100.0% $3,525 100.0% $4,261 100.0% $2,008 100.0% $2,309 100.0%
Cost of goods sold...... 1,752 62.7 2,401 68.1 2,738 64.3 1,386 69.0 1,542 66.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin............ 1,040 37.3 1,124 31.9 1,523 35.7 622 31.0 767 33.2
Selling, general and
administrative
expenses.............. 771 27.6 847 24.0 1,093 25.6 475 23.7 483 20.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations............ $ 269 9.7% $ 277 7.9% $ 430 10.1% $ 147 7.3% $ 284 12.3%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

- ---------------

(1) Period from March 1, 1993 through December 31, 1993.

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $301,000, or 15.0%, from $2.0 million
for the six months ended June 30, 1995 to $2.3 million for the six months ended
June 30, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $156,000, or 11.3%, from
$1.4 million for the six months ended June 30, 1995 to $1.5 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 69.0% for the six months ended June 30, 1995 to 66.8% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to an emphasis on higher margin products and services.

Gross Margin/Profit. Gross margin increased $145,000, or 23.3%, from
$622,000 for the six months ended June 30, 1995 to $767,000 for the six months
ended June 30, 1996. As a percentage of net revenue, gross margin increased 2.2%
from 31.0% for the six months ended June 30, 1995 to 33.2% for the six months
ended June 30, 1996.

28
<PAGE> 30

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $8,000, or 1.7%, from $475,000 for the six
months ended June 30, 1995 to $483,000 for the six months ended June 30, 1996.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 23.7% for the six months ended June 30, 1995 to 20.9% for the six
months ended June 30, 1996.

Income from Operations. Income from operations increased from $147,000 for
the six months ended June 30, 1995 to $284,000 for the six months ended June 30,
1996. As a percentage of net revenue, income from operations increased from 7.3%
for the six months ended June 30, 1995 to 12.3% for the six months ended June
30, 1996.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $736,000, or 20.9%, from $3.5 million
in 1994 to $4.3 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $338,000, or 14.1%, from
$2.4 million in 1994 to $2.7 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 68.1% in 1994 to 64.3% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.

Gross Margin/Profit. Gross margin increased $399,000, or 35.4%, from $1.1
million for the twelve months ended December 31, 1994 to $1.5 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 3.8% from 31.9% for the twelve months ended December 31, 1994
to 35.7% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to an emphasis on higher
margin products and services.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $246,000, or 29.0%, from $847,000 in 1994 to
$1.1 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 24.0% in 1994 to 25.6% in 1995.

Income from Operations. Income from operations increased $153,000, or
55.1%, from $277,000 in 1994 to $430,000 in 1995. As a percentage of net
revenue, income from operations increased from 7.9% in 1994 to 10.1% in 1995.

1994 Compared to Period from March 1, 1993 through December 31, 1993

Net Revenue. Net revenue increased $732,000, or 26.2%, from $2.8 million
in 1993 to $3.5 million in 1994. The increase in net revenue was primarily
attributable to an additional three months of operation in 1994.

Cost of Goods Sold. Cost of goods sold increased $648,000, or 37.0%, from
$1.8 million in 1993 to $2.4 million in 1994. As a percentage of net revenue,
cost of goods sold increased from 62.7% in 1993 to 68.1% in 1994.

Gross Margin/Profit. Gross margin increased $84,000, or 8.1%, from $1.0
million for the twelve months ended December 31, 1993 to $1.1 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin decreased 5.4% from 37.3% for the twelve months ended December 31, 1993
to 31.9% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $76,000, or 9.9%, from $771,000 in 1993 to
$847,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.6% in 1993 to 24.0% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue in 1994.

Income from Operations. Income from operations increased $8,000, or 3.0%,
from $269,000 in 1993 to $277,000 in 1994. As a percentage of net revenue,
income from operations decreased from 9.7% in 1993 to 7.9% in 1994.

29
<PAGE> 31

Liquidity and Capital Resources

The following table sets forth selected information from the statement of
cash flows of Vision Holding Company, Inc. (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- -----------
1993(1) 1994 1995 1995 1996
------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 317 $ 445 $ 531 $118 $208
Net cash provided by (used in) investing
activities....................................... (33) (330) 113 145 (90)
Net cash provided by (used in) financing
activities....................................... (88) (250) (123) 12 (20)
------- ----- ----- ---- ----
Increase (decrease) in cash and cash equivalents... $ 196 $(135) $ 521 $275 $ 98
====== ===== ===== ==== ====
</TABLE>

(1) Period from March 1, 1993 through December 31, 1993.

From March 1, 1993 through the six months ended June 30, 1996, Vision
Holding Company, Inc. generated $1.5 million in net cash from operating
activities. During this period, $1.3 million was generated from net income plus
non-cash charges, and was enhanced by $165,000 of cash from reductions in
working capital. Cash used in investing activities was primarily attributable to
the purchase and replacement of service and delivery trucks. Cash used in
financing activities consists primarily of payments on long-term debt.

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................... $3,532 100.0% $3,715 100.0% $4,233 100.0% $1,904 100.0% $2,552 100.0%
Cost of goods sold............. 2,032 57.6 2,113 56.9 2,271 53.7 1,107 58.1 1,294 50.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin................... 1,500 42.4 1,602 43.1 1,962 46.3 797 41.9 1,258 49.3
Selling, general and
administrative expenses...... 1,859 52.6 1,468 39.5 1,653 39.0 766 40.2 855 33.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
operations................... $ (359) (10.2)% $ 134 3.6% $ 309 7.3% $ 31 1.7% $ 403 15.8%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $648,000, or 34%, from $1.9 million for
the six months ended June 30, 1995 to $2.6 million for the six months ended June
30, 1996. The increase in net revenue was primarily attributable to increased
advertising, sales training and a focus on providing customers a complete
service package, resulting in higher average revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $187,000, or 16.9%, from
$1.1 million for the six months ended June 30, 1995 to $1.3 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 58.1% for the six months ended June 30, 1995 to 50.7% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to an emphasis on higher margin products and services.

Gross Margin/Profit. Gross margin increased $461,000, or 57.8%, from
$797,000 for the six months ended June 30, 1995 to $1.3 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
increased 7.4% from 41.9% for the six months ended June 30, 1995 to 49.3% for
the six months ended June 30, 1996.

30
<PAGE> 32

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $89,000, or 11.7%, from $766,000 for the six
months ended June 30, 1995 to $855,000 for the six months ended June 30, 1996.
As a percentage of net revenue, selling, general and administrative expenses
decreased from 40.2% for the six months ended June 30, 1995 to 33.5% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to the increase in net revenue.

Income from Operations. Income from operations increased $372,000, or
1,176%, from $31,000 for the six months ended June 30, 1995 to $403,000 for the
six months ended June 30, 1996. As a percentage of net revenue, income from
operations increased from 1.7% for the six months ended June 30, 1995 to 15.8%
for the six months ended June 30, 1996.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $518,000, or 13.9%, from $3.7 million
in 1994 to $4.2 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $158,000, or 7.5%, from
$2.1 million in 1994 to $2.3 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 56.9% in 1994 to 53.7% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.

Gross Margin/Profit. Gross margin increased $359,000, or 22.4%, from $1.6
million for the twelve months ended December 31, 1994 to $2.0 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 3.2% from 43.1% for the twelve months ended December 31, 1994
to 46.3% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to an emphasis on higher
margin products and services.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $184,000, or 12.5%, from $1.5 million in 1994
to $1.7 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses remained relatively constant at 39.0%.

Income from Operations. Income from operations increased $175,000, or
131.3%, from $134,000 in 1994 to $309,000 in 1995. As a percentage of net
revenue, income from operations increased from 3.6% in 1994 to 7.3% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $183,000, or 5.2%, from $3.5 million in
1993 to $3.7 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $81,000, or 4.0%, from
$2.0 million in 1993 to $2.1 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 57.6% in 1993 to 56.9% in 1994. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.

Gross Margin/Profit. Gross margin increased $102,000, or 6.8%, from $1.5
million for the twelve months ended December 31, 1993 to $1.6 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin increased .6% from 42.5% for the twelve months ended December 31, 1993 to
43.1% for the twelve months ended December 31, 1994, the increase as a
percentage of net revenue was primarily attributable to an emphasis on higher
margin products and services.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $391,000, or 21.0%, from $1.9 million in 1993
to $1.5 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 52.6% in 1993 to 39.5% in 1994.

31
<PAGE> 33

Income (Loss) from Operations. Income (loss) from operations increased
$493,000 to $134,000 in 1994 from ($359,000) in 1993. As a percentage of net
revenue, income (loss) from operations increased from (10.2%) in 1993 to 3.6% in
1994.

Liquidity and Capital Resources

The following table sets forth selected information from the statement of
cash flows of Comerford's Heating and Air Conditioning, Inc. (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating
activities...................................... $ 294 $(275) $ 614 $ 69 $(431)
Net cash used in investing activities............. (135) (104) (104) (104) (9)
Net cash used in financing activities............. (6) (10) (213) (6) (305)
----- ----- ----- ---- -----
Increase (decrease) in cash and cash
equivalents..................................... $ 153 $(389) $ 297 $(41) $(745)
===== ===== ===== ==== =====
</TABLE>

From 1993 through the six months ended June 30, 1996, Comerford's Heating
and Air Conditioning, Inc. generated $202,000 in net cash from operating
activities. During this period, $927,000 was generated from net income plus
non-cash charges, and was decreased by $724,000 of cash from reductions in
working capital. Cash used in investing activities was primarily attributable to
the purchase and replacement of service and delivery trucks. Cash used in
financing activities consists primarily of distributions to shareholders. In
1995, Comerford's Heating and Air Conditioning, Inc. distributed $201,000 to
shareholders.

ROLF COAL AND FUEL CORP.

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue..................... $3,036 100.0% $3,977 100.0% $4,105 100.0% $2,162 100.0% $2,448 100.0%
Cost of goods sold.............. 1,516 50.0 1,940 48.8 1,867 45.5 1,059 49.0 950 38.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin.................... 1,520 50.0 2,037 51.2 2,238 54.5 1,103 51.0 1,498 61.2
Selling, general and
administrative expenses..... 1,568 51.6 1,941 48.8 2,143 52.2 1,290 59.7 1,528 62.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations... $ (48) (1.6%) $ 96 2.4% $ 95 2.3% $ (187) (8.7%) $ (30) (1.2%)
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $287,000 or 13.3%, from $2.2 million
for the six month period ending June 30, 1995 to $2.5 million for the six month
period ending June 30, 1996.

Cost of Goods Sold. Cost of goods sold decreased $109,000, or 10.3%, from
$1.1 million for the six months ended June 30, 1995 to $1.0 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 49.0% for the six months ended June 30, 1995 to 38.8% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to an emphasis on higher margin products, particularly
service contracts.

32
<PAGE> 34

Gross Margin/Profit Gross margin increased $395,000, or 35.8%, from $1.1
million for the six months ended June 30, 1995 to $1.5 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
increased 10.2% from 51.0% for the six months ended June 30, 1995 to 61.2% for
the six months ended June 30, 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $238,000, or 18.4%, from $1.3 million for the
six months ended June 30, 1995 to $1.5 million for the six months ended June 30,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 59.7% for the six months ended June 30, 1995 to 62.4%
for the six months ended June 30, 1996. The increase as a percentage of net
revenue was primarily attributable to increased compensation expense.

Income (Loss) from Operations. Income (loss) from operations was ($30,000)
for the six months ended June 30, 1996 as compared to ($187,000) for the six
months ended June 30, 1995.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $128,000, or 3.2%, from $4.0 million in
1994 to $4.1 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold was relatively unchanged at $1.9
million in 1995. As a percentage of net revenue, cost of goods sold decreased
from 48.8% in 1994 to 45.5% in 1995. The decrease as a percentage of net revenue
was primarily attributable to the increase in net revenue and a focus on higher
margin products.

Gross Margin/Profit. Gross margin increased $201,000, or 9.9%, from $2.0
million for the twelve months ended December 31, 1994 to $2.2 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 3.3% from 51.2% for the twelve months ended December 31, 1994
to 54.5% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to the increase in net
revenue and a focus on higher margin products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $202,000, or 10.4%, from $1.9 million in 1994
to $2.1 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 48.8% in 1994 to 52.2% in 1995. The
increase as a percentage of net revenue was primarily attributable to the
increase in compensation expense.

Income from Operations. Income from operations remained relatively
unchanged at $95,000.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $941,000, or 31.0%, from $3.0 million
in 1993 to $4.0 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.

Cost of Goods Sold. Cost of goods sold increased $424,000, or 28.0%, from
$1.5 million in 1993 to $1.9 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 50.0% in 1993 to 48.8% in 1994. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products.

Gross Margin/Profit. Gross margin increased $517,000, or 34.0%, from $1.5
million for the twelve months ended December 31, 1993 to $2.0 million for the
twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin increased 1.1% from 50.1% for the twelve months ended December 31, 1993
to 51.2% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $373,000, or 23.8%, from $1.6 million in 1993
to $1.9 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 51.6% in 1993 to 48.8% in 1994. The
decrease as a

33
<PAGE> 35

percentage of net revenue was primarily attributable to the increase in net
revenue and the relatively fixed nature of these expenses.

Income (Loss) from Operations. Income (loss) from operations increased to
$96,000 in 1994 from ($48,000) in 1993. As a percentage of net revenue, income
(loss) from operations increased from (1.6%) in 1993 to 2.4% in 1994.

Liquidity and Capital Resources

The following table sets forth selected information from the statement of
cash flows of Rolf Coal and Fuel Corp. (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------- -------------
1993 1994 1995 1995 1996
----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 249 $313 $210 $(120) $ (92)
Net cash used in investing activities.............. (24) (76) (62) (75) (175)
Net cash provided by (used in) financing
activities....................................... (103) (52) (79) 104 82
----- ---- ---- ----- -----
Increase (decrease) in cash and cash equivalents... $ 122 $185 $ 69 $ (91) $(185)
===== ==== ==== ===== =====
</TABLE>

From 1993 through the six months ended June 30, 1996, Rolf Coal and Fuel
Corp. generated $680,000 in net cash from operating activities. During this
period, $207,000 was generated from net income plus non-cash charges, and was
enhanced by $473,000 of cash from reductions in working capital. Cash used in
investing activities was primarily attributable to the purchase and replacement
of service and delivery trucks. Cash used in financing activities consists
primarily of proceeds from and payments on long-term debt.

REMAINING COMPANIES

The following presents management's discussion of the results of
operations, as presented in the financial statements of certain Subsidiaries
appearing elsewhere in the Prospectus. The companies which are combined are Air
Experts, a United Services Co., Inc., Arrow Heating & Air Conditioning, Inc.,
Brand Heating & Air Conditioning, Inc., Coastal Air Conditioning Service, Inc.,
Gilley's Heating & Cooling, Inc. and Service Experts of Palm Springs, Inc.
(collectively, the "Remaining Companies").

Results of Operations

The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue........ $6,593 100.0% $12,053 100.0% $16,867 100.0% $7,940 100.0% $8,711 100.0%
Cost of goods
sold............. 4,193 63.6 7,950 65.9 10,194 60.4 4,997 62.9 5,407 62.1
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Gross margin....... 2,400 36.4 4,103 34.1 6,673 39.6 2,943 37.1 3,304 37.9
Selling, general
and
administrative
expenses....... 2,078 31.5 3,526 29.3 5,065 30.1 2,337 29.4 3,157 36.2
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Income from
operations....... $ 322 4.9% $ 577 4.8% $ 1,608 9.5% $ 606 7.6% $ 147 1.7%
====== ===== ======== ===== ======== ===== ====== ===== ====== =====
</TABLE>

Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995

Net Revenue. Net revenue increased $771,000, or 9.7%, from $7.9 million
for the six months ended June 30, 1995 to $8.7 million for the six months ended
June 30, 1996. The increase in net revenue was

34
<PAGE> 36

primarily attributable to increased advertising, sales training and a focus on
providing customers a complete service package, resulting in higher average
revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $410,000, or 8.2%, from
$5.0 million for the six months ended June 30, 1995 to $5.4 million for the six
months ended June 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 62.9% for the six months ended June 30, 1995 to 62.1% for the six
months ended June 30, 1996. The decrease as a percentage of net revenue was
primarily attributable to an emphasis on higher margin products and services.

Gross Margin/Profit. Gross margin increased $361,000, or 12.3%, from $2.9
million for the six months ended June 30, 1995 to $3.3 million for the six
months ended June 30, 1996. As a percentage of net revenue, gross margin
increased .8% from 37.1% for the six months ended June 30, 1995 to 37.9% for the
six months ended June 30, 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $820,000, or 35.1%, from $2.3 million for the
six months ended June 30, 1995 to $3.1 million for the six months ended June 30,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 29.4% for the six months ended June 30, 1995 to 36.2%
for the six months ended June 30, 1996. The increase as a percentage of net
revenue was primarily attributable to increase in compensation expense resulting
primarily from special S corporation distributions in anticipation of the
Combination.

Income from Operations. Income from operations decreased $459,000, or
75.8%, from $606,000 for the six months ended June 30, 1995 to $147,000 for the
six months ended June 30, 1996. As a percentage of net revenue, income from
operations decreased from 7.6% for the six months ended June 30, 1995 to 1.7%
for the six months ended June 30, 1996. The decrease as a percentage of net
revenue was primarily attributable to the increase in compensation expense noted
above.

Year Ended December 31, 1995 Compared to December 31, 1994

Net Revenue. Net revenue increased $4.8 million, or 39.9%, from $12.1
million in 1994 to $16.9 million in 1995. The increase in net revenue was
primarily attributable to increased advertising, sales training and a focus on
providing customers a complete service package, resulting in higher average
revenue per service visit.

Cost of Goods Sold. Cost of goods sold increased $2.2 million, or 28.2%,
from $8.0 million in 1994 to $10.2 million in 1995. As a percentage of net
revenue, cost of goods sold decreased from 65.9% in 1994 to 60.4% in 1995. The
decrease as a percentage of net revenue was primarily attributable to an
emphasis on higher margin products.

Gross Margin/Profit. Gross margin increased $2.6 million, or 62.6%, from
$4.1 million for the twelve months ended December 31, 1994 to $6.7 million for
the twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 5.6% from 34.0% for the twelve months ended December 31, 1994
to 39.6% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to the emphasis on higher
margin products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 43.7%, from $3.5 million in
1994 to $5.1 million in 1995. As a percentage of net revenue, selling, general
and administrative expenses increased slightly from 29.3% in 1994 to 30.1% in
1995.

Income from Operations. Income from operations increased $1.0 million, or
178.6%, from $577,000 in 1994 to $1.6 million in 1995. As a percentage of net
revenue, income from operations increased from 4.8% in 1994 to 9.5% in 1995.

Year Ended December 31, 1994 Compared to December 31, 1993

Net Revenue. Net revenue increased $5.5 million, or 82.8%, from $6.6
million in 1993 to $12.1 million in 1994. The increase in net revenue was
primarily attributable to the start-up of several of the Remaining Companies in
1994.

35
<PAGE> 37

Cost of Goods Sold. Cost of goods sold increased $3.8 million, or 89.6%,
from $4.2 million in 1993 to $8.0 million in 1994. As a percentage of net
revenue, cost of goods sold increased from 63.6% in 1993 to 65.9% in 1994. The
increase as a percentage of net revenue is attributable to an emphasis on higher
margin products.

Gross Margin/Profit. Gross margin increased $1.7 million, or 71.0%, from
$2.4 million for the twelve months ended December 31, 1993 to $4.1 million for
the twelve months ended December 31, 1994. As a percentage of net revenue, gross
margin decreased 2.4% from 36.4% for the twelve months ended December 31, 1993
to 34.0% for the twelve months ended December 31, 1994.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 69.7%, from $2.1 million in
1993 to $3.5 million in 1994. As a percentage of net revenue, selling, general
and administrative expenses decreased from 31.5% in 1993 to 29.3% in 1994.

Income from Operations. Income from operations increased $255,000, or
79.4%, from $322,000 in 1993 to $577,000 in 1994. As a percentage of net
revenue, income from operations remained relatively constant at 4.8%.

Liquidity and Capital Resources

The following table sets forth selected information from the Remaining
Companies' combined statement of cash flows (dollar amounts in thousands):

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------
1993 1994 1995 1995 1996
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.... $360 $ 314 $ 755 $ 590 $ 510
Net cash used in investing activities............. (85) (526) (456) (264) (337)
Net cash provided by (used in) financing
activities...................................... 109 275 (163) (162) (291)
---- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents..................................... $384 $ 63 $ 136 $(164) $(118)
==== ===== ===== ===== =====
</TABLE>

From 1993 through the six months ended June 30, 1996, the Remaining
Companies generated $1,939,000 in net cash from operating activities. Cash used
in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks. Cash used in financing activities
consists primarily of distributions to shareholders and proceeds from long-term
notes.

36
<PAGE> 38

THE COMPANY

GENERAL

Simultaneously with the completion of the IPO, the Company acquired all of
the outstanding capital stock of the Subsidiaries. Management believes that the
Company is one of the leading providers of residential HVAC services and
replacement equipment in the United States.

The Service Centers install, service and maintain central air conditioners,
furnaces and heat pumps, primarily in existing homes. In 1995, management
estimates that over 80% of the Company's pro forma net revenue was derived from
replacing, maintaining and servicing HVAC equipment at existing residences and
commercial businesses and less than 20% was derived from installing new
equipment at newly constructed homes and businesses. The Company focuses on the
service and replacement segment of the HVAC industry rather than the new
construction segment because management believes that the service and
replacement segment exposes the Company to less credit risk and offers higher
margins as a result of opportunities for more attractive pricing because of
customers' demands for immediate, convenient and reliable service.

Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. The
Company is implementing an aggressive acquisition strategy which targets for
acquisition as "hubs" CSG members that are geographically desirable, financially
stable, experienced in the industry, familiar with CSG operating methods and
characterized by strong management. The Company also plans to increase market
presence through acquisitions of other HVAC businesses that have long operating
histories, large customer bases, experienced management and present
opportunities to reduce overhead expenses or dispose of fixed assets to improve
profitability. In addition, management believes that it will be able to improve
the financial performance of acquired companies through the implementation of
the policies and procedures developed by CSG.

HVAC SERVICE AND REPLACEMENT INDUSTRY

The HVAC industry consists of (i) the installation, replacement,
maintenance, service and repair of HVAC systems at existing residences and
commercial businesses and (ii) the installation of HVAC systems at newly
constructed homes and businesses. The Company primarily provides installation
and replacement services to existing homes and small to medium-sized businesses.

According to Air Conditioning, Heating and Refrigeration News, there are
approximately 43 million central air conditioners, 54 million furnaces and 9
million heat pumps in operation in homes in the United States. Management
estimates, based on industry information, that the market for the service and
replacement of HVAC systems in existing homes is approximately $24 billion
annually. The installation and replacement segment of the industry has increased
in size as a result of the aging of the installed base of residential systems,
the introduction of new, energy efficient systems and the upgrading of existing
homes to central air conditioning. According to the Air Conditioning and
Refrigeration Institute, over 61 million central air conditioners have been
installed in the United States since 1975. Many of the units installed from the
mid-1970s to the mid-1980s are reaching the end of their useful lives, thus
providing a growing replacement market. In addition, in recent years, increased
governmental regulation restricting the use of ozone depleting refrigerants in
HVAC systems has contributed to the growing replacement market. See
"Regulation."

37
<PAGE> 39

Management believes that HVAC businesses are typically closely held,
single-center operations that serve a limited geographic area and are heavily
dependent upon referrals to generate business. Management believes that, in many
cases, these businesses are operated by former service technicians who lack the
business and marketing expertise to expand their businesses, increase their
profitability and compete effectively with larger operators. Management believes
that larger companies are able to operate more efficiently, offer customers a
broader array of products and services and provide a higher level of customer
service than smaller operators. These competitive advantages are the result of
greater managerial and financial resources as well as economies of scale in
purchasing and marketing expenses. Management believes that these factors will
continue to promote a trend toward consolidation in the industry and present an
opportunity for well-capitalized operators to acquire additional businesses on
favorable terms.

STRATEGY

The Company's goal is to become the leading provider of residential HVAC
services and replacement equipment in the United States through the acquisition
of CSG members in new markets, the integration of other HVAC business in
existing markets and the continued revenue and profit growth of its Service
Centers.

Acquisition Strategy

The Company is implementing an aggressive acquisition program utilizing a
"hub and spoke" strategy for expansion into new geographic areas and further
penetration into existing markets. The U.S. residential HVAC service industry is
currently highly fragmented. Management believes that many HVAC businesses,
which lack the capital necessary to expand operations and the ability to exit
their business profitably, will desire to affiliate with the Company because the
Company will provide (i) business and marketing systems that enable a company to
operate more profitably, (ii) the opportunity to increase the operator's focus
on customer service rather than administration, (iii) the potential for national
name recognition and (iv) the opportunity for the owner to gain liquidity while,
in some cases, continuing to manage the operations of the business. By expanding
geographically, management believes the Company will be able to offset certain
seasonal and economic trends that affect different regions of the country
periodically. See "Risk Factors -- Seasonal and Cyclical Nature of the Industry"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Subsidiaries."

Expanding Geographic Presence through Hub Acquisitions of CSG Members. The
Company plans to make "hub" acquisitions of existing HVAC businesses in new
markets that are not being served by the Company. Management plans to target for
acquisition HVAC businesses that are members of CSG and familiar with the
Company's policies and procedures. See the map appearing on page two indicating
the location of the current members of CSG. Typically, these businesses have
annual net revenue ranging from $2.0 million to $5.0 million. In evaluating such
acquisitions, the Company will consider candidates that are in attractive
markets, financially stable, experienced in the industry, familiar with CSG's
operating methods and characterized by strong management.

Expanding Market Penetration through the Acquisition of Other HVAC
Businesses. The Company expects to increase market share through acquisitions
of other HVAC businesses that have long operating histories, large customer
bases, experienced management and that present opportunities to reduce overhead
or dispose of fixed assets to improve profitability. When acquired, the
operations of such businesses will be integrated into the operations of existing
hubs, enabling the Company to reduce overhead costs, sell redundant assets and
consolidate operations within existing areas served by the Company. The Company
does not intend to acquire non-CSG members in territories currently served by a
CSG member unless and until that CSG member is acquired by the Company.

38
<PAGE> 40

Operating Strategy

The Company's operating strategy incorporates the successful methods
developed by CSG and capitalizes on the operating efficiencies resulting from
the integration of the operations of the Subsidiaries. The key elements of the
Company's operating strategy are as follows:

Providing Superior, High Quality Service in a Professional Manner. The
Service Centers provide superior, high quality service at a competitive price
and in a friendly, professional manner. In order to provide such service, the
Company requires that all service technicians, maintenance technicians and
installers employed by the Company complete comprehensive training programs
designed to teach employees the Company's operating procedures. Such procedures
are described in CSG's training manuals which provide detailed instructions in
areas such as residential replacement sales, residential installation,
preventive maintenance agreements, service and routine maintenance. The Company
has standard policies and operating procedures intended to result in a uniform
level of professional, high quality service, including installation and
maintenance procedures, random drug-testing of all employees, the technician's
appearance and the use of "Carpet Saver" shoe coverings when inside a customer's
home. The Service Centers utilize a flat rate billing system that advises the
customer of the cost of service before work begins and charges the quoted price
regardless of the actual time necessary to repair the system. The Service
Centers are generally open for business from 8:00 a.m. to 8:00 p.m. on weekdays,
and most are open on Saturday from 8:00 a.m. to 4:00 p.m. Management believes
that by providing evening and Saturday service, in addition to 24 hour emergency
service, the Service Centers are able to better accommodate customers than most
of its competitors. In addition, the Company guarantees complete customer
satisfaction and offers a toll-free "Customer Can't Lose" phone line to address
customer complaints and questions.

Increasing Revenue at Service Centers. The Company actively promotes its
maintenance agreements to both new and existing customers. See "Service
Centers -- Maintenance and Service Agreements." The sale of maintenance
agreements not only generates recurring revenue through the payment of fees, but
also helps the Company develop a committed, loyal customer base and provides the
opportunity for cross-marketing of the Company's other services and products.
The Company offers a wide assortment of financing packages designed to enable
customers to purchase equipment and services from the Company in the most
convenient and cost-effective manner possible. The Company also offers its
customers a Professional Courtesy(TM) credit card solely for use in purchasing
equipment and services from the Company. Such financing, including the
Professional Courtesy credit card, is offered through a number of third party
lenders. Pursuant to its arrangements with such financing companies, the Company
receives an origination fee based on the amount financed, but does not bear any
credit risk from such financing.

The Service Centers utilize local print advertising and targeted marketing
promotions designed by CSG, including maintenance technician referrals, service
technician referrals, yellow page advertising and direct mail campaigns followed
up by telemarketing. During the off-peak spring and fall months, the Service
Centers aggressively market products and services which generate revenue during
such months and help to offset increased demand historically experienced in the
summer and winter months. Management believes that such marketing efforts will
result in increased business for its Service Centers. In 1995, advertising and
marketing expenditures were 1.6% as a percentage of the Company's pro forma net
revenue.

The Company offers a number of services and products that are not available
from most HVAC contractors. Indoor air quality ("IAQ") has become an
increasingly popular and profitable segment of the industry. According to
industry sources, the market for IAQ products and services in the United States
was estimated to be $1.8 billion in 1994 and is expected to double by the year
2000 as public awareness of indoor air pollution, which the U.S. Environmental
Protection Agency now ranks as one of the top five environmental health threats,
continues to grow. As technology has improved, HVAC businesses have begun to
utilize equipment that monitors the levels of certain harmful substances in the
air of a customer's home. The Company's technicians are trained to educate
customers on the harmful effects of these substances, which can cause fatigue,
inattentiveness, allergies, asthma, hyper-sensitivity and respiratory diseases.
The Company offers and actively promotes a variety of IAQ services designed to
detect and correct unhealthy air quality.

39
<PAGE> 41

Among these services are duct cleaning, fresh air ventilation and heat recovery
systems, ultraviolet light processes and the sale and installation of ozonators.

Achieving Operating Efficiencies. Manufacturers of HVAC equipment have
historically offered more favorable prices and rebates to high volume
purchasers. Management believes that the Company will be able to increase the
discounts and rebates available to the Service Centers prior to acquisition by
the Company. In addition, the Company expects to achieve increased operating
efficiencies by consolidating certain functions at the corporate level,
including negotiating purchase terms for HVAC equipment, sales management,
purchasing and leasing of service vehicles and accounting, insurance, financial
management, marketing and legal support.

The Company is implementing a uniform system of budgets, forecasts, reports
and financial controls for its Service Centers. In addition, each of the Service
Centers generates and provides to the Company a daily management report of
revenue and expense information and certain billing and collection data. The
Company uses such information to prepare and provide to each Service Center
monthly and quarterly comparative financial data, which enable each Service
Center to track and compare its performance with the other Service Centers.

Attracting and Retaining Quality Employees. Management believes the
Service Centers attract and retain quality employees by providing (i) an
environment that emphasizes professionalism and customer satisfaction, (ii)
extensive training that allows employees to advance to higher-earning positions
and (iii) stability of income because the Service Centers do not experience the
cyclical lay-offs typically found in the HVAC industry. The Company has a cash
bonus program for each Service Center pursuant to which managers may earn
bonuses based on the performance of the Service Center and the Company relative
to established goals set by the Service Center's president and the Company. The
Service Centers are operated by managers who are trained in the CSG operating
methods and procedures and who management believes are better educated than a
typical HVAC service business operator.

Potential employees must pass extensive interviews and background checks,
where permitted, as well as technical tests prior to being hired. All service
technicians, maintenance technicians and installers employed by the Company are
required to complete comprehensive training programs designed to teach employees
the Company's operating procedures. Such training programs are conducted both at
the Service Centers and at CSG sponsored seminars. Management believes that its
policies have resulted in a low rate of employee turnover. See "Contractor
Success Group."

Developing a National Reputation. Management believes that successful
implementation of the Company's operating strategy will enable it to establish a
national reputation for superior, high quality service. By developing a national
reputation, management believes the Company will appeal to a large number of
customers who are familiar with and rely upon a large, stable company with a
national reputation for providing high quality service.

CONTRACTOR SUCCESS GROUP

CSG, a wholly-owned subsidiary of the Company, was formed in 1991 to offer
HVAC companies proprietary products and marketing, management, educational and
advisory services not available from industry trade associations. Currently,
there are over 270 members of CSG serving distinct market areas in the United
States and Canada defined primarily by zip codes. CSG offers its members a
competitive edge over other contractors in the market by providing useful
management and technical skills, training programs and proprietary products. In
exchange, CSG members pay an initial fee upon joining CSG and a quarterly fee
thereafter. In 1995, CSG collected fees totaling approximately $3.1 million. CSG
members are granted exclusive rights to the territory in which they operate. The
Company intends to continue to build and expand the membership of CSG.

CSG licenses to its members copyrighted training manuals that cover in
specific detail every aspect of owning and operating an HVAC service and
replacement company, including residential replacement sales, residential
maintenance, service contracts, residential installation, business planning and
service dispatch. In

40
<PAGE> 42

addition, CSG members receive materials containing, and attend conferences
discussing, methods and procedures to operate an efficient, profitable company,
including (i) daily report forms designed to provide accurate and timely sales
and cost information essential to determining the performance of an HVAC
business, (ii) "Scorecard," a monthly report distributed to CSG members
comparing top producers among members, (iii) contracts and forms, including
non-competition agreements for employees, sales and service contracts, (iv)
marketing promotions that are tested and proven with specific instructions on
how to tailor advertising for the member's market and (v) quarterly projects
introducing to CSG members new products and services designed to increase
productivity.

Seminars and Services

Potential CSG subscribers are invited to attend an informational seminar at
CSG's facility in St. Louis, Missouri where they are introduced to the CSG
concept and are invited to join the organization. Upon paying the initial fee,
CSG subscribers attend "Boot Camp" which is an intensive four-day workshop
conducted by CSG three times each year. At Boot Camp, HVAC contractors are
educated on all aspects of operating an HVAC service and replacement business.
Attendees receive presentations and materials that explain in specific detail
the methods and procedures successfully utilized by CSG members. Topics covered
include administration, sales, service, advertising, direct marketing,
maintenance, service contracts, acquisitions and accounting. CSG members may
also attend "Success Convention," which is a quarterly two-day convention of CSG
members designed to allow the members to compare ideas and projects and at which
quarterly projects are presented, and "Sales Extravaganza," which is an annual
convention designed to encourage and motivate a member's salespeople, selling
technicians and telemarketers.

Future University

In connection with the Combination, the Company acquired approximately 37%
of the issued and outstanding Common Stock of Future University, Inc. ("Future
University(R)"). Future University is a corporation that offers to CSG members
for an additional enrollment fee technical and operational educational programs
designed to improve the profitability of the CSG member's business. The
technical programs offer installers and technicians a combination of classroom
and on-the-job-training during one and two week sessions. Technicians receive
skills training that will enable them to effectively analyze customer problems
and offer efficient solutions. In the maintenance training classes, for example,
technicians are trained to maximize the operating efficiency of HVAC systems,
assure safe operation of systems and reduce the chances of future breakdowns. In
the sales training classes, technicians are trained to deal with customer
expectations, use and promote various products and services, develop leads,
explain financing programs and improve on various customer relations skills. In
sending technicians to the Future University program, CSG members are able to
develop a high level of commitment in their employees. The technical programs
are held in Little Rock, Arkansas under an exclusive licensing arrangement with
Hardwick Air Masters, Inc., one of the Service Centers. Pursuant to the current
licensing arrangement, Hardwick Air Masters, Inc. receives 70% of the revenue
from the technical programs and Future University receives 30% of such revenue.
The operational programs offer to general managers and salespeople a variety of
classes covering residential sales training, replacement sales, marketing and
promotions, telemarketing and general operations. These programs are held in
Houston, Texas.

Management believes that Future University is the only comprehensive
training school for management, salespeople, installers and technicians in the
residential HVAC industry. Since its formation in 1991, over 1,000 students per
year have completed Future University's technical and operational training
programs.

SERVICE CENTERS

General

Management estimates that during 1995 the Service Centers' service and
maintenance technicians responded to over 120,000 maintenance, repair and
service calls. The services offered by each Service Center include (i) the sale
of replacement central air conditioners, furnaces and heat pumps, (ii) the
maintenance and repair of HVAC units, (iii) diagnostic analysis of the condition
of existing unit and (iv) the sale of

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<PAGE> 43

ancillary products such as IAQ devices and monitors. Most of the Service Centers
employ an in-house sales force that sells replacement units, installation
technicians who install replacement equipment in existing homes, service
technicians who service and maintain the equipment, and an administrative staff
to perform dispatching, purchasing and other administrative functions. In
addition, some of the Service Centers offer plumbing services. Management
believes that in 1995 the installation and servicing of plumbing systems
represented less than 5% of the Company's pro forma net revenue. The Company
anticipates that such Service Centers will continue to offer plumbing services,
but currently does not intend to expand such business.

All of the Service Centers' technicians are trained to promote the
Company's preventive maintenance agreements and to cross-market IAQ equipment
and other ancillary services and products offered by the Company. Service
technicians are trained to perform service and maintenance in a professional
manner, to identify problems with existing HVAC systems and to offer customers
the most practical, cost-effective solution to their problem, whether that
involves repairing the existing system or suggesting a replacement system or
part. Often this involves providing customers with information on products to
upgrade their system and improve efficiency as well as informing them about the
advantages and disadvantages of a particular product or service. Maintenance
technicians perform routine maintenance examinations of HVAC systems in an
effort to keep the systems in working order and to identify potential problems
before they become too costly to correct.

Management believes that most HVAC contractors charge the cost of the
materials and the hourly rate for the actual time it takes to install or repair
the system. In contrast, the Company utilizes a flat rate pricing system that
advises the customer of the cost of service for the particular job before work
begins and charges the quoted price regardless of the time necessary to repair
the system. While this may result in parts, labor and other costs incurred in
repairing a customer's system exceeding the quoted price from time to time, the
Company is able to alter its pricing on a per job basis. The Company's
experience is that customers generally prefer this pricing method because it
eliminates surprise or hidden costs. This pricing method also creates an
incentive for the Company to hire quality technicians and to provide them with
the training necessary to service customer needs efficiently.

Sale of Replacement Units

The replacement market for residential HVAC equipment is dependent upon the
installed base of units, the mechanical life and usage of the equipment and
technological advances in the efficiency of newer units. The Company believes
the replacement market for HVAC units offers the potential for high growth and
profitability in the future given the potential number of HVAC systems that will
need replacement in the coming years and the Company's ability to effectively
service that need. The market for replacement units is highly fragmented, with
no single manufacturer dominating the market. In order to service the
replacement market, the Company intends to establish relationships with several
national, regional and local manufacturers of replacement units in order to
offer a wide variety of products to its customers. The Company is not dependent
on any manufacturers or distributors of replacement units, but rather has access
to products from all over the country allowing the Company to offer products
that its competition may be unable to provide.

At the time of sale, a customer is offered a wide assortment of financing
packages by the Service Center. A Service Center's installers and technicians,
in addition to the salespeople, are trained to educate customers as to the
financing options available, assist the customer in completing the credit
application forms and determine whether the customer's financing is approved.
The Company also offers its customers a Professional Courtesy credit card solely
for use in purchasing equipment and services from the Company. Such financing,
including the Professional Courtesy credit card, is offered through a number of
third party lenders. Pursuant to its arrangements with such financing companies,
the Company receives an origination fee based on the amount financed, but does
not bear any credit risk from such financing.

Maintenance and Service Agreements

The Company currently has approximately 27,600 maintenance agreements with
customers. These agreements are for a term of one to three years and provide for
two diagnostic and precision maintenance visits during the year at an average
cost to the customer of approximately $135 per year. The sale of maintenance

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<PAGE> 44

agreements not only generates recurring revenue through the payment of fees, but
also helps the Company develop a committed, loyal customer base and provides the
opportunity for cross-marketing of the Company's other services and products.
Management believes that customers with maintenance agreements are the Company's
most satisfied customers because of the many benefits offered by such
agreements, including (i) energy savings resulting from a more efficient HVAC
system, (ii) fewer and less costly emergency repairs, (iii) longer useful life
for the HVAC system, (iv) discounted rates for service and (v) guaranteed
same-day service in the event of an emergency repair. Maintenance agreements
also allow the Company to more fully utilize its technicians during the
historically slower spring and fall months by scheduling maintenance
appointments during such time. Because systems under maintenance agreements are
less likely to require emergency repairs, the Service Centers are able to
provide more prompt service to emergency and new service calls.

The Company's service agreements are generally for a term of one year and
provide for the repair of any problem with the customer's system at no
additional cost to the customer. Pursuant to the terms of such service
agreements, if the cost of repair exceeds the value of the customer's HVAC
system, the Company is not required to repair the system and the customer
receives a $300 discount if he purchases a replacement unit from the Company. In
some states, warranties provided for in the Company's service agreements may be
deemed insurance contracts by applicable state insurance regulatory agencies
thereby subjecting the Company and the service agreements to the insurance laws
and regulations of any such state. In such states, the Company insures its
service agreements through licensed insurers. Management believes that the
Company has made adequate provision for potential claims under these agreements.
See "Regulation."

Locations

The Company currently operates 12 Service Centers in nine states. The
following table sets forth certain information regarding these Service Centers:

<TABLE>
<CAPTION>
AREA OF YEAR
SERVICE CENTER STATE OPERATION FOUNDED
------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Norrell Heating & Air Conditioning, Inc.......... Alabama Birmingham 1953
Hardwick Air Masters, Inc........................ Arkansas Little Rock 1970
Service Experts of Palm Springs, Inc............. California Palm Springs 1993
Comerford's Heating and Air Conditioning, Inc.... California Pleasanton 1974
Coastal Air Conditioning Service, Inc............ Georgia Savannah 1976
Rolf Coal and Fuel Corp.......................... Indiana Fort Wayne 1904
Brand Heating & Air Conditioning, Inc............ Indiana Lafayette 1991
Gilley's Heating & Cooling, Inc.................. Louisiana Monroe 1980
Vision Holding Company, Inc...................... Missouri Kansas City 1982
Air Experts, a United Services Co., Inc.......... Missouri St. Louis 1981
AC Service & Installation Co., Inc./
Donelson Air Conditioning Company, Inc....... Tennessee Nashville 1974/1968
Arrow Heating & Air Conditioning, Inc............ Wisconsin Racine 1992
</TABLE>

Commercial Service and Replacement

Some of the Service Centers offer HVAC services to small and medium-sized
businesses. In 1995, revenues generated from the provision of services and sale
of products to commercial customers represented less than 20% of the Company's
pro forma net revenue. The Service Centers target restaurants, small office
buildings, warehouses and theaters as potential prospects for its commercial
services. The Company's commercial sales representatives receive extensive
training designed to enable the representatives to promote the Company's
services and products effectively. The services offered to commercial customers
are generally the same as services offered to residential customers, including
the analysis, maintenance and repair of existing HVAC systems, the sale of
replacement systems and the sale of ancillary products, including IAQ devices
and services. While management does not plan to further develop its plumbing and
commercial HVAC businesses

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<PAGE> 45

beyond existing operations given the potential for growth in the residential
service and replacement market, the Company intends to continue to provide
plumbing and commercial HVAC services.

SERVICES AND OPERATIONS

The Company provides management, financial and accounting services for all
of the Service Centers' operations. Management provides certain financial
control support, including budgets, forecasts and reports, while allowing each
general manager of a Service Center to manage its day-to-day operations. The
Company provides the following services:

Purchasing

Because of the number of Service Centers operated by the Company,
management believes the Company is able to negotiate at a lower cost (i) the
purchase of HVAC units, parts and supplies, (ii) the purchase and lease of
service vehicles and (iii) the provision of accounting, insurance, financial
management, marketing and legal support. The principal manufacturers of the
products sold by the Company include The Trane Company, Carrier Air
Conditioning, Inc., Lennox Industries, Inc. and Rheem Manufacturing Company.
Each Service Center orders products from the manufacturers or distributors at
the discounted rate negotiated by the Company. The Service Centers generally
order equipment only upon receipt of a contract for purchase from a customer,
enabling them to maintain low inventory.

Management Information Systems

The Service Centers currently utilize various compatible management and
financial information systems. The Company intends to convert the Service
Centers' current systems to an integrated system within the next 18 months. The
implementation of an integrated system will allow the Company to maintain
greater control over the operations of its Service Centers. The Company intends
to track important data related to the Service Centers' operations and financial
performance and to monitor all advertising expenditures. In addition, the
Service Centers will generate and provide to the Company a daily management
report of revenue and expense information and certain billing and collection
data. The Company will use such information to prepare and provide to each
Service Center monthly and quarterly comparative financial data, which will
enable each Service Center to track and compare its performance with the other
Service Centers.

Employee Screening and Training

Prior to employment, potential employees of the Company must take
comprehensive tests to determine their technical expertise. In addition, all
employees of the Company are required to pass a drug test prior to employment
and are thereafter subject to random drug testing. Failure to take or pass a
drug test results in immediate termination of employment. Once hired, employees
of the Company are required to complete various training programs covering
technical skills and communication and sales techniques. In addition, employees
periodically attend educational seminars and conventions conducted by CSG. See
"Contractor Success Group."

Advertising and Marketing

The Company's advertising and marketing programs are designed to attract
new customers and to stimulate increased demand from existing customers. Each
Service Center, utilizing materials produced by CSG, develops customized
marketing programs tailored to meet the needs of its local customer base.
Emphasizing superior, high quality service, the Service Centers market directly
to prospective and existing customers through local print advertising, yellow
page advertising and direct mail campaigns followed up by telemarketing. In
1995, advertising and marketing expenditures were 1.8% as a percentage of the
Company's pro forma net revenue.

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<PAGE> 46

REGULATION

HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, laws and regulations implementing the Clean Air
Act, as amended, relating to minimum energy efficiency standards of HVAC systems
and the production, servicing and disposal of certain ozone depleting
refrigerants used in such systems. In connection with the entry into new
markets, the Company may become subject to compliance with additional
regulations. Although, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future, to
date compliance with such regulatory requirements has not had a material effect
on the Company.

TRADEMARKS

"Service Experts" is registered as a federal trademark with the United
States Patent and Trademark Office. The Company currently licenses the Service
Experts name and logo to two companies that are members of CSG. The Company owns
and licenses numerous proprietary products used by the Service Centers and other
CSG members. See "Contractor Success Group." In addition, the Company owns
approximately 37% of the issued and outstanding common stock of "Future
University," which is registered as a federal trademark with the United States
Patent and Trademark Office. See "Contractor Success Group -- Future
University." The Company regards its trademarks as having significant value and
being an important factor in the development and marketing of its operations.
The Company's policy is to pursue registration of its trademarks whenever
possible and to oppose vigorously any infringement of its trademarks.

COMPETITION

The HVAC service and replacement industry is highly competitive in each of
the markets in which the Company operates. The Company's Service Centers compete
with other full-service HVAC businesses primarily on the basis of quality,
reliability, customer service and price. In one of its markets, Kansas City,
Missouri, the Company competes with utility companies which have access to
capital, personnel, marketing and technological resources that are equal to or
greater than those of the Company. Because of the fragmented nature of the
industry and relative low barriers to entry, additional competitors, including
companies that offer other home improvement services in addition to HVAC
services, may emerge that have greater access than the Company to capital,
personnel and technological resources.

EMPLOYEES

Management estimates that the Company has approximately 600 employees. None
of the Company's employees is represented by a collective bargaining agreement.

PROPERTIES

The Company currently leases the building and underlying real estate on
which all of its Service Centers are located pursuant to leases with terms
generally ranging from five to ten years on terms the Company believes to be
commercially reasonable. Total rental expense for the Company's leased centers
in 1995 was approximately $400,000. In the future, the Company plans to lease
rather than purchase space for the Service Centers to maximize the Company's
available capital.

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<PAGE> 47

The Company leases approximately 24,000 square feet of office space in
Nashville, Tennessee for its corporate headquarters. The remaining term of the
lease on this office space is approximately 10 years, and the Company pays
annual rent of $140,000. The Company also maintains an office in approximately
3,600 square feet of office space leased in Chesterfield, Missouri. The
remaining term of the lease on this office space is approximately 18 months, and
the Company pays annual rent of approximately $60,000.

INSURANCE

The Company maintains general liability and property insurance. The costs
of insurance coverage varies, and the availability of certain coverage has
fluctuated in recent years. The Company intends to consolidate the purchase of
insurance for its operations, which management believes will result in savings
from the amounts paid by the Subsidiaries prior to the Combination. While
management believes, based upon its claims experience, that the Company's
present insurance coverage is adequate for its current operations, there can be
no assurance that the coverage is sufficient for all future claims or will
continue to be available in adequate amounts or at reasonable rates.

LEGAL PROCEEDINGS

The Company does not have pending any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on the
Company. The Company and its Service Centers may, from time to time, be a party
to litigation or administrative proceedings which arise in the normal course of
its business.

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<PAGE> 48

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The table below sets forth certain information concerning each of the
executive officers and directors of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ---- -------------------------------------------
<S> <C> <C>
Alan R. Sielbeck........................... 43 Chairman of the Board and Chief Executive
Officer
James D. Abrams............................ 48 President, Chief Operating Officer and
Director
Anthony M. Schofield....................... 42 Chief Financial Officer, Secretary and
Treasurer
Raymond J. De Riggi(1)..................... 48 Director
Timothy G. Wallace(1)(2)................... 38 Director
William G. Roth(2)......................... 58 Director
Norman T. Rolf, Jr......................... 50 Director
</TABLE>

- ---------------

(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

The Company's Board of Directors is divided into three classes, each
consisting of two members. At each annual stockholders meeting, directors of one
class are elected to three year terms. The terms of Messrs. De Riggi and Rolf
expire in 1997, Messrs. Abrams and Roth in 1998 and Messrs. Sielbeck and Wallace
in 1999. See "Description of Capital Stock -- Anti-Takeover Provisions".

Alan R. Sielbeck has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception in March 1996. Mr. Sielbeck has
served as Chairman of the Board and President of AC Service and Installation
Co., Inc. and Donelson Air Conditioning Company, Inc., each a Subsidiary, since
1990 and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as President
of RC Mathews Contractor, Inc., a commercial building general contractor, and
Chief Financial Officer of RCM Interests, Inc., a commercial real estate
developing company.

James D. Abrams has served as President, Chief Operating Officer and as a
director of the Company since its inception in March 1996. Mr. Abrams has served
as President of CSG, one of the Subsidiaries, since 1996. From 1990 to 1996, Mr.
Abrams served as Chief Executive Officer and a director of CSG. Mr. Abrams has
served as President of Air Experts and Service Experts of Palm Springs, Inc.,
each a Subsidiary, since 1993. Mr. Abrams has served as President and sole
director of Air Comfort Services, Inc., an HVAC service and replacement business
located in Sarasota, Florida, since 1988. Mr. Abrams served, from 1992 to 1996,
as Chairman and President of Service Now, Inc. ("Service Now"), a holding
company that owns several HVAC businesses, and prior to the Combination owned
Air Experts and Service Experts of Palm Springs, Inc. He resigned from his
positions with Service Now prior to the closing of the Combination and the IPO.
Mr. Abrams previously served as Chief Executive Officer and a director of Future
University from 1991 to 1995. Mr. Abrams currently serves on the Advisory Board
of Boatmen's National Bank (Southern Region).

Anthony M. Schofield has served as Chief Financial Officer, Secretary and
Treasurer of the Company since June 1996. From 1982 to 1996, Mr. Schofield
served as Cost Manager, Vice-President-Controller, Senior Vice-President of
Finance, and Division Controller for Perrigo Company of Tennessee, formerly
Cumberland-Swan, Inc., a manufacturer of personal care health and beauty aid
products. Mr. Schofield is certified by the American Institute of Certified
Public Accountants as well as the Institute of Management Accountants holding
both CPA and CMA designations.

Raymond J. De Riggi has served as a director of the Company since June
1996. Mr. De Riggi has served as President of United Specialty Food Ingredients
Companies, a subsidiary of ConAgra Food Products, a diversified food processing
company, since November 1995. From 1992 to 1995, Mr. De Riggi served as
Executive Vice President of Pet, Incorporated, a diversified food processing
company, and from 1990 to 1992,

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<PAGE> 49

he served as its Vice President of Operations. From 1987 to 1990, Mr. De Riggi
served as President of Whitman's Chocolates, a division of Pet, Incorporated.

Timothy G. Wallace has served as a director of the Company since June 1996.
Mr. Wallace has served as Vice President of Finance and Chief Financial Officer
of Healthcare Realty Trust Incorporated, a company operating as a real estate
investment trust, since January 1993. Mr. Wallace was a Senior Manager with
responsibility for healthcare and real estate in the Nashville, Tennessee office
of Ernst & Young LLP from June 1989 to January 1993. Prior to joining Ernst &
Young LLP, he was employed by Arthur Andersen & Co. from September 1980 to June
1989.

William G. Roth has served as a director of the Company since July 1996.
Mr. Roth served as Chairman of the Board of Directors of Dravo Corporation, a
natural resources company that is the largest producer of lime in the United
States, from 1989 to 1994. Mr. Roth also served as Chief Executive of Dravo
Corporation from 1987 to 1989. Prior to that time, Mr. Roth served as President,
Chief Operating Officer and a director of American Standard, Inc., a worldwide
manufacturer of air conditioning, plumbing and transportation system products,
from 1985 to 1987. From 1978 to 1985, Mr. Roth served as Chairman and Chief
Executive Officer of The Trane Company, an international manufacturer and
marketer of HVAC systems. Mr. Roth currently serves as a director of Amcast
Industrial Corporation and Teknowledge Corporation.

Norman T. Rolf, Jr. has served as a director of the Company since July
1996. Since 1988, Mr. Rolf has served as President of Rolf Coal and Fuel Corp.,
a Subsidiary, where he also has previously served as a director and has been
employed in various positions since 1966.

The Compensation Committee of the Board of Directors is responsible for
establishing salaries, bonuses and other compensation for the Company's
executive officers and administering stock option and other employee benefit
plans of the Company. The Audit Committee is responsible for the annual
appointment of the Company's auditors and reviewing the scope of audit and
non-audit assignments and related fees, accounting principles used by the
Company in financial reporting, internal auditing procedures and the adequacy of
the Company's internal control procedures with the Company's auditors.

EXECUTIVE COMPENSATION

The Company has granted options to purchase 40,000 shares of Common Stock
under the 1996 Incentive Stock Plan (the "Incentive Plan"). These options are
exercisable at $13.00 per share and vest one-third per year commencing on the
second anniversary of the date of grant. The Company has not awarded any stock
appreciation rights to its executive officers, directors or employees. The
Company has no long-term incentive, defined benefit or actuarial plans, as those
terms are defined in Commission regulations, covering employees of the Company.

EMPLOYMENT AGREEMENTS

Pursuant to employment agreements, effective as of August 21, 1996, Messrs.
Sielbeck, Abrams and Schofield (the "executive officers") are employed as
executive officers of the Company. The employment agreements of Messrs.
Sielbeck, Abrams and Schofield provide for annual base salaries of $250,000,
$250,000 and $110,000, respectively, which salaries are subject to annual review
by the Compensation Committee, and bonuses, which amounts will be determined by
the Compensation Committee. The term of each employment agreement is three
years.

Each of the executive officers may terminate his respective employment
agreement without cause by giving the Company 90 days prior written notice.
Pursuant to the terms of his respective employment agreement, each executive
officer has agreed not to disclose the Company's confidential information and
not to compete against the Company during the term of his employment agreement
and for a period of two years thereafter.

In the event the executive officer is terminated upon a "change-in-control"
(as defined in the employment agreement), each of the executive officers will be
paid all accrued base salary, bonus compensation to the extent earned, vested
deferred compensation (other than plan benefits which will be paid

48
<PAGE> 50

in accordance with the applicable plan) and other benefits through the date of
termination. In addition, each executive officer will receive as severance pay
his base salary in monthly installments through the remaining term of the
agreement, or at his election, a lump sum severance payment equal to the present
value of the flow of severance payments that would otherwise be paid to him.
Notwithstanding the foregoing, the Company is not required to pay any amount
which is not deductible for federal income tax purposes.

Each executive officer is entitled to receive his accrued base salary,
earned bonus, vested deferred compensation (other than plan benefits which will
be paid in accordance with the applicable plan) and other benefits through the
date of termination in the event that the Company terminates his employment
without cause. In addition, he will receive as severance compensation his base
salary for the greater of two years or the remaining term of his employment
agreement.

In the event the executive officer is terminated for cause (as defined in
the agreement), he is entitled to receive all accrued base salary, earned bonus
compensation, vested deferred compensation (other than plan benefits which will
be payable in accordance with the applicable plan) and other benefits through
the date of termination, but shall receive no other severance benefits. Each
executive officer's employment agreements may also be terminated if he dies, in
which event his estate will receive these same payments and severance payments
equal to three months' salary.

In the event the executive officer becomes disabled for a period of 60
consecutive days, he is entitled to receive his base salary, insurance, bonus
and other benefits for a period of six months from the date such disability
began or for such shorter period as he is unable to perform his duties
hereunder. In the event he is unable to perform his duties hereunder after the
expiration of the six-month period, his employment agreement will terminate.

COMPENSATION OF DIRECTORS

Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors of
the Company are entitled to receive a fee of $10,000 per year. All directors are
also entitled to reimbursement for their actual out-of-pocket expenses incurred
in connection with attending meetings. In addition, each of the non-employee
directors of the Company is entitled to participate in the Service Experts, Inc.
1996 Non-Employee Director Stock Option Plan (the "Director Plan").

COMPENSATION PURSUANT TO PLANS

Incentive Stock Plan. In June 1996, the Company adopted the Incentive
Plan. The Company has reserved 700,000 of the authorized shares of Common Stock
for issuance pursuant to stock options and stock appreciation rights ("SARs") to
be granted under the Incentive Plan. Under the Incentive Plan and pursuant to
action of the Board, the Compensation Committee appointed by the Board of
Directors will administer the Incentive Plan and may grant to officers and key
employees (i) non-transferable options to purchase shares of Common Stock and
(ii) SARs. The options are for terms not longer than ten years (five years in
the case of incentive stock options granted to an individual who, at the time of
the grant, owns more than 10% of the total combined voting power of all classes
of stock of the Company), at prices to be determined by the Board of Directors
or the Compensation Committee. Such prices may not be less than 100% of the fair
market value of the Common Stock on the date of grant (110% in the case of an
individual who, at the time of grant of incentive stock options, owns more than
10% of the total combined voting power of all classes of stock of the Company)
in the case of incentive stock options under Section 422 of the Code. Incentive
stock options may be granted only to employees and may not be less than 85% of
the fair market value of the Common Stock on the date of grant in the case of
non-qualified stock options. Options granted under the Incentive Plan may be
exercisable in installments. The Company is authorized to loan, or guarantee
loans of, the purchase price of shares issuable upon exercise of options granted
under the Incentive Plan. Unless terminated earlier, the Incentive Plan will
terminate in 2006. The aggregate fair market value of Common Stock with regard
to which incentive stock options are exercisable by an individual for the first
time during any calendar year may not exceed $100,000. The Company has granted
options to purchase 40,000 shares of Common Stock under the

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<PAGE> 51

Incentive Plan. These options are exercisable at $13.00 per share and vest
one-third per year commencing on the second anniversary of the date of grant.

SARs will entitle the holder to receive an amount equal to the excess of
the fair market value of a specified number of shares of Common Stock as of the
date such right is exercised over a specified price which shall not be less than
85% of the fair market value of the Common Stock at the time the SAR is granted.
SARs may be granted separately or in connection with a non-qualified stock
option. No SAR is exercisable more than ten years after it is granted.

Non-Employee Director Stock Option Plan. In June 1996, the Company adopted
the Director Plan. The Company has reserved for issuance under the Director Plan
100,000 shares of Common Stock. The Director Plan provides for the granting of
nonqualified stock options to each director of the Company who is not also an
employee or officer of the Company ("Non-Employee Directors") at an exercise
price equal to the fair market value of the Common Stock on the date the options
are granted. The Director Plan contains provisions providing for adjustment of
the number of shares available for option and subject to unexercised options in
the event of stock splits, dividends payable in Common Stock, business
combinations or certain other events. The Board shall have no authority,
discretion or power to select the participants who will receive options pursuant
to the Director Plan, to set the number of shares of Common Stock to be covered
by each option, to set the exercise price or the period within which the options
may be exercised or to alter other terms or conditions specified in the options.

Pursuant to the Director Plan, each Non-Employee Director on the effective
date of the IPO was granted options to purchase 5,000 shares of Common Stock at
an exercise price equal to $13.00 per share. Each Non-Employee Director elected
in the future will be granted options to purchase 5,000 shares of Common Stock
on the date of such director's election to the Board of Directors at an exercise
price equal to the fair market value of the Common Stock on the date the options
are granted. In addition, the Director Plan provides for the grant to each
Non-Employee Director of options to purchase 1,000 shares of Common Stock on
each January 1 (each date of grant being referred to as the "Grant Date"). The
Board of Directors may revoke, on or prior to each January 1, the next automatic
grant of options otherwise provided for by the Director Plan if no options have
been granted to employees since the preceding January 1 under the Incentive Plan
or any other employee stock option plan that the Company might adopt. Each
option shall be exercisable in full upon receipt and shall expire ten years
after the Grant Date (the "Option Period"), unless cancelled sooner due to
termination of service or death, or unless the option is fully exercised prior
to the end of the Option Period.

Employee Stock Purchase Plan. The Service Experts, Inc. 1996 Employee
Stock Purchase Plan (the "Purchase Plan") was adopted in June 1996 and became
effective simultaneously with the IPO. A total of 100,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan, which is intended to
qualify under Section 423 of the Code. The Purchase Plan allows participants to
purchase shares of Common Stock in connection with option periods commencing on
the first trading date of each year and ending the following December 31 (except
the first option period which will commence the date of the Offering and end
December 31, 1996).

The Purchase Plan permits eligible employees of the Company and certain of
its subsidiaries to purchase Common Stock through payroll deductions, which may
not exceed 10% of the employee's base compensation, at a price equal to 85% of
the fair market value of the Common Stock at the beginning of the option period
or at the end of the option period, whichever is lower (subject to a minimum
price specified in the Purchase Plan). Employees are eligible to participate in
the Purchase Plan if they are employed by the Company or a participating
subsidiary for at least 20 hours a week and more than five months in any
calendar year and have been employed for at least six months since their last
date of hire.

In the event of a change of control of the Company (as defined in the
Purchase Plan), each option under the Purchase Plan will (if the Company is the
surviving corporation) pertain to and apply to the securities to which a holder
of the number of shares of the Company subject to such option would have been
entitled in such transaction. If the Company is not the surviving corporation in
such change in control, then all options under the Purchase Plan will terminate
provided that the Compensation Committee may determine that such options shall
be exercisable on the day prior to such change in control transaction.

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<PAGE> 52

401(k) Plan. In 1996, the Company adopted a Savings and Profit Sharing
Plan (the "Savings Plan") which is intended to be qualified under Sections
401(a) and 401(k) of the Code. To be eligible, an employee must have been
employed by the Company for at least one year. The Savings Plan permits
employees who have completed one year of service to defer from 1% to 15% of
their compensation into the Savings Plan up to specified limits per year ($9,500
during 1996). Additional annual contributions may be made at the discretion of
the Company which will vest according to a schedule set forth in the Savings
Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee is comprised of directors who are not employees
of the Company. The Compensation Committee is responsible for establishing
salaries, bonuses and other compensation for the Company's officers.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Pursuant to the Company's Restated Certificate of Incorporation and Bylaws,
the Company is obligated to indemnify each of its directors and officers to the
fullest extent permitted by law with respect to all liability and losses
suffered and reasonable expenses incurred by such person in any action, suit or
proceeding in which such person was or is made or threatened to be made a party
or is otherwise involved by reason of the fact that such person is or was a
director or officer of the Company. The Company is obligated to pay the
reasonable expenses of the directors or officers incurred in defending such
proceedings if the indemnified party agrees to repay all amounts advanced by the
Company if it is ultimately determined that such indemnified party is not
entitled to indemnification. See "Description of Capital Stock -- Limitations on
Liability of Officers and Directors."

CERTAIN TRANSACTIONS

Prior to the IPO, Mr. Abrams, Mr. Sielbeck, John R. Young, a principal
stockholder of CSG, and R. Edward Hutton, Jr., a principal stockholder of AC
Service & Installation Co., Inc./Donelson Air Conditioning Company, Inc. ("AC
Service/Donelson"), one of the Service Centers, received 500,695, 243,706,
473,992 and 243,707 shares of Common Stock, respectively, as founders of the
Company for their services in forming the Company, developing its business plans
and procedures and in acquiring the Subsidiaries. These shares do not include
the shares of Common Stock received in exchange for their interests in the
Subsidiaries. Following the issuance of such shares, Messrs. Abrams and Young
transferred 103,407 and 97,891 shares, respectively, to the other shareholders
of Service Now.

Pursuant to the Combination, and as consideration for their interests in
the Subsidiaries, certain officers, directors and holders of 5% or more of the
outstanding Common Stock received cash and shares of Common Stock as follows:
Mr. Sielbeck -- $2,513,959 and 576,549 shares; Mr. Abrams -- $2,000,505 and
390,612 shares; Mr. Young -- $2,000,505 and 390,612 shares; Mr.
Hutton -- $2,513,959 and 576,549 shares; and Norman T. Rolf, Jr. -- $636,217 and
133,661 shares. Such amounts were determined on the basis of the evaluation by
the Company and the representatives of the underwriters of the IPO of the
following factors: the financial and operational history and trends of the
Subsidiaries, the experience of the Company's management, the position of the
Company in the HVAC service and replacement industry, the Company's prospects
and financial results, the status of the securities markets, market conditions
for new offerings of securities and the prices of similar securities of
comparable companies.

In connection with the Combination, the Company acquired approximately 37%
of the issued and outstanding common stock of Future University in exchange for
$2,000 per share in cash, an aggregate of $592,000. The consideration paid was
determined by arms length negotiations between the Company and the stockholders
of Future University who agreed to sell their shares to the Company. Mr. Abrams
and Mr. Young, who were principal stockholders of Future University, each
received $248,000 in the transaction. The Company intends to continue to send
its employees to Future University for training after the Combination. See "The
Company -- Contractor Success Group."

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<PAGE> 53

Service Now, of which Mr. Abrams and Mr. Young are principal shareholders,
is a 48% shareholder of SuccessWare, a corporation that provides management and
financial information systems software to certain of the Subsidiaries. See "The
Company -- Services and Operations -- Management Information Systems." In
connection with the Combination, the Company acquired all of the capital stock
of Air Experts, a United Services Co., Inc. and Service Experts of Palm Springs,
Inc., both of which were wholly owned subsidiaries of Service Now. Service Now
continues to own and operate other HVAC companies, none of which are located in
geographic areas served by existing Service Centers. In addition, the Company
purchased from Service Now the exclusive rights to the name "Service Experts" in
exchange for $60,000.

Mr. Abrams and Mr. Young are the sole shareholders of Fusion Filters, Inc.
("Fusion"), which licenses air filters and other products from manufacturers and
sublicenses them to HVAC contractors, including certain of the Subsidiaries. The
Company has not entered into any definitive agreements with Fusion, but may
purchase filters from Fusion in the future.

At March 31, 1996, Mr. Sielbeck had outstanding indebtedness payable to AC
Service/Donelson in the amount of $133,800, consisting of a note payable in the
principal amount of $100,000, bearing annual interest at 5% and payable upon
demand, and an interest-free advance of $33,800. At March 31, 1996, Mr. Hutton
had outstanding indebtedness payable to AC Service/Donelson in the amount of
$133,800, consisting of a note payable in the principal amount of $100,000,
bearing annual interest at 5% and payable upon demand, and an interest-free
advance of $33,800. All of this indebtedness has been repaid.

Prior to the Combination, Messrs. Sielbeck and Hutton purchased from AC
Service/Donelson the building and underlying real estate on which its main
facility is located and certain residential property for approximately $826,000
and $61,000, respectively. AC Service/Donelson purchased the building and real
estate for its main facility in 1992 for approximately $729,000 and made certain
improvements to such property costing approximately $78,000. AC Service/Donelson
purchased the residential property in 1994 for approximately $61,000. The sale
price for such properties was determined by the board of directors of AC
Service/Donelson. AC Service/Donelson has entered into a lease with Messrs.
Sielbeck and Hutton whereby AC Service/Donelson will make annual rental payments
of approximately $140,000 to Messrs. Sielbeck and Hutton. Management of the
Company believes such transactions are on terms that are commercially reasonable
and no less favorable to AC Service/Donelson than those which could be obtained
from unaffiliated third parties.

On June 20, 1996, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors or principal
stockholders or affiliates thereof, must be on terms no less favorable than
those which could be obtained from unaffiliated parties and must be approved by
a majority of the disinterested members of the Board of Directors. The Audit
Committee of the Board of Directors will be responsible for reviewing all
related party transactions on a continuing basis and potential conflict of
interest situations where appropriate.

