<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1996
REGISTRATION NO. 333-12319
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------
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. [ ]
---------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PROSPECTUS
$50,000,000
SERVICE EXPERTS LOGO
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 11 THROUGH 14.
---------------------
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.
---------------------
The date of this Prospectus is November 18, 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, assuming the Subsidiaries were acquired at the beginning of the year,
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 "Selected 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
3
<PAGE> 5
technicians who lack the business and marketing expertise to expand their
businesses, increase their profitability and compete effectively with larger
operators.
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.
THE PENDING ACQUISITIONS
The Company has entered into definitive agreements to acquire 22 HVAC
service and replacement businesses (the "Combining Companies") (the "Pending
Acquisitions"). The Company has entered into an Agreement and Plan of Merger
(the "Merger Agreements") with 18 of the Combining Companies pursuant to which
such Combining Companies will be merged with wholly-owned subsidiaries of the
Company. The Company has entered into Combination Agreements (the "Combination
Agreements") with four of the Combining Companies pursuant to which the Company
will acquire all of the issued and outstanding capital stock of such Combining
Companies (the Merger Agreements and the Combination Agreements are hereinafter
referred to collectively as the "Agreements").
Pursuant to the terms of the Merger Agreements, the shares of capital stock
of the Combining Companies outstanding immediately prior to the closing, other
than treasury shares and shares held by dissenting stockholders, will be
converted into the right to receive shares of Common Stock and cash. Pursuant to
the terms of the Combination Agreements, the Company will acquire all of the
issued and outstanding capital stock of the Combining Companies in exchange for
shares of Common Stock, except for one Combining Company which will receive
cash.
The aggregate consideration to be paid by the Company in connection with
the Pending Acquisitions is estimated to be approximately 2,929,000 shares of
Common Stock and $10.3 million in cash. In general, the purchase price to be
paid to each of the Combining Companies is based on the Combining Company's
after tax net income for its most recent fiscal year or such other 12 month
period as agreed to by the parties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Service Experts,
Inc. -- Liquidity and Capital Resources," "The Pending Acquisitions," and the
Pro Forma Combining Financial Statements of the Company and Notes thereto
appearing elsewhere in this Prospectus.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
The following table presents summary financial and operating data of the
Company and the Combining Companies. The Company was incorporated on March 27,
1996. On August 21, 1996, and simultaneously with the closing of the IPO, the
Company acquired the Subsidiaries in the Combination. The Subsidiaries are AC
Service & Installation Co., Inc. and Donelson Air Conditioning Company, Inc.
(collectively, the "Acquiring Company"); Hardwick Air Masters, Inc. d/b/a
Airmasters, Inc.; Norrell Heating and Air Conditioning Company, 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.; and Service Experts of Palm Springs, Inc. In accordance with the
provisions of Commission Staff Accounting Bulletin No. 97 ("SAB 97"), the
historical financial statements of the Company for periods prior to August 21,
1996 are the combined financial statements of the Acquiring Company. The
operations of the Subsidiaries have been included in the Company's financial
statements from the date of acquisition. The above mentioned acquisitions have
been accounted for using the historical cost basis of the Subsidiaries in
accordance with Commission Staff Accounting Bulletin No. 48 ("SAB 48"). The
following should be read with the historical financial statements, the Pro Forma
Combining Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
SERVICE EXPERTS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------ ---------------------------------------
PRO FORMA PRO FORMA
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 $127,772,128 $12,500,548 $18,325,043 $105,229,654
Cost of goods sold....... 7,280,075 10,245,039 11,122,350 82,584,302 8,674,991 11,942,161 67,562,175
Gross margin............. 3,012,220 4,053,867 5,330,272 45,187,826 3,825,557 6,382,882 37,667,479
Selling, general and
administrative
expenses............... 2,908,741 3,786,221 4,591,636 33,141,768 3,434,471 5,389,188 26,005,632
Income (loss) from
operations............. 103,479 267,646 738,636 12,046,058 391,086 993,694 11,661,847
Interest (expense)
income, net............ (69,637) (64,541) (53,963) 480,174 (26,637) 20,284 292,410
Pro forma net income
(loss)(3).............. 88,746 162,129 423,354 8,098,661 242,187 635,108 7,257,604
Pro forma net income per
share(4)............... $ 0.70 $ 0.65
Pro forma weighted
average shares
outstanding(4)......... 11,501,350 11,501,350
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
PRO FORMA
1996 1996(5)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................... $13,404,390 $ 4,576,553
Total assets...................................................................... 27,641,227 81,526,110
Total debt........................................................................ 324,490 324,490
Stockholders' equity.............................................................. 18,688,545 63,475,416
</TABLE>
- ---------------
(1) The Combination was accounted for using the historical cost basis of the
combined Subsidiaries, in accordance with SAB 48.
(2) Pro forma gives effect to the Combination and the Pending Acquisitions as if
such Combination and the Pending Acquisitions 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
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 11,501,350
weighted average shares of Common Stock outstanding, which includes (i)
4,522,636 shares distributed to the stockholders of the Subsidiaries, (ii)
1,462,100 shares held by existing stockholders of the Company, (iii)
2,587,500 shares sold in the IPO and (iv) 2,929,114 shares to be issued in
connection with the acquisition of the Combining Companies.
(5) The Pro Forma Balance Sheet Data gives effect to the Pending Acquisitions.
In addition, the pro forma information is based on certain assumptions and
adjustments. See Notes to the Pro Forma Combining Financial Statements.
5
<PAGE> 7
CERTAIN INDIVIDUAL SUBSIDIARIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FALSO HEATING AND SHEET METAL CO., INC.
Net revenue................................................ $6,687,694 $8,213,510 $8,223,966 $5,652,907 $7,296,387
Cost of goods sold......................................... 5,066,431 6,209,046 5,993,600 4,166,619 5,286,970
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 1,621,263 2,004,464 2,230,366 1,486,288 2,009,417
Selling, general and administrative expenses(1)............ 1,485,688 1,749,296 2,011,970 1,344,396 1,836,567
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 135,575 255,168 218,396 141,892 172,850
Interest (expense) income, net............................. (28,991) (31,721) (12,663) (15,103) (3,848)
Pro forma net income(2).................................... 60,099 152,669 122,822 81,737 121,929
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COMBINED PARDEE'S REFRIGERATION COMPANY INCORPORATED,
ISLAND AIR CONDITIONING, INC., SANDERS INDOOR COMFORT,
INC., AND SOUTHERN STATES COMFORT CORPORATION(3)
Net revenue................................................ $4,109,632 $4,929,808 $6,385,477 $4,589,179 $5,625,751
Cost of goods sold......................................... 3,130,771 3,754,505 4,465,504 3,098,051 3,854,156
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 978,861 1,175,303 1,919,973 1,491,128 1,771,595
Selling, general and administrative expenses(1)............ 853,005 1,145,187 1,741,749 1,279,788 1,629,896
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 125,856 30,116 178,224 211,340 141,699
Interest (expense) income, net............................. 2,176 (10,087) (1,089) 404 (1,628)
Net income................................................. 118,872 48,844 146,099 119,949 113,227
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
FREES SERVICE EXPERTS, INC.
Net revenue...................................................................... $5,081,939 $5,769,098 $5,409,547
Cost of goods sold............................................................... 3,729,137 3,904,284 3,588,717
---------- ---------- ----------
Gross margin..................................................................... 1,352,802 1,864,814 1,820,830
Selling, general and administrative expenses(1).................................. 1,291,921 1,766,381 1,391,314
---------- ---------- ----------
Income from operations........................................................... 60,881 98,433 429,516
Interest (expense) income, net................................................... (17,540) (6,652) (61,165)
Net income....................................................................... 16,220 236,348 204,639
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CUSTOM AIR CONDITIONING, INC.
Net revenue................................................ $3,472,491 $4,638,254 $5,168,461 $4,181,302 $4,295,566
Cost of goods sold......................................... 2,486,568 3,309,300 3,571,102 2,863,532 2,939,851
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 985,923 1,328,954 1,597,359 1,317,770 1,355,715
Selling, general and administrative expenses(1)............ 967,783 1,070,717 1,428,206 837,375 1,106,059
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 18,140 258,237 169,153 480,395 249,656
Interest (expense) income, net............................. (11,695) (4,526) (427) 653 (13,259)
Pro forma net income(2).................................... 14,212 143,821 108,830 296,658 150,357
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GORDON'S SPECIALTY COMPANY, INC.
Net revenue................................................ $5,093,279 $4,604,132 $4,952,159 $3,777,426 $3,546,598
Cost of goods sold......................................... 3,891,576 3,289,148 3,386,183 2,648,620 2,449,422
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 1,201,703 1,314,984 1,565,976 1,128,806 1,097,176
Selling, general and administrative expenses(1)............ 1,237,341 1,295,799 1,363,705 993,445 699,101
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............................. (35,638) 19,185 202,271 135,361 398,075
Interest (expense) income, net............................. 35,430 31,394 42,401 19,201 24,756
Net income (loss).......................................... (2,951) 55,047 148,135 102,805 285,811
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DIAL ONE SERVICE CHAMPIONS, ET AL.(3)
Net revenue................................................ $5,810,849 $5,338,173 $4,887,446 $3,720,947 $4,097,290
Cost of goods sold......................................... 4,019,582 3,596,556 3,317,584 2,488,342 2,608,479
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 1,791,267 1,741,617 1,569,862 1,232,605 1,488,811
Selling, general and administrative expenses(1)............ 1,515,191 1,546,566 1,424,697 1,032,358 1,176,728
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 276,076 195,051 145,165 200,247 312,083
Interest (expense) income, net............................. (73,264) (32,678) 19,362 16,856 (23,561)
Pro forma net income(2).................................... 82,579 87,362 56,703 152,131 186,225
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COMFORTECH, INC.
Net revenue................................................ $4,325,415 $4,362,501 $4,538,263 $2,682,047 $3,072,811
Cost of goods sold......................................... 3,092,738 3,108,993 3,200,252 1,821,374 2,067,852
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 1,232,677 1,253,508 1,338,011 860,673 1,004,959
Selling, general and administrative expenses(1)............ 1,097,587 1,156,072 1,212,079 583,587 583,417
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 135,090 97,436 125,932 277,086 421,542
Interest (expense) income, net............................. 33,676) (32,285) (27,097) (15,886) (12,099)
Net income................................................. 92,105 59,811 69,792 166,384 258,703
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
Net revenue.................................................................. $3,500,213 $3,780,200 $4,333,010
Cost of goods sold........................................................... 2,681,908 2,759,778 3,056,918
---------- ---------- ----------
Gross margin................................................................. 818,305 1,020,422 1,276,092
Selling, general and administrative expenses(1).............................. 655,187 979,119 1,223,132
---------- ---------- ----------
Income from operations....................................................... 163,118 41,303 52,960
Interest (expense) income, net............................................... 1,382 5,887 3,440
Net income................................................................... 101,352 37,738 49,265
</TABLE>
7
<PAGE> 9
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
THE 1589 NIAGARA STREET CORPORATION
Net revenue...................................................................... $2,462,955 $2,913,881 $3,785,399
Cost of goods sold............................................................... 1,758,003 2,058,467 2,301,244
---------- ---------- ----------
Gross margin..................................................................... 704,952 855,414 1,484,155
Selling, general and administrative expenses(1).................................. 703,017 773,653 1,272,756
---------- ---------- ----------
Income (loss) from operations.................................................... 1,935 81,761 211,399
Interest (expense) income, net................................................... (3,291) (1,037) 6,039
Net income (loss)................................................................ (51) 48,236 139,523
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
HVAC DIVISION OF PAUL E. SMITH CO., INC.
Net revenue................................................ $2,536,110 $2,604,559 $3,584,158 $1,919,861 $1,693,759
Cost of goods sold......................................... 2,237,426 2,186,744 3,088,877 1,619,046 1,444,374
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 298,684 417,815 495,281 300,815 249,385
Selling, general and administrative expenses(1)............ 354,888 368,125 489,320 253,843 213,966
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............................. (56,204) 49,690 5,961 46,972 35,419
Interest (expense) income, net............................. 362 291 800 330 1,476
Net income (loss).......................................... (41,985) 40,752 7,656 38,001 29,178
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FRESCHI AIR SYSTEMS, INC.
Net revenue................................................ $2,574,930 $3,256,328 $3,254,462 $2,431,991 $3,336,481
Cost of goods sold......................................... 1,949,658 2,444,587 2,222,997 1,687,967 2,024,587
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 625,272 811,741 1,031,465 774,024 1,311,894
Selling, general and administrative expenses(1)............ 707,314 866,644 1,142,142 810,520 912,523
---------- ---------- ---------- ---------- ----------
Income (loss) from operations.............................. (82,042) (54,903) (110,677) (66,496) 399,371
Interest (expense) income, net............................. 6,082 5,136 (973) (6,191) (3,653)
Pro forma net income (loss)(2)............................. (25,063) (24,387) (56,157) (29,453) 229,912
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PARKER HEATING & AIR CONDITIONING, INCORPORATED
Net revenue................................................ $2,207,450 $2,789,553 $2,904,779 $2,255,388 $2,334,106
Cost of goods sold......................................... 1,248,494 1,508,385 1,635,236 1,229,658 1,299,566
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 958,956 1,281,168 1,269,543 1,025,730 1,034,540
Selling, general and administrative expenses(1)............ 892,079 1,100,879 1,215,126 864,436 899,400
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 66,877 180,289 54,417 161,294 135,140
Interest (expense) income, net............................. (5,335) (10,584) (1,030) (9,070) (9,195)
Net income................................................. 36,137 92,364 13,090 99,394 89,357
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JANUARY 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
B.W. HEATING & COOLING, INC.
Net revenue................................................ $1,410,587 $2,170,302 $2,795,817 $1,617,781 $2,471,140
Cost of goods sold......................................... 897,489 1,407,005 1,771,363 973,550 1,461,554
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 513,098 763,297 1,024,454 644,231 1,009,586
Selling, general and administrative expenses(1)............ 468,181 700,986 974,630 577,133 694,495
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 44,917 62,311 49,824 67,098 315,091
Interest (expense) income, net............................. (11,397) (10,444) (9,128) (8,081) (4,688)
Net income................................................. 24,817 33,621 26,004 42,243 182,330
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
B & B AIR CONDITIONING, INC.
Net revenue................................................ $2,056,083 $2,160,418 $2,557,058 $1,948,547 $1,928,090
Cost of goods sold......................................... 1,278,359 1,257,942 1,531,687 1,362,538 1,173,943
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 777,724 902,476 1,025,371 586,009 754,147
Selling, general and administrative expenses(1)............ 685,841 818,975 947,818 559,668 736,138
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 91,883 83,501 77,553 26,341 18,009
Interest (expense) income, net............................. (6,074) (3,248) (2,259) (1,876) (3,614)
Net income................................................. 63,564 52,701 59,280 16,494 10,436
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SYLVESTER'S CORP.
Net revenue................................................ $1,762,946 $2,400,104 $2,487,668 $1,270,474 $1,187,033
Cost of goods sold......................................... 1,367,126 1,415,771 1,631,608 833,655 746,468
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 395,820 984,333 856,060 436,819 440,565
Selling, general and administrative expenses(1)............ 291,678 769,327 684,210 300,406 294,628
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 104,142 215,006 171,850 136,413 145,937
Interest (expense) income, net............................. (24,877) (14,862) (268) (589) (584)
Pro forma net income....................................... 45,127 138,812 118,172 106,942 158,217
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
COMBINED AUTOMATED AIR, INC. AND BAUER HEATING & AIR
CONDITIONING, INC.(3)
Net revenue................................................ $1,735,202 $1,732,246 $2,472,360 $1,865,965 $2,059,517
Cost of goods sold......................................... 842,188 895,576 1,298,021 975,758 1,095,868
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 893,014 836,670 1,174,339 890,207 963,649
Selling, general and administrative expenses(1)............ 863,666 820,430 1,041,707 818,254 932,172
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 29,348 16,240 132,632 71,953 31,477
Interest (expense) income, net............................. (5,795) (7,941) (9,592) (7,968) (10,525)
Pro forma net income(2).................................... 21,551 9,793 58,577 50,902 10,190
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
GADDIS CO.
Net revenue................................................ $1,230,274 $1,374,176 $1,576,798 $1,372,196 $1,255,643
Cost of goods sold......................................... 949,543 1,016,801 1,100,679 945,248 833,316
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 280,731 357,375 476,119 426,948 422,327
Selling, general and administrative expenses(1)............ 272,070 286,478 397,029 281,192 305,830
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 8,661 70,897 79,090 145,756 116,497
Interest (expense) income, net............................. (11,032) (7,891) 264 (11,299) (4,410)
Pro forma net income (loss)(2)............................. (1,969) 40,333 45,523 97,865 83,350
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
EISENBACH ENTERPRISES, INC.
Net revenue.................................................................. $1,280,438 $1,291,687 $1,436,870
Cost of goods sold........................................................... 792,268 895,101 899,890
---------- ---------- ----------
Gross margin................................................................. 488,170 396,586 536,980
Selling, general and administrative expenses(1).............................. 443,810 480,442 588,809
---------- ---------- ----------
Income (loss) from operations................................................ 44,360 (83,856) (51,829)
Interest (expense) income, net............................................... (2,038) 1,741 (8,343)
Net income (loss)............................................................ 46,660 (79,025) (57,753)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
Net revenue................................................ $ 824,714 $1,173,338 $1,383,530 $1,117,262 $1,059,751
Cost of goods sold......................................... 605,105 868,359 959,365 734,533 724,761
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 219,609 304,979 424,165 382,729 334,990
Selling, general and administrative expenses(1)............ 193,864 301,865 321,122 214,441 257,180
---------- ---------- ---------- ---------- ----------
Income from operations..................................... 25,745 3,114 103,043 168,288 77,810
Interest (expense) income, net............................. 532 (7,572) (7,475) (4,855) (4,988)
Pro forma net income (loss)(2)............................. 25,836 (1,624) 77,337 133,198 48,577
</TABLE>
- ---------------
(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) The entities have been combined because of common control, ownership and
management.
10
<PAGE> 12
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. For
the nine months ended September 30, 1996, Comerford's Heating and Air
Conditioning, Inc. and Service Experts of Palm Springs, Inc. had operating
losses of $11,391 and $1,747, respectively. At September 30, 1996 and December
31, 1995, Air Experts, a United Services Co., Inc., had working capital deficits
of $221,683 and $245,381, respectively. There can be no assurance that such
operating losses and working capital deficits will not continue.
RISKS ASSOCIATED WITH EXPANSION AND THE PENDING ACQUISITIONS
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." In addition, the closing of the Pending Acquisitions is
subject to customary conditions, and there can be no assurance that the Company
will be able to consummate all of the Pending Acquisitions or to successfully
integrate the businesses of the acquired Combining Companies.
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,
11
<PAGE> 13
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 41.4% 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."
12
<PAGE> 14
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.
13
<PAGE> 15
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 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.
14
<PAGE> 16
DIVIDEND POLICY
As a newly formed corporation, the Company has never declared or paid
dividends on its Common Stock. The Company expects that future earnings, if any,
will be retained to finance the growth and development of the Company's business
and, accordingly, does not intend to declare or pay any dividends on the Common
Stock for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. Under Delaware law, the Company is prohibited from paying any dividends
unless it has capital surplus or net profits available for this purpose. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Service Experts, Inc. -- Liquidity and Capital Resources."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on a historical basis and (ii) on a pro forma basis to
reflect the acquisition of the Combining Companies and to give effect to the
elimination of debt balances upon the closing of the Pending Acquisitions. The
following table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements of the Combining Companies and the related Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
HISTORICAL PRO FORMA
----------- -----------
<S> <C> <C>
Short-term debt, including current portion of long-term debt,
capital lease obligations and notes payable to related parties.... $ 149,811 $ 149,811
========== ==========
Long-term debt and capital lease obligations, less current
portion........................................................... 174,879 174,879
Stockholders' equity:
Preferred Stock, $.01 par value per share; 10,000,000 shares
authorized, no shares outstanding.............................. -- --
Common Stock, $.01 par value per share; 30,000,000 shares
authorized; 8,572,236 shares outstanding; 11,501,350 shares
outstanding, pro forma......................................... 85,722 115,013
Additional paid-in capital.......................................... 16,049,932 60,446,772
Retained Earnings................................................... 2,552,891 2,913,631
---------- ----------
Total stockholders' equity................................ 18,688,545 63,475,416
---------- ----------
Total capitalization...................................... $18,863,424 $63,650,295
========== ==========
</TABLE>
15
<PAGE> 17
SELECTED COMBINED FINANCIAL DATA
The Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneous with the closing of the IPO, the Company acquired the Subsidiaries
in the Combination. In accordance with the provisions of SAB 97, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of the Acquiring Company. The operations of the
Subsidiaries have been included in the Company's financial statements from the
date of acquisition. The above mentioned acquisitions have been accounted for
using the historical cost basis of the Subsidiaries in accordance with SAB 48.
The Subsidiaries are the Acquiring Company; Hardwick Air Masters, Inc. d/b/a
Airmasters, Inc.; Norrell Heating and Air Conditioning Company, 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.; and Service Experts of Palm Springs, Inc.
The Selected 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 Service Experts, Inc. (formerly AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc.). The
Selected Financial Data of the Company for the nine months ended September 30,
1995 and 1996 have been derived from unaudited financial statements that appear
elsewhere in this Prospectus. The Selected Financial Data of the Company for the
fiscal years ended December 31, 1991 and 1992 have been derived from unaudited
financial statements 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 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 income statement data gives effect to the
Combination and the Pending Acquisitions, as if each transaction had occurred at
the beginning of the periods presented. The pro forma balance sheet data gives
effect to the issuance of the shares of Common Stock and cash to the owners of
the Combining Companies, 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
Company and the Combining Companies, including the related notes thereto, that
appear elsewhere in this Prospectus.
The selected financial data presented for each of the Combining Companies
for their three most recent fiscal years, have been derived from the financial
statements of each of these companies. The unaudited financial statements have
been prepared on the same basis as the audited financial statements, when
applicable, and in the opinion of the Combining Companies' 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 Combining Companies have
been presented as follows:
- Falso Heating and Sheet Metal Co., Inc.
- Combined Pardee's Refrigeration Company Incorporated, Island Air
Conditioning, Inc., Sanders Indoor Comfort, Inc., and Southern States
Comfort Corporation
- Frees Service Experts, Inc.
- Custom Air Conditioning, Inc.
- Gordon's Specialty Company, Inc.
- Dial One Service Champions, ET AL.
- Comfortech, Inc.
- Air-Conditioning and Heating Unlimited, Inc.
- The 1589 Niagara Street Corporation
- HVAC Division of Paul E. Smith Co., Inc.
- Freschi Air Systems, Inc.
- Parker Heating & Air Conditioning, Incorporated
- B. W. Heating & Cooling, Inc.
- B & B Air Conditioning, Inc.
- Sylvester's Corp.
- Combined Automated Air, Inc. and Bauer Heating & Air Conditioning, Inc.
- Gaddis Co.
- Eisenbach Enterprises, Inc.
- Quality Air Conditioning & Heating of West Monroe, Inc.
16
<PAGE> 18
SERVICE EXPERTS, INC.(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------------------------- -------------------------
PRO FORMA(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 $ 127,772,128 $12,500,548 $18,325,043
Cost of goods
sold.......... 3,977,827 5,991,098 7,280,075 10,245,039 11,122,350 82,584,302 8,674,991 11,942,161
----------- ----------- ----------- ----------- ----------- --------------- ----------- -----------
Gross margin.... 1,803,941 2,206,592 3,012,220 4,053,867 5,330,272 45,187,826 3,825,557 6,382,882
Selling, general
and
administrative
expenses...... 1,602,061 2,163,084 2,908,741 3,786,221 4,591,636 33,141,768 3,434,471 5,389,188
----------- ----------- ----------- ----------- ----------- --------------- ----------- -----------
Income (loss)
from
operations.... 201,880 43,508 103,479 267,646 738,636 12,046,058 391,086 993,694
Other income
(expense):
Interest
expense..... (21,917) (36,026) (74,631) (71,600) (77,149) -- (48,632) (56,364)
Interest
income...... 7,846 16,613 4,994 7,059 23,186 480,174 21,995 76,648
Other income
(expense)... (51,751) 26,662 68,450 17,065 25,569 586,790 26,176 10,389
----------- ----------- ----------- ----------- ----------- --------------- ----------- -----------
(65,822) 7,249 (1,187) (47,476) (28,394) 1,066,964 (461) 30,673
Income (loss)
before tax.... 136,058 50,757 102,292 220,170 710,242 13,113,022 390,625 1,024,367
Pro forma income
tax expense
(benefit)(4)... 34,681 17,845 13,546 58,041 286,888 5,014,361 148,438 389,259
----------- ----------- ----------- ----------- ----------- --------------- ----------- -----------
Pro forma net
income
(loss)(4)..... $ 101,377 $ 32,912 $ 88,746 $ 162,129 $ 423,354 $ 8,098,661 $ 242,187 $ 635,108
========== ========== ========== ========== ========== ============== ========== ==========
Pro forma net
income per
share(5)...... $ 0.70
==============
Pro forma
weighted
average shares
outstanding(5).. 11,501,350
==============
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
PRO FORMA(2)(3)
1996
---------------
<S> <C>
INCOME STATEMENT
DATA:
Net revenue..... $ 105,229,654
Cost of goods
sold.......... 67,562,175
---------------
Gross margin.... 37,667,479
Selling, general
and
administrative
expenses...... 26,005,632
---------------
Income (loss)
from
operations.... 11,661,847
Other income
(expense):
Interest
expense..... (60,339)
Interest
income...... 352,749
Other income
(expense)... 187,039
---------------
479,449
Income (loss)
before tax.... 12,141,296
Pro forma income
tax expense
(benefit)(4)... 4,613,692
---------------
Pro forma net
income
(loss)(4)..... $ 7,527,604
==============
Pro forma net
income per
share(5)...... $ 0.65
==============
Pro forma
weighted
average shares
outstanding(5).. 11,501,350
==============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, -------------------------
---------------------------------------------------------- PRO FORMA(6)
1991 1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Working
capital....... $ 527,905 $ 870,155 $ 758,049 $ 614,770 $1,182,653 $13,404,390 $ 4,576,553
Total assets.... 1,507,497 2,796,279 3,313,115 3,931,581 4,569,910 27,641,227 85,052,131
Total debt...... 356,982 1,163,006 1,141,709 1,070,812 1,289,602 324,490 324,490
Stockholders'
equity........ 471,858 940,514 921,060 1,100,104 1,728,658 18,688,545 63,475,416
</TABLE>
17
<PAGE> 19
- ---------------
(1) The selected financial data above includes AC Service & Installation Co.,
Inc., from the period January 1, 1991 and Donelson Air Conditioning Company,
Inc. from the period beginning December 2, 1991.
(2) The Combination was accounted for using historical cost basis of the
Subsidiaries in accordance with SAB 48. Accordingly, the Company recorded
the net assets acquired at the Subsidiaries' historical cost basis.
(3) Pro forma information gives effect to the Combination and the Pending
Acquisitions as if such Combination and Pending Acquisitions had occurred as
of January 1, 1995. In addition, the pro forma information is based on
certain assumptions and adjustments. 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
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 11,501,350
weighted average shares of Common Stock outstanding, which includes (i)
4,522,636 shares distributed to the stockholders of the Subsidiaries, (ii)
1,462,100 shares outstanding held by existing stockholders of the Company,
(iii) 2,587,500 shares sold in the IPO and (iv) 2,929,114 shares to be
issued in connection with the Pending Acquisitions.
(6) The Pro Forma Balance Sheet Data gives effect to the Pending Acquisitions.
In addition, the pro forma information is based on certain assumptions and
adjustments. See Notes to the Pro Forma Combining Financial Statements.