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<PAGE> 54

PRINCIPAL STOCKHOLDERS

The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof, by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director and executive officer of the Company and (iii)
all directors and executive officers of the Company as a group. Unless otherwise
indicated, each of the stockholders listed below has sole voting and investment
power with respect to the shares beneficially owned.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
BENEFICIAL OWNER NUMBER PERCENT
- --------------------------------------------------------------------- --------- -------
<S> <C> <C>
James D. Abrams(1)................................................... 991,914(4) 11.57%
Alan R. Sielbeck(2).................................................. 820,255 9.56
John R. Young(3)..................................................... 970,727(4) 11.32
R. Edward Hutton, Jr.(2)............................................. 820,256 9.56
Anthony M. Schofield................................................. 2,000 *
Raymond J. De Riggi.................................................. 5,000(5) *
Timothy G. Wallace................................................... 5,000(5) *
William G. Roth...................................................... 5,000(5) *
Norman T. Rolf, Jr................................................... 133,661 1.56
All executive officers and directors as a group (seven persons)...... 1,962,830(4)(5) 22.89
</TABLE>

- ---------------

* Represents less than 1%.
(1) Mr. Abrams's address is c/o Contractor Success Group, Inc., 16141 North
Outer Forty Drive, Suite 310, Chesterfield, Missouri 63017.
(2) The indicated person's address is c/o Service Experts, Inc., 1134
Murfreesboro Road, Nashville, Tennessee 37217.
(3) Mr. Young's address is c/o John Young & Associates, 13950 Switzer, Overland
Park, Kansas 66221.
(4) Includes 204,014 shares issued to Service Now, the sole stockholder of two
of the Subsidiaries, in connection with the Combination. Messrs. Abrams and
Young are principal shareholders of Service Now.
(5) Includes 5,000 shares subject to outstanding options held by such
individuals.

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<PAGE> 55

RATIO OF EARNINGS TO FIXED CHARGES(1)

Set forth below is the ratio of earnings to fixed charges for the Company
for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- -----------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges........... 7.21 2.41 2.37 4.08 10.21 3.84 (2)
</TABLE>

- ---------------

(1) Because the Company has no shares of Preferred Stock outstanding, the ratio
of earnings to combined fixed charges and preferred stock dividends is
identical to the ratio of earnings to fixed charges for each period listed
above.
(2) Due to the salaries paid to the shareholders of AC Service & Installation
Co., Inc. and Donelson Air Conditioning Company, Inc. for the six months
ended June 30, 1996, the amount to cover the deficiency would have been
$179,657.

MARKET AND DIVIDEND INFORMATION

The Company completed its IPO on August 21, 1996 at a price per share of
$13.00. Since such time, the Common Stock has traded on the Nasdaq National
Market under the symbol "SERX." The following table sets forth the range of high
and low sales prices for the Common Stock for the periods indicated, as reported
by the Nasdaq National Market. The price quotations reflect inter-dealer prices
without retail mark-up, mark-down or commission and may not represent actual
transactions.

<TABLE>
<CAPTION>
1996 HIGH LOW
--------------------------------------------------------------------- ------ ------
<S> <C> <C>
Third Quarter (beginning August 21, 1996 and through September 17,
1996).............................................................. $17.00 $13.75
</TABLE>

On September 17, 1996, the last reported sale price for the Common Stock on
the Nasdaq National Market was $15.75 per share. The Company estimates that as
of August 31, 1996, there were approximately 75 holders of record of the Common
Stock.

The Company has not paid any cash dividends on its Common Stock. The
Company intends to retain its earnings to finance the growth and development of
its business and does not expect to declare or pay any cash dividends in the
foreseeable future. The declaration of dividends is within the discretion of the
Company's Board of Directors.

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<PAGE> 56

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 30,000,000 shares of Common Stock, $.01
par value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share (the "Preferred Stock"). As of August 31, 1996, the Company had
8,576,610 shares of Common Stock and no shares of Preferred Stock outstanding.
The following description of capital stock of the Company is qualified in its
entirety by reference to the Company's Restated Certificate of Incorporation, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. An additional 900,000 shares of Common Stock are
reserved for issuance upon exercise of employee and director stock options, of
which options to purchase 55,000 shares have been granted as of the date hereof.
As of August 31, 1996, there are approximately 75 holders of Common Stock.

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders. Stockholders have no right to cumulate
their votes in the election of directors. Accordingly, holders of a majority of
the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive dividends and other distributions when, as and if declared
from time to time by the Board of Directors out of funds legally available
therefor. In the event of a voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, including all
distributions to holders of Preferred Stock having a liquidation preference over
the Common Stock. The Company's Restated Certificate of Incorporation gives the
holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and non-assessable. The rights, preferences
and privileges of holders of Common Stock are subject to, and may be adversely
effected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.

PREFERRED STOCK

The Board of Directors has the authority, without any further vote or
action of the stockholders of the Company, to issue shares of the Preferred
Stock in one or more series and to fix the number of shares, designations,
relative rights (including voting rights), preferences and limitations of such
series to the fullest extent now or hereafter permitted by Delaware law. The
Company has no present intention to issue any series of Preferred Stock.

LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS

The Company's Restated Certificate of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the fullest
extent permitted by Delaware law, including some instances in which
indemnification is otherwise discretionary under Delaware law. The Restated
Certificate of Incorporation contains provisions that eliminate the personal
liability of the Company's directors for monetary damages resulting from
breaches of their fiduciary duty other than liability for breaches of the
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the Delaware General
Corporation Law, or for any transaction from which the director derived an
improper personal benefit. The Company believes that these provisions are
essential to attracting and retaining qualified persons as officers and
directors.

There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.

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<PAGE> 57

ANTI-TAKEOVER PROVISIONS

Section 203 of the Delaware General Corporation Law prevents an "interested
stockholder" (defined in Section 203, generally, as a person owning 15% or more
of a corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with a publicly-held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination; (ii) upon consummation of the transaction that resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owns at least 85% of the voting stock of the corporation outstanding
at the time the transaction commenced (excluding stock held by directors who are
also officers of the corporation and by employee stock plans that do not provide
employees with the right to determine confidentially whether shares held subject
to the plan will be tendered in a tender or exchange offer); or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of two-thirds of the outstanding voting stock of the corporation not
owned by the interested stockholder.

Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may make a change in the control of the Company difficult to effect,
even if a change in control were in the stockholders' interest. These include
certain super-majority vote requirements to amend or repeal certain provisions
of the Company's Restated Certificate of Incorporation or Bylaws, including
provisions relating to the election of a staggered Board of Directors and the
limitation that directors be removed only for cause by a majority of the
outstanding voting stock. The Company's Restated Certificate of Incorporation
eliminates the right of stockholders to take action by written consent. In
addition, the Company's Restated Certificate of Incorporation allows the Board
to determine the terms of the Preferred Stock which may be issued by the Company
without approval of the holders of the Company's Common Stock. The ability of
the Company to issue Preferred Stock in such manner could enable the Board of
Directors to prevent changes in management and control of the Company. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company first to negotiate with the Company. Management
believes that the benefits of increased protection of the Company's potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals. Management believes that negotiations of such proposals, among
other things, could result in an improvement of their terms.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is
Boatmen's Trust Company.

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<PAGE> 58

DESCRIPTION OF COMMON STOCK WARRANTS

The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Securities pursuant to any Prospectus Supplement or Post-Effective
Amendment, as applicable, and may be attached to or separate from such
Securities. Each series of Common Stock Warrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between the
Company and the warrant recipient or, if the recipients are numerous, a warrant
agent identified in the Prospectus Supplement or Post-Effective Amendment, as
applicable (the "Warrant Agent"). The Warrant Agent, if engaged, will act solely
as an agent of the Company in connection with the Common Stock Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Common Stock Warrants. Further terms
of the Common Stock Warrants and the applicable Warrant Agreements will be set
forth in the Prospectus Supplement or Post-Effective Amendment, as applicable.

The Prospectus Supplement or Post-Effective Amendment, as applicable, will
describe the terms of any Common Stock Warrants in respect of which this
Prospectus is being delivered, including, where applicable, the following: (a)
the title of such Common Stock Warrants; (b) the aggregate number of such Common
Stock Warrants; (c) the price or prices at which such Common Stock Warrants will
be issued; (d) the designation, number and terms of the shares of Common Stock
purchasable upon exercise of such Common Stock Warrants; (e) the designation and
terms of the other Securities with which such Common Stock Warrants are issued
and the number of such Common Stock Warrants issued with each such offered
Security; (f) the date, if any, on and after which such Common Stock Warrants
and the related Common Stock will be separately transferable; (g) the price at
which each share of Common Stock purchasable upon exercise of such Common Stock
Warrants may be purchased; (h) the date on which the right to exercise such
Common Stock Warrants shall commence and the date on which such right shall
expire; (i) the minimum or maximum amount of such Common Stock Warrants which
may be exercised at any one time; (j) information with respect to book-entry
procedures, if any; (k) a discussion of certain federal income tax
considerations; and (l) any other terms of such Common Stock Warrants, including
terms, procedures and limitations relating to the exchange and exercise of such
Common Stock Warrants.

As of the date of this Prospectus, no Common Stock Warrants are
outstanding.

DESCRIPTION OF DEBT SECURITIES

The Company may issue Debt Securities under one or more trust indentures
(each an "Indenture") to be executed by the Company and a specified trustee. The
terms of Securities will include those stated in an Indenture and those made a
part of an Indenture (before any supplements) by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The Indenture will be qualified
under the TIA.

The following description sets forth certain anticipated general terms and
provisions of the Debt Securities to which any Prospectus Supplement or
Post-Effective Amendment, as applicable, may relate. The particular terms of the
Debt Securities offered by any Prospectus Supplement or Post-Effective
Amendment, as applicable (which terms may be different than those stated below)
and the extent, if any, to which such general provisions may apply to the Debt
Securities so offered will be described in the Prospectus Supplement or
Post-Effective Amendment, as applicable, relating to such Debt Securities.
Accordingly, for a description of the terms of a particular issue of Debt
Securities, reference must be made to both the Prospectus Supplement or
Post-Effective Amendment, as applicable, relating thereto and the following
description. A form of Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

GENERAL

The indebtedness represented by Debt Securities will be subordinated in
right of payment to the prior payment in full of the Senior Debt (as such term
is defined in the Indenture) of the Company. The Debt Securities will be issued
pursuant to an Indenture between the Company and a trustee.

57
<PAGE> 59

Except as set forth in an Indenture and described in a Prospectus
Supplement or Post-Effective Amendment, as applicable, relating thereto, the
Debt Securities may be issued without limit as to aggregate principal amount, in
one or more series, secured or unsecured, in each case as established from time
to time in or pursuant to authority granted by a resolution of the Board of
Directors of the Company or as established in an Indenture. All Debt Securities
of one series need not be issued at the time and, unless otherwise provided, a
series may be reopened, without the consent of the holders of the Debt
Securities of such series, for issuance of additional Debt Securities of such
series.

The Prospectus Supplement or Post-Effective Amendment, as applicable,
relating to any series of Debt Securities being offered will contain the
specific terms thereof, including, without limitation:

(a) the title of such Debt Securities;

(b) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;

(c) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of such Debt Securities which is convertible into Common
Stock, or the method by which any such portion shall be determined;

(d) if convertible, any applicable limitations on the ownership or
transferability of the Common Stock into which such Debt Securities are
convertible;

(e) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;

(f) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;

(g) the date or dates, or the method for determining such date or
dates, from which any interest will accrue, the interest payment dates on
which any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which any such date shall be
determined, the person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;

(h) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and notices or demands to or upon the Company in respect of such
Debt Securities and an Indenture may be served;

(i) the period or periods within which, the price or prices at which
and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;

(j) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, as a
whole or in part, pursuant to such obligation;

(k) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;

(l) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;

58
<PAGE> 60

(m) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default (as defined in
an Indenture) or covenants set forth in an Indenture;

(n) any provisions for collateral security for repayment of such Debt
Securities;

(o) whether such Debt Securities will be issued in certificated and/or
book-entry form;

(p) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;

(q) the applicability, if any, of defeasance and covenant defeasance
provisions of an Indenture;

(r) the terms, if any, upon which such Debt Securities may be
convertible into Common Stock of the Company and the terms and conditions
upon which such conversion will be effected, including, without limitation,
the initial conversion price or rate and the conversion period;

(s) whether and under what circumstances the Company will pay
additional amounts as contemplated in an Indenture on such Debt Securities
in respect of any tax assessment or governmental charge and, if so, whether
the Company will have the option to redeem such Debt Securities in lieu of
making such payment; and

(t) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.

The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement or Post-Effective
Amendment, as applicable.

Except as set forth in an Indenture, an Indenture will not contain any
provisions that would limit the ability of the Company to incur indebtedness or
that would afford holders of Debt Securities protection in the event of a highly
leveraged or similar transaction involving the Company or in the event of a
change of control. Reference is made to the applicable Prospectus Supplement or
Post-Effective Amendment, as applicable, for information with respect to any
deletions from, modifications of or additions to the Events of Default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.

MERGER, CONSOLIDATION OR SALE

It is expected that an Indenture will provide that the Company may
consolidate with, or sell, lease or convey all or substantially all of its
assets to, or merge with or into, any other corporation, provided that (a)
either the Company shall be the continuing corporation, or the successor
corporation (if other than the Company) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such assets
shall expressly assume payment of the principal of (and premium, if any), and
interest on, all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in an Indenture; (b)
immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Company or any subsidiary as a
result thereof as having been incurred by the Company or such subsidiary at the
time of such transaction, no Event of Default under an Indenture, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the trustee.

COVENANTS

An Indenture will contain covenants requiring the Company to take certain
actions and prohibiting the Company from taking certain actions. The covenants
with respect to any series of Debt Securities will be described in the
Prospectus Supplement or Post-Effective Amendment, as applicable, relating
thereto.

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<PAGE> 61

EVENTS OF DEFAULT, NOTICE AND WAIVER

An Indenture will describe specific "Events of Defaults" with respect to
any series of Debt Securities issued thereunder. Such "Events of Defaults" are
likely to include (with grace and cure periods): (i) default in the payment of
any installment of interest on any Debt Security of such series; (ii) default in
the payment of principal of (or premium, if any, on) any Debt Security of such
series at its maturity; (iii) default in making any required sinking fund
payment, if any, for any Debt Security of such series; (iv) default in the
performance or breach of any other covenant or warranty of the Company contained
in the Indenture (other than a covenant added to the Indenture solely for the
benefit of a series of Debt Securities issued thereunder other than such series)
that is continued for a specified period of days after written notice as
provided in the Indenture; (v) default in the payment of specified amounts of
indebtedness of the Company or any mortgage, indenture or other instrument under
which such indebtedness is issued or by which such indebtedness is secured, such
default having occurred after the expiration of any applicable grace period and
having resulted in the acceleration of the maturity of such indebtedness, but
only if such indebtedness is not discharged or such acceleration is not
rescinded or annulled; and (vi) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any significant subsidiary or the property of either.

If an Event of Default under an Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case, subject to the rights of the holder of Senior Debt, the applicable
trustee or the holders of not less than 25% of the principal amount of the
outstanding Debt Securities of that series will have the right to declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities or indexed securities, such portion of the principal amounts
as may be specified in the terms thereof) of all the Debt Securities of that
series to be due and payable immediately by written notice thereof to the
Company (and to the applicable trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under any Indenture, as
the case may be) has been made, but before a judgment or decree for payment of
the money due has been obtained by the applicable trustee, the holders of not
less than a majority in principal amount of outstanding Debt Securities of such
series (or of all Debt Securities then outstanding under an Indenture, as the
case may be) may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the trustee all required payments of the
principal of (and premium, if any) and interest on the Debt Securities of such
series (or of all Debt Securities then outstanding under an Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances of the
trustee and (b) all events of default, other than the non-payment of accelerated
principal (or specified portion thereof), with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under an Indenture, as
the case may be) have been cured or waived as provided in such Indenture. An
Indenture also will provide that the holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under an Indenture, as the case may be) may
waive any past default with respect to such series and its consequences, except
a default (x) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (y) in respect of a covenant or
provision contained in an Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security affected thereby.

The trustee will be required to give notice to the holders of Debt
Securities within 90 days of a default under an Indenture unless such default
shall have been cured or waived; provided, however, that such trustee may
withhold notice to the holders of any series of Debt Securities of any default
with respect to such series (except a default in the payment of the principal of
(or premium, if any) or interest on any Debt Security of such series or in the
payment of any sinking fund installment in respect of any Debt Security of such
series) if specified responsible officers of such trustee consider such
withholding to be in the interest of such holders.

An Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the cases of failure of the
trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an Event of Default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it. This
provision will not prevent,

60
<PAGE> 62

however, any holder of Debt Securities from instituting suit for the enforcement
of payment of the principal of (and premium, if any) and interest on such Debt
Securities at the respective due dates thereof.

Subject to provisions in an Indenture relating to its duties in case of
default, the trustee will not be under any obligation to exercise any of its
rights or powers under such Indenture at the request or direction of any holders
of any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to the trustee thereunder reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series (or of all Debt Securities then
outstanding under an Indenture, as the case may be) shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or of exercising any trust or power conferred upon the
trustee. However, the trustee may refuse to follow any direction which is in
conflict with any law or an Indenture, which may involve the trustee in personal
liability or which may be unduly prejudicial to the holders of Debt Securities
of such series not joining therein.

Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under an Indenture and, if so, specifying each such default and the
nature and status thereof.

MODIFICATION OF AN INDENTURE

It is anticipated that modifications and amendments of an Indenture may be
made by the Company and the trustee, with the consent of the holders of not less
than a majority in aggregate principal amount of each series of the outstanding
Debt Securities issued under an Indenture which are affected by the modification
or amendment, provided that no such modification or amendment may, without the
consent of each holder of such Debt Securities affected thereby, (a) change the
stated maturity date of the principal of (or premium, if any) or any installment
of interest, if any, on any such Debt Security; (b) reduce the principal amount
of (or premium, if any) or the interest, if any, on any such Debt Security or
the principal amount due upon acceleration of an Original Issue Discount
Security; (c) change the place or currency of payment of principal of (or
premium, if any) or interest, if any, on any such Debt Security; (d) impair the
right to institute suit for the enforcement of any such payment on or with
respect to any such Debt Security; (e) reduce the above stated percentage of
holders of Debt Securities necessary to modify or amend such Indenture; or (f)
modify the foregoing requirements or reduce the percentage of outstanding Debt
Securities necessary to waive compliance with certain provisions of an Indenture
or for waiver of certain defaults. A record date may be set for any act of the
holders with respect to consenting to any amendment.

The holders of not less than a majority in principal amount of outstanding
Debt Securities of each series affected thereby will have the right to waive
compliance by the Company with certain covenants in an Indenture.

An Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series to take permitted action.

CONVERSION OF SECURITIES

The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock will be set forth in the applicable Prospectus
Supplement or Post-Effective Amendment, as applicable, relating thereto. Such
terms will include whether such Debt Securities are convertible into Common
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company or such conversion will be automatic, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Debt Securities.

SUBORDINATION

Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Debt Securities will be subordinated to the extent provided in

61
<PAGE> 63

an Indenture in right of payment to the prior payment in full of all Senior
Debt. No payment of principal or interest will be permitted to be made on Debt
Securities at any time if a default in Senior Debt exists that permits the
holders of such Senior Debt to accelerate their maturity and the default is the
subject of judicial proceedings or the Company receives notice of the default.
After all Senior Debt is paid in full and until the Debt Securities are paid in
full, holders of Debt Securities will be subrogated to the right of holders of
Senior Debt to the extent that distributions otherwise payable to holders of
Debt Securities have been applied to the payment of Senior Debt. By reason of
such subordination, in the event of a distribution of assets upon insolvency,
certain general creditors of the Company may recover more, ratably, than holders
of Debt Securities. If this Prospectus is being delivered in connection with a
series of Debt Securities, the accompanying Prospectus Supplement or
Post-Effective Amendment, as applicable, or the information incorporated herein
by reference will contain the approximate amount of Senior Debt outstanding as
of the end of the Company's most recent fiscal quarter.

SHARES ELIGIBLE FOR FUTURE SALE

No precise predictions can be made as to the effect, if any, that sales of
shares or the availability of shares for sale in the public market will have on
the market prices prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices and impair the Company's ability to raise capital
through the sale of equity securities.

As of September 18, 1996, the Company had outstanding 8,576,610 shares of
Common Stock of which the 2,587,500 shares sold in the IPO are freely tradeable
without restrictions or further registration under the Securities Act, unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act ("Rule 144").

All the remaining shares were issued and sold by the Company in private
transactions in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act and are restricted securities under Rule 144.
These shares may not be sold unless they are registered under the Securities Act
or are sold pursuant to an applicable exemption from registration, pursuant to
Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days
after August 16, 1996 a person who has beneficially owned these shares for at
least two years, including "affiliates" of the Company, would be entitled to
sell in broker's transactions or to market makers within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly trading volume of the
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. A person (or person whose shares are aggregated) who is
not an "affiliate" of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned such shares for at least three years, is
currently entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions or notice requirements. The above is a summary of Rule 144 and is not
intended to be a complete description thereof. Notwithstanding the eligibility
of certain shares to be sold after the expiration of the 90 day period, such
shares are subject to certain lockup agreements described below.

The Company, its officers and directors and certain of its present
stockholders have agreed that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, grant any option to purchase or otherwise
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
therefor or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company for a period of 180
days after August 16, 1996 without the prior written consent of Equitable
Securities Corporation on behalf of the underwriters of the IPO.

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<PAGE> 64

SELLING STOCKHOLDERS

The Company intends to offer Securities, from time to time, pursuant to
this Prospectus in connection with its acquisition of the assets or stock of
HVAC service and replacement businesses, as described herein. The recipients of
the Securities issued in connection with such transactions may determine to
reoffer the Common Stock issued in such transactions, the Common Stock issued
upon the exercise of the Common Stock Warrants or Common Stock issued upon the
conversion of the Debt Securities from time to time. Specific information
regarding the resale transactions by Selling Stockholders who may be deemed to
be "underwriters" as defined in the Securities Act, the identity of the Selling
Stockholders, and the number of shares of Common Stock to be reoffered shall be
provided at the time of such acquisition by means of a Post-Effective Amendment
or Prospectus Supplement, as applicable.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Securities
offered hereby will be passed upon for the Company by Waller Lansden Dortch &
Davis, A Professional Limited Liability Company, Nashville, Tennessee.

EXPERTS

The financial statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.

63
<PAGE> 65

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
Basis of Presentation................................................................ F-4
Unaudited Pro Forma Combining Balance Sheet as of June 30, 1996...................... F-5
Unaudited Pro Forma Combining Statement of Income for the Twelve Months ended
December 31, 1995.................................................................. F-7
Unaudited Pro Forma Combining Statement of Income for the Six Months ended June 30,
1996............................................................................... F-8
Notes to Unaudited Pro Forma Combining Financial Statements.......................... F-9
SERVICE EXPERTS, INC. -- AUDITED BALANCE SHEET AS OF JUNE 30, 1996 AND STATEMENTS OF
OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE PERIOD FROM MARCH 27, 1996
(DATE OF INCEPTION) THROUGH JUNE 30, 1996
Report of Independent Auditors....................................................... F-12
Balance Sheet........................................................................ F-13
Statements of Operations............................................................. F-14
Statements of Stockholders' Equity................................................... F-15
Statements of Cash Flows............................................................. F-16
Notes to Balance Sheet............................................................... F-17
AC SERVICE & INSTALLATION CO., INC. AND DONELSON AIR CONDITIONING COMPANY,
INC. -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-20
Combined Balance Sheets.............................................................. F-21
Combined Statements of Income........................................................ F-22
Combined Statements of Stockholders' Equity.......................................... F-23
Combined Statements of Cash Flows.................................................... F-24
Notes to Combined Financial Statements............................................... F-25
HARDWICK AIR MASTERS, INC. D/B/A AIRMASTERS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-32
Balance Sheets....................................................................... F-33
Statements of Income................................................................. F-34
Statements of Stockholders' Equity................................................... F-35
Statements of Cash Flows............................................................. F-36
Notes to Financial Statements........................................................ F-37
NORRELL HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-44
Balance Sheets....................................................................... F-45
Statements of Income................................................................. F-46
Statements of Stockholders' Equity................................................... F-47
Statements of Cash Flows............................................................. F-48
Notes to Financial Statements........................................................ F-49
</TABLE>

F-1
<PAGE> 66

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VISION HOLDING COMPANY, INC. -- AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MARCH 1, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-54
Consolidated Balance Sheets.......................................................... F-55
Consolidated Statements of Operations................................................ F-56
Consolidated Statements of Stockholder's Equity...................................... F-57
Consolidated Statements of Cash Flows................................................ F-58
Notes to Consolidated Financial Statements........................................... F-59
COMERFORD'S HEATING AND AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-66
Balance Sheets....................................................................... F-67
Statements of Operations............................................................. F-68
Statements of Stockholders' Equity................................................... F-69
Statements of Cash Flows............................................................. F-70
Notes to Financial Statements........................................................ F-71
ROLF COAL AND FUEL CORP. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-75
Balance Sheets....................................................................... F-76
Statements of Operations............................................................. F-77
Statements of Stockholders' Equity................................................... F-78
Statements of Cash Flows............................................................. F-79
Notes to Financial Statements........................................................ F-80
BRAND HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-86
Balance Sheets....................................................................... F-87
Statements of Operations............................................................. F-88
Statements of Stockholders' Equity................................................... F-89
Statements of Cash Flows............................................................. F-90
Notes to Financial Statements........................................................ F-91
COASTAL AIR CONDITIONING SERVICE, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-96
Balance Sheets....................................................................... F-97
Statements of Income................................................................. F-98
Statements of Stockholder's Equity................................................... F-99
Statements of Cash Flows............................................................. F-100
Notes to Financial Statements........................................................ F-101
CONTRACTOR SUCCESS GROUP, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-108
Balance Sheets....................................................................... F-109
Statements of Income................................................................. F-110
Statements of Stockholders' Equity................................................... F-111
Statements of Cash Flows............................................................. F-112
Notes to Financial Statements........................................................ F-113
</TABLE>

F-2
<PAGE> 67

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARROW HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 29, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-118
Balance Sheets....................................................................... F-119
Statements of Income................................................................. F-120
Statements of Stockholders' Equity................................................... F-121
Statements of Cash Flows............................................................. F-122
Notes to Financial Statements........................................................ F-123
AIR EXPERTS, A UNITED SERVICES CO., INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-128
Balance Sheets....................................................................... F-129
Statements of Operations............................................................. F-130
Statements of Stockholders' Equity................................................... F-131
Statements of Cash Flows............................................................. F-132
Notes to Financial Statements........................................................ F-133
GILLEY'S HEATING & COOLING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-138
Balance Sheets....................................................................... F-139
Statements of Income................................................................. F-140
Statements of Stockholder's Equity................................................... F-141
Statements of Cash Flows............................................................. F-142
Notes to Financial Statements........................................................ F-143
SERVICE EXPERTS OF PALM SPRINGS, INC. -- AUDITED FINANCIAL STATEMENTS
PERIOD FROM OCTOBER 15, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED JUNE 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-147
Balance Sheets....................................................................... F-148
Statements of Operations............................................................. F-149
Statements of Stockholders' Equity................................................... F-150
Statements of Cash Flows............................................................. F-151
Notes to Financial Statements........................................................ F-152
</TABLE>

F-3
<PAGE> 68

PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.

The following unaudited pro forma combining financial statements give
effect to the acquisition by Service Experts, Inc., a Delaware Corporation, of
the following companies ("Predecessor Companies"), in exchange for shares of the
Company's common stock, cash, and the assumption of certain debt (the
"Combination").

Combined AC Service & Installation Co., Inc. and Donelson Air Conditioning
Company, Inc.
Hardwick Air Masters, Inc.
Norrell Heating & Air Conditioning, Inc.
Vision Holding Company, Inc.
Comerford's Heating and Air Conditioning, Inc.
Rolf Coal and Fuel Corp.
Brand Heating & Air Conditioning, Inc.
Coastal Air Conditioning Service, Inc.
Contractor Success Group, Inc.
Arrow Heating & Air Conditioning, Inc.
Air Experts, a United Services Co., Inc.
Gilley's Heating & Cooling, Inc.
Service Experts of Palm Springs, Inc.

The unaudited pro forma combining financial statements have been prepared
by the Company based on the historical financial statements of Service Experts,
Inc. and the Predecessor Companies included elsewhere in this Prospectus, and
certain preliminary estimates and assumptions deemed appropriate by management
of the Company. These pro forma combining financial statements may not be
indicative of actual results as if the transaction had occurred on the dates
indicated or which may be realized in the future. Neither expected benefits nor
cost reductions anticipated by the Predecessor Companies following consummation
of the Combination have been reflected in such pro forma combining financial
statements. The pro forma combining balance sheet as of June 30, 1996, gives
effect to the Combination and this Offering as if such transactions had occurred
on June 30, 1996. The pro forma combining statements of income for the six
months ended June 30, 1996 and year ended December 31, 1995, assume the
Combination was completed on January 1, 1995.

The pro forma combining financial statements should be read in conjunction
with the historical combined financial statements of the Combined Predecessor
Companies, including the related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that appear elsewhere
in this prospectus.

F-4
<PAGE> 69

PRO FORMA COMBINING BALANCE SHEET OF SERVICE EXPERTS, INC.

UNAUDITED PRO FORMA COMBINING BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
COMBINING COMPANIES
--------------------------------------
AC SERVICE &
INSTALLATION CO., INC.
AND DONELSON AIR ALL OTHER/
SERVICE CONDITIONING COMPANY, PREDECESSOR
EXPERTS, INC. INC. COMPANIES COMBINED
------------- ---------------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 13,386 $ 568,643 $ 2,626,164 $ 3,208,193
Certificates of deposit........................... -- 100,000 100,000
Receivables:
Trade, net...................................... 2,501,600 3,307,483 5,809,083
Related Party................................... 60,631 1,245,947 1,306,578
Employee........................................ 51,642 67,137 118,779
Other........................................... 99,230 121,665 220,895
------------- ----------- ----------- -----------
-- 2,713,103 4,742,232 7,455,335
Inventories....................................... 269,474 1,839,085 2,108,559
Costs and estimated earnings in excess of
billings........................................ 109,495 167,211 276,706
Investments....................................... -- 357,634 357,634
Prepaid expenses and other current assets......... 473,385 94,828 984,967 1,553,180
Current portion of notes receivable, net.......... -- 224,161 224,161
Deferred income taxes............................. 541,509 448,799 990,308
------------- ----------- ----------- -----------
Total current assets........................ 486,771 4,297,052 11,490,253 16,274,076
Property, buildings and equipment, net.............. 701,179 3,144,081 3,845,260
Notes receivable -- related parties, net............ -- 131,544 131,544
Notes receivable -- other, net...................... -- 300,806 300,806
Equity investment in Future University, Inc.........
Deferred income taxes............................... -- 16,927 16,927
Goodwill, net....................................... -- 811,958 811,958
Other assets........................................ 30,613 282,073 312,686
------------- ----------- ----------- -----------
Total assets................................ $ 486,771 $5,028,844 $16,177,642 $21,693,257
=========== ================== ========== ==========

PRO FORMA PRO FORMA
COMBINATION OFFERING PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- -----------
<S> <<C> <C> <C> <C>

Current assets:
Cash and cash equivalents......................... (1,361,033 )(a) $ 1,847,160 30,130,375 (g) $13,790,287
(17,067,644 )(i)
1,438,122 (j)
(384,566 )(k)
(2,173,160 )(l)
Certificates of deposit........................... 100,000 100,000
Receivables:
Trade, net...................................... 5,809,083 5,809,083
Related Party................................... 1,306,578 (1,306,578 )(j) --
Employee........................................ 118,779 118,779
Other........................................... (30,001 )(c) 190,894 190,894
----------- ----------- ----------- -----------
(30,001 ) 7,425,334 (1,306,578 ) 6,118,756
Inventories....................................... 2,108,559 2,108,559
Costs and estimated earnings in excess of
billings........................................ 276,706 276,706
Investments....................................... 357,634 357,634
Prepaid expenses and other current assets......... 1,553,180 (1,300,000 )(g) 253,180
Current portion of notes receivable, net.......... 384,970 (d) 609,131 609,131
Deferred income taxes............................. 236,165 (e) 1,226,473 1,226,473
----------- ----------- ----------- -----------
Total current assets........................ (769,899 ) 15,504,177 9,336,549 24,840,726
Property, buildings and equipment, net.............. (384,970 )(d) 3,460,290 3,480,290
Notes receivable -- related parties, net............ 131,544 (131,544 )(i) --
Notes receivable -- other, net...................... 300,806 300,806
Equity investment in Future University, Inc......... 604,000 (b) 604,000 604,000
Deferred income taxes............................... 16,927 16,927
Goodwill, net....................................... 811,958 811,958
Other assets........................................ 312,686 312,688
----------- ----------- ----------- -----------
Total assets................................ $ (550,869 ) $21,142,388 $ 9,205,005 $30,347,393
=========== ========== =========== ===========
</TABLE>

F-5
<PAGE> 70

PRO FORMA COMBINING BALANCE SHEET OF SERVICE EXPERTS, INC.

UNAUDITED PRO FORMA COMBINING BALANCE SHEET -- (CONTINUED)
JUNE 30, 1996
<TABLE>
<CAPTION>
COMBINING COMPANIES
--------------------------------------
AC SERVICE &
INSTALLATION CO., INC.
AND DONELSON AIR ALL OTHER
SERVICE CONDITIONING COMPANY, PREDECESSOR
EXPERTS, INC. INC. COMPANIES COMBINED
------------- ---------------------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ -- $ -- $ 127,143 $ 127,143
Trade accounts payable and accrued liabilities.... 456,770 715,471 2,867,000 4,039,241
Accrued compensation.............................. 1,208,125 1,282,096 2,490,221
Accrued taxes, other than income.................. 160,225 60,662 220,887
Accrued warranties................................ 94,283 345,047 439,330
Income taxes payable.............................. 352,551 728,179 1,080,730
Deferred revenue.................................. 185,426 1,394,726 1,580,152
Billings in excess of costs and estimated
earnings........................................ 400,512 -- 400,512
Liabilities to Companies' benefit plans........... 34,686 78,359 113,045
Due to related parties............................ 30,001 -- 180,972 210,973
Notes payable to related parties --
current......................................... -- 100,215 100,215
--
Current portion of long-term debt and capital
lease obligations............................... 43,901 747,408 791,309
Distributions payable to Founders................. --
-------- ---------- ----------- -----------
Total current liabilities................... 486,771 3,195,180 7,911,807 11,593,758
Long-term debt and capital lease obligations, net of
current portion................................... -- 650,708 650,708
Notes payable to related parties, net............... -- 867,027 867,027
Deferred compensation............................... -- 112,557 112,557
Deferred income taxes............................... 157,240 319,351 476,591
Stockholders' equity:
Common stock......................................
Additional paid-in capital (owners' equity)....... 1,676,424 6,316,192 7,992,616
Retained earnings...................................
-------- ---------- ----------- -----------
$ 486,771 $5,028,844 $16,177,642 $21,693,257
======== ========== =========== ===========

PRO FORMA PRO FORMA
COMBINATION OFFERING PRO FORMA
ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ -- $ 127,143 $ (127,143)(l) $ --
Trade accounts payable and accrued liabilities.... 4,039,241 4,039,241
Accrued compensation.............................. 2,490,221 2,490,221
Accrued taxes, other than income.................. 220,887 220,887
Accrued warranties................................ 439,330 439,330
Income taxes payable.............................. (127,223)(a) 953,507 953,507
Deferred revenue.................................. 1,580,152 1,580,152
Billings in excess of costs and estimated
earnings........................................ 400,512 400,512
Liabilities to Companies' benefit plans........... 113,045 113,045
Due to related parties............................ (30,001)(c) 180,972 (180,972)(k) --
Notes payable to related parties --
current......................................... 604,000(b) 661,917 (604,000)(l) --
(42,298)(d) (57,917)(k)
Current portion of long-term debt and capital
lease obligations............................... 791,309 (791,309)(l) --
Distributions payable to Founders................. 17,000,163(a) 17,000,163 (17,067,644)(i) (67,481)
------------ ----------- ----------- -----------
Total current liabilities................... 17,404,641 28,998,399 (18,828,985) 10,169,414
Long-term debt and capital lease obligations, net of
current portion................................... 650,708 (650,708)(l) --
Notes payable to related parties, net............... (721,350)(d) 145,677 (145,677)(k) --
Deferred compensation............................... (112,557)(f) -- --
Deferred income taxes............................... 476,591 476,591
Stockholders' equity:
Common stock...................................... 25,875(g) 65,766
59,891(h)
Additional paid-in capital (owners' equity)....... (18,233,973)(a) (9,128,987) 28,804,500(g) 19,615,622
(59,891)(h)
763,648(d)
236,165(e)
112,557(f)
Retained earnings...................................
------------ ----------- ----------- -----------
$ (550,869) $21,142,388 $9,205,005 $30,347,393
============ =========== =========== ===========
</TABLE>

See accompanying notes to Unaudited Pro Forma Combining Financial Statements.

F-6
<PAGE> 71

PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.

UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
COMBINING COMPANIES
---------------------------------------
AC SERVICE
&
INSTALLATION
CO., INC.
AND
DONELSON
AIR
SERVICE CONDITIONING ALL OTHER
EXPERTS, COMPANY, PREDECESSOR PRO FORMA PRO FORMA
INC. INC. COMPANIES PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.............. $ $16,452,622 $43,198,541 $59,651,163 $59,651,163
Cost of goods sold........ 11,122,350 25,093,693 36,216,043 (120,333)(m) 36,095,710
----------- ----------- ----------- ----------- ----------- -----------
Gross margin.............. -- 5,330,272 18,104,848 23,435,120 120,333 23,555,453
Selling, general and
administrative
expenses................ 4,591,636 14,114,960 18,706,596 (3,035,621)(n) 15,670,975
----------- ----------- ----------- ----------- ----------- -----------
Income from operations.... -- 738,636 3,989,888 4,728,524 3,155,954 7,884,478
Other income (expense):
Interest expense........ (77,149) (281,753) (358,902) 358,902(o) --
Interest income......... 23,186 233,020 256,206 256,206
Other income............ 25,569 182,161 207,730 91,006(p) 298,736
----------- ----------- ----------- ----------- ----------- -----------
-- (28,394) 133,428 105,034 449,908 554,942
----------- ----------- ----------- ----------- ----------- -----------
Income before taxes....... -- 710,242 4,123,316 4,833,558 3,605,862 8,439,420
Provision for income
taxes:.................. 81,688 532,224 613,912 2,623,721(q) 3,237,633
----------- ----------- ----------- ----------- ----------- -----------
Net income................ $ -- $ 628,554 $ 3,591,092 $ 4,219,646 $ 982,141 $ 5,201,787
========== ========== ========== ========== ========== ==========
Pro forma net income per
share................... $0.67
Pro forma weighted average
shares outstanding...... 7,710,234
</TABLE>

See accompanying notes to Unaudited Pro Forma Combining Financial Statements.

F-7
<PAGE> 72

PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.

UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996

<TABLE>
<CAPTION>
COMBINING COMPANIES
----------------------------------------------------
AC SERVICE &
INSTALLATION
CO., INC.
AND DONELSON
AIR ALL OTHER
SERVICE CONDITIONING PREDECESSOR PRO FORMA PRO FORMA
EXPERTS, INC. COMPANY, INC. COMPANIES PRO FORMA ADJUSTMENTS AS ADJUSTED
---------------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues.......... $ -- $ 8,634,712 $23,569,726 $32,204,438 $ -- $32,204,438
Cost of goods sold.... 5,741,935 13,756,285 19,498,220 19,498,220
---------------------- ------------- ----------- ----------- ----------- -----------
Gross margin.......... -- 2,892,777 9,813,441 12,706,218 -- 12,706,218
Selling, general and
administrative
expenses............ 3,024,184 8,053,511 11,077,695 (2,445,207)(n) 8,632,488
---------------------- ------------- ----------- ----------- ----------- -----------
Income from
operations.......... -- (131,407) 1,759,930 1,628,523 2,445,207 4,073,730
Other income
(expense):
Interest expense.... (40,484) (171,195) (211,679) 211,679(o) --
Interest income..... 11,863 128,533 140,396 140,396
Other income........ 20,855 52,269 73,124 39,820(p) 112,944
---------------------- ------------- ----------- ----------- ----------- -----------
-- (7,766) 9,607 1,841 251,499 253,340
---------------------- ------------- ----------- ----------- ----------- -----------
Income before taxes... -- (139,173) 1,769,537 1,630,364 2,696,706 4,327,070
Provision for income
taxes............... (86,939) 207,882 120,943 1,472,790(q) 1,593,733
---------------------- ------------- ----------- ----------- ----------- -----------
Net income (loss)..... $ -- $ (52,234) $ 1,561,655 $ 1,509,421 $ 1,223,916 $ 2,733,337
=============== ========== ========== ========== ========== ==========
Pro forma net income
per share........... $0.35
Pro forma weighted
average shares
outstanding......... 7,710,234
</TABLE>

See accompanying notes to Unaudited Pro Forma Combining Financial Statements.

F-8
<PAGE> 73

PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS

PRO FORMA BALANCE SHEET ADJUSTMENTS

(a) Reflects the liability for payments to owners of Acquired Companies of
$18,361,196 in connection with the Combination, which in the opinion of
Management Staff Accounting Bulletin No. 48 applies. The liability for
payments to owners is accounted for as distributions to the owners of the
Predecessor Companies. This results in: (i) $18,233,973 reduction in
additional paid-in capital, (ii) $17,000,163 increase in distributions
payable to the owners of the Predecessor Companies, (iii) a reduction of
cash of $1,361,033, and (iv) a reduction of income taxes payable of
$127,223. A detail of such distributions is as follows:

DIVIDENDS

<TABLE>
<CAPTION>
CASH
RETAINED
CASH FROM (CONTRIBUTED) TOTAL CASH
PREDECESSOR COMPANIES OFFERING BY OWNERS DISTRIBUTION
------------------------------------------------- ------------ ---------- -----------
<S> <C> <C> <C>
Combined AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc......... $ 4,996,755 $ 31,162 $ 5,027,917
Hardwick Air Masters, Inc........................ 58,568 -- 58,568
Norrell Heating & Air Conditioning, Inc.......... 1,523,241 (12) 1,523,229
Vision Holding Company, Inc...................... 1,108,489 589,752 1,698,241
Comerford's Heating and Air Conditioning, Inc.... 1,411,640 (270,898) 1,140,742
Rolf Coal and Fuel Corp.......................... 1,158,399 14,317 1,172,716
Brand Heating & Air Conditioning, Inc............ 802,371 105,143 907,514
Coastal Air Conditioning Service, Inc............ 166,939 46,300 213,239
Contractor Success Group, Inc.................... 3,385,304 615,706 4,001,010
Arrow Heating & Air Conditioning, Inc............ 969,690 180,972 1,150,662
Air Experts, a United Services Co., Inc.......... 486,679 -- 486,679
Gilley's Heating & Cooling, Inc.................. 534,705 (9,494) 525,211
Service Experts of Palm Springs, Inc............. 397,383 58,085 455,468
------------ ---------- -----------
$17,000,163 $1,361,033 $18,361,196
============ ========== ===========
</TABLE>

(b) Reflects the purchase of a 37% interest in Future University (for $592,000
plus estimated transaction costs of $12,000) in exchange for a note payable
that will be repaid from the net proceeds of the Offering, resulting in:
(i) $604,000 investment in Future University, Inc., and (ii) $604,000 in
notes payable to related parties.

(c) Reflects the elimination of amounts due to Predecessor Companies by Service
Experts, Inc. This results in a reduction in due to related parties of
$30,001 and a decrease in accounts receivable -- other of $30,001.

(d) Reflects the distribution of Vision Holding Company, Inc.'s building to a
stockholder in exchange for a note receivable and the elimination of the
mortgage payable to a former stockholder that is assumed by the stockholder
of Vision Holding Company, Inc. This results in (i) an increase in note
receivable from stockholder of $384,970, (ii) a decrease in property, plant
and equipment of $384,970; (iii) a decrease in notes payable of $763,648
and an increase in equity of $763,648 to reflect the assumption by the
stockholder.

(e) Reflects the resulting deferred income taxes in accordance with SFAS 109
for the Predecessor Companies organized as Subchapter S corporations and
not subject to federal income tax under the Internal Revenue Code. This
results in: (i) $236,165 increase in deferred income taxes and (ii)
$236,165 increase in additional paid-in capital.

F-9
<PAGE> 74

PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS -- (CONTINUED)

(f) Reflects the reversal of deferred compensation at Norrell Heating & Air
Conditioning, Inc. resulting in: (i) a reduction of deferred compensation
of $112,557 and (ii) an increase in additional paid-in capital of $112,557.
The deferred compensation arrangement is being cancelled subject to the
Offering.

(g) Reflects the proceeds of the Offering, net of estimated expenses
($2,452,500) and underwriting commissions ($2,354,625), some of which are
included in prepaid expenses and other current assets at June 30, 1996. The
net proceeds are reflected as: (i) $30,130,375 of cash, (ii) $25,875 of
2,587,500 shares of common stock, (iii) $28,804,500 of additional paid-in
capital, and (iv) a reduction of prepaid expenses and other current assets
of $1,300,000.

(h) Reflects the reclassification of Owners' equity of the Predecessor
Companies into 5,989,110 shares of Common Stock, resulting in: (i) $59,891
increase in Common Stock, and (ii) $59,891 reduction of additional paid-in
capital (owners' equity).

(i) Reflects the use of net proceeds from the Offering for payment of
distributions payable to Predecessor Company stockholders (see pro forma
balance sheet adjustment a), resulting in: (i) $17,000,163 reduction in
dividends payable to Predecessor Company stockholders, and (ii) $17,000,163
reduction in cash.

(j) Reflects the collection in cash of receivables from related parties. This
results in (i) a decrease in accounts receivable from related parties of
$1,306,578; (ii) a decrease in notes receivable from related parties of
$131,544; and (iii) an increase in cash of $1,438,122.

(k) Reflects the payment to the stockholders for the notes payable due them.
This results in (i) a decrease of $203,594 in notes payable to related
parties; (ii) a decrease in due to related parties of $180,972; and (iii) a
decrease in cash of $384,566.

(l) Reflects the use of proceeds from the Offering for the repayment of
$1,569,160 of debt assumed in the Combination and $604,000 of notes payable
to related parties, resulting in: (i) a reduction in total debt of
$1,569,160, of which $791,309 is current and $127,143 classified as
short-term debt, (ii) reduction in notes payable to related parties of
$604,000 and (iii) $2,173,160 reduction in cash.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1995 1996
------------ ---------------
<C> <C> <S> <C> <C>
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(m)
Reflects the following adjustment to cost of goods sold:
(i) Elimination of discretionary employee bonuses........... $ (120,333) $ --
(n)
Reflects the following adjustments to selling, general, and
administrative:
(i) Elimination of historical owner's compensation.......... (5,990,468) (3,954,214)
(ii) Additional compensation relating to new agreements with
previous owners......................................... 1,773,006 886,503
(iii) Additional lease expense on real estate sold by AC
Service & Installation Co., Inc. and Vision Holding
Company, Inc............................................ 178,690 89,346
(iv) Elimination of depreciation expense on real estate sold
by
AC Service & Installation Co., Inc. and Vision Holding
Company, Inc............................................ (48,239) (24,120)
(v) Elimination of non-competition fees resulting from
buyout of non-competition agreements.................... (85,723) (42,862)
(vi) Elimination of discretionary employee bonuses........... (60,167) --
(vii) Corporate office overhead expenses...................... 540,000 270,000
(viii) Corporate office compensation........................... 729,000 366,000
</TABLE>

F-10
<PAGE> 75

PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.

NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1995 1996
------------ ---------------
<S> <C> <C>
(x) Elimination of management fees paid by Air Experts, a
United Services Co., Inc., and Service Experts of Palm
Springs, Inc. to parent companies or affiliates such
amounts are part of the corporate office adjustments.... (71,720) (35,860)
------------ ---------------
(3,035,621) (2,445,207)
(o) Reflects the following adjustments to interest expense related
to:
(i) Elimination of debt distributed to stockholder of Vision
Holding Company, Inc.................................... $ 72,830 $ 44,678
(ii) Elimination of interest on debt distributed to
stockholders of AC Service & Installation Co., Inc...... 33,499 14,722
(iii) Elimination of all other debt assumed in the transaction
to be paid at closing................................... 252,573 152,279
------------ ---------------
$ 358,902 $ 211,679

(p) Reflects the following adjustment to other income
(i) The addition of income from its 37% investment in Future
University.............................................. $ 91,006 $ 39,820

(q) Reflects the following adjustment to income taxes
(i) Additional income tax provision for state and federal
taxes at a combined effective rate of 38% as the
Predecessor Companies previously were taxed as
Subchapter S corporations............................... $ 1,253,493 $ 448,042
(ii) Additional income taxes on adjustments m-p.............. 1,370,228 1,024,748
------------ ---------------
$ 2,623,721 $ 1,472,790

(r) The computation of pro forma net income per share is based upon 7,710,234 weighted average
shares of Common Stock outstanding, which includes (i) 4,527,010 shares distributed to the
shareholders of the Predecessor Companies, (ii) 1,462,100 shares outstanding to stockholders of
Service Experts, Inc. and (iii) 1,721,124 shares sold in the Offering to cover the cash portion
of the distribution to be paid to the promoters, debt to be paid at closing, and associated
costs of the offering on shares used for the distribution and the paydown of debt.
</TABLE>

F-11
<PAGE> 76

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholder
Service Experts, Inc.

We have audited the accompanying balance sheet of Service Experts, Inc. as
of June 30, 1996, and the related statements of operations, stockholders'
equity, and cash flows for the period from March 27, 1996 (date of inception)
through June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Service Experts, Inc. at
June 30, 1996, and the results of operations and cash flows for the period from
March 27, 1996 (date of inception) through June 30, 1996 in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
July 29, 1996

F-12
<PAGE> 77

SERVICE EXPERTS, INC.

BALANCE SHEET
JUNE 30, 1996

<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................ $ 13,386
Prepaid offering expenses....................................................... $473,385
--------
Total current assets.................................................... $486,771
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses................................................................ $456,770
Due to related parties.......................................................... 30,001
--------
Total current liabilities............................................... 486,771
Stockholders' equity:
Preferred stock -- $.01 par value:
Authorized -- 10,000,000 shares; outstanding -- none......................... --
Common Stock, $.01 par value;
Authorized -- 30,000,000; outstanding -- 1,462,100 shares.................... 14,621
Less: Notes receivable from stockholders........................................ (14,621)
Retained earnings............................................................... --
--------
Total stockholders' equity.............................................. --
--------
$486,771
========
</TABLE>

See accompanying notes.

F-13
<PAGE> 78

SERVICE EXPERTS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27, 1996
(DATE OF INCEPTION)
THROUGH JUNE 30, 1996
---------------------
<S> <C>
Net revenues.............................................................. $ --
Cost of goods sold........................................................ --
-----------
Gross margin.............................................................. --
Selling, general and administrative expenses.............................. --
Bad debt expense.......................................................... --
-----------
Income from operations.................................................... --
Other income (expense):
Interest expense........................................................ --
Other income............................................................ --
-----------
Income before provision for income taxes.................................. --
Provision (benefit) for income taxes:
Current................................................................. --
Deferred................................................................ --
-----------
--
-----------
Net income................................................................ $ --
================
</TABLE>

See accompanying notes.

F-14
<PAGE> 79

SERVICE EXPERTS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK $.01 NOTES
PAR VALUE ADDITIONAL RECEIVABLE
------------------- PAID-IN RETAINED FROM
SHARES AMOUNT CAPITAL EARNINGS STOCKHOLDERS TOTAL
--------- ------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Date of inception -- March 27,
1996............................. 1,000,000 $10,000 $ -- $ -- $ (10,000) --
Retroactive stock dividend......... 462,100 4,621 -- -- (4,621) --
Net income (loss).................. -- -- -- -- -- --
--------- ------- ---------- -------- ----------- --------
Balance at June 30, 1996........... 1,462,100 $14,621 $ -- $ -- $ (14,621) $ --
======== ======= ======= ======== ========= ========
</TABLE>

See accompanying notes.

F-15
<PAGE> 80

SERVICE EXPERTS, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27, 1996
(DATE OF INCEPTION)
THROUGH JUNE 30, 1996
---------------------
<S> <C>
FINANCING ACTIVITIES
Changes in assets and liabilities:
Prepaid offering expenses............................................ (473,385)
Accrued expenses..................................................... 456,770
Funds loaned to the Company.......................................... 30,001
---------------------
Net cash provided by operating activities and increase in cash............ 13,386
Increase in cash.......................................................... 13,386
Cash at beginning of period............................................... --
---------------------
Cash at end of year....................................................... $ 13,386
================
</TABLE>

See accompanying notes.

F-16
<PAGE> 81

SERVICE EXPERTS, INC.

NOTES TO BALANCE SHEET
JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Service Experts, Inc. (of Delaware) ("the Company") was formed on March 27,
1996, primarily for the purpose of acquiring 12 unrelated heating and air
conditioning businesses and Contractor Success Group, Inc., in exchange for
shares of its common stock and cash from the proceeds of sale of its stock in
the initial public offering of the Company ("the Offering"). The Offering is to
be effected in accordance with executed combination agreements with the 13
acquired businesses and is subject to the closing of the Offering. The companies
to be acquired are primarily engaged in the installation and servicing of air
conditioning and heating systems for residential and commercial customers in the
United States. The 13 unrelated businesses to be acquired, their city of
operations and the consideration to be paid by the Company to the stockholders
of each of the businesses to be acquired, are as follows:

<TABLE>
<CAPTION>
UNAUDITED
---------------------------
SHARES OF
COMPANY NAME LOCATION COMMON STOCK CASH
- ------------------------------------------- ------------------------ ------------ -----------
<S> <C> <C> <C>
Combined AC Service & Installation Co.,
Inc. and Donelson Air Conditioning
Company, Inc............................. Nashville, Tennessee 1,153,097 $ 4,996,755
Air Experts, a United Services Co., Inc.... St. Louis, Missouri 112,310 58,568
Hardwick Air Masters, Inc.................. Little Rock, Arkansas 347,464 1,523,241
Arrow Heating & Air Conditioning, Inc...... Racine, Wisconsin 223,775 1,108,489
Brand Heating & Air Conditioning, Inc...... Lafayette, Indiana 185,163 1,411,640
Coastal Air Conditioning Service, Inc...... Savannah, Georgia 243,987 1,158,399
Contractor Success Group, Inc.............. St. Louis, Missouri 781,225 802,371
Comerford's Heating and Air Conditioning,
Inc...................................... Pleasanton, California 349,116 166,939
Gilley's Heating & Cooling, Inc............ Monroe, Louisiana 164,524 3,385,304
Norrell Heating & Air Conditioning, Inc.... Birmingham, Alabama 351,517 969,690
Rolf Coal and Fuel Corp.................... Fort Wayne, Indiana 267,323 486,679
Service Experts of Palm Springs, Inc....... Palm Springs, California 91,704 534,705
Vision Holding Company, Inc................ Kansas City, Missouri 255,805 397,383
------------ -----------
4,527,010 $17,000,163
=========== ==========
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS

Notes Receivable from Stockholders and Accrued Expenses

The carrying amounts reported in the balance sheet for notes receivable and
accrued expenses approximates fair value.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of" and does not believe the adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

F-17
<PAGE> 82

SERVICE EXPERTS, INC.

NOTES TO BALANCE SHEET -- (CONTINUED)

2. RELATED PARTY TRANSACTIONS

The Company has notes receivable outstanding of $10,000 from four
stockholders of the Company as of March 31, 1996. The notes are payable on July
31, 1996 and bear interest at 7.5%. The Company also has a payable to various of
the 13 unrelated businesses to be acquired for the reimbursement of professional
service fees related to the offering. The Company will settle this payable from
the proceeds of the Offering.

3. COMPENSATION PURSUANT TO PLANS

Incentive Stock Plan. In June 1996, the Company's Board of Directors
adopted the Incentive Plan which is subject to approval by the stockholders. The
Company has reserved 700,000 of the authorized shares of Common Stock for
issuance pursuant to options to be granted under the Incentive Plan. Under the
Incentive Plan and pursuant to action of the Board, the Compensation Committee
appointed by the Board of Directors will administer the Incentive Plan and may
grant to officers and key employees non-transferable options to purchase shares
of Common Stock. The options are for terms not longer than ten years (five years
in the case of incentive stock options granted to an individual who, at the time
of the grant, owns more than 10% of the total combined voting power of all
classes of stock of the Company), at prices to be determined by the Board of
Directors or the Compensation Committee. Such prices may not be less than 100%
of the fair market value of the Common Stock on the date of grant (110% in the
case of an individual who, at the time of grant of incentive stock options, owns
more than 10% of the total combined voting power of all classes of stock of the
Company) in the case of incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Incentive stock options
may be granted only to employees and may not be less than 85% of the fair market
value of the Common Stock on the date of grant in the case of non-qualified
stock options. Options granted under the Incentive Plan may be exercisable in
installments. The Company is authorized to loan, or guarantee loans of, the
purchase price of shares issuable upon exercise of options granted under the
Incentive Plan. Unless terminated earlier, the Incentive Plan will terminate in
2006. The aggregate fair market value of Common Stock with regard to which
incentive stock options are exercisable by an individual for the first time
during any calendar year may not exceed $100,000.

4. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

In June 1996, the Company adopted the Director Plan. The Company has
reserved for issuance under the Director Plan 100,000 shares of Common Stock.
The Director Plan provides for the granting of nonqualified stock options and
awards of restricted stock to each director of the Company who is not also an
employee or officer of the Company ("Non-Employee Directors") at an exercise
price, in the case of options, equal to the fair market value of the Common
Stock on the date the options are granted. The Director Plan contains provisions
providing for adjustment of the number of shares available for option and
subject to unexercised options in the event of stock splits, dividends payable
in Common Stock, business combinations or certain other events. The Board shall
have no authority, discretion or power to select the participants who will
receive options or restricted stock pursuant to the Director Plan, to set the
number of shares of Common Stock to be covered by each option or issuance of
restricted stock, to set the exercise price or the period within which the
options may be exercised or modify the restrictions applicable to restricted
stock awards or to alter other terms or conditions specified in the options.

The Director Plan provides for the grant of options to purchase 5,000
shares of Common Stock to (i) each nonemployee director of the Company on the
effective date of this Offering at an exercise price equal to the public
offering price and (ii) each non-employee director elected after the effective
date of this Offering on the date of such director's election to the Board of
Directors at an exercise price equal to the fair market value of the Common
Stock on the date the options are granted. In addition, the Director Plan
provides for the grant to each non-employee director of the Company of options
to purchase 1,000 shares of Common Stock on each January 1 (each date of grant
being referred to as the "Grant Date"). The Board of Directors may

F-18
<PAGE> 83

SERVICE EXPERTS, INC.

NOTES TO BALANCE SHEET -- (CONTINUED)

revoke, on or prior to each January 1, the next automatic grant of options
otherwise provided for by the Director Plan if no options have been granted to
employees since the preceding January 1 under the Incentive Plan or any other
employee stock option plan that the Company might adopt. Each option shall be
exercisable in full beginning one year after the Grant Date and shall expire ten
years after the Grant Date (the "Option Period"), unless cancelled sooner due to
termination of service or death, or unless the option is fully exercised prior
to the end of the Option Period.

5. EMPLOYEE STOCK PURCHASE PLAN

The Service Experts, Inc. Employee Stock Purchase Plan (the "Purchase
Plan") was adopted in June 1996 by the Company's Board of Directors and will
become effective simultaneously with the Offering subject to stockholder
approval. A total of 100,000 shares of Common Stock have been reserved for
issuance under the Purchase Plan, which is intended to qualify under Section 423
of the Code. The Purchase Plan allows participants to purchase shares of Common
Stock in connection with option periods commencing on the first trading date of
each year and ending the following December 31 (except the first option period
which will commence the date of the Offering and end December 31, 1996).

6. 401(K) PLAN

In 1996, the Company adopted a Savings and Profit Sharing Plan (the
"Savings Plan") which is intended to be qualified under Sections 401(a) and
401(k) of the Code. To be eligible, an employee must have been employed by the
Company for at least one year. The Savings Plan permits employees who have
completed one year of service to defer from 1% to 15% of their compensation into
the Savings Plan up to specified limits per year ($9,500 during 1996).
Additional annual contributions may be made at the discretion of the Company
which will vest according to a schedule set forth in the Savings Plan.

7. SUBSEQUENT EVENT

On July 11, 1996 the Company's Board of Directors declared a dividend of
0.4621 shares of Common Stock for each share of common stock outstanding to all
common stock holders of record as of July 1, 1996. In connection with the
dividend the Company contributed an additional $4,621 in capital.

The number of shares of Common Stock in the financial statements have been
adjusted to give effect to the stock dividend.

F-19
<PAGE> 84

REPORT OF INDEPENDENT AUDITORS

The Stockholders
AC Service & Installation Co., Inc.
and Donelson Air Conditioning Company, Inc.

We have audited the accompanying combined balance sheets of AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. as of
December 31, 1994 and 1995, and the related combined statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. at December
31, 1994 and 1995, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 5, 1996

F-20
<PAGE> 85

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 91,096 $ 275,720 $ 568,643
Receivables:
Trade, net of allowance for doubtful accounts of
$135,786 in 1994 and $135,000 in 1995............. 1,944,403 1,975,449 2,501,600
Related party....................................... -- 207,259 60,631
Employee............................................ 13,411 63,092 51,642
Other............................................... 140,593 77,473 99,230
---------- ---------- -----------
2,098,407 2,323,273 2,713,103
Inventories............................................ 209,340 234,439 269,474
Costs and estimated earnings in excess of billings..... 55,936 30,740 109,495
Prepaid expenses and other current assets.............. 12,264 9,143 94,828
Deferred income taxes.................................. -- 16,817 541,509
---------- ---------- -----------
Total current assets........................... 2,467,043 2,890,132 4,297,052
Property, buildings and equipment:
Land................................................... 105,000 105,000 --
Buildings.............................................. 707,999 766,677 --
Furniture and fixtures................................. 182,516 396,278 407,684
Machinery and equipment................................ 121,500 162,883 169,897
Vehicles............................................... 1,047,710 1,300,369 1,317,616
Leasehold improvements................................. 77,451 67,224 67,224
---------- ---------- -----------
2,242,176 2,798,431 1,962,421
Less accumulated depreciation and amortization......... (872,184) (1,183,066) (1,261,242)
---------- ---------- -----------
1,369,992 1,615,365 701,179
Other assets............................................. 94,546 64,413 30,613
---------- ---------- -----------
Total assets................................... $3,931,581 $4,569,910 $ 5,028,844
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities......... $ 665,209 $ 403,442 $ 715,471
Accrued compensation................................... 463,995 487,900 1,208,125
Accrued taxes, other than income....................... 39,293 12,728 160,225
Accrued warranties..................................... 54,174 98,379 94,283
Income taxes payable................................... 25,641 66,793 352,551
Deferred revenue....................................... 215,585 189,108 185,426
Billings in excess of costs and estimated earnings..... 235,450 228,283 400,512
Liability to Company benefit plan...................... 46,332 56,581 34,686
Current portion of long-term debt...................... 106,594 164,265 43,901
---------- ---------- -----------
Total current liabilities...................... 1,852,273 1,707,479 3,195,180
Long-term debt, net of current portion................... 516,010 463,529 --
Notes payable to stockholders............................ 448,208 661,808 --
Deferred income taxes.................................... 14,986 8,436 157,240
Stockholders' equity..................................... 1,100,104 1,728,658 1,676,424
---------- ---------- -----------
Total liabilities and stockholders' equity..... $3,931,581 $4,569,910 $ 5,028,844
========= ========= =========
</TABLE>

See accompanying notes.

F-21
<PAGE> 86

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

COMBINED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $10,292,295 $14,298,906 $16,452,622 $7,671,638 $8,634,712
Cost of goods sold................ 7,280,075 10,245,039 11,122,350 5,316,352 5,741,935
----------- ----------- ----------- ---------- ----------
Gross margin...................... 3,012,220 4,053,867 5,330,272 2,355,286 2,892,777
Selling, general and
administrative expenses......... 2,865,476 3,701,883 4,563,134 2,219,598 2,978,149
Bad debt expense.................. 43,265 84,338 28,502 33,349 46,035
----------- ----------- ----------- ---------- ----------
Income (loss) from operations..... 103,479 267,646 738,636 102,339 (131,407)
Other income (expense):
Interest expense................ (74,631) (71,600) (77,149) (32,698) (40,484)
Interest income................. 4,994 7,059 23,186 1,995 11,863
Other income.................... 68,450 17,065 25,569 21,101 20,855
----------- ----------- ----------- ---------- ----------
(1,187) (47,476) (28,394) (9,602) (7,766)
----------- ----------- ----------- ---------- ----------
Income (loss) before federal and
state income taxes.............. 102,292 220,170 710,242 92,737 (139,173)
Provision (benefit) for income
taxes:
Current......................... 19,505 48,525 105,055 9,560 67,342
Deferred........................ 2,241 (7,399) (23,367) (33,414) (154,281)
----------- ----------- ----------- ---------- ----------
21,746 41,126 81,688 (23,854) (86,939)
----------- ----------- ----------- ---------- ----------
Net income (loss)................. $ 80,546 $ 179,044 $ 628,554 $ 116,591 $ (52,234)
========== ========== ========== ========= =========
</TABLE>

See accompanying notes.

F-22
<PAGE> 87

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<S> <C>
Balance at December 31, 1992..................................................... $ 940,514
Retirement of stock............................................................ (100,000)
Net income..................................................................... 80,546
----------
Balance at December 31, 1993..................................................... 921,060
Net income..................................................................... 179,044
----------
Balance at December 31, 1994..................................................... 1,100,104
Net income..................................................................... 628,554
----------
Balance at December 31, 1995..................................................... 1,728,658
Net loss (unaudited)........................................................... (52,234)
Balance at June 30, 1996 (unaudited)............................................. $1,676,424
=========
</TABLE>

See accompanying notes.

F-23
<PAGE> 88

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................. $ 80,546 $ 179,044 $ 628,554 $ 116,591 $ (52,234)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............... 214,789 286,988 411,438 202,574 193,425
Current deferred income taxes............... 2,241 (7,399) (23,367) (33,414) (154,281)
Provisions for loss on accounts
receivable............................... 43,265 84,338 28,502 7,524 46,035
Gain on asset disposals..................... (53,455) (3,711) (14,018) (14,335) (9,790)
Changes in assets and liabilities:
Receivables.............................. (260,964) (731,644) (253,368) (662,391) (691,518)
Inventories.............................. (44,848) (76,656) (25,099) 23,295 (35,035)
Prepaid expenses and other current
assets................................. 8,026 27,581 3,121 (8,559) (85,685)
Trade accounts payable and accrued
liabilities............................ (83,156) 193,280 (261,767) 142,367 312,029
Accrued compensation..................... 458,326 24,734 34,154 94,551 962,363
Accrued taxes, other than income......... 6,184 9,272 (26,565) 9,281 147,497
Accrued warranties....................... 20,516 28,439 44,205 (24,994) (4,096)
Deferred revenue......................... 12,767 187,768 (26,477) 5,567 (3,682)
Income taxes payable..................... (10,779) 3,604 41,152 (8,861) 64,151
Costs and estimated earnings in excess of
billings and billings in excess of
costs and estimated earnings........... 155,052 58,864 18,029 330,460 93,474
--------- --------- --------- --------- ----------
Net cash flow provided by operating
activities.................................. 548,510 264,502 578,494 179,656 782,653
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment................................... (283,278) (508,769) (642,470) (487,657) (55,440)
Proceeds from sale of property, buildings, and
equipment................................... 165,685 4,491 29,810 19,441 14,011
Increase in other assets...................... (124,162) -- -- -- --
--------- --------- --------- --------- ----------
Net cash used in investing activities......... (241,755) (504,278) (612,660) (468,216) (41,429)
FINANCING ACTIVITIES
Retirement of stock........................... (100,000) -- -- -- --
Proceeds of long-term debt.................... 205,845 119,000 266,139 266,139 --
Payments of long-term debt.................... (336,545) (192,922) (260,949) (115,557) (80,988)
Proceeds on notes payable to stockholders..... 9,403 220,378 280,000 159,990 --
Payments on notes payable to stockholders..... -- (83,248) (66,400) (20,000) (367,313)
--------- --------- --------- --------- ----------
Net cash provided by (used in) financing
activities.................................. (221,297) 63,208 218,790 290,572 (448,301)
--------- --------- --------- --------- ----------
Increase (decrease) in cash and cash
equivalents................................. 85,458 (176,568) 184,624 2,012 292,923
Cash and cash equivalents at beginning of
period...................................... 182,206 267,664 91,096 91,096 275,720
--------- --------- --------- --------- ----------
Cash and cash equivalents at end of period.... $ 267,664 $ 91,096 $ 275,720 $ 93,108 $ 568,643
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ 62,053 $ 84,178 $ 77,054 $ 32,698 $ 25,045
========= ========= ========= ========= =========
Income tax paid............................... $ 9,490 $ 49,460 $ 67,003 $ 19,000 $ 48,797
========= ========= ========= ========= =========
DISTRIBUTION OF ASSETS TO STOCKHOLDERS
Book value of assets distributed.............. $ -- $ -- $ -- $ -- $1,095,548
========= ========= ========= ========= =========
Long-term debt assumed by stockholders........ $ -- $ -- $ -- $ -- $ 488,110
========= ========= ========= ========= =========
Notes payable to stockholders retired......... $ -- $ -- $ -- $ -- $ 343,395
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-24
<PAGE> 89

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

AC Service & Installation Co., Inc. and Donelson Air Conditioning Company,
Inc., hereafter referred to as ("the Combined Company"), are under common
ownership. The financial statements of these companies have been combined for
all periods presented. The Combined Company operates in one industry segment and
is primarily engaged in the installation and servicing of air conditioning and
heating systems for residential and commercial customers in Nashville,
Tennessee.