18
<PAGE> 20
FALSO HEATING AND SHEET METAL CO., INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $5,524,106 $5,644,910 $6,687,694 $8,213,510 $8,223,966 $5,652,907 $7,296,387
Cost of goods sold................. 4,357,987 4,240,689 5,066,431 6,209,046 5,993,600 4,166,619 5,286,970
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 1,166,121 1,404,221 1,621,263 2,004,464 2,230,366 1,486,288 2,009,417
Selling, general and administrative
expenses......................... 1,081,347 1,298,939 1,485,688 1,749,296 2,011,970 1,344,396 1,836,567
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations............. 84,774 105,282 135,575 255,168 218,396 141,892 172,850
Interest (expense) income,
net.............................. (47,044) (44,656) (28,991) (31,721) (12,663) (15,103) (3,848)
Net income......................... 37,306 60,350 60,099 152,669 122,822 81,737 121,929
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 658,075 $ 577,368 $ 590,060 $ 583,916 $ 666,484 $733,690
Total assets....................... 1,597,798 1,591,994 1,549,251 2,039,862 2,097,208 2,446,416
Total debt......................... 668,148 565,493 493,036 287,429 165,123 137,210
Stockholders' equity............... 473,723 534,073 594,172 746,841 869,723 991,652
</TABLE>
COMBINED PARDEE'S REFRIGERATION COMPANY INCORPORATED,
ISLAND AIR CONDITIONING, INC., SANDERS INDOOR COMFORT, INC.,
AND SOUTHERN STATES COMFORT CORPORATION(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
---------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.............................. $1,708,446 $2,637,572 $4,109,632 $4,929,808 $6,385,477 $4,589,179 $5,625,751
Cost of goods sold....................... 1,154,958 1,861,670 3,130,771 3,754,505 4,465,504 3,098,051 3,854,156
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin............................. 553,488 775,902 978,861 1,175,303 1,919,973 1,491,128 1,771,595
Selling, general and administrative
expenses............................... 627,066 759,972 853,005 1,145,187 1,741,749 1,279,788 1,629,896
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations............ (73,578) 15,930 125,856 30,116 178,224 211,340 141,699
Interest (expense) income, net........... 1,668 (3,972) 2,176 (10,087) (1,089) 404 (1,628)
Pro forma net income (loss)(2)........... (108,871) 127,936 118,872 48,844 146,099 119,949 113,227
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30,
-------------------------------------------------------------- AUGUST 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $ 178,340 $ 107,204 $ 265,818 $ 108,993 $ 150,000 $ 201,791
Total assets.................... 494,779 641,307 948,656 1,159,338 1,792,554 1,784,489
Total debt...................... 186,496 151,252 256,582 245,573 344,164 292,212
Stockholders' equity............ 98,166 133,936 118,420 290,605 462,496 549,696
</TABLE>
- ---------------
(1) The selected financial data above has been combined for the period from
December 1, 1990 through August 31, 1996 except the following which are
included from the date operations commenced as follows: Island Air
Conditioning, Inc. -- September 1, 1994, Sanders Indoor Comfort,
Inc. -- August 23, 1995 and Southern States Comfort Corporation -- August
14, 1995.
(2) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
19
<PAGE> 21
FREES SERVICE EXPERTS, INC.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.......................................... $3,519,825 $4,750,473 $5,081,939 $5,769,098 $5,409,547
Cost of goods sold................................... 2,055,758 3,213,376 3,729,137 3,904,284 3,588,717
---------- ---------- ---------- ---------- ----------
Gross margin......................................... 1,464,067 1,537,097 1,352,802 1,864,814 1,820,830
Selling, general and administrative expenses......... 1,437,137 1,387,226 1,291,921 1,766,381 1,391,314
---------- ---------- ---------- ---------- ----------
Income from operations............................... 26,930 149,871 60,881 98,433 429,516
Interest (expense) income, net....................... (4,505) (19,367) (17,540) (6,652) (61,165)
Net income........................................... 42,409 91,215 16,220 236,348 204,639
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 244,275 $ 242,004 $ 213,732 $ 282,725 $ 208,690
Total assets......................................... 1,201,698 1,280,904 1,681,732 2,177,510 2,344,779
Total debt........................................... 216,415 153,272 125,965 865,261 783,483
Stockholders' equity................................. 482,043 573,258 589,478 325,826 530,465
</TABLE>
CUSTOM AIR CONDITIONING, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.................... $3,674,132 $3,705,811 $3,472,491 $4,638,254 $5,168,461 $4,181,302 $4,295,566
Cost of goods sold............. 2,560,406 2,555,389 2,486,568 3,309,300 3,571,102 2,863,532 2,939,851
---------- ---------- ---------- ---------- ---------- ---- ----
Gross margin................... 1,113,726 1,150,422 985,923 1,328,954 1,597,359 1,317,770 1,355,715
Selling, general and
administrative expenses...... 1,104,420 1,125,274 967,783 1,070,717 1,428,206 837,375 1,106,059
---------- ---------- ---------- ---------- ---------- ---- ----
Income from operations......... 9,306 25,148 18,140 258,237 169,153 480,395 249,656
Interest (expense) income,
net.......................... (7,808) (12,155) (11,695) (4,526) (427) 653 (13,259)
Pro forma net income(1)........ 1,498 8,593 14,212 143,821 108,830 296,658 150,357
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................ $ 44,296 $183,787 $233,005 $(50,639) $(31,983) $ 218,552
Total assets............................... 709,771 547,926 620,774 669,714 661,740 1,117,279
Total debt................................. 164,725 120,450 104,624 90,346 118,778 166,076
Stockholders' equity....................... 114,061 122,654 136,866 97,278 83,359 361,740
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
20
<PAGE> 22
GORDON'S SPECIALTY COMPANY, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.................... $4,016,802 $3,838,105 $5,093,279 $4,604,132 $4,952,159 $3,777,426 $3,546,598
Cost of goods sold............. 3,081,321 3,039,553 3,891,576 3,289,148 3,386,183 2,648,620 2,449,422
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin................... 935,481 798,552 1,201,703 1,314,984 1,565,976 1,128,806 1,097,176
Selling, general and
administrative expenses...... 916,400 757,674 1,237,341 1,295,799 1,363,705 993,445 699,101
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
operations................... 19,081 40,878 (35,638) 19,185 202,271 135,361 398,075
Interest (expense) income,
net.......................... 38,343 38,604 35,430 31,394 42,401 19,201 24,756
Net income (loss).............. 42,160 72,404 (2,951) 55,047 148,135 102,805 285,811
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------ SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 653,561 $ 682,124 $ 278,263 $ 511,121 $ 429,194 $ 398,531
Total assets.................. 1,485,892 1,551,294 1,680,960 1,711,395 1,954,012 2,284,067
Total debt.................... 68,201 -- -- -- -- --
Stockholders' equity.......... 1,053,842 1,126,246 1,123,295 1,178,342 1,326,477 1,612,288
</TABLE>
DIAL ONE SERVICE CHAMPIONS, ET AL.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.................... $3,409,595 $5,166,543 $5,810,849 $5,338,173 $4,887,446 $3,720,947 $4,097,290
Cost of goods sold............. 1,821,186 2,560,042 4,019,582 3,596,556 3,317,584 2,488,342 2,608,479
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin................... 1,588,409 2,606,501 1,791,267 1,741,617 1,569,862 1,232,605 1,488,811
Selling, general and
administrative expenses...... 1,567,063 2,357,343 1,515,191 1,546,566 1,424,697 1,032,358 1,176,728
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations......... 21,346 249,158 276,076 195,051 145,165 200,247 312,083
Interest (expense) income,
net.......................... 78,703 20,344 (73,264) (32,678) 19,362 16,856 (23,561)
Pro forma net income(1)........ 62,030 167,091 82,579 87,362 56,703 152,131 186,225
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ (139,962) $ 392,429 $ 203,879 $ 245,921 $ 5,308 $ 527,749
Total assets................... 815,276 1,023,475 1,311,834 1,471,097 1,335,236 1,687,312
Total debt..................... 464,902 373,814 426,274 340,697 384,552 94,090
Stockholders' equity........... 23,572 286,779 448,734 554,741 344,718 888,111
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
21
<PAGE> 23
COMFORTECH, INC.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.................... $3,294,343 $3,607,022 $4,325,415 $4,362,501 $4,538,263 $2,682,047 $3,072,811
Cost of goods sold............. 2,432,572 2,610,112 3,092,738 3,108,993 3,200,252 1,821,374 2,067,852
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin................... 861,771 996,910 1,232,677 1,253,508 1,338,011 860,673 1,004,959
Selling, general and
administrative expenses...... 835,361 879,405 1,097,587 1,156,072 1,212,079 583,587 583,417
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations......... 26,410 117,505 135,090 97,436 125,932 277,086 421,542
Interest (expense) income,
net.......................... (53,285) (42,526) (33,676) (32,285) (27,097) (15,886) (12,099)
Net income..................... 9,045 69,253 92,105 59,811 69,792 166,384 258,703
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
-------- ---------- ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $241,264 $ 213,107 $ 234,148 $ 214,257 $228,390 $ 472,711
Total assets.................. 935,728 1,081,181 1,137,331 1,049,991 957,597 1,486,314
Total debt.................... 432,172 452,415 361,307 358,698 254,204 324,537
Stockholders' equity.......... 98,872 168,125 260,230 320,041 389,833 648,536
</TABLE>
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.............................................. $2,420,524 $2,967,054 $3,500,213 $3,780,200 $4,333,010
Cost of goods sold....................................... 1,869,766 2,216,182 2,681,908 2,759,778 3,056,918
---------- ---------- ---------- ---------- ----------
Gross margin............................................. 550,758 750,872 818,305 1,020,422 1,276,092
Selling, general and administrative expenses............. 523,256 639,420 655,187 979,119 1,223,132
---------- ---------- ---------- ---------- ----------
Income from operations................................... 27,502 111,452 163,118 41,303 52,960
Interest (expense) income, net........................... (5,838) (5,666) 1,382 5,887 3,440
Net income............................................... 28,520 74,848 101,352 37,738 49,265
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 96,848 $163,863 $ 426,881 $ 308,483 $ 371,124
Total assets................................................ 682,418 910,132 1,065,478 1,173,974 1,137,557
Total debt.................................................. 126,675 110,619 79,240 72,638 49,385
Stockholders' equity........................................ 294,347 369,195 470,547 508,285 557,550
</TABLE>
22
<PAGE> 24
THE 1589 NIAGARA STREET CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.............................................. $1,520,530 $1,877,065 $2,462,955 $2,913,881 $3,785,399
Cost of goods sold....................................... 657,356 828,544 1,758,003 2,058,467 2,301,244
---------- ---------- ---------- ---------- ----------
Gross margin............................................. 863,174 1,048,521 704,952 855,414 1,484,155
Selling, general and administrative expenses............. 844,165 996,940 703,017 773,653 1,272,756
---------- ---------- ---------- ---------- ----------
Income (loss) from operations............................ 19,009 51,581 1,935 81,761 211,399
Interest (expense) income, net........................... (862) (5,906) (3,291) (1,037) 6,039
Net income (loss)........................................ 18,147 45,675 (51) 48,236 139,523
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................ $ 25,615 $ 37,866 $ (38,383) $ 26,928 $ 42,055
Total assets............................................. 236,056 273,962 407,604 533,871 810,719
Total debt............................................... 47,899 27,353 -- 95,211 104,891
Stockholders' equity..................................... 39,920 60,470 60,419 105,455 240,178
</TABLE>
HVAC DIVISION OF PAUL E. SMITH CO., INC.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,894,716 $2,850,541 $2,536,110 $2,604,559 $3,584,158 $1,919,861 $1,693,759
Cost of goods sold................. 1,740,513 2,656,307 2,237,426 2,186,744 3,088,877 1,619,046 1,444,374
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 154,203 194,234 298,684 417,815 495,281 300,815 249,385
Selling, general and administrative
expenses......................... 254,158 294,416 354,888 368,125 489,320 253,843 213,966
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (99,955) (100,182) (56,204) 49,690 5,961 46,972 35,419
Interest (expense) income, net..... 671 461 362 291 800 330 1,476
Net income (loss).................. (99,284) (99,721) (41,985) 40,752 7,656 38,001 29,178
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 348,638 $ 361,710 $ 160,302 $ 47,387 $ 59,332 $(31,414)
Total assets....................... 532,334 568,756 370,596 310,227 405,444 313,221
Total debt......................... -- -- -- -- -- --
Stockholders' equity............... 306,074 306,816 264,831 182,352 225,679 105,381
</TABLE>
23
<PAGE> 25
FRESCHI AIR SYSTEMS, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $2,841,759 $2,604,021 $2,574,930 $3,256,328 $3,254,462 $2,431,991 $3,336,481
Cost of goods sold................. 1,696,245 1,548,993 1,949,658 2,444,587 2,222,997 1,687,967 2,024,587
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 1,145,514 1,055,028 625,272 811,741 1,031,465 774,024 1,311,894
Selling, general and administrative
expenses......................... 1,118,441 953,059 707,314 866,644 1,142,142 810,520 912,523
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 27,073 101,969 (82,042) (54,903) (110,677) (66,496) 399,371
Interest (expense) income, net..... (4,110) (91) 6,082 5,136 (973) (6,191) (3,653)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net income (loss)(1)..... 40,072 75,386 (25,063) (24,387) (56,157) (29,453) 229,912
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $179,480 $177,134 $234,715 $286,023 $185,167 $ 585,125
Total assets....................... 543,878 590,447 670,614 829,895 788,193 1,348,743
Total debt......................... 103,336 106,280 127,416 155,945 120,740 142,373
Stockholders' equity............... 326,531 460,431 393,845 353,104 252,356 669,953
</TABLE>
- ---------------
(1) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
PARKER HEATING & AIR CONDITIONING, INCORPORATED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,657,681 $2,003,233 $2,207,450 $2,789,553 $2,904,779 $2,255,388 $2,334,106
Cost of goods sold................. 813,950 1,086,326 1,248,494 1,508,385 1,635,236 1,229,658 1,299,566
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 843,731 916,907 958,956 1,281,168 1,269,543 1,025,730 1,034,540
Selling, general and administrative
expenses......................... 815,773 859,319 892,079 1,100,879 1,215,126 864,436 899,400
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations............. 27,958 57,588 66,877 180,289 54,417 161,294 135,140
Interest (expense) income, net..... (20,320) (21,806) (5,335) (10,584) (1,030) (9,070) (9,195)
Net income......................... 1,425 25,670 36,137 92,364 13,090 99,394 89,357
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $(48,081) $(29,090) $ 77,168 $(54,555) $(74,978) $(15,223)
Total assets....................... 565,680 521,874 567,560 839,261 766,286 832,196
Total debt......................... 226,864 250,637 209,904 299,032 233,195 187,172
Stockholders' equity............... 114,984 155,654 191,791 284,155 297,245 386,602
</TABLE>
24
<PAGE> 26
B.W. HEATING & COOLING, INC.
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JANUARY 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,061,648 $1,038,957 $1,410,587 $2,170,302 $2,795,817 $1,617,781 $2,471,140
Cost of goods sold................. 722,405 744,237 897,489 1,407,005 1,771,363 973,550 1,461,554
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 339,243 294,720 513,098 763,297 1,024,454 644,231 1,009,586
Selling, general and administrative
expenses......................... 352,150 272,505 468,181 700,986 974,630 577,133 694,495
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (12,907) 22,215 44,917 62,311 49,824 67,098 315,091
Interest (expense) income,
net.............................. (8,054) (10,904) (11,397) (10,444) (9,128) (8,081) (4,688)
Net income (loss).................. (18,772) 6,951 24,817 33,621 26,004 42,243 182,330
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 99,057 $ 78,877 $ 69,152 $ 60,745 $ 97,887 $246,522
Total assets....................... 318,141 426,159 371,731 570,114 749,111 988,399
Total debt......................... 110,417 209,163 89,073 102,004 73,659 56,317
Stockholders' equity............... 106,094 121,391 146,208 179,829 205,833 388,163
</TABLE>
B & B AIR CONDITIONING, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,472,551 $1,729,548 $2,056,083 $2,160,418 $2,557,058 $1,948,547 $1,928,090
Cost of goods sold................. 987,335 1,120,224 1,278,359 1,257,942 1,531,687 1,362,538 1,173,943
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 485,216 609,324 777,724 902,476 1,025,371 586,009 754,147
Selling, general and administrative
expenses......................... 468,110 633,984 685,841 818,975 947,818 559,668 736,138
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 17,106 (24,660) 91,883 83,501 77,553 26,341 18,009
Interest (expense) income, net..... 4,839 (2,376) (6,074) (3,248) (2,259) (1,876) (3,614)
Net income (loss).................. 8,343 (30,835) 63,564 52,701 59,280 16,494 10,436
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 124,962 $ 101,819 $ 135,090 $ 157,116 $ 189,822 $190,884
Total assets....................... 277,381 323,642 349,519 424,453 488,284 566,308
Total debt......................... 17,701 53,216 43,167 26,373 12,206 75,269
Stockholders' equity............... 139,196 127,334 186,238 246,754 312,927 327,893
</TABLE>
25
<PAGE> 27
SYLVESTER'S CORP.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................... $1,616,758 $1,593,847 $1,762,946 $2,400,104 $2,487,668 $1,270,474 $ 1,187,033
Cost of goods sold............... 1,402,855 1,356,889 1,367,126 1,415,771 1,631,608 833,655 746,468
---------- ---------- ---------- ---------- ---------- ---------- ------------
Gross margin..................... 213,903 236,958 395,820 984,333 856,060 436,819 440,565
Selling, general and
administrative expenses........ 153,182 147,030 291,678 769,327 684,210 300,406 294,628
---------- ---------- ---------- ---------- ---------- ---------- ------------
Income from operations........... 60,721 89,928 104,142 215,006 171,850 136,413 145,937
Interest (expense) income,
net............................ (33,058) (29,640) (24,877) (14,862) (268) (589) (584)
Pro forma net income(1).......... 28,392 88,405 45,127 138,812 118,172 106,942 112,694
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 9,726 $ 31,599 $ 113,900 $ 82,598 $ 118,314 $185,139
Total assets....................... 406,785 595,003 630,227 593,622 792,493 819,619
Total debt......................... 422,906 518,710 487,596 89,008 57,718 41,822
Stockholders' equity............... (16,121) 72,287 117,412 256,226 374,398 451,802
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
COMBINED AUTOMATED AIR, INC. AND BAUER HEATING & AIR CONDITIONING, INC.(1)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................... $1,285,045 $1,551,162 $1,735,202 $1,732,246 $2,472,360 $1,865,965 $2,059,517
Cost of goods sold............... 634,237 732,465 842,188 895,576 1,298,021 975,758 1,095,868
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin..................... 650,808 818,697 893,014 836,670 1,174,339 890,207 963,649
Selling, general and
administrative expenses........ 604,463 770,332 863,666 820,430 1,041,707 818,254 932,172
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations........... 46,345 48,365 29,348 16,240 132,632 71,953 31,477
Interest (expense) income,
net............................ 20,613 5,797 (5,795) (7,941) (9,592) (7,968) (10,525)
Pro forma net income(2).......... 25,732 42,568 21,551 9,793 58,577 50,902 10,190
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
-------- -------- --------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................. $175,750 $132,143 $172,845 $ 86,683 $ 31,057 $ 64,596
Total assets..................... 35,026 455,677 447,412 610,945 612,725 633,993
Total debt....................... 190,393 264,970 235,155 226,391 184,569 215,368
Stockholders' equity............. 160,633 190,706 162,257 172,929 120,075 131,474
</TABLE>
- ---------------
(1) The selected financial data above has been combined for the period from
January 1, 1991 through September 30, 1996 except for Bauer Heating & Air
Conditioning, Inc. from September 20, 1994 (date operations commenced).
(2) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
26
<PAGE> 28
GADDIS CO.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................... $1,594,822 $1,899,783 $1,230,274 $ 1,374,176 $ 1,576,798 $1,372,196 $1,255,643
Cost of goods sold............... 823,003 1,550,624 949,543 1,016,801 1,100,679 945,248 833,316
---------- ---------- ---------- ----------- ----------- ---------- ----------
Gross margin..................... 771,819 349,159 280,731 357,375 476,119 426,948 422,327
Selling, general and
administrative expenses........ 708,712 365,873 272,070 286,478 397,029 281,192 305,830
---------- ---------- ---------- ----------- ----------- ---------- ----------
Income (loss) from operations.... 63,107 (16,714) 8,661 70,897 79,090 145,756 116,497
Interest (expense) income,
net............................ (8,078) (12,335) (11,032) (7,891) 264 (11,299) (4,410)
Pro forma net income (loss)(1)... 48,019 (21,724) (1,969) 40,333 45,523 97,865 83,350
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 50,874 $ 18,777 $ (27,521) $ (15,220) $ 53,907 $ 90,512
Total assets....................... 210,545 254,145 169,000 267,424 274,016 360,537
Total debt......................... 95,782 99,900 75,548 75,007 30,174 17,901
Stockholders' equity............... 30,604 556 (1,274) 54,331 113,429 160,059
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
EISENBACH ENTERPRISES, INC.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue................................................... $1,271,540 $1,384,185 $1,280,438 $1,291,687 $1,436,870
Cost of goods sold............................................ 881,731 948,650 792,268 895,101 899,890
---------- ---------- ---------- ---------- ----------
Gross margin.................................................. 389,809 435,535 488,170 396,586 536,980
Selling, general and administrative expenses.................. 356,494 425,985 443,810 480,442 588,809
---------- ---------- ---------- ---------- ----------
Income from operations........................................ 33,315 9,550 44,360 (83,856) (51,829)
Interest (expense) income,
net......................................................... (14,189) (1,920) (2,038) 1,741 (8,343)
Net income.................................................... 16,257 6,454 46,660 (79,025) (57,753)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................... $ 87,333 $ (484) $ 114,834 $ 6,364 $ (44,880)
Total assets.................................................. 389,394 333,358 384,764 375,801 349,693
Total debt.................................................... 62,837 68,497 52,628 42,559 48,676
Stockholders' equity.......................................... 166,683 161,015 217,675 138,650 80,897
</TABLE>
27
<PAGE> 29
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue............................. $585,099 $652,129 $824,714 $1,173,338 $1,383,530 $1,117,262 $1,059,751
Cost of goods sold...................... 465,117 495,316 605,105 868,359 959,365 734,533 724,761
-------- -------- -------- ---------- ---------- ---------- ----------
Gross margin............................ 119,982 156,813 219,609 304,979 424,165 382,729 334,990
Selling, general and administrative
expenses.............................. 106,371 143,552 193,864 301,865 321,122 214,441 257,180
-------- -------- -------- ---------- ---------- ---------- ----------
Income from operations.................. 13,611 13,261 25,745 3,114 103,043 168,288 77,810
Interest (expense) income, net.......... (1,960) (622) 532 (7,572) (7,475) (4,855) (4,988)
Pro Forma net income (loss)(1).......... 20,412 14,416 25,836 (1,624) 77,337 133,198 48,577
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
-------- -------- -------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $ 64,081 $104,430 $110,006 $ 132,503 $ 193,839 $256,152
Total assets............................ 165,770 175,903 223,556 367,376 415,898 490,214
Total debt.............................. 14,827 8,813 -- 135,855 108,419 106,722
Stockholders' equity.................... 117,198 136,777 169,395 151,009 224,018 296,840
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
28
<PAGE> 30
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 Company's and the Combining Companies' combined Financial
Statements and Pro Forma Combining Financial Information, including the Notes
thereto, and the other financial information appearing elsewhere in this
Prospectus.
THE COMPANY
Overview
The Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneous with the closing of the IPO, the Company acquired the Subsidiaries
in the Combination. In accordance with the provisions of SAB 97, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of the Acquiring Company. The operations of the
Subsidiaries have been included in the Company's financial statements from the
date of acquisition. The above mentioned acquisitions have been accounted for
using the historical cost basis of the Subsidiaries in accordance with SAB 48.
The Subsidiaries are the Acquiring Company; Hardwick Air Masters, Inc. d/b/a
Airmasters, Inc.; Norrell Heating and Air Conditioning Company, 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.; and Service Experts of Palm Springs, Inc.
Management believes that the Subsidiaries and the Combining Companies, 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. There
can be no assurance that the Company will be able to integrate successfully the
businesses of the Subsidiaries or the Combining Companies or to operate them
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 or the Combining Companies and to implement the
Company's operating and acquisition strategies could have a material adverse
effect on the Company's net revenue and earnings.
Both the Subsidiaries and the Combining Companies, historically, 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 Pending Acquisitions. These reductions
equaled approximately $7.2 million based upon 1995 and 1996 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 that have strong management, and 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.
29
<PAGE> 31
Components of Income
Net revenue of the Combining Companies has been derived primarily from the
following sources (i) the installation of central air conditioners, furnaces and
heat pumps primarily in existing homes and (ii) the service and maintenance of
central air conditioners, furnaces and heat pumps primarily in existing homes.
Net revenue and associated income from operations are subject to seasonal
fluctuations resulting from increased demand for the Company's services during
warmer weather in the summer months and during colder weather in winter months,
particularly in the beginning of each season. Cost of goods sold primarily
consists of purchased materials such as replacement air conditioning units and
heat pumps and the labor associated with both installations and repair orders.
The main components of selling, general and administrative expenses include
administrative salaries, insurance expense and promotion and advertising
expenses.
SERVICE EXPERTS, INC.
RESULTS OF OPERATIONS
Management believes that the increases in the components of revenues and
expenses discussed for the nine months ended September 30, 1996 compared to
September 30, 1995 are primarily a result of the Combination effected on August
21, 1996.
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 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% $12,501 100.0% $18,325 100.0%
Cost of goods sold...... 7,280 70.7 10,245 71.6 11,122 67.6 8,675 69.4 11,942 65.2
------- ----- ------- ----- ------- ----- ------- ----- ------- ------
Gross margin............ 3,012 29.3 4,054 28.4 5,331 32.4 3,826 30.6 6,393 34.8
Selling, general and
administrative
expenses.............. 2,909 28.3 3,786 26.5 4,592 27.9 3,434 27.5 5,389 29.4
------- ----- ------- ----- ------- ----- ------- ----- ------- ------
Income from
operations............ $ 103 1.0% $ 268 1.9% $ 739 4.5% $ 391 3.1% $ 994 5.4
======== ===== ======== ===== ======== ===== ======== ===== ======== ======
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased from $12.5 million for the nine months
ended September 30, 1995 to $18.3 million for the nine months ended September
30, 1996, an increase of $5.8 million or 46.6%.
Cost of Goods Sold. Cost of goods sold increased from $8.7 million for the
nine months ended September 30, 1995 to $11.9 million for the nine months ended
September 30, 1996, an increase of $3.2 million or 37.7%. As a percentage of net
revenue, cost of goods sold decreased from 69.4% for the nine months ended
September 30, 1995 to 65.2% for the nine months ended September 30, 1996.
Gross Margin. Gross margin increased from $3.8 million for the nine months
ended September 30, 1995 to $6.4 million for the nine months ended September 30,
1996, an increase of $2.6 million or 66.8%. As a percentage of net revenue,
gross margin increased from 30.6% for the nine months ended September 30, 1995
to 34.8% for the nine months ended September 30, 1996.
General and Administrative Expenses. General and administrative expenses
increased $2.0 million or 56.9% from $3.4 million for the nine months ended
September 30, 1995 to $5.4 million for the nine months ended September 30, 1996.
As a percentage of net revenue, general and administrative expenses increased
from 27.5% for the nine months ended September 30, 1995 to 29.4% for the nine
months ended September 30, 1996.
Income from Operations. Income from operations increased from $391,000 for
the nine months ended September 30, 1995 to $994,000 for the nine months ended
September 30, 1996, an increase of $603,000 or
30
<PAGE> 32
154.1%. Income from operations as a percent of net revenue increased from 3.1%
in the 1995 period to 5.4% in the 1996 period.
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.
31
<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of the Company (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER ENDED
31, SEPTEMBER 30,
--------------------- ----------------
1993 1994 1995 1995 1996
----- ----- ----- ------ -------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities................................... $ 548 $ 264 $ 579 $1,255 $ 2,222
Net cash used in investing activities.......... (242) (504) (613) (538) (16,673)
Net cash provided by (used in) financing
activities................................... (221) 63 219 64 27,080
----- ----- ----- ------ -------
Increase (decrease) in cash and cash
equivalents.................................. $ 85 $(177) $ 185 $ 781 $12,629
===== ===== ===== ====== =======
</TABLE>
From 1993 through the nine months ended September 30, 1996, the Company
generated $3.6 million in net cash from operating activities. During this
period, $2.6 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.
On August 21, 1996, the Company completed the IPO at $13.00 per share. The
proceeds to the Company, net of expenses and underwriting discounts and
commissions, were approximately $28,173,859. Of the net proceeds, $18,533,241
was used to pay the cash portion of the consideration for the Subsidiaries,
including $1,025,770 which was used to repay certain indebtedness arising from
the Combination. The Company plans to use the remaining proceeds for working
capital and capital expenditures, including the acquisition of additional HVAC
service and replacement businesses. The Company's ability to acquire new service
centers will depend on a number of factors, including the ability of management
of the Company to identify favorable target businesses and to negotiate
favorable acquisition terms, the availability of adequate financing and other
factors, many of which are beyond the control of the Company. Thus far, the
Company has been very active in acquiring service centers. Management does not
expect, however, to continue to acquire service centers at its current rate. In
addition, there can be no assurance that the Company will be successful in
identifying and acquiring service centers, that the Company can integrate such
new service centers into the Company's operations or that the Company's new
service centers will generate sales revenue or profit margins consistent with
those of the Company's existing service centers.
Working capital at September 30, 1996 was $13,404,390 and cash, cash
equivalents and short term investments were $12,904,442. Net cash generated from
operations during the first period of operations was $2,221,651.