RECOGNITION OF INCOME

Revenues on all of the Combined Company's heating and air conditioning
installation contracts (Contracts) for commercial buildings are recognized on
the percentage of completion method in the ratio that total incurred costs bear
to total estimated costs. Revenues on all of the Combined Company's heating and
air conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services.

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within six to 18 months.
Nonidentifiable selling, general, and administrative expenses are charged to
income as incurred and are not allocated to Contract costs.

Trade accounts receivable includes billings and billed retainage on
Contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $124,298 and $75,504 at December 31, 1994 and 1995, respectively. The
Combined Company classifies these amounts as current assets because all balances
are expected to be collected in the current year. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Combined Company's customer base, and their dispersions
across many different industries and geographies.

The asset, "costs and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings" represent
billings in excess of revenue recognized on in-progress contracts.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.

F-25
<PAGE> 90

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

CASH EQUIVALENTS

The Combined Company considers all highly liquid inventory investments with
an original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

PROPERTY, BUILDING AND EQUIPMENT

Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................... 31.5
Furniture and fixtures....................................................... 5-7
Machinery and equipment...................................................... 5
Vehicles..................................................................... 5
</TABLE>

WARRANTIES

The Combined Company provides the retail customer with a two-year warranty
on parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the manufacturer's
warranty on parts and for the first year on labor. The Combined Company provides
an accrual for future warranty costs based upon the relationship of prior years'
sales to actual warranty costs. It is the Combined Company's practice to
classify the entire warranty accrual as a current liability.

USE OF ESTIMATES

INCOME TAXES

Donelson Air Conditioning Company, Inc. uses the liability method of
accounting for federal and state income taxes as provided by SFAS No. 109,
"Accounting for Income Taxes." Under the liability method, the deferred tax
liability or asset is based on temporary differences between the financial
statement and income tax bases of assets and liabilities, measured at tax rates
that will be in effect when the differences reverse.

The stockholders of AC Service & Installation Co., Inc. have elected under
Subchapter S of the Internal Revenue Code to include the Company's income in
their own income for federal income tax purposes. Accordingly, AC Service &
Installation Co., Inc. is not subject to federal income taxes. This election is
not available for Tennessee state income tax reporting; accordingly, AC Service
& Installation Co., Inc. uses the liability method of accounting for Tennessee
state income taxes.

F-26
<PAGE> 91

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING COSTS

The Combined Company expenses advertising costs as incurred. During 1993,
1994 and 1995, the Combined Company expensed $235,360, $304,417 and $207,802,
respectively.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $43,265, $84,338 and $28,502, respectively and accounts
written off, net of recoveries were $22,057, $(77) and $29,288, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

2. CONTRACTS IN PROCESS

Information relative to contracts in process is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts........................ $1,264,339 $ 911,195
Estimated earnings.......................................... 420,053 486,693
---------- ----------
1,684,392 1,397,888
Less applicable billings...................................... 1,863,906 1,595,431
---------- ----------
$ (179,514) $ (197,543)
========= =========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 55,936 $ 30,740
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (235,450) (228,283)
---------- ----------
$ (179,514) $ (197,543)
========= =========
</TABLE>

Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.

F-27
<PAGE> 92

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Mortgage note payable......................................... $ 582,350 $ 516,010
Notes payable -- stockholders................................. 482,313 695,913
Installment note -- SunTrust Bank............................. -- 68,884
Installment note -- Bank of Nashville......................... 28,921 19,158
Other......................................................... 11,333 23,742
---------- ----------
1,104,917 1,323,707
Less current portion.......................................... 106,594 164,265
---------- ----------
$ 998,323 $1,159,442
========= =========
</TABLE>

The Combined Company has a mortgage note payable to Free Will Baptist, Inc.
that is secured by the Combined Company's office building and related land. The
loan requires monthly installments of $8,400, including fixed principal and
imputed interest (6.1% at December 31, 1995), through July 15, 1997, at which
time the remaining balance of $403,160 is due.

The Combined Company has an installment note payable to SunTrust Bank that
expires April 15, 1997. The loan is secured by vehicles and requires monthly
payments of $4,593, including principal and interest at the SunTrust Bank base
rate plus .25% (8.75% at December 31, 1995).

The Combined Company has an installment note payable to the Bank of
Nashville that expires March 16, 1996. The loan is secured by vehicles and
requires monthly payments of $6,458, including principal and interest at 8.50%.

The notes payable to stockholders represents amounts loaned to the Combined
Company for working capital needs. The Combined Company has signed unsecured
promissory notes payable to the stockholders for $482,313 and $695,913 at
December 31, 1994 and 1995, respectively, all due December 31, 1997. The notes
bear interest of 4.8% per year.

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:

4. EMPLOYEE BENEFIT PLANS

The Combined Company has a defined-contribution employee benefit plan
incorporating provisions of section 401(k) of the Internal Revenue Code.
Employees of the Combined Company must have one year of service and work 500
hours during the plan year to be eligible. Under the plan's provisions, a plan
member may make contributions, on a tax-deferred basis, not to exceed the
maximum established annually by the Internal Revenue Service. Matching
contributions are made by the Combined Company equal to 1/3 of total
contributions by a plan member, to a maximum of 6% of the employee's total
calendar year compensation. The Combined Company's accrued matching
contributions totaled $16,160, $30,340 and $45,678 as of December 31, 1993, 1994
and 1995, respectively.

F-28
<PAGE> 93

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENT LIABILITIES

The Combined Company is a party to a number of legal proceedings arising in
the ordinary course of its business. In the opinion of management, the
resolution of these proceedings will not have a material adverse effect on the
financial position or results of operations of the Combined Company.

The Combined Company maintains general liability insurance coverage and an
umbrella policy to ensure itself against any liabilities occurring in the normal
course of business. The Combined Company believes that its insurance coverage is
adequate.

6. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $1,402,085,
$1,674,280 and $2,093,240 in 1993, 1994 and 1995, respectively.

7. INCOME TAXES

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $12,675 $39,913 $ 64,582
State.................................................. 6,830 8,612 40,473
Deferred................................................. 2,241 (7,399) (23,367)
------- ------- --------
$21,746 $41,126 $ 81,688
======= ======= ========
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Contract billings.............................................. $34,068 $21,918
------- -------
Deferred tax liabilities......................................... 34,068 21,918
Deferred tax assets:
Depreciation and amortization.................................. 2,307 1,901
Bad debts...................................................... 12,375 17,754
Warranty reserves.............................................. 4,400 10,644
------- -------
Total gross deferred tax assets.................................. 19,082 30,299
Valuation allowance.............................................. -- --
------- -------
Net deferred tax assets.......................................... 19,082 30,299
------- -------
Net deferred tax liabilities (assets)............................ $14,986 $(8,381)
======= =======
</TABLE>

F-29
<PAGE> 94

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized. Accordingly, no valuation allowance has
been recognized for the year ended December 31, 1995.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $ 34,689 $ 74,858 $ 241,482
State income tax less applicable federal tax benefit...... 4,508 5,684 26,712
Less benefit of graduated tax notes and adjustments to
eliminate S corporation................................. (17,451) (39,416) (186,506)
-------- -------- ---------
$ 21,746 $ 41,126 $ 81,688
======== ======== =========
</TABLE>

PRO FORMA INCOME TAX INFORMATION (UNAUDITED)

As discussed previously in this note, AC Service & Installation Co., Inc.
operates under Subchapter S of the Internal Revenue Code and is not subject to
corporate federal income tax. In connection with the contemplated initial public
offering (See Note 9), the Subchapter S election will be terminated. As a
result, AC Service and Installation Co., Inc. will be subject to corporate
income taxes subsequent to the termination of S corporation status. AC Service
and Installation Co., Inc. had net operating income for income tax purposes of
$74,800, $(142,000), $521,000 and $1,122,360 for 1993, 1994, 1995 and the six
months ended June 30, 1996, respectively. Had AC Service & Installation Co.,
Inc. filed federal and state income tax returns as a regular corporation for
1993, 1994, 1995 and the six months ended June 30, 1996, income tax expense
under the provisions of Financial Accounting Standard No. 109 would have been
$(8,200), $16,915, $205,200 and $40,853, respectively.

At the date of termination of S corporation status, AC Service &
Installation Co., Inc. will be required to provide deferred taxes for cumulative
temporary differences between financial reporting and tax reporting basis of
assets and liabilities. Such deferred taxes will be based on the cumulative
temporary differences at the date of termination of S corporation status.

The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of S corporation status had
occurred at June 30, 1996, the deferred tax asset would have been approximately
$331,800.

8. RELATED PARTY TRANSACTIONS

The Combined Company has two outstanding notes receivable of $100,000 each
from the two stockholders of the Combined Company as of December 31, 1995 and
March 31, 1996. The notes are payable upon demand and bear annual interest of
5%.

9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

The Combined Company plans to exchange shares of its common stock in
exchange for shares of common stock and cash of Service Experts, Inc.
simultaneously with Service Experts, Inc. closing the initial public offering of
its common stock. Service Experts, Inc. was formed primarily for the purpose of
acquiring air conditioning and heating companies, similar to the Combined
Company, in exchange for shares of its common stock and cash. The combination is
to be effected in accordance with executed combination agreements with air
conditioning and heating companies and Service Experts, Inc.

F-30
<PAGE> 95

AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

10. UNAUDITED INTERIM FINANCIAL INFORMATION

The combined statements of income (operations) and cash flows for the six
months ended June 30, 1995 and 1996 (interim financial statements) have been
prepared by management and are unaudited. The interim financial statements
include all adjustments, consisting of only normal recurring adjustments
necessary for a fair presentation of the interim results.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the six months ended June 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.

11. SUBSEQUENT EVENT

Effective June 30, 1996, the Company distributed land, buildings, accounts
receivable and other assets with a net book value of $1,095,548 in satisfaction
of mortgage notes payable of $488,110, shareholder notes payable of $343,395,
and accrued compensation of $364,846.

F-31
<PAGE> 96

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Hardwick Air Masters, Inc.
d/b/a Airmasters, Inc.

We have audited the accompanying balance sheets of Hardwick Air Masters,
Inc. d/b/a Airmasters, Inc. as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hardwick Air Masters, Inc.
d/b/a Airmasters, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-32
<PAGE> 97

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 80,896 $ 57,512 $ 115,476
Receivables:
Trade, net of allowance for doubtful accounts of
$48,716 in 1994 and $60,299 in 1995................. 588,707 985,311 1,064,300
Related party......................................... 43,725 39,914 31,859
Employee.............................................. 16,377 22,517 37,948
---------- ---------- ----------
648,809 1,047,742 1,134,107
Inventories.............................................. 238,250 178,739 316,112
Costs and estimated earnings in excess of billings....... 72,477 83,203 132,075
Prepaid income taxes..................................... 22,141 401 --
Prepaid expenses and other current assets................ 7,609 17,437 57,006
Deferred income taxes.................................... 69,026 58,693 64,075
---------- ---------- ----------
Total current assets............................. 1,139,208 1,443,727 1,818,851
Property, buildings and equipment:
Furniture and fixtures................................... 83,733 108,262 116,205
Machinery and equipment.................................. 294,995 313,300 329,543
Vehicles................................................. 463,196 681,641 738,579
Leasehold improvements................................... 28,212 36,348 43,182
---------- ---------- ----------
870,136 1,139,551 1,227,509
Less accumulated depreciation and amortization........... (521,448) (610,220) (658,287)
---------- ---------- ----------
348,688 529,331 569,222
Other assets............................................... 6,748 6,381 6,197
---------- ---------- ----------
Total assets..................................... $1,494,644 $1,979,439 $2,394,270
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 554,430 $ 796,322 $ 978,427
Accrued compensation..................................... 67,910 66,641 45,284
Accrued warranties....................................... 26,717 35,689 37,650
Income taxes payable..................................... -- -- 45,399
Deferred revenue......................................... 192,326 154,454 179,835
Billings in excess of costs and estimated earnings....... 24,901 7,514 --
Liability to Company benefit plan........................ 1,855 13,270 3,965
Current portion of long-term debt........................ 304,024 205,146 240,228
---------- ---------- ----------
Total current liabilities........................ 1,172,163 1,279,036 1,530,788
Long-term debt, net of current portion..................... 169,070 402,091 201,639
Deferred income taxes...................................... 39,579 46,420 64,994
Stockholders' equity:
Common stock -- $5 par value, 10,000 shares authorized,
2,600 shares issued and outstanding................... 13,000 13,000 13,000
Paid-in capital.......................................... -- -- 217,017
Retained earnings........................................ 100,832 238,892 366,832
---------- ---------- ----------
Total stockholders' equity....................... 113,832 251,892 596,849
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,494,644 $1,979,439 $2,394,270
========= ========= =========
</TABLE>

See accompanying notes.

F-33
<PAGE> 98

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $3,989,626 $4,797,873 $6,377,285 $2,964,718 $3,877,541
Cost of goods sold................... 2,986,702 3,418,062 4,556,146 2,083,397 2,856,457
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,002,924 1,379,811 1,821,139 881,321 1,021,084
Selling, general and administrative
expenses........................... 912,694 1,250,029 1,535,155 722,894 761,789
Bad debt expense..................... 5,102 60,938 42,157 19,262 17,012
---------- ---------- ---------- ---------- ----------
Income from operations............... 85,128 68,844 243,827 139,165 242,283
Other income (expense):
Interest expense................... (59,591) (71,875) (73,788) (33,556) (52,087)
Interest income.................... 2,527 2,928 2,201 1,133 561
Other income....................... 19,989 16,363 10,482 2,933 10,598
---------- ---------- ---------- ---------- ----------
(37,075) (52,584) (61,105) (29,490) (40,928)
---------- ---------- ---------- ---------- ----------
Income before federal and state
income taxes....................... 48,053 16,260 182,722 109,675 201,355
Provision (benefit) for income taxes:
Current............................ 5,471 16,656 27,488 16,060 60,223
Deferred........................... 7,365 (8,715) 17,174 10,334 13,192
---------- ---------- ---------- ---------- ----------
12,836 7,941 44,662 26,394 73,415
---------- ---------- ---------- ---------- ----------
Net income........................... $ 35,217 $ 8,319 $ 138,060 $ 83,281 $ 127,940
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-34
<PAGE> 99

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK,
$5 PAR VALUE
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................... 2,600 $13,000 -- $ 57,296 $ 70,296
Net income.................................... -- -- -- 35,217 35,217
------ ------- -------- -------- --------
Balance at December 31, 1993.................... 2,600 13,000 -- 92,513 105,513
Net income.................................... -- -- -- 8,319 8,319
------ ------- -------- -------- --------
Balance at December 31, 1994.................... 2,600 13,000 -- 100,832 113,832
Net income.................................... -- -- -- 138,060 138,060
------ ------- -------- -------- --------
Balance at December 31, 1995.................... 2,600 13,000 -- 238,892 251,892
Net income (unaudited)........................ -- -- -- 127,940 127,940
Contribution (unaudited)...................... 217,017 -- 217,017
------ ------- -------- -------- --------
Balance at June 30, 1996 (unaudited)............ 2,600 $13,000 $217,017 $366,832 $596,849
===== ======= ======== ======== ========
</TABLE>

See accompanying notes.

F-35
<PAGE> 100

HARDWICK AIRMASTERS, INC.
D/B/A AIRMASTERS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 35,217 $ 8,319 $ 138,060 $ 83,281 $127,940
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 87,052 95,771 109,777 59,149 78,267
Deferred income taxes................. 7,365 (8,715) 17,174 10,334 13,192
Provisions for loss on accounts
receivable......................... 5,102 60,938 42,157 19,262 17,012
(Gain) loss on asset disposals........ (2,750) 751 -- -- (122)
Changes in assets and liabilities:
Receivables........................ (308,735) (55,999) (441,090) (223,723) (13,194)
Inventories........................ (40,040) (22,630) 59,511 17,885 (2,773)
Prepaid income taxes and income
taxes payable.................... (19,719) (1,275) 21,740 783 45,800
Prepaid expenses and other current
assets........................... (3,171) 30,214 (9,828) (10,389) (34,922)
Trade accounts payable and accrued
liabilities...................... 247,015 29,017 241,892 96,535 163,913
Accrued compensation............... 15,723 14,794 10,146 42,779 (27,944)
Accrued warranties................. 4,821 5,294 8,972 6,415 (3,039)
Deferred revenue................... 8,543 64,210 (37,872) (17,911) (3,456)
Costs and estimated earnings in
excess of billings and billings
in excess of costs and estimated
earnings......................... 23,701 (66,976) (28,113) (17,431) (24,744)
--------- --------- --------- --------- --------
Net cash flow provided by operating
activities............................ 60,124 153,713 132,526 66,969 335,930
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................. (195,719) (98,577) (301,533) (172,034) (123,910)
Proceeds from sale of property,
buildings, and equipment.............. 2,750 7,776 11,847 -- 32,767
Cash obtained from acquisition of
company............................... -- -- -- -- 54,401
(Increase) decrease in other assets..... 372 367 (367) 184 184
--------- --------- --------- --------- --------
Net cash used in investing activities... (192,597) (90,434) (290,053) (171,850) (36,558)
FINANCING ACTIVITIES
Proceeds of long-term debt.............. 268,284 110,749 324,260 195,997 27,393
Payments of long-term debt and capital
leases................................ (98,898) (158,318) (190,117) (101,290) (268,801)
--------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities............................ 169,386 (47,569) 134,143 94,707 (241,408)
--------- --------- --------- --------- --------
Increase (decrease) in cash and cash
equivalents........................... 36,913 15,710 (23,384) (10,174) 57,964
Cash and cash equivalents at beginning
of year............................... 28,273 65,186 80,896 80,896 57,512
--------- --------- --------- --------- --------
Cash and cash equivalents at end of
year.................................. $ 65,186 $ 80,896 $ 57,512 $ 70,722 $115,476
========= ========= ========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 71,402 $ 74,082 $ 64,922 $ 33,056 $ 47,822
========= ========= ========= ========= ========
Income tax paid (refunded).............. $ 25,900 $ (2,196) $ 6,497 $ -- $ 11,334
========= ========= ========= ========= ========
</TABLE>

See accompanying notes.

F-36
<PAGE> 101

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Hardwick Air Masters, Inc. d/b/a Airmasters, Inc. ("the Company") operates
in one industry segment and is primarily engaged in the installation and
servicing of air conditioning and heating systems for residential and commercial
customers.

Effective April 1, 1996, AMT Enterprises, Inc. ("AMT") was merged with and
into the Company. AMT is under common control, with the Company's shareholders
owning 100% of AMT. The merger was effected by an exchange of stock whereby the
Company exchanged 600 shares of its common stock for 100% of the outstanding
common stock (40 shares) of AMT. This transaction was accounted for similar to a
pooling-of-interests and, accordingly, the accompanying financial statements
have been restated to include the accounts of AMT.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
contracts (Contracts) for commercial buildings are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues on all of the Company's heating and air
conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services.

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 6 to 18 months. Nonidentifiable
selling, general, and administrative expenses are charged to income as incurred
and are not allocated to Contract costs.

Trade accounts receivable includes billings and billed retainage on
Contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $10,688 and $42,626 at December 31, 1994 and 1995, respectively. The
Company classifies these amounts as current assets because all balances are
expected to be collected in the current year. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base.

CASH EQUIVALENTS

The Company considers all highly liquid inventory investments with an
original maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

F-37
<PAGE> 102

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, BUILDING AND EQUIPMENT

Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line method over the
following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 3-10
Machinery and equipment....................................................... 3-10
Vehicles...................................................................... 3-10
Leasehold improvements........................................................ 31
</TABLE>

WARRANTIES

The Company provides the retail customer with a choice of one, three or
ten-year warranties on parts and labor from the date of installation of the
heating and air conditioning unit. This warranty runs concurrent with the
manufacturer's warranty on parts and for the first year on labor. The Company
provides an accrual for future warranty costs based upon the relationship of
prior years' sales to actual warranty costs. It is the Company's practice to
classify the entire warranty accrual as a current liability.

USE OF ESTIMATES

INCOME TAXES

The Company uses the liability method of accounting for income taxes as
provided in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, the deferred tax liability or asset
is based on temporary differences between the financial statement and income tax
bases of assets and liabilities, measured at tax rates that will be in effect
when the differences reverse.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:

Cash and Cash Equivalents -- The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value.

Long and Short-Term Debt -- The carrying amounts of the Company's
borrowings under its revolving credit agreements and other debt agreements
are estimated using discounted cash flow analyses, using interest rates
currently being offered by banks for similar types of borrowing
arrangements.

The carrying amounts and fair value of the Company's financial instruments
at December 31, 1995 are as follows:

<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................ $ 80,896 $ 80,896
Long-term debt, including current portion........................ 607,237 607,237
</TABLE>

F-38
<PAGE> 103

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $5,102, $60,938 and $42,157, respectively and accounts
written off, net of recoveries were $2,214, $28,437 and $30,574, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

2. CONTRACTS IN PROCESS

Information relative to contracts in process is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on completed contracts............................ $105,885 $308,300
Estimated earnings............................................. 65,670 115,070
-------- --------
171,555 423,370
Less applicable billings....................................... 123,979 347,681
-------- --------
$ 47,576 $ 75,689
======== ========
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... $ 72,477 $ 83,203
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 24,901 7,514
-------- --------
$ 47,576 $ 75,689
======== ========
</TABLE>

Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.

F-39
<PAGE> 104

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Lines of credit with a bank(1)................................... $109,721 $121,721
Notes payable to banks and finance companies(2).................. 282,242 409,716
Debentures payable to stockholder(3)............................. 75,800 75,800
Other............................................................ 5,331 --
-------- --------
473,094 607,237
Less current portion............................................. 304,024 205,146
-------- --------
$169,070 $402,091
======== ========
</TABLE>

- ---------------

(1) The Company has two secured lines of credit with a bank that expire February
5, 1997. Under their terms, the Company can borrow up to $150,000 at
10.25%. The agreement is secured by accounts receivable, inventory, and
real estate.
(2) Notes payable are due in installments through December 2000, with a weighted
average interest rate of 8.9% with substantially all notes collateralized
by vehicles and equipment.
(3) The debentures are payable to the Company's majority shareholder, with
interest at 10.0% and maturing from August 1997 to March 1999.

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:

4. LEASES

Total rental expense for all operating leases was $27,232, $32,303 and
$42,957 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities under terms of noncancelable operating lease agreements
which expire at various dates through 2000. Minimum rental commitments at
December 31, 1995 under operating leases having an initial noncancelable term of
one year or more are as follows:

F-40
<PAGE> 105

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, multiples of 2%
to 15% maximum allowable of total compensation, not to exceed the maximum
established annually by the Internal Revenue Service. Matching contributions are
made by the Company equal to 50% of total contributions by a plan member, to a
maximum of 2% of the employee's total calendar year compensation. The Company's
matching contributions totaled $12,237, $11,540 and $21,312 for the years ended
December 31, 1993, 1994 and 1995, respectively.

6. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position of the Company.

The Company maintains general liability insurance coverage and an umbrella
policy to ensure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.

7. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $184,275,
$271,527 and $425,650 in 1993, 1994 and 1995, respectively.

8. INCOME TAXES

Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes." Under the provisions of SFAS No. 109, deferred tax assets and
liabilities are determined based upon differences between financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The adoption of this statement had no significant impact on the
Company's financial statements.

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 3,838 $12,251 $21,286
State................................................... 1,633 4,405 6,202
------- ------- -------
5,471 16,656 27,488
Deferred.................................................. 7,365 (8,715) 17,174
------- ------- -------
$12,836 $ 7,941 $44,662
======= ======= =======
</TABLE>

F-41
<PAGE> 106

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $(39,579) $(46,420)
-------- --------
Deferred tax liabilities......................................... (39,579) (46,420)
Deferred tax assets:
Deferred revenue............................................... 40,364 22,218
Accrued expenses............................................... 10,152 13,562
Allowance for doubtful accounts................................ 18,510 22,913
-------- --------
Deferred tax assets.............................................. 69,026 58,693
-------- --------
Net deferred tax assets................................ $ 29,447 $ 12,273
======== ========
</TABLE>

Management has evaluated the need for valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely than not be realized. Accordingly, no valuation allowance has
been recorded for the years ended December 31, 1994 and 1995.

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 38% to income before provision
for deferred income taxes. The differences are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Tax provision at statutory rate......................... $ 18,260 $ 6,179 $ 69,434
State income tax less applicable federal tax benefit.... 1,078 2,731 3,845
Impact of surtax exemptions............................. (11,052) (3,740) (14,922)
Other, net.............................................. 4,550 2,771 (13,695)
-------- ------- --------
$ 12,836 $ 7,941 $ 44,662
======== ======= ========
</TABLE>

9. RELATED PARTY TRANSACTIONS

The Company paid rental fees of approximately $6,600 for the years ended
December 31, 1993, 1994 and 1995, to a stockholder in the Company and a company
with common ownership.

10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.

11. UNAUDITED INTERIM FINANCIAL INFORMATION

F-42
<PAGE> 107

HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

12. SUBSEQUENT EVENTS

Effective May 1, 1996, the Company's stockholders purchased all of the
outstanding common stock of Cummings Air Conditioning, Inc. ("Cummings") for
approximately $135,000, with the final purchase price subject to final
negotiations. This stock was then contributed to capital of the Company, with
Cummings becoming a wholly owned subsidiary of the Company. This transaction
will be treated as a purchase. Pro forma unaudited information, as if the
acquisition were completed at the beginning of 1995 for the year ended December
31, 1995 and the six months ended June 30, 1996 is reflected as follows:

<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Operating revenues......................................... $7,148,718 $ 4,242,965
========== ==========
Net income................................................. $ 189,691 $ 158,370
========== ==========
</TABLE>

F-43
<PAGE> 108

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Norrell Heating & Air Conditioning, Inc.

We have audited the accompanying balance sheets of Norrell Heating & Air
Conditioning Company, Inc. as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Norrell Heating & Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 6, 1996

F-44
<PAGE> 109

NORRELL HEATING & AIR CONDITIONING, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
---------------------- JUNE 30,
1994 1995 1996
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 233,214 $ 815,975 $ 797,371
Receivables:
Trade, net of allowance for doubtful accounts of $8,000
in 1994 and $3,000 in 1995............................ 62,636 148,374 161,291
Related party............................................ 2,394 64,421 51,100
--------- ---------- ----------
65,030 212,795 212,391
Note receivable from related party....................... -- 200,000 --
Inventories.............................................. 192,805 86,727 59,454
Investments.............................................. 57,075 75,946 77,365
Deferred income taxes.................................... 5,182 309 25,689
Prepaid expenses and other current assets................ -- -- 40,133
--------- ---------- ----------
Total current assets............................. 553,306 1,391,752 1,212,403
Property, buildings and equipment:
Furniture and fixtures................................... 44,267 45,079 45,530
Machinery and equipment.................................. 57,653 57,653 57,653
Vehicles................................................. 460,509 484,366 366,905
Leasehold improvements................................... 12,290 12,290 12,290
--------- ---------- ----------
574,719 599,388 482,378
Less accumulated depreciation and amortization........... (408,466) (466,781) (425,295)
--------- ---------- ----------
166,253 132,607 57,083
Deferred income taxes...................................... 31,423 39,092 16,927
Other assets............................................... 25,756 30,791 32,030
--------- ---------- ----------
Total assets..................................... $ 776,738 $1,594,242 $1,318,443
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 96,455 $ 122,679 $ 115,933
Accrued compensation..................................... 11,274 646,202 219,696
Accrued taxes, other than income......................... 143,811 11,701 7,047
Income taxes payable..................................... 466 24,755 54,941
Accrued warranties....................................... 80,066 139,747 162,464
Deferred revenue......................................... 125,129 225,667 276,862
Liability to profit sharing plan......................... 50,000 50,000 25,000
--------- ---------- ----------
Total current liabilities........................ 507,201 1,220,751 861,943
Deferred compensation...................................... 91,725 105,191 112,557
Commitments and contingent liabilities..................... -- --
Stockholders' equity:
Common stock, par value $2 per share; 2,000 shares
authorized and issued................................. 2,000 2,000 2,000
Paid-in capital.......................................... 52,400 52,400 52,400
Unrealized gain (loss) on investments.................... (4,780) 6,158 6,158
Retained earnings........................................ 168,192 247,742 323,385
Treasury stock (300 shares, at cost)..................... (40,000) (40,000) (40,000)
--------- ---------- ----------
Total stockholders' equity....................... 177,812 268,300 343,943
--------- ---------- ----------
Total liabilities and stockholders' equity....... $ 776,738 $1,594,242 $1,318,443
========= ========= =========
</TABLE>

See accompanying notes.

F-45
<PAGE> 110

NORRELL HEATING & AIR CONDITIONING, INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $3,274,267 $3,508,903 $4,265,726 $1,971,802 $2,047,437
Cost of goods sold............... 2,285,621 2,436,732 2,852,690 1,334,641 1,406,695
---------- ---------- ---------- ---------- ----------
Gross margin..................... 988,646 1,072,171 1,413,036 637,161 640,742
Selling, general and
administrative
expenses....................... 990,601 1,066,158 1,380,306 686,652 587,135
Bad debt expense................. 1,885 5,834 3,643 (467) 619
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.... (3,840) 179 29,087 (49,024) 52,988
Other income (expense):
Interest expense............... -- (1,412) (110) (110) --
Interest income................ 10,360 19,361 26,882 6,783 22,313
Other income................... 34,650 12,898 64,207 38,055 27,313
---------- ---------- ---------- ---------- ----------
45,010 30,847 90,979 44,728 49,626
---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes.......................... 41,170 31,026 120,066 (4,296) 102,614
Provision (benefit) for income
taxes:
Current........................ 8,961 5,058 46,485 253 29,475
Deferred....................... (2,318) (1,120) (5,969) (2,289) (2,504)
---------- ---------- ---------- ---------- ----------
6,643 3,938 40,516 (2,036) 26,971
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 34,527 $ 27,088 $ 79,550 $ (2,260) $ 75,643
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-46
<PAGE> 111

NORRELL HEATING & AIR CONDITIONING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK, (LOSSES) ON
$2 PAR VALUE AVAILABLE-
--------------- PAID-IN FOR-SALE RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK TOTAL
------ ------ ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ 1,000 $2,000 $52,400 $ -- $106,577 $(40,000) $120,977
Net income.................. -- -- -- 34,527 -- 34,527
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1993........................ 1,000 2,000 52,400 -- 141,104 (40,000) 155,504
Net income.................. -- -- -- -- 27,088 -- 27,088
Adjustment to unrealized
losses on
available-for-sale
securities, net of tax... -- -- -- (4,780) -- -- (4,780)
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1994........................ 1,000 2,000 52,400 (4,780) 168,192 (40,000) 177,812
Net income.................. -- -- -- -- 79,550 -- 79,550
Adjustment to unrealized
gains on
available-for-sale
securities, net of tax... -- -- -- 10,938 -- -- 10,938
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1995........................ 1,000 2,000 52,400 6,158 247,742 (40,000) 268,300
Net income (unaudited)...... -- -- -- -- 75,643 -- 75,643
------ ------ ------- ----------- -------- -------- --------
Balance at June 30, 1996
(unaudited)................. 1,000 $2,000 $52,400 $ 6,158 $323,385 $(40,000) $343,943
===== ====== ======= ========= ======== ======== ========
</TABLE>

See accompanying notes.

F-47
<PAGE> 112

NORRELL HEATING & AIR CONDITIONING, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1993 1994 1995 1995 1996
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $ 34,527 $ 27,088 $ 79,550 $ (2,260) $ 75,643
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 68,756 56,666 77,989 28,870 31,649
Deferred income taxes................. (2,318) (1,120) (5,969) (2,289) (2,504)
Provisions for loss on (recoveries of)
accounts receivable................ 1,885 5,834 3,643 (467) 619
Loss (gain) on asset disposals........ 1,462 25,099 (1,300) -- (3,329)
Changes in assets and liabilities:
Receivables........................ 9,343 (5,793) (348,235) (52,563) 199,785
Inventories........................ (24,311) (65,065) 106,078 91,937 27,273
Prepaid expenses and other current
assets........................... (1,039) 1,039 -- -- (40,133)
Trade accounts payable and accrued
liabilities...................... 88,251 (114,536) 26,224 34,923 (6,746)
Accrued compensation............... 49,757 (34,371) 648,394 267,712 (444,140)
Accrued taxes, other than income... 27,932 58,353 (132,110) (130,609) (4,654)
Accrued warranties................. 31,082 38,985 59,681 25,311 22,717
Deferred revenue................... 30,936 34,806 100,538 28,736 51,195
Income taxes payable............... (6,527) 466 24,289 2,249 29,475
-------- --------- --------- --------- ---------
Net cash flow provided by (used in)
operating activities.................. 309,736 27,451 638,772 291,550 (63,150)
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................. $(67,648) $ (74,757) $ (44,343) $ (7,784) $ (450)
Proceeds from sale of property,
buildings, and equipment.............. -- -- 1,300 -- 47,654
Purchase of investments................. (8,978) (7,877) (7,933) (6,827) (1,419)
Increase in other assets................ (3,546) (2,408) (5,035) (46,684) (1,239)
-------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................ (80,172) (85,042) (56,011) (61,295) 44,546
-------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents........................... 229,564 (57,591) 582,761 230,255 (18,604)
Cash and cash equivalents at beginning
of period............................. 61,241 290,805 233,214 233,214 815,975
-------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period................................ $290,805 $ 233,214 $ 815,975 $ 463,469 $ 797,371
======== ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 1,412 $ 110 $ 110 $ --
======== ========= ========= ========= =========
Income tax paid......................... $ 16,527 $ 8,853 $ 25,539 $ -- $ --
======== ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-48
<PAGE> 113

NORRELL HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Norrell Heating & Air Conditioning, Inc. ("the Company") is a C corporation
and operates in one industry segment. The Company is primarily engaged in the
installation and servicing of air conditioning and heating systems for
residential and commercial customers. The Company purchases inventories from two
suppliers. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

SHORT-TERM INVESTMENTS

Short-term investments include investments in mutual funds. These
investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." It is the Company's intent not to hold these
investments to maturity.

F-49
<PAGE> 114

NORRELL HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY, BUILDING AND EQUIPMENT

Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 5
Machinery and equipment....................................................... 5
Vehicles...................................................................... 5
Leasehold improvements........................................................ 10
</TABLE>

WARRANTIES

The Company provides the residential customer a one-year warranty and
offers extended warranties for select models on parts and labor from the date of
installation of the heating and air conditioning unit. These warranties run
concurrent with the manufacturer's warranty on parts. The Company provides an
accrual for future warranty costs based upon historical experience. It is the
Company's practice to classify the entire warranty accrual as a current
liability.

USE OF ESTIMATES

INCOME TAXES

The Company uses the liability method of accounting for income taxes as
provided in Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes." Under the liability method, the deferred tax liability or asset
is based on temporary differences between the financial statement and income tax
bases of assets and liabilities, measured at tax rates that will be in effect
when the differences reverse.

ADVERTISING

The cost of advertising is expensed as incurred. The Company incurred
$200,255, $176,014 and $167,595 in such costs during 1993, 1994 and 1995,
respectively.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $1,884, $5,834 and $3,644, respectively and accounts
written off, net of recoveries were $7,884, $(1,166) and $8,644, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

F-50
<PAGE> 115

NORRELL HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SHORT-TERM INVESTMENTS

Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available for sale under SFAS No. 115
and, as a result, the carrying amount is a reasonable estimate of fair value.
The cost of available-for-sale securities was $64,139 and $73,679 at December
31, 1994 and 1995, respectively. The adoption of SFAS No. 115 did not have a
significant impact on the Company's financial statements in 1994.

All investments are classified as current because the Company views its
portfolio as available for use in its current operations.

3. LONG-TERM DEBT

The Company has the ability to borrow up to $100,000 under the terms of an
unsecured line of credit that expires September 13, 1996. At December 31, 1994
and 1995, the Company had no borrowings outstanding under the agreement.

4. LEASES

Total rental expense for all operating leases was $68,013, $87,485 and
$89,833 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities and vehicles under terms of noncancelable operating
lease agreements which expire at various dates through the year 1999. Minimum
rental commitments at December 31, 1995 under operating leases having an initial
noncancellable term of one year or more are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996........................................................... $ 106,056
1997........................................................... 5,196
1998........................................................... 3,528
1999........................................................... 3,528
---------
$ 118,308
========
</TABLE>

5. EMPLOYEE BENEFIT PLANS

Substantially all of the Company's employees are eligible to participate in
a profit sharing plan. Contributions are made to the plan at the discretion of
the Board of Directors. Contributions to the plan totaled $100,000, $50,000 and
$50,000 for the years ended December 31, 1993, 1994 and 1995, respectively.

6. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a party to legal proceedings arising in the ordinary course
of its business. In the opinion of management, the resolution of these
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.

The Company has entered into a salary continuation agreement with the
President of the Company whereby the Company will pay the President following
the retirement date of August 1, 2003, $1,667 per month for 180 months. The
amount charged to expense was $6,356, $7,347 and $8,466 at December 31, 1993,
1994 and 1995, respectively. The liability classified as long-term is $45,191 at
December 31, 1995.

F-51
<PAGE> 116

NORRELL HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company has entered into a deferred compensation agreement with an
employee (nonshareholder) whereby the Company makes $5,000 payments through
December 31, 1997 into an account designated by the employer. Beginning December
31, 1998, additional payments of $23,000 are to be made until the earlier of the
termination of the agreement, termination of employment or a change in control
of the Company. Such amounts are expensed as earned.

7. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $390,000,
$442,000 and $727,000 in 1993, 1994 and 1995, respectively.

8. INCOME TAXES

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 6,902 $ 3,896 $40,861
State................................................... 2,059 1,162 5,624
Deferred.................................................. (2,318) (1,120) (5,969)
------- ------- -------
$ 6,643 $ 3,938 $40,516
======= ======= =======
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on investments................................... $ -- $ 711
------- -------
Deferred tax liabilities........................................... -- 711
Deferred tax assets:
Employee compensation............................................ 17,587 22,165
Depreciation and amortization.................................... 13,836 16,927
Accounts receivable.............................................. 2,720 1,020
Unrealized loss on investment.................................... 2,462 --
------- -------
Total deferred tax assets.......................................... 36,605 40,112
Valuation allowance................................................ -- --
------- -------
Net deferred tax assets............................................ $36,605 $39,401
======= =======
</TABLE>

F-52
<PAGE> 117

NORRELL HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes and cumulative effect of accounting change. The differences are summarized
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $13,998 $10,549 $40,822
State income tax less applicable federal tax benefit...... 1,359 2,170 3,712
Other, net -- principally effects of graduated rates...... (8,714) (8,781) (4,018)
------- ------- -------
$ 6,643 $ 3,938 $40,516
======= ======= =======
</TABLE>

9. RELATED PARTY TRANSACTIONS

The Company leases the office building and real estate from the president
and majority shareholder under one year operating lease agreements during 1993,
1994 and 1995. The Company paid rental fees of $60,000, $84,000 and $86,000
during 1993, 1994 and 1995, respectively, to the president and majority
stockholder.

10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

11. UNAUDITED INTERIM FINANCIAL INFORMATION

F-53
<PAGE> 118

REPORT OF INDEPENDENT AUDITORS

The Stockholder
Vision Holding Company, Inc.

We have audited the accompanying consolidated balance sheets of Vision
Holding Company, Inc. as of December 31, 1994 and 1995, and the related
statements of operations, stockholder's equity, and cash flows for the period
from March 1, 1993 (date operations commenced) through December 31, 1993, and
the years ended December 31, 1994 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vision
Holding Company, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from March 1, 1993 (date
operations commenced) through December 31, 1993, and the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 24, 1996

F-54
<PAGE> 119

VISION HOLDING COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 94,543 $ 615,873 $ 713,880
Receivables:
Trade, net of allowance for doubtful accounts of
$3,800 in 1994, 1995 and 1996....................... 174,177 163,678 291,320
Related party......................................... 10,276 11,273 83,955
Employee.............................................. 2,352 1,044 5,939
Other................................................. 242 -- --
---------- ---------- ----------
187,047 175,995 381,214
Inventories.............................................. 105,516 116,175 183,761
Investments.............................................. 200,994 -- --
Prepaid expenses and other current assets................ 28,802 17,837 140,347
---------- ---------- ----------
Total current assets............................. 616,902 925,880 1,419,202
Property, buildings and equipment:
Land..................................................... 25,000 25,000 25,000
Buildings and leasehold improvements..................... 593,059 606,981 628,528
Furniture and fixtures................................... 36,396 37,192 37,884
Machinery and equipment.................................. 73,524 102,697 112,503
Vehicles................................................. 149,047 193,830 252,186
---------- ---------- ----------
877,026 965,700 1,056,101
Less accumulated depreciation and amortization........... (125,522) (230,015) (287,664)
---------- ---------- ----------
751,504 735,685 768,437
Goodwill, net of accumulated amortization of $19,272 in
1994, $29,784 in 1995, and $40,296 in 1996............... 410,604 400,092 394,836
Other intangible assets, net of accumulated amortization of
$55,000 in 1994, $85,000 in 1995, and $90,000 in 1996.... 35,000 5,000 --
Other assets............................................... 138,768 62,046 --
---------- ---------- ----------
Total assets..................................... $1,952,778 $2,128,703 $2,582,475
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 186,598 $ 148,480 $ 432,756
Accrued compensation..................................... 82,195 90,936 83,244
Accrued warranties....................................... 3,085 3,940 6,516
Income taxes payable..................................... 60,012 108,239 134,352
Deferred revenue......................................... 162,558 178,281 191,935
Liability to profit sharing plan......................... 4,443 8,919 9,394
Current portion of long-term debt and capital leases..... 71,474 38,479 42,298
---------- ---------- ----------
Total current liabilities........................ 570,365 577,274 900,495
Long-term debt, net of current portion..................... 783,431 744,952 721,350
Due to former stockholder.................................. 51,783 -- --
Deferred income taxes...................................... 174,254 171,651 183,072
Stockholder's equity:
Common Stock, $10 par value; 3,000 shares authorized,
1,960 shares issued and outstanding................... 19,600 19,600 19,600
Retained earnings........................................ 353,345 615,226 757,958
---------- ---------- ----------
Total stockholder's equity....................... 372,945 634,826 777,558
---------- ---------- ----------
Total liabilities and stockholder's equity....... $1,952,778 $2,128,703 $2,582,475
========= ========= =========
</TABLE>

See accompanying notes.

F-55
<PAGE> 120

VISION HOLDING COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1993 SIX MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------ ------------------------
1993 1994 1995 1995 1996
------------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $ 2,792,574 $3,525,119 $4,261,485 $2,008,262 $2,309,356
Cost of goods sold.............. 1,751,998 2,400,309 2,738,022 1,385,883 1,542,173
------------- ---------- ---------- ---------- ----------
Gross margin.................... 1,040,576 1,124,810 1,523,463 622,379 767,183
Selling, general and
administrative
expenses...................... 762,505 851,348 1,090,916 471,301 482,215
Bad debt expense................ 8,580 (4,029) 2,259 4,092 1,138
------------- ---------- ---------- ---------- ----------
Income from operations.......... 269,491 277,491 430,288 146,986 283,830
Other income (expense):
Interest expense.............. (14,767) (60,278) (72,830) (33,928) (44,678)
Interest income............... 249 2,210 22,911 5,069 16,444
Other income (expense)........ 44,550 55,450 49,034 23,795 (10,273)
------------- ---------- ---------- ---------- ----------
30,032 (2,618) (885) (5,064) (38,507)
------------- ---------- ---------- ---------- ----------
Income before income taxes...... 299,523 274,873 429,403 141,922 245,323
Provision (benefit) for income
taxes:
Current....................... -- 76,755 170,125 50,524 91,170
Deferred...................... 109,566 34,730 (2,603) 2,091 11,421
------------- ---------- ---------- ---------- ----------
109,566 111,485 167,522 52,615 102,591
------------- ---------- ---------- ---------- ----------
Net income...................... $ 189,957 $ 163,388 $ 261,881 $ 89,307 $ 142,732
========== ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-56
<PAGE> 121

VISION HOLDING COMPANY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at March 1, 1993............................... -- $ -- $ -- $ --
Issuance of common stock............................. 1,960 19,600 -- 19,600
Net income........................................... -- -- 189,957 189,957
------ ------- -------- --------
Balance at December 31, 1993........................... 1,960 19,600 189,957 209,557
Net income........................................... -- -- 163,388 163,388
------ ------- -------- --------
Balance at December 31, 1994........................... 1,960 19,600 353,345 372,945
Net income........................................... -- -- 261,881 261,881
------ ------- -------- --------
Balance at December 31, 1995........................... 1,960 19,600 615,226 634,826
Net income (unaudited)............................... -- -- 142,732 142,732
------ ------- -------- --------
Balance at June 30, 1996 (unaudited)................... 1,960 $19,600 $757,958 $777,558
===== ======= ======== ========
</TABLE>

See accompanying notes.

F-57
<PAGE> 122

VISION HOLDING COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1993 YEAR ENDED DECEMBER SIX MONTHS ENDED
THROUGH 31, JUNE 30,
DECEMBER 31, --------------------- --------------------
1993 1994 1995 1995 1996
------------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 189,957 $ 163,388 $ 261,881 $ 89,307 $ 142,732
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 81,207 131,252 144,346 74,605 67,905
Deferred income taxes................ 109,566 34,730 (2,603) 2,091 11,421
Other assets......................... 18,694 (45,178) 76,722 (12,116) 62,046
Changes in assets and liabilities:
Receivables....................... (129,831) 9,025 11,052 (20,756) (205,219)
Inventories....................... 5,595 2,941 (10,659) (42,376) (67,586)
Prepaid expenses and other current
assets.......................... (4,188) 1,065 10,965 9,188 (16,919)
Trade accounts payable and accrued
liabilities..................... (72,403) 67,120 (38,118) 84,268 178,685
Accrued compensation.............. 59,432 14,419 8,741 5,479 (7,692)
Accrued warranties................ (340) 425 855 277 2,576
Income taxes payable.............. -- 59,976 48,227 (50,686) 26,113
Deferred revenue.................. 64,319 4,876 15,723 (23,961) 13,654
Liability to profit sharing
plan............................ (5,080) 468 4,476 2,776 475
------------- --------- --------- -------- ---------
Net cash flow provided by operating
activities........................... 316,928 444,507 531,608 118,096 208,191
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................ (56,368) (128,615) (88,015) (55,909) (90,401)
Proceeds from sale of fixed assets..... 23,402 -- -- -- --
Purchase of investments................ -- (200,994) -- -- --
Proceeds from sale of investments...... -- -- 200,994 200,994 --
------------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities................. (32,966) (329,609) 112,979 145,085 (90,401)
FINANCING ACTIVITIES
Proceeds from short-term debt.......... 15,000 -- -- -- --
Payments on short-term debt............ (6,060) -- -- -- --
Proceeds from long-term debt........... 30,069 -- -- -- --
Payments of long-term debt and capital
leases............................... (102,720) (236,231) (71,474) (21,748) (19,783)
Due to former stockholder.............. (24,500) (13,717) (51,783) 33,332 --
------------- --------- --------- -------- ---------
Net cash used in (provided by)
financing activities................. (88,211) (249,948) (123,257) 11,584 (19,783)
------------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents.......................... 195,751 (135,050) 521,330 274,765 98,007
Cash at beginning of year.............. 33,842 229,593 94,543 94,543 615,873
------------- --------- --------- -------- ---------
Cash at end of year.................... $ 229,593 $ 94,543 $ 615,873 $369,308 $ 713,880
========== ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 19,056 $ 60,278 $ 72,830 $ 33,928 $ 44,678
========== ========= ========= ======== =========
Income tax paid........................ $ 800 $ 14,470 $ 141,204 $ 85,210 $ 55,388
========== ========= ========= ======== =========
Covenant not-to-compete exchanged for
debt................................. $ 90,000 $ -- $ -- $ -- $ --
========== ========= ========= ======== =========
</TABLE>

See accompanying notes.

F-58
<PAGE> 123

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

On March 1, 1993, Vision Holding Company, Inc. (the Company), a
newly-formed corporation, purchased all of the outstanding common stock of Neal
Harris Heating and Air Conditioning Company, Inc. (NHHACC), an existing
business, for $938,600. The acquisition was financed from the issuance of 1,960
shares of the Company's common stock for $19,600, from $19,000 in cash and from
seller debt totaling $900,000.

The acquisition was accounted for as a purchase in accordance with
generally accepted accounting principles, with goodwill of approximately
$430,000 recorded for the excess of the purchase price over the fair market
values of the net assets at the date of acquisition. The goodwill is being
amortized over 40 years using the straight-line method. The Company periodically
reviews goodwill to assess recoverability, and impairments would be recognized
in operating results if a permanent diminution in value were to occur.

NHHACC operates in one industry segment and is primarily engaged in the
installation and servicing of air conditioning and heating systems for
residential and commercial customers in eastern Kansas and western Missouri.

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All material intercompany
transactions and balances have been eliminated.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
contracts (Contracts) for commercial buildings are recognized on the
percentage-of-completion method in the ratio that incurred costs bear to total
estimated costs. Revenues on all of the Company's heating and air conditioning
installation and service and maintenance revenue are recognized upon completion
of the services.

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the period in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within three to six months.
Nonidentifiable selling, general and administrative expenses are charged to
income as incurred and are not allocated to contract costs. As of December 31,
1994 and 1995 and March 31, 1996, all Contracts were complete and billed and
there were no billings in excess of costs and estimated earnings.

Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersions across many different industries and geographies. The Company
does not require collateral for its receivables.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

F-59
<PAGE> 124

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

SHORT-TERM INVESTMENTS

Short-term investments consist of U.S. Treasury Bills. U.S. Treasury Bills
have maturity dates of one year from the date of purchase and are accounted for
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." It is the
Company's intent to hold the Treasury Bills to maturity.

PROPERTY, BUILDINGS AND EQUIPMENT

Property, buildings and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................... 25
Furniture and fixtures....................................................... 7
Machinery and equipment...................................................... 5
Vehicles..................................................................... 5
Leasehold improvements....................................................... 20-25
</TABLE>

OTHER INTANGIBLE ASSETS

Intangible assets include an agreement not-to-compete with a former
stockholder and are recorded at cost, net of accumulated amortization. Such
assets are amortized on a straight-line basis over the term of the agreement.

WARRANTIES

The Company provides retail customers with a one-year warranty on parts and
labor from the date of installation of the heating and air conditioning unit.
This warranty runs concurrent with the manufacturer's warranty on parts and for
the first year on labor. The Company provides an accrual for future warranty
costs based upon the relationship of prior years' sales to actual warranty
costs. It is the Company's practice to classify the entire warranty accrual as a
current liability.

F-60
<PAGE> 125

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

DEFERRED REVENUE

The Company offers extended service agreements to its customers to provide
periodic maintenance on heating and air conditioning units. The full amount of
the revenues associated with these agreements is initially deferred and
recognized as income over the life of the agreement.

ADVERTISING COSTS

Costs associated with advertising are expensed at the time of the
advertisement's first showing. Advertising expenses totaled approximately
$77,000 for the ten months ended December 31, 1993 and $116,000 and $79,000 for
the years ended December 31, 1994 and 1995, respectively.

USE OF ESTIMATES

ALLOWANCE FOR DOUBTFUL ACCOUNTS

For the period March 1, 1993 (date operations commenced), through December
31, 1993, and the years ended December 31, 1994 and December 31, 1995 amounts
charged to bad debt expense totaled $8,580, $(4,029) and $2,259, respectively
and accounts written off, net of recoveries were $8,485, $2,449 and $2,259,
respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

2. SHORT-TERM INVESTMENTS

Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available for sale under SFAS No. 115.
On securities classified as available for sale, carrying amount is a reasonable
estimate of fair value. The adoption of SFAS No. 115 had no effect on the
Company's financial statements in 1994.

The securities available for sale were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
U.S. Treasury Bills (cost equals fair value)...................... $200,994 $ --
</TABLE>

There were no gross realized gains or gross realized losses from the sale
of available-for-sale securities. The Company's proceeds from the sale of
available-for-sale securities were $-0- for the ten months ended December 31,
1993, $-0- and $200,994 in 1994 and 1995, respectively.

3. AGREEMENT NOT-TO-COMPETE

The Company has a covenant not-to-compete with a former stockholder dated
March 1, 1993. The agreement is for a three-year period ending February 1996.
Total consideration paid under the noncompete

F-61
<PAGE> 126

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

agreement was $90,000, payable in the form of $30,000 cash paid in equal monthly
installments over the first twelve months, a vehicle valued at $8,217
transferred in 1994, and $51,783 of life insurance cash surrender value
transferred in 1995. The asset is being amortized evenly over the term of the
agreement. Amortization expense for the ten months ended December 31, 1993 and
the years ended December 31, 1994 and 1995 was $25,000, $30,000 and $30,000,
respectively. Amounts reported as due to former stockholder at December 31, 1994
and 1995 of $51,783 and $-0-, respectively, represent the remaining portion of
the initial $90,000 liability due the former stockholder under this agreement.

4. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable to former stockholder of NHHACC due in equal
installments from March 1994 through January 2009, interest
at prime plus 1%, collateralized by the common stock of
NHHACC....................................................... $852,307 $783,431
Capital lease obligation, secured by data processing equipment,
expiring in 1995............................................. 2,075 --
Note payable, collateralized by vehicle, paid in 1995.......... 523 --
-------- --------
854,905 783,431
Less current portion........................................... 71,474 38,479
-------- --------
$783,431 $744,952
======== ========
</TABLE>

The Company has a $200,000 revolving line of credit secured by accounts
receivable, inventory and equipment. The line matures October 8, 1996. Interest
is at the bank's prime rate (8.5% at December 31, 1995). There were no
borrowings against this line at December 31, 1994 or 1995.

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:

<TABLE>
<S> <C>
1996........................................................... $ 38,479
1997........................................................... 34,855
1998........................................................... 38,219
1999........................................................... 41,908
2000........................................................... 45,954
Thereafter..................................................... 584,016
--------
$783,431
========
</TABLE>

The interest paid to the former stockholder of NHHACC was $-0-, $43,286 and
$70,019 for the ten months ended December 31, 1993, and the years ended December
31, 1994 and 1995, respectively.

5. LEASES

Total rental expense for all operating leases was $3,654, $5,117 and $4,701
for the ten months ended at December 31, 1993, and in 1994 and 1995,
respectively.

F-62
<PAGE> 127

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheet, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
Tools and equipment............................................... $ 33,570 $ --
Less accumulated depreciation..................................... (15,325) --
-------- ----
Net equipment under capital leases................................ $ 18,245 $ --
======== ====
</TABLE>

Depreciation of the assets under capital leases is included in depreciation
expense.

5. LEASES

The Company leases a portion of its building to another company. The lease
is noncancelable and expires in January 1998. Minimum future rentals receivable
under this lease at December 31, 1995 are follows:

<TABLE>
<S> <C>
1996............................................................... $44,118
1997............................................................... 45,004
1998............................................................... 3,756
Thereafter......................................................... --
-------
$92,878
=======
</TABLE>

6. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 50% of total contributions by a plan member, to a maximum of 3% of the
employee's total calendar year compensation. The Company's matching
contributions totaled $12,529, $33,224 and $29,214 for the ten months ended
December 31, 1993, and the years ended 1994 and 1995, respectively. In addition,
the Company made a contribution to the Plan from its profits during 1995 in the
amount of $20,000.

7. COMMITMENTS AND CONTINGENT LIABILITIES

The Company maintains general liability insurance coverage and an umbrella
policy to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.

8. STOCKHOLDER'S COMPENSATION

Compensation to the stockholder of the Company consisting of salary and
cash bonuses, is included in selling, general and administrative expenses and
totaled approximately $58,900, $89,900, and $151,700 for the ten months ended
December 31, 1993 and in 1994, and 1995, respectively.

F-63
<PAGE> 128

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES

The Company is a C corporation and accounts for income taxes under the
liability method. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

Income tax expense consists of the following:

<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, -------------------
1993 1994 1995
------------ -------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ 71,766 $159,067
State.............................................. -- 4,989 11,058
------------ -------- --------
$ -- $ 76,755 $170,125
========== ======== ========
Deferred:
Federal............................................ $102,444 $ 32,473 $ (2,434)
State.............................................. 7,122 2,257 (169)
------------ -------- --------
$109,566 $ 34,730 $ (2,603)
========== ======== ========
Provision for income taxes........................... $109,566 $111,485 $167,522
========== ======== ========
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $168,912 $170,850
Prepaids....................................................... 10,508 6,506
-------- --------
Deferred tax liabilities......................................... 179,420 177,356
Deferred tax assets:
Other.......................................................... 5,166 5,705
-------- --------
Deferred tax assets.............................................. 5,166 5,705
-------- --------
Net deferred tax liabilities........................... $174,254 $171,651
======== ========
</TABLE>

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before provision
for deferred income taxes. The differences are summarized as follows:

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1993
THROUGH DECEMBER 31,
DECEMBER 31, -------------------
1993 1994 1995
-------------- -------- --------
<S> <C> <C> <C>
Tax provision at federal statutory rate............. $101,838 $ 93,456 $145,996
State income tax less applicable federal tax
benefit........................................... 12,850 11,792 18,421
Other, net.......................................... (5,122) 6,237 3,105
-------------- -------- --------
$109,566 $111,485 $167,522
=========== ======== ========
</TABLE>

F-64
<PAGE> 129

VISION HOLDING COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. RELATED-PARTY TRANSACTIONS

As discussed in Note 3 and in Note 4, the Company has a noncompete
agreement and a note payable with a former stockholder. The former stockholder
is the father of the present owner.

11. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

12. UNAUDITED INTERIM FINANCIAL INFORMATION

The consolidated statements of operations and cash flows for the six months
ended June 30, 1995 and 1996 (interim financial statements) have been prepared
by management and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the interim results.

F-65
<PAGE> 130

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Comerford's Heating and Air Conditioning, Inc.

We have audited the accompanying balance sheets of Comerford's Heating and
Air Conditioning, Inc. as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comerford's Heating and Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 15, 1996

F-66
<PAGE> 131

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 449,298 $ 745,979 $ --
Certificates of deposit.................................. 100,000 200,000 100,000
Receivables:
Trade................................................. 92,378 89,496 210,741
Related party......................................... 204,269 -- 784,969
Employee.............................................. -- 147 1,089
Other................................................. 1,348 -- --
---------- ---------- -----------
297,995 89,643 996,799
Inventories.............................................. 137,172 97,172 143,960
Prepaid expenses and other current assets................ 9,898 874 159,693
---------- ---------- -----------
Total current assets............................. 994,363 1,133,668 1,400,452
Property and equipment:
Furniture and fixtures................................... 24,402 28,567 26,073
Machinery and equipment.................................. 196,830 199,898 219,294
Vehicles................................................. 477,843 469,696 414,681
Leasehold improvements................................... 39,858 43,353 52,391
---------- ---------- -----------
738,933 741,514 712,439
Less accumulated depreciation............................ (455,870) (526,961) (499,536)
---------- ---------- -----------
283,063 214,553 212,903
Other assets............................................... 100 100 1,474
---------- ---------- -----------
Total assets..................................... $1,277,526 $1,348,321 $ 1,614,829
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 160,547 $ 112,099 $ 270,899
Accrued compensation..................................... 31,393 27,879 124,937
Accrued taxes, other than income......................... 20,711 3,133 --
Accrued warranties....................................... 8,000 13,000 13,000
Income taxes payable..................................... 2,669 1,239 --
Deferred revenue......................................... 293,137 308,234 235,423
Current portion capital leases........................... 11,486 12,689 18,171
---------- ---------- -----------
Total current liabilities........................ 527,943 478,273 662,430
Capital lease obligations, less current portion............ 31,699 19,010 29,634
Stockholders' equity:
Common stock, no par value, 1,000,000 shares authorized,
75,000 shares issued and outstanding.................. 7,500 7,500 7,500
Retained earnings........................................ 710,384 843,538 915,265
---------- ---------- -----------
Total stockholders' equity....................... 717,884 851,038 922,765
---------- ---------- -----------
Total liabilities and stockholders' equity....... $1,277,526 $1,348,321 $ 1,614,829
========= ========= =========
</TABLE>

See accompanying notes.

F-67
<PAGE> 132

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $3,532,089 $3,715,214 $4,232,962 $1,904,167 $2,551,967
Cost of goods sold................... 2,031,910 2,113,176 2,271,332 1,106,727 1,293,770
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,500,179 1,602,038 1,961,630 797,440 1,258,197
Selling, general and administrative
expenses........................... 1,855,038 1,463,587 1,651,773 765,863 855,268
Bad debt expense..................... 4,281 4,926 1,011 -- --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (359,140) 133,525 308,846 31,577 402,929
Other income (expense):
Interest expense................... (4,017) (5,130) (3,802) (1,902) (1,733)
Interest income.................... 21,024 37,807 24,944 8,963 15,445
Other income (expense)............. 44,697 12,673 9,253 2,776 (43,052)
---------- ---------- ---------- ---------- ----------
(61,704) 45,350 30,395 9,837 (29,340)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (297,436) 178,875 339,241 41,414 373,589
Provision for income taxes........... 800 3,382 4,819 2,500 10
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (298,236) $ 175,493 $ 334,422 $ 38,914 $ 373,579
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-68
<PAGE> 133

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992........................... 75,000 $7,500 $ 833,127 $ 840,627
Net loss............................................. -- -- (298,236) (298,236)
------ ------ ---------- ----------
Balance at December 31, 1993........................... 75,000 7,500 534,891 542,391
Net income........................................... -- -- 175,493 175,493
------ ------ ---------- ----------
Balance at December 31, 1994........................... 75,000 7,500 710,384 717,884
Capital distributions................................ -- -- (201,268) (201,268)
Net income........................................... -- -- 334,422 334,422
------ ------ ---------- ----------
Balance at December 31, 1995........................... 75,000 7,500 843,538 851,038
Capital distributions (unaudited).................... -- -- (301,852) (301,852)
Net income (unaudited)............................... -- -- 373,579 373,579
====== ====== ========= =========
Balance at June 30, 1996 (unaudited)................... 75,000 $7,500 $ 915,265 $ 922,765
</TABLE>

See accompanying notes.

F-69
<PAGE> 134

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $(298,236) $ 175,493 $ 334,422 $ 38,914 $ 373,579
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 57,665 89,608 72,867 34,831 68,788
Provision for bad debts............... 4,281 4,926 1,011 -- --
Loss on asset disposals............... -- -- -- -- 42,107
Changes in assets and liabilities:
Receivables........................ (163,316) 15,065 207,341 (19,290) (907,156)
Inventories........................ (57,720) (32,547) 40,000 (806) (46,788)
Prepaid expenses and other current
assets........................... 1,493 (6,284) 9,024 (4,621) (140,193)
Trade accounts payable and accrued
liabilities...................... 612,139 (636,823) (48,448) (10,795) 158,800
Accrued compensation............... 9,160 1,464 (3,514) 3,589 97,058
Accrued taxes, other than income... (4,778) 20,711 (17,578) (16,511) (3,133)
Accrued warranties................. (276) (1,000) 5,000 2,502 --
Deferred revenue................... 135,737 92,003 15,097 43,521 (72,811)
Income taxes payable............... (1,578) 2,669 (1,430) (2,669) (1,239)
--------- --------- --------- -------- ---------
Net cash flow provided by (used in)
operating activities.................. 294,571 (274,715) 613,792 68,665 (430,988)
INVESTING ACTIVITIES
Purchase of certificates of deposit..... (100,000) (100,000) (200,000) (200,000) --
Sales of certificates of deposit........ 100,000 100,000 100,000 100,000 100,000
Purchase of property and equipment...... (165,147) (106,098) (10,728) (4,259) (196,345)
Proceeds from sale of property and
equipment............................. 29,935 2,553 6,371 -- 86,850
--------- --------- --------- -------- ---------
Net cash used in investing activities... (135,212) (103,545) (104,357) (104,259) (9,495)
FINANCING ACTIVITIES
Payments of capital leases.............. (6,378) (10,398) (11,486) (5,742) (3,644)
Distributions to shareholders........... -- -- (201,268) -- (301,852)
--------- --------- --------- -------- ---------
Net cash used in financing activities... (6,378) (10,398) (212,754) (5,742) (305,496)
--------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents........................... 152,981 (388,658) 296,681 (41,336) (745,979)
Cash and cash equivalents at beginning
of period............................. 684,975 837,956 449,298 449,298 745,979
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of
period................................ $ 837,956 $ 449,298 $ 745,979 $407,962 $ --
========= ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3,814 $ 4,890 $ 3,802 $ 1,902 $ 1,733
========= ========= ========= ======== =========
Purchase of equipment through capital
leases................................ $ 59,961 $ -- $ -- $ -- $ 19,750
========= ========= ========= ======== =========
</TABLE>

See accompanying notes.

F-70
<PAGE> 135

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Comerford's Heating and Air Conditioning, Inc. ("the Company") operates in
one industry segment and is primarily engaged in the installation and servicing
of air conditioning and heating systems for residential and commercial customers
in Northern California.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.

USE OF ESTIMATES

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash and Certificates of Deposit

The carrying amounts reported in the balance sheets for cash and cash
equivalents and certificates of deposit approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

TRADE RECEIVABLES

At December 31, 1994 and 1995, the Company does not believe there were any
material amounts considered to be uncollectible. Accordingly, an allowance for
doubtful accounts has not been made.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

F-71
<PAGE> 136

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line and declining-balance methods
over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Furniture and fixtures..................................................... 5-7
Machinery and equipment.................................................... 5-15
Vehicles................................................................... 5
Leasehold improvements..................................................... 20-31.5
</TABLE>

WARRANTIES

The Company provides the retail customer with a one-year warranty and
offers extended warranties for up to ten years on parts and labor from the date
of installation of the heating and air conditioning unit. The warranty runs
concurrent with the manufacturer's warranty on parts for the first year. The
Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.

INCOME TAXES

The stockholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and California state income tax purposes.
Accordingly, the Company is not subject to federal income taxes.

DEFERRED REVENUE

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $4,281, $4,926 and $1,011, respectively and accounts
written off, net of recoveries were $4,281, $4,926 and $1,011, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

F-72
<PAGE> 137

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. LEASES

Total rental expense for all operating leases was $51,900, $48,356 and
$52,272 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities and vehicles under terms of noncancellable operating
lease agreements which expire at various dates through 2000. Minimum rental
commitments at December 31, 1995 under capital and operating leases having an
initial noncancellable term of one year or more are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $15,288 $ 52,272
1997.............................................................. 15,288 52,272
1998.............................................................. 5,096 52,272
1999.............................................................. -- 52,272
2000.............................................................. -- 48,000
Thereafter........................................................ -- --
------- ---------
35,672 $ 257,088
========
Amounts representing interest..................................... 3,973
-------
Present value of net minimum rentals (including $12,689 classified
as current)..................................................... $31,699
=======
</TABLE>

The carrying values of equipment under capital leases, which are included
with owned assets in the accompanying balance sheets at December 31, 1994 and
1995, are $26,383 and $15,850, net of accumulated amortization of $33,578 and
$44,111, respectively. Amortization of the assets under capital leases is
included in depreciation expense.

3. EMPLOYEE BENEFIT PLANS

The Company has a defined contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 25% of total contributions by a plan member, to a maximum of 4% of the
employee's total calendar year compensation. The Company's matching
contributions totaled $9,993, $5,717 and $14,773 for the years ended December
31, 1993, 1994 and 1995, respectively.

4. COMMITMENTS AND CONTINGENT LIABILITIES

5. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $1,000,000,
$347,000, and $574,203 in 1993, 1994 and 1995, respectively.

6. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)

F-73
<PAGE> 138

COMERFORD'S HEATING AND AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

termination of S corporation status. The Company had net operating income (loss)
for income tax purposes of $(276,621), $(91,297), $247,012 and $375,251 for
1993, 1994, 1995 and the six months ended June 30, 1996, respectively. Had the
Company filed federal and state income tax returns as a regular corporation for
1993, 1994, 1995 and the six months ended June 30, 1996, income tax expense
(benefit) under the provisions of Statement of Financial Accounting Standards
No. 109 would have been $(107,273), $80,319, $146,793 and $150,618,
respectively.

At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and tax reporting bases of assets and liabilities. Such
deferred taxes will be based on the cumulative temporary difference at the date
of termination of S corporation status. The effect of recognizing the deferred
taxes will be included in income from continuing operations. If the termination
of S corporation status had occurred at June 30, 1996, the net deferred tax
asset would have been approximately $5,200.