The Company's principal capital needs arise from the acquisition of new
HVAC businesses and the costs associated with such expansion. During the first
nine months of 1996, the Company's capital expenditures were $55,440. The
Company repaid of $1,093,558 of debt. At September 30, 1996 the Company had
$324,490 of outstanding notes payable.
The Company has a commitment from a bank to borrow up to $20 million to be
used for acquisitions, working capital and capital expenditures. Management
believes that its existing cash balances, cash generated from operations and
additional borrowings will be sufficient to fund the Company's planned capital
expenditures through the remainder of 1996 and 1997. Should the Company's actual
results of operations fall short of, or its rate of expansion significantly
exceed its plans, or should its costs or capital expenditures exceed
expectations, the Company may need to seek additional financing in the future.
In negotiating such financing, there can be no assurance that the Company will
be able to raise additional capital on terms satisfactory to the Company.
Between October 24, 1996 and November 14, 1996, the Company entered into
definitive agreements to acquire 22 HVAC service centers throughout the United
States. Pursuant to the Agreements, the Company will merge with or acquire the
stock of the 22 companies for an aggregate of approximately $10.3 million cash
and approximately 2,929,000 shares of Common Stock. Closing of the transactions
is subject to customary conditions and is expected to take place prior to year
end.
32
<PAGE> 34
FALSO HEATING AND SHEET METAL CO., INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue..................... $6,688 100.0% $8,214 100.0% $8,224 100.0% $5,653 100.0% $7,296 100.0%
Cost of Goods Sold.............. 5,066 75.8 6,209 75.6 5,994 72.9 4,167 73.7 5,287 72.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin.................... 1,621 24.2 2,004 24.4 2,230 27.1 1,486 26.3 2,009 27.5
Selling, general and
administrative expenses....... 1,486 22.2 1,749 21.3 2,012 24.5 1,344 23.8 1,837 25.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.......... $ 136 2.0% $ 255 3.1% $ 218 2.7% $ 142 2.5% $ 173 2.4%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased $1.6 million, or 29.1%, from $5.7
million for the nine months ended September 30, 1995 to $7.3 million for the
nine months ended September 30, 1996. Management believes that the increase in
net revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $1.1 million, or 26.9%,
from $4.2 million for the nine months ended September 30, 1995 to $5.3 million
for the nine months ended September 30, 1996. As a percentage of net revenue,
cost of goods sold decreased from 73.7% for the nine months ended September 30,
1995 to 72.5% for the nine months ended September 30, 1996. 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 $523,000, or 35.2%, from $1.5
million for the nine months ended September 30, 1995 to $2.0 million for the
nine months ended September 30, 1996. As a percentage of net revenue, gross
margin increased from 26.3% for the nine months ended September 30, 1995 to
27.5% for the nine months ended September 30, 1996. 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 $492,000, or 36.6%, from $1.3 million for the
nine months ended September 30, 1995 to $1.8 million for the nine months ended
September 30, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 23.8% for the nine months ended September
30, 1995 to 25.2% for the nine months ended September 30, 1996. The increase as
a percentage of net revenue was primarily attributable to increased compensation
expense.
Income from Operations. Income from operations increased $31,000, or
21.8%, from $142,000 for the nine months ended September 30, 1995 to $173,000
for the nine months ended September 30, 1996. As a percentage of net revenue,
income from operations decreased from 2.5% for the nine months ended September
30, 1995 to 2.4% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue remained relatively even at $8.2 million in 1994
and 1995.
Cost of Goods Sold. Cost of goods sold decreased $215,000, or 3.5%, from
$6.2 million in 1994 to $6.0 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 75.6% in 1994 to 72.9% in 1995. 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 $226,000, or 11.3%, from $2.0
million in 1994 to $2.2 million in 1995. As a percentage of net revenue, gross
margin increased from 24.4% in 1994 to 27.1% in 1995.
33
<PAGE> 35
The increase as a percentage of net revenue was primarily attributable to
increased emphasis on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $263,000, or 15.0%, from $1.8 million in 1994
to $2.0 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 21.3% in 1994 to 24.5% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $37,000, or
14.4%, from $255,000 in 1994 to $218,000 in 1995. As a percentage of net
revenue, income from operations decreased from 3.1% in 1994 to 2.7% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $1.5 million, or 22.8%, from $6.7
million in 1993 to $8.2 million in 1994. 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 $1.1 million, or 22.6%,
from $5.1 million in 1993 to $6.2 million in 1994. As a percentage of net
revenue, cost of goods sold decreased from 75.8% in 1993 to 75.6% in 1994.
Gross Margin/Profit. Gross margin increased $383,000, or 23.6%, from $1.6
million in 1993 to $2.0 million in 1994. As a percentage of net revenue, gross
margin increased from 24.2% in 1993 to 24.4% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $264,000, or 17.7%, from $1.5 million in 1993
to $1.8 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 22.2% in 1993 to 21.3% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $120,000, or
88.2%, from $136,000 in 1993 to $255,000 in 1994. As a percentage of net
revenue, income from operations increased from 2.0% in 1993 to 3.1% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Falso Heating and Sheet Metal Co., Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities.................................. $ 183 $ 285 $ 465 $ 596 $500
Net cash used in investing activities......... (119) (183) (81) (50) (83)
Net cash used in financing activities......... (72) (105) (223) (204) (28)
----- ----- ----- ----- ----
Increase (decrease) in cash and cash
equivalents................................. $ (8) $ (3) $ 161 $ 342 $389
===== ===== ===== ===== ====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Falso Heating
and Sheet Metal Co., Inc. generated $1,433,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
34
<PAGE> 36
COMBINED PARDEE'S REFRIGERATION COMPANY INCORPORATED,
ISLAND AIR CONDITIONING, INC., SANDERS INDOOR COMFORT, INC.,
AND SOUTHERN STATES COMFORT CORPORATION
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, NINE MONTHS ENDED AUGUST 31,
--------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue.................... $4,110 100.0% $4,930 100.0% $6,385 100.0% $4,589 100.0% $5,626 100.0%
Cost of Goods Sold............. 3,131 76.2 3,755 76.2 4,466 69.9 3,098 67.5 3,854 68.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross Margin................... 979 23.8 1,175 23.8 1,920 30.1 1,491 32.5 1,772 31.5
Selling, general and
administrative............... 853 20.8 1,145 23.2 1,742 27.3 1,280 27.9 1,630 29.0
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations......... $ 126 3.1% $ 30 0.6% $ 178 2.8% $ 211 4.6% $ 142 2.5%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Nine Months Ended August 31, 1996 Compared to Nine Months Ended August 31,
1995
Net Revenue. Net revenue increased $1.0 million, or 22.6%, from $4.6
million for the nine months ended August 31, 1995 to $5.6 million for the nine
months ended August 31, 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $756,000, or 24.4%, from
$3.1 million for the nine months ended August 31, 1995 to $3.9 million for the
nine months ended August 31, 1996. As a percentage of net revenue, cost of goods
sold increased from 67.5% for the nine months ended August 31, 1995 to 68.5% for
the nine months ended August 31, 1996. The increase as a percentage of net
revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin increased $280,000, or 18.8%, from $1.5
million for the nine months ended August 31, 1995 to $1.8 million for the nine
months ended August 31, 1996. As a percentage of net revenue, gross margin
decreased from 32.5% for the nine months ended August 31, 1995 to 31.5% for the
nine months ended August 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $350,000, or 27.4%, from $1.3 million for the
nine months ended August 31, 1995 to $1.6 million for the nine months ended
August 31, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 27.9% for the nine months ended August
31, 1995 to 29.0% for the nine months ended August 31, 1996. The increase as a
percentage of net revenue was primarily attributable to increased compensation
expense.
Income from Operations. Income from operations decreased $70,000, or
33.0%, from $211,000 for the nine months ended August 31, 1995 to $142,000 for
the nine months ended August 31, 1996. As a percentage of net revenue, income
from operations decreased from 4.6% for the nine months ended August 31, 1995 to
2.5% for the nine months ended August 31, 1996.
Year Ended November 30, 1995 Compared to November 30, 1994
Net Revenue. Net revenue increased $1.5 million, or 29.5%, from $4.9
million in 1994 to $6.4 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 $711,000, or 18.9%, from
$3.8 million in 1994 to $4.5 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 76.2% in 1994 to 69.9% in
35
<PAGE> 37
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 $745,000, or 63.4%, from $1.2
million in 1994 to $1.9 million in 1995. As a percentage of net revenue, gross
margin increased from 23.8% in 1994 to 30.1% in 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 $597,000, or 52.1%, from $1.2 million in 1994
to $1.7 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 23.2% in 1994 to 27.3% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $148,000, or
491.8%, from $30,000 in 1994 to $178,000 in 1995. As a percentage of net
revenue, income from operations increased from .6% in 1994 to 2.8% in 1995.
Year Ended November 30, 1994 Compared to November 30, 1993
Net Revenue. Net revenue increased $820,000, or 20.0%, from $4.1 million
in 1993 to $4.9 million in 1994. 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 $624,000, or 19.9%, from
$3.1 million in 1993 to $3.8 million in 1994. As a percentage of net revenue,
cost of goods sold remained even at 76.2% in 1993 and in 1994.
Gross Margin/Profit. Gross margin increased $196,000, or 20.1%, from $1.0
million in 1993 to $1.2 million in 1994. As a percentage of net revenue, gross
margin remained even at 23.8% in 1993 and in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $292,000, or 34.3%, from $853,000 in 1993 to
$1.1 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 20.8% in 1993 to 23.2% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $96,000, or
76.1%, from $126,000 in 1993 to $30,000 in 1994. As a percentage of net revenue,
income from operations decreased from 3.1% in 1993 to .6% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Combined Pardee's Refrigeration Company Incorporated, Island Air
Conditioning, Inc., Sanders Indoor Comfort, Inc., and Southern States Comfort
Corporation:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
NOVEMBER 30, AUGUST 31,
------------------ -----------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities........ $246 $361 $524 $445 $237
Net cash used in investing activities................. (223) (280) (257) (190) (177)
Net cash provided by (used in) financing activities... 88 7 100 89 (87)
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalents...... $111 $ 88 $367 $344 $(27)
==== ==== ==== ==== ====
</TABLE>
From 1993 through the nine months ended August 31, 1996, Combined Pardee's
Refrigeration Company Incorporated, Island Air Conditioning, Inc., Sanders
Indoor Comfort, Inc., and Southern States Comfort Corporation generated
$1,368,000 in net cash from operating activities. Cash used in investing
activities was primarily attributable to the purchase and replacement of service
and delivery trucks.
36
<PAGE> 38
FREES SERVICE EXPERTS, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue........................... $5,082 100.0% $5,769 100.0% $5,410 100.0%
Cost of Goods Sold.................... 3,729 73.4 3,904 67.7 3,589 66.3
------ ----- ------ ----- ------ -----
Gross Margin.......................... 1,353 26.6 1,865 32.3 1,821 33.7
Selling, general and administrative
expenses............................ 1,292 25.4 1,766 30.6 1,391 25.7
------ ----- ------ ----- ------ -----
Income from operations................ $ 61 1.2% $ 98 1.7% $ 430 7.9%
====== ===== ====== ===== ====== =====
</TABLE>
Year Ended September 30, 1996 Compared to September 30, 1995
Net Revenue. Net revenue decreased $360,000, or 6.2%, from $5.8 million in
1995 to $5.4 million in 1996.
Cost of Goods Sold. Cost of goods sold decreased $316,000, or 8.1%, from
$3.9 million in 1995 to $3.6 million in 1996. As a percentage of net revenue,
cost of goods sold decreased from 67.7% in 1995 to 66.3% in 1996. 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 decreased $44,000, or 2.4%, from $1.9
million in 1995 to $1.8 million in 1996. As a percentage of net revenue, gross
margin increased from 32.3% in 1995 to 33.7% in 1996. The increase as a
percentage of net revenue was primarily attributable to increased emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $375,000, or 21.2%, from $1.8 million in 1995
to $1.4 million in 1996. As a percentage of net revenue, selling, general and
administrative expenses decreased from 30.6% in 1995 to 25.7% in 1996.
Income from Operations. Income from operations increased $331,000, or
336.4%, from $98,000 in 1995 to $430,000 in 1996. As a percentage of net
revenue, income from operations increased from 1.7% in 1995 to 7.9% in 1996.
Year Ended September 30, 1995 Compared to September 30, 1994
Net Revenue. Net revenue increased $687,000, or 13.5%, from $5.1 million
in 1994 to $5.8 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 $175,000, or 4.7%, from
$3.7 million in 1994 to $3.9 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 73.4% in 1994 to 67.7% 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 $512,000, or 37.8%, from $1.4
million in 1994 to $1.9 million in 1995. As a percentage of net revenue, gross
margin increased from 26.6% in 1994 to 32.3% in 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 $474,000, or 36.7%, from $1.3 million in 1994
to $1.8 million in 1995. As a percentage of net revenue, selling,
37
<PAGE> 39
general and administrative expenses increased from 25.4% in 1994 to 30.6% in
1995. The increase as a percentage of net revenue was primarily attributable to
increased compensation expense.
Income from Operations. Income from operations increased $38,000, or
61.7%, from $61,000 in 1994 to $98,000 in 1995. As a percentage of net revenue,
income from operations increased from 1.2% in 1994 to 1.7% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Frees Service Experts, Inc.:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net cash flow provided by operating activities.................... $203 $384 $390
Net cash used in investing activities............................. (61) (475) (313)
Net cash provided by (used in) financing activities............... (83) 150 (166)
---- ---- ----
Increase (decrease) in cash and cash equivalents.................. $ 59 $ 59 $(89)
==== ==== ====
</TABLE>
From 1994 through the year ended September 30, 1996, Frees Service Experts,
Inc. generated $977,000 in net cash from operating activities. Cash used in
investing activities was primarily attributable to the purchase and replacement
of service and delivery trucks.
38
<PAGE> 40
CUSTOM AIR CONDITIONING, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue............. $3,472 100.0% $4,638 100.0% $5,168 100.0% $4,181 100.0% $4,296 100.0%
Cost of Goods Sold...... 2,487 71.6 3,309 71.3 3,571 69.1 2,864 68.5 2,940 68.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin............ 986 28.4 1,329 28.7 1,597 30.9 1,318 31.5 1,356 31.6
Selling, general and
administrative
expenses.............. 968 27.9 1,071 23.1 1,428 27.6 837 20.0 1,106 25.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from
operations............ $ 18 0.5% $ 258 5.6% $ 169 3.3% $ 480 11.5% $ 250 5.8%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased $114,000, or 2.7%, from $4.2 million
for the nine months ended September 30, 1995 to $4.3 million for the nine months
ended September 30, 1996.
Cost of Goods Sold. Cost of goods sold remained relatively even at $2.9
million for the nine months ended September 30, 1995 and for the nine months
ended September 30, 1996. As a percentage of net revenue, cost of goods sold
decreased from 68.5% for the nine months ended September 30, 1995 to 68.4% for
the nine months ended September 30, 1996.
Gross Margin/Profit. Gross margin increased $38,000, or 2.9%, from $1.3
million for the nine months ended September 30, 1995 to $1.4 million for the
nine months ended September 30, 1996. As a percentage of net revenue, gross
margin increased from 31.5% for the nine months ended September 30, 1995 to
31.6% for the nine months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $269,000, or 32.1%, from $837,000 for the nine
months ended September 30, 1995 to $1.1 million for the nine months ended
September 30, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 20.0% for the nine months ended September
30, 1995 to 25.7% for the nine months ended September 30, 1996. The increase as
a percentage of net revenue was primarily attributable to increased compensation
expense.
Income from Operations. Income from operations decreased $231,000, or
48.0%, from $480,000 for the nine months ended September 30, 1995 to $250,000
for the nine months ended September 30, 1996. As a percentage of net revenue,
income from operations decreased from 11.5% for the nine months ended September
30, 1995 to 5.8% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $530,000, or 11.4%, from $4.6 million
in 1994 to $5.2 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 $262,000, or 7.9%, from
$3.3 million in 1994 to $3.6 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 71.3% in 1994 to 69.1% 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.
39
<PAGE> 41
Gross Margin/Profit. Gross margin increased $268,000, or 20.2%, from $1.3
million in 1994 to $1.6 million in 1995. As a percentage of net revenue, gross
margin increased from 28.7% in 1994 to 30.9% in 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 $357,000, or 33.4%, 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 23.1% in 1994 to 27.6% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $89,000, or
34.5%, from $258,000 in 1994 to $169,000 in 1995. As a percentage of net
revenue, income from operations decreased from 5.6% in 1994 to 3.3% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $1.2 million, or 33.6%, from $3.5
million in 1993 to $4.6 million in 1994. 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 $823,000, or 33.1%, from
$2.5 million in 1993 to $3.3 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 71.6% in 1993 to 71.3% in 1994.
Gross Margin/Profit. Gross margin increased $343,000, or 34.8%, from
$986,000 in 1993 to $1.3 million in 1994. As a percentage of net revenue, gross
margin increased from 28.4% in 1993 to 28.7% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $103,000, or 10.6%, from $968,000 in 1993 to
$1.1 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.9% in 1993 to 23.1% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $240,000, or
1,323.6%, from $18,000 in 1993 to $258,000 in 1994. As a percentage of net
revenue, income from operations increased from .5% in 1993 to 5.6% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Custom Air Conditioning, Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities................................... $ 179 $ 460 $ 279 $ 693 $ 345
Net cash used in investing activities.......... (81) (209) (190) (68) (151)
Net cash provided by (used in) financing
activities................................... (16) (299) (172) 23 47
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................. $ 82 $ (48) $ (83) $ 648 $ 241
===== ===== ===== ===== =====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Custom Air
Conditioning, Inc.: generated $1,262,000 in net cash from operating activities.
Cash used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
40
<PAGE> 42
GORDON'S SPECIALTY COMPANY, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ---------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue....................... $5,093 100.0% $4,604 100.0% $4,952 100.0% $3,777 100.0% $3,547 100.0%
Cost of Goods Sold................ 3,892 76.4% 3,289 71.4% 3,386 68.4% 2,649 70.1 2,449 69.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin...................... 1,202 23.6% 1,315 28.6% 1,566 31.6% 1,129 29.9 1,097 30.9
Selling, general and
administrative expenses......... 1,237 24.3% 1,296 28.1% 1,364 27.5% 993 26.3 699 19.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations..... $ (36) (0.7)% $ 19 0.4% $ 202 4.1% $ 135 3.6% $ 398 11.2%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue decreased $231,000, or 6.1%, from $3.8 million
for the nine months ended September 30, 1995 to $3.5 million for the nine months
ended September 30, 1996.
Cost of Goods Sold. Cost of goods sold decreased $199,000, or 7.5%, from
$2.6 million for the nine months ended September 30, 1995 to $2.4 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold decreased from 70.1% for the nine months ended September 30, 1995
to 69.1% for the nine months ended September 30, 1996. 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 remained relatively even at $1.1 million
for the nine months ended September 30, 1995 and September 30, 1996. As a
percentage of net revenue, gross margin increased from 29.9% for the nine months
ended September 30, 1995 to 30.9% for the nine months ended September 30, 1996.
The increase as a percentage of net revenue was primarily attributable to
increased emphasis on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $294,000, or 29.6%, from $993,000 for the nine
months ended September 30, 1995 to $699,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses decreased from 26.3% for the nine months ended September 30, 1995 to
19.7% for the nine months ended September 30, 1996.
Income (Loss) from Operations. Income from operations increased $263,000,
or 194.1%, from $135,000 for the nine months ended September 30, 1995 to
$398,000 for the nine months ended September 30, 1996. As a percentage of net
revenue, income from operations increased from 3.6% for the nine months ended
September 30, 1995 to 11.2% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $348,000, or 7.6%, from $4.6 million in
1994 to $5.0 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 $97,000, or 3.0%, from
$3.3 million in 1994 to $3.4 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 71.4% in 1994 to 68.4% 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 $251,000, or 19.1%, from $1.3
million in 1994 to $1.6 in 1995. As a percentage of net revenue, gross margin
increased from 28.6% in 1994 to 31.6% in 1995. The
41
<PAGE> 43
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 $68,000, or 5.2%, from $1.3 million in 1994 to
$1.4 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 28.1% in 1994 to 27.5% in 1995.
Income from Operations. Income from operations increased $183,000 from
$19,000 in 1994 to $202,000 in 1995. As a percentage of net revenue, income from
operations increased from .4% in 1994 to 4.1% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue decreased $489,000, or 9.6%, from $5.1 million in
1993 to $4.6 million in 1994.
Cost of Goods Sold. Cost of goods sold decreased $602,000, or 15.5%, from
$3.9 million, in 1993 to $3.3 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 76.4% in 1993 to 71.4% 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 $113,000, or 9.4%, from $1.2
million in 1993 to $1.3 million in 1994. As a percentage of net revenue, gross
margin increased from 23.6% in 1993 to 28.6% in 1994. The increase as a
percentage of net revenue was primarily attributable to increased emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $58,000, or 4.7%, from $1.2 million in 1993 to
$1.3 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 24.3% in 1993 to 28.1% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $55,000, or
153.8%, from $(36,000) in 1993 to $19,000 in 1994. As a percentage of net
revenue, income from operations increased from (.7%) in 1993 to .4% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Gordon's Specialty Company, Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating
activities................................... $ (90) $ 435 $ 178 $ 634 599
Net cash used in investing activities.......... (388) (12) (578) (575) (142
Net cash provided by (used in) financing
activities................................... -- -- -- -- --
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................. $(478) $ 423 $(400) $ 59 457
===== ===== ===== ===== =====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Gordon's
Specialty Company, Inc. generated $1,122,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
42
<PAGE> 44
DIAL ONE SERVICE CHAMPIONS, ET AL.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $5,811 100.0% $5,338 100.0% $4,887 100.0% $3,721 100.0% $4,097 100.0%
Cost of Goods Sold.................. 4,020 69.2 3,597 67.4 3,318 67.9 2,488 66.9 2,608 63.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin........................ 1,791 30.8 1,742 32.6 1,570 32.1 1,233 33.1 1,489 36.3
Selling, general and
administrative.................... 1,515 26.1 1,547 29.0 1,425 29.2 1,032 27.7 1,177 28.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $ 276 4.8% $ 195 3.7% $ 145 3.0% $ 200 5.4% $ 312 7.6%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased $376,000, or 10.1%, from $3.7 million
for the nine months ended September 30, 1995 to $4.1 million for the nine months
ended September 30, 1996. Management believes that the increase in net revenue
was primarily attributable to continued focus on the promotion of service
contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $120,000, or 4.8%, from
$2.5 million for the nine months ended September 30, 1995 to $2.6 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold decreased from 66.9% for the nine months ended September 30, 1995
to 63.7% for the nine months ended September 30, 1996. 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 $256,000, or 20.8%, from $1.2
million for the nine months ended September 30, 1995 to $1.5 million for the
nine months ended September 30, 1996. As a percentage of net revenue, gross
margin increased from 33.1% for the nine months ended September 30, 1995 to
36.3% for the nine months ended September 30, 1996. 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 $144,000, or 14.0%, from $1.0 million for the
nine months ended September 30, 1995 to $1.2 million for the nine months ended
September 30, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 27.7% for the nine months ended September
30, 1995 to 28.7% for the nine months ended September 30, 1996. The increase as
a percentage of net revenue was primarily attributable to increased compensation
expense.
Income from Operations. Income from operations increased $112,000, or
55.8%, from $200,000 for the nine months ended September 30, 1995 to $312,000
for the nine months ended September 30, 1996. As a percentage of net revenue,
income from operations increased from 5.4% for the nine months ended September
30, 1995 to 7.6% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue decreased $451,000, or 8.4%, from $5.3 million in
1994 to $4.9 million in 1995.
Cost of Goods Sold. Cost of goods sold decreased $279,000, or 7.8%, from
$3.6 million in 1994 to $3.3 million in 1995. As a percentage of net revenue,
cost of goods sold increased from 67.4% in 1994 to 67.9% in 1995
Gross Margin/Profit. Gross margin decreased $172,000, or 9.9%, from $1.7
million in 1994 to $1.5 million in 1995. As a percentage of net revenue, gross
margin decreased from 32.6% in 1994 to 32.1% in 1995.
43
<PAGE> 45
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $122,000, or 7.9%, from $1.5 million in 1994
to $1.4 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 29.0% in 1994 to 29.2% in 1995.
Income from Operations. Income from operations decreased $50,000, or
25.6%, from $195,000 in 1994 to $145,000 in 1995. As a percentage of net
revenue, income from operations decreased from 3.7% in 1994 to 3.0% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue decreased $473,000, or 8.1%, from $5.8 million in
1993 to $5.3 million in 1994.
Cost of Goods Sold. Cost of goods sold decreased $423,000, or 10.5%, from
$4.0 million in 1993 to $3.6 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 69.2% in 1993 to 67.4% 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 decreased $50,000, or 2.8%, from $1.8
million in 1993 to $1.7 million in 1994. As a percentage of net revenue, gross
margin increased from 30.8% in 1993 to 32.6% in 1994. The increase as a
percentage of net revenue was primarily attributable to increased emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively even at $1.5 million 1993 and 1994.
As a percentage of net revenue, selling, general and administrative expenses
increased from 26.1% in 1993 to 29.0% in 1994. The increase as a percentage of
net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations decreased $81,000, or
29.3%, from $276,000 in 1993 to $195,000 in 1994. As a percentage of net
revenue, income from operations decreased from 4.8% in 1993 to 3.7% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Dial One Service Champions, ET AL.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities..................................... $ 339 $ 401 $ 405 $ 326 $ 293
Net cash provided by (used in) investing
activities..................................... (210) (474) 135 (159) (174)
Net cash provided by (used in) financing
activities..................................... 40 (90) (386) (27) (18)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................... $ 169 $(163) $ 154 $ 140 $ 101
===== ===== ===== ===== =====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Dial One
Service Champions, ET AL. generated $1,438,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
44
<PAGE> 46
COMFORTECH, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER
YEAR ENDED MARCH 31, 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue................................. $4,325 100.0% $4,363 100.0% $4,538 100.0% $2,682 100.0% $3,073 100.0%
Cost of Goods Sold.......................... 3,093 71.5 3,109 71.3 3,200 70.5 1,821 67.9 2,068 67.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin................................ 1,233 28.5 1,254 28.7 1,338 29.5 861 32.1 1,005 32.7
Selling, general and administrative
expenses.................................. 1,098 25.4 1,156 26.5 1,212 26.7 584 21.8 583 19.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations...................... $ 135 3.1% $ 97 2.2% $ 126 2.8% $ 277 10.3% $ 422 13.7%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Net Revenue. Net revenue increased $391,000, or 14.6%, from $2.7 million
for the six months ended September 30, 1995 to $3.1 million for the six months
ended September 30, 1996. Management believes that the increase in net revenue
was primarily attributable to continued focus on the promotion of service
contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $246,000, or 13.5%, from
$1.8 million for the six months ended September 30, 1995 to $2.1 million for the
six months ended September 30, 1996. As a percentage of net revenue, cost of
goods sold decreased from 67.9% for the six months ended September 30, 1995 to
67.3% for the six months ended September 30, 1996.
Gross Margin/Profit. Gross margin increased $144,000, or 16.8%, from
$861,000 for the six months ended September 30, 1995 to $1.0 million for the six
months ended September 30, 1996. As a percentage of net revenue, gross margin
increased from 32.1% for the six months ended September 30, 1995 to 32.7% for
the six months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained even at $583,000 for the six months ended
September 30, 1995 and for the six months ended September 30, 1996. As a
percentage of net revenue, selling, general and administrative expenses
decreased from 21.8% for the six months ended September 30, 1995 to 19.0% for
the six months ended September 30, 1996. The decrease as a percentage of net
revenue was primarily attributable to increased net revenue.
Income from Operations. Income from operations increased $144,000, or
52.1%, from $277,000 for the six months ended September 30, 1995 to $422,000 for
the six months ended September 30, 1996. As a percentage of net revenue, income
from operations increased from 10.3% for the six months ended September 30, 1995
to 13.7% for the six months ended September 30, 1996.
Year Ended March 31, 1996 Compared to March 31, 1995
Net Revenue. Net revenue increased $176,000, or 4.0%, from $4.4 million in
1995 to $4.5 million in 1996. 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 $91,000, or 2.9%, from
$3.1 million in 1995 to $3.2 million in 1996. As a percentage of net revenue,
cost of goods sold decreased from 71.3% in 1995 to 70.5% in 1996. 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 $85,000, or 6.7%, from $1.3
million in 1995 to $1.3 million in 1996. As a percentage of net revenue, gross
margin increased from 28.7% in 1995 to 29.5% in 1996.
45
<PAGE> 47
The increase as a percentage of net revenue was primarily attributable to
increased emphasis on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $56,000, or 4.8%, from $1.1 million in 1995 to
$1.2 million in 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 26.5% in 1995 to 26.7% in 1996.