7. STOCKHOLDERS' EQUITY

On December 26, 1995, the Company amended and restated its articles of
incorporation to, among other things, authorize the Company to issue two classes
of common stock, the designations and authorized shares of which are Class A
Common Stock (100,000 shares) and Class B Common Stock (900,000 shares). Upon
amendment and restatement of the articles of incorporation, each share of the
then outstanding common stock was split and converted into one share of Class A
Common Stock and nine shares of Class B Common Stock. All share information
presented herein has been adjusted to reflect the stock split. The rights,
preferences, privileges and restrictions of both classes of stock are identical
except that the holders of Class A Common Stock have exclusive voting rights.
There are 7,500 shares of Class A and 67,500 shares of Class B Common Stock
outstanding.

8. RELATED PARTY TRANSACTIONS

The Company paid rental fees of $62,092, $63,644 and $67,560 at December
31, 1993, 1994 and 1995, respectively, to the Company's stockholders.

9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

10. UNAUDITED INTERIM FINANCIAL INFORMATION

The combined statements of income and cash flows for the six months ended
June 30, 1995 and 1996 (interim financial statements) have been prepared by
management and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the interim results.

F-74
<PAGE> 139

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Rolf Coal and Fuel Corp.

We have audited the accompanying balance sheets of Rolf Coal and Fuel Corp.
as of December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rolf Coal and Fuel Corp. at
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 17, 1996

F-75
<PAGE> 140

ROLF COAL AND FUEL CORP.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 429,875 $ 498,608 $ 313,200
Receivables:
Trade, net of allowance for doubtful accounts of
$17,021 in 1994 and $2,410 in 1995.................. 139,343 183,801 176,609
Related party............................................ -- 62,324 --
Employee................................................. 12,891 24,590 9,593
---------- ---------- ----------
152,234 270,715 186,202
Inventories.............................................. 128,941 164,623 202,470
Costs and estimated earnings in excess of billings....... 37,978 63,362 26,639
Prepaid expenses and other current assets................ 13,547 27,048 86,791
Deferred tax asset....................................... 2,900 112,000 142,886
---------- ---------- ----------
Total current assets............................. 765,475 1,136,356 958,188
Property and equipment:
Furniture and fixtures................................... 159,652 164,542 147,507
Machinery and equipment.................................. 113,090 129,528 134,282
Vehicles................................................. 345,391 320,087 418,225
Leasehold improvements................................... 7,107 7,107 20,919
---------- ---------- ----------
625,240 621,264 720,933
Less accumulated depreciation and amortization........... (416,504) (412,880) (426,551)
---------- ---------- ----------
208,736 208,384 294,382
Other assets............................................... 56,800 60,341 60,283
---------- ---------- ----------
Total assets..................................... $1,031,011 $1,405,081 $1,312,853
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable -- related party............................ $ 20,219 $ -- $ 40,428
Trade accounts payable and accrued liabilities........... 186,093 114,620 121,498
Accrued compensation..................................... 229,824 369,167 120,846
Accrued taxes, other than income......................... 13,506 15,439 17,002
Accrued warranties....................................... 8,238 25,000 26,796
Income taxes payable..................................... 20,480 156,484 170,209
Deferred revenue......................................... 144,563 329,321 352,335
Billings in excess of costs and estimated earnings....... 2,853 -- --
Current portion of long-term debt and capital lease
obligations........................................... 29,597 33,094 53,441
---------- ---------- ----------
Total current liabilities........................ 655,373 1,043,125 902,555
Long-term debt, net of current portion..................... 29,395 100 57,408
Capital lease obligations, net of current portion.......... 38,937 5,843 --
Deferred income taxes...................................... 5,600 10,200 52,558
Stockholders' equity:
Common stock, $100 par value, 750 shares authorized, 310
shares issued and outstanding......................... 31,000 31,000 31,000
Retained earnings........................................ 270,706 314,813 269,332
---------- ---------- ----------
Total Stockholders' Equity....................... 301,706 345,813 300,332
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,031,011 $1,405,081 $1,312,853
========= ========= =========
</TABLE>

See accompanying notes.

F-76
<PAGE> 141

ROLF COAL AND FUEL CORP.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $3,036,009 $3,977,013 $4,104,580 $2,161,613 $2,448,305
Cost of goods sold................... 1,516,213 1,940,213 1,866,607 1,058,267 949,703
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,519,796 2,036,800 2,237,973 1,103,346 1,498,602
Selling, general and administrative
expenses........................... 1,538,777 1,924,815 2,137,108 1,288,726 1,527,582
Bad debt expense..................... 29,318 16,328 5,670 1,594 584
---------- ---------- ---------- ---------- ----------
Income from operations............... (48,299) 95,657 95,195 (186,974) (29,564)
Other income (expense):
Interest expense................... (15,320) (14,333) (18,721) (20,159) (19,867)
Interest income.................... 1,744 6,773 16,678 12,325 22,845
Other income....................... 14,917 12,345 9,955 -- --
---------- ---------- ---------- ---------- ----------
1,341 4,785 7,912 (7,834) 2,978
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (46,958) 100,442 103,107 (194,808) (26,586)
Provision (benefit) for income taxes:
Current............................ 5,396 28,690 163,500 -- --
Deferred........................... (32,400) 1,800 (104,500) (51,631) (11,105)
---------- ---------- ---------- ---------- ----------
(27,004) 30,490 59,000 (51,631) (11,105)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (19,954) $ 69,952 $ 44,107 $ (143,177) $ (15,481)
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-77
<PAGE> 142

ROLF COAL AND FUEL CORP.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK,
$100 PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............................. 310 $31,000 $220,708 $251,708
Net loss................................................ -- -- (19,954) (19,954)
------ ------- -------- --------
Balance at December 31, 1993.............................. 310 31,000 200,754 231,754
Net income.............................................. -- -- 69,952 69,952
------ ------- -------- --------
Balance at December 31, 1994.............................. 310 31,000 270,706 301,706
Net income.............................................. -- -- 44,107 44,107
------ ------- -------- --------
Balance at December 31, 1995.............................. 310 31,000 314,813 345,813
Capital distribution (unaudited)........................ -- -- (30,000) (30,000)
Net loss (unaudited).................................... -- -- (15,481) (15,481)
------ ------- -------- --------
Balance at June 30, 1996 (unaudited)...................... 310 $31,000 $269,332 $300,332
===== ======= ======== ========
</TABLE>

See accompanying notes.

F-78
<PAGE> 143

ROLF COAL AND FUEL CORP.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (19,954) $ 69,952 $ 44,107 $(143,177) $ (15,481)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 49,002 46,934 67,039 45,116 92,678
Deferred income taxes.......................... (32,400) 1,800 (104,500) (51,631) (11,105)
Gain on asset disposals........................ (13,888) (7,353) (8,650) -- (3,200)
Provision for bad debts........................ 29,318 16,328 5,670 1,594 584
Changes in assets and liabilities:
Receivables.................................. 4,193 (10,419) (124,151) (62,184) 83,928
Inventories.................................. 10,630 28,452 (35,682) 44,299 (37,847)
Prepaid expenses and other current assets.... 17,777 (10,875) (13,501) (5,025) (59,743)
Trade accounts payable and accrued
liabilities................................ 12,255 87,402 (71,473) (68,530) 6,878
Accrued compensation......................... 111,095 62,199 139,343 (35,841) (248,321)
Accrued taxes, other than income............. 2,943 (263) 1,933 1,509 1,563
Accrued warranties........................... (2,347) 2,067 16,762 17,514 1,796
Deferred revenue............................. 39,361 26,923 184,758 43,965 23,014
Income taxes payable......................... (14,527) 8,980 136,004 57,142 36,304
Costs and estimated earnings in excess of
billings and billings in excess of costs
and estimated earnings..................... 56,021 (8,803) (28,237) 35,125 36,723
--------- --------- --------- --------- ---------
Net cash flow provided by (used in) operating
activities..................................... 249,479 313,324 209,422 (120,124) (92,229)
INVESTING ACTIVITIES
Purchase of property, buildings and equipment.... (16,400) (87,930) (76,995) (90,503) (178,677)
Proceeds from sale of property, buildings and
equipment...................................... 11,827 14,120 18,958 -- 3,200
Increase in other assets......................... (19,484) (2,555) (3,541) 15,930 58
--------- --------- --------- --------- ---------
Net cash used in investing activities............ (24,057) (76,365) (61,578) (74,573) (175,419)
FINANCING ACTIVITIES
Proceeds from long-term debt and capital
leases......................................... 119,918 170,687 131,414 89,302 77,755
Payments on long-term debt and capital leases.... (217,956) (199,279) (190,306) (6,593) (5,943)
Distribution to stockholders..................... -- -- -- -- (30,000)
Proceeds from note payable -- related party...... 44,136 169,397 151,662 20,884 40,428
Payment on note payable -- related party......... (49,187) (192,641) (171,881) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities..................................... (103,089) (51,836) (79,111) 103,593 82,240
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................... 122,333 185,123 68,733 (91,104) (185,408)
Cash and cash equivalents at beginning of year... 122,419 244,752 429,875 429,875 498,608
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year......... $ 244,752 $ 429,875 $ 498,608 $ 338,771 $ 313,200
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................... $ 9,866 $ 19,231 $ 9,241 $ 5,215 $ 5,921
========== ========== ========== ========== ==========
Income tax paid.................................. $ 7,405 $ 3,496 $ 6,243 $ 4,518 $ 42,827
========== ========== ========== ========== ==========
</TABLE>

See accompanying notes.

F-79
<PAGE> 144

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Rolf Coal and Fuel Corp. ("the Company") operates in one industry segment
and is primarily engaged in the installation and servicing of air conditioning
and heating systems for residential and commercial customers.

RECOGNITION OF INCOME

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within three to six months.
Nonidentifiable selling, general, and administrative expenses are charged to
income as incurred and are not allocated to Contract costs.

Trade accounts receivable includes billings on Contracts. The Company
classifies these amounts as current assets because all balances are expected to
be collected in the current year. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersions across many different
industries and geographies. The Company does not require collateral for its
receivables.

CASH EQUIVALENTS

The Company considers all highly liquid inventory investments with an
original maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.

F-80
<PAGE> 145

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:

<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Furniture and fixtures...................................................... 3-10
Machinery and equipment..................................................... 3-8
Vehicles.................................................................... 3-5
Leasehold improvements...................................................... 7-31.5
</TABLE>

Amortization of the assets under capital leases is included in depreciation
expense.

WARRANTIES

The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and labor. The Company provides an accrual for future warranty costs based upon
the relationship of prior years' sales to actual warranty costs. It is the
Company's practice to classify the entire warranty accrual as a current
liability.

ADVERTISING COSTS

Advertising costs, consisting principally of print advertising, are
expensed as incurred. Net advertising expenses for 1993, 1994 and 1995 was
$52,777, $74,114 and $75,548, respectively.

USE OF ESTIMATES

INCOME TAXES

The Company uses the liability method of accounting for income taxes as
provided in "Statement of Financial Accounting Standards No. 109." Under the
liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $29,318, $16,328 and $5,670, respectively and accounts
written off, net of recoveries were $94,738, $3,344 and $20,281, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-

F-81
<PAGE> 146

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Lived Assets and for Long-Lived Assets to Be Disposed Of," and does not believe
that adoption of this and any other newly issued pronouncements would have a
significant impact on the Company's financial statements.

2. CONTRACTS IN PROCESS

Information relative to contracts in process is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts.......................... $214,792 $118,825
Estimated earnings............................................ 200,787 114,352
-------- --------
415,579 233,177
Less applicable billings........................................ 380,454 169,815
-------- --------
$ 35,125 $ 63,362
======== ========
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts...................................... $ 37,978 $ 63,362
Billings in excess of costs and estimated earnings on
uncompleted contracts...................................... (2,853) --
-------- --------
$ 35,125 $ 63,362
======== ========
</TABLE>

Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.

3. LONG-TERM DEBT

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
------- ------------
<S> <C> <C>
Secured line of credit.......................................... $29,395 $100
</TABLE>

The Company has three secured lines of credit with a bank that aggregate
$225,000 and that expire in April 1997. The agreements are secured by
substantially all the Company's assets. At December 31, 1994 and 1995, the
Company had aggregate borrowings of $29,395 and $100, respectively, under these
agreements and these are classified as long term.

The Company can borrow at the bank's prime rate plus 2%. At December 31,
1995, the interest rate was 9.75%.

4. LEASES

Total rental expense for all operating leases was $103,396, $107,980 and
$113,348 for 1993, 1994 and 1995, respectively. The Company leases certain
office and warehouse facilities from an entity related through common ownership
and vehicles under terms of noncancelable operating lease agreements which
expire at various dates through September 1999. The building lease has an option
for renewal, in two five-year

F-82
<PAGE> 147

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

increments. Minimum rental commitments at December 31, 1995 under capital and
operating leases having an initial noncancelable term of one year or more are as
follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $35,498 $ 107,920
1997.............................................................. 5,916 91,200
1998.............................................................. -- 84,000
1999.............................................................. -- 63,000
------- ---------
41,414 $ 346,120
========
Amounts representing interest..................................... 2,477
-------
Present value of net minimum rentals (including $33,094 classified
as current)..................................................... $38,937
=======
</TABLE>

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Tools and equipment................................................ $92,442 $92,442
Less accumulated amortization...................................... 13,866 32,355
------- -------
Net property, plant and equipment under capital leases............. $78,576 $60,087
======= =======
</TABLE>

5. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 50% of total contributions by a plan member, to a maximum of 6% of the
employee's total calendar year compensation. The Company may also elect to make
discretionary contributions. The Company's matching contributions totaled
$22,237, $28,879 and $32,987 for the years ended December 31, 1993, 1994 and
1995, respectively.

6. COMMITMENTS AND CONTINGENT LIABILITIES

7. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $277,752,
$397,644 and $619,341 in 1993, 1994 and 1995, respectively.

F-83
<PAGE> 148

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. INCOME TAXES

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- ------- ---------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 4,356 $23,180 $ 132,790
State................................................ 1,040 5,510 30,710
-------- ------- ---------
5,396 28,690 163,500
Deferred:
Federal.............................................. (26,170) 1,450 (85,130)
State................................................ (6,230) 350 (19,370)
-------- ------- ---------
(32,400) 1,800 (104,500)
-------- ------- ---------
$(27,004) $30,490 $ 59,000
======== ======= =========
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................... $ 4,300 $ 2,600
Deferred revenues.............................................. 52,200 29,700
------- ---------
Deferred tax liabilities......................................... 56,500 32,300
Deferred tax assets:
Compensation and related....................................... 47,200 127,000
Reserve for bad debts.......................................... 4,400 600
Warranty reserve............................................... 2,200 6,500
------- ---------
Deferred tax assets.............................................. 53,800 134,100
------- ---------
Net deferred tax liabilities (assets)............................ $ 2,700 $(101,800)
======= =========
</TABLE>

Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely than not be realized. Accordingly, no valuation allowance has
been recorded for the years ended December 31, 1994 and 1995.

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income (loss) before
income taxes. The differences are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate.............. $(16,000) $ 34,150 $ 35,100
State income tax less applicable federal tax benefit... (2,400) 5,000 5,200
Surtax exemption....................................... 8,900 (11,750) (11,750)
Other, net............................................. (17,504) 3,090 30,450
-------- -------- --------
$(27,004) $ 30,490 $ 59,000
======== ======== ========
</TABLE>

9. RELATED PARTY TRANSACTIONS

The Company paid rental fees of $84,000, $84,000 and $84,000 at December
31, 1993, 1994 and 1995, respectively, to a related partnership, whose partners
are stockholders in the Company.

F-84
<PAGE> 149

ROLF COAL AND FUEL CORP.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

11. UNAUDITED INTERIM FINANCIAL INFORMATION

F-85
<PAGE> 150

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Brand Heating & Air Conditioning, Inc.

We have audited the accompanying balance sheets of Brand Heating & Air
Conditioning, Inc., as of December 31, 1994 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brand Heating & Air
Conditioning, Inc., at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 14, 1996

F-86
<PAGE> 151

BRAND HEATING & AIR CONDITIONING, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,384 $ 6,871 $ 23,119
Receivables:
Trade, net of allowance for doubtful accounts of
$14,950 in 1994 and $18,732 in 1995.................. 296,372 551,475 198,981
Related party.......................................... 16,479 186,985 236,620
Employee............................................... 6,202 8,572 4,853
--------- ---------- ---------
319,053 747,032 440,454
Inventories............................................... 122,904 238,853 201,187
Prepaid expenses and other current assets................. 2,931 135 67,664
--------- ---------- ---------
Total current assets.............................. 450,272 992,891 732,424
Property and equipment:
Furniture and fixtures.................................... 43,107 50,876 66,824
Machinery and equipment................................... 68,947 77,026 77,026
Vehicles.................................................. 172,029 289,175 289,175
Leasehold improvements.................................... 30,000 30,000 0
--------- ---------- ---------
314,083 447,077 433,025
Less accumulated depreciation and amortization............ (105,491) (193,728) (234,234)
--------- ---------- ---------
208,592 253,349 198,791
Other assets................................................ 7,212 11,025 13,513
--------- ---------- ---------
Total assets...................................... $ 666,076 $1,257,265 $ 944,728
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 55,772 $ 41,060 $ --
Trade accounts payable and accrued liabilities............ 115,551 171,208 142,624
Accrued compensation...................................... 35,202 38,079 95,964
Note payable to related party............................. -- 100,000 --
Current portion of long-term debt and capital leases...... 193,923 131,018 208,655
--------- ---------- ---------
Total current liabilities......................... 400,448 481,365 447,243
Long-term debt, net of current portion...................... 118,247 75,977 50,742
Stockholders' equity........................................ 147,381 699,923 446,743
--------- ---------- ---------
Total liabilities and stockholders' equity........ $ 666,076 $1,257,265 $ 944,728
========= ========= =========
</TABLE>

See accompanying notes.

F-87
<PAGE> 152

BRAND HEATING & AIR CONDITIONING, INC.

STATEMENTS OF OPERATIONS

See accompanying notes.

F-88
<PAGE> 153

BRAND HEATING & AIR CONDITIONING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992............................. 200 $1,940 $ 102,002 $ 103,942
Capital distributions.................................. -- -- (10,887) (10,887)
Net income............................................. -- -- 46,867 46,867
------ ------ --------- ---------
Balance at December 31, 1993............................. 200 1,940 137,982 139,922
Net income............................................. -- -- 7,459 7,459
------ ------ --------- ---------
Balance at December 31, 1994............................. 200 1,940 145,441 147,381
Net income............................................. -- -- 552,542 552,542
------ ------ --------- ---------
Balance at December 31, 1995............................. 200 1,940 697,983 699,923
Net loss (unaudited)................................... -- -- (253,180) (253,180)
------ ------ --------- ---------
Balance at June 30, 1996 (unaudited)..................... 200 $1,940 $ 444,803 $ 446,743
===== ====== ========= =========
</TABLE>

See accompanying notes.

F-89
<PAGE> 154

BRAND HEATING & AIR CONDITIONING, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ 46,867 $ 7,459 $ 552,542 $ 188,782 $(253,180)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 25,846 58,103 95,816 49,906 42,938
Provision for bad debts.............. 9,950 -- 18,732 -- --
(Gain) loss on asset disposals....... 3,140 -- (1,492) -- 27,580
Changes in assets and liabilities:
Receivables....................... (65,951) (160,944) (446,711) 144,576 306,578
Inventories....................... (32,253) (69,251) (115,949) (27,217) 37,666
Prepaid expenses and other current
assets.......................... -- (2,931) 2,796 (55,902) (67,529)
Trade accounts payable and accrued
liabilities..................... 39,989 88,517 40,945 21,740 (69,644)
Accrued compensation.............. 4,724 20,711 2,877 1,217 57,885
--------- --------- --------- --------- ---------
Net cash flow provided by (used in)
operating activities................. 32,312 (58,336) 149,556 323,102 82,294
INVESTING ACTIVITIES
Purchase of property and equipment..... (89,819) (161,586) (141,394) (84,385) (15,948)
Proceeds from sale of property and
equipment............................ 2,600 -- 2,500 -- --
(Increase) in other assets............. (3,000) (4,000) (4,000) (2,000) (2,500)
--------- --------- --------- --------- ---------
Net cash used in investing
activities........................... (90,219) (165,586) (142,894) (86,385) (18,448)
FINANCING ACTIVITIES
Proceeds from notes payable to related
party................................ -- -- 100,000 -- --
Payments on notes payable from related
party................................ -- -- -- -- (100,000)
Proceeds of long-term debt............. 80,125 257,370 42,520 23,868 94,000
Payments of long-term debt and capital
leases............................... (19,070) (37,242) (147,695) (171,339) (41,598)
Distributions to shareholders.......... (10,887) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities................. 50,168 220,128 (5,175) (147,471) (47,598)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... (7,739) (3,794) 1,487 89,246 16,248
Cash at beginning of year.............. 16,917 9,178 5,384 5,384 6,871
--------- --------- --------- --------- ---------
Cash at end of year.................... $ 9,178 $ 5,384 $ 6,871 $ 94,630 $ 23,119
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 6,381 $ 15,132 $ 16,140 $ 7,394 $ 5,483
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-90
<PAGE> 155

BRAND HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Brand Heating & Air Conditioning, Inc., ("the Company") operates in one
industry segment and is primarily engaged in the installation and servicing of
air conditioning and heating systems for residential and commercial customers.

RECOGNITION OF INCOME

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 3 to 18 months. Nonidentifiable
selling, general, and administrative expenses are charged to income as incurred
and are not allocated to Contract costs.

As discussed in Note 4, the Company had one long-term contract outstanding
at December 31, 1995. This contract qualifies for segmentation under SOP 81-1.
Accordingly, each billing is treated as a separate long-term contract. As of
December 31, 1995, all costs incurred have been billed and there were no
billings in excess of costs incurred on the contract.

Trade accounts receivable includes billings on the sole contract. The
Company classifies its trade accounts receivable as current assets because all
balances are expected to be collected in the current year. Except as discussed
in Note 4, concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersions across many different industries and geographies.
The Company does not require collateral for its receivables.

ADVERTISING COSTS

Advertising costs, consisting principally of direct mail advertisements,
are expensed as incurred. Net advertising expense for 1993, 1994 and 1995 was
$32,000, $31,000 and $88,000, respectively.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

F-91
<PAGE> 156

BRAND HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Long-Term Debt

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the declining-balance methods over the following
useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 5-7
Machinery and equipment....................................................... 7
Vehicles...................................................................... 5
Leasehold improvements........................................................ 39
</TABLE>

WARRANTIES

The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company provides an accrual for future
warranty costs based upon the relationship of prior years' sales to actual
warranty costs. It is the Company's practice to classify the entire warranty
accrual as a current liability.

USE OF ESTIMATES

INCOME TAXES

The shareholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and state income tax purposes. Accordingly, the
Company is not subject to federal and state income taxes.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $9,950, $0 and $18,732, respectively and accounts
written off, net of recoveries were $0, $0 and $14,950, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and

F-92
<PAGE> 157

BRAND HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

any other newly issued pronouncements would have a significant impact on the
Company's financial statements.

2. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Line of credit................................................... $135,000 $ 56,000
Various equipment loans, with interest rates of 6.45% to 11.0%,
with maturity through September 25, 1999, requiring monthly
payments of $339 to $1,292, collateralized by the respective
equipment...................................................... 177,170 150,995
-------- --------
312,170 206,995
Less current portion............................................. 193,923 131,018
-------- --------
$118,247 $ 75,977
======== ========
</TABLE>

The Company has a secured line of credit with a bank that expires June 1,
1996. Under its terms, the Company can borrow up to $150,000 at the prime rate
plus 1.5% (10.25% at December 31, 1995). The agreement is secured by accounts
receivable and inventory, and is personally guaranteed by the stockholders. The
agreement requires the Company to maintain a minimum equity base. At December
31, 1994 and 1995, the Company had borrowings of $135,000 and $56,000,
respectively, under this agreement.

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:

3. LEASES

Total rental expense for all operating leases was $12,000, $22,000 and
$25,000 for 1993, 1994 and 1995, respectively. The Company leases vehicles under
terms of noncancelable operating lease agreements which expire at various dates
through 1999. Minimum rental commitments at December 31, 1995 under operating
leases having an initial noncancellable term of one year or more are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996.............................................................. $ 55,702
1997.............................................................. 54,001
1998.............................................................. 39,019
1999.............................................................. 37,807
---------
$ 186,529
========
</TABLE>

The Company leases its office and warehouse space from its stockholders on
a month-to-month basis.

F-93
<PAGE> 158

BRAND HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. MAJOR CUSTOMERS

Approximately 45% of the Company's net revenue for 1995 was from one major
customer. Substantially all revenues under such contract were recognized in
1995. The central location has the authority for purchasing. Approximately 69%
of the accounts receivable was from this customer at December 31, 1995.

5. COMMITMENTS AND CONTINGENT LIABILITIES

6. STOCKHOLDERS' COMPENSATION

Stockholders' compensation, which consisted of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $42,000,
$45,000 and $84,000 in 1993, 1994 and 1995, respectively.

7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)

In connection with the contemplated initial public offering (see Note 9),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income (loss) for income tax purposes of
$(21,000), $(165,000), $216,000 and $200,000 for 1993, 1994, 1995 and the six
months ended June 30, 1996, respectively. Had the Company filed federal and
state income tax returns as a regular corporation for 1993, 1994, 1995 and the
six months ended June 30, 1996, income tax expense under the provisions of
Statement of Financial Accounting Standard No. 109 would have been $26,000,
$3,000, $242,000 and $(99,000), respectively.

At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and tax reporting basis of assets and liabilities. Such
deferred taxes will be provided on the cumulative temporary differences at the
date of termination of S corporation status. The effect of recognizing the
deferred taxes will be included in income from continuing operations. If the
termination of S corporation status had occurred at June 30, 1996, the deferred
tax liability would have been approximately $63,000.

8. RELATED PARTY TRANSACTIONS

The Company is involved in various related party transactions, the majority
of which involve payroll related reimbursements to Brand Electric, Inc., a
company owned by one of the board members of the Company. The Company and owner
also had various transactions. The following summarizes these transactions.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Notes receivable from owner............................................. $16,479 $186,985
Note receivable from employees.......................................... 6,202 8,572
Note payable to Brand Electric, Inc.
(unsecured and noninterest bearing)................................... -- 100,000
</TABLE>

F-94
<PAGE> 159

BRAND HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Rent expense paid to Brand Electric, Inc............................. $9,200 $9,000 $2,400
Rent expense paid to stockholder..................................... 2,400 2,400 2,400
</TABLE>

In addition, the Company reimbursed an affiliate for payroll payments made
on the Company's behalf.

9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

10. UNAUDITED INTERIM FINANCIAL INFORMATION

F-95
<PAGE> 160

REPORT OF INDEPENDENT AUDITORS

The Stockholder
Coastal Air Conditioning Service, Inc.

We have audited the accompanying balance sheets of Coastal Air Conditioning
Service, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Coastal Air Conditioning
Service, Inc. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-96
<PAGE> 161

COASTAL AIR CONDITIONING SERVICE, INC.

BALANCE SHEETS

DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 60,846 $ 100,833 $ 73,357
Receivables:
Trade, net of allowance for doubtful accounts of
$5,240 and $19,750 at December 31, 1994 and 1995,
respectively........................................ 291,159 311,055 412,264
Employee.............................................. 4,395 6,559 7,216
Other................................................. 14,443 16,562 12,917
--------- ---------- -----------
370,843 435,009 432,397
Inventories........................................... 206,075 205,944 231,485
Costs and estimated earnings in excess of billings.... 21,178 9,975 8,497
Prepaid expenses and other current assets............. 5,104 3,354 42,798
Deferred income taxes................................. 7,429 20,210 150,975
--------- ---------- -----------
Total current assets............................. 610,629 674,492 939,509
Note receivable from stockholder........................... 150,763 135,944 131,544
Property and equipment:
Machinery and equipment.................................. 152,904 188,261 188,261
Vehicles................................................. 215,644 284,524 277,842
Leasehold improvements................................... 46,024 46,024 46,024
--------- ---------- -----------
414,572 518,809 512,127
Less accumulated depreciation and amortization........... (242,844) (259,072) (279,648)
--------- ---------- -----------
171,728 259,737 232,479
Other assets............................................... 25,097 51,169 61,791
--------- ---------- -----------
Total assets..................................... $ 958,217 $1,121,342 $ 1,365,323
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Credit agreement......................................... $ 131,138 $ 82,500 $ 127,143
Trade accounts payable and accrued liabilities........... 64,027 86,588 86,613
Accrued compensation..................................... 335,000
Accrued warranties....................................... 17,822 20,875 20,356
Contributions payable to benefit plan.................... 30,000 30,000 40,000
Income taxes payable..................................... 64,009 53,805 56,081
Current portion of amounts due to stockholder............ 15,796 17,107 17,489
Current portion of long-term debt and capital leases..... 45,442 59,186 59,186
--------- ---------- -----------
Total current liabilities........................ 368,234 350,061 741,868
Due to stockholder, net of current portion................. 186,549 169,441 145,677
Long-term debt, net of current portion..................... 45,517 91,751 54,055
Capital lease obligations, net of current portion.......... 19,546 34,409 26,626
Stockholder's equity:
Common stock, par value $5 per share, 20,000 shares
authorized, 980 shares issued and outstanding......... 4,900 4,900 4,900
Additional paid-in capital............................... 54 54 54
Retained earnings........................................ 333,417 470,726 392,143
--------- ---------- -----------
Total stockholders' equity....................... 338,371 475,680 397,097
--------- ---------- -----------
Total liabilities and stockholder's equity....... $ 958,217 $1,121,342 $ 1,365,323
========= ========= =========
</TABLE>

See accompanying notes.

F-97
<PAGE> 162

COASTAL AIR CONDITIONING SERVICE, INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $2,648,484 $3,278,151 $3,824,195 $1,859,731 $2,029,336
Cost of goods sold................... 1,533,732 1,854,194 2,072,274 991,555 1,052,514
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,114,752 1,423,957 1,751,921 868,176 976,822
Selling, general and administrative
expenses........................... 910,950 1,174,933 1,504,150 684,856 1,104,759
Bad debt expense..................... 19,587 5,240 22,098 5,384 8,962
---------- ---------- ---------- ---------- ----------
Income from operations............... 184,215 243,784 225,673 177,936 (136,899)
Other income (expense):
Interest expense................... (30,314) (28,581) (29,465) (16,394) (17,692)
Other income....................... 8,095 13,828 20,937 17,151 19,638
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes....................... 161,996 229,031 217,145 178,693 (134,953)
Provision (benefit) for income taxes:
Current............................ -- 64,009 92,617 68,668 74,395
Deferred........................... 59,743 16,508 (12,781) (6,609) (130,765)
---------- ---------- ---------- ---------- ----------
59,743 80,517 79,836 62,059 (56,370)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 102,253 $ 148,514 $ 137,309 $ 116,634 $ (78,583)
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-98
<PAGE> 163

COASTAL AIR CONDITIONING SERVICE, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
COMMON STOCK $5
PAR VALUE ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992..................... 980 $4,900 $ 54 $ 82,650 $ 87,604
Net income..................................... -- -- -- 102,253 102,253
------ ------ --- -------- --------
Balance at December 31, 1993..................... 980 4,900 54 184,903 189,857
Net income..................................... -- -- -- 148,514 148,514
------ ------ --- -------- --------
Balance at December 31, 1994..................... 980 4,900 54 333,417 338,371
Net income..................................... -- -- -- 137,309 137,309
------ ------ --- -------- --------
Balance at December 31, 1995..................... 980 4,900 54 470,726 475,680
Net loss (unaudited)........................... -- -- -- (78,583) (78,583)
------ ------ --- -------- --------
Balance at June 30, 1996 (unaudited)............. 980 $4,900 $ 54 $392,143 $397,097
===== ====== ======= ======== ========
</TABLE>

See accompanying notes.

F-99
<PAGE> 164

COASTAL AIR CONDITIONING SERVICE, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- ----------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 102,253 $ 148,514 $ 137,309 $ 116,634 $ (78,583)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization....... 27,056 46,525 49,537 23,759 25,739
Provisions for loss on accounts
receivable....................... 19,587 5,240 22,098 15,709 --
Loss on asset disposals............. 7,718
Deferred tax asset.................. 59,743 16,508 (12,781) (6,609) (130,765)
Changes in assets and liabilities:
Receivables...................... (20,725) (141,232) (31,458) (136,052) (93,821)
Inventories...................... 30,880 (104,781) 131 9,112 (25,541)
Costs and estimated earnings in
excess of billings............. (6,547) (42,791) 11,203 10,275 1,478
Prepaid expenses and other
assets......................... 6,949 (200) (24,322) (17,036) (50,065)
Contributions payable to benefit
plan........................... -- 30,000 -- -- 10,000
Trade accounts payable and
accrued liabilities............ (63,943) 9,218 22,561 29,680 25
Accrued compensation............. -- 335,000
Accrued warranties............... 509 4,275 3,053 2,102 (519)
Income taxes payable............. 18,949 64,009 (10,204) 39,530 2,276
--------- ----------- --------- --------- ---------
Net cash provided by operating
activities.......................... 174,711 35,285 167,127 87,104 2,942
INVESTING ACTIVITIES
Purchase of property and equipment.... (4,649) (111,592) (100,039) (42,624) (6,200)
--------- ----------- --------- --------- ---------
Net cash used in investing
activities.......................... (4,649) (111,592) (100,039) (42,624) (6,200)
FINANCING ACTIVITIES
Proceeds from debt and credit
agreement........................... 535,733 1,078,874 686,782 318,832 278,337
Payments on debt and credit
agreement........................... (572,386) (1,077,562) (713,883) (312,643) (302,555)
--------- ----------- --------- --------- ---------
Net cash provided by (used in)
financing activities................ (36,653) 1,312 (27,101) 6,189 (24,218)
--------- ----------- --------- --------- ---------
Increase (decrease) in cash........... 133,409 (74,995) 39,987 50,669 (27,476)
Cash at beginning of year............. 2,432 135,841 60,846 60,846 100,833
--------- ----------- --------- --------- ---------
Cash at end of year................... $ 135,841 $ 60,846 $ 100,833 $ 111,515 $ 73,357
========= ========== ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................... $ 30,314 $ 28,581 $ 29,465 $ 16,394 $ 17,692
========= ========== ========= ========= =========
Income tax paid....................... $ -- $ -- $ 102,819 $ $ 48,590
========= ========== ========= ========= =========
Equipment purchase under capital
leases.............................. $ 59,212 $ -- $ 37,507 $ -- $ --
========= ========== ========= ========= =========
</TABLE>

See accompanying notes.

F-100
<PAGE> 165

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Coastal Air Conditioning Service, Inc. ("the Company") is engaged in the
installation and servicing of air conditioning and heating systems primarily for
residential customers in the Savannah, Georgia area.

REVENUE RECOGNITION

Revenues on all of the Company's heating and air conditioning installation
contracts ("Contracts") for customers are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues related to servicing are recognized upon
completion of those services.

Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within two months. Nonidentifiable
selling, general and administrative expenses are charged to operations as
incurred and are not allocated to Contract costs.

Trade accounts receivable includes billings on Contracts. The Company
classifies these amounts as current assets because all balances are expected to
be collected in the current year. Concentrations of credit risk with respect to
trade Receivables are limited to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies.

The asset, "costs and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

INVENTORIES

Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method and consist of heating and air conditioning
units ready for installation and related parts and supplies.

F-101
<PAGE> 166

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment....................................................... 8
Vehicles...................................................................... 6
Leasehold improvements........................................................ 10
</TABLE>

WARRANTIES

The Company provides a one-year warranty on parts and labor for all
construction and a two-year warranty on parts and labor for all replacement
service. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company accrues future warranty costs based
upon the relationship of prior year's sales to actual warranty costs. It is the
Company's policy to classify the entire warranty accrual as a current liability.

ADVERTISING

The Company's policy is to expense advertising costs as incurred. Amounts
paid for advertising were approximately $32,300, $24,600 and $59,100 for the
years ended December 31, 1993, 1994 and 1995.

INCOME TAXES

USE OF ESTIMATES

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $19,587, $5,240 and $22,098, respectively and accounts
written off, net of recoveries were $0, $19,587 and $7,588, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
opinions, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued opinions would have a significant impact on the Company's financial
statements.

F-102
<PAGE> 167

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. CONTRACTS IN PROGRESS

Contracts in process consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contracts........................ $136,541 $ 86,585
Estimated earnings........................................... 65,217 53,708
-------- --------
201,758 140,293
Less applicable progress billings.............................. 180,580 130,318
-------- --------
Costs and estimated earnings in excess of billings............. $ 21,178 $ 9,975
======== ========
</TABLE>

As of December 31, 1994 and 1995, there were no contracts with billings in
excess of costs and estimated earnings.

Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.

3. CREDIT AGREEMENT

The Company purchases substantially all of its inventory from a major
manufacturer of air conditioners under a credit agreement secured by such
inventory. Payment is due in three equal installments over 90 days following the
receipt of such inventory. Amounts payable under this agreement as of December
31, 1994 and 1995 were $131,138 and $82,500, respectively.

F-103
<PAGE> 168

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. LONG-TERM DEBT AND CAPITAL LEASES

Long-term debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Secured line of credit with a bank, borrowings of $50,000
available
at 9.5%........................................................ $ -- $ --
Notes payable to a bank, secured by six vehicles bearing interest
at 9.0%. Interest and principal payments of $2,120 are due
through December 1999. ........................................ -- 85,000
Note payable to a bank, secured by two vans, bearing interest at
7.25%. Interest and principal payments of $540 are due monthly
through March 1999. ........................................... 24,469 19,006
Note payable to a bank, secured by a vehicle, software, leasehold
improvements and personal guaranty of stockholder, bearing
interest at 1% above prime (8.5% at December 31, 1995).
Interest and principal payments of $1,241 are due monthly
through November 1997. ........................................ 38,044 26,060
Note payable to a bank, secured by two trucks, bearing interest
at 7.0%. Interest and principal payments of $451 are due
monthly through January 1996. ................................. 5,863 451
Notes payable, secured by two vans, with imputed interest of 10%.
Interest and principal payments of $1,693 were made through
September 1995. ............................................... 9,942 --
Note payable to an employee bearing interest at 10%. Interest and
principal payments of $1,496 were made through April 1996. .... -- 4,854
-------- --------
78,318 135,371
Less current portion............................................. (32,801) (43,620)
-------- --------
$ 45,517 $ 91,751
======== ========
</TABLE>

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:

F-104
<PAGE> 169

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The Company leases certain equipment and vehicles under capital leases.
Future lease payments for the capital lease obligations at December 31, 1995 are
as follows:

<TABLE>
<S> <C>
1996.............................................................. $ 20,395
1997.............................................................. 17,718
1998.............................................................. 8,175
1999.............................................................. 8,175
2000.............................................................. 3,581
--------
Total minimum lease payments...................................... 58,044
Less amount representing interest................................. (8,069)
--------
Present value of net minimum lease payments....................... 49,975
Less current portion.............................................. (15,566)
--------
Long-term capital lease obligations............................... $ 34,409
========
</TABLE>

Equipment with a cost of $59,212 and $96,719 and accumulated amortization
of $19,125 and $31,227 related to these capital leases is included in property
and equipment as of December 31, 1994 and 1995, respectively.

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheet for long-term debt and capital
lease obligations approximate fair value.

4. OPERATING LEASES

Total rental expense for all operating leases was $40,500, $50,502 and
$60,074 for 1993, 1994 and 1995, respectively. The Company leases certain
equipment and vehicles under terms of noncancelable operating lease agreements
which expire at various dates through January 2000 and have an initial
noncancelable term of one year or more. Minimum rental commitments at December
31, 1995 under operating leases are as follows:

<TABLE>
<CAPTION>
OPERATING
LEASES
-------
<S> <C>
1996............................................................... $20,693
1997............................................................... 20,142
1998............................................................... 5,211
-------
$46,046
=======
</TABLE>

5. EMPLOYEE BENEFIT PLANS

6. COMMITMENTS AND CONTINGENT LIABILITIES

The Company has guaranteed a $314,266 personal loan of its stockholder with
a bank dated January 1994 and due January 2004.

F-105
<PAGE> 170

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. STOCKHOLDER'S COMPENSATION

Stockholder's compensation, consisting of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $54,000,
$58,000 and $150,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.

8. INCOME TAXES

Income tax provision (benefit) expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $52,650 $ 77,233
State.................................................. -- 11,359 15,384
------- ------- --------
-- 64,009 92,617
Deferred:
Federal and State...................................... 59,743 16,508 (12,781)
------- ------- --------
$59,743 $80,517 $ 79,836
======= ======= ========
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized overhead........................................... $(21,594) $(11,859)
Other.......................................................... (3,037) (8,351)
-------- --------
Deferred tax liabilities......................................... (24,631) (20,210)
Deferred tax assets:
Bad debt reserve............................................... 1,989 7,496
Passive activity loss carryforwards............................ 9,490 9,490
Other.......................................................... 20,581 23,434
-------- --------
Deferred tax assets.............................................. 32,060 40,420
-------- --------
Net deferred tax assets.......................................... $ 7,429 $ 20,210
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $55,079 $77,871 $73,829
State income tax.......................................... -- 11,520 10,892
Other, net................................................ 4,664 (8,874) (4,885)
------- ------- -------
$59,743 $80,517 $79,836
======= ======= =======
</TABLE>

F-106
<PAGE> 171

COASTAL AIR CONDITIONING SERVICE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. RELATED PARTY TRANSACTIONS

The Company has a note receivable from its stockholder which accrues
interest at 6%. Amounts receivable under this note were $150,763 and $135,944 at
December 31, 1994 and 1995, respectively.

The Company's note payable to its stockholder bears interest at 8% and is
payable through January 2004. Amounts due under this note were $202,345 and
$186,548 at December 31, 1994 and 1995, respectively. The aggregate amounts of
annual principal maturities are $17,107, $18,527, $20,065, $21,730, $23,534 and
$85,585 for 1996, 1997, 1998, 1999, 2000 and thereafter, respectively.

The Company leases its office and warehouse facility from its stockholder.
Rental payments of $40,500, $40,400 and $40,875 related to this lease were made
in the years ended December 31, 1993, 1994 and 1995, respectively. Under the
terms of this lease, the Company paid property taxes related to the lease
facilities of $3,500, $3,800 and $3,600 in the years ended December 31, 1993,
1994 and 1995, respectively.

10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

11. UNAUDITED INTERIM FINANCIAL INFORMATION

The accompanying balance sheet as of June 30, 1996 and statements of
operations and cash flows for the six months ended June 30, 1995 and 1996 have
been prepared by management and are unaudited. The interim financial statements
include all adjustments, (consisting of normal recurring accruals) considered
necessary for a fair presentation of the interim results.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from the interim financial statements. The interim financial
statements should be read in conjunction with the audited financial statements
appearing herein. The results of the interim periods may not be indicative of
operating results for the full year.

F-107
<PAGE> 172

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Contractor Success Group, Inc.

We have audited the accompanying balance sheets of Contractor Success
Group, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Contractor Success Group,
Inc. at December 31, 1994 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-108
<PAGE> 173

CONTRACTOR SUCCESS GROUP, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 83,714 $ 218,228 $ 135,939
Receivables:
Current portion of notes receivable, net of allowance
for doubtful accounts of $79,216 in 1995, $56,387 at
June 30, 1996........................................ 270,795 231,232 224,161
Trade.................................................. 41,688 69,365 240,883
Related party.......................................... 204,456 389,688 47,950
Employee............................................... 18,000 149 149
Other.................................................. -- 10,000 --
-------- ---------- ----------
534,939 700,434 513,143
Prepaid expenses and other current assets................. 7,421 5,573 66,428
-------- ---------- ----------
Total current assets........................................ 626,074 924,235 715,510
Notes receivable, net of current portion.................... 309,725 310,294 300,806
Property and equipment:
Furniture and fixtures.................................... 68,773 86,656 93,402
Equipment................................................. -- 100,000 100,000
-------- ---------- ----------
68,773 186,656 193,402
Less accumulated depreciation............................. (22,932) (45,267) (70,438)
-------- ---------- ----------
45,841 141,389 122,964
Other assets................................................ 13,572 34,773 35,541
-------- ---------- ----------
Total assets...................................... $995,212 $1,410,691 $1,174,821
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ -- $ 251,534 $ --
Trade accounts payable and accrued liabilities............ 150,435 268,613 155,529
Accounts payable to related parties....................... 8,233 111,346 --
Accrued compensation...................................... 31,060 34,672 32,680
Current portion of capital leases......................... 3,619 5,743 --
-------- ---------- ----------
Total current liabilities................................... 193,347 671,908 188,209
Capital lease obligations, less current portion............. 2,216 6,000 --
Other liabilities........................................... 14,677 1,624 --
-------- ---------- ----------
Total liabilities........................................... 210,240 679,532 188,209
Stockholders' equity:
Common stock, $1 par value; authorized, issued and
outstanding -- 5,000 shares............................ 5,000 5,000 5,000
Retained earnings......................................... 779,972 726,159 981,612
-------- ---------- ----------
Total stockholders' equity........................ 784,972 731,159 986,612
-------- ---------- ----------
Total liabilities and stockholders' equity........ $995,212 $1,410,691 $1,174,821
======== ========= =========
</TABLE>

See accompanying notes.

F-109
<PAGE> 174

CONTRACTOR SUCCESS GROUP, INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue.......................... $2,414,497 $2,740,976 $3,229,558 $1,570,089 $1,693,636
Cost of goods sold................... 466,196 414,938 615,245 263,124 300,528
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,948,301 2,326,038 2,614,313 1,306,965 1,393,108
Selling, general and administrative
expenses........................... 1,171,461 1,453,813 1,260,005 514,537 732,524
Bad debt expense..................... 53,358 2,611 79,216 22,829 --
---------- ---------- ---------- ---------- ----------
Income from operations............... 723,482 869,614 1,275,092 769,599 660,584
Other income (expense):
Interest expense................... (1,015) (1,851) (10,196) (1,575) (7,331)
Interest income.................... 119,019 106,388 125,491 50,667 69,200
Other income....................... 56,263 -- 7,800 1,082 13,000
---------- ---------- ---------- ---------- ----------
174,267 104,537 123,095 50,174 74,869
---------- ---------- ---------- ---------- ----------
Net income........................... $ 897,749 $ 974,151 $1,398,187 $ 819,773 $ 735,453
========= ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-110
<PAGE> 175

CONTRACTOR SUCCESS GROUP, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK,
$1 PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................... 5,000 $5,000 $ 731,044 $ 736,044
Capital distributions............................... -- -- (972,972) (972,972)
Net income.......................................... -- -- 897,749 897,749
------ ------ ----------- -----------
Balance at December 31, 1993.......................... 5,000 5,000 655,821 660,821
Capital distributions............................... -- -- (850,000) (850,000)
Net income.......................................... -- -- 974,151 974,151
------ ------ ----------- -----------
Balance at December 31, 1994.......................... 5,000 5,000 779,972 784,972
Capital distributions............................... -- -- (1,452,000) (1,452,000)
Net income.......................................... -- -- 1,398,187 1,398,187
------ ------ ----------- -----------
Balance at December 31, 1995.......................... 5,000 5,000 726,159 731,159
Capital distributions (unaudited)................... -- -- (480,000) (480,000)
Net income (unaudited).............................. -- -- 735,453 735,453
------ ------ ----------- -----------
Balance at June 30, 1996 (unaudited).................. 5,000 $5,000 $ 981,612 $ 986,612
===== ====== ========== ==========
</TABLE>

See accompanying notes.

F-111
<PAGE> 176

CONTRACTOR SUCCESS GROUP, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------ ---------------------
1993 1994 1995 1995 1996
-------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $897,749 $ 974,151 $ 1,398,187 $ 819,773 $ 735,453
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 9,115 12,249 22,335 3,153 25,973
Provisions for loss on notes
receivable...................... -- -- 79,216 -- --
Changes in assets and liabilities:
Receivables..................... (10,074) (19,908) (19,826) (95,196) (161,518)
Prepaid expenses and other
current assets................ (3,009) 1,407 1,848 5,983 (60,855)
Notes receivable................ 32,514 20,663 (40,222) 81,736 16,559
Trade accounts payable and
accrued liabilities........... 54,960 78,527 118,178 (13,156) (113,084)
Accrued compensation............ 5,457 (9,115) 3,612 (15,216) (1,992)
Other liabilities............... 8,069 4,810 (11,519) (13,865) (3,158)
-------- ----------- ----------- --------- ---------
Net cash flow provided by operating
activities......................... 994,781 1,062,784 1,551,809 773,212 437,378
INVESTING ACTIVITIES
Purchase of property and equipment... (31,666) (5,975) (105,998) (99,977) (6,746)
Increase in other assets............. (2,341) (4,294) (21,201) (20,010) (1,570)
-------- ----------- ----------- --------- ---------
Net cash used in investing
activities......................... (34,007) (10,269) (127,199) (119,987) (8,316)
FINANCING ACTIVITIES
Proceeds from short-term debt........ -- -- 250,000 50,000 --
Payments on short-term debt.......... -- -- -- -- (250,000)
Payments of capital leases........... (1,431) (3,020) (5,977) (7,242) (11,743)
Accounts receivable and accounts
payable to related parties......... 17,292 (160,679) (82,119) (15,349) 230,392
Distributions to shareholders........ (972,972) (850,000) (1,452,000) (355,000) (480,000)
-------- ----------- ----------- --------- ---------
Net cash used in financing
activities......................... (957,111) (1,013,699) (1,290,096) (327,591) (511,351)
-------- ----------- ----------- --------- ---------
Increase (decrease) in cash and cash
equivalents........................ 3,663 38,816 134,514 325,634 (82,289)
Cash and cash equivalents at
beginning of year.................. 41,235 44,898 83,714 83,714 218,228
-------- ----------- ----------- --------- ---------
Cash and cash equivalents at end of
year............................... $ 44,898 $ 83,714 $ 218,228 $ 409,348 $ 135,939
======== ========== ========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................ $ 1,015 $ 1,851 $ 8,662 $ 1,575 $ 8,865
======== ========== ========== ========= =========
Income tax paid...................... $ -- $ -- $ -- $ -- $ --
======== ========== ========== ========= =========
Purchase of equipment through capital
leases............................. $ 5,070 $ 3,559 $ 11,885 $ 14,056 $ --
======== ========== ========== ========= =========
</TABLE>

See accompanying notes.

F-112
<PAGE> 177

CONTRACTOR SUCCESS GROUP, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Contractor Success Group, Inc. ("the Company") provides management
consulting, marketing services, reporting mechanisms, lead generation tools,
sales techniques, implementation materials and customized training for its
member companies in the heating, ventilation and air conditioning contracting
("HVAC") industry. The Company currently has over 270 members throughout the
United States and Canada.

RECOGNITION OF INCOME

Initial membership fees, less a provision for estimated uncollectible
amounts, are recognized on the date the membership agreement is signed given
that the fees are nonrefundable, and all obligations have been substantially
performed by the Company. Initial membership fees included in net revenue
totaled $1,071,000, $1,120,000 and $900,000 during 1993, 1994 and 1995,
respectively.

Quarterly dues, less a provision for estimated uncollectible amounts, are
recognized in the same period the services and obligations are performed.

Revenue from sales of copyrighted literature is recognized on the date of
sale.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable, Notes Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts
receivable, notes receivable and accounts payable approximate fair value.

Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for capital lease obligations
approximate fair value.

NOTES RECEIVABLE

Notes receivable are accepted from members who desire to finance a portion
of their initial membership fee. The original principal balance generally does
not exceed $15,000 and the notes typically involve a three-year term, accrue
interest at 18% and are payable in equal monthly installments of principal and
interest. The notes are periodically reviewed for collectibility and reserves
are established at the time it appears that collectibility is uncertain.

F-113
<PAGE> 178

CONTRACTOR SUCCESS GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $53,358, $2,611 and $79,216, respectively and accounts
written off, net of recoveries were $0, $0 and $79,216, respectively.

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation is
provided on the straight-line method over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 3-7
Equipment..................................................................... 7
</TABLE>

Depreciation expense totaled $9,114, $12,249 and $22,335 during 1993, 1994
and 1995, respectively.

INTANGIBLE AND OTHER ASSETS

Intangible assets, included in other assets, represent the cost of
organization, copyrights, trademarks, and other intangible assets less
accumulated amortization. Amortization is provided on the straight-line method
over five to 15 years. The remaining other assets represent amounts on deposit.
The carrying values of intangible and other assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Copyrights......................................................... $10,505 $11,405
Trademarks......................................................... 2,885 6,883
Other intangible assets............................................ 1,500 19,500
Deposits........................................................... 2,000 2,000
------- -------
16,890 39,788
Less accumulated amortization (3,318) (5,015)
------- -------
$13,572 $34,773
======= =======
</TABLE>

USE OF ESTIMATES

INCOME TAXES

The stockholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and state income tax purposes. Accordingly, the
Company is not subjected to income taxes.

NEWLY ISSUED ACCOUNTING STANDARDS

F-114
<PAGE> 179

CONTRACTOR SUCCESS GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SHORT-TERM DEBT

During May 1995, the Company secured a line of credit with a bank that
expired May 1, 1996. Based on its terms, the Company could borrow up to $500,000
at a variable rate of interest. The agreement is secured by the notes and
accounts receivable balances of the Company with the Company's stockholders
acting as personal guarantors.

At December 31, 1995, the Company had borrowings of $250,000 and accrued
interest expense of $1,534 in accordance with this agreement. The Company paid
$6,156 of interest during 1995 at a weighted-average interest rate of 9.25%.

At May 1, 1996, the bank began renewing the line of credit on a monthly
basis.

3. LEASES

Total rental expense for all operating leases was $82,798, $82,798 and
$58,036 during 1993, 1994 and 1995, respectively. Portions of this rental
expense totaling $545, $40,427 and $26,175 during 1993, 1994 and 1995,
respectively, were reimbursed by related parties based on allocations using
percentages of total occupancy. The Company leases office facilities under terms
of a noncancelable operating lease agreement which expires during 1997. Minimum
rental commitments at December 31, 1995 under capital and operating leases
having an initial noncancelable term of one year or more are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $ 7,370 $ 58,620
1997.............................................................. 5,192 56,751
1998.............................................................. 1,652 --
------- ---------
14,214 $ 115,371
========
Amounts representing interest..................................... (2,471)
-------
Present value of net minimum rentals (including $5,743 classified
as current)..................................................... $11,743
=======
</TABLE>

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Furniture and fixtures............................................. $10,361 $22,246
Less accumulated amortization...................................... 6,234 11,562
------- -------
Net property, plant and equipment under capital leases............. $ 4,127 $10,684
======= =======
</TABLE>

Amortization of the assets under capital leases is included in depreciation
expense.

4. COMMITMENTS AND CONTINGENT LIABILITIES

The Company is a party to various of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position or results of operations of the Company.

F-115
<PAGE> 180

CONTRACTOR SUCCESS GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' COMPENSATION

Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $579,231,
$400,000 and $300,000 during 1993, 1994 and 1995, respectively.

Capital distributions to stockholders totaled $972,972, $850,000 and
$1,452,000 during 1993, 1994 and 1995, respectively.

6. INCOME TAXES

The Company is an S corporation; accordingly, income tax liabilities are
the responsibility of the respective owners. Under these provisions, the Company
generally does not pay corporate income taxes; rather the income or loss is
allocated to each stockholder for inclusion in their respective income tax
returns. Because of this practice, provisions for income taxes and deferred tax
assets and liabilities of these taxable entities have not been reflected in
these financial statements.

PRO FORMA INCOME TAX INFORMATION (UNAUDITED)

As discussed previously in this note, the Company operates under Subchapter
S of the Internal Revenue Code and is not subject to corporate federal income
tax. In connection with the contemplated initial public offering (see Note 8),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income for income tax purposes of
approximately $899,000, $978,000, $1,414,000 and $758,000 for 1993, 1994, 1995
and the six months ended June 30, 1996, respectively. Had the Company filed
federal and state income tax returns as a regular corporation for 1993, 1994,
1995 and the six months ended June 30, 1996, income tax expense under the
provisions of Financial Accounting Standard No. 109 would have been
approximately $342,000, $372,000, $537,000 and $281,000, respectively.

At the date of termination of S corporation status, the Company will be
required to provide for a deferred tax asset for cumulative temporary
differences between financial reporting and tax reporting. Such deferred taxes
will be recognized on the cumulative temporary difference at the date of
termination of S corporation status. The effect of recognizing the deferred
taxes will be included in income from continuing operations. If the termination
of S corporation status had occurred at June 30, 1996, the deferred tax asset
would have been approximately $25,000.

7. RELATED PARTY TRANSACTIONS

During 1995, the Company purchased certain computer equipment for $100,000
from a company owned by one of the stockholders. The Company leases this
equipment to various other companies in which the same stockholder has ownership
interests. The Company received rental fees of $7,500 during 1995 from these
lease agreement.

8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

F-116
<PAGE> 181

CONTRACTOR SUCCESS GROUP, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. UNAUDITED INTERIM FINANCIAL INFORMATION

The statements of income and cash flows for the six months ended June 30,
1995 and 1996 (interim financial statements) have been prepared by management
and are unaudited. The interim financial statements include all adjustments,
consisting of only normal recurring adjustments necessary for a fair
presentation of the interim results.

F-117
<PAGE> 182

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Arrow Heating & Air Conditioning, Inc.

We have audited the accompanying balance sheets of Arrow Heating & Air
Conditioning, Inc. as of December 31, 1994 and 1995, and the related statements
of income, stockholders' equity, and cash flows for the period from January 29,
1993 (date operations commenced) through December 31, 1993, and the years ended
December 31, 1994 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arrow Heating & Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from January 29, 1993 (date
operations commenced) through December 31, 1993 and the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-118
<PAGE> 183

ARROW HEATING & AIR CONDITIONING, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- ----------
1994 1995 1996
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $126,635 $ 64,080 $ 103,184
Receivables:
Trade.................................................... 174,709 159,862 228,572
Other.................................................... 3,730 49,819 31,435
-------- -------- ----------
178,439 209,681 260,007
Inventories................................................. 143,308 231,246 272,030
Prepaid expenses and other current assets................... 5,214 11,436 48,454
-------- -------- ----------
Total current assets................................ 453,596 516,443 683,675
Property and equipment:
Machinery and equipment..................................... 56,106 158,408 183,732
Vehicles.................................................... 150,712 216,203 279,202
Leasehold improvements...................................... 3,495 14,050 14,050
-------- -------- ----------
210,313 388,661 476,984
Less accumulated depreciation and amortization.............. (23,793) (78,941) (118,293)
-------- -------- ----------
186,520 309,720 358,691
Other assets.................................................. 9,398 4,845 3,800
-------- -------- ----------
Total assets........................................ $649,514 $831,008 $1,046,166
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities........ $127,352 $132,706 $ 187,373
Due to related parties...................................... -- 2,400 180,972
Accrued compensation........................................ 15,454 23,866 61,097
Accrued taxes, other than income............................ 20,568 29,430 17,600
Accrued warranties.......................................... 22,501 16,009 16,009
Deferred revenue............................................ 32,481 26,710 22,469
Related Party Notes......................................... 40,000
Current portion of long-term debt and capital lease
obligations.............................................. 59,943 66,180 140,945
-------- -------- ----------
Total current liabilities........................... 318,299 294,901 626,465
Long-term debt, net of current portion........................ 132,283 104,467 75,149
Capital lease obligations, less current portion............... -- 26,406 21,717
Deferred credit............................................... 12,819 -- --
Stockholders' equity:
Common stock, no par value, 4,500 shares authorized, 100
shares issued and outstanding............................ 10,000 10,000 10,000
Nonvoting common stock, no par value, 4,500 shares
authorized,
100 shares issued and outstanding........................ -- -- --
Retained earnings........................................... 176,113 395,234 312,835
-------- -------- ----------
Total stockholders' equity.......................... 186,113 405,234 322,835
-------- -------- ----------
Total liabilities and stockholders' equity.......... $649,514 $831,008 $1,046,166
======== ======== =========
</TABLE>

See accompanying notes.

F-119
<PAGE> 184

ARROW HEATING & AIR CONDITIONING, INC.

STATEMENTS OF INCOME

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 29,
1993 (DATE
OPERATIONS
COMMENCED) SIX MONTHS ENDED JUNE
THROUGH YEAR ENDED DECEMBER 31, 30,
DECEMBER 31, ----------------------- -----------------------
1993 1994 1995 1995 1996
------------ ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................ $906,693 $1,968,756 $3,228,359 $1,389,869 $1,993,696
Cost of goods sold.................. 503,322 1,324,454 2,127,976 1,006,699 1,235,182
------------ ---------- ---------- ---------- ----------
Gross margin........................ 403,371 644,302 1,100,383 383,170 758,514
Selling, general and administrative
expenses.......................... 315,519 472,722 768,748 361,411 534,443
Bad debt expense.................... 446 252 505 735 1,569
------------ ---------- ---------- ---------- ----------
Income from operations.............. 87,406 171,328 331,130 21,024 222,502
Other income (expense):
Interest expense.................. (11,554) (14,854) (21,419) (10,513) (10,929)
Interest income................... 1,253 1,819 1,811 633 339
Other income (expense)............ 16,226 4,989 (171) 533 1,855
------------ ---------- ---------- ---------- ----------
5,925 (8,046) (19,779) (9,347) (8,735)
------------ ---------- ---------- ---------- ----------
Net income.......................... $ 93,331 $ 163,282 $ 311,351 $ 11,677 $ 213,767
========== ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-120
<PAGE> 185

ARROW HEATING & AIR CONDITIONING, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
NONVOTING
COMMON COMMON
STOCK, STOCK, NO PAR
NO PAR VALUE VALUE
---------------- --------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of stock for initial capital
contribution.............................. 100 $10,000 -- $ -- $ -- $ 10,000
Capital distributions..................... -- -- -- -- (24,500) (24,500)
Net income................................ -- -- -- -- 93,331 93,331
------ ------- ------ ------ -------- --------
Balance at December 31, 1993................ 100 10,000 -- -- 68,831 78,831
Capital distributions..................... -- -- -- -- (56,000) (56,000)
Net income................................ -- -- -- -- 163,282 163,282
------ ------- ------ ------ -------- --------
Balance at December 31, 1994................ 100 10,000 -- -- 176,113 186,113
Capital distributions..................... -- -- -- -- (92,230) (92,230)
Stock dividend............................ -- -- 100 -- -- --
Net income................................ -- -- -- -- 311,351 311,351
------ ------- ------ ------ -------- --------
Balance at December 31, 1995................ 100 10,000 100 -- 395,234 405,234
Net income (unaudited).................... -- -- -- -- 213,767 213,767
Distributions (unaudited)................. -- -- -- -- (296,166) (296,166)
------ ------- ------ ------ -------- --------
Balance at June 30, 1996 (unaudited)........ 100 $10,000 100 $ -- $312,835 $322,835
===== ======= ===== ====== ======== ========
</TABLE>

See accompanying notes.

F-121
<PAGE> 186

ARROW HEATING & AIR CONDITIONING, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 29,
1993 (DATE
OPERATIONS
COMMENCED) YEAR ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- ---------------------
1993 1994 1995 1995 1996
------------ --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................. $ 93,331 $ 163,282 $ 311,351 $ 11,677 $ 213,767
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ (2,135) 16,574 49,381 18,865 39,351
Provisions for loss on (recoveries of)
accounts receivable................... 446 252 505 -- --
Gain on asset disposals.................. -- (4,062) -- -- --
Changes in assets and liabilities:
Receivables........................... (6,296) (96,956) (31,747) (78,269) (50,326)
Inventories........................... (9,245) (82,413) (87,938) (34,793) (40,784)
Prepaid expenses and other current
assets.............................. (2,888) 9,467 (6,222) (10,153) (37,018)
Trade accounts payable and other
accrued liabilities................. (59,367) 100,155 5,354 131,599 54,667
Accrued compensation.................. 1,213 7,948 8,412 38,974 37,231
Accrued taxes, other than income...... (1,898) 12,349 8,862 2,940 (11,830)
Accrued warranties.................... 8,346 14,155 (6,492) 7,285 --
Deferred revenue...................... 6,773 25,708 (5,771) (32,481) (4,241)
------------ --------- --------- --------- ---------
Net cash provided by operating
activities............................... 28,280 166,459 245,695 55,644 200,817
INVESTING ACTIVITIES
Purchase of property and
equipment................................ (5,926) (134,869) (140,413) (102,212) (88,323)
Proceeds from sale of property and
equipment................................ -- 5,700 483 -- --
Purchase of business, net of cash acquired
of $63,753............................... (8,247) -- -- -- --
Other deferred credits..................... 65,350 -- -- -- 1,045
Increase in other assets................... -- -- (1,999) -- --
------------ --------- --------- --------- ---------
Net cash provided by (used in) investing
activities............................... 51,177 (129,169) (141,929) (102,212) (87,278)
FINANCING ACTIVITIES
Proceeds of long-term debt................. 61,081 79,621 215,378 78,105 73,617
Payments of long-term debt and capital
lease obligations........................ (13,916) (36,398) (289,469) (30,123) (32,858)
Due to related parties..................... -- -- -- 2,400 180,972
Distributions to shareholders.............. (24,500) (56,000) (92,230) (32,462) (296,166)
------------ --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................... 22,665 (12,777) (166,321) 17,920 (74,435)
------------ --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 102,122 24,513 (62,555) (28,648) 39,104
Cash and cash equivalents at beginning of
year..................................... -- 102,122 126,635 126,635 64,080
------------ --------- --------- --------- ---------
Cash and cash equivalents at end of year... $102,122 $ 126,635 $ 64,080 $ 97,987 $ 103,184
========== ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.............................. $ 11,554 $ 14,854 $ 21,419 $ 10,513 $ 9,928
========== ========= ========= ========= =========
Purchase of equipment through capital
leases and financing arrangements........ $ 15,213 $ 56,625 $ 38,918 $ 17,382 $ --
========== ========= ========= ========= =========
</TABLE>

See accompanying notes.

F-122
<PAGE> 187

ARROW HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. ORGANIZATION AND NATURE OF OPERATIONS

ORGANIZATION

Arrow Heating & Air Conditioning, Inc. (the Company) was incorporated in
December 1992. On January 29, 1993, the Company commenced operations through the
acquisition of a business accounted for as a purchase for $72,000. The fair
value of the assets purchased was $181,221, net of cash acquired of $63,753, and
liabilities of $172,974 were assumed.

NATURE OF OPERATIONS

The Company operates in one industry segment and is primarily engaged in
the installation and servicing of air conditioning and heating systems for
residential customers.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECOGNITION OF INCOME

Revenues on the Company's heating and air conditioning installation,
service and maintenance are recognized upon completion of the services.

Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.

CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

F-123
<PAGE> 188

ARROW HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories consist
of:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Supplies and materials.......................................... $ 61,474 $113,162
Finished goods (primarily heating and air
conditioning units)........................................... 81,834 118,084
-------- --------
$143,308 $231,246
======== ========
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:

<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Machinery and equipment.................................................... 3 to 10
Vehicles................................................................... 3 to 8
Leasehold improvements..................................................... 3 to 10
</TABLE>

WARRANTIES

The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts.
The Company provides an accrual for future warranty costs based upon the
relationship of sales to actual warranty costs.

ADVERTISING COSTS

The Company expenses advertising costs as incurred. During 1993, 1994 and
1995, the Company expensed $18,500, $55,800 and $79,700 in advertising costs.

USE OF ESTIMATES

INCOME TAXES

The stockholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and Wisconsin state income tax purposes.
Accordingly, the Company is not subject to federal or state income taxes.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

For the period January 29, 1993 (date operations commenced), through
December 31, 1993, and the years ended December 31, 1994 and December 31, 1995
amounts charged to bad debt expense totaled $446, $252 and $505, respectively
and accounts written off, net of recoveries were $446, $252 and $505,
respectively.

F-124
<PAGE> 189

ARROW HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

STOCK DIVIDEND

On January 1, 1995, the Board of Directors declared a stock dividend of one
share of nonvoting common stock for each outstanding share of common stock. The
number of shares in the accompanying financial statements have been
retroactively adjusted to reflect the stock dividend.

3. LONG-TERM DEBT

Long-term debt consists of:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Vehicle and equipment loans...................................... $123,476 $155,009
Note payable to the Racine County Economic Development
Corporation, bearing interest at 7%............................ 31,333 --
Mortgage loan with the Small Business Association................ 34,648 --
Subordinated related party note payable.......................... 40,000 --
Other............................................................ 2,769 6,976
-------- --------
232,226 161,985
Less current portion............................................. 59,943 57,518
-------- --------
$172,283 $104,467
======== ========
</TABLE>

The Company has a line of credit with a bank that expires December 19,
1996. Under its terms, the Company can borrow up to $200,000 at the prime rate
(8.5% at December 31, 1995) plus 1%. The agreement is secured by substantially
all of the Company's assets. At December 31, 1994 and 1995, the Company had no
borrowings under this agreement. Payment of any outstanding borrowings is
personally guaranteed by the stockholders of the Company.

The Company has various vehicle and equipment loans from a bank that mature
through December 1999. The loans are secured by the related vehicles and
equipment, and require monthly principal payments of $4,000 plus interest at the
prime rate less 0.5% and monthly payments of $413, including principal and
interest at the prime rate plus 1%.