Income from Operations. Income from operations increased $28,000, or
29.2%, from $97,000 in 1995 to $126,000 in 1996. As a percentage of net revenue,
income from operations increased from 2.2% in 1995 to 2.8% in 1996.
Year Ended March 31, 1995 Compared to March 31, 1994
Net Revenue. Net revenue increased $37,000, or .9%, from $4.3 million in
1994 to $4.4 million in 1995.
Cost of Goods Sold. Cost of goods sold was relatively even at $3.1 million
in 1994 and in 1995. As a percentage of net revenue, cost of goods sold
decreased from 71.5% in 1994 to 71.3% in 1995.
Gross Margin/Profit. Gross margin was relatively even at $1.2 million in
1994 and in 1995. As a percentage of net revenue, gross margin increased from
28.5% in 1994 to 28.7% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $58,000, or 5.3%, from $1.1 million in 1994 to
$1.2 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 25.4% in 1994 to 26.5% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $38,000, or
27.9%, from $135,000 in 1994 to $97,000 in 1995. As a percentage of net revenue,
income from operations decreased from 3.1% in 1994 to 2.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Comfortech, Inc.:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------- --------------
1994 1995 1996 1995 1996
---- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $104 $ 25 $ 193 $335 $ 197
Net cash used in investing activities.............. (77) (124) (124) (89) (145)
Net cash provided by (used in) financing
activities....................................... (91) (2) (105) (60) 70
---- ----- ----- ---- -----
Increase (decrease) in cash and cash equivalents... $(64) $(101) $ (36) $186 $ 122
==== ===== ===== ==== =====
</TABLE>
From 1994 through the six months ended September 30, 1996, Comfortech, Inc.
generated $519,000 in net cash from operating activities. Cash used in investing
activities was primarily attributable to the purchase and replacement of service
and delivery trucks.
46
<PAGE> 48
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue.......................... $3,500 100.0% $3,780 100.0% $4,333 100.0%
Cost of Goods Sold................... 2,682 76.6 2,760 73.0 3,057 70.5
------ ------ ------ ------ ------ ------
Gross Margin......................... 818 23.4 1,020 27.0 1,276 29.5
Selling, general and administrative
expenses........................... 655 18.7 979 25.9 1,223 28.2
------ ------ ------ ------ ------ ------
Income from operations............... $ 163 4.7% $ 41 1.1% $ 53 1.2%
====== ====== ====== ====== ====== ======
</TABLE>
Year Ended September 30, 1996 Compared to September 30, 1995
Net Revenue. Net revenue increased $553,000, or 14.6%, from $3.8 million
in 1995 to $4.3 million in 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $297,000, or 10.8%, from
$2.8 million in 1995 to $3.1 million in 1996. As a percentage of net revenue,
cost of goods sold decreased from 73.0% in 1995 to 70.5% in 1996. 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 $256,000, or 25.1%, from $1.0
million in 1995 to $1.3 million in 1996. As a percentage of net revenue, gross
margin increased from 27.0% in 1995 to 29.5% in 1996. 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 $244,000, or 24.9%, from $1.0 million in 1995
to $1.2 million in 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 25.9% in 1995 to 28.2% in 1996. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $12,000, or
28.2%, from $41,000 in 1995 to $53,000 in 1996. As a percentage of net revenue,
income from operations increased from 1.1% in 1995 to 1.2% in 1996.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994
Net Revenue. Net revenue increased $280,000, or 8.0%, from $3.5 million in
1994 to $3.8 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 $78,000, or 2.9%, from
$2.7 million in 1994 to $2.8 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 76.6% in 1994 to 73.0% 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 $202,000, or 24.7%, from
$818,000 in 1994 to $1.0 million in 1995. As a percentage of net revenue, gross
margin increased from 23.4% in 1994 to 27.0% in 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.
47
<PAGE> 49
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $324,000, or 49.4%, from $655,000 in 1994 to
$1.0 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 18.7% in 1994 to 25.9% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $122,000, or
74.7%, from $163,000 in 1994 to $41,000 in 1995. As a percentage of net revenue,
income from operations decreased from 4.7% in 1994 to 1.1% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Air-Conditioning and Heating Unlimited, Inc.:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Net cash flow provided by (used in) operating
activities.......................................... $ 188 $ 105 $ (33)
Net cash used in investing activities................. (61) (36) (141)
Net cash used in financing activities................. (18) (39) (23)
------- ------- -------
Increase (decrease) in cash and cash equivalents...... $ 109 $ 30 $ (197)
======= ======= =======
</TABLE>
From 1994 through the year ended September 30, 1996, Air-Conditioning and
Heating Unlimited, Inc. generated $260,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
48
<PAGE> 50
THE 1589 NIAGARA STREET CORPORATION
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue........................... $2,463 100.0% $2,914 100.0% $3,785 100.0%
Cost of Goods Sold.................... 1,758 71.4 2,058 70.6 2,301 60.8
------ ----- ------ ----- ------ -----
Gross Margin.......................... 705 28.6 855 29.4 1,484 39.2
Selling, general and administrative
expenses............................ 703 28.5 774 26.6 1,273 33.6
------ ----- ------ ----- ------ -----
Income from operations................ $ 2 0.1% $ 82 2.8% $ 211 5.6%
====== ===== ====== ===== ====== =====
</TABLE>
Year Ended August 31, 1996 Compared to August 31, 1995
Net Revenue. Net revenue increased $872,000, or 29.9%, from $2.9 million
in 1995 to $3.8 million in 1996. Management believes that the increase in net
revenues was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $243,000, or 11.8%, from
$2.1 million in 1995 to $2.3 million in 1996. As a percentage of net revenue,
cost of goods sold decreased from 70.6% in 1995 to 60.8% in 1996. 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 $629,000, or 73.5%, from
$855,000 in 1995 to $1.5 million in 1996. As a percentage of net revenue, gross
margin increased from 29.4% in 1995 to 39.2% in 1996. 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 $499,000, or 64.5%, from $774,000 in 1995 to
$1.3 million in 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 26.6% in 1995 to 33.6% in 1996. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $130,000, or
158.6%, from $82,000 in 1995 to $211,000 in 1996. As a percentage of net
revenue, income from operations increased from 2.8% in 1995 to 5.6% in 1996.
Year Ended August 31, 1995 Compared to August 31, 1994
Net Revenue. Net revenue increased $451,000, or 18.3%, from $2.5 million
in 1994 to $2.9 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 $300,000, or 17.1%, from
$1.8 million in 1994 to $2.1 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 71.4% in 1994 to 70.6% 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 $150,000, or 21.3%, from
$705,000 in 1994 to $855,000 in 1995. As a percentage of net revenue, gross
margin increased from 28.6% in 1994 to 29.4% in 1995. The
49
<PAGE> 51
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 $71,000, or 10.0%, from $703,000 in 1994 to
$774,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 28.5% in 1994 to 26.6% in 1995. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $80,000, or
4,125.4%, from $2,000 in 1994 to $82,000 in 1995. As a percentage of net
revenue, income from operations increased from .1% in 1994 to 2.8% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of The 1589 Niagara Street Corporation:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net cash flow provided by (used in) operating activities....... $ 212 $ 111 $ 240
Net cash used in investing activities.......................... (72) (196) (205)
Net cash provided by (used in) financing activities............ (91) 71 28
----- ----- -----
Increase (decrease) in cash and cash equivalents............... $ 49 $ (14) $ 63
===== ===== =====
</TABLE>
For the three years ended August 31, 1996, The 1589 Niagara Street
Corporation generated $563,000 in net cash from operating activities. Cash used
in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
50
<PAGE> 52
HVAC DIVISION OF PAUL E. SMITH CO., INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $2,536 100.0% $2,605 100.0% $3,584 100.0% $1,920 100.0% $1,694 100.0%
Cost of Goods Sold.................. 2,237 88.2 2,187 84.0 3,089 86.2 1,619 84.3 1,444 85.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin........................ 299 11.8 418 16.0 495 13.8 301 15.7 249 14.7
Selling, general and administrative
expenses.......................... 355 14.0 368 14.1 489 13.7 254 13.2 214 12.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations....... $ (56) (2.2)% $ 50 1.9% $ 6 0.2% $ 47 2.4% $ 35 2.1%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Net Revenue. Net revenue decreased $226,000, or 11.8%, from $1.9 million
for the six months ended September 30, 1995 to $1.7 million for the six months
ended September 30, 1996.
Cost of Goods Sold. Cost of goods sold decreased $175,000, or 10.8%, from
$1.6 million for the six months ended September 30, 1995 to $1.4 million for the
six months ended September 30, 1996. As a percentage of net revenue, cost of
goods sold increased from 84.3% for the six months ended September 30, 1995 to
85.3% for the six months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin decreased $51,000, or 17.1%, from
$301,000 for the six months ended September 30, 1995 to $249,000 for the six
months ended September 30, 1996. As a percentage of net revenue, gross margin
decreased from 15.7% for the six months ended September 30, 1995 to 14.7% for
the six months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $40,000, or 15.7%, from $254,000 for the six
months ended September 30, 1995 to $214,000 for the six months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses decreased from 13.2% for the six months ended September 30, 1995 to
12.6% for the six months ended September 30, 1996.
Income (Loss) from Operations. Income from operations decreased $12,000,
or 24.6%, from $47,000 for the six months ended September 30, 1995 to $35,000
for the six months ended September 30, 1996. As a percentage of net revenue,
income from operations decreased from 2.4% for the six months ended September
30, 1995 to 2.1% for the six months ended September 30, 1996.
Year Ended March 31, 1996 Compared to March 31, 1995
Net Revenue. Net revenue increased $980,000, or 37.6%, from $2.6 million
in 1995 to $3.6 million in 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $902,000, or 41.3%, from
$2.2 million in 1995 to $3.1 million in 1996. As a percentage of net revenue,
cost of goods sold increased from 84.0% in 1995 to 86.2% in 1996. The increase
as a percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin increased $77,000, or 18.5%, from
$418,000 in 1995 to $495,000 in 1996. As a percentage of net revenue, gross
margin decreased from 16.0% in 1995 to 13.8% in 1996.
51
<PAGE> 53
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $121,000, or 32.9%, from $368,000 in 1995 to
$489,000 in 1996. As a percentage of net revenue, selling, general and
administrative expenses decreased from 14.1% in 1995 to 13.7% in 1996. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations decreased $44,000, or
88.0%, from $50,000 in 1995 to $6,000 in 1996. As a percentage of net revenue,
income from operations decreased from 1.9% in 1995 to .2% in 1996.
Year Ended March 31, 1995 Compared to March 31, 1994
Net Revenue. Net revenue increased $68,000, or 2.7%, from $2.5 million in
1994 to $2.6 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 remained relatively even at $2.2
million in 1994 and in 1995. As a percentage of net revenue, cost of goods sold
decreased from 88.2% in 1994 to 84.0% in 1995. 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 $119,000, or 39.9%, from
$299,000 in 1994 to $418,000 in 1995. As a percentage of net revenue, gross
margin increased from 11.8% in 1994 to 16.0% in 1995. The increase as a
percentage of net revenue was primarily attributable to increased emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $13,000, or 3.7%, from $355,000 in 1994 to
$368,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 14.0% in 1994 to 14.1% in 1995.
Income from Operations. Income from operations increased $106,000 from
($56,000) in 1994 to $50,000 in 1995. As a percentage of net revenue, income
from operations increased from (2.2)% in 1994 to 1.9% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of HVAC Division of Paul E. Smith Co., Inc.:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------- ---------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities................................... $ 214 $ 215 $ 57 $ 80 $ 149
Net cash used in investing activities.......... (28) (92) (93) (37)
Net cash provided by (used in) financing
activities................................... (186) (123) 36 (43) (149)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................. $ -- $ -- $ -- $ -- $ --
===== ===== ===== ===== =====
</TABLE>
From 1994 through the six months ended September 30, 1996, HVAC Division of
Paul E. Smith Co., Inc. generated $635,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
52
<PAGE> 54
FRESCHI AIR SYSTEMS, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ----------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue...................... $2,575 100.0% $3,256 100.0% $3,254 100.0% $2,432 100.0% $3,336 100.0%
Cost of Goods Sold............... 1,950 75.7 2,445 75.1 2,223 68.3 1,688 69.4 2,025 60.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin..................... 625 24.3 812 24.9 1,031 31.7 744 30.6 1,312 39.3
Selling, general and
administrative
expenses....................... 707 27.5 867 26.6 1,142 35.1 811 33.3 913 27.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations.... $ (82) (3.2)% $ (55) (1.7)% $ (111) (3.4)% $ (66) (2.7)% $ 399 12.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased $904,000, or 37.2%, from $2.4 million
for the nine months ended September 30, 1995 to $3.3 million for the nine months
ended September 30, 1996. Management believes that the increase in net revenue
was primarily attributable to continued focus on the promotion of service
contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $337,000, or 19.9%, from
$1.7 million for the nine months ended September 30, 1995 to $2.0 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold decreased from 69.4% for the nine months ended September 30, 1995
to 60.7% for the nine months ended September 30, 1996. 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 $568,000, or 76.3%, from
$744,000 for the nine months ended September 30, 1995 to $1.3 million for the
nine months ended September 30, 1996. As a percentage of net revenue, gross
margin increased from 30.6% for the nine months ended September 30, 1995 to
39.3% for the nine months ended September 30, 1996. 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 $102,000, or 12.6%, from $811,000 for the nine
months ended September 30, 1995 to $913,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses decreased from 33.3% for the nine months ended September 30, 1995 to
27.3% for the nine months ended September 30, 1996. The decrease as a percentage
of net revenue was primarily attributable to increased net revenue.
Income (Loss) from Operations. Income from operations increased $466,000,
or 700.6%, from $(66,000) for the nine months ended September 30, 1995 to
$399,000 for the nine months ended September 30, 1996. As a percentage of net
revenue, income from operations increased from (2.7)% for the nine months ended
September 30, 1995 to 12.0% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue remained relatively even at $3.3 million in 1994
and in 1995.
Cost of Goods Sold. Cost of goods sold decreased $222,000, or 9.1%, from
$2.4 million in 1994 to $2.2 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 75.1% in 1994 to 68.3% in 1995. 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 $220,000, or 27.1%, from
$812,000 in 1994 to $1.0 million in 1995. As a percentage of net revenue, gross
margin increased from 24.9% in 1994 to 31.7% in 1995. The
53
<PAGE> 55
increase as a percentage of net revenue was primarily attributable to increased
emphasis on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $275,000, or 31.8%, from $867,000 in 1994 to
$1.1 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 26.6% in 1994 to 35.1% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income (Loss) from Operations. Income from operations decreased $(56,000),
or 101.6%, from $(55,000) in 1994 to $(111,000) in 1995. As a percentage of net
revenue, income from operations decreased from (1.7)% in 1994 to (3.4)% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $681,000, or 26.5%, from $2.6 million
in 1993 to $3.3 million in 1994. 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 $495,000, or 25.4%, from
$2.0 million in 1993 to $2.4 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 75.7% in 1993 to 75.1% in 1994.