During the period from January 29, 1993 through September 29, 1995, the
Company had a note payable of $40,000 due to an immediate family member of a
stockholder, bearing interest at 9.5%. The related interest expense recognized
by the Company was $3,500, $3,800 and $3,000 in 1993, 1994 and 1995,
respectively.

It was not practicable to estimate the fair market value of the Company's
long-term debt securities because of a lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs.

F-125
<PAGE> 190

ARROW HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:

4. LEASES

Total rental expense for all operating leases was $19,217, $22,804 and
$26,600 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities under terms of noncancelable operating lease agreements
which expire at various dates through January 1999. Minimum rental commitments
at December 31, 1995 under capital and operating leases having an initial
noncancelable term of one year or more are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $11,723 $26,917
1997.............................................................. 11,723 23,040
1998.............................................................. 11,723 23,040
1999.............................................................. 6,404 1,920
------- ---------
41,573 $74,917
=======
Amounts representing interest..................................... 6,505
-------
Present value of net minimum rentals (including $8,662 classified
as current)..................................................... $35,068
=======
</TABLE>

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ -------
<S> <C> <C>
Machinery and equipment............................................. $ -- $38,918
Less accumulated amortization....................................... -- 3,084
------ -------
Net equipment under capital leases.................................. $ -- $35,834
====== =======
</TABLE>

Amortization of the assets under capital leases is included in depreciation
expense.

5. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, multiples of 1%
to 20% of total compensation, not to exceed the maximum contributions
established annually by the Internal Revenue Service. Matching contributions are
made by the Company equal to 25% of total contributions by a plan member, to a
maximum of 2.5% of the employee's total calendar year compensation. At its
discretion, the Company may make additional contributions. The Company's
contributions totaled $6,500, $9,978 and $13,200 for 1993, 1994 and 1995,
respectively.

F-126
<PAGE> 191

ARROW HEATING & AIR CONDITIONING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. CONTINGENT LIABILITIES

7. STOCKHOLDERS' COMPENSATION

Stockholder's compensation, which consisted of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $52,239,
$59,900 and $197,321 in 1993, 1994 and 1995, respectively.

8. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)

In connection with the contemplated initial public offering (see Note 9),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income for income tax purposes of $68,000,
$128,300, $244,900 and $143,900 for 1993, 1994, 1995 and the six months ended
June 30, 1996, respectively. Had the Company filed federal and state income tax
returns as a regular corporation for 1993, 1994, 1995 and the six months ended
June 30, 1996, income tax expense under the provisions of Financial Accounting
Standards No. 109 would have been $25,200, $56,700, $122,500 and $75,100,
respectively.

At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and income tax reporting bases of assets and liabilities.
Such deferred taxes will be based on the cumulative temporary differences at the
date of termination of S corporation status. The effect of recognizing the
deferred taxes will be included in income from continuing operations. If the
termination of S corporation status had occurred at June 30, 1996, the net
deferred tax liability would have been approximately $62,700.

9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

10. UNAUDITED INTERIM FINANCIAL INFORMATION

The balance sheet as of June 30, 1996 and the statements of income and cash
flows for the six months ended June 30, 1995 and 1996 (interim financial
statements) have been prepared by management and are unaudited. The interim
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the interim results.

F-127
<PAGE> 192

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Air Experts, a United Services Co., Inc.

We have audited the accompanying balance sheets of Air Experts, a United
Services Co., Inc. as of December 31, 1994 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Air Experts, A United
Services Co., Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-128
<PAGE> 193

AIR EXPERTS, A UNITED SERVICES CO., INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 15,368 $ 76,463 $ 51,121
Receivables:
Trade, net of allowance for doubtful accounts of
$1,534 in 1994, $760 in 1995, and $-0- in 1996..... 37,316 54,708 118,844
Employees............................................ 1,210 521 350
Other................................................ 2,936 10,099 37,180
-------- -------- -----------
41,462 65,328 156,374
Inventories............................................. -- 68,241 103,629
Deferred income taxes................................... 37,051 30,998 43,888
Prepaid expenses and other current assets............... 23,291 37,930 170,355
-------- -------- -----------
Total current assets............................ 117,172 278,960 525,367
Property, buildings and equipment:
Furniture and fixtures.................................. 8,931 8,931 16,567
Machinery and equipment................................. 61,216 71,677 153,648
Vehicles................................................ 17,473 2,394 70,368
Leasehold improvements.................................. 17,893 17,285 26,582
-------- -------- -----------
105,513 100,287 267,165
Less accumulated depreciation and amortization.......... (28,451) (45,648) (68,885)
-------- -------- -----------
77,062 54,639 198,280
Goodwill, net............................................. 467,176 433,806 417,122
Other assets.............................................. 7,938 9,479 14,077
-------- -------- -----------
Total assets.................................... $669,348 $776,884 $ 1,154,846
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities.......... $217,070 $111,615 $ 255,518
Accrued compensation.................................... 34,509 63,211 35,492
Accrued taxes, other than income........................ 4,048 5,942 15,244
Accrued warranties...................................... 29,954 31,715 43,870
Income taxes payable.................................... 34,190 96,526 127,221
Deferred revenue........................................ 98,233 78,718 93,205
Current portion of long-term debt and capital leases.... 43,805 19,008 26,782
Due to related parties.................................. 20,000 117,606 --
Liability to Company benefit plan....................... 452 -- --
-------- -------- -----------
Total current liabilities....................... 482,261 524,341 597,332
Long-term debt, net of current portion.................... 6,262 1,965 910
Capital lease obligations, less current portion........... 19,685 14,016 132,828
Deferred income taxes..................................... 1,796 1,383 1,383
Stockholders' equity:
Common stock ($1 per share par value, 30,000 shares
authorized, 4,666 shares issued and outstanding at
December 31, 1995 and 1994 and June 30, 1996)........ 4,666 4,666 4,666
Paid-in capital in excess of par value of common
stock................................................ 176,834 176,834 176,834
Retained earnings....................................... (22,156) 53,679 240,893
-------- -------- -----------
Total stockholders' equity...................... 159,344 235,179 422,393
-------- -------- -----------
Total liabilities and stockholders' equity...... $669,348 $776,884 $ 1,154,846
======== ======== =========
</TABLE>

See accompanying notes.

F-129
<PAGE> 194

AIR EXPERTS, A UNITED SERVICES CO., INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------- -----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.................................... $2,166,990 $2,554,838 $1,123,711 $1,750,233
Cost of goods sold.............................. 1,300,590 1,289,891 547,585 1,015,958
---------- ---------- ---------- ----------
Gross margin.................................... 866,400 1,264,947 576,126 734,275
Selling, general and administrative expenses.... 878,642 1,112,360 490,609 651,165
---------- ---------- ---------- ----------
Income (loss) from operations................... (12,242) 152,587 85,517 83,110
Other income (expense):
Interest expense.............................. (2,848) (17,012) (3,156) (8,255)
Interest income............................... 3 59 56 72
Other income.................................. 31,455 8,176 2,070 36,793
---------- ---------- ---------- ----------
28,610 (8,777) (1,030) 28,610
---------- ---------- ---------- ----------
Income before federal and state income taxes.... 16,368 143,810 84,487 111,720
Provision (benefit) for income taxes:
Current....................................... 34,190 62,335 30,796 30,696
Deferred...................................... 4,334 5,640 (3,907) (12,890)
---------- ---------- ---------- ----------
38,524 67,975 26,889 17,806
---------- ---------- ---------- ----------
Net income (loss)............................... $ (22,156) $ 75,835 $ 57,598 $ 93,914
========= ========= ========= =========
</TABLE>

See accompanying notes.

F-130
<PAGE> 195

AIR EXPERTS, A UNITED SERVICES CO., INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning balance............................... -- $ -- $ -- $ -- $ --
Purchase of company........................... 4,666 4,666 176,834 -- 181,500
Net income.................................... -- -- -- (22,156) (22,156)
------ ------ -------- -------- --------
Balance at December 31, 1994.................... 4,666 4,666 176,834 (22,156) 159,344
Net income.................................... -- -- -- 75,835 75,835
------ ------ -------- -------- --------
Balance at December 31, 1995.................... 4,666 4,666 176,834 53,679 235,179
------ ------ -------- -------- --------
Capital distributions (unaudited)............. -- -- -- 93,300 93,300
Net income (unaudited)........................ -- -- -- 93,914 93,914
------ ------ -------- -------- --------
Balance at June 30, 1996 (unaudited)............ 4,666 $4,666 $176,834 $240,893 $422,393
====== ====== ======== ======== ========
</TABLE>

See accompanying notes.

F-131
<PAGE> 196

AIR EXPERTS, A UNITED SERVICES CO., INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS ENDED
31, JUNE 30,
--------------------- -------------------
1994 1995 1995 1996
--------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $ (22,156) $ 75,835 $ 57,599 $ 93,914
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization..................... 61,822 59,545 31,808 39,920
Deferred income taxes............................. 4,334 5,640 (3,907) (12,890)
Provisions for loss on (recoveries of) accounts
receivable..................................... 1,534 (774) (774) --
Gain on asset disposals........................... -- (3,216) -- --
Changes in assets and liabilities:
Receivables.................................... 21,962 (23,092) (18,020) (91,047)
Inventories.................................... 4,221 (68,241) (39,177) (35,388)
Prepaid expenses and other current assets...... 5,827 (14,639) (7,447) (132,425)
Trade accounts payable and accrued
liabilities.................................. (74,948) (105,455) (38,455) 143,903
Accrued compensation........................... (5,115) 28,702 19,743 (27,719)
Accrued taxes, other than income............... (7,461) 1,894 1,312 9,302
Accrued warranties............................. (9,728) 1,761 (4,842) 12,155
Deferred revenue............................... (7,111) (19,515) 21,850 14,487
Income taxes payable........................... 34,190 62,335 26,462 30,697
Liability to Company benefit plan.............. 452 (452) -- --
--------- --------- -------- --------
Net cash flow provided by operating activities...... 7,823 328 46,152 44,909
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment...... (45,213) (5,884) (1,015) (9,169)
Proceeds from sale of property, buildings, and
equipment......................................... -- 5,349 -- --
Cash received from acquisition of business.......... 76,906 -- -- --
(Increase) decrease in other assets................. 11,212 (1,541) (13,145) (4,598)
--------- --------- -------- --------
Net cash provided by (used in) investing
activities........................................ 42,905 (2,076) (14,160) (13,767)
FINANCING ACTIVITIES
Proceeds of long-term debt.......................... 117,105 -- -- --
Payments of long-term debt and capital leases....... (112,465) (34,763) (13,829) (32,178)
Due to related parties.............................. (40,000) 97,606 -- (24,306)
--------- --------- -------- --------
Net cash provided by (used in) financing
activities........................................ (35,360) 62,843 (13,829) (56,484)
--------- --------- -------- --------
Increase (decrease) in cash......................... 15,368 61,095 18,163 (25,342)
Cash at beginning of year........................... -- 15,368 15,368 76,463
--------- --------- -------- --------
Cash at end of year................................. $ 15,368 $ 76,463 $ 33,531 $ 51,121
========= ========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................... $ 2,848 $ 5,051 $ 3,156 $ 8,255
========= ========= ======== ========
Purchase of equipment through capital leases........ $ 3,068 $ 5,600 $ -- $157,709
========= ========= ======== ========
ACQUISITION OF COMPANY
Common stock issued................................. $ 181,500
Liabilities assumed................................. 613,289
---------
Fair value of assets acquired excluding cash........ (717,883)
---------
Cash received....................................... $ 76,906
=========
</TABLE>

See accompanying notes.

F-132
<PAGE> 197

AIR EXPERTS, A UNITED SERVICES CO., INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Air Experts, a United Services Co., Inc. ("the Company"), a wholly-owned
subsidiary of Service Now, Inc. operates in one industry segment and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential customers in St. Louis. On January 2, 1994,
(effective January 1, 1994) Service Now purchased all the outstanding shares of
stock of the Company and accounted for the transaction by the purchase method
recording goodwill of $500,546. Prior to the purchase, Air Experts was owned by
an individual who is also a shareholder of Service Now, Inc. The aggregate
purchase price included adjustments for the shareholder's basis in the Company.
Amortization is provided on the straight-line basis over 15 years, which totaled
$33,370 and $33,370 in both 1994 and 1995.

RECOGNITION OF INCOME

Revenue on all of the Company's heating and air conditioning installation
for residential and service and maintenance are recognized upon completion of
the services.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash approximate
fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

PROPERTY, BUILDING AND EQUIPMENT

Property, building and equipment are stated on the basis of cost.
Depreciation is provided on the straight-line basis over five years, except
leases which are depreciated over five years or the life of the lease, whichever
is shorter.

Depreciation expense was $28,451 and $24,353 and 1995, respectively.

WARRANTIES

The Company provides retail customers with a one-year warranty on labor
from the date of installation of the heating and air conditioning unit. This
warranty runs concurrent with the manufacturer's warranty on parts for the first
year. The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.

F-133
<PAGE> 198

AIR EXPERTS, A UNITED SERVICES CO., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

ADVERTISING COSTS

Advertising costs primarily relate to brochures which are accounted for as
prepaid supplies and expensed as distributed. The Company had no prepaid
advertising at December 31, 1994. The Company had $20,014 of prepaid advertising
at December 31, 1995. Advertising expense was $87,175 and $158,350 in 1994 and
1995, respectively.

USE OF ESTIMATES

INCOME TAXES

During 1994 and 1995, the Company used the liability method of accounting
for income taxes as provided by SFAS No. 109, "Accounting for Income Taxes."
Under the liability method, the deferred tax liability or asset is based on
temporary differences between the financial statement and income tax bases of
assets and liabilities, measured at estimated tax rates that will be in effect
when the differences reverse.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1994 and 1995, amounts charged to bad
debt expense totaled ($614) and $541, respectively, and accounts written off,
net of recoveries, were ($2,148) and $1,315, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

2. LONG-TERM DEBT

Long-term debt, including capital lease obligations consists of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable to Tokai Financial, monthly payments of $1,000
including principal and interest at 9%, matures July 1996...... $ 21,411 $ 6,262
Term loan with bank, secured by vehicle, monthly payments of $187
including principal and interest at 9.2%, matures November
1997........................................................... -- 3,926
Note payable to Premium Assignment Corporation, monthly payments
of $8,066 including principal and interest at 7%, matured
February 1995.................................................. 16,013 --
Capital lease obligations, payable in monthly installments of
various amounts, maturing February 1996 to March 2001.......... 32,328 19,686
Capital lease obligations -- related party, monthly payments of
$202 including principal and interest at 18%, matures 1998..... -- 5,115
-------- --------
69,752 34,989
Less current portion............................................. (43,805) (19,008)
-------- --------
$ 25,947 $ 15,981
======== ========
</TABLE>

F-134
<PAGE> 199

AIR EXPERTS, A UNITED SERVICES CO., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:

Based on market interest rates at December 31, 1995 the fair value of the
long-term debt approximates its carrying value.

3. LEASES

Total rental expense for all operating leases was $78,783 and $61,952 for
1994 and 1995, respectively. The Company leases certain office and warehouse
facilities, vehicles, and equipment under terms of noncancelable operating lease
agreements which expire at various dates through March 1999. Minimum rental
commitments at December 31, 1995 under capital and operating leases having an
initial noncancelable term of one year or more are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $13,480 $48,439
1997.............................................................. 8,132 15,689
1998.............................................................. 7,322 8,787
1999.............................................................. 475 1,500
------- ---------
29,409 $74,415
=======
Amounts representing interest..................................... (4,608)
-------
Present value of net minimum rentals (including $10,785 classified
as current)..................................................... $24,801
=======
</TABLE>

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Machinery and equipment.......................................... $ 55,087 $ 60,687
Less accumulated amortization.................................... (27,527) (37,772)
-------- --------
Net property, plant and equipment under capital leases........... $ 27,560 $ 22,915
======== ========
</TABLE>

Amortization of the assets under capital leases is included in depreciation
expense.

4. COMMITMENTS AND CONTINGENT LIABILITIES

F-135
<PAGE> 200

AIR EXPERTS, A UNITED SERVICES CO., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES

The Company is included in the consolidated return of Service Now, Inc.
Income tax for the Company is calculated as if the Company filed a separate
return.

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Current:
Federal.......................................................... $27,025 $51,212
State............................................................ 7,165 11,123
------- -------
34,190 62,335
Deferred........................................................... 4,334 5,640
------- -------
$38,524 $67,975
======= =======
</TABLE>

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $ 1,796 $ 1,383
-------- --------
Deferred tax liabilities......................................... 1,796 1,383
Deferred tax assets:
Deferred revenue............................................... 23,533 17,593
Accrued warranty............................................... 11,383 12,052
Contributions.................................................. 33,340 46,097
Other.......................................................... 2,135 1,353
-------- --------
Deferred tax assets.............................................. 70,391 77,095
Valuation allowance.............................................. (33,340) (46,097)
-------- --------
Net deferred tax assets.......................................... 37,051 30,998
-------- --------
Net deferred tax liabilities (assets)............................ $(35,255) $(29,615)
======== ========
</TABLE>

A valuation allowance of $46,097 has been provided against the deferred tax
assets as the Company cannot conclude that it is more likely than not that these
deferred tax assets will be realized. In connection with the acquisition as
described in Note 1 (which was treated as a tax-free exchange for tax purposes),
a valuation allowance of $43,429 was recorded against the deferred tax assets.
During 1994, the Company determined that $39,589 of these assets were realizable
and recorded the related tax benefits as a reduction of goodwill. Of the $46,097
reserve at December 31, 1995, $3,840 relates to assets acquired on January 2,
1994. If these assets are realized in the future, the related tax benefits will
be recorded as a reduction of goodwill. The remaining $42,257 relates to assets
which arose after the acquisition. If these assets are realized in the future,
the related tax benefits will reduce income tax expense.

F-136
<PAGE> 201

AIR EXPERTS, A UNITED SERVICES CO., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Tax provision at statutory rate.................................. $ 5,565 $ 48,895
State income tax less applicable federal tax benefit............. 5,030 7,734
Goodwill amortization............................................ 11,346 11,346
Change in valuation allowance.................................... 29,500 12,757
Rate differential................................................ (12,917) (12,757)
-------- --------
$ 38,524 $ 67,975
======== ========
</TABLE>

6. RELATED PARTY TRANSACTIONS

The Company paid rental fees for an office building of $35,414 and $30,000
at December 31, 1994 and 1995, respectively, to STEFCO, whose owner is a
shareholder of the Company's Parent, Service Now, Inc.

The Company has an obligation to its Parent of $20,000 at 12.5% interest at
December 31, 1994 and 1995, respectively, for which there is no fixed repayment
schedule.

The Company also has a capital lease for computer software with its Parent
which has an outstanding obligation of $5,115 at December 31, 1995.

The Company has an obligation to Contractor Success Group (CSG) of $97,606
at 8% interest at December 31, 1995. The Company paid CSG $6,775 and $32,293
during 1994 and 1995, respectively, for monthly membership dues and various
sales materials. The shareholders of CSG also are majority interest shareholders
of the Company's Parent.

7. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

8. UNAUDITED INTERIM FINANCIAL INFORMATION

The statements of income (loss) and cash flows for the six months ended
June 30, 1995 and 1996, (interim financial statements) have been prepared by
management and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the interim results.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the six months ended June 30, 1995 and 1996, may not be indicative of
operating results for the full respective years.

F-137
<PAGE> 202

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Gilley's Heating & Cooling, Inc.

We have audited the accompanying balance sheets of Gilley's Heating &
Cooling, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gilley's Heating & Cooling,
Inc. at December 31, 1994 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-138
<PAGE> 203

GILLEY'S HEATING & COOLING, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- ---------
1994 1995 1996
--------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 321,199 $ 338,032 $ 234,601
Receivables:
Trade, net of allowance for doubtful accounts of
$2,367, $3,232 and $808 in 1994, 1995 and 1996,
respectively..................................... 68,291 104,817 185,763
Related party...................................... -- 12,495 9,494
Other.............................................. -- 2,600 --
--------- --------- ---------
68,291 119,912 195,257
Inventories........................................... 67,014 79,379 104,073
Investments........................................... 36,148 60,595 280,269
Prepaid expenses and other current assets............. 2,839 12,305 69,308
Deferred income taxes................................. 1,222 1,099 549
--------- --------- ---------
Total current assets.......................... 496,713 611,322 884,057
Property and equipment:
Furniture and fixtures................................ 75,263 81,269 81,269
Vehicles.............................................. 226,673 226,673 226,673
Leasehold improvements................................ 18,959 18,959 18,959
--------- --------- ---------
320,895 326,901 326,901
Less accumulated depreciation and amortization........ (209,172) (246,442) (262,574)
--------- --------- ---------
111,723 80,459 64,327
Other assets............................................ 8,566 12,431 12,431
--------- --------- ---------
Total assets.................................. $ 617,002 $ 704,212 $ 960,815
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........ $ 45,975 $ 32,812 $ 86,618
Accrued compensation.................................. 6,645 8,889 103,257
Accrued taxes, other than income...................... 4,244 5,747 3,769
Accrued warranties.................................... 7,861 11,374 7,500
Income taxes payable.................................. 78,177 56,398 82,926
Deferred revenue...................................... 10,709 13,473 2,970
--------- --------- ---------
Total current liabilities..................... 153,611 128,693 287,040
Deferred income taxes................................... 8,155 9,176 11,918
Stockholder's equity:
Common stock, no par value, 100 shares authorized and
issued............................................. 4,000 4,000 4,000
Unrealized gains (losses) on available-for-sale
securities......................................... (1,250) 5,244 10,745
Retained earnings..................................... 452,486 557,099 647,112
--------- --------- ---------
Total stockholder's equity.................... 455,236 566,343 661,857
--------- --------- ---------
Total liabilities and stockholder's equity.... $ 617,002 $ 704,212 $ 960,815
========= ========= =========
</TABLE>

See accompanying notes.

F-139
<PAGE> 204

GILLEY'S HEATING & COOLING, INC.

STATEMENTS OF INCOME

See accompanying notes.

F-140
<PAGE> 205

GILLEY'S HEATING & COOLING, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK, GAINS (LOSSES)
NO PAR VALUE ON AVAILABLE-
--------------- FOR-SALE RETAINED
SHARES AMOUNT SECURITIES EARNINGS TOTAL
------ ------ -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. 100 $4,000 $ -- $260,965 $264,965
Net income.................................. -- -- -- 38,017 38,017
------ ------ -------------- -------- --------
Balance at December 31, 1993.................. 100 4,000 -- 298,982 302,982
Net income.................................. -- -- -- 153,504 153,504
Adjustment to unrealized losses on
available-for-sale securities, net of
tax...................................... -- -- (1,250) -- (1,250)
------ ------ -------------- -------- --------
Balance at December 31, 1994.................. 100 4,000 (1,250) 452,486 455,236
Net income.................................. -- -- -- 104,613 104,613
Adjustment to unrealized gains on
available-for-sale securities, net of
tax...................................... -- -- 6,494 -- 6,494
------ ------ -------------- -------- --------
Balance at December 31, 1995.................. 100 4,000 5,244 557,099 566,343
Net income (unaudited)...................... -- -- -- 90,013 90,013
Adjustment to unrealized gains on
available-for-sale securities, net of tax
(unaudited).............................. -- -- 5,501 -- 5,501
------ ------ -------------- -------- --------
Balance at June 30, 1996 (unaudited).......... 100 $4,000 $ 10,745 $647,112 $661,857
===== ====== =========== ======== ========
</TABLE>

See accompanying notes.

F-141
<PAGE> 206

GILLEY'S HEATING & COOLING, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................. $ 38,017 $153,504 $104,613 $ 14,143 $ 90,013
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 31,478 38,256 37,270 18,135 16,132
Current deferred income taxes............ 2,113 2,857 (1,023) 256 1,461
Provisions for loss on accounts
receivable............................ 3,941 2,801 3,232 1,616 1,616
Loss on asset disposals.................. 1,529 -- -- -- --
Changes in assets and liabilities:
Receivables........................... 1,568 (3,363) (54,853) (87,071) (76,961)
Inventories........................... 38,576 (357) (12,365) (25,662) (24,694)
Prepaid expenses and other current
assets.............................. 1,242 (170) (9,466) 1,313 (57,003)
Trade accounts payable and accrued
liabilities......................... (14,520) 2,904 (13,163) 64,698 53,806
Accrued compensation.................. 54,394 (59,896) 2,244 93,355 94,368
Accrued taxes, other than income...... 28,489 (33,607) 1,503 (4,357) (1,978)
Accrued warranties.................... (2,086) 6,187 3,513 1,171 (3,874)
Deferred revenue...................... (2,314) 1,039 2,764 1,337 (10,503)
Income taxes payable.................. 714 75,026 (21,779) (64,384) 24,777
-------- -------- -------- -------- ---------
Net cash flow provided by operating
activities............................... 183,141 185,181 42,490 14,550 107,160
INVESTING ACTIVITIES
Purchase of property and equipment......... $(10,760) $(64,347) $ (6,006) $ -- $ --
Purchase of investments.................... (16,960) (13,605) (15,786) (7,918) (210,591)
Increase in other assets................... (3,174) (3,654) (3,865) (1,932) --
-------- -------- -------- -------- ---------
Net cash used in investing activities...... (30,894) (81,606) (25,657) (9,850) (210,591)
-------- -------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 152,247 103,575 16,833 4,700 (103,431)
Cash and cash equivalents at beginning of
year..................................... 65,377 217,624 321,199 321,199 338,032
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of year... $217,624 $321,199 $338,032 $325,899 $ 234,601
======== ======== ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Income tax paid............................ $ 5,853 $ 7,821 $ 69,196 $ 70,037 $ 12,703
======== ======== ======== ======== =========
</TABLE>

See accompanying notes.

F-142
<PAGE> 207

GILLEY'S HEATING & COOLING, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REPORTING ENTITY

Gilley's Heating & Cooling, Inc. ("the Company") is a "C" corporation and
operates in one industry segment and is primarily engaged in the installation
and servicing of air conditioning and heating systems for residential customers.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.

CASH EQUIVALENTS

The Company considers all highly liquid inventory investments with an
original maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.

INVENTORIES

Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.

SHORT-TERM INVESTMENTS

F-143
<PAGE> 208

GILLEY'S HEATING & COOLING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line and declining-balance methods
over the following useful lives:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................................... 5
Machinery and equipment..................................................... 5
Vehicles.................................................................... 5
Leasehold improvements...................................................... 10
</TABLE>

WARRANTIES

The Company provides the retail customer with a two-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company provides an accrual for future
warranty costs based upon the relationship of prior years' sales to actual
warranty costs. It is the Company's practice to classify the entire warranty
accrual as a current liability.

USE OF ESTIMATES

INCOME TAXES

ADVERTISING

The cost of advertising is expensed as incurred. The Company incurred
$47,788, $48,373 and $57,581 is such costs during 1993, 1994 and 1995,
respectively.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $3,941, $2,801 and $3,232, respectively and accounts
written off, net of recoveries were $2,016, $2,359 and $2,367, respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

F-144
<PAGE> 209

GILLEY'S HEATING & COOLING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SHORT-TERM INVESTMENTS

Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available for sale under SFAS No. 115
and, as a result, the carrying amount is a reasonable estimate of fair value.
The cost of available-for-sale securities was $37,815 and $53,601 at December
31, 1994 and 1995, respectively. The adoption of SFAS No. 115 did not have a
significant impact on the Company's 1994 financial statements.

All investments are classified as current because the Company views its
portfolio as available for use in its current operations.

3. LINE OF CREDIT

The Company has an unsecured line of credit with a bank that expires in
October 1996. Under its terms, the Company can borrow up to $50,000 at prime
plus 1.25%. At December 31, 1994 and 1995, the Company had no borrowings
outstanding under this agreement.

4. COMMITMENTS AND CONTINGENT LIABILITIES

5. STOCKHOLDER'S COMPENSATION

Stockholder's compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $300,000,
$104,000 and $296,000 in 1993, 1994 and 1995, respectively.

6. INCOME TAXES

Income tax expense consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Current:
Federal.................................................. $5,261 $72,912 $41,214
State.................................................... 1,306 9,935 6,203
Deferred................................................... 2,113 2,857 (1,023)
------ ------- -------
$8,680 $85,704 $46,394
====== ======= =======
</TABLE>

F-145
<PAGE> 210

GILLEY'S HEATING & COOLING, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on available-for-sale securities................... $ -- $1,752
Depreciation and amortization...................................... 8,155 7,424
------ ------
8,155 9,176
Deferred tax assets:
Accounts receivable................................................ 805 1,099
Unrealized loss on available-for-sale securities................... 417 --
------ ------
Deferred tax assets.................................................. 1,222 1,099
Valuation allowance.................................................. -- --
------ ------
Net deferred tax assets.............................................. 1,222 1,099
------ ------
Net deferred tax liabilities......................................... $6,933 $8,077
====== ======
</TABLE>

The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $15,877 $81,331 $51,342
State income tax less applicable federal tax benefit...... 862 6,557 4,094
Other, net -- principally effects of graduated rates...... (8,059) (2,184) (9,042)
------- ------- -------
$ 8,680 $85,704 $46,394
======= ======= =======
</TABLE>

7. RELATED PARTY TRANSACTIONS

The Company paid annual rental fees of $18,000 in 1993, 1994 and 1995 to
the president and sole stockholder of the Company.

8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

9. UNAUDITED INTERIM FINANCIAL INFORMATION

F-146
<PAGE> 211

REPORT OF INDEPENDENT AUDITORS

The Stockholders
Service Experts of Palm Springs, Inc.

We have audited the accompanying balance sheets of Service Experts of Palm
Springs, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the period from
October 15, 1993 (date operations commenced) through December 31, 1993, and the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Service Experts of Palm
Springs, Inc. at December 31, 1994 and 1995, and the results of their operations
and their cash flows for the period from October 15, 1993 (date operations
commenced) through December 31, 1993, and for the years ended December 31, 1994
and 1995, in conformity with generally accepted accounting principles.

/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP

Nashville, Tennessee
May 10, 1996

F-147
<PAGE> 212

SERVICE EXPERTS OF PALM SPRINGS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- --------
1994 1995 1996
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 2,933 $ 82,008 $ 64,916
Receivables:
Trade, net of allowance for doubtful accounts of $2,400 in
1994, $9,000 in 1995, and $-0- in 1996.................. 15,563 33,989 17,915
Employee.................................................. -- 881 --
-------- -------- --------
15,563 34,870 17,915
Inventories.................................................. 21,550 18,775 20,924
Prepaid expenses and other current assets.................... 26,320 29,460 76,123
Deferred income taxes........................................ -- 25,000 20,737
-------- -------- --------
Total current assets................................. 66,366 190,113 200,615
Property and equipment:
Furniture and fixtures....................................... 7,036 8,362 8,362
Machinery and equipment...................................... 34,487 76,653 78,054
Vehicles..................................................... 2,500 2,500 2,500
-------- -------- --------
44,023 87,515 88,916
Less accumulated depreciation and amortization............... 5,385 17,859 22,394
-------- -------- --------
38,638 69,656 66,522
Intangible assets, net of accumulated amortization of $2,589 in
1994 and $5,666 in 1995 and 1996............................. 44,811 41,734 40,936
-------- -------- --------
Total assets......................................... $149,815 $301,503 $308,073
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued liabilities............... $ 47,234 $ 2,805 $ 33,212
Accrued compensation......................................... 17,466 30,760 24,599
Accrued warranties........................................... 7,058 9,595 10,886
Income taxes payable......................................... -- 41,000 57,050
Deferred revenue............................................. 34,511 42,032 39,692
Current portion of long-term debt and capital lease
obligations............................................... 46,069 40,775 --
-------- -------- --------
Total current liabilities............................ 152,338 166,967 165,439
Long-term debt and capital lease obligations, net of current
portion...................................................... 69,362 47,686 --
Deferred income taxes.......................................... -- 5,500 5,426
Stockholders' equity (deficit):
Common stock, $1 par value; 1,000 shares authorized, 100
shares issued and outstanding............................. 100 100 100
Additional paid-in capital................................... 59,900 59,900 59,900
(Accumulated deficit) retained earnings...................... (131,885) 21,350 77,208
-------- -------- --------
Total shareholders' (deficit) equity................. (71,885) 81,350 137,208
-------- -------- --------
Total liabilities and stockholders' equity
(deficit).......................................... $149,815 $301,503 $308,073
======== ======== ========
</TABLE>

See accompanying notes.

F-148
<PAGE> 213

SERVICE EXPERTS OF PALM SPRINGS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, YEAR ENDED DECEMBER SIX MONTHS ENDED
1993 THROUGH 31, JUNE 30,
DECEMBER 31, --------------------- -------------------
1993 1994 1995 1995 1996
------------ -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $ 54,175 $999,164 $1,361,727 $674,098 $594,058
Cost of goods sold.................... 43,092 632,425 707,598 325,147 280,188
------------ -------- ---------- -------- --------
Gross margin.......................... 11,083 366,739 654,129 348,951 313,870
Selling, general and administrative
expenses............................ 50,186 449,052 454,847 235,110 234,633
Bad debt expense...................... -- 2,400 9,323 -- --
------------ -------- ---------- -------- --------
Income (loss) from operations......... (39,103) (84,713) 189,959 113,841 79,237
Other income (expense):
Interest expense.................... (105) (8,438) (15,253) (820) (3,140)
Other income........................ -- 474 29 1,315 --
------------ -------- ---------- -------- --------
(105) (7,964) (15,224) 495 (3,140)
------------ -------- ---------- -------- --------
Income (loss) before federal and state
income taxes........................ (39,208) (92,677) 174,735 114,336 76,097
Provision (benefit) for income taxes:
Current............................. -- -- 41,000 39,527 16,119
Deferred............................ -- -- (19,500) (4,772) 4,120
------------ -------- ---------- -------- --------
-- -- 21,500 34,755 20,239
------------ -------- ---------- -------- --------
Net income (loss)..................... $(39,208) $(92,677) $ 153,235 $ 79,581 $ 55,858
============ ======== ========= ======== ========
</TABLE>

See accompanying notes.

F-149
<PAGE> 214

SERVICE EXPERTS OF PALM SPRINGS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK, (ACCUMULATED
$1 PAR VALUE ADDITIONAL DEFICIT)
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Beginning balance............................. -- $ -- $ -- $ -- $ --
Issuance of stock........................... 100 100 59,900 -- 60,000
Net loss.................................... -- -- -- (39,208) (39,208)
------ ------ ---------- ------------ ---------
Balance at December 31, 1993.................. 100 100 59,900 (39,208) 20,792
Net loss.................................... -- -- -- (92,677) (92,677)
------ ------ ---------- ------------ ---------
Balance at December 31, 1994.................. 100 100 59,900 (131,885) (71,885)
Net income.................................. -- -- -- 153,235 153,235
------ ------ ---------- ------------ ---------
Balance at December 31, 1995.................. 100 100 59,900 21,350 81,350
Net income (unaudited)...................... -- -- -- 55,858 55,858
------ ------ ---------- ------------ ---------
Balance at June 30, 1996 (unaudited).......... 100 $100 $ 59,900 $ 77,208 $ 137,208
===== ====== ======= ========== =========
</TABLE>

See accompanying notes.

F-150
<PAGE> 215

SERVICE EXPERTS OF PALM SPRINGS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, YEAR ENDED DECEMBER SIX MONTHS ENDED JUNE
1993 THROUGH 31, 30,
DECEMBER 31, ---------------------- ---------------------
1993 1994 1995 1995 1996
------------ --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................. $(39,208) $ (92,677) $153,235 $ 79,581 $ 55,858
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.... 197 7,775 15,551 4,200 4,535
Deferred income taxes............ -- -- (19,500) (4,772) 4,120
Provisions for loss on accounts
receivable.................... -- 2,400 6,600 -- --
Changes in assets and
liabilities:
Receivables................... (9,262) (8,701) (25,907) (16,041) 16,955
Inventories................... (525) (21,025) 2,775 (10,485) (46,032)
Prepaid expenses and other
current assets.............. (19,405) (6,915) (3,140) 9,918 (2,780)
Trade accounts payable and
accrued liabilities......... 2,903 44,331 (44,429) (37,292) 30,407
Accrued compensation.......... 6,721 10,745 13,294 (11,160) (6,161)
Accrued warranties............ 406 6,652 2,537 (4,192) 1,291
Deferred revenue.............. -- 34,511 7,521 5,024 (2,340)
Income taxes payable.......... -- -- 41,000 48,992 16,119
------------ --------- -------- -------- --------
Net cash flows provided by (used
in) operating activities......... (58,173) (22,904) 149,537 63,773 71,972
INVESTING ACTIVITIES
Purchase of property and
equipment........................ (7,860) (36,163) (43,492) (6,351) (1,401)
Purchase of customer lists......... (2,400) (45,000) -- (2,455) 798
------------ --------- -------- -------- --------
Net cash used in investing
activities....................... (10,260) (81,163) (43,492) (8,806) (603)
FINANCING ACTIVITIES
Issuance of common stock, including
additional paid-in-capital....... 60,000 -- -- -- --
Proceeds of long-term debt......... 14,891 125,009 38,384 -- --
Payments on long-term debt and
capital leases................... (1,609) (22,858) (65,354) (25,137) (88,461)
------------ --------- -------- -------- --------
Net cash provided by (used in)
financing activities............. 73,282 102,151 (26,970) (25,137) (88,461)
------------ --------- -------- -------- --------
Increase (decrease) in cash........ 4,849 (1,916) 79,075 29,830 (17,092)
Cash at beginning of year.......... -- 4,849 2,933 2,933 82,008
------------ --------- -------- -------- --------
Cash at end of year................ $ 4,849 $ 2,933 $ 82,008 $ 32,763 $ 64,916
============ ========= ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid...................... $ 105 $ 6,952 $ 16,739 $ 4,240 $ 2,270
============ ========= ======== ======== ========
Income tax paid.................... $ -- $ 800 $ 800 $ 800 $ 12,000
============ ========= ======== ======== ========
</TABLE>

See accompanying notes.

F-151
<PAGE> 216

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

The Company was incorporated in the state of California during October of
1993. At that time, 1,000 shares of capital stock were authorized with a par
value of $1 per share. Capital of $60,000 was received in exchange for 100
shares of the Company's stock during 1993, resulting in additional paid-in
capital of $59,900.

REPORTING ENTITY

Service Experts of Palm Springs, Inc. ("the Company") is primarily engaged
in the installation and servicing of air conditioning and heating systems for
residential customers in and around Palm Springs, California. The Company
commenced operations in October of 1993. Accordingly, 1993 includes
approximately three months of operations, compared to twelve months during 1994
and 1995.

RECOGNITION OF INCOME

Revenues on all of the Company's heating and air conditioning installation
and other services are recognized upon completion of the services.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash

The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.

Accounts Receivable and Accounts Payable

The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.

Long-Term Debt and Capital Lease Obligations

Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out (FIFO) method for all inventories.

PROPERTY AND EQUIPMENT

Property and equipment are stated on the basis of cost. Depreciation and
amortization, including that associated with equipment acquired under capital
leases, are provided on the straight-line method over the following useful
lives:

F-152
<PAGE> 217

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INTANGIBLE ASSETS

Intangible assets include customer lists purchased from outside parties and
are recorded at cost, net of accumulated amortization. Such assets are amortized
on a straight-line basis over a period of 15 years.

WARRANTIES

The Company provides customers with a one-year warranty on parts and labor
from the date of installation of the heating and air conditioning unit. This
warranty runs concurrent with the manufacturer's warranty on parts. The Company
provides an accrual for future warranty costs based upon the relationship of
prior years' sales to actual warranty costs. It is the Company's practice to
classify the entire warranty accrual as a current liability.

ADVERTISING COSTS

Costs associated with advertising are expensed at the time of the
advertisement's first showing. Advertising expenses totaled approximately $200,
$54,000 and $92,000 for the period from October 15, 1993 through December 31,
1993 and years ended December 31, 1994 and 1995, respectively.

USE OF ESTIMATES

INCOME TAXES

ALLOWANCE FOR DOUBTFUL ACCOUNTS

For the period October 15, 1993 (date operations commenced), through
December 31, 1993, and the years ended December 31, 1994 and December 31, 1995
amounts charged to bad debt expense totaled $0, $2,400 and $9,323, respectively
and accounts written off, net of recoveries were $0, $0 and $2,723,
respectively.

NEWLY ISSUED ACCOUNTING STANDARDS

The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.

F-153
<PAGE> 218

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. LONG-TERM DEBT

Long-term debt consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- -------
<S> <C> <C>
Notes payable to related party.................................. $ 69,842 $33,254
Note payable for insurance coverage............................. 24,838 17,859
Loan payable to a bank.......................................... 20,751 14,410
Capital leases.................................................. -- 22,938
-------- -------
115,431 88,461
Less current portion............................................ 46,069 40,775
-------- -------
$ 69,362 $47,686
======== =======
</TABLE>

The Company has notes payable to a party related through similar ownership.
These notes are due through 1999 and were given in exchange for cash to fund
operations and finance capital purchases. The notes require monthly payments of
$1,500 including principal and interest at 8%. Subsequent to December 31, 1995,
the Company used available funds to pay down a significant portion of these
notes, leaving approximately $1,300 due as of March 31, 1996.

Insurance coverage is financed annually through an outside lending
institution. The Company has a note payable to this institution that requires
monthly payments of $2,575 including principal and interest at 8%.

The Company has a term loan with a bank that expires in 1997. The loan is
secured by equipment and requires monthly payments of approximately $630
including principal and interest at 9.4%.

Certain computer software is leased under capital lease agreements with
parties related to the Company through similar ownership. The leases continue
through 1999. Ownership of this software will transfer to the Company at the end
of the lease term. The leases are payable in monthly installments of
approximately $700 including implicit interest at 8%.

As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:

3. LEASES

Total rental expense for all operating leases was approximately $7,500,
$53,000 and $49,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Company leases certain office and warehouse facilities and
equipment, as well as vehicles under terms of noncancellable operating lease
agreements which

F-154
<PAGE> 219

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

expire at various dates through 1998. Minimum rental commitments at December 31,
1995 under capital and operating leases having an initial noncancellable term of
one year or more are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $ 8,430 $41,000
1997.............................................................. 8,430 27,500
1998.............................................................. 7,620 1,300
1999.............................................................. 1,500 --
------- ---------
25,980 $69,800
=======
Amounts representing interest..................................... 3,042
-------
Present value of net minimum rentals, including $1,588 classified
as current...................................................... $22,938
=======
</TABLE>

The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Machinery and equipment............................................ $ -- $24,885
Less accumulated amortization...................................... -- 1,786
------- -------
Net property and equipment under capital leases.................... $ -- $23,099
======= =======
</TABLE>

4. EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, 2% to 12% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company in an
amount determined at the discretion of management. The Company's matching
contributions for 1995 totaled approximately $3,000. No contributions were made
during 1994 or 1993.

5. COMMITMENTS AND CONTINGENT LIABILITIES

The Company maintains general liability insurance coverage to insure itself
against liabilities occurring in the normal course of business. The Company
believes that its insurance coverage is adequate.

F-155
<PAGE> 220

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

Significant components of the deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................. $ 1,800 $ 5,500
-------- -------
Total deferred tax liabilities........................ 1,800 5,500
Deferred tax assets:
Net operating loss carryforwards.............................. 39,500 --
Deferred revenue.............................................. 8,800 17,200
Other......................................................... 4,000 7,800
-------- -------
Total deferred tax assets............................. 52,300 25,000
Valuation allowance for deferred tax assets..................... (50,500) --
-------- -------
Net deferred tax assets......................................... 1,800 25,000
-------- -------
Net deferred tax assets......................................... $ -- $19,500
======== =======
</TABLE>

Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized during the carryforward period.
Accordingly, no valuation allowance has been recorded for the year ended
December 31, 1995. The valuation allowance was decreased by $50,500 during the
year ended December 31, 1995.

Significant components of the (benefit) provision for income taxes
attributable to continuing operations are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 31,000
State................................................ -- -- 10,000
-------- -------- --------
-- -- 41,000
Deferred:
Federal.............................................. -- -- (16,100)
State................................................ -- -- (3,400)
-------- -------- --------
-- -- (19,500)
-------- -------- --------
Provision for income taxes $ -- $ -- $ 21,500
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Tax (benefit) provision at federal statutory rate...... $(13,300) $(22,500) $ 59,500
State income tax less applicable federal tax benefit... (1,400) (2,300) 12,500
Change in valuation allowance.......................... -- -- (50,500)
Net operating losses for which no benefit was
recognized........................................... 14,700 24,800 --
-------- -------- --------
$ -- $ -- $ 21,500
======== ======== ========
</TABLE>

F-156
<PAGE> 221

SERVICE EXPERTS OF PALM SPRINGS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. RELATED PARTY TRANSACTIONS

The Company paid management and other service fees of approximately $2,000,
$28,500 and $34,500 during the period from October 15, 1993 through December 31,
1993 and for years ended December 31, 1994 and 1995, respectively, to parties
with similar ownership to that of the Company.

8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING

9. UNAUDITED INTERIM FINANCIAL INFORMATION

The statements of operations and cash flows for the six months ended June
30, 1995 and 1996 (interim financial statements) have been prepared by
management and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments necessary for a
fair presentation of the interim results.

F-157
<PAGE> 222

- ------------------------------------------------------
- ------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING STOCKHOLDER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

---------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Summary Combined Financial Data....... 5
Risk Factors.......................... 8
Selected Combined Financial Data...... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 19
The Company........................... 37
Management............................ 47
Certain Transactions.................. 51
Principal Stockholders................ 53
Ratio of Earnings to Fixed Charges.... 54
Market and Dividend Information....... 54
Description of Capital Stock.......... 55
Description of Common Stock
Warrants............................ 57
Description of Debt Securities........ 57
Shares Eligible for Future Sale....... 62
Selling Stockholders.................. 63
Legal Matters......................... 63
Experts............................... 63
Index to Financial Statements......... F-1
</TABLE>

- ------------------------------------------------------
- ------------------------------------------------------

- ------------------------------------------------------
- ------------------------------------------------------
[LOGO] SERVICE EXPERTS (R)

$50,000,000

COMMON STOCK
COMMON STOCK WARRANTS
AND DEBT SECURITIES

--------------------
PROSPECTUS
--------------------

September 19, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 223

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

(a) The Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person made party to an action by reason of such
person's status as a director, officer, employee or agent of the corporation
against expenses, judgments, fines and settlements provided such person acted
(i) in good faith, (ii) in a manner reasonably believed to be in or not opposed
to the best interests of the Corporation and (iii) with respect to a criminal
action, had no reasonable cause to believe such person's conduct was unlawful.
The termination of an action by a judgment, order, settlement, conviction or
plea of nolo contendere shall not create a presumption that a person did not
meet the standard of conduct set forth above. In actions brought by or in the
right of the corporation, however, the DGCL provides that no indemnification may
be made if the person was adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
was brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper. To the extent that a person is successful, on the merits or
otherwise, in the defense of any proceeding instigated because of his or her
status as a director, officer, employee or agent of a corporation, the DGCL
mandates that the corporation indemnify such person against reasonable expenses
incurred in the proceeding. A corporation may advance litigation expenses,
including attorneys' fees, to a person who is a party to a proceeding upon such
person undertaking to repay such amount if it shall ultimately be determined
that such person is not entitled to indemnification. The indemnification and
advancement of expenses under the DGCL are not deemed exclusive of any other
rights to which a person may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise.

(b) Article VII of the Registrant's Restated Certificate of Incorporation
provides as follows:

(i) The Corporation shall indemnify, and upon request shall advance
expenses (including attorneys' fees) to, in the manner and to the fullest
extent permitted by law, any officer or director (or the estate of any such
person) who was or is a party to, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan (an "indemnitee"). The
Corporation may, to the fullest extent permitted by law, purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan against any liability
which may be asserted against such person. To the fullest extent permitted
by law, the indemnification and advances provided for herein shall include
expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement. The indemnification provided herein shall not
be deemed to limit the right of the Corporation to indemnify and any other
person for any such expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement to the fullest extent permitted by law, both
as to action in his official capacity and as to action in another capacity
while holding such office.

(ii) Notwithstanding the foregoing, the Corporation shall not
indemnify any such indemnitee who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to secure a judgment in its favor against
such indemnitee with the Corporation, unless and only to the extent that,
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such indemnitee
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.

(iii) The rights to indemnification and advancement of expenses set
forth in this Article VII are intended to be greater than those which are
otherwise provided for in the General Corporation Law of the

II-1
<PAGE> 224

State of Delaware, are contractual between the Corporation and the person
being indemnified, his heirs, executors and administrators, and, with
respect to this Article VII are mandatory, notwithstanding a person's
failure to meet the standard of conduct required for permissive
indemnification under the General Corporation Law of the State of Delaware,
as amended from time to time. The rights to indemnification and advancement
of expenses set forth in this Article VII are nonexclusive of other similar
rights which may be granted by law, this Certificate, the Bylaws, a
resolution of the Board of Directors or stockholders or an agreement with
the Corporation, which means of indemnification and advancement of expenses
are hereby specifically authorized.

(iv) Any repeal or modification of the provisions of this Article VII,
either directly or by the adoption of an inconsistent provision of this
Certificate, shall be prospective only and shall not adversely affect any
right or protection set forth herein existing in favor of a particular
individual at the time of such repeal or modification. In addition, if an
amendment to the General Corporation Law of the State of Delaware limits or
restricts in any way the indemnification rights permitted by law as of the
date hereof, such amendment shall apply only to the extent mandated by law
and only to activities of persons subject to indemnification under this
Article VII which occur subsequent to the effective date of such amendment.

(c) The Company has obtained insurance for its directors and executive
officers in amounts of $3,000,000 per claim and $3,000,000 for aggregate claims.

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4.1 -- Form of Common Stock Certificate(b)
4.2 -- Form of Subordinated Indenture
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
10.1 -- Registrant's 1996 Incentive Stock Plan(a)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(a)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(a)
10.4 -- Form of Combination Agreement by and among each of the Subsidiaries, each of its
respective stockholders and the Registrant(a)
10.5 -- Employment Agreement, dated June 26, 1996, between the Registrant and Alan R.
Sielbeck(a)
10.6 -- Employment Agreement, dated June 26, 1996, between the Registrant and James D.
Abrams(a)
10.7 -- Employment Agreement, dated June 26, 1996, between the Registrant and Anthony M.
Schofield(a)
10.8 -- Form of Employment Agreement between the Registrant and certain of its employees(a)
10.9 -- Form of Escrow Agreement between the Registrant, each of the stockholders of the
Subsidiaries and the escrow agent(a)
10.10 -- Form of Equitable Securities Corporation Stock Purchase Warrant(a)
10.11 -- Loan Agreement, dated September 10, 1996, between the Registrant and SunTrust Bank,
Nashville, N.A.
21 -- List of subsidiaries of the Registrant (c)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company
(included in Exhibit 5)
24 -- Power of Attorney (set forth on Page II-5)
</TABLE>

- ---------------

(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.

II-2
<PAGE> 225

(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8, Registration No. 333-11791.

(b) Financial Statement Schedules

All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.

ITEM 22. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.

II-3
<PAGE> 226

The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as part of an amendment
to the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.

The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of section 310 of the Trust Indenture Act (the "TIA") in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the TIA.

II-4
<PAGE> 227

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on September 19, 1996.

SERVICE EXPERTS, INC.

By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman and
Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Alan R. Sielbeck and Anthony M. Schofield
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Registration Statement, and
to file the same, with all exhibits thereto, and other documents in connection
therewith with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as each might or could do in
person hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- --------------------------------------------- --------------------------- -------------------
<C> <S> <C>
/s/ ALAN R. SIELBECK Chairman of the Board and September 19, 1996
- --------------------------------------------- Chief Executive Officer
Alan R. Sielbeck (principal executive
officer)

/s/ JAMES D. ABRAMS President and Chief September 19, 1996
- --------------------------------------------- Operating Officer;
James D. Abrams Director

/s/ ANTHONY M. SCHOFIELD Chief Financial Officer September 19, 1996
- --------------------------------------------- (principal financial and
Anthony M. Schofield accounting officer)

/s/ RAYMOND J. DERIGGI Director September 19, 1996
- ---------------------------------------------
Raymond J. DeRiggi

/s/ NORMAN T. ROLF Director September 19, 1996
- ---------------------------------------------
Norman T. Rolf

/s/ WILLIAM G. ROTH Director September 19, 1996
- ---------------------------------------------
William G. Roth

Director September , 1996
- ---------------------------------------------
Timothy G. Wallace
</TABLE>

II-5
<PAGE> 228

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
- ------ -------------------------------------------------------------------------------------
<C> <C> <S> <C>
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4.1 -- Form of Common Stock Certificate(b)
4.2 -- Form of Subordinated Indenture
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company
10.1 -- Registrant's 1996 Incentive Stock Plan(a)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(a)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(a)
10.4 -- Form of Combination Agreement by and among each of the Subsidiaries, each of
its respective stockholders and the Registrant(a)
10.5 -- Employment Agreement, dated June 26, 1996, between the Registrant and Alan
R. Sielbeck(a)
10.6 -- Employment Agreement, dated June 26, 1996, between the Registrant and James
D. Abrams(a)
10.7 -- Employment Agreement, dated June 26, 1996, between the Registrant and
Anthony M. Schofield(a)
10.8 -- Form of Employment Agreement between the Registrant and certain of its
employees(a)
10.9 -- Form of Escrow Agreement between the Registrant, each of the stockholders of
the Subsidiaries and the escrow agent(a)
10.10 -- Form of Equitable Securities Corporation Stock Purchase Warrant(a)
10.11 -- Loan Agreement, dated September 10, 1996, between the Registrant and
SunTrust Bank, Nashville, N.A.
21 -- List of subsidiaries of the Registrant (c)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company (included in Exhibit 5)
24 -- Power of Attorney (set forth on Page II-5)
</TABLE>

- ---------------

(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8, Registration No. 333-11791.

<PAGE> 1
EXHIBIT 4.2

SERVICE EXPERTS, INC.

[ ]
TRUSTEE

INDENTURE
DATED AS OF __________________

SUBORDINATED DEBT SECURITIES
<PAGE> 2

SERVICE EXPERTS, INC.

Reconciliation and tie between Trust Indenture Act of 1939, as amended (the
"1939 Act"), and Indenture, dated as of ____________.

<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607
(b) 608
312(c) 701
313(a) 702
(c) 702
314(a)(1), (2), (3) . . . . . . . . . . . . . . . . . . . . . . . . 703
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1010
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
(e) 102
315(b) 601
316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . 101 ("Outstanding")
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502, 512
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 513
(b) 508
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504
318(a) 112
(c) 112
</TABLE>

_____________________

Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.

Attention should also be directed to Section 318(c) of the
1939 Act, which provides that the provisions of Sections 310
to and including 317 of the 1939 Act are a part of and govern
every qualified indenture, whether or not physically contained
therein.

i
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE ONE

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 101. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Acquired Debt" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Additional Amounts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Affiliate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Authenticating Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Authorized Newspaper" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Bankruptcy Law" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Bearer Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Board of Directors" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Board Resolution" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Capital Stock" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"CEDEL" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Common Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Company" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Company Request" and "Company Order" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Conversion Event" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Corporate Trust Office" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"corporation" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"coupon" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Defaulted Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Dollar" or "$" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"ECU" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Euroclear" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"European Communities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"European Monetary System" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Event of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"Foreign Currency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
"GAAP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Government Obligations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Holder" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C>
"Indexed Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Interest Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Make-Whole Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Officers' Certificate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Opinion of Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Original Issue Discount Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Outstanding" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Paying Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Place of Payment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Predecessor Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Redemption Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Redemption Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Registered Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Regular Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Repayment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Repayment Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Responsible Officer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Security Register" and "Security Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Significant Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Special Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Stated Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Subsidiary" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Trust Indenture Act" or "TIA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"United States" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"United States person" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Yield to Maturity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 102. Compliance Certificates and Opinions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 103. Form of Documents Delivered to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 104. Acts of Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 105. Notices, etc., to Trustee and Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 106. Notice to Holders; Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 107. Effect of Headings and Table of Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 108. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 109. Separability Clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 110. Benefits of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 111. No Personal Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 112. Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 113. Legal Holidays. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>

iii
<PAGE> 5

<TABLE>
<S> <C>
ARTICLE TWO

SECURITIES FORMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 201. Forms of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 202. Form of Trustee's Certificate of Authentication . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 203. Securities Issuable in Global Form. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE THREE

THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 301. Amount Unlimited; Issuable in Series. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 302. Denominations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 303. Execution, Authentication, Delivery and Dating. . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 304. Temporary Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 305. Registration, Registration of Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . . 27
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 307. Payment of Interest; Interest Rights Preserved. . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 308. Persons Deemed Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 309. Cancellation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 310. Computation of Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ARTICLE FOUR

SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 401. Satisfaction and Discharge of Indenture. . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 402. Application of Trust Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

ARTICLE FIVE

REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 501. Events of Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 502. Acceleration of Maturity; Rescission and Annulment. . . . . . . . . . . . . . . . . . . . . . 39
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . . . 40
SECTION 504. Trustee May File Proofs of Claim. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 505. Trustee May Enforce Claims Without Possession of Securities or Coupons . . . . . . . . . . . . 42
SECTION 506. Application of Money Collected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 507. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium or Make-Whole Amount, if any,
Interest and Additional Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 509. Restoration of Rights and Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 510. Rights and-Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 511. Delay or Omission Not Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 512. Control by Holders of Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

</TABLE>

iv
<PAGE> 6

<TABLE>
<S> <C>
SECTION 513. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 514. Waiver of Usury, Stay or Extension Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 515. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ARTICLE SIX

THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 601. Notice of Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 602. Certain Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 603. Not Responsible for Recitals or Issuance of Securities. . . . . . . . . . . . . . . . . . . . 47
SECTION 604. May Hold Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 605. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 606. Compensation and Reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 607. Corporate Trustee Required; Eligibility; Conflicting Interests. . . . . . . . . . . . . . . . 49
SECTION 608. Resignation and Removal; Appointment of Successor. . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 609. Acceptance of Appointment By Successor. . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 610. Merger, Conversion, Consolidation or Succession to Business. . . . . . . . . . . . . . . . . . 52
SECTION 611. Appointment of Authenticating Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

ARTICLE SEVEN

HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 701. Disclosure of Names and Addresses of Holders. . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 702. Reports by Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 703. Reports by Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SECTION 704. Company to Furnish Trustee Names and Addresses of Holders. . . . . . . . . . . . . . . . . . . 55

ARTICLE EIGHT

CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 801. Consolidations and Mergers of Company and Sales, Leases and Conveyances Permitted Subject to
Certain Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 802. Rights and Duties of Successor Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 803. Officers' Certificate and Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . 56

ARTICLE NINE

SUPPLEMENTAL INDENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 901. Supplemental Indentures Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 902. Supplemental Indentures with Consent of Holders. . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 903. Execution of Supplemental Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 904. Effect of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 905. Conformity with Trust Indenture Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
</TABLE>

v
<PAGE> 7

<TABLE>
<S> <C>
SECTION 906. Reference in Securities to Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . 60
SECTION 907. Notice of Supplemental Indentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

ARTICLE TEN

COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 1001. Payment of Principal, Premium or Make-Whole Amount, if any, Interest and Additional Amounts.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 1002. Maintenance of Office or Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 1003. Money for Securities Payments to Be Held in Trust. . . . . . . . . . . . . . . . . . . . . . 62
SECTION 1004. Additional Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1005. Existence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1006. Maintenance of Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1007. Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1008. Payment of Taxes and Other Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 1009. Provision of Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 1010. Statement as to Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 1011. Additional Amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 1012. Waiver of Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

ARTICLE ELEVEN

REDEMPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1101. Applicability of Article. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1102. Election to Redeem; Notice to Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1103. Selection by Trustee of Securities to Be Redeemed. . . . . . . . . . . . . . . . . . . . . . 67
SECTION 1104. Notice of Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 1105. Deposit of Redemption Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 1106. Securities Payable on Redemption Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 1107. Securities Redeemed in Part. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

ARTICLE TWELVE

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

ARTICLE THIRTEEN

[RESERVED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

</TABLE>

vi
<PAGE> 8

<TABLE>
<S> <C>
ARTICLE FOURTEEN

DEFEASANCE AND COVENANT DEFEASANCE
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 1401. Applicability of Article; Company's Option to Effect Defeasance or
Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 1402. Defeasance and Discharge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 1403. Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1404. Conditions to Defeasance or Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 1405. Deposited Money and Government Obligations to Be Held in Trust;
Other Miscellaneous Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

ARTICLE FIFTEEN

MEETINGS OF HOLDERS OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 1501. Purposes for Which Meetings May Be Called. . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 1502. Call, Notice and Place of Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 1503. Persons Entitled to Vote at Meetings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 1504. Quorum; Action. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 1505. Determination of Voting Rights; Conduct and Adjournment of Meetings . . . . . . . . . . . . . 77
SECTION 1506. Counting Votes and Recording Action of Meetings. . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 1507. Evidence of Action Taken by Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 1508. Proof of Execution of Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

ARTICLE SIXTEEN

SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 1601. Agreement to Subordinate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 1602. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 1603. Default on Senior Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 1604. Acceleration of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
SECTION 1605. When Distribution Must Be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1606. Notice by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1607. Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1608. Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 1609. Subordination May Not Be Impaired
by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 1610. Distribution or Notice to Representative . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 1611. Rights of Trustee and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

</TABLE>

vii
<PAGE> 9

INDENTURE

INDENTURE, dated as of ______________, between SERVICE EXPERTS, INC.,
a Delaware corporation (hereinafter called the "Company"), having its principal
office at 1134 Murfreesboro Road, Nashville, Tennessee 37217 and
_________________________ _______________________________________ as Trustee
hereunder (hereinafter called the "Trustee"), having its Corporate Trust Office
at _____________________________________________________________.

RECITALS OF THE TRUST

The Company deems it necessary to issue from time to time for its
lawful purposes subordinated debt securities (hereinafter called the
"Securities") evidencing its unsecured indebtedness, and has duly authorized
the execution and delivery of this Indenture to provide for the issuance from
time to time of the Securities, unlimited as to aggregate principal amount, to
bear interest at the rates or formulas, to mature at such times and to have
such other provisions as shall be fixed therefor as hereinafter provided.

All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchase of the
Securities by the Holders thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders of the Securities, as
follows:

ARTICLE ONE

DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 101. Definitions.

For all purposes of this Indenture, except as otherwise expressly
provided or the context otherwise requires:

(1) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;

(2) all other terms used herein which are defined in the Trust
Indenture Act (as defined below), either directly or by reference therein, have
the meanings assigned to them therein, and the terms "cash transaction" and
"self-liquidating paper," as used in Trust Indenture Act Section 311, shall
have the meanings assigned to them in the rules of the Commission adopted under
the Trust Indenture Act;
<PAGE> 10

(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles; and

(4) the words "herein," "hereof" and "hereunder" and other words
of similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.

Certain terms, used principally in Article Three, Article Five,
Article Six and Article Ten, are defined in those Articles. In addition, the
following terms shall have the indicated respective meanings:

"Acquired Debt" means Debt of a Person (i) existing at the time such
Person becomes a Subsidiary or (ii) assumed in connection with the acquisition
of assets from such Person, in each case, other than Debt incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary or
such acquisition. Acquired Debt shall be deemed to be incurred on the date of
the related acquisition of assets from any Person or the date the acquired
Person becomes a Subsidiary.

"Act" has the meaning specified in Section 104.

"Additional Amounts" means any additional amounts which are required
by a Security, under circumstances specified therein, to be paid by the Company
in respect of certain taxes imposed on certain Holders and which are owing to
such Holders.

"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.

"Authenticating Agent" means any authenticating agent appointed by the
Trustee pursuant to Section 611.

"Authorized Newspaper" means a newspaper, printed in the English
language or in an official language of the country of publication, customarily
published on each Business Day, whether or not published on Saturdays, Sundays
or holidays, and of general circulation in each place in connection with which
the term is used or in the financial community of each such place. Whenever
successive publications are required to be made in Authorized Newspapers, the
successive publications may be made in the same or in different Authorized
Newspapers in the same city meeting the foregoing requirements and in each case
on any Business Day.

"Bankruptcy Law" has the meaning specified in Section 501.

"Bearer Security" means a Security which is payable to bearer.

2
<PAGE> 11

"Board of Directors" means either (i) the Board of Directors of the
Company, the executive committee or any other committee of directors of that
board duly authorized to act for it in respect hereof, or (ii) one or more duly
authorized officers of the Company to whom the Board of Directors of the
Company or a committee thereof has delegated the authority to act with respect
to the matters contemplated by this Indenture.

"Board Resolution" means (i) a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors or a committee thereof, and to be in full force and
effect on the date of such certification, or (ii) a certificate signed by the
authorized officer or officers of the Company to whom the Board of Directors of
the Company or a committee thereof has delegated its authority (as described in
the definition of Board of Directors), and in each case delivered to the
Trustee.

"Business Day", when used with respect to any Place of Payment or any
other particular location referred to in this Indenture or in the Securities,
means, unless otherwise specified with respect to any Securities pursuant to
Section 301, any day, other than a Saturday or Sunday, that is neither a legal
holiday nor a day on which banking institutions in that Place of Payment or
particular location are authorized or required by law, regulation or executive
order to close.

"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights (other
than debt securities convertible into or exchangeable for corporate stock),
warrants or options to purchase any thereof.

"CEDEL" means Centrale de Livraison de Valeurs Mobilieres, S.A., or its
successor.

"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Exchange Act, or, if at any time
after execution of this instrument such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.

"Common Depository" has the meaning specified in Section 304(b).

"Company" means the Person named as the "Company" in the first
paragraph of this Indenture until a successor corporation shall have become
such pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor corporation.

"Company Request" and "Company Order" mean, respectively, a written
request or order signed in the name of the Company by the Chief Executive
Officer, the President or a Vice President of the Company, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of
the Company, and delivered to the Trustee.

"Conversion Event" means the cessation of use of (i) a Foreign
Currency (other than the ECU or other currency unit) both by the government of
the country which issued such currency

3
<PAGE> 12

and for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU
both within the European Monetary System and for the settlement of transactions
by public institutions of or within the European Communities or (iii) any
currency unit (or composite currency) other than the ECU for the purposes for
which it was established.

"Corporate Trust Office" means the office of the Trustee at which, at
any particular time, its corporate trust business shall be principally
administered, which office at the date hereof is located at
_____________________________________________________.

"Corporation" includes corporations, associations, companies and
business trusts.

"Coupon" means any interest coupon appertaining to a Bearer Security.

"Custodian" has the meaning set forth in Section 501.

"Defaulted Interest" has the meaning specified in Section 307.

"Dollar" or "$" means a dollar or other equivalent unit in such coin
or currency of the United States of America as at the time shall be legal
tender for payment of public and private debts.

"DTC" means The Depository Trust Company.

"ECU" means the European Currency Unit as defined and revised from
time to time by the Council of the European Communities.

"Euroclear" means Morgan Guaranty Trust Company of New York, Brussels
Office, or its successor as operator of the Euroclear System.

"European Communities" means the European Economic Community, the
European Coal and Steel Community and the European Atomic Energy Community.

"European Monetary System" means the European Monetary System
established by the Resolution of December 5, 1978 of the Council of the
European Communities.

"Event of Default" has the meaning specified in Article Five.

"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder by the Commission.

"Foreign Currency" means any currency, currency unit or composite
currency, including, without limitation, the ECU, issued by the government of
one or more countries other than the United States of America or by any
recognized confederation or association of such governments.

4
<PAGE> 13

"GAAP" means generally accepted accounting principles as used in the
United States applied on a consistent basis as in effect from time to time;
provided, that solely for purposes of any calculation required by the financial
covenants contained herein, "GAAP" shall mean generally accepted accounting
principles as used in the United States on the date hereof, applied on a
consistent basis.

"Government Obligations" means securities which are (i) direct
obligations of the United States of America or the government which issued the
Foreign Currency in which the Securities of a particular series are payable,
for the payment of which its full faith and credit is pledged or (ii)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the Foreign Currency in which the Securities of such series are payable, the
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government, which, in
either case, are not callable or redeemable at the option of the issuer
thereof, and shall also include a depository receipt issued by a bank or trust
company as custodian with respect to any such Government Obligation or a
specific payment of interest on or principal of any such Government Obligation
held by such custodian for the account of the holder of a depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the
Government Obligation evidenced by such depository receipt.

"Holder" means, in the case of a Registered Security, the Person in
whose name a Security is registered in the Security Register and, in the case
of a Bearer Security, the bearer thereof and, when used with respect to any
coupon, shall mean the bearer thereof.

"Indenture" means this instrument as originally executed or as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
and shall include the terms of particular series of Securities established as
contemplated by Section 301; provided, however, that, if at any time more than
one Person is acting as Trustee under this instrument, "Indenture" shall mean,
with respect to any one or more series of Securities for which such Person is
Trustee, this instrument as originally executed or as it may from time to time
be supplemented or amended by one or more indentures supplemental hereto
entered into pursuant to the applicable provisions hereof and shall include the
terms of the or those particular series of Securities for which such Person is
Trustee established as contemplated by Section 301, exclusive, however, of any
provisions or terms which relate solely to other series of Securities for which
such Person is not Trustee, regardless of when such terms or provisions were
adopted, and exclusive of any provisions or terms adopted by means of one or
more indentures supplemental hereto executed and delivered after such Person
had become such Trustee but to which such Person, as such Trustee, was not a
party.

5
<PAGE> 14

"Indexed Security" means a Security the terms of which provide that
the principal amount thereof payable at Stated Maturity may be more or less
than the principal face amount thereof at original issuance.

"Interest" when used with respect to an Original Issue Discount
Security which by its terms bears interest only after Maturity, shall mean
interest payable after Maturity, and, when used with respect to a Security
which provides for the payment of Additional Amounts pursuant to Section 1011,
includes such Additional Amounts.

"Interest Payment Date" means, when used with respect to any Security,
the Stated Maturity of an installment of interest on such Security.

"Make-Whole Amount" means the amount, if any, in addition to principal
which is required by a Security, under the terms and conditions specified
therein or as otherwise specified as contemplated by Section 301, to be paid by
the Company to the Holder thereof in connection with any optional redemption or
accelerated payment of such Security.

"Maturity" means, when used with respect to any Security, the date on
which the principal of such Security or an installment of principal becomes due
and payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption, notice of option to elect
repayment, repurchase or otherwise.

"Officers' Certificate" means a certificate signed by the Chief
Executive Officer, the President or a Vice President and by the Treasurer, an
Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company,
and delivered to the Trustee.

"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or counsel for the Company or other counsel satisfactory to the
Trustee.

"Original Issue Discount Security" means any Security which provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the Maturity thereof pursuant to Section 502.

"Outstanding", when used with respect to Securities, means, as of the
date of determination, all Securities theretofore authenticated and delivered
under this Indenture, except:

(i) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;

(ii) Securities, or portions thereof, for whose payment or
redemption or repayment at the option of the Holder money in the
necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its
own Paying Agent) for the Holders of such Securities and any coupons
appertaining

6
<PAGE> 15

thereto; provided that, if such Securities are to be redeemed, notice
of such redemption has been duly given pursuant to this Indenture or
other provision therefor satisfactory to the Trustee has been made;

(iii) Securities, except solely to the extent provided in
Sections 1402 or 1403, as applicable, with respect to which the
Company has effected defeasance and/or covenant defeasance as provided
in Article Fourteen;

(iv) Securities which have been paid pursuant to Section 306
or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by
a bona fide purchaser in whose hands such Securities are valid
obligations of the Company; and

(v) Securities converted into Capital Stock of the
Company pursuant to or in accordance with this Indenture if the terms
of such Securities provide for convertibility pursuant to Section 301;

provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder or are present at
a meeting of Holders for quorum purposes, and for the purpose of making the
calculations required by Trust Indenture Act Section 313, (i) the principal
amount of an Original Issue Discount Security that may be counted in making
such determination or calculation and that shall be deemed to be Outstanding
for such purpose shall be equal to the amount of principal thereof that would
be (or shall have been declared to be) due and payable, at the time of such
determination, upon a declaration of acceleration of the maturity thereof
pursuant to Section 502, (ii) the principal amount of any Security denominated
in a Foreign Currency that may be counted in making such determination or
calculation and that shall be deemed Outstanding for such purpose shall be
equal to the Dollar equivalent, determined pursuant to Section 301 as of the
date such Security is originally issued by the Company, of the principal amount
(or, in the case of an Original Issue Discount Security, the Dollar equivalent
as of such date of original issuance of the amount determined as provided in
clause (i) above) of such Security, (iii) the principal amount of any Indexed
Security that may be counted in making such determination or calculation and
that shall be deemed outstanding for such purpose shall be equal to the
principal face amount of such Indexed Security at original issuance, unless
otherwise provided with respect to such Indexed Security pursuant to Section
301, and (iv) Securities owned by the Company or any other obligor upon the
Securities or any Affiliate of the Company or of such other obligor shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in making such calculation or in relying
upon any such request, demand, authorization, direction, notice, consent or
waiver, only Securities which a Responsible Officer of the Trustee knows to be
so owned shall be so disregarded. Securities so owned which have been pledged
in good faith may be regarded as Outstanding if the pledgee establishes to the
satisfaction of the Trustee the pledgee's right so to

7
<PAGE> 16

act with respect to such Securities and that the pledgee is not the Company or
any other obligor upon the Securities or any Affiliate of the Company or of
such other obligor.

"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium or Make-Whole Amount, if any) or interest on any
Securities, or coupons on behalf of the Company, or if no such Person is
authorized, the Company.

"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.

"Place of Payment" means, when used with respect to the Securities of
or within any series, the place or places where the principal of (and premium
or Make-Whole Amount, if any) and interest on such Securities are payable as
specified as contemplated by Sections 301 and 1002.

"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
mutilated, destroyed, lost or stolen Security or a Security to which a
mutilated, destroyed, lost or stolen coupon appertains shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security or
the Security to which the mutilated, destroyed, lost or stolen coupon
appertains.

"Redemption Date" means, when used with respect to any Security to be
redeemed in whole or in part, the date fixed for such redemption by or pursuant
to this Indenture.

"Redemption Price" means, when used with respect to any Security to be
redeemed, the price at which it is to be redeemed pursuant to this Indenture.

"Registered Security" means any Security which is registered in the
Security Register.

"Regular Record Date" for the installment of interest payable on any
Interest Payment Date on the Registered Securities of or within any series
means the date specified for that purpose as contemplated by Section 301,
whether or not a Business Day.

"Repayment Date" means, when used with respect to any Security to be
repaid or repurchased at the option of the Holder, the date fixed for such
repayment or repurchase by or pursuant to this Indenture.

"Repayment Price" means, when used with respect to any Security to be
repaid or purchased at the option of the Holder, the price at which it is to be
repaid or repurchased by or pursuant to this Indenture.

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<PAGE> 17

"Representative" means the indenture trustee or other trustee, agent
or representative for an issue of Senior Debt.

"Responsible Officer" means, when used with respect to the Trustee,
any officer of the Trustee assigned by the Trustee to administer its corporate
trust matters.

"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder by the Commission.

"Security" has the meaning stated in the first recital of this
Indenture and, more particularly, means any Security or Securities
authenticated and delivered under this Indenture; provided, however, that, if
at any time there is more than one Person acting as Trustee under this
Indenture, "Securities" with respect to the Indenture as to which such Person
is Trustee shall have the meaning stated in the first recital of this Indenture
and shall more particularly mean Securities authenticated and delivered under
this Indenture, exclusive, however, of Securities of or within any series as to
which such Person is not Trustee.

"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.

"Senior Debt" means the principal of and interest on, or substantially
similar payments to be made by the Company in respect of, the following,
whether outstanding at the date of execution of this Indenture or thereafter
incurred, created or assumed: (a) indebtedness of the Company for money
borrowed or represented by purchase-money obligations, (b) indebtedness of the
Company evidenced by notes, debentures, or bonds, or other securities issued
under the provisions of an indenture, fiscal agency agreement or other
instrument, (c) obligations of the Company as lessee under leases of property
either made as part of any sale and lease-back transaction to which the Company
is a party or otherwise, (d) indebtedness of partnerships and joint ventures
which is included in the Company's consolidated financial statements, (e)
indebtedness, obligations and liabilities of others in respect of which the
Company is liable contingently or otherwise to pay or advance money or property
or as guarantor, endorser or otherwise or which the Company has agreed to
purchase or otherwise acquire, and (f) any binding commitment of the Company to
fund any real estate investment or to fund any investment in any entity making
such real estate investment; but excluding, however, (1) any such indebtedness,
obligation or liability referred to in clauses (a) through (f) above as to
which, in the instrument creating or evidencing the same or pursuant to which
the same is outstanding, it is provided that such indebtedness, obligation or
liability is not superior in right of payment to the Securities, or ranks pari
passu with the Securities, (2) any such indebtedness, obligation or liability
which is subordinated to indebtedness of the Company to substantially the same
extent as or to a greater extent than the Securities are subordinated and (3)
the Securities. As used in the preceding sentence the term "purchase-money
obligations" shall mean indebtedness or obligations evidenced by a note,
debenture, bond or other instrument (whether or not secured by any lien or
other security interest but excluding indebtedness or obligations for which
recourse is limited to the property purchased) issued or assumed as all or a
part of the consideration for the acquisition of

9
<PAGE> 18

property, whether by purchase, merger, consolidation or otherwise, but shall
not include any trade accounts payable. A distribution may consist of cash,
securities or other property.

"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary"(within the meaning of Regulation S-X, promulgated under the
Securities Act) of the Company.

"Special Record Date" for the payment of any Defaulted Interest on the
Registered Securities of or within any series means a date fixed by the Trustee
pursuant to Section 307.

"Stated Maturity" means, when used with respect to any Security or any
installment of principal thereof or interest thereon, the date specified in
such Security or a coupon representing such installment of interest as the
fixed date on which the principal of such Security or such installment of
principal or interest is due and payable.

"Subsidiary" means, with respect to any Person, any corporation or
other entity of which a majority of (a) the voting power of the voting equity
securities or (b) the outstanding equity interests of which are owned, directly
or indirectly, by such Person. For the purposes of this definition, "voting
equity securities" means equity securities having voting power for the election
of directors, whether at all times or only so long as no senior class of
security has such voting power by reason of any contingency.

"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939,
as amended and as in force at the date as of which this Indenture was executed,
except as provided in Section 905.

"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean or include each Person who is then a Trustee hereunder;
provided, however, that if at any time there is more than one such Person,
"Trustee" as used with respect to the Securities of or within any series shall
mean only the Trustee with respect to the Securities of that series.

"United States" means, unless otherwise specified with respect to any
Securities pursuant to Section 301, the United States of America (including the
states and the District of Columbia), its territories, its possessions and
other areas subject to its jurisdiction.

"United States person" means, unless otherwise specified with respect
to any Securities pursuant to Section 301, an individual who is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States of or any state
or the District of Columbia or an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.

"Yield to Maturity" means the yield to maturity, computed at the time
of issuance of a Security (or, if applicable, at the most recent
predetermination of interest on such Security) and

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<PAGE> 19

as set forth in such Security in accordance with generally accepted United
States bond yield computation principles.

SECTION 102. Compliance Certificates and Opinions.

Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officers' Certificate stating that all conditions precedent, if
any, provided for in this Indenture (including covenants, compliance with which
constitute conditions precedent) relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate
or opinion need be furnished.

Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (excluding certificates
delivered pursuant to Section 1010) shall include:

(1) a statement that each individual signing such certificate or
opinion has read such condition or covenant and the provisions herein relating
thereto;

(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;

(3) a statement that, in the opinion of each such individual, he
has made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such condition or covenant has
been complied with; and

(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.

SECTION 103. Form of Documents Delivered to Trustee.

In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion as to some matters and one or more
other such Persons as to other matters, and any such Person may certify or give
an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon an Opinion of Counsel, or a
certificate or representations by counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the opinion, certificate

11
<PAGE> 20

or representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such Opinion of Counsel or certificate or
representations may be based, insofar as it relates to factual matters, upon a
certificate or opinion of, or representations by, an officer or officers of the
Company stating that the information as to such factual matters is in the
possession of the Company, unless such counsel knows that the certificate or
opinion or representations as to such matters are erroneous.

Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

SECTION 104. Acts of Holders.

(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders of the Outstanding Securities of all series or one or more series,
as the case may be, may be embodied in and evidenced by one or more instruments
of substantially similar tenor signed by such Holders in person or by agents
duly appointed in writing. If Securities of a series are issuable as Bearer
Securities, any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders of Securities of such series may, alternatively, be embodied in and
evidenced by the record of Holders of Securities of such series voting in favor
thereof, whether in person or by proxies duly appointed in writing, at any
meeting of Holders of Securities of such series duly called and held in
accordance with the provisions of Article Fifteen, or a combination of such
instruments and any such record. Except as herein otherwise expressly
provided, such action shall become effective when such instrument or
instruments or record or both are delivered to the Trustee and, where it is
hereby expressly required, to the Company. Such instrument or instruments and
any such record (and the action embodied therein and evidenced thereby) are
herein sometimes referred to as the "Act" of the Holders signing such
instrument or instruments or so voting at any such meeting. Proof of execution
of any such instrument or of a writing appointing any such agent, or of the
holding by any Person of a Security, shall be sufficient for any purpose of
this Indenture and conclusive in favor of the Trustee and the Company and any
agent of the Trustee or the Company, if made in the manner provided in this
Section. The record of any meeting of Holders of Securities shall be proved in
the manner provided in Section 1506.

(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where
such execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other reasonable manner which the Trustee deems sufficient

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<PAGE> 21

(c) The ownership of Registered Securities shall be proved by the
Security Register or by a certificate of the Security Register.

(d) The ownership of Bearer Securities may be proved by the
production of such Bearer Securities or by a certificate executed, as
depository, by any trust company, bank, banker or other depository, wherever
situated, if such certificate shall be deemed by the Trustee to be
satisfactory, showing that at the date therein mentioned such Person had on
deposit with such depository, or exhibited to it, the Bearer Securities therein
described; or such facts may be proved by the certificate or affidavit of the
Person holding such Bearer Securities, if such certificate or affidavit is
deemed by the Trustee to be satisfactory. The Trustee and the Company may
assume that such ownership of any Bearer Security continues until (1) another
certificate or affidavit bearing a later date issued in respect of the same
Bearer Security is produced, or (2) such Bearer Security is produced to the
Trustee by some other Person, or (3) such Bearer Security is surrendered in
exchange for a Registered Security, or (4) such Bearer Security is no longer
Outstanding. The ownership of Bearer Securities may also be proved in any
other manner which the Trustee deems sufficient.

(e) If the Company shall solicit from the Holders of Registered
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may, at its option, in or pursuant to a Board
Resolution, fix in advance a record date for the determination of Holders
entitled to give such request, demand, authorization, direction, notice,
consent, waiver or other Act, but the Company shall have no obligation to do
so. Notwithstanding TIA Section 316(c), such record date shall be the record
date specified in or pursuant to such Board Resolution, which shall be a date
not earlier than the date 30 days prior to the first solicitation of Holders
generally in connection therewith and not later than the date such solicitation
is completed. If such a record date is fixed, such request, demand,
authorization, direction, notice, consent, waiver or other Act may be given
before or after such record date, but only the Holders of record at the close
of business on such record date shall be deemed to be Holders for the purposes
of determining whether Holders of the requisite proportion of Outstanding
Securities have authorized or agreed or consented to such request, demand,
authorization, direction, notice, consent, waiver or other Act, and for that
purpose the Outstanding Securities shall be computed as of such record date;
provided that no such authorization, agreement or consent by the Holders on
such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than eleven months after
the record date.

(f) Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee, any
Security Registrar, any Paying Agent, any Authenticating Agent or the Company
in reliance thereon, whether or not notation of such action is made upon such
Security.

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<PAGE> 22

SECTION 105. Notices, etc., to Trustee and Company.

Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to or filed with,

(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or filed in
writing to or with the Trustee at its Corporate Trust Office, Attention:
Corporate Trust Department, or

(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein expressly
provided) if in writing and mailed, first class postage prepaid, to the Company
at the address of its principal office specified in the first paragraph of this
Indenture or at any other address previously furnished in writing to the
Trustee by the Company.

SECTION 106. Notice to Holders; Waiver.

Where this Indenture provides for notice of any event to Holders of
Registered Securities by the Company or the Trustee, such notice shall be
sufficiently given (unless otherwise herein expressly provided) if in writing
and mailed, first-class postage prepaid, to each such Holder affected by such
event, at his address as it appears in the Security Register, not later than
the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Holders of Registered
Securities is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice to Holders of Bearer Securities
given as provided herein. Any notice mailed to a Holder in the manner herein
prescribed shall be conclusively deemed to have been received by such Holder,
whether or not such Holder actually receives such notice.

If by reason of the suspension of or irregularities in regular mail
service or by reason of any other cause it shall be impracticable to give such
notice by mail, then such notification to Holders of Registered Securities as
shall be made with the approval of the Trustee shall constitute a sufficient
notification to such Holders for every purpose hereunder.

Except as otherwise expressly provided herein or otherwise specified
with respect to any Securities pursuant to Section 301, where this Indenture
provides for notice to Holders of Bearer Securities of any event, such notice
shall be sufficiently given if published in an Authorized Newspaper in The City
of New York and in such other city or cities as may be specified in such
Securities, and if the Securities of such series are listed on any stock
exchange outside the United States, in any place at which such Securities are
listed on a securities exchange to the extent that such securities exchange so
requires, on a Business Day, such publication to be not later than the latest
date, and not earlier than the earliest date, prescribed for the giving of such
notice. Any

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<PAGE> 23

such notice shall be deemed to have been given on the date of such publication
or, if published more than once, on the date of the first such publication.

If by reason of the suspension of publication of any Authorized
Newspaper or Authorized Newspapers or by reason of any other cause it shall be
impracticable to publish any notice to Holders of Bearer Securities as provided
above, then such notification to Holders of Bearer Securities as shall be given
with the approval of the Trustee shall constitute sufficient notice to such
Holders for every purpose hereunder. Neither the failure to give notice by
publication to any particular Holder of Bearer Securities as provided above,
nor any defect in any notice so published, shall affect the sufficiency of such
notice with respect to other Holders of Bearer Securities or the sufficiency of
any notice to Holders of Registered Securities given as provided herein.

Any request, demand, authorization, direction, notice, consent or
waiver required or permitted under this Indenture shall be in the English
language, except that any published notice may be in an official language of
the country of publication.

Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken
in reliance upon such waiver.

SECTION 107. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.

SECTION 108. Successors and Assigns.

All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.

SECTION 109. Separability Clause.

In case any provision in this Indenture or in any Security or coupon
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.

SECTION 110. Benefits of Indenture.

Nothing in this Indenture or in the Securities or coupons appertaining
thereto, express or implied, shall give to any Person, other than the parties
hereto, any Security Registrar, any Paying

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<PAGE> 24

Agent, any Authenticating Agent and their successors hereunder and the Holders
any benefit or any legal or equitable right, remedy or claim under this
Indenture.

SECTION 111. No Personal Liability.

No recourse under or upon any obligation, covenant or agreement
contained in this Indenture, in any Security or coupon appertaining thereto, or
because of any indebtedness evidenced thereby, shall be had against any
promoter, as such, or against any past, present or future shareholder, officer
or director, as such, of the Company or of any successor, either directly or
through the Company or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any
legal or equitable proceeding or otherwise, all such liability being expressly
waived and released by the acceptance of the Securities by the Holders thereof
and as part of the consideration for the issue of the Securities.

SECTION 112. Governing Law.

This Indenture and the Securities and coupons shall be governed by and
construed in accordance with the laws of the State of Tennessee. This
Indenture is subject to the provisions of the TIA that are required to be part
of this Indenture and shall, to the extent applicable, be governed by such
provisions. If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA Section 318(c), the duties imposed by TIA
Section 318(c) shall control.

SECTION 113. Legal Holidays.

In any case where any Interest Payment Date, Redemption Date,
Repayment Date, sinking fund payment date, Stated Maturity or Maturity of any
Security shall not be a Business Day at any Place of Payment, then
(notwithstanding any other provision of this Indenture or any Security or
coupon other than a provision in the Securities of any series which
specifically states that such provision shall apply in lieu hereof), payment of
interest or any Additional Amounts or principal (and premium or Make-Whole
Amount, if any) need not be made at such Place of Payment on such date, but may
be made on the next succeeding Business Day at such Place of Payment with the
same force and effect as if made on the Interest Payment Date, Redemption Date,
Repayment Date or sinking fund payment date, or at the Stated Maturity or
Maturity, provided that no interest shall accrue on the amount so payable for
the period from and after such Interest Payment Date, Redemption Date,
Repayment Date, sinking fund payment date, Stated Maturity or Maturity, as the
case may be.

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<PAGE> 25

ARTICLE TWO

SECURITIES FORMS

SECTION 201. Forms of Securities.

The Registered Securities, if any, of each series and the Bearer
Securities, if any, and related coupons of each series, shall be in
substantially the forms as shall be established in or pursuant to one or more
indentures supplemental hereto or Board Resolutions, shall have such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture or any indenture supplemental hereto,
and may have such letters, numbers or other marks of identification or
designation and such legends or endorsements placed thereon as the Company may
deem appropriate and as are not inconsistent with the provisions of this
Indenture, or as may be required to comply with any law or with any rule or
regulation made pursuant thereto or with any rule or regulation of any stock
exchange on which the Securities may be listed, or to conform to usage.

Unless otherwise specified as contemplated by Section 301, Bearer
Securities shall have interest coupons attached.

The definitive Securities and coupons shall be printed, lithographed,
engraved or produced by any combination of these methods on a steel engraved
border or steel engraved borders or may be produced in any other manner, all as
determined by the officers executing such Securities or coupons, as evidenced
by their execution of such Securities or coupons.

SECTION 202. Form of Trustee's Certificate of Authentication.

Subject to Section 611, the Trustee's certificate of authentication
shall be in substantially the following form:

This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.

, as Trustee
-------------------------

By:
---------------------------------
Authorized Signatory

SECTION 203. Securities Issuable in Global Form.

If Securities of or within a series are issuable in global form, as
specified as contemplated by Section 301, then, notwithstanding clause (8) of
Section 301 and the provisions of Section 302, any such Security shall
represent such of the Outstanding Securities of such series as shall

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<PAGE> 26

be specified therein and may provide that it shall represent the aggregate
amount of Outstanding Securities of such series from time to time endorsed
thereon and that the aggregate amount of Outstanding Securities of such series
represented thereby may from time to time be increased or decreased to reflect
exchanges. Any endorsement of a Security in global form to reflect the amount,
or any increase or decrease in the amount, of Outstanding Securities
represented thereby shall be made by the Trustee in such manner and upon
instructions given by such Person or Persons as shall be specified therein or
in the Company Order to be delivered to the Trustee pursuant to Section 303 or
304. Subject to the provisions of Section 303 and, if applicable, Section 304,
the Trustee shall deliver and redeliver any Security in permanent global form
in the manner and upon instructions given by the Person or Persons specified
therein or in the applicable Company Order. If a Company Order pursuant to
Section 303 or 304 has been, or simultaneously is, delivered, any instructions
by the Company with respect to endorsement or delivery or redelivery of a
Security in global form shall be in writing but need not comply with Section
102 and need not be accompanied by an Opinion of Counsel.

The provisions of the last sentence of Section 303 shall apply to any
Security represented by a Security in global form if such Security was never
issued and sold by the Company and the Company delivers to the Trustee the
Security in global form together with written instructions (which need not
comply with Section 102 and need not be accompanied by an Opinion of Counsel)
with regard to the reduction in the principal amount of Securities represented
thereby, together with the written statement contemplated by the last sentence
of Section 303.

Notwithstanding the provisions of Section 307, unless otherwise
specified as contemplated by Section 301, payment of principal of and any
premium or Make-Whole Amount and interest on any Security in permanent global
form shall be made to the Person or Persons specified therein.

Notwithstanding the provisions of Section 308 and except as provided
in the preceding paragraph, the Company, the Trustee and any agent of the
Company and the Trustee shall treat as the Holder of such principal amount of
Outstanding Securities represented by a permanent global Security (i) in the
case of a permanent global Security in registered form, the Holder of such
permanent global Security in registered form, or (ii) in the case of a
permanent global Security in bearer form, Euroclear or CEDEL.

ARTICLE THREE

THE SECURITIES

SECTION 301. Amount Unlimited; Issuable in Series.

The aggregate principal amount of Securities which may be
authenticated and delivered under this Indenture is unlimited.

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<PAGE> 27

The Securities may be issued in one or more series. Prior to the
issuance of Securities of any series, there shall be established in or pursuant
to the authority granted by one or more Board Resolutions, or indentures
supplemental hereto, any or all of the following, as applicable (each of which,
if so provided, may be determined from time to time by the Company with respect
to unissued Securities of or within the series when issued from time to time):

(1) the title of the Securities of or within the series (which
shall distinguish the Securities of such series from all other series of
Securities);

(2) any limit upon the aggregate principal amount of the
Securities of or within the series that may be authenticated and delivered
under this Indenture (except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other
Securities of or within the series pursuant to Section 304, 305, 306, 906, 1107
or 1305);

(3) the date or dates, or the method by which such date or dates
will be determined, on which the principal of the Securities of or within the
series shall be payable and the amount of principal payable thereon;

(4) the rate or rates (which may be fixed or variable) at which
the Securities of or within the series shall bear interest, if any, or the
method by which such rate or rates shall be determined, the date or dates from
which such interest shall accrue or the method by which such date or dates
shall be determined, the Interest Payment Dates on which such interest will be
payable and the Regular Record Date, if any, for the interest payable on any
Registered Security on any Interest Payment Date, or the method by which such
date shall be determined, and the basis upon which interest shall be calculated
if other than that of a 360-day year consisting of twelve 30-day months;

(5) the place or places, if any, other than or in addition to the
Borough of Manhattan, The City of New York, where the principal of (and premium
or Make-Whole Amount, if any), interest, if any, on, and Additional Amounts, if
any, payable in respect of, Securities of or within the series shall be
payable, any Registered Securities of or within the series may be surrendered
for registration of transfer, exchange or conversion and notices or demands to
or upon the Company in respect of the Securities of or within the series and
this Indenture may be served;

(6) the period or periods within which, the price or prices
(including the premium or Make-Whole Amount, if any) at which, the currency or
currencies, currency unit or units or composite currency or currencies in which
and other terms and conditions upon which Securities of or within the series
may be redeemed in whole or in part, at the option of the Company, if the
Company is to have the option;

(7) the obligation, if any, of the Company to redeem, repay or
purchase Securities of or within the series pursuant to any sinking fund or
analogous provision or at the option of a Holder thereof, and the period or
periods within which or the date or dates on which, the price or prices at
which, the currency or currencies, currency unit or units or composite currency
or

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<PAGE> 28

currencies in which, and other terms and conditions upon which Securities of or
within the series shall be redeemed, repaid or purchased, in whole or in part,
pursuant to such obligation;

(8) if other than denominations of $1,000 and any integral
multiple thereof, the denominations in which any Registered Securities of or
within the series shall be issuable and, if other than the denomination of
$5,000, the denomination or denominations in which any Bearer Securities of or
within the series shall be issuable;

(9) if other than the Trustee, the identity of each Security
Registrar and/or Paying Agent;

(10) if other than the principal amount thereof, the portion of the
principal amount of Securities of or within the series that shall be payable
upon declaration of acceleration of the maturity thereof pursuant to Section
502 or, if applicable, the portion of the principal amount of Securities of or
within the series that is convertible in accordance with the provisions of this
Indenture, or the method by which such portion shall be determined;

(11) if other than Dollars, the Foreign Currency or Currencies in
which payment of the principal of (and premium or Make-Whole Amount, if any) or
interest or Additional Amounts, if any, on the Securities of or within the
series shall be payable or in which the Securities of or within the series
shall be denominated;

(12) whether the amount of payments of principal of (and premium or
Make-Whole Amount, if any) or interest, if any, on the Securities of or within
the series may be determined with reference to an index, formula or other
method (which index, formula or method may be based, without limitation, on one
or more currencies, currency units, composite currencies, commodities, equity
indices or other indices), and the manner in which such amounts shall be
determined;

(13) whether the principal of (and premium or Make-Whole Amount, if
any) or interest or Additional Amounts, if any, on the Securities of or within
the series are to be payable, at the election of the Company or a Holder
thereof, in a currency or currencies, currency unit or units or composite
currency or currencies other than that in which such Securities are denominated
or stated to be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner of,
and identity of the exchange rate agent with responsibility for, determining
the exchange rate between the currency or currencies, currency unit or units or
composite currency or currencies in which such Securities are denominated or
stated to be payable and the currency or currencies, currency unit or units or
composite currency or currencies in which such Securities are to be so payable;

(14) provisions, if any, granting special rights to the Holders of
Securities of or within the series upon the occurrence of such events as may be
specified;

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<PAGE> 29

(15) any deletions from, modifications of or additions to the Events
of Default or covenants of the Company with respect to Securities of or within
the series, whether or not such Events of Default or covenants are consistent
with the Events of Default or covenants set forth herein;

(16) whether Securities of or within the series are to be issuable as
Registered Securities, Bearer Securities (with or without coupons) or both, any
restrictions applicable to the offer, sale or delivery of Bearer Securities and
the terms upon which Bearer Securities of or within the series may be exchanged
for Registered Securities of or within the series and vice versa (if permitted
by applicable laws and regulations), whether any Securities of or within the
series are to be issuable initially in temporary global form and whether any
Securities of or within the series are to be issuable in permanent global form
(with or without coupons) and, if so, whether beneficial owners of interests in
any such permanent global Security may exchange such interests for Securities
of such series and of like tenor of any authorized form and denomination and
the circumstances under which any such exchanges may occur, if other than in
the manner provided in Section 305, and, if Registered Securities of or within
the series are to be issuable as a global Security, the identity of the
depository for such series;

(17) the date as of which any Bearer Securities of or within the
series and any temporary global Security representing Outstanding Securities of
or within the series shall be dated if other than the date of original issuance
of the first Security of the series to be issued;

(18) the Person to whom any interest on any Registered Security of
the series shall be payable, if other than the Person in whose name that
Security (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest, the manner in which, or
the Person to whom, any interest on any Bearer Security of the series shall be
payable, if otherwise than upon presentation and surrender of the coupons
appertaining thereto as they severally mature, and the extent to which, or the
manner in which, any interest payable on a temporary global Security on an
Interest Payment Date will be paid if other than in the manner provided in
Section 304;

(19) the applicability, if any, of Sections 1402 and/or 1403 to the
Securities of or within the series and any provisions in modification of, in
addition to or in lieu of any of the provisions of Article Fourteen;

(20) if the Securities of such series are to be issuable in
definitive form (whether upon original issue or upon exchange of a temporary
Security of such series) only upon receipt of certain certificates or other
documents or satisfaction of other conditions, then the form and/or terms of
such certificates, documents or conditions;

(21) if the Securities of or within the series are to be issued upon
the exercise of debt warrants, the time, manner and place for such Securities
to be authenticated and delivered;

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<PAGE> 30

(22) whether and under what circumstances the Company will pay
Additional Amounts as contemplated by Section 1011 on the Securities of or
within the series to any Holder who is not a United States person (including
any modification to the definition of such term) in respect of any tax,
assessment or governmental charge and, if so, whether the Company will have the
option to redeem such Securities rather than pay such Additional Amounts (and
the terms of any such option);

(23) the obligation, if any, of the Company to permit the conversion
of the Securities of such series into shares of Capital Stock of the Company
and the terms and conditions upon which such conversion shall be effected
(including, without limitation, the initial conversion price or rate, the
conversion period, any adjustment of the applicable conversion price or rate
and any requirements relative to the reservation of such shares for purposes of
conversion);

(24) if convertible, any applicable limitations on the ownership or
transferability of the Capital Stock into which such Securities are
convertible; and

(25) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture, except as permitted by
Section 905(4) and (5)).

All Securities of any one series and the coupons appertaining to any
Bearer Securities of such series, if any, shall be substantially identical
except, in the case of Registered or Bearer Securities issued in global form,
as to denomination and except as may otherwise be provided in or pursuant to
such Board Resolution or in any such indenture supplemental hereto. All
Securities of any one series need not be issued at the same time and, unless
otherwise provided, a series may be reopened, without the consent of the
Holders, for issuances of additional Securities of such series.

If any of the terms of the Securities of any series are established by
action taken pursuant to one or more Board Resolutions, a copy of an
appropriate record of such action(s) shall be certified by the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee at or prior to
the delivery of the Company Order for authentication and delivery of such
Securities.

SECTION 302. Denominations.

The Securities of each series shall be issuable in such denominations
as shall be specified as contemplated by Section 301. With respect to
Securities of any series denominated in Dollars, in the absence of any such
provisions with respect to the Securities of any series, the Registered
Securities of such series, other than Registered Securities issued in global
form (which may be of any denomination), shall be issuable in denominations of
$1,000 and any integral multiple thereof and the Bearer Securities of such
series other than Bearer Securities issued in global form (which may be of any
denomination), shall be issuable in denominations of $5,000.

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<PAGE> 31

SECTION 303. Execution, Authentication, Delivery and Dating.

The Securities and any coupons appertaining thereto shall be executed
on behalf of the Company by its Chief Executive Officer, its President or a
Vice President, and attested by its Secretary or an Assistant Secretary. The
signature of any of these officers on the Securities and coupons may be manual
or facsimile signatures of the present or any future such authorized officer
and may be imprinted or otherwise reproduced on the Securities.

Securities or coupons appertaining thereto bearing the manual or
facsimile signatures of individuals who were at any time the proper officers of
the Company shall bind the Company, notwithstanding that such individuals or
any of them have ceased to hold such offices prior to the authentication and
delivery of such Securities or did not hold such offices at the date of such
Securities or coupons.

At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities of any series, together with
any coupon appertaining thereto, executed by the Company to the Trustee for
authentication, together with a Company Order for the authentication and
delivery of such Securities, and the Trustee in accordance with the Company
Order shall authenticate and deliver such Securities; provided, however, that,
in connection with its original issuance, no Bearer Security shall be mailed or
otherwise delivered to any location in the United States; and provided further
that, unless otherwise specified with respect to any series of Securities
pursuant to Section 301, a Bearer Security may be delivered in connection with
its original issuance only if the Person entitled to receive such Bearer
Security shall have furnished a certificate to Euroclear or CEDEL, as the case
may be, in the form set forth in Exhibit A-1 to this Indenture or such other
certificate as may be specified with respect to any series of Securities
pursuant to Section 301, dated no earlier than 15 days prior to the earlier of
the date on which such Bearer Security is delivered and the date on which any
temporary Security first becomes exchangeable for such Bearer Security in
accordance with the terms of such temporary Security and this Indenture.
Except as permitted by Section 306, the Trustee shall not authenticate and
deliver any Bearer Security unless all appurtenant coupons for interest then
matured have been detached and canceled.

If all of the Securities of any series are not to be issued at one
time and if the Board Resolution or supplemental indenture establishing such
series shall so permit, such Company Order may set forth procedures acceptable
to the Trustee for the issuance of such Securities and determining the terms of
particular Securities of such series, such as interest rate or formula,
maturity date, date of issuance and date from which interest shall accrue. In
authenticating such Securities, and accepting the additional responsibilities
under this Indenture in relation to such Securities, the Trustee shall be
entitled to receive, and (subject to TIA Section 315(a) through 315(d)) shall
be fully protected in relying upon:

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<PAGE> 32

(i) an Opinion of Counsel complying with Section 102 and stating
that:

(a) the form or forms of such Securities and any coupons
have been, or will have been upon compliance with such
procedures as may be specified therein, established in
conformity with the provisions of this Indenture;

(b) the terms of such Securities and any coupons have
been, or will have been upon compliance with such procedures
as may be specified therein, established in conformity with
the provisions of this Indenture; and

(c) such Securities, together with any coupons
appertaining thereto, when completed pursuant to such
procedures as may be specified therein, and executed and
delivered by the Company to the Trustee for authentication in
accordance with this Indenture, authenticated and delivered by
the Trustee in accordance with this Indenture and issued by
the Company in the manner and subject to any conditions
specified in such Opinion of Counsel, will constitute legal,
valid and binding obligations of the Company, enforceable in
accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization and other similar laws of general
applicability relating to or affecting the enforcement of
creditors' rights generally and to general equitable
principles and to such other matters as may be specified
therein; and

(ii) an Officers' Certificate complying with Section 102 and stating
that all conditions precedent provided for in this Indenture relating to the
issuance of such Securities have been, or will have been upon compliance with
such procedures as may be specified therein, complied with and that, to the
best of the knowledge of the signers of such certificate, no Event of Default
with respect to such Securities shall have occurred and be continuing.

The Trustee shall not be required to authenticate such Securities if
the issue of such Securities pursuant to this Indenture will affect the
Trustee's own rights, duties, obligations or immunities under the Securities
and this Indenture or otherwise in a manner which is not reasonably acceptable
to the Trustee.

Notwithstanding the provisions of Section 301 and of the preceding
paragraph, if all the Securities of any series are not to be issued at one
time, it shall not be necessary to deliver a Company Order, an Opinion of
Counsel or an Officers' Certificate otherwise required pursuant to the
preceding paragraph at the time of issuance of each Security of such series,
but such order, opinion and certificate, with appropriate modifications to
cover such future issuances, shall be delivered at or before the time of
issuance of the first Security of such series.

Each Registered Security shall be dated the date of its authentication
and each Bearer Security shall be dated as of the date specified as
contemplated by Section 301.

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<PAGE> 33

No Security or coupon appertaining thereto shall be entitled to any
benefit under this Indenture or be valid or obligatory for any purpose unless
there appears on such Security or the Security to which such coupon appertains
a certificate of authentication substantially in the form provided for herein
duly executed by the Trustee by manual signature of an authorized officer, and
such certificate upon any Security shall be conclusive evidence, and the only
evidence, that such Security has been duly authenticated and delivered
hereunder and is entitled to the benefits of this Indenture. Notwithstanding
the foregoing, if any Security shall have been authenticated and delivered
hereunder but never issued and sold by the Company, and the Company shall
deliver such Security to the Trustee for cancellation as provided in Section
309 together with a written statement (which need not comply with Section 102
and need not be accompanied by an Opinion of Counsel) stating that such
Security has never been issued or sold by the Company, for all purposes of this
Indenture such Security shall be deemed never to have been authenticated and
delivered hereunder and shall never be entitled to the benefits of this
Indenture.

SECTION 304. Temporary Securities.

(a) Pending the preparation of definitive Securities of any
series, the Company may execute, and upon Company Order the Trustee shall
authenticate and deliver, temporary Securities which are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized
denomination, substantially of the tenor of the definitive Securities in lieu
of which they are issued, in registered form or, if authorized, in bearer form
with one or more coupons or without coupons, and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Securities may determine, as conclusively evidenced by their
execution of such Securities. In the case of Securities of any series, such
temporary Securities may be in global form.

Except in the case of temporary Securities in global form (which shall
be exchanged in accordance with Section 304(b) or as otherwise provided in or
pursuant to a Board Resolution), if temporary Securities of any series are
issued, the Company will cause definitive Securities of that series to be
prepared without unreasonable delay. After the preparation of definitive
Securities of such series, the temporary Securities of such series shall be
exchangeable for definitive Securities of such series upon surrender of the
temporary Securities of such series at the office or agency of the Company in a
Place of Payment for that series, without charge to the Holder. Upon surrender
for cancellation of any one or more temporary Securities of any series
(accompanied by any non-matured coupons appertaining thereto), the Company
shall execute and the Trustee shall authenticate and deliver in exchange
therefor a like principal amount of definitive Securities of the same series of
authorized denominations; provided, however, that no definitive Bearer Security
shall be delivered in exchange for a temporary Registered Security; and
provided further that a definitive Bearer Security shall be delivered in
exchange for a temporary Bearer Security only in compliance with the conditions
set forth in Section 303. Until so exchanged, the temporary Securities of any
series shall in all respects be entitled to the same benefits under this
Indenture as definitive Securities of such series.

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<PAGE> 34

(b) Unless otherwise provided as contemplated in Section 301, this
Section 304(b) shall govern the exchange of temporary Securities issued in
global form other than through the facilities of DTC. If any such temporary
Security is issued in global form, then such temporary global Security shall,
unless otherwise provided therein, be delivered to the London office of a
depository or common depository (the "Common Depository"), for the benefit of
Euroclear and CEDEL.

Without unnecessary delay but in any event not later than the date
specified in, or determined pursuant to the terms of, any such temporary global
Security (the "Exchange Date"), the Company shall deliver to the Trustee
definitive Securities, in an aggregate principal amount equal to the principal
amount of such temporary global Security, executed by the Company. On or after
the Exchange Date, such temporary global Security shall be surrendered by the
Common Depository to the Trustee, as the Company's agent for such purpose, to
be exchanged, in whole or from time to time in part, for definitive Securities
without charge, and the Trustee shall authenticate and deliver, in exchange for
each portion of such temporary global Security, an equal aggregate principal
amount of definitive Securities of or within the same series of authorized
denominations and of like tenor as the portion of such temporary global
Security to be exchanged. The definitive Securities to be delivered in
exchange for any such temporary global Security shall be in bearer form,
registered form, permanent global bearer form or permanent global registered
form, or any combination thereof, as specified as contemplated by Section 301,
and, if any combination thereof is so specified, as requested by the beneficial
owner thereof; provided, however, that, unless otherwise specified in such
temporary global Security, upon such presentation by the Common Depository,
such temporary global Security, if any, is accompanied by a certificate dated
the Exchange Date or a subsequent date and signed by Euroclear as to the
portion of such temporary global Security held for its account then to be
exchanged and a certificate dated the Exchange Date or a subsequent date and
signed by CEDEL as to the portion of such temporary global Security, if any,
held for its account then to be exchanged, each in the form set forth in
Exhibit A-2 to this Indenture or in such other form as may be established
pursuant to Section 301; and provided further that definitive Bearer Securities
shall be delivered in exchange for a portion of a temporary global Security
only in compliance with the requirements of Section 303.

Unless otherwise specified in such temporary global Security, the
interest of a beneficial owner of Securities of a series in a temporary global
Security shall be exchanged for definitive Securities of the same series and of
like tenor following the Exchange Date when the account holder instructs
Euroclear or CEDEL, as the case may be, to request such exchange on his behalf
and delivers to Euroclear or CEDEL, as the case may be, a certificate in the
form set forth in Exhibit A-1 to this Indenture (or in such other form as may
be established pursuant to Section 301), dated no earlier than 15 days prior to
the Exchange Date, copies of which certificate shall be available from the
offices of Euroclear or CEDEL, the Trustee, any Authenticating Agent appointed
for such series of Securities and each Paying Agent. Unless otherwise
specified in such temporary global Security, any such exchange shall be made
free of charge to the beneficial owners of such temporary global Security,
except that a Person receiving definitive Securities must bear the cost of
insurance, postage, transportation and the like unless such Person takes

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<PAGE> 35

delivery of such definitive Securities in person at the offices of Euroclear or
CEDEL. Definitive Securities in bearer form to be delivered in exchange for
any portion of a temporary global Security shall be delivered only outside the
United States.

Until exchanged in full as hereinabove provided, the temporary
Securities of any series shall in all respects be entitled to the same benefits
under this Indenture as definitive Securities of the same series and of like
tenor authenticated and delivered hereunder, except that, unless otherwise
specified as contemplated by Section 301, interest payable on a temporary
global Security on an Interest Payment Date for Securities of such series
occurring prior to the applicable Exchange Date shall be payable to Euroclear
or CEDEL on such Interest Payment Date upon delivery by Euroclear or CEDEL to
the Trustee of a certificate or certificates in the form set forth in Exhibit
A-1 to this Indenture (or in such other forms as may be established pursuant to
Section 301), for credit without further interest on or after such Interest
Payment Date to the respective accounts of Persons who are the beneficial
owners of such temporary global Security on such Interest Payment Date and who
have each delivered to Euroclear or CEDEL, as the case may be, a certificate
dated no earlier than 15 days prior to the Interest Payment Date occurring
prior to such Exchange Date in the form set forth as Exhibit A-1 to this
Indenture (or in such other forms as may be established pursuant to Section
301). Notwithstanding anything to the contrary herein contained, the
certifications made pursuant to this paragraph shall satisfy the certification
requirements of the preceding two paragraphs of this Section 304(b) and of the
third paragraph of Section 303 of this Indenture and the interests of the
Persons who are the beneficial owners of the temporary global Security with
respect to which such certification was made will be exchanged for definitive
Securities of the same series and of like tenor on the Exchange Date or the
date of certification if such date occurs after the Exchange Date, without
further act or deed by such beneficial owners. Except as otherwise provided in
this paragraph, no payments of principal or interest owing with respect to a
beneficial interest in a temporary global Security will be made unless and
until such interest in such temporary global Security shall have been exchanged
for an interest in a definitive Security. Any interest so received by
Euroclear or CEDEL and not paid as herein provided shall be returned to the
Trustee prior to the expiration of two years after such Interest Payment Date
in order to be repaid to the Company.

SECTION 305. Registration, Registration of Transfer and Exchange.

The Company shall cause to be kept at the Corporate Trust Office of
the Trustee or in any office or agency of the Company in a Place of Payment a
register for each series of Securities (the registers maintained in such office
or in any such office or agency of the Company in a Place of Payment being
herein sometimes referred to collectively as the "Security Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Registered Securities and of transfers of
Registered Securities. The Security Register shall be in written form or any
other form capable of being converted into written form within a reasonable
time. The Trustee, at its Corporate Trust Office, is hereby initially
appointed "Security Registrar" for the purpose of registering Registered
Securities and transfers of Registered Securities on such Security Register as
herein provided. In the event that the Trustee shall cease to be Security
Registrar, it shall have the right to examine the Security Register at all

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<PAGE> 36

reasonable times and to require that a copy of the Security Register in written
form be delivered to it from time to time as reasonably requested.

Subject to the provisions of this Section 305, upon surrender for
registration of transfer of any Registered Security of any series at any office
or agency of the Company in a Place of Payment for that series, the Company
shall execute, and the Trustee shall authenticate and deliver, in the name of
the designated transferee or transferees, one or more new Registered Securities
of the same series, of any authorized denominations and of a like aggregate
principal amount, bearing a number not contemporaneously outstanding, and
containing identical terms and provisions.

Subject to the provisions of this Section 305, at the option of the
Holder, Registered Securities of any series may be exchanged for other
Registered Securities of the same series, of any authorized denomination or
denominations and of a like aggregate principal amount, containing identical
terms and provisions, upon surrender of the Registered Securities to be
exchanged at any such office or agency. Whenever any such Registered
Securities are so surrendered for exchange, the Company shall execute, and the
Trustee shall authenticate and deliver, the Registered Securities which the
Holder making the exchange is entitled to receive. Unless otherwise specified
with respect to any series of Securities as contemplated by Section 301, Bearer
Securities may not be issued in exchange for Registered Securities.

If (but only if) permitted as contemplated by Section 301, at the
option of the Holder, Bearer Securities of any series may be exchanged for
Registered Securities of the same series of any authorized denominations and of
a like aggregate principal amount and tenor, upon surrender of the Bearer
Securities to be exchanged at any such office or agency, with all unmatured
coupons and all matured coupons in default thereto appertaining. If the Holder
of a Bearer Security is unable to produce any such unmatured coupon or coupons
or matured coupon or coupons in default, any such permitted exchange may be
effected if the Bearer Securities are accompanied by payment in funds
acceptable to the Company in an amount equal to the face amount of such missing
coupon or coupons, or the surrender of such missing coupon or coupons may be
waived by the Company and the Trustee if there is furnished to them such
security or indemnity as they may require to save each of them and any Paying
Agent harmless. If thereafter the Holder of such Security shall surrender to
any Paying Agent any such missing coupon in respect of which such a payment
shall have been made, such Holder shall be entitled to receive the amount of
such payment; provided, however, that, except as otherwise provided in Section
1002, interest represented by coupons shall be payable only upon presentation
and surrender of those coupons at an office or agency located outside the
United States. Notwithstanding the foregoing, in case a Bearer Security of any
series is surrendered at any such office or agency in a permitted exchange for
a Registered Security of the same series and like tenor after the close of
business at such office or agency on (i) any Regular Record Date and before the
opening of business at such office or agency on the relevant Interest Payment
Date, or (ii) any Special Record Date and before the opening of business at
such office or agency on the related proposed date for payment of Defaulted
Interest, such Bearer Security shall be surrendered without the coupon relating
to such Interest Payment Date or proposed date for payment, as the case may be,

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<PAGE> 37

and interest or Defaulted Interest, as the case may be, will not be payable on
such Interest Payment Date or proposed date for payment, as the case may be, in
respect of the Registered Security issued in exchange for such Bearer Security,
but will be payable only to the Holder of such coupon when due in accordance
with the provisions of this Indenture. Whenever any Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Securities which the holder making the exchange
is entitled to receive.

Notwithstanding the foregoing, except as otherwise specified as
contemplated by Section 301, any permanent global Security shall be
exchangeable only as provided in this paragraph. If the depository for any
permanent global Security is DTC, then, unless the terms of such global
Security expressly permit such global Security to be exchanged in whole or in
part for definitive Securities, a global Security may be transferred, in whole
but not in part, only to a nominee of DTC, or by a nominee of DTC to DTC, or to
a successor to DTC for such global Security selected or approved by the Company
or to a nominee of such successor to DTC. If at any time DTC notifies the
Company that it is unwilling or unable to continue as depository for the
applicable global Security or Securities or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act if so required by applicable
law or regulation, the Company shall appoint a successor depository with
respect to such global Security or Securities. If (x) a successor depository
for such global Security or Securities is not appointed by the Company within
90 days after the Company receives such notice or becomes aware of such
unwillingness, inability or ineligibility, (y) an Event of Default has occurred
and is continuing and the beneficial owners representing a majority in
principal amount of the applicable series of Securities represented by such
global Security or Securities advise DTC to cease acting as depository for such
global Security or Securities or (z) the Company, in its sole discretion,
determines at any time that all Outstanding Securities (but not less than all)
of any series issued or issuable in the form of one or more global Securities
shall no longer be represented by such global Security or Securities (provided,
however, the Company may not make such determination during the 40-day
restricted period provided by Regulation S under the Securities Act or during
any other similar period during which the Securities must be held in global
form as may be required by the Securities Act), then the Company shall execute,
and the Trustee shall authenticate and deliver definitive Securities of like
series, rank, tenor and terms in definitive form in an aggregate principal
amount equal to the principal amount of such global Security or Securities. If
any beneficial owner of an interest in a permanent global Security is otherwise
entitled to exchange such in interest for Securities of such series and of like
tenor and principal amount of another authorized form and denomination, as
specified as contemplated by Section 301 and provided that any applicable
notice provided in the permanent global Security shall have been given, then
without unnecessary delay but in any event not later than the earliest date on
which such interest may be so exchanged, the Company shall execute, and the
Trustee shall authenticate and deliver definitive Securities in aggregate
principal amount equal to the principal amount of such beneficial owner's
interest in such permanent global Security. On or after the earliest date on
which such interests may be so exchanged, such permanent global Security shall
be surrendered for exchange by DTC or such other depository as shall be
specified in the Company Order with respect thereto to the Trustee, as the
Company's agent for such purpose; provided, however, that

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<PAGE> 38

no such exchanges may occur during a period beginning at the opening of
business 15 days before any selection of Securities to be redeemed and ending
on the relevant Redemption Date if the Security for which exchange is requested
may be among those selected for redemption; and provided further that no Bearer
Security delivered in exchange for a portion of a permanent global Security
shall be mailed or otherwise delivered to any location in the United States.
If a Registered Security is issued in exchange for any portion of a permanent
global Security after the close of business at the office or agency where such
exchange occurs on (i) any Regular Record Date and before the opening of
business at such office or agency on the relevant Interest Payment Date, or
(ii) any Special Record Date and before the opening of business at such office
or agency on the related proposed date for payment of Defaulted Interest,
interest or Defaulted Interest, as the case may be, will not be payable on such
Interest Payment Date or proposed date for payment, as the case may be, in
respect of such Registered Security, but will be payable on such Interest
Payment Date or proposed date for payment, as the case may be, only to the
Person to whom interest in respect of such portion of such permanent global
Security is payable in accordance with the provisions of this Indenture.

All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.

Every Registered Security presented or surrendered for registration of
transfer or for exchange or redemption shall (if so required by the Company or
the Security Registrar) be duly endorsed, or be accompanied by a written
instrument of transfer in form satisfactory to the Security Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or
exchange of Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration of transfer or exchange of Securities, other than
exchanges pursuant to Section 304, 906, 1107 or 1305 not involving any
transfer.

The Company or the Trustee, as applicable, shall not be required (i)
to issue, register the transfer of or exchange any Security if such Security
may be among those selected for redemption during a period beginning at the
opening of business 15 days before selection of the Securities to be redeemed
under Section 1103 and ending at the close of business on (A) if such
Securities are issuable only as Registered Securities, the day of the mailing
of the relevant notice of redemption and (B) if such Securities are issuable as
Bearer Securities, the day of the first publication of the relevant notice of
redemption or, if such Securities are also issuable as Registered Securities
and there is no publication, the mailing of the relevant notice of redemption,
or (ii) to register the transfer of or exchange any Registered Security so
selected for redemption in whole or in part, except, in the case of any
Registered Security to be redeemed in part, the portion thereof not to be
redeemed, or (iii) to exchange any Bearer Security so selected for redemption
except that such a Bearer Security may be exchanged for a Registered Security
of that series and like tenor, provided that such Registered Security shall be
simultaneously surrendered

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for redemption, or (iv) to issue or to register the transfer or exchange of any
Security which has been surrendered for repayment at the option of the Holder,
except the portion, if any, of such Security not to be so repaid.

SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.

If any mutilated Security or a Security with a mutilated coupon
appertaining to it is surrendered to the Trustee or the Company, together with,
in proper cases, such security or indemnity as may be required by the Company
or the Trustee to save each of them or any agent of either of them harmless,
the Company shall execute and the Trustee shall authenticate and deliver in
exchange therefor a new Security of the same series and principal amount,
containing identical terms and provisions and bearing a number not
contemporaneously outstanding, with coupons corresponding to the coupons, if
any, appertaining to the surrendered Security.

If there shall be delivered to the Company and to the Trustee (i)
evidence to their satisfaction of the destruction, loss or theft of any
Security or coupon, and (ii) such security or indemnity as may be required by
them to save each of them and any agent of either of them harmless, then, in
the absence of actual notice to the Company or the Trustee that such Security
or coupon has been acquired by a bona fide purchaser, the Company shall execute
and upon its request the Trustee shall authenticate and deliver, in lieu of any
such destroyed, lost or stolen Security or in exchange for the Security to
which a destroyed, lost or stolen coupon appertains (with all appurtenant
coupons not destroyed, lost or stolen), a new Security of the same series and
principal amount, containing identical terms and provisions and bearing a
number not contemporaneously outstanding, with coupons corresponding to the
coupons, if any, appertaining to such destroyed, lost or stolen Security or to
the Security to which such destroyed, lost or stolen coupon appertains.

Notwithstanding the provisions of the previous two paragraphs, in case
any such mutilated, destroyed, lost or stolen Security or coupon has become or
is about to become due and payable, the Company in its discretion may, instead
of issuing a new Security, with coupons corresponding to the coupons, if any,
appertaining to such destroyed, lost or stolen Security or to the Security to
which such destroyed, lost or stolen coupon appertains, pay such Security or
coupon; provided, however, that payment of principal of (and premium or
Make-Whole Amount, if any), any interest on and any Additional Amounts with
respect to, Bearer Securities shall, except as otherwise provided in Section
1002, be payable only at an office or agency located outside the United States
and, unless otherwise specified as contemplated by Section 301, any interest on
Bearer Securities shall be payable only upon presentation and surrender of the
coupons appertaining thereto.

Upon the issuance of any new Security under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

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Every new Security of any series with its coupons, if any, issued
pursuant to this Section in lieu of any destroyed, lost or stolen Security, or
in exchange for a Security to which a destroyed, lost or stolen coupon
appertains, shall constitute an original additional contractual obligation of
the Company, whether or not the destroyed, lost or stolen Security and its
coupons, if any, or the destroyed, lost or stolen coupon shall be at any time
enforceable by anyone, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Securities of that
series and their coupons, if any, duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Securities or
coupons.

SECTION 307. Payment of Interest; Interest Rights Preserved.

Except as otherwise specified with respect to a series of Securities
in accordance with the provisions of Section 301, interest on any Registered
Security that is payable, and is punctually paid or duly provided for, on any
Interest Payment Date shall be paid to the Person in whose name that Security
(or one or more Predecessor Securities) is registered at the close of business
on the Regular Record Date for such interest at the office or agency of the
Company maintained for such purpose pursuant to Section 1002; provided,
however, that each installment of interest on any Registered Security may at
the Company's option be paid by (i) mailing a check for such interest, payable
to or upon the written order of the Person entitled thereto pursuant to Section
308, to the address of such Person as it appears on the Security Register or
(ii) transfer to an account maintained by the payee located inside the United
States.

Unless otherwise provided as contemplated by Section 301 with respect
to the Securities of any series, payment of interest may be made, in the case
of a Bearer Security, by transfer to an account maintained by the payee with a
bank located outside the United States.

Unless otherwise provided as contemplated by Section 301, every
permanent global Security will provide that interest, if any, payable on any
Interest Payment Date will be paid to DTC, Euroclear and/or CEDEL, as the case
may be, with respect to that portion of such permanent global Security held for
its account Euroclear or CEDEL, as the case may be, for the purpose of
permitting such party to credit the interest received by it in respect of such
permanent global Security to the accounts of the beneficial owners thereof.

In case a Bearer Security of any series is surrendered in exchange for
a Registered Security of such series after the close of business (at an office
or agency in a Place of Payment for such series) on any Regular Record Date and
before the opening of business (at such office or agency) on the next
succeeding Interest Payment Date, such Bearer Security shall be surrendered
without the coupon relating to such Interest Payment Date and interest will not
be payable on such Interest Payment Date in respect of the Registered Security
issued in exchange for such Bearer Security, but will be payable only to the
Holder of such coupon when due in accordance with the provisions of this
Indenture.

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Except as otherwise specified with respect to a series of Securities
in accordance with the provisions of Section 301, any interest on any
Registered Security of any series that is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to be payable to the registered Holder thereof
on the relevant Regular Record Date by virtue of having been such Holder, and
such Defaulted Interest may be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Registered Securities of such series
(or their respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest,
which shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid on
each Registered Security of such series and the date of the proposed payment
(which shall not be less than 20 days after such notice is received by the
Trustee), and at the same time the Company shall deposit with the Trustee an
amount of money in the currency or currencies, currency unit or units or
composite currency or currencies in which the Securities of such series are
payable (except as otherwise specified pursuant to Section 301 for the
Securities of such series) equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit on or prior to the date of the proposed payment,
such money when deposited to be held in trust for the benefit of the Persons
entitled to such Defaulted Interest as in this clause provided. Thereupon the
Trustee shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than [15] days and not less than [10] days
prior to the date of the proposed payment and not less than [10] days after the
receipt by the Trustee of the notice of the proposed payment. The Trustee
shall promptly notify the Company of such Special Record Date and, in the name
and at the expense of the Company, shall cause notice of the proposed payment
of such Defaulted Interest and the Special Record Date therefor to be mailed,
first-class postage prepaid, to each Holder of Registered Securities of such
series at his address as it appears in the Security Register not less than 10
days prior to such Special Record Date. The Trustee may, in its discretion, in
the name and at the expense of the Company, cause a similar notice to be
published at least once in an Authorized Newspaper in each place of payment,
but such publications shall not be a condition precedent to the establishment
of such Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been mailed as aforesaid,
such Defaulted Interest shall be paid to the Persons in whose names the
Registered Securities of such series (or their respective Predecessor
Securities) are registered at the close of business on such Special Record Date
and shall no longer be payable pursuant to the following clause (2). In case a
Bearer Security of any series is surrendered at the office or agency in a Place
of Payment for such series in exchange for a Registered Security of such series
after the close of business at such office or agency on any Special Record Date
and before the opening of business at such office or agency on the related
proposed date for payment of Defaulted Interest, such Bearer Security shall be
surrendered without the coupon relating to such proposed date of payment and
Defaulted Interest will not be payable on such proposed date of payment in
respect of the Registered Security issued in exchange for such Bearer Security,
but will be payable only to the Holder of such coupon when due in accordance
with the provisions of this Indenture.

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(2) The Company may make payment of any Defaulted Interest on the
Registered Securities of any series in any other lawful manner not inconsistent
with the requirements of any securities exchange on which such Securities may
be listed, and upon such notice as may be required by such exchange, if, after
notice given by the Company to the Trustee of the proposed payment pursuant to
this clause, such manner of payment shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section and Section 305,
each Security delivered under this Indenture upon registration of transfer of
or in exchange for or in lieu of any other Security shall carry the rights to
interest accrued and unpaid, and to accrue, which were carried by such other
Security.

SECTION 308. Persons Deemed Owners.

Prior to due presentment of a Registered Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Registered Security is registered as
the owner of such Security for the purpose of receiving payment of principal of
(and premium or Make-Whole Amount, if any), and (subject to Sections 305 and
307) interest on, such Registered Security and for all other purposes
whatsoever, whether or not such Registered Security be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.

Title to any Bearer Security and any coupons appertaining thereto
shall pass by delivery. The Company, the Trustee and any agent of the Company
or the Trustee may treat the Holder of any Bearer Security and the Holder of
any coupon as the absolute owner of such Security or coupon for the purpose of
receiving payment thereof or on account thereof and for all other purposes
whatsoever whether or not such Security or coupon be overdue, and neither the
Company, the Trustee nor any agent of the Company or the Trustee shall be
affected by notice to the contrary.

None of the Company, the Trustee, any Paying Agent or the Security
Registrar will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of a Security in global form or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.

Notwithstanding the foregoing, with respect to any global Security,
nothing herein shall prevent the Company, the Trustee, or any agent of the
Company or the Trustee, from giving effect to any written certification, proxy
or other authorization furnished by any depository, as a Holder, with respect
to such global Security or impair, as between such depository and owners of
beneficial interests in such global Security, the operation of customary
practices governing the exercise of the rights of such depository (or its
nominee) as Holder of such global Security.

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SECTION 309. Cancellation.

All Securities and coupons surrendered for payment, redemption,
repayment at the option of the Holder, registration of transfer or exchange or
for credit against any sinking fund payment shall, if surrendered to any Person
other than the Trustee, be delivered to the Trustee, and any such Securities
and coupons and Securities and coupons surrendered directly to the Trustee for
any such purpose shall be promptly canceled by it. The Company may at any time
deliver to the Trustee for cancellation any Securities previously authenticated
and delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Securities previously authenticated
hereunder which the Company has not issued and sold, and all Securities so
delivered shall be promptly canceled by the Trustee. If the Company shall so
acquire any of the Securities, however, such acquisition shall not operate as a
redemption or satisfaction of the indebtedness represented by such Securities
unless and until the same are surrendered to the Trustee for cancellation. No
Securities shall be authenticated in lieu of or in exchange for any Securities
canceled as provided in this Section, except as expressly permitted by this
Indenture. Cancelled Securities and coupons held by the Trustee shall be
destroyed by the Trustee and the Trustee shall deliver a certificate of such
destruction to the Company, unless by a Company Order the Company directs their
return to it.

SECTION 310. Computation of Interest.

Except as otherwise specified as contemplated by Section 301
with respect to Securities of any series, interest on the Securities
of each series shall be computed on the basis of a 360-day year
consisting of twelve 30-day months.

ARTICLE FOUR

SATISFACTION AND DISCHARGE

SECTION 401. Satisfaction and Discharge of Indenture.

This Indenture shall upon Company Request cease to be of further
effect with respect to any series of Securities specified in such Company
Request (except as to any surviving rights of registration of transfer or
exchange of Securities of such series herein expressly provided for and any
right to receive Additional Amounts, as provided in Section 1011), and the
Trustee, upon receipt of a Company Order, and at the expense of the Company,
shall execute proper instruments acknowledging satisfaction and discharge of
this Indenture as to such series when

(1) either

(A) all Securities of such series theretofore
authenticated and delivered and all coupons, if any,
appertaining thereto (other than (i) coupons appertaining to
Bearer

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Securities surrendered for exchange for Registered Securities
and maturing after such exchange, whose surrender is not
required or has been waived as provided in Section 305, (ii)
Securities and coupons of such series which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in Section 306, (iii) coupons appertaining to
Securities called for redemption and maturing after the
relevant Redemption Date, whose surrender has been waived as
provided in Section 1106, and (iv) Securities and coupons of
such series for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged
from such trust, as provided in Section 1003) have been
delivered to the Trustee for cancellation; or

(B) all Securities of such series and, in the case of (i)
or (ii) below, any coupons appertaining thereto not
theretofore delivered to the Trustee for cancellation

(i) have become due and payable, or

(ii) will become due and payable at their Stated
Maturity within one year, or

(iii) if redeemable at the option of the Company,
are to be called for redemption within one
year under arrangements satisfactory to the
Trustee for the giving of notice of
redemption by the Trustee in the name, and
at the expense, of the Company,

and the Company, in the case of (i), (ii) or (iii) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust
for the purpose an amount in the currency or currencies, currency unit or units
or composite currency or currencies in which the Securities of such series are
payable, sufficient to pay and discharge the entire indebtedness on such
Securities and such coupons not theretofore delivered to the Trustee for
cancellation, for principal (and premium or Make-Whole Amount, if any) and
interest, and any Additional Amounts with respect thereto, to the date of such
deposit (in the case of Securities which have become due and payable)or the
Stated Maturity or Redemption Date, as the case may be;

(2) The Company has paid or caused to be paid all other sums
payable hereunder by the Company; and

(3) The Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of
this Indenture as to such series have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee and any predecessor Trustee under
Section 606, the obligations of the

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Company to any Authenticating Agent under Section 611 and, if money shall have
been deposited with and held by the Trustee pursuant to subclause (B) of clause
(1) of this Section, the obligations of the Trustee under Section 402 and the
last paragraph of Section 1003, shall survive.

In the event that there are Securities of two or more series
outstanding hereunder, the Trustee shall be required to execute an instrument
acknowledging satisfaction and discharge of this Indenture only if requested to
do so with respect to Securities of a particular series as to which it is
Trustee and if the other conditions thereto are met.

SECTION 402. Application of Trust Funds.

Subject to the provisions of the last paragraph of Section 1003, all
money deposited with the Trustee pursuant to Section 401 shall be held in trust
and applied by it, in accordance with the provisions of the Securities, the
coupons and this Indenture, to the payment, either directly or through any
Paying Agent (including the Company acting as its own Paying Agent) as the
Trustee may determine, to the Persons entitled thereto, of the principal (and
premium or Make-Whole Amount, if any), and any interest and Additional Amounts
for whose payment such money has been deposited with or received by the
Trustee, but such money need not be segregated from other funds except to the
extent required by law.

ARTICLE FIVE

REMEDIES

SECTION 501. Events of Default.

Subject to any modifications, additions or deletions relating to any
series of Securities as contemplated pursuant to Section 301, "Event of
Default," wherever used herein with respect to any particular series of
Securities, means any one of the following events (whatever the reason for such
Event of Default and whether or not it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of
any court or any order, rule or regulation of any administrative or
governmental body):

(1) default in the payment of any interest upon or any Additional
Amounts payable in respect of any Security of or within that series or of any
coupon appertaining thereto, when such interest, Additional Amounts or coupon
becomes due and payable, and continuance of such default for a period of [30]
days; or

(2) default in the payment of the principal of (or premium or
Make-Whole Amount, if any, on) any Security of that series when it becomes due
and payable at its Maturity; or

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(3) default in the deposit of any sinking fund payment, when and
as due by the terms of any Security of that series; or

(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture with respect to any Security of that
series (other than a covenant or warranty a default in whose performance or
whose breach is elsewhere in this Section specifically dealt with), and
continuance of such default or breach for a period of [60] days after there has
been given, by registered or certified mail, to the Company by the Trustee or
to the Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of that series a written notice specifying
such default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" hereunder; or

(5) default under any bond, debenture, note, mortgage, indenture
or instrument under which there may be issued or by which there may be secured
or evidenced any indebtedness for money borrowed by the Company (or by any
Subsidiary, the repayment of which the Company has guaranteed or for which the
Company is directly responsible or liable as obligor or guarantor), having an
aggregate principal amount outstanding of at least [$10,000,000], whether such
indebtedness now exists or shall hereafter be created, which default shall have
resulted in such indebtedness being declared due and payable prior to the date
on which it would otherwise have become due and payable, without such
indebtedness having been discharged, or such acceleration having been rescinded
or annulled, within a period of [10] days after there shall have been given, by
registered or certified mail, to the Company by the Trustee or to the Company
and the Trustee by the Holders of at least 10% in principal amount of the
Outstanding Securities of that series a written notice specifying such default
and requiring the Company to cause such indebtedness to be discharged or cause
such acceleration to be rescinded or annulled and stating that such notice is a
"Notice of Default" hereunder; or

(6) the entry by a court of competent jurisdiction of one or more
judgments, orders or decrees against the Company or any of its Subsidiaries in
an aggregate amount (excluding amounts covered by insurance) in excess of
[$10,000,000] and such judgments, orders or decrees remain undischarged,
unstayed and unsatisfied in an aggregate amount (excluding amounts covered by
insurance) in excess of [$10,000,000] for a period of [30] consecutive days; or

(7) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:

(A) commences a voluntary case,

(B) consents to the entry of an order for relief against
it in an involuntary case,

(D) makes a general assignment for the benefit of its
creditors; or

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(8) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:

(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case,

(B) appoints a Custodian of the Company or any
Significant Subsidiary or for all or substantially
all of either of its property, or

(C) orders the liquidation of the Company or any
Significant Subsidiary and the order or decree
remains unstayed and in effect for [90] days; or

(9) any other Event of Default provided with respect to Securities
of that series.

As used in this Section 501, the term "Bankruptcy Law" means Title 11,
U.S. Code or any similar Federal or state law for the relief of debtors and the
term "Custodian" means any receiver, trustee, assignee, liquidator or other
similar official under any Bankruptcy Law.

SECTION 502. Acceleration of Maturity; Rescission and Annulment.

If an Event of Default with respect to Securities of any series at the
time Outstanding occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than a majority in principal amount of the
Outstanding Securities of that series may declare the principal (or, if any
Securities are Original Issue Discount Securities or Indexed Securities, such
portion of the principal as may be specified in the terms thereof) of, and the
Make-Whole Amount, if any, on, all the Securities of that series to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by the Holders), and upon any such declaration such principal or
specified portion thereof shall become immediately due and payable.

At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in
this Article provided, the Holders of a majority in principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if:

(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay in the currency, currency unit or composite currency in which
the Securities of such series is payable (except as otherwise specified
pursuant to Section 301 for the Securities of such series):

(A) all overdue installments of interest on and any
Additional Amounts payable in respect of all
Outstanding Securities of that series and any related
coupons;

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(B) the principal of (and premium or Make-Whole Amount,
if any, on) any Outstanding Securities of that series
which have become due otherwise than by such
declaration of acceleration and interest thereon at
the rate or rates borne by or provided for in such
Securities;

(C) to the extent that payment of such interest is
lawful, interest upon overdue installments of
interest and any Additional Amounts at the rate or
rates borne by or provided for in such Securities;
and

(D) all sums paid or advanced by the Trustee hereunder
and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents
and counsel; and

(2) all Events of Default with respect to Securities of that
series, other than the nonpayment of the principal of (or premium or Make-Whole
Amount, if any) or interest on Securities of that series which have become due
solely by such declaration of acceleration, have been cured or waived as
provided in Section 513.

No such rescission shall affect any subsequent default or impair any
right consequent thereon.

SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.

The Company covenants that if:

(1) default is made in the payment of any installment of interest
or Additional Amounts, if any, on any Security of any series and any related
coupon when such interest or Additional Amount becomes due and payable and such
default continues for a period of [30] days, or

(2) default is made in the payment of the principal of (or premium
or Make-Whole Amount, if any, on) any Security of any series at its Maturity,
then the Company will, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities of such series and coupons, the whole
amount then due and payable on such Securities and coupons for principal (and
premium or Make Whole Amount, if any) and interest and Additional Amounts, with
interest upon any overdue principal (and premium or Make-Whole Amount, if any)
and, to the extent that payment of such interest shall be legally enforceable,
upon any overdue installments of interest or Additional Amounts, if any, at the
rate or rates borne by or provided for in such Securities, and, in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel.

If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name and as trustee of an express trust, may institute
a judicial proceeding for the

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collection of the sums so due and unpaid, and may prosecute such proceeding to
judgment or final decree, and may enforce the same against the Company or any
other obligor upon such Securities of such series and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon such Securities of such
series, wherever situated.

If an Event of Default with respect to Securities of any series occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders of Securities of such series
and any related coupons by such appropriate judicial proceedings as the Trustee
shall deem most effectual to protect and enforce any such rights, whether for
the specific enforcement of any covenant or agreement in this Indenture or in
aid of the exercise of any power granted herein, or to enforce any other proper
remedy.

SECTION 504. Trustee May File Proofs of Claim.

In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
of any series shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Company for the payment of overdue principal, premium or
Make-Whole Amount, if any, or interest) shall be entitled and empowered, by
intervention in such proceeding or otherwise:

(i) to file proofs of claim for the whole amount, or such lesser
amount as may be provided for in the Securities of such series, of principal
(and premium or Make-Whole Amount, if any) and interest and Additional Amounts,
if any, owing and unpaid in respect of the Securities and to file such other
papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and of the Holders allowed in such judicial proceeding; and

(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator (or
other similar official) in any such judicial proceeding is hereby authorized by
each Holder of Securities of such series and coupons to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disbursements and advances of the
Trustee and any predecessor Trustee, their agents and counsel, and any other
amounts due the Trustee or any predecessor Trustee under Section 606.

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Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a
Security or coupon any plan of reorganization, arrangement, adjustment or
composition affecting the Securities or coupons or the rights of any Holder
thereof, or to authorize the Trustee to vote in respect of the claim of any
Holder of a Security or coupon in any such proceeding.

SECTION 505. Trustee May Enforce Claims Without Possession of
Securities or Coupons.

All rights of action and claims under this Indenture or any of the
Securities or coupons may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or coupons or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders of the Securities and
coupons in respect of which such judgment has been recovered.

SECTION 506. Application of Money Collected.

Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (or premium
or Make-Whole Amount, if any) or interest and any Additional Amounts, upon
presentation of the Securities or coupons, or both, as the case may be, and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee and any
predecessor Trustee under Section 606;

SECOND: To the payment of the amounts then due and unpaid upon the
Securities and coupons for principal (and premium or
Make-Whole Amount, if any) and interest and any Additional
Amounts payable, in respect of which or for the benefit of
which such money has been collected, ratably, without
preference or priority of any kind, according to the aggregate
amounts due and payable on such Securities and coupons for
principal (and premium or Make-Whole Amount, if any), interest
and Additional Amounts, respectively; and

THIRD: To the payment of the remainder, if any, to the Company.

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SECTION 507. Limitation on Suits.

No Holder of any Security of any series or any related coupon shall
have any right to institute any proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless:

(1) such Holder has previously given written notice to the Trustee
of a continuing Event of Default with respect to the Securities of that series;

(2) the Holders of not less than a majority in principal amount of
the Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in its
own name as Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;

(4) the Trustee for [60] days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding; and

(5) no direction inconsistent with such written request has been
given to the Trustee during such [60] day period by the Holders of a majority
in principal amount of the Outstanding Securities of that series; it being
understood and intended that no one or more of such Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other of such
Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all such
Holders.

SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium or Make-Whole Amount, if any, Interest and Additional Amounts.

Notwithstanding any other provision in this Indenture, the Holder of
any Security or coupon shall have the right which is absolute and unconditional
to receive payment of the principal of (and premium or Make-Whole Amount, if
any) and (subject to Sections 305 and 307) interest on, and any Additional
Amounts in respect of, such Security or payment of such coupon on the
respective due dates expressed in such Security or coupon (or, in the case of
redemption, on the Redemption Date) and to institute suit for the enforcement
of any such payment, and such rights shall not be impaired or affected without
the consent of such Holder.

SECTION 509. Restoration of Rights and Remedies.

If the Trustee or any Holder of a Security or coupon has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder,

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then and in every such case the Company, the Trustee and the Holders of
Securities and coupons shall, subject to any determination in such proceeding,
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.

SECTION 510. Rights and-Remedies Cumulative.

Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities or coupons in the
last paragraph of Section 306, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders of Securities or coupons is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

SECTION 511. Delay or Omission Not Waiver.

No delay or omission of the Trustee or of any Holder of any Security
or coupon to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders may be exercised from time
to time, and as often as may be deemed expedient, by the Trustee or by the
Holders of Securities or coupons, as the case may be.

SECTION 512. Control by Holders of Securities.

The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee with respect
to the Securities of such series, provided that:

(1) such direction shall not be in conflict with any rule of law
or with this Indenture;

(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; and

(3) the Trustee need not take any action which might involve it in
personal liability or be unduly prejudicial to the Holders of Securities of
such series not joining therein (but the Trustee shall have no obligation as to
the determination of such undue prejudice).

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SECTION 513. Waiver of Past Defaults.

The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of such series and any related coupons waive any past default
hereunder with respect to such series and its consequences, except a default

(1) in the payment of the principal of (or premium or Make-Whole
Amount, if any) or interest on or Additional Amounts payable in respect of any
Security of such series or any related coupons, or

(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security of such series affected.

Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.

SECTION 514. Waiver of Usury, Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever
claim or take the benefit or advantage of, any usury, stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law, and covenants that it will not hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been
enacted.

SECTION 515. Undertaking for Costs.

All parties to this Indenture agree, and each Holder of any Security
by his acceptance thereof shall be deemed to have agreed, that any court may in
its discretion require, in any suit for the enforcement of any right or remedy
under this Indenture, or in any suit against the Trustee for any action taken
or omitted by it as Trustee, the filing by any party litigant in such suit of
any undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Holder, or group of Holders, holding in
the aggregate more than 10% in principal amount of the Outstanding Securities,
or to any suit instituted by any Holder for the enforcement of the payment of
the principal of (or premium or Make-Whole Amount, if any) or

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interest on or Additional Amounts payable with respect to any Security on or
after the respective Stated Maturities expressed in such Security (or in the
case of redemption, on or after the Redemption Date).

ARTICLE SIX

THE TRUSTEE

SECTION 601. Notice of Defaults.

Within 90 days after the occurrence of any default hereunder with
respect to the Securities of any series, the Trustee shall transmit, in the
manner and to the extent provided in TIA Section 313(c), notice of such default
hereunder known to the Trustee, unless such default shall have been cured or
waived; provided, however, that, except in the case of a default in the payment
of the principal of (or premium or Make-Whole Amount, if any) or interest on or
any Additional Amounts with respect to any Security of such series, or in the
payment of any sinking fund installment with respect to the Securities of such
series, the Trustee shall be protected in withholding such notice if and so
long as Responsible Officers of the Trustee in good faith determine that the
withholding of such notice is in the interests of the Holders of the Securities
and coupons of such series; and provided further that in the case of any
default or breach of the character specified in Section 501(4) of this
Indenture with respect to the Securities and coupons of such series, no such
notice to Holders shall be given until at least [60] days after the occurrence
thereof. For the purpose of this Section, the term "default" means any event
which is, or after notice or lapse of time or both would become, an Event of
Default with respect to the Securities of such series.

SECTION 602. Certain Rights of Trustee.

Subject to the provisions of TIA Section 315(a) through 315(d):

(1) the Trustee shall perform only such duties as are expressly
undertaken by it to perform under this Indenture;

(2) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, coupon or other paper or document believed by it to be genuine and to
have been signed or presented by the proper party or parties;

(3) any request or direction of the Company mentioned herein shall
be sufficiently evidenced by a Company Request or Company Order (other than
delivery of any Security, together with any coupons appertaining thereto, to
the Trustee for authentication and delivery pursuant to Section 303 which shall
be sufficiently evidenced as provided therein) and any resolution of the Board
of Directors may be sufficiently evidenced by a Board Resolution;

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(4) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other evidence
be herein specifically prescribed) may, in the absence of bad faith on its
part, rely upon an Officers' Certificate;

(5) the Trustee may consult with counsel and as a condition to the
taking, suffering or omission of any action hereunder may demand an Opinion of
Counsel, and the advice of such counsel or any Opinion of Counsel shall be full
and complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance thereon;

(6) the Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture at the request or direction
of any of the Holders of Securities of any series or any related coupons
pursuant to this Indenture, unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction;

(7) the Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture, note, coupon or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts or
matters as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney;

(8) the Trustee may execute any of the trusts or powers hereunder
or perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder; and

(9) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and reasonably believed by it to be authorized
or within the discretion or rights or powers conferred upon it by this
Indenture. The Trustee shall not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers, if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.

SECTION 603. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities, except the
Trustee's certificate of authentication, and in any coupons shall be taken as
the statements of the Company, and neither the Trustee nor any Authenticating
Agent assumes any responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the

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Securities or coupons, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Securities
and perform its obligations hereunder. Neither the Trustee nor any
Authenticating Agent shall be accountable for the use or application by the
Company of Securities or the proceeds thereof.

SECTION 604. May Hold Securities.

The Trustee, any Paying Agent, Security Registrar, Authenticating
Agent or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and coupons and,
subject to TIA Sections 310(b) and 311, may otherwise deal with the Company
with the same rights it would have if it were not Trustee, Paying Agent,
Security Registrar, Authenticating Agent or such other agent.

SECTION 605. Money Held in Trust.

Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. The Trustee shall be
under no liability for interest on, or investment of, any money received by it
hereunder.

SECTION 606. Compensation and Reimbursement.

The Company agrees:

(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder, including extraordinary
services rendered in connection with or during the continuation of a default
hereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust);

(2) except as otherwise expressly provided herein, to reimburse
each of the Trustee and any predecessor Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by it in
accordance with any provision of this Indenture (including the reasonable
compensation and the expenses and disbursements of its agents and counsel),
except to the extent any such expense, disbursement or advance may be
attributable to its negligence or bad faith; and

(3) to indemnify each of the Trustee and any predecessor Trustee
for, and to hold it harmless against, any loss, liability or expense, arising
out of or in connection with the acceptance or administration of the trust or
trusts or the performance of its duties hereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of its powers or duties hereunder except to
the extent any such loss, liability or expense may be attributable to its own
negligence or bad faith.

As security for the performance of the obligations of the Company
under this Section, the Trustee shall have a lien prior to the Securities upon
all property and funds held or collected by

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the Trustee as such, except funds held in trust for the payment of principal of
(or premium or Make-Whole Amount, if any) or interest on particular Securities
or any coupons.

The provisions of this Section shall survive the termination of this
Indenture.

SECTION 607. Corporate Trustee Required; Eligibility; Conflicting
Interests.

There shall at all times be a corporate Trustee hereunder which shall
be eligible to act as Trustee under TIA Section 310(a) and shall have a
combined capital and surplus of at least $10,000,000 or shall be a subsidiary
of a corporation which shall be a Person that has a combined capital and
surplus of at least $10,000,000 and which unconditionally guarantees the
obligations of the Trustee hereunder. If such Trustee or Person publishes
reports of condition at least annually, pursuant to law or the requirements of
a Federal, State, Territorial or District of Columbia supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such Trustee or Person shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published.
If at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.

SECTION 608. Resignation and Removal; Appointment of Successor.

(a) No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 609.

(b) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Company. If an instrument of acceptance by a successor Trustee shall not have
been delivered to the Trustee within [30] days after the giving of such notice
of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee.

(c) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal
amount of the Outstanding Securities of such series delivered to the Trustee
and to the Company.

(d) If at any time:

(1) the Trustee shall fail to comply with the provisions
of TIA Section 310(b) after written request therefor
by the Company or by any Holder of a Security who has
been a bona fide Holder of a Security for at least
six months, or

(2) the Trustee shall cease to be eligible under Section
607 of this Indenture and shall fail to resign after
written request therefor by the Company or by

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any Holder of a Security who has been a bona fide
Holder of a Security for at least six months, or

(3) the Trustee shall become incapable of acting or shall
be adjudged a bankrupt or insolvent or a receiver of
the Trustee or of its property shall be appointed or
any public officer shall take charge or control of
the Trustee or of its property or affairs for the
purpose of rehabilitation, conservation or
liquidation,

then, in any such case, (i) the Company by or pursuant to a Board Resolution
may remove the Trustee and appoint a successor Trustee with respect to all
Securities, or (ii) subject to TIA Section 315(e), any Holder of a Security who
has been a bona fide Holder of a Security for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee with respect to all
Securities and the appointment of a successor Trustee or Trustees.

(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause with
respect to the authority granted by the Securities of one or more series, the
Company, by or pursuant to a Board Resolution, shall promptly appoint a
successor Trustee or Trustees with respect to the Securities of that or those
series (it being understood that any such successor Trustee may be appointed
with respect to the Securities of one or more or all of such series and that at
any time there shall be only one Trustee with respect to the Securities of any
particular series). If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee with
respect to the Securities of any series shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities of such
series delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment, become
the successor Trustee with respect to the Securities of such series and to that
extent supersede the successor Trustee appointed by the Company. If no
successor Trustee with respect to the Securities of any series shall have been
so appointed by the Company or the Holders of Securities and accepted
appointment in the manner hereinafter provided, any Holder of a Security who
has been a bona fide Holder of a Security of such series for at least six
months may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the appointment of a successor Trustee
with respect to Securities of such series.

(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any series
in the manner provided for notices to the Holders of Securities in Section 106.
Each notice shall include the name of the successor Trustee with respect to the
Securities of such series and the address of its Corporate Trust Office.

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SECTION 609. Acceptance of Appointment By Successor.

(a) In case of the appointment hereunder of a successor Trustee
with respect to all Securities, every such successor Trustee shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on request of
the Company or the successor Trustee, such retiring Trustee shall, upon payment
of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee,
and shall duly assign, transfer and deliver to such successor Trustee all
property and money held by such retiring Trustee hereunder, subject
nevertheless to its claim, if any, provided for in Section 606.

(b) In case of the appointment hereunder of a successor Trustee
with respect to the Securities of one or more (but not all) series, the
Company, the retiring Trustee and each successor Trustee with respect to the
Securities of one or more series shall execute and deliver an indenture
supplemental hereto, pursuant to Article Nine hereof, wherein each successor
Trustee shall accept such appointment and which (1) shall contain such
provisions as shall be necessary or desirable to transfer and confirm to, and
to vest in, each successor Trustee all the rights, powers, trusts and duties of
the retiring Trustee with respect to the Securities of that or those series to
which the appointment of such successor Trustee relates, (2) if the retiring
Trustee is not retiring with respect to all Securities, shall contain such
provisions as shall be deemed necessary or desirable to confirm that all the
rights, powers, trusts and duties of the retiring Trustee with respect to the
Securities of that or those series as to which the retiring Trustee is not
retiring shall continue to be vested in the retiring Trustee, and (3) shall add
to or change any of the provisions of this Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one Trustee, it being understood that nothing herein or in such
supplemental indenture shall constitute such Trustees co-trustees of the same
trust and that each such Trustee shall be trustee of a trust or trusts
hereunder separate and apart from any trust or trusts hereunder administered by
any other such Trustee; and upon the execution and delivery of such
supplemental indenture the resignation or removal of the retiring Trustee shall
become effective to the extent provided therein and each such successor
Trustee, without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties of the retiring Trustee with respect
to the Securities of that or those series to which the appointment of such
successor Trustee relates; but, on request of the Company or any successor
Trustee, such retiring Trustee shall duly assign, transfer and deliver to such
successor Trustee all property and money held by such retiring Trustee
hereunder with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates.

(c) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (a) or (b) of this Section, as the case may be.

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(d) No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.

SECTION 610. Merger, Conversion, Consolidation or Succession to
Business.

Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities or coupons shall have
been authenticated, but not delivered, by the Trustee then in office, any
successor by merger, conversion or consolidation to such authenticating Trustee
may adopt such authentication and deliver the Securities or coupons so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities or coupons. In case any Securities or coupons
shall not have been authenticated by such predecessor Trustee, any such
successor Trustee may authenticate and deliver such Securities or coupons, in
either its own name or that of its predecessor Trustee, with the full force and
effect which this Indenture provides for the certificate of authentication of
the Trustee.

SECTION 611. Appointment of Authenticating Agent.

At any time when any of the Securities remain Outstanding, the Trustee
may appoint an Authenticating Agent or Agents with respect to one or more
series of Securities which shall be authorized to act on behalf of the Trustee
to authenticate Securities of such series issued upon exchange, registration of
transfer or partial redemption or repayment thereof, and Securities so
authenticated shall be entitled to the benefits of this Indenture and shall be
valid and obligatory for all purposes as if authenticated by the Trustee
hereunder. Any such appointment shall be evidenced by an instrument in writing
signed by a Responsible Officer of the Trustee, a copy of which instrument
shall be promptly furnished to the Company. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or
the Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and, except as may otherwise be provided pursuant to
Section 301, shall at all times be a bank or trust company or corporation
organized and doing business and in good standing under the laws of the United
States of America or of any State or the District of Columbia, authorized under
such laws to act as Authenticating Agent, having a combined capital and surplus
of not less than $25,000,000 and subject to supervision or examination by
Federal or State authorities. If such Authenticating Agent publishes reports of
condition at least annually, pursuant to law or the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such Authenticating Agent shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. In case at any time an Authenticating Agent
shall cease to be eligible in

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accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or further act
on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent for any series of Securities may at any time
resign by giving written notice of resignation to the Trustee for such series
and to the Company. The Trustee for any series of Securities may at any time
terminate the agency of an Authenticating Agent by giving written notice of
termination to such Authenticating Agent and to the Company. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee for such series may appoint a successor
Authenticating Agent which shall be acceptable to the Company and shall give
notice of such appointment to all Holders of Securities of or within the series
with respect to which such Authenticating Agent will serve in the manner set
forth in Section 106. Any successor Authenticating Agent upon acceptance of its
appointment hereunder shall become vested with all the rights, powers and
duties of its predecessor hereunder, with like effect as if originally named as
an Authenticating Agent herein. No successor Authenticating Agent shall be
appointed unless eligible under the provisions of this Section.

The Company agrees to pay to each Authenticating Agent from time to
time reasonable compensation including reimbursement of its reasonable expenses
for its services under this Section.

If an appointment with respect to one or more series is made pursuant
to this Section, the Securities of such series may have endorsed thereon, in
addition to or in lieu of the Trustee's certificate of authentication, an
alternate certificate of authentication substantially in the following form:

This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.

, as Trustee
---------------------------

By:
-------------------------------------
as Authenticating Agent

By:
-------------------------------------
Authorized Officer

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ARTICLE SEVEN

HOLDERS' LISTS AND REPORTS BY TRUSTEE AND TRUST

SECTION 701. Disclosure of Names and Addresses of Holders.

Every Holder of Securities or coupons, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any Authenticating Agent nor any Paying Agent nor any Security
Registrar shall be held accountable by reason of the disclosure of any
information as to the names and addresses of the Holders of Securities in
accordance with TIA Section 312, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under TIA Section
312(b).

SECTION 702. Reports by Trustee.

If required by TIA Section 313(a), within 60 days after ____________
of each year commencing with the first ________ after the first issuance of
Securities pursuant to this Indenture, the Trustee shall transmit by mail to
all Holders of Securities as provided in TIA Section 313(c) a brief report
dated as of such date.

SECTION 703. Reports by Company.

The Company will:

(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports and
of the information, documents and other reports (or copies of such portions of
any of the foregoing as the Commission may from time to time by rules and
regulations prescribe) which the Company is required to file with the
Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if
the Company is not required to file information, documents or reports pursuant
to either of such sections, then it will file with the Trustee and the
Commission, in accordance with rules and regulations prescribed from time to
time by the Commission, such of the supplementary and periodic information,
documents and reports which may be required pursuant to Section 13 of the
Exchange Act in respect of a security listed and registered on a national
securities exchange as may be prescribed from time to time in such rules and
regulations;

(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by the
Company with the conditions and covenants of this Indenture as may be required
from time to time by such rules and regulations; and

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(3) transmit by mail to the Holders of Securities, within 30 days
after the filing thereof with the Trustee, in the manner and to the extent
provided in TIA Section 313(c), such summaries of any information, documents
and reports required to be filed by the Company pursuant to paragraphs (1) and
(2) of this Section as may be required by rules and regulations prescribed from
time to time by the Commission.

SECTION 704. Company to Furnish Trustee Names and Addresses of
Holders.

The Company will furnish or cause to be furnished to the Trustee:

(a) semi-annually, not later than 15 days after the Regular Record
Date for interest for each series of Securities, a list, in such form as the
Trustee may reasonably require, of the names and addresses of the Holders of
Registered Securities of such series as of such Regular Record Date, or if
there is no Regular Record Date for interest for such series of Securities,
semi-annually, upon such dates as are set forth in the Board Resolution or
indenture supplemental hereto authorizing such series, and

(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the time
such list is furnished, provided, however, that, so long as the Trustee is the
Security Registrar, no such lists shall be required to be furnished.

ARTICLE EIGHT

CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE

SECTION 801. Consolidations and Mergers of Company and Sales, Leases
and Conveyances Permitted Subject to Certain Conditions.

The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into any other Person,
provided that in any such case, (i) either the Company shall be the continuing
entity, or the successor (if other than the Company) entity shall be a Person
organized and existing under the laws of the United States or a State thereof
and such successor entity shall expressly assume the due and punctual payment
of the principal of (and premium or Make-Whole Amount, if any) and any interest
(including all Additional Amounts, if any, payable pursuant to Section 1011) on
all of the Securities, according to their tenor, and the due and punctual
performance and observance of all of the covenants and conditions of this
Indenture to be performed by the Company by supplemental indenture, complying
with Article Nine hereof, satisfactory to the Trustee, executed and delivered
to the Trustee by such Person and (ii) immediately after giving effect to such
transaction and treating any indebtedness which becomes an obligation of the
Company or any Subsidiary as a result thereof as having been incurred by the
Company or such Subsidiary at the time of such

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transaction, no Event of Default, and no event which, after notice or the lapse
of time, or both, would become an Event of Default, shall have occurred and be
continuing.

SECTION 802. Rights and Duties of Successor Corporation.

In case of any such consolidation, merger, sale, lease or conveyance
and upon any such assumption by the successor entity, such successor entity
shall succeed to and be substituted for the Company, with the same effect as if
it had been named herein as the party of the first part, and the predecessor
entity, except in the event of a lease, shall be relieved of any further
obligation under this Indenture and the Securities. Such successor entity
thereupon may cause to be signed, and may issue either in its own name or in
the name of the Company, any or all of the Securities issuable hereunder which
theretofore shall not have been signed by the Company and delivered to the
Trustee; and, upon the order of such successor entity, instead of the Company,
and subject to all the terms, conditions and limitations in this Indenture
prescribed, the Trustee shall authenticate and shall deliver any Securities
which previously shall have been signed and delivered by the officers of the
Company to the Trustee for authentication, and any Securities which such
successor entity thereafter shall cause to be signed and delivered to the
Trustee for that purpose. All the Securities so issued shall in all respects
have the same legal rank and benefit under this Indenture as the Securities
theretofore or thereafter issued in accordance with the terms of this Indenture
as though all of such Securities had been issued at the date of the execution
hereof.

In case of any such consolidation, merger, sale, lease or conveyance,
such changes in phraseology and form (but not in substance) may be made in the
Securities thereafter to be issued as may be appropriate.

SECTION 803. Officers' Certificate and Opinion of Counsel.

Any consolidation, merger, sale, lease or conveyance permitted under
Section 801 is also subject to the condition that the Trustee receive an
Officers' Certificate and an Opinion of Counsel to the effect that any such
consolidation, merger, sale, lease or conveyance, and the assumption by any
successor entity, complies with the provisions of this Article and that all
conditions precedent herein provided for relating to such transaction have been
complied with.

ARTICLE NINE

SUPPLEMENTAL INDENTURES

SECTION 901. Supplemental Indentures Without Consent of Holders

Without the consent of any Holders of Securities or coupons, the
Company, when authorized by or pursuant to a Board Resolution, and the Trustee,
at any time and from time to

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time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:

(1) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company herein
and in the Securities contained; or

(2) to add to the covenants of the Company for the benefit of the
Holders of all or any series of Securities (and, if such covenants are to be
for the benefit of less than all series of Securities, stating that such
covenants are expressly being included solely for the benefit of such series)
or to surrender any right or power herein conferred upon the Company; or

(3) to add any additional Events of Default for the benefit of the
Holders of all or any series of Securities (and if such Events of Default are
to be for the benefit of less than all series of Securities, stating that such
Events of Default are expressly being included solely for the benefit of such
series); provided, however, that in respect of any such additional Events of
Default such supplemental indenture may provide for a particular period of
grace after default (which period may be shorter or longer than that allowed in
the case of other defaults) or may provide for an immediate enforcement upon
such default or may limit the remedies available to the Trustee upon such
default or may limit the right of the Holders of a majority in aggregate
principal amount of that or those series of Securities to which such additional
Events of Default apply to waive such default; or

(4) to add to or change any of the provisions of this Indenture to
provide that Bearer Securities may be registrable as to principal, to change or
eliminate any restrictions on the payment of principal of or any premium,
Make-Whole Amount or Interest on Bearer Securities, to permit Bearer Securities
to be issued in exchange for Registered Securities, to permit Bearer Securities
to be issued in exchange for Bearer Securities of other authorized
denominations or to permit or facilitate the issuance of Securities in
uncertificated form, provided that any such action shall not adversely affect
the interests of the Holders of Securities of any series or any related coupons
in any material respect; or

(5) to add to, change or eliminate any of the provisions of this
Indenture in respect of one or more series of Securities, provided that any
such addition, change or elimination shall (i) not adversely affect the rights
of the Holders of any Security of any series created prior to the execution of
such supplemental indenture entitled to the benefit of such provision; or (ii)
become effective only when there is no such Security Outstanding; or

(6) to secure the Securities; or

(7) to establish the form or terms of Securities of any series and
any related coupons as permitted by Sections 201 and 301, including the
provisions and procedures relating to Securities convertible into Capital
Stock; or

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(8) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or more
series and to add to or change any of the provisions of this Indenture as shall
be necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee; or

(9) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision herein,
or to make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provisions of
this Indenture or to make any other changes, provided that in each case, such
provisions shall not adversely affect the interests of the Holders of
Securities of any series or any related coupons in any material respect; or

(10) to close this Indenture with respect to the authentication and
delivery of additional series of Securities or to qualify, or maintain
qualification of, this Indenture under the TIA; or

(11) to supplement any of the provisions of this Indenture to such
extent as shall be necessary to permit or facilitate the defeasance and
discharge of any series of Securities pursuant to Sections 401, 1402 and 1403;
provided in each case that any such action shall not adversely affect the
interests of the Holders of Securities of such series and any related coupons
or any other series of Securities in any material respect.

SECTION 902. Supplemental Indentures with Consent of Holders.

With the consent of the Holders of not less than a majority in
principal amount of all Outstanding Securities affected by such supplemental
indenture, by Act of said Holders delivered to the Company and the Trustee, the
Company, when authorized by or pursuant to a Board Resolution, and the Trustee
may enter into an indenture or indentures supplemental hereto for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Securities and any related coupons under this Indenture; provided,
however, that no such supplemental indenture shall, without the consent of the
Holder of each Outstanding Security affected thereby:

(1) change the Stated Maturity of the principal of (or premium or
Make-Whole Amount, if any, on) or any installment of principal of or interest
on, any Security; or reduce the principal amount thereof or the rate or amount
of interest thereon or any Additional Amounts payable in respect thereof, or
any premium or Make-Whole Amount payable upon the redemption thereof, or change
any obligation of the Company to pay Additional Amounts pursuant to Section
1011 (except as otherwise contemplated or permitted under this Indenture), or
reduce the amount of the principal of an Original Issue Discount Security or
Make-Whole Amount, if any, that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502 or the amount
thereof provable in bankruptcy pursuant to Section 504, or adversely affect any
right of repayment at the option of the Holder of any Security, or change any
Place of Payment where, or the currency or currencies, currency unit or units
or composite currency or currencies in which, the principal of any Security or
any premium or Make-Whole Amount or

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any Additional Amounts payable in respect thereof or the interest thereon is
payable, or impair the right to institute suit for the enforcement of any such
payment on or after the Stated Maturity thereof (or, in the case of redemption
or repayment at the option of the Holder, on or after the Redemption Date or
the Repayment Date, as the case may be); or

(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of whose Holders is required for any such
supplemental indenture, or the consent of whose Holders is required for any
waiver with respect to such series (or compliance with certain provisions of
this Indenture or certain defaults hereunder and their consequences) provided
for in this Indenture, or reduce the requirements of Section 1504 for quorum or
voting; or

(3) modify any of the provisions of this Section, Section 513 or
Section 1012, except to increase the required percentage to effect such action
or to provide that certain other provisions of this Indenture cannot be
modified or waived without the consent of the Holder of each Outstanding
Security affected thereby.

It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it
shall be sufficient if such Act shall approve the substance thereof.

A supplemental indenture which changes or eliminates any covenant or
other provision of this Indenture which has expressly been included for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such
covenant or other provision, shall be deemed not to affect the rights under
this Indenture of the Holders of Securities of any other series.

SECTION 903. Execution of Supplemental Indentures.

In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modification thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating
that the execution of such supplemental indenture is authorized or permitted by
this Indenture and that all conditions precedent to the execution of such
supplemental indenture have been complied with. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.

SECTION 904. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every
Holder of Securities theretofore or thereafter authenticated and delivered
hereunder and of any coupon appertaining thereto shall be bound thereby.

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SECTION 905. Conformity with Trust Indenture Act.

Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.

SECTION 906. Reference in Securities to Supplemental Indentures.

Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article may, and shall
if required by the Trustee, bear a notation in form approved by the Trustee as
to any matter provided for in such supplemental indenture. If the Company shall
so determine, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities of such series.

SECTION 907. Notice of Supplemental Indentures.

Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Company
shall give notice thereof to the Holders of each Outstanding Security affected,
in the manner provided for in Section 106, setting forth in general terms the
substance of such supplemental indenture.

ARTICLE TEN

COVENANTS

SECTION 1001. Payment of Principal, Premium or Make-Whole Amount, if
any, Interest and Additional Amounts.

The Company covenants and agrees for the benefit of the Holders of
each series of Securities that it will duly and punctually pay the principal of
(and premium or Make-Whole Amount, if any) and interest on and any Additional
Amounts payable in respect of the Securities of that series in accordance with
the terms of such series of Securities, any coupons appertaining thereto and
this Indenture. Unless otherwise specified as contemplated by Section 301 with
respect to any series of Securities, any interest due on and any Additional
Amounts payable in respect of Bearer Securities on or before Maturity, other
than Additional Amounts, if any, payable as provided in Section 1011 in respect
of principal of (or premium or Make-Whole Amount, if any, on) such a Security,
shall be payable only upon presentation and surrender of the several coupons
for such interest installments as are evidenced thereby as they severally
mature. Unless otherwise specified with respect to Securities of any series
pursuant to Section 301, at the option of the Company, all payments of
principal may be paid by check to the registered Holder of the Registered
Security or other person entitled thereto against surrender of such Security.

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SECTION 1002. Maintenance of Office or Agency.

If Securities of a series are issuable only as Registered Securities,
the Company shall maintain in each Place of Payment for any series of
Securities an office or agency where Securities of that series may be presented
or surrendered for payment or conversion, where Securities of that series may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Securities of that series and
this Indenture may be served. If Securities of a series are issuable as Bearer
Securities, the Company will maintain: (A) in the Borough of Manhattan, The
City of New York, an office or agency where any Registered Securities of that
series may be presented or surrendered for payment or conversion, where any
Registered Securities of that series may be surrendered for exchange, where
notices and demands to or upon the Company in respect of the Securities of that
series and this Indenture may be served and where Bearer Securities of that
series and related coupons may be presented or surrendered for payment or
conversion in the circumstances described in the following paragraph (and not
otherwise); (B) subject to any laws or regulations applicable thereto, in a
Place of Payment for that series which is located outside the United States, an
office or agency where Securities of that series and related coupons may be
presented and surrendered for payment (including payment of any Additional
Amounts payable on Securities of that series pursuant to Section 1011) or
conversion; provided, however, that if the Securities of that series are listed
on the Luxembourg Stock Exchange, The International Stock Exchange or any other
stock exchange located outside the United States and such stock exchange shall
so require, the Company will maintain a Paying Agent for the Securities of that
series in Luxembourg, London or any other required city located outside the
United States, as the case may be, so long as the Securities of that series are
listed on such exchange; and (C) subject to any laws or regulations applicable
thereto, in each Place of Payment for that series located outside the United
States an office or agency where any Securities of that series may be
surrendered for registration of transfer, where Securities of that series may
be surrendered for exchange and where notices and demands to or upon the
Company in respect of the Securities of that series and this Indenture may be
served. The Company will give prompt written notice to the Trustee of the
location, and any change in the location, of each such office or agency. If at
any time the Company shall fail to maintain any such required office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, except that Bearer Securities of that
series and the related coupons may be presented and surrendered for payment
(including payment of any Additional Amounts payable on Bearer Securities of
that series pursuant to Section 1011) at the offices specified in the Security,
in London, England, and the Company hereby appoints the same as its agent to
receive such respective presentations, surrenders, notices and demands, and the
Company hereby appoints the Trustee its agent to receive all such
presentations, surrenders, notices and demands.

Unless otherwise specified with respect to any Securities pursuant to
Section 301, no payment of principal, premium, Make-Whole Amount or interest on
or Additional Amounts in respect of Bearer Securities shall be made at any
office or agency of the Company in the United States or by check mailed to any
address in the United States or by transfer to an account

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maintained with a bank located in the United States; provided, however, that,
if the Securities of a series are payable in Dollars, payment of principal of
and any premium and interest on any Bearer Security (including any Additional
Amounts or Make-Whole Amount payable on Securities of such series pursuant to
Section 1011) shall be made at the office of the Company's Paying Agent in the
Borough of Manhattan, The City of New York, if (but only if) payment in Dollars
of the full amount of such principal, premium, interest, Additional Amounts or
Make-Whole Amount, as the case may be, at all offices or agencies outside the
United States maintained for the purpose by the Company in accordance with this
Indenture, is illegal or effectively precluded by exchange controls or other
similar restrictions.

The Company may from time to time designate one or more other offices
or agencies where the Securities of one or more series and related coupons, if
any, may be presented or surrendered for any or all of such purposes, and may
from time to time rescind such designations; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in accordance with the requirements
set forth above for Securities of any series for such purposes. The Company
will give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency.

Unless otherwise specified with respect to any Securities pursuant to
Section 301, if and so long as the Securities of any series (i) are denominated
in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long
as it is required under any other provision of the Indenture, then the Company
will maintain with respect to each such series of Securities, or as so
required, at least one exchange rate agent.

SECTION 1003. Money for Securities Payments to Be Held in Trust.

If the Company shall at any time act as its own Paying Agent with
respect to any series of any Securities and any related coupons, it will, on or
before each due date of the principal of (and premium or Make-Whole Amount, if
any), or interest on or Additional Amounts in respect of, any of the Securities
of that series, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum in the currency or currencies, currency unit or units or
composite currency or currencies in which the Securities of such series are
payable (except as otherwise specified pursuant to Section 301 for the
Securities of such series) sufficient to pay the principal (and premium or
Make-Whole Amount, if any) or interest or Additional Amounts so becoming due
until such sums shall be paid to such Persons or otherwise disposed of as
herein provided, and will promptly notify the Trustee of its action or failure
so to act.

Whenever the Company shall have one or more Paying Agents for any
series of Securities and any related coupons, it will, on or before each due
date of the principal of (and premium or Make-Whole Amount, if any), or
interest on or Additional Amounts in respect of, any Securities of that series,
deposit with a Paying Agent a sum (in the currency or currencies, currency unit
or units or composite currency or currencies described in the preceding
paragraph) sufficient to pay the principal (and premium or Make-Whole Amount,
if any) or interest or Additional

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Amounts, so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal, premium, Make-Whole Amount or interest or
Additional Amounts and (unless such Paying Agent is the Trustee) the Company
will promptly notify the Trustee of its action or failure so to act.

The Company will cause each Paying Agent other than the Trustee to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:

(1) hold all sums held by it for the payment of principal of (and
premium or Make-Whole Amount, if any) or interest on Securities or Additional
Amounts in trust for the benefit of the Persons entitled thereto until such
sums shall be paid to such Persons or otherwise disposed of as herein provided;

(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities) in the making of any such payment of
principal (and premium or Make-Whole Amount, if any) or interest or Additional
Amounts; and

(3) at any time during the continuance of any such default upon
the written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.

The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Company or such Paying Agent, such sums to be held by the
Trustee upon the same trusts as those upon which such sums were held by the
Company or such Paying Agent; and, upon such payment by any Paying Agent to the
Trustee, such Paying Agent shall be released from all further liability with
respect to such sums.

Except as otherwise provided in the Securities of any series, any
money deposited with the Trustee or any Paying Agent, or then held by the
Company, in trust for the payment of the principal of (and premium or
Make-Whole Amount, if any) or interest on, or any Additional Amounts in respect
of, any Security of any series and remaining unclaimed for two years after such
principal (and premium or Make-Whole Amount, if any), interest or Additional
Amounts has become due and payable shall be paid to the Company upon Company
Request or (if then held by the Company) shall be discharged from such trust;
and the Holder of such Security shall thereafter, as an unsecured general
creditor, look only to the Company for payment of such principal of (and
premium or Make-Whole Amount, if any) or interest on, or any Additional Amounts
in respect of, any Security, without interest thereon, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all
liability of the Company as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Company cause to be published
once, in an Authorized Newspaper, notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days from
the date of such publication, any unclaimed balance of such money then
remaining will be repaid to the Company.

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SECTION 1004. Additional Covenants.

The Company will do or cause to be done all such other things required
under any supplemental indenture executed in accordance with this Indenture.

SECTION 1005. Existence.

Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the existence,
rights (charter and statutory) and franchises of the Company and its
Subsidiaries; provided, however, that the Company shall not be required to
preserve any right or franchise if the Board of Directors shall determine that
the preservation thereof is no longer desirable in the conduct of the business
of the Company and its Subsidiaries as a whole and that the loss thereof is not
disadvantageous in any material respect to the Holders of Securities of any
series.

SECTION 1006. Maintenance of Properties.

The Company will cause all of its properties used or useful in the
conduct of its business or the business of any Subsidiary to be maintained and
kept in good condition, repair and working order and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Company may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times; provided,
however, that nothing in this Section shall prevent the Company or any
Subsidiary from selling or otherwise disposing of for value its properties in
the ordinary course of its business.

SECTION 1007. Insurance.

The Company will, and will cause each of its Subsidiaries to, keep all
of its insurable Properties insured against loss or damage at least equal to
their then full insurable value with financially sound and reputable insurance
companies.

SECTION 1008. Payment of Taxes and Other Claims.

The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all taxes, assessments and
governmental charges levied or imposed upon it or any Subsidiary or upon the
income, profits or property of the Company or any Subsidiary, and (2) all
lawful claims for labor, materials and supplies which, if unpaid, might by law
become a lien upon the property of the Company or any Subsidiary; provided,
however, that the Company shall not be required to pay or discharge or cause to
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.

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SECTION 1009. Provision of Financial Information.

Whether or not the Company is subject to Section 13 or 15(d) of the
Exchange Act, the Company will, to the extent permitted under the Exchange Act,
file with the Commission the annual reports, quarterly reports and other
documents which the Company would have been required to file with the
Commission pursuant to such Section 13 or 15(d) (the "Financial Statements") if
the Company were so subject, such documents to be filed with the Commission on
or prior to the respective dates (the "Required Filing Dates") by which the
Company would have been required so to file such documents if the Company were
so subject.

The Company will also in any event (x) within [15] days of each
Required Filing Date (i) transmit by mail to all Holders, as their names and
addresses appear in the Security Register, without cost to such Holders, copies
of the annual reports and quarterly reports which the Company would have been
required to file with the Commission pursuant to Section 13 or 15(d) of the
Exchange Act if the Company were subject to such Sections, and (ii) file with
the Trustee copies of annual reports, quarterly reports and other documents
which the Company would have been required to file with the Commission pursuant
to Section 13 or 15(d) of the Exchange Act if the Company were subject to such
Sections and (y) if filing such documents by the Company with the Commission is
not permitted under the Exchange Act, promptly upon written request and payment
of the reasonable cost of duplication and delivery, supply copies of such
documents to any prospective Holder.

SECTION 1010. Statement as to Compliance.

The Company will deliver to the Trustee within 120 days after the end
of each fiscal year a brief certificate from the principal executive officer,
principal financial officer or principal accounting officer as to his or her
knowledge of the Company's compliance with all conditions and covenants under
this Indenture and, in the event of any noncompliance, specifying such
noncompliance and the nature and status thereof. For purposes of this Section
1010, such compliance shall be determined without regard to any period of grace
or requirement of notice under this Indenture.

SECTION 1011. Additional Amounts.

If any Securities of a series provide for the payment of Additional
Amounts, the Company will pay to the Holder of any Security of such series or
any coupon appertaining thereto Additional Amounts as may be specified as
contemplated by Section 301. Whenever in this Indenture there is mentioned, in
any context except in the case of Section 502(1), the payment of the principal
of or any premium, Make-Whole Amount or interest on, or in respect of, any
Security of any series or payment of any related coupon or the net proceeds
received on the sale or exchange of any Security of any series, such mention
shall be deemed to include mention of the payment of Additional Amounts
provided by the terms of such series established pursuant to Section 301 to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof pursuant to such terms and express mention of the payment of

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Additional Amounts (if applicable) in any provisions hereof shall not be
construed as excluding Additional Amounts in those provisions hereof where
such express mention is not made.

Except as otherwise specified as contemplated by Section 301, if the
Securities of a series provide for the payment of Additional Amounts, at least
10 days prior to the first Interest Payment Date with respect to that series of
Securities (or if the Securities of that series will not bear interest prior to
Maturity, the first day on which a payment of principal and any premium is
made), and at least 10 days prior to each date of payment of principal and any
premium or Make-Whole Amount or interest if there has been any change with
respect to the matters set forth in the below-mentioned Officers' Certificate,
the Company will furnish the Trustee and the Company's principal Paying Agent
or Paying Agents, if other than the Trustee, with an Officers' Certificate
instructing the Trustee and such Paying Agent or Paying Agents whether such
payment of principal of and any premium or interest on the Securities of that
series shall be made to Holders of Securities of that series or any related
coupons who are not United States persons without withholding for or on account
of any tax, assessment or other governmental charge described in the Securities
of or within the series. If any such withholding shall be required, then such
Officers' Certificate shall specify by country the amount, if any, required to
be withheld on such payments to such Holders of Securities of that series or
related coupons and the Company will pay to the Trustee or such Paying Agent
the Additional Amounts, if any, required by the terms of such Securities. In
the event that the Trustee or any Paying Agent, as the case may be, shall not
so receive the above-mentioned certificate, then the Trustee or such Paying
Agent shall be entitled (i) to assume that no such withholding or deduction is
required with respect to any payment of principal or interest with respect to
any Securities of a series or related coupons until it shall have received a
certificate advising otherwise and (ii) to make all payments of principal and
interest with respect to the Securities of a series or related coupons without
withholding or deductions until otherwise advised. The Company covenants to
indemnify the Trustee and any Paying Agent for, and to hold them harmless
against, any loss, liability or expense reasonably incurred without negligence
or bad faith on their part arising out of or in connection with actions taken
or omitted by any of them in reliance on any Officers' Certificate furnished
pursuant to this Section or in reliance on the Company's not furnishing such an
Officers' Certificate.

SECTION 1012. Waiver of Certain Covenants.

The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Sections 1004 to 1009, inclusive, and
with any other term, provision or condition with respect to the Securities of
any series specified in accordance with Section 301 (except any such term,
provision or condition which could not be amended without the consent of all
Holders of Securities of such series pursuant to Section 902), if before or
after the time for such compliance the Holders of at least a majority in
principal amount of all outstanding Securities of such series, by Act of such
Holders, either waive such compliance in such instance or generally waive
compliance with such covenant or condition, but no such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, the obligations of the Company
and the duties of the Trustee in respect of any such term, provision or
condition shall remain in full force and effect.

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ARTICLE ELEVEN

REDEMPTION OF SECURITIES

SECTION 1101. Applicability of Article.

Securities of any series which are redeemable before their Stated
Maturity shall be redeemable in accordance with their terms and (except as
otherwise specified as contemplated by Section 301 for Securities of any
series) in accordance with this Article.

SECTION 1102. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities shall be
evidenced by or pursuant to a Board Resolution. In case of any redemption at
the election of the Company of less than all of the Securities of any series,
the Company shall, at least [45] days prior to the giving of the notice of
redemption in Section 1104 (unless a shorter notice shall be satisfactory to
the Trustee), notify the Trustee of such Redemption Date and of the principal
amount of Securities of such series to be redeemed. In the case of any
redemption of Securities prior to the expiration of any restriction on such
redemption provided in the terms of such Securities or elsewhere in this
Indenture, the Company shall furnish the Trustee with an Officers' Certificate
evidencing compliance with such restriction.

SECTION 1103. Selection by Trustee of Securities to Be Redeemed.

If less than all the Securities of any series issued on the same day
with the same terms are to be redeemed, the particular Securities to be
redeemed shall be selected not more than [60] days prior to the Redemption Date
by the Trustee, from the Outstanding Securities of such series issued on such
date with the same terms not previously called for redemption, by such method
as the Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to the minimum authorized
denomination for Securities of that series or any integral multiple thereof) of
the principal amount of Securities of such series of a denomination larger than
the minimum authorized denomination for Securities of that series.

The Trustee shall promptly notify the Company and the Security
Registrar (if other than itself) in writing of the Securities selected for
redemption and, in the case of any Securities selected for partial redemption,
the principal amount thereof to be redeemed.

For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed.

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SECTION 1104. Notice of Redemption.

Notice of redemption shall be given in the manner provided in Section
106, not less than [30] days nor more than [60] days prior to the Redemption
Date, unless a shorter period is specified by the terms of such series
established pursuant to Section 301, to each Holder of Securities to be
redeemed, but failure to give such notice in the manner herein provided to the
Holder of any Security designated for redemption as a whole or in part, or any
defect in the notice to any such Holder, shall not affect the validity of the
proceedings for the redemption of any other such Security or portion thereof.

Any notice that is mailed to the Holders of Registered Securities in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not the Holder receives the notice.

All notices of redemption shall state:

(1) the Redemption Date;

(2) the Redemption Price, accrued interest to the Redemption Date
payable as provided in Section 1106, if any, and Additional Amounts, if any;

(3) if less than all Outstanding Securities of any series are to
be redeemed, the identification (and, in the case of partial redemption, the
principal amount) of the particular Security or Securities to be redeemed;

(4) in case any Security is to be redeemed in part only, that on
and after the Redemption Date, upon surrender of such Security, the holder will
receive, without charge, a new Security or Securities of authorized
denominations for the principal amount thereof remaining unredeemed;

(5) that on the Redemption Date the Redemption Price and accrued
interest to the Redemption Date payable as provided in Section 1106, if any,
will become due and payable upon each such Security, or the portion thereof, to
be redeemed and, if applicable, that interest thereon shall cease to accrue on
and after said date;

(6) the Place or Places of Payment where such Securities, together
in the case of Bearer Securities with all coupons appertaining thereto, if any,
maturing after the Redemption Date, are to be surrendered for payment of the
Redemption Price and accrued interest, if any, or for conversion;

(7) that the redemption is for a sinking fund, if such is the
case;

(8) that, unless otherwise specified in such notice, Bearer Securities
of any series, if any, surrendered for redemption must be accompanied by all
coupons maturing subsequent to the date

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fixed for redemption or the amount of any such missing coupon or coupons will
be deducted from the Redemption Price, unless security or indemnity
satisfactory to the Company, the Trustee for such series and any Paying Agent
is furnished;

(9) if Bearer Securities of any series are to be redeemed and any
Registered Securities of such series are not to be redeemed, and if such Bearer
Securities may be exchanged for Registered Securities not subject to the
redemption on this Redemption Date pursuant to Section 305 or otherwise, the
last date, as determined by the Company, on which such exchanges may be made;

(10) the CUSIP number of such Security, if any, provided that
neither the Company nor the Trustee shall have any responsibility for any such
CUSIP number; and

(11) if applicable, that a Holder of Securities who desires to
convert Securities to be redeemed must satisfy the requirements for conversion
contained in such Securities, the then existing conversion price or rate and
the date and time when the option to convert shall expire.

Notice of redemption of Securities to be redeemed shall be given by
the Company or, at the Company's Request, by the Trustee in the name and at the
expense of the Company.

SECTION 1105. Deposit of Redemption Price.

On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, which it may not do in the case of a sinking fund payment under Article
Twelve, segregate and hold in trust as provided in Section 1003) an amount of
money in the currency or currencies, currency unit or units or composite
currency or currencies in which the Securities of such series are payable
(except as otherwise specified pursuant to Section 301 for the Securities of
such series) sufficient to pay on the Redemption Date the Redemption Price of,
and (except if the Redemption Date shall be an Interest Payment Date) accrued
interest on, all the Securities or portions thereof which are to be redeemed on
that date.

SECTION 1106. Securities Payable on Redemption Date.

Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified in the currency or currencies, currency unit
or units or composite currency or currencies in which the Securities of such
series are payable (except as otherwise specified pursuant to Section 301 for
the Securities of such series) (together with accrued interest, if any, to the
Redemption Date), and from and after such date (unless the Company shall
default in the payment of the Redemption Price and accrued interest) such
Securities shall, if the same were interest-bearing, cease to bear interest and
the coupons for such interest appertaining to any Bearer Securities so to be
redeemed, except to the extent provided below, shall be void. Upon surrender of
any such Security for redemption in accordance with said notice, together with
all coupons, if any, appertaining thereto

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maturing after the Redemption Date, such Security shall be paid by the Company
at the Redemption Price, together with accrued interest, if any, to the
Redemption Date; provided, however, that installments of interest on Bearer
Securities whose Stated Maturity is on or prior to the Redemption Date shall be
payable only at an office or agency located outside the United States (except
as otherwise provided in Section 1002) and, unless otherwise specified as
contemplated by Section 301, only upon presentation and surrender of coupons
for such interest; and provided further that except as otherwise provided with
respect to Securities convertible into Capital Stock, installments of interest
on Registered Securities whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Securities, or one or more
Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of Section
307.

If any Bearer Security surrendered for redemption shall not be
accompanied by all appurtenant coupons maturing after the Redemption Date, such
Security may be paid after deducting from the Redemption Price an amount equal
to the face amount of all such missing coupons, or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee if there
be furnished to them such security or indemnity as they may require to save
each of them and any Paying Agent harmless. If thereafter the Holder of such
Security shall surrender to the Trustee or any Paying Agent any such missing
coupon in respect of which a deduction shall have been made from the Redemption
Price, such Holder shall be entitled to receive the amount so deducted;
provided, however, that interest represented by coupons shall be payable only
at an office or agency located outside the United States (except as otherwise
provided in Section 1002) and, unless otherwise specified as contemplated by
Section 301, only upon presentation and surrender of those coupons. If any
Security called for redemption shall not be so paid upon surrender thereof for
redemption, the principal (and premium or Make-Whole Amount, if any) shall,
until paid, bear interest from the Redemption Date at the rate borne by the
Security.

SECTION 1107. Securities Redeemed in Part.

Any Security which is to be redeemed only in part (pursuant to the
provisions of this Article or of Article Twelve) shall be surrendered at a
Place of Payment therefor (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge
a new Security or Securities of the same series, of any authorized denomination
as requested by such Holder in aggregate principal amount equal to and in
exchange for the unredeemed portion of the principal of the Security so
surrendered.

ARTICLE TWELVE

[RESERVED]

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ARTICLE THIRTEEN

[RESERVED]

ARTICLE FOURTEEN

DEFEASANCE AND COVENANT DEFEASANCE

SECTION 1401. Applicability of Article; Company's Option to Effect
Defeasance or Covenant Defeasance.

If, pursuant to Section 301, provision is made for either or both of
(a) defeasance of the Securities of or within a series under Section 1402 or
(b) covenant defeasance of the Securities of or within a series under Section
1403 to be applicable to the Securities of any series, then the provisions of
such Section or Sections, as the case may be, together with the other
provisions of this Article (with such modifications thereto as may be specified
pursuant to Section 301 with respect to any Securities), shall be applicable to
such Securities and any coupons appertaining thereto, and the Company may at
its option by Board Resolution at any time, with respect to such Securities and
any coupons appertaining thereto, elect to defease such Outstanding Securities
and any coupons appertaining thereto pursuant to Section 1402 (if applicable)
or Section 1403 (if applicable) upon compliance with the conditions set forth
below in this Article.

SECTION 1402. Defeasance and Discharge.

Upon the Company's exercise of the above option applicable to this
Section with respect to any Securities of or within a series, the Company shall
be deemed to have been discharged from its obligations with respect to such
Outstanding Securities and any coupons appertaining thereto on the date the
conditions set forth in Section 1404 are satisfied (hereinafter, "defeasance").
For this purpose, such defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by such
Outstanding Securities and any coupons appertaining thereto, which shall
thereafter be deemed to be "Outstanding" only for the purposes of Section 1405
and the other Sections of this Indenture referred to in clauses (A) and (B)
below, and to have satisfied all of its other obligations under such Securities
and any coupons appertaining thereto and this Indenture insofar as such
Securities and any coupons appertaining thereto are concerned (and the Trustee,
at the expense of the Company, shall execute proper instruments acknowledging
the same), except for the following which shall survive until otherwise
terminated or discharged hereunder: (A) the rights of Holders of such
Outstanding Securities and any coupons appertaining thereto to receive, solely
from the trust fund described in Section 1404 and as more fully set forth in
such Section, payments in respect of the principal of (and premium or
Make-Whole Amount, if any) and interest, if any, on such Securities and any
coupons appertaining thereto when such payments are due, (B)the Company's
obligations with

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respect to such Securities under Sections 305, 306, 1002 and 1003 and with
respect to the payment of Additional Amounts, if any, on such Securities as
contemplated by Section 1011, (C) the rights, powers, trusts, duties and
immunities of the Trustee hereunder and (D) this Article. Subject to compliance
with this Article Fourteen, the Company may exercise its option under this
Section notwithstanding the prior exercise of its option under Section 1403
with respect to such Securities and any coupons appertaining thereto.

SECTION 1403. Covenant Defeasance.

Upon the Company's exercise of the above option applicable to this
Section with respect to any Securities of or within a series, the Company shall
be released from its obligations under Sections 1004 to 1009, inclusive, and,
if specified pursuant to Section 301, its obligations under any other covenant,
with respect to such Outstanding Securities and any coupons appertaining
thereto on and after the date the conditions set forth in Section 1404 are
satisfied (hereinafter, "covenant defeasance"), and such Securities and any
coupons appertaining thereto shall thereafter be deemed to be not "Outstanding"
for the purposes of any direction, waiver, consent or declaration or Act of
Holders (and the consequences of any thereof) in connection with Sections 1004
to 1009, inclusive, or such other covenant, but shall continue to be deemed
"Outstanding" for all other purposes hereunder. For this purpose, such
covenant defeasance means that, with respect to such Outstanding Securities and
any coupons appertaining thereto, the Company may omit to comply with and shall
have no liability in respect of any term, condition or limitation set forth in
any such Section or such other covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such Section or such other
covenant or by reason of reference in any such Section or such other covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a default or an Event of Default under Section
501(4) or 501(9) or otherwise, as the case may be, but, except as specified
above, the remainder of this Indenture and such Securities and any coupons
appertaining thereto shall be unaffected thereby.

SECTION 1404. Conditions to Defeasance or Covenant Defeasance.

The following shall be the conditions to application of Section 1402
or Section 1403 to any Outstanding Securities of or within a series and any
coupons appertaining thereto:

(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements of
Section 607 who shall agree to comply with the provisions of this Article
Fourteen applicable to it) as trust funds in trust for the purpose of making
the following payments, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders of such Securities and any coupons
appertaining thereto, (1) an amount in such currency, currencies or currency
unit in which such Securities and any coupons appertaining thereto are then
specified as payable at Stated Maturity, or (2) Government Obligations
applicable to such Securities and coupons appertaining thereto (determined on
the basis of the currency, currencies or currency unit in which such Securities
and coupons appertaining thereto are then specified as payable at Stated
Maturity) which through the scheduled

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payment of principal and interest in respect thereof in accordance with their
terms will provide, not later than one day before the due date of any payment
of principal of (and premium or Make-Whole Amount, if any) and interest, if
any, on such Securities and any coupons appertaining thereto, money in an
amount, or (3) a combination thereof in an amount, sufficient, without
consideration of any reinvestment of such principal and interest, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
and discharge, and which shall be applied by the Trustee (or other qualifying
trustee) to pay and discharge, (i) the principal of (and premium or Make-Whole
Amount, if any) and interest, if any, on such Outstanding Securities and any
coupons appertaining thereto on the Stated Maturity of such principal or
installment of principal or interest and (ii) any mandatory sinking fund
payments or analogous payments applicable to such Outstanding Securities and
any coupons appertaining thereto on the day on which such payments are due and
payable in accordance with the terms of this Indenture and of such Securities
and any coupons appertaining thereto; provided, that the Trustee shall have
been irrevocably instructed to apply such money or the proceeds of such
Government Obligations to said payments with respect to such Securities. Before
such a deposit, the Company may give to the Trustee, in accordance with Section
1102 hereof, a notice of its election to redeem all or any portion of such
Outstanding Securities at a future date in accordance with the terms of the
Securities of such series and Article Eleven hereof, which notice shall be
irrevocable. Such irrevocable redemption notice, if given, shall be given
effect in applying the foregoing.

(b) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or any
other material agreement or instrument to which the Company is a party or by
which it is bound (and shall not cause the Trustee to have a conflicting
interest pursuant to Section 310(b) of the TIA with respect to any Security of
the Company).

(c) No Event of Default or event which with notice or lapse of
time or both would become an Event of Default with respect to such Securities
and any coupons appertaining thereto shall have occurred and be continuing on
the date of such deposit or, insofar as Sections 501(7) and 501(8) are
concerned, at any time during the period ending on the 91st day after the date
of such deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period).

(d) In the case of an election under Section 1402, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of execution of this Indenture, there
has been a change in the applicable Federal income tax law, in either case to
the effect that, and based thereon such opinion shall confirm that, the Holders
of such Outstanding Securities and any coupons appertaining thereto will not
recognize income, gain or loss for Federal income tax purposes as a result of
such defeasance and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred.

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(e) In the case of an election under Section 1403, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of such Outstanding Securities and any coupons appertaining thereto
will not recognize income, gain or loss for Federal income tax purposes as a
result of such covenant defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred.

(f) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance under Section 1402 or the covenant defeasance under
Section 1403 (as the case may be) have been complied with and an Opinion of
Counsel to the effect that either (i) as a result of a deposit pursuant to
subsection (a) above and the related exercise of the Company's option under
Section 1402 or Section 1403 (as the case may be) registration is not required
under the Investment Company Act of 1940, as amended, by the Company, with
respect to the trust funds representing such deposit or by the Trustee for such
trust funds or (ii) all necessary registrations under said Act have been
effected.

(g) After the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally.

(h) Notwithstanding any other provisions of this Section, such
defeasance or covenant defeasance shall be effected in compliance with any
additional or substitute terms, conditions or limitations which may be imposed
on the Company in connection therewith pursuant to Section 301.

SECTION 1405. Deposited Money and Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions.

Subject to the provisions of the last paragraph of Section 1003, all
money and Government Obligations (or other property as may be provided pursuant
to Section 301) (including the proceeds thereof) deposited with the Trustee (or
other qualifying trustee, collectively for purposes of this Section 1405, the
"Trustee") pursuant to Section 1404 in respect of any Outstanding Securities of
any series and any coupons appertaining thereto shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Securities
and any coupons appertaining thereto and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its own
Paying Agent) as the Trustee may determine, to the Holders of such Securities
and any coupons appertaining thereto of all sums due and to become due thereon
in respect of principal (and premium or Make-Whole Amount, if any) and interest
and Additional Amounts, if any, but such money need not be segregated from
other funds except to the extent required by law.

Unless otherwise specified with respect to any Security pursuant to
Section 301, if, after a deposit referred to in Section 1404(a) has been made,
(a) the Holder of a Security in respect

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of which such deposit was made is entitled to, and does, elect pursuant to
Section 301 or the terms of such Security to receive payment in a currency or
currency unit other than that in which the deposit pursuant to Section 1404(a)
has been made in respect of such Security, or (b) a Conversion Event occurs in
respect of the currency or currency unit in which the deposit pursuant to
Section 1404(a) has been made, the indebtedness represented by such Security
and any coupons appertaining thereto shall be deemed to have been, and will be,
fully discharged and satisfied through the payment of the principal of (and
premium or Make-Whole Amount, if any), and interest, if any, on such Security
as the same becomes due out of the proceeds yielded by converting (from time to
time as specified below in the case of any such election) the amount or other
property deposited in respect of such Security into the currency or currency
unit in which such Security becomes payable, as a result of such election or
Conversion Event based on the applicable market exchange rate for such currency
or currency unit in effect [on the second Business Day prior to] each payment
date, except, with respect to a Conversion Event, for such currency or currency
unit in effect (as nearly as feasible) at the time of the Conversion Event.

The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the Government Obligations
deposited pursuant to Section 1404 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of such Outstanding Securities and any coupons
appertaining thereto.

Anything in this Article to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Request any
money or Government Obligations (or other property and any proceeds therefrom)
held by it as provided in Section 1404 which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, are in excess of the amount
thereof which would then be required to be deposited to effect a defeasance or
covenant defeasance, as applicable, in accordance with this Article.

ARTICLE FIFTEEN

MEETINGS OF HOLDERS OF SECURITIES

SECTION 1501. Purposes for Which Meetings May Be Called.

A meeting of Holders of Securities of any series may be called at any
time and from time to time pursuant to this Article to make, give or take any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be made, given or taken by Holders of
Securities of such series.

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SECTION 1502. Call, Notice and Place of Meetings.

(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 1501, to be held
at such time and at such place in the Borough of Manhattan, The City of New
York, or in London as the Trustee shall determine. Notice of every meeting of
Holders of Securities of any series, setting forth the time and the place of
such meeting and in general terms the action proposed to be taken at such
meeting, shall be given, in the manner provided in Section 106, not less than
[21] nor more than [90] days prior to the date fixed for the meeting.

(b) In case at any time the Company, pursuant to a Board
Resolution, or the Holders of at least 10% in principal amount of the
Outstanding Securities of any series shall have requested the Trustee to call a
meeting of the Holders of Securities of such series for any purpose specified
in Section 1501, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee shall not have made
the first publication of the notice of such meeting within [21] days after
receipt of such request or shall not thereafter proceed to cause the meeting to
be held as provided herein, then the Company or the Holders of Securities of
such series in the amount above specified, as the case may be, may determine
the time and the place in the Borough of Manhattan, The City of New York, or in
London for such meeting and may call such meeting for such purposes by giving
notice thereof as provided in subsection (a) of this Section.

SECTION 1503. Persons Entitled to Vote at Meetings.

To be entitled to vote at any meeting of Holders of Securities of any
series, a Person shall be (1) a Holder of one or more Outstanding Securities of
such series, or (2) a Person appointed by an instrument in writing as proxy for
a Holder or Holders of one or more Outstanding Securities of such series by
such Holder or Holders. The only Persons who shall be entitled to be present or
to speak at any meeting of Holders of Securities of any series shall be the
Persons entitled to vote at such meeting and their counsel, any representatives
of the Trustee and its counsel and any representatives of the Company and its
counsel.

SECTION 1504. Quorum; Action.

The Persons entitled to vote a majority in principal amount of the
Outstanding Securities of a series shall constitute a quorum for a meeting of
Holders of Securities of such series; provided, however, that if any action is
to be taken at such meeting with respect to a consent or waiver which this
Indenture expressly provides may be given by the Holders of not less than a
specified percentage in principal amount of the Outstanding Securities of a
series, the Persons entitled to vote such specified percentage in principal
amount of the Outstanding Securities of such series shall constitute a quorum.
In the absence of a quorum within 30 minutes after the time appointed for any
such meeting, the meeting shall, if convened at the request of Holders of
Securities of such series, be dissolved. In any other case the meeting may be
adjourned for a period of not less than 10 days as determined by the chairman
of the meeting prior to the

76
<PAGE> 85

adjournment of such meeting. In the absence of a quorum at any such adjourned
meeting, such adjourned meeting may be further adjourned for a period of not
less than 10 days as determined by the chairman of the meeting prior to the
adjournment of such adjourned meeting. Notice of the reconvening of any
adjourned meeting shall be given as provided in Section 1502(a), except that
such notice need be given only once not less than [five (5)] days prior to the
date on which the meeting is scheduled to be reconvened. Notice of the
reconvening of any adjourned meeting shall state expressly the percentage, as
provided above, of the principal amount of the Outstanding Securities of such
series which shall constitute a quorum. Except as limited by the proviso to
Section 902, any resolution presented to a meeting or adjourned meeting duly
reconvened at which a quorum is present as aforesaid may be adopted by the
affirmative vote of the Holders of a majority in principal amount of the
Outstanding Securities of that series; provided, however, that, except as
limited by the proviso to Section 902, any resolution with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action which this Indenture expressly provides may be made, given or taken by
the Holders of a specified percentage, which is less than a majority, in
principal amount of the Outstanding Securities of a series may be adopted at a
meeting or an adjourned meeting duly reconvened and at which a quorum is
present as aforesaid by the affirmative vote of the Holders of such specified
percentage in principal amount of the Outstanding Securities of that series.

Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and the related
coupons, whether or not present or represented at the meeting.

Notwithstanding the foregoing provisions of this Section 1504, if any
action is to be taken at a meeting of Holders of Securities of any series with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that this Indenture expressly provides may be made,
given or taken by the Holders of a specified percentage in principal amount of
all Outstanding Securities affected thereby, or of the Holders of such series
and one or more additional series:

(i) there shall be no minimum quorum requirement for such
meeting; and

(ii) the principal amount of the Outstanding Securities of such
series that vote in favor of such request, demand,
authorization, direction, notice, consent, waiver or other
action shall be taken into account in determining whether such
request, demand, authorization, direction, notice, consent,
waiver or other action has been made, given or taken under
this Indenture.

SECTION 1505. Determination of Voting Rights; Conduct and Adjournment
of Meetings.

(a) Notwithstanding any provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting
of Holders of Securities of a series in regard to proof of the holding of
Securities of such series and of the appointment of proxies and in regard to
the appointment and duties of inspectors of votes, the submission and

77
<PAGE> 86

examination of proxies, certificates and other evidence of the right to vote,
and such other matters concerning the conduct of the meeting as it shall deem
appropriate. Except as otherwise permitted or required by any such regulations,
the holding of Securities shall be proved in the manner specified in Section
104 and the appointment of any proxy shall be proved in the manner specified in
Section 104 or by having the signature of the Person executing the proxy
witnessed or guaranteed by any trust company, bank or banker authorized by
Section 104 to certify to the holding of Bearer Securities. Such regulations
may provide that written instruments appointing proxies, regular on their face,
may be presumed valid and genuine without the proof specified in Section 104 or
other proof.

(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been called by
the Company or by Holders of Securities as provided in Section 1502(b), in
which case the Company or the Holders of Securities of or within the series
calling the meeting, as the case may be, shall in like manner appoint a
temporary chairman. A permanent chairman and a permanent secretary of the
meeting shall be elected by vote of the Persons entitled to vote a majority in
principal amount of the Outstanding Securities of such series represented at
the meeting.

(c) At any meeting each Holder of a Security of such series or
proxy shall be entitled to one vote for each $1,000 principal amount of the
Outstanding Securities of such series held or represented by him; provided,
however, that no vote shall be cast or counted at any meeting in respect of any
Security challenged as not Outstanding and ruled by the chairman of the meeting
to be not Outstanding. The chairman of the meeting shall have no right to vote,
except as a Holder of a Security of such series or proxy.

(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 1502 at which a quorum is present may be adjourned from
time to time by Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting, and the
meeting may be held as so adjourned without further notice.

SECTION 1506. Counting Votes and Recording Action of Meetings.

The vote upon any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of such series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in duplicate of all votes cast at the meeting. A record, at least in
duplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the fact, setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 1502 and, if
applicable, Section 1504.

78
<PAGE> 87

Each copy shall be signed and verified by the affidavits of the permanent
chairman and secretary of the meeting and one such copy shall be delivered to
the Company and another to the Trustee to be preserved by the Trustee, the
latter to have attached thereto the ballots voted at the meeting. Any record so
signed and verified shall be conclusive evidence of the matters therein stated.

SECTION 1507. Evidence of Action Taken by Holders.

Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by a specified
percentage in principal amount of the Holders of any or all series may be
embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such specified percentage of Holders in person or by agent duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee. Proof of execution of any instrument or of a writing appointing
any such agent shall be sufficient for any purpose of this Indenture and
(subject to Article Six) conclusive in favor of the Trustee and the Company, if
made in the manner provided in this Article.

SECTION 1508. Proof of Execution of Instruments.

Subject to Article Six, the execution of any instrument by a Holder or
his agent or proxy may be proved in accordance with such reasonable rules and
regulations as may be prescribed by the Trustee or in such manner as shall be
satisfactory to the Trustee.

ARTICLE SIXTEEN

SUBORDINATION

SECTION 1601. Agreement to Subordinate.

The Company agrees, and each Holder by accepting a Security agrees,
that the indebtedness evidenced by the Securities is subordinated in right of
payment, to the extent and in the manner provided in this Article, to the prior
payment in full of all Senior Debt and that the subordination is for the
benefit of the holders of Senior Debt.

SECTION 1602. Liquidation; Dissolution; Bankruptcy.

Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property:

(1) holders of Senior Debt shall be entitled to receive payment in
full in cash of the principal of and interest (including interest accruing
after the commencement of any such

79
<PAGE> 88

proceeding) to the date of payment on the Senior Debt before Holders shall be
entitled to receive any payment of principal of or interest on Securities;

(2) until the Senior Debt is paid in full in cash, any
distribution to which Holders would be entitled but for this Article shall be
made to holders of Senior Debt as their interests may appear, except that
Holders may receive securities that are subordinated to Senior Debt to at least
the same extent as the Securities; and

(3) the Trustee is entitled to rely upon an order or decree of a
court of competent jurisdiction or a certificate of a bankruptcy trustee or
other similar official for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of Senior Debt and other Company
debt, the amount thereof or payable thereon and all other pertinent facts
relating to the Trustee's obligations under this Article Sixteen.

SECTION 1603. Default on Senior Debt.

The Company may not pay principal of or interest on the Securities and
may not acquire any Securities for cash or property other than capital stock of
the Company if:

(1) a default on Senior Debt occurs and is continuing that permits
holders of such Senior Debt to accelerate its maturity, and

(2) the default is the subject of judicial proceedings or the
Company receives a notice of the default from a person who may give it pursuant
to Section 1611. If the Company receives any such notice, a similar notice
received within nine months thereafter relating to the same default on the same
issue of Senior Debt shall not be effective for purposes of this Section.

The Company may resume payments on the Securities and may acquire them
when:

(a) the default is cured or waived, or

(b) 120 days pass after the notice is given if the
default is not the subject of judicial proceedings,

if this Article otherwise permits the payment or acquisition at that
time.

SECTION 1604. Acceleration of Securities.

If payment of the Securities is accelerated because of an Event of
Default, the Company shall promptly notify holders of Senior Debt of the
acceleration. The Company may pay the Securities when 120 days pass after the
acceleration occurs if this Article permits the payment at that time.

80
<PAGE> 89

SECTION 1605. When Distribution Must Be Paid Over.

If a distribution is made to Holders that because of this Article
should not have been made to them, the Holders who receive the distribution
shall hold it in trust for holders of Senior Debt and pay it over to them as
their interests may appear.

SECTION 1606. Notice by Company.

The Company shall promptly notify the Trustee and any Paying Agent of
any facts known to the Company that would cause a payment of principal of or
interest on Securities to violate this Article.

SECTION 1607. Subrogation.

After all Senior Debt is paid in full and until the Securities are
paid in full, Holders shall be subrogated to the rights of holders of Senior
Debt to receive distributions applicable to Senior Debt to the extent that
distributions otherwise payable to the Holders have been applied to the payment
of Senior Debt. A distribution made under this Article to holders of Senior
Debt which otherwise would have been made to Holders is not, as between the
Company and Holders, a payment by the Company on Senior Debt.

SECTION 1608. Relative Rights.

This Article defines the relative rights of Holders and holders of
Senior Debt. Nothing in this Indenture shall:

(1) impair, as between the Company and Holders, the obligation of
the Company, which is absolute and unconditional, to pay principal of and
interest on the Securities in accordance with their terms;

(2) affect the relative rights of Holders and creditors of the
Company other than holders of Senior Debt; or

(3) prevent the Trustee or any Holder from exercising its
available remedies upon an Event of Default, subject to the rights of holders
of Senior Debt to receive distributions otherwise payable to Holders.

If the Company fails because of this Article to pay principal of or
interest on a Security on the due date, the failure is still a default.

81
<PAGE> 90

SECTION 1609. Subordination May Not Be Impaired
by Company.

No right of any holder of Senior Debt to enforce the subordination of
the indebtedness evidenced by the Securities shall be impaired by any act or
failure to act by the Company or by its failure to comply with this Indenture.

SECTION 1610. Distribution or Notice to Representative.

Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
Representative.

SECTION 1611. Rights of Trustee and Paying Agent.

The Trustee or any Paying Agent may continue to make payments on the
Securities until it receives written notice of facts that would cause a payment
of principal of or interest on the Securities to violate this Article. Only the
Company, a Representative or a holder of an issue of Senior Debt that has no
Representative may give the written notice.

The Trustee has no fiduciary duty to the holders of Senior Debt other
than as created under this Indenture. The Trustee in its individual or any
other capacity may hold Senior Debt with the same rights it would have if it
were not Trustee.

The Company's obligation to pay, and the Company's payment of, the
Trustee's fees pursuant to Section 606 are excluded from the operation of this
Article Sixteen.

This Indenture may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.

82
<PAGE> 91

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed by their respective officers hereunto duly authorized, all as
of the day and year first above written.

SERVICE EXPERTS, INC.

By:
---------------------------------
Name:
Title:

, as Trustee
------------------------

By:
--------------------------------
Name:
Title:

83
<PAGE> 92

EXHIBIT A

FORMS OF CERTIFICATION

<PAGE> 93

EXHIBIT A-1

FORM OF CERTIFICATE TO BE GIVEN BY PERSON ENTITLED
TO RECEIVE BEARER SECURITY OR TO OBTAIN INTEREST
PAYABLE PRIOR TO THE EXCHANGE DATE

(Insert title or sufficient description of Securities to be delivered)

This is to certify that, as of the date hereof, and except as
set forth below, the above-captioned Securities held by you for our account (i)
are owned by person(s) that are not citizens or residents of the United States,
domestic partnerships, domestic corporations or any estate or trust the income
of which is subject to United States federal income taxation regardless of its
source ("United States person(s)"), (ii) are owned by United States person(s)
that are (a) foreign branches of United States financial institutions
(financial institutions, as defined in United States Treasury Regulations
Section 1. 165-12(c)(1)(v) are herein referred to as "financial institutions")
purchasing for their own account or for resale, or (b) United States person(s)
who acquired the Securities through foreign branches of United States financial
institutions and who hold the Securities through such United States Financial
institutions on the date hereof (and in either case (a) or (b), each such
United States financial institution hereby agrees, on its own behalf or through
its agent, that you may advise ____________________ or its agent that such
financial institution will provide a certificate within a reasonable time
stating that it agrees to comply with the requirements of Section 165(j)(3)(A),
(B) or (C) of the United States Internal Revenue Code of 1986, as amended, and
the regulations thereunder), or (iii) are owned by a financial institution for
purposes of resale during the restricted period (as defined in United States
Treasury Regulations Section 1. 1635(c)(2)(i)(D)(7)), and, such financial
institution described in clause (iii) above (whether or not also described in
clause (i) or (ii)), certifies that it has not acquired the Securities for
purposes of resale directly or indirectly to a United States person or to a
person within the United States or its possessions.

As used herein, "United States" means the United States of America
(including the States and the District of Columbia), and its "possessions"
include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island
and the Northern Mariana Islands.

We undertake to advise you promptly by tested telex on or prior to the
date on which you intend to submit your certification relating to the
above-captioned Securities held by you for our account in accordance with your
operating procedures if any applicable statement herein is not correct on such
date, and in the absence of any such notification it may be assumed that this
certification applies as of such date. This certificate excepts and does not
related to __________________________ (U.S. $) of such interest in the
above-captioned Securities in respect of which we are not able to certify and
as to which we understand an exchange for an interest in a permanent global
Security or an exchange for and delivery of definitive Securities (or, if
relevant, collection of any interest) cannot be made until we do so certify.

A-1
<PAGE> 94

We understand that this certificate may be required in connection with
certain tax legislation in the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certificate is or would be relevant, we irrevocably authorize you to produce
this certificate or a copy thereof to any interested party in such proceedings.

Dated: ______________, 19__ (To be dated no earlier than the 15th day
prior to the earlier of (i) the Exchange Date or (ii) the relevant Interest
Payment Date occurring prior to the Exchange Date, as applicable)

-------------------------------------
(Name of Person Making Certification)

-------------------------------------
(Authorized Signatory)
Name:
--------------------------------
Title:
-------------------------------

A-2
<PAGE> 95

EXHIBIT A-2

FORM OF CERTIFICATE TO BE GIVEN BY EUROCLEAR
AND CEDEL S.A. IN CONNECTION WITH THE EXCHANGE OF
A PORTION OF A TEMPORARY GLOBAL SECURITY OR TO
OBTAIN INTEREST PAYABLE PRIOR TO THE EXCHANGE DATE

(Insert title or sufficient description of Securities to be delivered)

This is to certify that, based solely on written certifications that
we have received in writing, by tested telex or by electronic transmission from
each of the persons appearing in our records as persons entitled to a portion
of the principal amount set forth below (our "Member Organizations")
substantially in the form attached hereto, as of the date hereof, _____________
_________________________ (U.S. $) principal amount of the above-captioned
Securities (i) is owned by person(s) that are not citizens or residents of the
United States, domestic partnerships, domestic corporations or any estate or
trust the income of which is subject to United States Federal income taxation
regardless of its source ("United States person(s)"), (ii) is owned by United
States person(s) that are (a) foreign branches of United States financial
institutions (financial institutions, as defined in United States Treasury
Regulations Section 1.165-12(c)(1)(v) are herein referred to as "financial
institutions") purchasing for their own account or for resale, or (b) United
States person(s) who acquired the Securities through foreign branches of United
States financial institutions and who hold the Securities through such United
States financial institutions on the date hereof (and in either case (a) or
(b), each such financial institution has agreed, on its own behalf or through
its agent, that we may advise ___________________ or its agent that such
financial institution will provide a certificate within a reasonable time
stating that it agrees to comply with the requirements of Section 165(j)(3)(A),
(B), or (C) of the Internal Revenue Code of 1986, as amended, and the
regulations thereunder), or (iii) is owned by a financial institution for
purposes of resale during the restricted period (as defined in United States
Treasury Regulations Section 1.163-5(c)(2)(i)(D)(7)), and that such financial
institutions described in clause (iii) above (whether or not also described in
clause (i) or (ii)) have certified that they have not acquired the Securities
for purposes of resale directly or indirectly to a United States person or to a
person within the United States or its possessions.

As used herein, "United States" means the United States of America
(including the States and the District of Columbia) and its "possessions"
include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island
and the Northern Mariana Islands.

We further certify that (i) we are not making available herewith for
exchange (or, if relevant, collection of any interest) any portion of the
temporary global Security representing the above-captioned Securities excepted
in the above-referenced certificates of Member Organizations and (ii) as of the
date hereof we have not received any notification from any of our Member
Organizations to the effect that the statements made by such Member
Organizations with respect to any portion of the part submitted herewith for
exchange (or, if relevant, collection of any interest) are no longer true and
cannot be relied upon as of the date hereof.

A-3
<PAGE> 96

We understand that this certification is required in connection with
certain tax legislation in the United States. If administrative or legal
proceedings are commenced or threatened in connection with which this
certificate is or would be relevant, we irrevocably authorize you to produce
this certificate or a copy thereof to any interested party in such proceedings.

Dated:_______________________ , 19__

(To be dated no earlier than the earlier of the
Exchange Date or the relevant Interest Payment Date
occurring prior to the Exchange Date, as applicable)

----------------------------------
,
----------------------------------
as
----------------------------------

----------------------------------

By:
-------------------------------

A-4

<PAGE> 1
EXHIBIT 5

September 19, 1996

Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217

Re: Registration Statement on Form S-4

Ladies and Gentlemen:

We have acted as counsel to Service Experts, Inc., a Delaware
corporation (the "Company"), in connection with the registration statement on
Form S-4 (the "Registration Statement") to be filed by the Company with the
Securities and Exchange Commission on September 19, 1996, relating to up to an
aggregate of $50,000,000 consisting of (i) subordinated debt securities
(the "Debt Securities"), (ii) shares of the Company's Common Stock, $.01 par
value per share (the "Common Stock"), or (iii) warrants to purchase Common
Stock (the "Common Stock Warrants"). The Common Stock, the Debt Securities and
the Common Stock Warrants (collectively, the "Securities") may be offered and
sold by the Company from time to time as set forth in the prospectus which
forms a part of the Registration Statement (the "Prospectus") and the
applicable supplement to the Prospectus (the "Prospectus Supplement").

We have assumed that the issuance, sale, amount and terms of the
Securities to be offered from time to time will be duly authorized and
determined by proper action of the Board of Directors of the Company (each, a
"Board Action") and in accordance with the Company's Certificate of
Incorporation and applicable Delaware law, each as in effect at all times
relevant to this opinion, including requirements that the Securities be issued
for consideration equal to the greater of their par or stated value and the
consideration set by the Board Action. We assume that all Securities will be
issued as described in the Registration Statement. We further assume that any
Debt Securities will be issued pursuant to an Indenture in the form
filed as Exhibit 4.2 to the Registration Statement (the "Indenture"), and any
Common Stock Warrants will be issued pursuant to a warrant certificate or
agreement (the "Warrant Agreement"), to be between the Company and the warrant
recipient or, if the recipients are numerous, a financial institution
identified therein as the warrant agent (the "Warrant Agent").

<PAGE> 2

Service Experts, Inc.
September 19, 1996
Page 2

In connection with this opinion, we have examined and relied upon such
records, documents and other instruments as in our judgment are necessary or
appropriate in order to express the opinions hereinafter set forth and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.

Members of this firm are admitted to practice in the State of
Tennessee. We express no opinion herein as to the law of any jurisdiction
other than the General Corporation Law of the State of Delaware.

Based upon, subject to and limited by the foregoing, we are of the
opinion that, as of the date hereof:

(1) When a series of the Debt Securities has been (a) duly
established by an Indenture or any supplemental indenture
thereto, (b) duly authorized and established by applicable
Board Action and duly authenticated by the trustee under such
Indenture and (c) duly executed and delivered on behalf of the
Company against payment therefor in accordance with the terms
of such Board Action, an Indenture and any applicable
supplemental indenture, and as contemplated by the
Registration Statement and/or the applicable Prospectus
Supplement, the Debt Securities will be duly authorized and
validly issued.

(2) Upon due authorization by Board Action of an issuance of
Common Stock, and upon issuance and delivery of certificates
for Common Stock against payment therefor in accordance with
the terms of such Board Action, and as contemplated by the
Registration Statement and/or the applicable Prospectus
Supplement, the shares of Common Stock represented by such
certificates will be duly authorized and validly issued, fully
paid and non-assessable by the Company.

(3) When the Common Stock Warrants have been (a) duly
established by the related Warrant Agreement, (b) duly
authorized and established by applicable Board Action and duly
authenticated by the Warrant Agent, if applicable, and (c)
duly executed and delivered on behalf of the Company against
payment therefor in accordance with the terms of such Board
Action, the applicable Warrant Agreement and as

<PAGE> 3

Service Experts, Inc.
September 19, 1996
Page 3

contemplated by the Registration Statement and/or the
applicable Prospectus Supplement, the Common Stock Warrants will
be duly authorized and validly issued.

We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion. This opinion has been prepared
solely for your use in connection with the transmitting for filing of the
Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.

We hereby consent to the filing of this opinion letter as Exhibit 5 to
the Registration Statement and further consent to the reference to this firm
under the caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement.

Very truly yours,

<PAGE> 1

EXHIBIT 10.11

LOAN AGREEMENT

ENTERED INTO by and between SERVICE EXPERTS, INC., a Delaware
corporation (the "Borrower"), and SUNTRUST BANK, NASHVILLE, N.A., a national
bank (the "Lender"), as of this 10th day of September, 1996.

RECITALS:

1. The Borrower desires that the Lender extend credit.

2. The Lender is willing to extend the Borrower credit pursuant
to the terms and conditions contained in this Loan Agreement ("Agreement").

NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:

Article I. The Loans.

Section 1.01 The Revolving Credit Loan. Subject to the terms and
conditions of the Loan Documents, and in reliance upon the representations,
warranties, and covenants set forth in the Loan Documents, the Lender agrees to
extend a revolving credit loan to the Borrower in the principal amount of up to
$10,000,000 pursuant to the Revolving Credit Note, a copy of which is attached
hereto as Exhibit A (the "Revolving Credit Note"). The interest rate and the
terms and provisions of repayment shall be as set forth in the Revolving Credit
Note.

From time to time the Borrower may request that the Lender issue
letters of credit on Borrower's account. The Lender may in its sole discretion
and without obligation agree to issue any requested letter of credit. The
agreement by the Lender to issue any one or more letters of credit does not
bind the Lender to issue any other requested letter of credit.

In connection with the issuance of any letter of credit, the Borrower
shall execute an application and reimbursement agreement in form and substance
satisfactory to Lender, and the Borrower shall pay to Lender a letter of credit
application and/or issuance fee in such amount as required by Lender. No
letter of credit shall be issued for a term that extends beyond the maturity
date of the Revolving Credit Note.

The Borrower's availability to receive advances under the Revolving
Credit Note shall be reduced by an amount equal to the aggregate face amount of
any letters of credit issued by Lender pursuant to this section.

Advances under the Revolving Credit Note shall be made pursuant to the
following procedure:

(a) advances may be made pursuant to the procedure
specified in any applicable agreement between Borrower and Lender, and

(b) advances may be made within three (3) business days
subsequent to receipt by Lender of a written request submitted on
behalf of Borrower by its Chief Financial Officer, President, or other
appropriate officer, and advances so funded under this subpart (b)
shall be made by Lender's depositing the funds into Borrower's
operating account maintained with Lender.

Section 1.02 The Discretionary Line of Credit Loan. Subject to the
terms and conditions of the Loan Documents and subject to the sole and absolute
and arbitrary discretion of the Lender, the Lender agrees to consider extending
the Borrower advances up to the principal amount of $10,000,000 pursuant to the
Discretionary Line of Credit Note, a copy of which is attached hereto as
Exhibit B (the "Discretionary Line of Credit Note"). The interest rate and the
terms and provisions of repayment shall be as set forth in the Discretionary
Line of Credit Note.

Advances under the Discretionary Line of Credit Note shall be made
pursuant to the following procedure:

<PAGE> 2

(a) on each occasion that the Borrower desires to obtain
an advance under the Discretionary Line of Credit Note, the Borrower
(through its president or chief financial officer) shall submit a
written request therefor to Lender, along with an itemization
detailing the use of the proceeds of the advance;

(b) within three (3) business days from receipt of the
written request specified in subpart (a), the Lender shall notify the
Borrower whether it has elected to fund the advance or whether it
declines to fund the advance; and

(c) if the Lender elects to fund the requested advance,
it shall deposit the proceeds of the advance into Borrower's operating
account maintained with Lender.

IT IS UNDERSTOOD AND AGREED BY BORROWER THAT LENDER HAS NO OBLIGATION
WHATSOEVER TO FUND ANY ADVANCE UNDER THE DISCRETIONARY LINE OF CREDIT NOTE.
LENDER HAS THE SOLE AND ABSOLUTE AND ARBITRARY DISCRETION TO DETERMINE WHETHER
OR NOT IT WILL FUND AN ADVANCE UNDER THE DISCRETIONARY LINE OF CREDIT NOTE.
THE BORROWER AGREES THAT THE LENDER HAS NO LIABILITY OF ANY KIND WHATSOEVER
ARISING OUT OF LENDER'S DETERMINATION NOT TO FUND ANY ADVANCE UNDER THE
DISCRETIONARY LINE OF CREDIT NOTE.

Section 1.03 Use of Proceeds. The Borrower shall use the proceeds
from the Revolving Credit Note for working capital purposes and to enable the
Borrower to acquire other companies or their assets. The Borrower shall use the
proceeds from any advances under the Discretionary Line of Credit Note to
enable the Borrower to acquire other companies or their assets or such other
purposes as may be approved by the Lender.

Section 1.04 Term of This Agreement. This Agreement shall be binding
on the Borrower so long as any portion of the indebtedness evidenced by the
Revolving Credit Note and the Discretionary Line of Credit Note (collectively
referred to herein as the "Indebtedness") remains outstanding, provided and
except, Borrower's representations, warranties, and indemnity agreements shall
survive the payment in full of such Indebtedness.

Section 1.05 Right of Offset, Etc. The Borrower hereby agrees that,
in addition to (and without limitation of) any right of set-off, banker's lien
or counterclaim the Lender may otherwise have, the Lender shall be entitled, at
its option, to offset balances held by it at any of its offices against any
principal of or interest on the Indebtedness which is not paid when due by
reason of a failure by the Borrower to make any payment when due to the Lender
(regardless whether such balances are then due to the Borrower), in which case
it shall promptly notify the Borrower, provided that its failure to give such
notice shall not affect the validity thereof.

Section 1.06 Structuring Fee. Upon the execution of this Agreement,
the Borrower shall pay to the Lender a non-refundable structuring fee equal to
$25,000, which structuring fee is paid in consideration of Lender's willingness
and the work taken to issue a commitment to fund the Revolving Credit Note.

Section 1.07 Non-Use Fee. Commencing on the tenth (10th) day of
October, 1996 and on the tenth (10th) day of each consecutive month thereafter
through and including August 10, 1998 and on September 10, 1998, the Borrower
agrees to pay to Lender a non-use fee equal to one quarter of one percent
(.25%) per annum on the average unused portion of the Revolving Credit Note for
the calendar month (or portion thereof) just ended.

Section 1.08 Guarantees. In order to induce the Lender to extend the
credit described in this Agreement and for other consideration, all
subsidiaries ("Subsidiaries") and affiliates of Borrower shall guarantee the
repayment of the indebtedness extended to Borrower and described herein.

Article II. Representations and Warranties.

To induce Lender to enter this Agreement and extend credit under this
Agreement, Borrower covenants, represents, and warrants to Lender that as of
the date hereof:

Section 2.01 Corporate Existence. Borrower is a corporation duly
organized, legally existing, and in good standing under the laws of the State
of Delaware and it is duly qualified as a foreign corporation in all
jurisdictions in which the property owned or the business transacted by it
makes such qualification necessary. Borrower will not

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<PAGE> 3

commence doing business in any state unless and until it shall have qualified
to do business in such state if such qualification is required by law.

Section 2.02 Corporate Power and Authorization. Borrower is duly
authorized and empowered to execute, deliver, and perform under all Loan
Documents; the Borrower's board of directors has authorized the Borrower to
execute and perform under the Loan Documents; and all other corporate and/or
shareholder action on Borrower's part required for the due execution, delivery,
and performance of the Loan Documents has been duly and effectively taken.

Section 2.03 Binding Obligations. This Agreement is, and the Loan
Documents when executed and delivered in accordance with this Agreement will
be, legal, valid and binding upon and against the Borrower and its properties
enforceable in accordance with their respective terms, subject to no defense,
counterclaim, set-off, or objection of any kind.

Section 2.04 No Legal Bar or Resultant Lien. The Borrower's execution,
delivery and performance of the Loan Documents do not constitute a default
under, and will not violate any provisions of the articles of incorporation (or
charter) or bylaws of Borrower, any contract, agreement, law, regulation,
order, injunction, judgment, decree, or writ to which Borrower is subject, or
result in the creation or imposition of any lien upon any properties of
Borrower, other than those contemplated by the Loan Documents.

Section 2.05 No Consent. Borrower's execution, delivery, and
performance of the Loan Documents do not require the consent or approval of any
other person.

Section 2.06 Financial Condition. The financial statements (the
"Financial Statements") which have been delivered to Lender, have been prepared
in accordance with generally accepted accounting principles ("GAAP"),
consistently applied, and the Financial Statements present fairly the financial
condition of Borrower as of the date or dates and for the period or periods
stated therein. No material adverse change in the financial condition of
Borrower has occurred since the date of the most recent Financial Statements.

Section 2.07 Investments, Advances, and Guaranties. Borrower has not
made investments in, advances to, or guaranties of the obligations of any
person, or committed or agreed to undertake any of these actions or
obligations, except as referred to or reflected in the Financial Statements and
as contained in certain guaranties executed by Borrower in favor of American
General Finance Center regarding obligations of certain Subsidiaries under
certain Private Label Credit Agreements.

Section 2.08 Liabilities and Litigation. Borrower has no material
liabilities (individually or in the aggregate) direct or contingent, except as
referred to or reflected in the Financial Statements. There is no litigation,
legal or administrative proceeding, investigation, or other action of any
nature pending or, to the knowledge of Borrower, threatened against or
affecting Borrower that involves the possibility of any judgment or liability
not fully covered by insurance and that may materially and adversely affect the
business or the properties of Borrower or its ability to carry on its business
as now conducted.

Section 2.09 Taxes; Governmental Charges. Borrower has filed or
caused to be filed all tax returns and reports required to be filed and has
paid all taxes, assessments, fees, and other governmental charges levied upon
it or upon any of its properties or income, which are due and payable,
including interest and penalties. Borrower has made all required withholding
deposits.

Section 2.10 No Default. Borrower is not in default in any respect
that affects its business, properties, operations, or condition, financial or
otherwise, under any indenture, mortgage, deed of trust, credit agreement,
note, agreement, or other instrument to which Borrower is a party or by which
it or its properties are bound. The Borrower is not in violation of its
Articles of Incorporation or Bylaws. No Default Conditions hereunder have
occurred or are continuing as of the date hereof.

Section 2.11 Compliance with Laws, Etc. Borrower is not in violation
of any law, judgment, decree, order, ordinance, or governmental rule or
regulation to which Borrower or any of its properties is subject. Borrower has
not failed to obtain any license, permit, franchise, or other governmental
authorization necessary to the ownership of any of its properties or to the
conduct of its business. All improvements on the real estate owned by Borrower
conform in all

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<PAGE> 4

material respects to all applicable state and local laws, zoning and building
ordinances and health and safety ordinances, and such real estate is zoned for
the various purposes for which such real estate and improvements thereon are
presently being used.

Section 2.12 ERISA. Borrower is in compliance in all material
respects with the applicable provisions of ERISA. Borrower has not incurred any
"accumulated funding deficiency" within the meaning of ERISA which is material,
and Borrower has not incurred any material liability to PBGC in connection with
any Plan.

Section 2.13 Subsidiaries, Etc. The Subsidiaries of Borrower are
identified on Exhibit C hereto.

Section 2.14 No Material Misstatements. No information, exhibit, or
report furnished or to be furnished by Borrower to Lender in connection with
this Agreement, contain as of the date thereof, or will contain as of the date
this Agreement is executed, any material misstatement of fact or failed or will
fail to state any material fact, the omission of which would render the
statements therein materially false or misleading.

Section 2.15 Solvency. Borrower is solvent as of the date hereof.
Borrower is generally paying its debts as they mature and the fair value of
Borrower's assets substantially exceeds the sum total of Borrower's
liabilities.

Section 2.16 Accounts. As an inducement to Lender to provide the
pricing and terms contained in this Loan Agreement, the Borrower agrees to
maintain its primary investment and operating accounts with Lender.

Article III. Conditions Precedent.

Section 3.01 Initial Conditions. Lender's obligation to extend
credit hereunder is subject to the conditions precedent (herein "Conditions
Precedent") that Lender shall have received (or agreed in writing to waive or
defer receipt of) all of the following, each duly executed, dated and delivered
as of the date hereof, in form and substance satisfactory to Lender and its
counsel:

(a) Notes and Loan Documents. This Agreement, the
Revolving Credit Note, the Discretionary Line of Credit Note, and
other documents executed in connection with this Agreement (the "Loan
Documents").

(b) Resolutions. Certified copies of resolutions of the
Board of Directors of Borrower authorizing or ratifying the execution,
delivery, and performance, respectively, of this Agreement and all
Loan Documents.

(c) Certificates of Existence. Certificates of existence
of Borrower from the state in which Borrower is incorporated and from
each state in which Borrower does business, which certificates shall
contain no facts objectionable to Lender.

(d) Consents, Etc. Certified copies of all documents
evidencing any necessary corporate action, consents, and governmental
approvals (if any) with respect to this Agreement and the Loan
Documents.

(e) Officer's Certificate. A certificate of the secretary
or any assistant secretary of Borrower certifying: (i) the names of
the officer or officers of Borrower authorized to sign this Agreement
and the Loan Documents, together with a sample of the true signature
of such officer(s), and (ii) as to representations and warranties of,
and litigation involving, Borrower.

(f) Charter and By-Laws. A copy of Borrower's by-laws and
charter or articles of incorporation (including all amendments
thereto) certified, in the case of by-laws, by the secretary or any
assistant secretary of Borrower, and in the case of the charter or
articles of incorporation, by the Secretary of State of the state in
which the Borrower is incorporated, as being true and complete copies
of the current charter or articles of incorporation and by-laws of
Borrower.

(g) Borrower's Counsel Opinion Letter. An opinion letter
from Borrower's counsel in form and substance satisfactory to Lender.

(h) Other. Such other documents as Lender may reasonably
request.

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<PAGE> 5

Section 3.02 All Borrowings. The Lender's obligation to extend
credit pursuant to this Agreement is subject to the following additional
conditions precedent which shall be met each time an advance is requested and
an advance is made:

(a) The representations of the Borrower contained in
Article II are true and correct as of the date of the requested
advance, with the same effect as though made on the date additional
funds are advanced; (b) There has been no material adverse change in
the Borrower's financial condition or other condition since the date
of the last borrowing hereunder; (c) No Default Conditions and no
Event of Default have occurred and continue to exist; (d) No material
litigation (including, without limitation, derivative actions),
arbitration proceedings or governmental proceedings not disclosed in
writing by the Borrower to the Lender prior to the date of the
execution and delivery of this Agreement is pending or known to be
threatened against the Borrower and no material development not so
disclosed has occurred in any litigation, arbitration proceedings or
governmental proceedings so disclosed, which could reasonably be
expected to adversely affect the financial position or business of the
Borrower or impair the ability of the Borrower to perform its
obligations under this Agreement or any other Loan Documents.

Article IV. Affirmative Covenants.

Borrower covenants that, during the term of this Agreement (including
any extensions hereof) and until all indebtedness described herein shall have
been finally paid in full, unless Lender shall otherwise first consent in
writing, Borrower shall:

Section 4.01 Financial Statements and Reports. Promptly furnish to
Lender:

(a) Annual Reports. As soon as available, and in any
event within ninety (90) days after the close of each fiscal year, the
audited consolidated Financial Statements of the Borrower setting
forth the audited consolidated balance sheets of Borrower as at the
end of such year, and the audited consolidated statements of income,
consolidated statements of cash flows, and consolidated statements of
retained earnings of Borrower for such year, setting forth in each
case in comparative form (beginning when comparative data are
available) the corresponding figures for the preceding fiscal year
accompanied by the report of Borrower's certified public accountants,
and by an unaudited consolidating balance sheet and unaudited
consolidating statements of income, statements of cash flows, and
statements of retained earnings of Borrower duly certified by
Borrower's chief financial officer as being correct reflections of the
information used for the audited financial statements. The audit
opinion in respect of the financial statements of Borrower shall be
the opinion of a firm of independent certified public accountants
acceptable to Lender and shall be accompanied by such certificates in
substantially the same manner as provided in the past;

(b) Quarterly and Year-to-Date Reports. As soon as
available and in any event within forty-five (45) days after the end
of each fiscal quarter, the unaudited consolidated and consolidating
balance sheets of Borrower as of the end of such fiscal quarter, and
the unaudited consolidated and consolidating statements of income of
Borrower for such quarter and for a period from the beginning of the
fiscal year to the close of such fiscal quarter, all certified by the
chief financial officer or chief accounting officer of Borrower as
being true and correct to the best of his or her knowledge;

(c) Financial Covenant Reports. As soon as available and
in any event within forty-five (45) days after the end of each fiscal
quarter, the calculations and reports prepared by the Borrower's chief
financial officer detailing Borrower's compliance with the financial
covenants specified in Article VI hereof, including the calculations
thereof;

(d) SEC Reporting. Within three (3) business days after
delivery to the federal Securities and Exchange Commission ("SEC") or
to any regulatory agency, copies of all material reports, financial
statements, or filings made with the SEC or any state regulatory
agency; and

(e) Other Information. Promptly upon its becoming
available, such other material, financial information about Borrower
or the Indebtedness as Lender may reasonably request from time to
time.

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<PAGE> 6

All such balance sheets and other financial statements referred to in Sections
4.01(a) and (b) hereof shall conform to GAAP on a basis consistent with those
of previous financial statements.

Section 4.02 Annual Certificates of Compliance. Concurrently with
the furnishing of the annual financial statements pursuant to Section 4.01(a)
hereof, furnish or cause to be furnished to Lender a certificate of compliance
from its Chief Financial Officer stating that the Chief Financial Officer has
no knowledge of any Default Condition or Event of Default, or event which,
after notice or lapse of time (or both), would constitute a Default Condition
or Event of Default or, if they have obtained such knowledge, disclosing the
nature, details, and period of existence of such event.

Section 4.03 Taxes and Other Liens. Pay and discharge promptly all
taxes, assessments, and governmental charges or levies imposed upon it or upon
any of its income or property as well as all claims of any kind (including
claims for labor, materials, supplies, and rent) which, if unpaid, might become
a lien upon any or all of its property; provided, however, that Borrower shall
not be required to pay any such tax, assessment, charge, levy, or claim if the
amount, applicability, or validity thereof shall currently be contested in good
faith by appropriate proceedings diligently conducted and if Borrower shall
establish reserves therefor adequate under GAAP.

Section 4.04 Maintenance.

(a) Maintain its corporate existence, name, rights, and
franchises;

(b) observe and comply (to the extent necessary so that
any failure will not materially and adversely affect the business or
property of Borrower) with all applicable laws, statutes, codes, acts,
ordinances, orders, judgments, decrees, injunctions, rules,
regulations, certificates, franchises, permits, licenses,
authorizations, and requirements of all federal, state, county,
municipal, and other governments; and

(c) maintain its property (and any property leased by or
consigned to it or held under title retention or conditional sales
contracts) in good and workable condition at all times and make all
repairs, replacements, additions, and improvements to its property
reasonably necessary and proper to ensure that the business carried on
in connection with its property may be conducted properly and
efficiently at all times.

Section 4.05 Performance of Obligations.

(a) Pay the Indebtedness described herein according to
the terms of the Loan Documents; and

(b) do and perform, and cause to be done and to be
performed, every act and discharge all of the obligations provided to
be performed and discharged by Borrower under the Loan Documents, at
the time or times and in the manner specified.

Section 4.06 Insurance. Maintain and continue to maintain, with
financially sound and reputable insurors, insurance satisfactory in type,
coverage and amount to Lender against such liabilities, casualties, risks, and
contingencies and in such types and amounts as is customary in the case of
corporations engaged in the same or similar businesses and similarly situated.
Upon request of Lender, Borrower will furnish or cause to be furnished to
Lender from time to time a summary of the insurance coverage of Borrower in
form and substance satisfactory to Lender and if requested will furnish Lender
copies of the applicable policies.

Section 4.07 Accounts and Records. Keep books of record and account,
in which full, true, and correct entries will be made of all dealings or
transactions in accordance with GAAP, except only for changes in accounting
principles or practices with which Borrower's certified public accountants
concur and which changes have been reported to Lender in writing and with an
explanation thereof.

Section 4.08 Right of Inspection. Permit any officer, employee, or
agent of Lender to visit and inspect any of the property of Borrower, to
examine Borrower's books of record and accounts, to take copies and extracts
from such books of record and accounts, and to discuss the affairs, finances,
and accounts of Borrower with Borrower's respective officers, accountants, and
auditors, all at such reasonable times and as often as Lender may reasonably
desire.

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<PAGE> 7

Section 4.09 Notice of Certain Events. Promptly notify Lender if
Borrower learns of the occurrence of (i) any event that constitutes a Default
Condition or Event of Default together with a detailed statement by a
responsible officer of Borrower of the steps being taken as a result thereof;
or (ii) the receipt of any notice from, or the taking of any other action by,
the holder of any promissory note, debenture, or other evidence of debt of
Borrower with respect to a claimed default, together with a detailed statement
by a responsible officer of Borrower specifying the notice given or other
action taken by such holder and the nature of the claimed default and what
action Borrower is taking or proposes to take with respect thereto; or (iii)
any legal, judicial, or regulatory proceedings affecting Borrower in which the
amount involved is material and is not covered by insurance or which, if
adversely determined, would have a material and adverse effect on the business
or the financial condition of Borrower; or (iv) any dispute between Borrower
and any governmental or regulatory authority or any other person, entity, or
agency which, if adversely determined, might interfere with the normal business
operations of Borrower; or (v) any material adverse changes, either
individually or in the aggregate, in the assets, liabilities, financial
condition, business, operations, affairs, or circumstances of Borrower from
those reflected in the financial statements or from the facts warranted or
represented in any Loan Document.

Section 4.10 ERISA Information and Compliance. Comply with ERISA and
all other applicable laws governing any pension or profit sharing plan or
arrangement to which Borrower is a party. Borrower shall provide Lender with
notice of any "reportable event" or "prohibited transaction" or the imposition
of a "withdrawal liability" within the meaning of ERISA.

Section 4.11 Management. Give immediate notice to Lender of any
material change in the senior management of Borrower.

Section 4.12 SEC Requirements. Comply at all times with requirements
of the SEC and all state regulatory agencies with jurisdiction over Borrower
and comply with all other applicable laws and regulations.

Section 4.13 Guarantees of Subsidiaries and Affiliates. In the event
that the Borrower or its existing Subsidiaries acquire any future Subsidiaries
or affiliates, the Borrower agrees to cause such additionally acquired
Subsidiaries or affiliates to execute a guaranty of the indebtedness evidenced
hereby pursuant to a guaranty in a form substantially similar to the form
executed by existing Subsidiaries of Borrower on the date hereof.

ARTICLE V. Negative Covenants.

Borrower covenants and agrees that, during the term of this Agreement
and any extensions hereof and until the Indebtedness described herein has been
paid and satisfied in full, unless Lender shall otherwise first consent in
writing, Borrower and its Subsidiaries will not, either directly or indirectly:

Section 5.01 Debts, Guaranties, and Other Obligations. Incur, create,
assume, or in any manner become or be liable with respect to any debt; provided
that subject to all other provisions of this Article V, the foregoing
prohibitions shall not apply to:

(a) Any indebtedness to Lender;

(b) liabilities, direct or contingent, of Borrower or its
Subsidiaries existing on the date of this Agreement that are
referenced or reflected in the Financial Statements;

(d) trade payables or similar obligations (other than for
borrowed money or purchase money obligations) from time to time
incurred in the ordinary course of business not to exceed amounts
historically and customarily incurred by the Borrower or its
Subsidiaries;

(e) taxes, assessments, or other governmental charges
that are not assessed or are being contested in good faith by
appropriate action promptly initiated and diligently conducted, if
Borrower or its Subsidiaries shall have made any reserve therefor
required by GAAP;

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<PAGE> 8

(f) purchase money debt of Borrower and its Subsidiaries
in an aggregate amount not to exceed $500,000.00; and

(g) obligations contained in certain guaranties executed
by Borrower in favor of American General Finance Center regarding
obligations of certain Subsidiaries under certain Private Label Credit
Agreements.

Section 5.02 Leases. Incur obligations to pay rent or simila
payments under leases in excess of an aggregate amount of $3,500,000 at any
time.

Section 5.03 Liens. Create, incur, assume, or permit to exist any
lien on any of its real or personal property, including the shares of stock of
its Subsidiaries owned by Borrower (now owned or hereafter acquired) except,
subject to all other provisions of this Article, the foregoing restrictions
shall not apply to:

(a) Liens securing the payment of any indebtedness to
Lender;

(b) Liens for taxes, assessments, or other governmental
charges not yet due or which are being contested in good faith by
appropriate action promptly initiated and diligently conducted, if
Borrower shall have made any reserve therefor required by GAAP;

(d) Purchase money security interests granted to secure
the indebtedness permitted by Section 5.02(f).

Section 5.04 Investments, Loans, and Advances. Make or permit to
remain outstanding any loans or advances to or investments in any person,
except that, subject to all other provisions of this Article, the foregoing
restriction shall not apply to:

(a) investments in direct obligations of the United
States of America or any agency thereof;

(b) investments in certificates of deposit having
maturities of less than one year, or repurchase agreements issued by
commercial banks in the United States of America having capital and
surplus in excess of $50,000,000, or commercial paper of the highest
quality;

(c) investments in money market funds so long as the
entire investment therein is fully insured or so long as the fund is a
fund operated by a commercial bank of the type specified in (b) above.

Section 5.05 Dividends, Distributions, and Redemptions; Issuance of
Stock. Declare or pay any dividend, or purchase, redeem, or otherwise acquire
for value any of its stock now or hereafter outstanding, or return any capital
to its stockholders, or make any distribution of its assets to its stockholders
as such. Borrower shall not issue any of its debt securities for borrowed money
(or for any other purpose prohibited in the Loan Documents) or any of its
equity securities to any person.

Section 5.06 Sales and Leasebacks. Enter into any arrangement,
directly or indirectly, with any person by which Borrower shall sell or
transfer any property, whether now owned or hereafter acquired, and by which
Borrower shall then or thereafter rent or lease as lessee such property or any
part thereof or other property that Borrower intends to use for substantially
the same purpose or purposes as the property sold or transferred.

Section 5.07 Nature of Business. Suffer or permit any material
change to be made in the character of the business as carried on by Borrower
and its Subsidiaries as of the date hereof.

Section 5.08 Consolidations, Mergers, Etc. Merge or consolidate
with or into, or sell, assign, lease, or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
property (whether now owned or hereafter acquired) to, any person; provided,
however, that with Lender's express prior written consent, Borrower may merge
or consolidate with any person as long as, immediately after and giving effect
to any such merger, no event shall occur and be continuing which constitutes a
Default Condition or an Event of Default and, in the case of any such merger or
consolidation to which Borrower is a party, Borrower is the surviving
corporation.

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<PAGE> 9

Section 5.09 Proceeds of Loan. Permit the proceeds of the advances
to be used for any purpose other than those permitted under this Agreement.

Section 5.10 Disposition of Assets. Dispose of any of its assets
other than in the ordinary course of Borrower's present business upon terms
standard in Borrower's industry.

Section 5.11 Limitation on Business. Engage in any business other
than the business in which it is currently engaged.

Section 5.12 Inconsistent Agreements. Enter into any agreement
containing any provision which would be violated or breached by the performance
by Borrower of its obligations hereunder.

Section 5.13 Transfer of an Interest in Stock. Transfer, assign,
sell, or encumber any shares of stock, including, without limitation, all
shares of stock of its Subsidiaries owned by Borrower.

Article VI. Financial Covenants.

Section 6.01 Minimum Net Worth. At all times subsequent hereto,
the Borrower shall maintain a minimum Net Worth of: (a) an amount equal to the
greater of $15,000,000 or the initial calculation of Borrower's net worth
determined after giving effect to its recently completed public offering, plus
(b) on an annual basis for each fiscal year commencing December, 1996, a
cumulative amount equal to fifty percent (50%) of Net Income. For the purposes
hereof, Net Income shall not be a number less than 0.

As used herein, Net Worth shall mean the excess of (A) total assets
over (B) total liabilities.

As used herein, "Net Income" shall mean after-tax income (excluding
any impact from Deferred Taxes). "Deferred Taxes" shall mean deferred taxes as
calculated in accordance with GAAP.

As used herein, the amount attributable to the post-offering
calculation of Borrower's net worth shall be confirmed to Lender by Borrower on
or before October 31, 1996 pursuant to calculations not objectionable to Lender
(it is expected that such calculations shall result in a current net worth in
excess of $15,000,000).

Section 6.02 EBIT Interest Expense to Ratio. At all times, the
Borrower shall maintain a ratio of EBIT to Interest Expense of no less than 2.5
to 1.0 as measured on a trailing four quarter basis.

As used herein, "EBIT" (earnings before interest and income taxes) for
any period shall mean an amount equal to the sum of: (A) all pre-tax income
earned by the Borrower, plus (B) interest expense.

"Interest Expense" shall mean, as to the Borrower for any period, an
amount equal to the aggregate interest expense and amortization of deferred
loan costs of the Borrower on a consolidated basis for such period (calculated
without regard to any limitations on the payment thereof), imputed interest on
capitalized lease obligations, commissions, discounts and other fees and
charges owed with respect to letters of credit and unused commitments and net
costs under interest rate protection agreements, all as determined in
conformity with GAAP.

Section 6.03 Funded Debt to EBITDA. At all times, Borrower shall
maintain a ratio of Funded Debt to EBITDA of not greater than 3.0 to 1.0.

As used herein, "Funded Debt" shall mean, without duplication, all
indebtedness for money borrowed, indebtedness guaranteed, purchase money market
mortgages, capitalized leases, amounts evidenced by the aggregate face amount
of all outstanding letters of credit, conditional sales contracts and similar
title retention debt instruments, including any current maturities of such
indebtedness, which by its terms matures more than one year from the date of
any calculation thereof and/or which is renewable or extendable at the option
of the obligor to a date beyond one year from such date.

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<PAGE> 10

As used herein, "EBITDA" (earnings before interest, income taxes,
depreciation, and amortization) for any period shall mean an amount equal to
the sum of: (A) all pre-tax income earned by the Borrower, plus (B)
depreciation, plus (C) amortization of goodwill and other intangible assets,
plus (D) net-interest expense.

Article VII. Events of Default.

Section 7.01 Events of Default. Any of the following events shall be
considered an Event of Default as those terms are used in this Agreement:

(a) Principal and Interest Payments. Borrower fails to
make payment within ten (10) days when due of any installment of
principal or interest on the Note or Borrower fails to pay within ten
(10) days when due any payment due Lender hereunder or under any of
the Loan Documents; or

(b) Representations and Warranties. Any representation or
warranty made by Borrower in any Loan Document is incorrect in any
material respect as of the date thereof; or any representation,
statement (including financial statements), certificate, or data
furnished or made by Borrower in any Loan Document with respect to any
Indebtedness is untrue in any material respect, as of the date as of
which the facts therein set forth were stated or certified; or

(c) Obligations. Borrower fails to perform its
obligations as required by and contained in any Loan Document,
provided that in the event the default arises out of a default or
breach of Article VI above, an Event of Default shall not be deemed to
exist unless the Borrower shall fail to cure the default within thirty
(30) days subsequent to receipt by the Borrower of written notice from
Lender of such default; or

(d) Involuntary Bankruptcy or Receivership Proceedings. A
receiver, custodian, liquidator, or trustee of Borrower, or of any of
its respective Property, is appointed by the order or decree of any
court or agency or supervisory authority having jurisdiction and such
proceedings are not dismissed within 60 days after filing; or Borrower
is adjudicated bankrupt or insolvent; or any of the property of
Borrower is sequestered by court order or a petition is filed against
Borrower under any state or federal bankruptcy, reorganization, debt
arrangement, insolvency, readjustment of debt, dissolution,
liquidation, or receivership law of any jurisdiction, whether now or
hereafter in effect; or

(e) Voluntary Petitions. Borrower takes affirmative steps
to prepare to file, or Borrower files a petition in voluntary
bankruptcy or to seek relief under any provision of any bankruptcy,
reorganization, debt arrangement, insolvency, readjustment of debt,
dissolution, or liquidation law of any jurisdiction, whether now or
hereafter in effect, or consents to the filing of any petition against
it under any such law; or

(f) Assignment for Benefit of Creditors, Etc. Borrower
makes an assignment for the benefit of its creditors, or admits in
writing its inability to pay its debts generally as they become due,
or consents to the appointment of a receiver, trustee, or liquidator
of Borrower or of all or any part of its properties; or

(g) Discontinuance of Business, Etc. Borrower
discontinues its usual business, or Borrower becomes an affiliate of
any person, or any person who is not presently an owner of a
controlling interest in Borrower becomes a controlling person; or

(h) Undischarged Judgments. If a final, non-appealable
judgment for the payment of money in excess of $100,000 is rendered by
any court or other governmental authority against Borrower which is
not fully covered by valid collectible insurance; or

(i) Violation of Laws, Etc. Borrower materially violates
or otherwise materially fails to comply with any law, rule,
regulation, decree, order, or judgment under the laws of the United
States of America, or of any state or jurisdiction thereof and the
Borrower fails to cure such violation within 30 days after it has
received notice thereof; or Borrower fails or refuses at any and all
times to remain current in its or their financial reporting
requirements pursuant to such laws, rules, and regulations or pursuant
to the rules and regulations of any exchange upon which any shares of
Borrower are traded and the Borrower fails to cure such violation
within 30 days after it has received notice thereof.

-10-
<PAGE> 11

Section 7.02 Remedies. Upon the happening of any Event of Default set
forth above, with the exception of those events set forth in Section 7.01(d)
and 7.01(e): (i) Lender may declare the entire principal amount of all
Indebtedness then outstanding, including interest accrued thereon, to be
immediately due and payable without presentment, demand, protest, notice of
protest, or dishonor or other notice of default of any kind, all of which
Borrower hereby expressly waives, (ii) at Lender's sole discretion and option,
all obligations of Lender under this Agreement shall immediately cease and
terminate unless and until Lender shall reinstate such obligations in writing,
or (iii) Lender may bring an action to protect or enforce its rights under the
Loan Documents or seek to collect the Indebtedness by any lawful means.

Upon the happening of any event specified in Section 7.01(d) and
Section 7.01(e) above: (i) all Indebtedness, including all principal, accrued
interest, and other charges or monies due in connection therewith shall be
immediately and automatically due and payable in full, without presentment,
demand, protest, or dishonor or other notice of any kind, all of which Borrower
hereby expressly waives, (ii) all obligations of Lender under this Agreement
shall immediately cease and terminate unless and until Lender shall reinstate
such obligations in writing, (iii) Lender may exercise all rights afforded a
creditor under applicable law; or (iv) Lender may bring an action to protect or
enforce its rights under the Loan Documents or seek to collect the Indebtedness
by any lawful means.

Section 7.03 Default Conditions. Any of the following events shall
be considered a Default Condition:

(a) Borrower suffers a material adverse change in its
financial condition; or

(b) Should any event occur that except for the giving of
notice and/or the passage of time would be an Event of Default.

Upon the occurrence of a Default Condition or at any time thereafter
until such Default Condition no longer exists, the Borrower agrees that the
Lender, in its sole discretion, and without notice to Borrower, may immediately
cease making any advances under Indebtedness, all without liability whatsoever
to Borrower or any other person whomsoever, all of which is expressly waived
hereby. Borrower releases Lender from any and all liability whatsoever, whether
direct, indirect, or consequential, and whether seen or unforeseen, resulting
from or arising out of or in connection with Lender's determination to cease
making advances pursuant to this Section.

Article VIII. General Provisions.

Section 8.01 Notices. All communications under or in connection with
this Agreement or any of the other Loan Documents shall be in writing and shall
be mailed by first class certified mail, postage prepaid, or otherwise sent by
telex, telegram, telecopy, or other similar form of rapid transmission
confirmed by mailing (in the manner stated above) a written confirmation at
substantially the same time as such rapid transmission, or personally delivered
to an officer of the receiving party. All such communications shall be mailed,
sent, or delivered as follows:

(a) if to Borrower, to its address shown below, or to
such other address as Borrower may have furnished to Lender in
writing:

Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217
Attention: Alan R. Sielbeck

(b) if to Lender, to its address shown below, or to such
other address or to such individual's or department's attention as it
may have furnished Borrower in writing:

SunTrust Bank, Nashville, N.A.
201 Fourth Avenue, North
Nashville, Tennessee 37244
Attention: Rett Dallas

Any communication so addressed and mailed by certified mail shall be deemed to
be given when so mailed.

-11-
<PAGE> 12

Section 8.02 Invalidity. In the event that any one or more of the
provisions contained in any Loan Document for any reason shall be held invalid,
illegal, or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of any Loan Document.

Section 8.03 Survival of Agreements. All representations and
warranties of Borrower in this Agreement and all covenants and agreements in
this Agreement not fully performed before the date of this Agreement shall
survive the closing of the transaction evidenced hereby.

Section 8.04 Successors and Assigns. Borrower may not assign its
rights or delegate its duties under this Agreement or any other Loan Document.
All covenants and agreements contained by or on behalf of Borrower in any Loan
Document shall bind the Borrower's successors and assigns and shall inure to
the benefit of Lender and its successors and assigns.

Section 8.05 Waivers. Pursuant to T.C.A. Section 47-50-112, no action
Waivers. Pursuant to T.C.A. Section 47-50-112, no action or course of dealing
on the part of Lender, its officers, employees, consultants, or agents, nor
any failure or delay by Lender with respect to exercising any right, power, or
privilege of Lender under this Agreement or any other Loan Document shall
operate as a waiver thereof, except as otherwise provided in this Agreement.
Lender may from time to time waive any requirement hereof, including any of the
Conditions Precedent; however no waiver shall be effective unless in writing
and signed by the Lender. The execution by Lender of any waiver shall not
obligate Lender to grant any further, similar, or other waivers.

Section 8.06 Cumulative Rights. Rights and remedies of Lender under
each Loan Document shall be cumulative, and the exercise or partial exercise of
any such right or remedy shall not preclude the exercise of any other right or
remedy.

Section 8.07 Construction. This Agreement and the other Loan
Document constitute a contract made under and shall be construed in accordance
with and governed by the laws of the State of Tennessee.

Section 8.08 Time of Essence. Time is of the essence with regard to
each and every provision of this Agreement.

Section 8.09 Costs, Expenses, and Taxes. Borrower agrees to pay on
demand all out-of-pocket costs and expenses of Lender (including the reasonable
fees and out-of-pocket expenses of counsel for Lender) incurred by Lender in
connection with the preparation, execution, delivery, administration,
enforcement, or protection of Lender's rights under the Loan Documents
(including any suit for declaratory judgment or interpretation of the
provisions hereof).

Section 8.10 Entire Agreement; No Oral Representations Limiting
Enforcement. This Agreement represents the entire agreement between the parties
hereto except for such other agreements set forth in the Loan Documents, and
any and all oral statements heretofore made regarding the matters set forth
herein are merged herein.

Section 8.11 Amendments. The parties hereto agree that this Agreement
may not be modified or amended except in writing signed by the parties hereto.

Article IX. Jury Waiver.

Section 9.01. Jury Waiver. IF ANY ACTION OR PROCEEDING INVOLVING
THIS LOAN AGREEMENT OR ANY LOAN DOCUMENT IS COMMENCED IN ANY COURT OF COMPETENT
JURISDICTION, BORROWER AND LENDER HEREBY WAIVE THEIR RIGHTS TO DEMAND A JURY
TRIAL.

-12-
<PAGE> 13

ENTERED INTO the date first above written.

BORROWER:

SERVICE EXPERTS, INC.

By: /s/ Alan R. Sielbeck
---------------------------------------
Title: Chief Executive Officer
------------------------------------

LENDER:

SUNTRUST BANK, NASHVILLE, N.A.

By: /s/ Rett Dallas
---------------------------------------
Title: Asst. Vice President
------------------------------------

-13-

<PAGE> 14
EXHIBIT A

REVOLVING CREDIT NOTE

Nashville, Tennessee $10,000,000.00
September 10, 1996

FOR VALUE RECEIVED, SERVICE EXPERTS, INC., a Delaware corporation (the
"Borrower"), promises and agrees to pay to the order of SUNTRUST BANK,
NASHVILLE, N. A., a national bank (the "Lender"), at its offices in Nashville,
Tennessee, or at such other place as may be designated in writing by the
holder, in lawful money of the United States of America, the principal sum of
up to Ten Million and no/100 Dollars ($10,000,000), or so much thereof as may
be advanced from time to time by the Lender, together with interest from the
date hereof on the unpaid principal balance outstanding from time to time
hereon computed from the date of each advance until maturity at the LIBOR Rate
Reference. The term "LIBOR Rate Reference" shall mean that rate of interest
equal to the LIBOR Rate, plus the applicable LIBOR Rate Margin, as set forth on
Exhibit A hereto. The term "LIBOR Rate" shall mean the 30 day LIBOR Rate as
quoted by Telerate, Inc. and as set forth in Lender's Funds Management, Cost of
Funds Report published each Monday through Friday that Lender is open for
business. The LIBOR Rate shall be determined daily to reflect changes in the
LIBOR Rate as such occur from time to time. The LIBOR Rate Margin shall be
determined on a quarterly basis, with such determination to be made on the
tenth (10th) day next following the date the Borrower submits the quarterly
reports required by Section 4.01(c) of the Loan Agreement, as defined below
(the "Determination Date"), provided and except that from the date hereof until
the first such quarterly report is submitted, the LIBOR Rate Margin shall be
125 basis points per annum. Interest shall be calculated based on a year of
360 days.

This Note shall be repaid as follows: (a) commencing on the 31st day
of October, 1996 and thereafter on the last day of each consecutive month
through and including August 31, 1998, the Borrower shall pay to Lender an
amount equal to all then accrued interest, and (b) on September 10, 1998, this
Note shall mature and the Borrower shall pay to Lender an amount equal to all
outstanding principal, plus all then accrued interest.

Notwithstanding any provision to the contrary, it is the intent of the
Lender, the Borrower, and all parties liable on this Note, that neither the
Lender nor any subsequent holder shall be entitled to receive, collect, reserve
or apply, as interest, any amount in excess of the maximum lawful rate of
interest permitted to be charged by applicable law or regulations, as amended
or enacted from time to time. In the event the Note calls for an interest
payment that exceeds the maximum lawful rate of interest then applicable, such
interest shall not be received, collected, charged, or reserved until such time
as that interest, together with all other interest then payable, falls within
the then applicable maximum lawful rate of interest. In the event the Lender,
or any subsequent holder, receives any such interest in excess of the then
maximum lawful rate of interest, such amount which would be excessive interest
shall be deemed a partial prepayment of principal and treated hereunder as
such, or, if the principal indebtedness evidenced hereby is paid in full, any
remaining excess funds shall immediately be paid to the Borrower. In
determining whether or not the interest paid or payable, under any specific
contingency, exceeds the maximum lawful rate of interest, the Borrower and the
Lender shall, to the maximum extent permitted under applicable law, (a) exclude
voluntary prepayments

<PAGE> 15

and the effects thereof, and (b) amortize, prorate, allocate, and spread, in
equal parts, the total amount of interest throughout the entire term of the
indebtedness; provided that if the indebtedness is paid in full prior to the
end of the full contemplated term hereof, and if the interest received for the
actual period of existence hereof exceeds the maximum lawful rate of interest,
the holder of the Note shall refund to the Borrower the amount of such excess
or credit the amount of such excess against the principal portion of the
indebtedness as of the date it was received, and, in such event, the Lender
shall not be subject to any penalties provided by any laws for contracting for,
charging, reserving, collecting or receiving interest in excess of the maximum
lawful rate of interest.

This Note may be permanently prepaid in whole or in part without
penalty.

Principal and unpaid interest bear interest following any default in
payment of principal and interest at the maximum rate of interest allowed by
law until paid. In case of suit, or if this obligation is placed in an
attorney's hands for collection, or to protect the security for its payment,
the undersigned will pay all costs of collection and litigation, including a
reasonable attorney's fee.

Upon the occurrence of an Event of Default as set forth in the Loan
Agreement, at the option of the holder, the entire indebtedness hereby
evidenced shall become due, payable and collectible then or thereafter, without
notice, as the holder may elect regardless of the date of maturity. The holder
may waive any default before or after the same has been declared and restore
this Note to full force and effect without impairing any rights hereunder, such
right of waiver being a continuing one.

The makers, endorsers, guarantors and all parties to this Note and all
who may become liable for same, jointly and severally waive presentment for
payment, protest, notice of protest, notice of nonpayment of this Note, demand
and all legal diligence in enforcing collection, and hereby expressly agree
that the lawful owner or holder of this Note may defer or postpone collection
of the whole or any part thereof, either principal and/or interest, or may
extend or renew the whole or any part thereof, either principal and/or
interest, or may accept additional collateral or security for the payment of
this Note, or may release the whole or any part of any collateral security
and/or liens given to secure the payment of this Note, or may release from
liability on account of this Note any one or more of the makers, endorsers,
guarantors and/or other parties thereto, all without notice to them or any of
them; and such deferment, postponement, renewal, extension, acceptance of
additional collateral or security and/or release shall not in any way affect or
change the obligation of any such maker, endorser, guarantor or other party to
this Note, or of any who may become liable for the payment thereof.

The Borrower shall pay a "late charge" of the lesser of $100 or five
percent (5%) of any payments of principal and/or interest due when paid ten
(10) days after the due date thereof (provided that in no event shall said
"late charge" result in the payment of interest in excess of the maximum lawful
rate of interest permitted by applicable law), to cover the extra expenses
involved in handling delinquent payments.

The term "maximum lawful rate of interest" as used herein shall mean a
rate of interest equal to the higher or greater of the following: (a) the
"applicable formula rate" defined in Tennessee Code Annotated Section
47-14-102(2), or (b) such other rate of interest as may be charged under other
applicable laws or regulations.

- 2 -
<PAGE> 16

This Note has been executed and delivered in, and shall be governed by
and construed according to the laws of the State of Tennessee except to the
extent pre-empted by applicable laws of the United States of America.

This Note may not be changed or terminated without the prior written
approval of the Lender and the Borrower. No waiver of any term or provision
hereof shall be valid unless in writing signed by the holder.

Executed to be effective the 10th day of September, 1996.

BORROWER

SERVICE EXPERTS, INC.

By: /s/ Alan R. Sielbeck
----------------------------------
Title: Chief Executive Officer
-------------------------------

- 3 -
<PAGE> 17
EXHIBIT B

DISCRETIONARY LINE OF CREDIT NOTE

Nashville, Tennessee $10,000,000.00
September 10, 1996

Any advances permitted to be made by Lender hereunder, shall be repaid
as follows: (a) commencing on the 31st day of October, 1996 and thereafter on
the last day of each consecutive month through and including August 31, 1998,
the Borrower shall pay to Lender an amount equal to all then accrued interest,
and (b) on September 10, 1998, this Note shall mature and the Borrower shall
pay to Lender an amount equal to all outstanding principal, plus all then
accrued interest.

Until maturity and subject to the terms and conditions of that certain
Loan Agreement executed between Lender and Borrower dated September 10, 1996
(the "Loan Agreement"), the Borrower may request advances hereunder pursuant to
the procedure set forth in Section 1.02 of the Loan Agreement. THE LENDER HAS
NO OBLIGATION WHATSOEVER TO FUND ANY ADVANCE UNDER THIS NOTE. THE LENDER HAS
THE SOLE AND ABSOLUTE AND ARBITRARY DISCRETION TO DETERMINE WHETHER OR NOT IT
WILL FUND AN ADVANCE UNDER THIS NOTE. THE BORROWER AGREES THAT THE LENDER HAS
NO LIABILITY OF ANY KIND WHATSOEVER ARISING OUT OF THE LENDER'S DETERMINATION
NOT TO FUND ANY ADVANCE UNDER THIS NOTE.

<PAGE> 18

which would be excessive interest shall be deemed a partial prepayment of
principal and treated hereunder as such, or, if the principal indebtedness
evidenced hereby is paid in full, any remaining excess funds shall immediately
be paid to the Borrower. In determining whether or not the interest paid or
payable, under any specific contingency, exceeds the maximum lawful rate of
interest, the Borrower and the Lender shall, to the maximum extent permitted
under applicable law, (a) exclude voluntary prepayments and the effects
thereof, and (b) amortize, prorate, allocate, and spread, in equal parts, the
total amount of interest throughout the entire term of the indebtedness;
provided that if the indebtedness is paid in full prior to the end of the full
contemplated term hereof, and if the interest received for the actual period of
existence hereof exceeds the maximum lawful rate of interest, the holder of the
Note shall refund to the Borrower the amount of such excess or credit the
amount of such excess against the principal portion of the indebtedness as of
the date it was received, and, in such event, the Lender shall not be subject
to any penalties provided by any laws for contracting for, charging, reserving,
collecting or receiving interest in excess of the maximum lawful rate of
interest.

This Note may be permanently prepaid in whole or in part without
penalty.

- 2 -
<PAGE> 19

Executed to be effective the 10th day of September, 1996.

BORROWER

SERVICE EXPERTS, INC.

By: /s/ Alan R. Sielbeck
----------------------------------
Title: Chief Executive Officer
-------------------------------

- 3 -
<PAGE> 20

EXHIBIT A

The LIBOR Rate Margin shall be that amount depicted in Column (A) and
shall be applicable when the Borrower's Funded Debt to EBITDA corresponds to
the ratios depicted in Column (B), and shall be effective on the Determination
Date.

<TABLE>
<CAPTION>
==============================================================================================================
COLUMN A COLUMN B
--------------------------------------------------------------------------------------------------------------
LIBOR RATE MARGIN FUNDED DEBT TO EBITDA RATIO
--------------------------------------------------------------------------------------------------------------
<S> <C>
125 basis points per annum 1.0 to 1.0 or less
--------------------------------------------------------------------------------------------------------------
150 basis points per annum greater than 1.0 to 1.0 and less than or equal to
2.0 to 1.0
--------------------------------------------------------------------------------------------------------------
200 basis points per annum greater than 2.0 to 1.0 and less than or equal to
2.5 to 1.0
--------------------------------------------------------------------------------------------------------------
250 basis points per annum greater than 2.5 to 1.0 and less than or equal to
3.0 to 1.0
==============================================================================================================
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Combined Financial Data" and "Experts" and to the use of our report dated July
29, 1996 with respect to the financial statements of Service Experts, Inc., the
use of our report dated May 5, 1996 with respect to the financial statements of
the Combined AC Service & Installation Co. Inc. and Donelson Air Conditioning
Company, Inc., the use of our report dated May 10, 1996 with respect to the
financial statements of Hardwick Air Masters, Inc., the use of our report dated
May 6, 1996 with respect to the financial statements of Norrell Heating & Air
Conditioning, Inc., the use of our report dated May 24, 1996 with respect to the
financial statements of Vision Holding Company, Inc., the use of our report
dated May 15, 1996 with respect to the financial statements of Comerford's
Heating and Air Conditioning, Inc., the use of our report dated May 17, 1996
with respect to the financial statements of Rolf Coal and Fuel Corp., the use of
our report dated May 14, 1996 with respect to the financial statements of Brand
Heating & Air Conditioning, Inc., the use of our report dated May 10, 1996 with
respect to the financial statements of Coastal Air Conditioning Service, Inc.,
the use of our report dated May 10, 1996 with respect to the financial
statements of Contractor Success Group, Inc., the use of our report dated May
10, 1996 with respect to the financial statements of Arrow Heating & Air
Conditioning, Inc., the use of our report dated May 10, 1996 with respect to the
financial statements of Air Experts, a United Services Company, Inc., the use of
our report dated May 10, 1996 with respect to the financial statements of
Gilley's Heating & Cooling, Inc. and the use of our report dated May 10, 1996
with respect to the financial statements of Service Experts, of Palm Springs,
Inc. in the Registration Statement (Form S-4) and related Prospectus of Service
Experts, Inc. related to $50,000,000 aggregate amount of shares of its common
stock, warrants to purchase its common stock and the shares of its common stock
issued thereunder upon the exercise of such warrants to purchase its common
stock, or debt securities and the shares of its common stock issued thereunder
upon the conversion of such debt securities.

Ernst & Young LLP

Nashville, Tennessee
September 18, 1996