Gross Margin/Profit. Gross margin increased $186,000, or 29.8%, from
$625,000 in 1993 to $812,000 in 1994. As a percentage of net revenue, gross
margin increased from 24.3% in 1993 to 24.9% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $159,000, or 22.5%, from $707,000 in 1993 to
$867,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.5% in 1993 to 26.6% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income (Loss) from Operations. Income from operations increased $27,000
from $(82,000) in 1993 to $(55,000) in 1994. As a percentage of net revenue,
income from operations increased from (3.2)% in 1993 to (1.7)% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Freschi Air Systems, Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1996
------------------ -------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating
activities.......................................... $ 50 $(5 ) $ 54 $ 42 $420
Net cash used in investing activities................. (34) (5 ) (30) (3) (99)
Net cash provided by (used in) financing activities... 15 10 (42) (27) 21
---- --- ---- ---- ----
Increase (decrease) in cash and cash equivalents...... $ 31 $-- $(18) $ 12 $342
==== === ==== ==== ====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Freschi Air
Systems, Inc. generated $519,000 in net cash from operating activities. Cash
used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
54
<PAGE> 56
PARKER HEATING & AIR CONDITIONING, INCORPORATED
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue................. $2,207 100.0% $2,790 100.0% $2,905 100.0% $2,255 100.0% $2,334 100.0%
Cost of Goods Sold.......... 1,248 56.6 1,508 54.1 1,635 56.3 1,230 54.5 1,300 55.7
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin................ 959 43.4 1,281 45.9 1,270 43.7 1,026 45.5 1,035 44.3
Selling, general and
administrative expenses... 892 40.4 1,101 39.5 1,215 41.8 864 38.3 899 38.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations...... $ 67 3.0% $ 180 6.5% $ 54 1.9% $ 161 7.2% $ 135 5.8%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue remained relatively unchanged at $2.3 million for
the nine months ended September 30, 1995 and for the nine months ended September
30, 1996.
Cost of Goods Sold. Cost of goods sold increased $70,000, or 5.7%, from
$1.2 million for the nine months ended September 30, 1995 to $1.3 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold increased from 54.5% for the nine months ended September 30, 1995
to 55.7% for the nine months ended September 30, 1996. The increase as a
percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin remained relatively unchanged at $1.0
million for the nine months ended September 30, 1995 and for the nine months
ended September 30, 1996. As a percentage of net revenue, gross margin decreased
from 45.5% for the nine months ended September 30, 1995 to 44.3% for the nine
months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $35,000, or 4.0%, from $864,000 for the nine
months ended September 30, 1995 to $899,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 38.3% for the nine months ended September 30, 1995 to
38.5% for the nine months ended September 30, 1996.
Income from Operations. Income from operations decreased $26,000, or
16.2%, from $161,000 for the nine months ended September 30, 1995 to $135,000
for the nine months ended September 30, 1996. As a percentage of net revenue,
income from operations decreased from 7.2% for the nine months ended September
30, 1995 to 5.8% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $115,000, or 4.1%, from $2.8 million in
1994 to $2.9 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 $127,000, or 8.4%, from
$1.5 million in 1994 to $1.6 million in 1995. As a percentage of net revenue,
cost of goods sold increased from 54.1% in 1994 to 56.3% in 1995. The increase
as a percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin remained relatively unchanged at $1.3
million in 1994 and in 1995. As a percentage of net revenue, gross margin
decreased from 45.9% in 1994 to 43.7% in 1995.
55
<PAGE> 57
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $114,000, or 10.4%, from $1.1 million in 1994
to $1.2 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 39.5% in 1994 to 41.8% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $126,000, or
69.8%, from $180,000 in 1994 to $54,000 in 1995. As a percentage of net revenue,
income from operations decreased from 6.5% in 1994 to 1.9% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $582,000, or 26.4%, from $2.2 million
in 1993 to $2.8 million in 1994. 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 $260,000, or 20.8%, from
$1.2 million in 1993 to $1.5 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 56.6% in 1993 to 54.1% in 1994. 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 $322,000, or 33.6%, from $1.0
million in 1993 to $1.3 million in 1994. As a percentage of net revenue, gross
margin increased from 43.4% in 1993 to 45.9% in 1994. 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 $209,000, or 23.4%, from $892,000 in 1993 to
$1.1 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 40.4% in 1993 to 39.5% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $113,000, or
169.6%, from $67,000 in 1993 to $180,000 in 1994. As a percentage of net
revenue, income from operations increased from 3.0% in 1993 to 6.5% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Parker Heating & Air Conditioning, Incorporated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating
activities.................................. $ 58 $ 159 $ 53 $ 53 $ 111
Net cash used in investing activities......... (3) (39) (22) (25) --
Net cash provided by (used in) financing
activities.................................. (61) (75) (81) (65) 84
------ ------ ------ ------ ------
Increase (decrease) in cash and cash
equivalents................................. $ (6) $ 45 $ (50) $ (37) $ 27
====== ====== ====== ====== ======
</TABLE>
From 1993 through the nine months ended September 30, 1996, Parker Heating
& Air Conditioning, Incorporated generated $381,000 in net cash from operating
activities. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
56
<PAGE> 58
B.W. HEATING & COOLING, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JANUARY 31, SEPTEMBER 30,
------------------------------------------------ -------------------------------
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $1,411 100.0% $2,170 100.0% $2,796 100.0% $1,618 100.0% $2,471 100.0%
Cost of Goods Sold.................. 897 63.6 1,407 64.8 1,772 63.4 974 60.2 1,462 59.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin........................ 513 36.4 763 35.2 1,024 36.6 644 39.8 1,010 40.9
Selling, general and
administrative.................... 468 33.2 701 32.3 975 34.9 577 35.7 694 28.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $ 45 3.2% $ 62 2.9% $ 50 1.8% $ 67 4.1% $ 315 12.8%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Eight Months Ended September 30, 1996 Compared to Eight Months Ended September
30, 1995
Net Revenue. Net revenue increased $853,000, or 52.7%, from $1.7 million
for the eight months ended September 30, 1995 to $2.5 million for the eight
months ended September 30, 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $488,000, or 50.1%, from
$1.0 million for the eight months ended September 30, 1995 to $1.5 million for
the eight months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold decreased from 60.2% for the eight months ended September 30, 1995
to 59.1% for the eight months ended September 30, 1996. 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 $365,000, or 56.7%, from
$644,000 for the eight months ended September 30, 1995 to $1.0 million for the
eight months ended September 30, 1996. As a percentage of net revenue, gross
margin increased from 39.8% for the eight months ended September 30, 1995 to
40.9% for the eight months ended September 30, 1996. 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 $117,000, or 20.3%, from $577,000 for the
eight months ended September 30, 1995 to $694,000 for the eight months ended
September 30, 1996. As a percentage of net revenue, selling, general and
administrative expenses decreased from 35.7% for the eight months ended
September 30, 1995 to 28.1% for the eight months ended September 30, 1996. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $248,000, or
369.6%, from $67,000 for the eight months ended September 30, 1995 to $315,000
for the eight months ended September 30, 1996. As a percentage of net revenue,
income from operations increased from 4.1% for the eight months ended September
30, 1995 to 12.8% for the eight months ended September 30, 1996.
Year Ended January 31, 1996 Compared to January 31, 1995
Net Revenue. Net revenue increased $626,000, or 28.8%, from $2.2 million
in 1995 to $2.8 million in 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $364,000, or 25.9%, from
$1.4 million in 1995 to $1.8 million in 1996. As a percentage of net revenue,
cost of goods sold decreased from 64.8% in 1995 to 63.4% in
57
<PAGE> 59
1996. 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 $261,000, or 34.2%, from
$763,000 in 1995 to $1.0 million in 1996. As a percentage of net revenue, gross
margin increased from 35.2% in 1995 to 36.6% in 1996. 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 $274,000, or 39.0%, from $701,000 in 1995 to
$975,000 in 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 32.3% in 1995 to 34.9% in 1996. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $12,000, or
20.0%, from $62,000 in 1995 to $50,000 in 1996. As a percentage of net revenue,
income from operations decreased from 2.9% in 1995 to 1.8% in 1996.
Year Ended January 31, 1995 Compared to January 31, 1994
Net Revenue. Net revenue increased $760,000, or 53.9%, from $1.4 million
in 1994 to $2.2 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 $510,000, or 56.8%, from
$897,000 in 1994 to $1.4 million in 1995. As a percentage of net revenue, cost
of goods sold increased from 63.6% in 1994 to 64.8% in 1995. The increase as a
percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin increased $250,000, or 48.8%, from
$513,000 in 1994 to $763,000 in 1995. As a percentage of net revenue, gross
margin decreased from 36.4% in 1994 to 35.2% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $233,000, or 49.7%, from $468,000 in 1994 to
$701,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 33.2% in 1994 to 32.3% in 1995. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $17,000, or
38.7%, from $45,000 in 1994 to $62,000 in 1995. As a percentage of net revenue,
income from operations decreased from 3.2% in 1994 to 2.9% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of B.W. Heating & Cooling, Inc.:
<TABLE>
<CAPTION>
EIGHT MONTHS
YEAR ENDED JANUARY ENDED
31, SEPTEMBER 30,
--------------------- -------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities... $ 148 $ 148 $ 172 $ 65 $ 239
Net cash used in investing activities............ (12) (26) (18) (2) (63)
Net cash used in financing activities............ (120) (69) (43) (5) (42)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................... $ 16 $ 53 $ 111 $ 58 $ 134
===== ===== ===== ===== =====
</TABLE>
From 1994 through the eight months ended September 30, 1996, B.W. Heating &
Cooling, Inc. generated $707,000 in net cash from operating activities. Cash
used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
58
<PAGE> 60
B & B AIR CONDITIONING, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ---------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue....................... $2,056 100.0% $2,160 100.0% $2,557 100.0% $1,949 100.0% $1,928 100.0%
Cost of Goods Sold................ 1,278 62.2 1,258 58.2 1,532 59.9 1,363 69.9 1,174 60.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin...................... 778 37.8 902 41.8 1,025 40.1 586 30.1 754 39.1
Selling, general and
administrative expenses......... 686 33.4 819 37.9 948 37.1 560 28.7 736 38.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations............ $ 92 4.5% $ 84 3.9% $ 78 3.0% $ 26 1.4% $ 18 0.9%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue remained relatively even at $1.9 million for the
nine months ended September 30, 1995 and for the nine months ended September 30,
1996.
Cost of Goods Sold. Cost of goods sold decreased $189,000, or 13.8%, from
$1.4 million for the nine months ended September 30, 1995 to $1.2 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold decreased from 69.9% for the nine months ended September 30, 1995
to 60.9% for the nine months ended September 30, 1996. 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 $168,000, or 28.7%, from
$586,000 for the nine months ended September 30, 1995 to $754,000 for the nine
months ended September 30, 1996. As a percentage of net revenue, gross margin
increased from 30.1% for the nine months ended September 30, 1995 to 39.1% for
the nine months ended September 30, 1996. The increase as a percentage of net
revenue was primarily attributable to increased emphasis on higher margin
products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $176,000, or 31.5%, from $560,000 for the nine
months ended September 30, 1995 to $736,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 28.7% for the nine months ended September 30, 1995 to
38.2% for the nine months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations decreased $8,000, or 31.6%,
from $26,000 for the nine months ended September 30, 1995 to $18,000 for the
nine months ended September 30, 1996. As a percentage of net revenue, income
from operations decreased from 1.4% for the nine months ended September 30, 1995
to .9% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $397,000, or 18.4%, from $2.2 million
in 1994 to $2.6 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 $274,000, or 21.8%, from
$1.3 million in 1994 to $1.5 million in 1995. As a percentage of net revenue,
cost of goods sold increased from 58.2% in 1994 to 59.9% in 1995. The increase
as a percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin increased $123,000, or 13.6%, from
$902,000 in 1994 to $1.0 million in 1995. As a percentage of net revenue, gross
margin decreased from 41.8% in 1994 to 40.1% in 1995.
59
<PAGE> 61
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $129,000, or 15.7%, from $819,000 in 1994 to
$948,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 37.9% in 1994 to 37.1% in 1995. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations decreased $6,000, or 7.1%,
from $84,000 in 1994 to $78,000 in 1995. As a percentage of net revenue, income
from operations decreased from 3.9% in 1994 to 3.0% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $104,000, or 5.1%, from $2.1 million in
1993 to $2.2 million in 1994. The increase in net revenue was primarily
attributable to promotion of service contracts and increased advertising.
Cost of Goods Sold. Cost of goods sold remained relatively even at $1.3
million in 1993 and in 1994. As a percentage of net revenue, cost of goods sold
decreased from 62.2% in 1993 to 58.2% in 1994. 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 $125,000, or 16.0%, from
$778,000 in 1993 to $902,000 in 1994. As a percentage of net revenue, gross
margin increased from 37.8% in 1993 to 41.8% in 1994. 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 $133,000, or 19.4%, from $686,000 in 1993 to
$819,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 33.4% in 1993 to 37.9% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $8,000, or 9.1%,
from $92,000 in 1993 to $84,000 in 1994. As a percentage of net revenue, income
from operations decreased from 4.5% in 1993 to 3.9% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of B & B Air Conditioning, Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ ------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities................ $ 41 $ 59 $109 $ 42 $ 20
Net cash used in investing activities......................... (30) (65) (48) (48) (89)
Net cash used in financing activities......................... (10) (17) (14) (12) 63
---- ---- ---- ---- ----
Increase (decrease) in cash and cash equivalents.............. $ 1 $(23) $(47) $(18) $ (6)
==== ==== ==== ==== ====
</TABLE>
From 1993 through the nine months ended September 30, 1996, B & B Air
Conditioning, Inc. generated $229,000 in net cash from operating activities.
Cash used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
60
<PAGE> 62
SYLVESTER'S CORP.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------- ---------------------------------
1994 1995 1996 1995 1996
-------------- -------------- -------------- -------------- --------------
% % % % %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $1,763 100.0% $2,400 100.0% $2,488 100.0% $1,270 100.0% $1,187 100.0%
Cost of Goods Sold.................. 1,367 77.5 1,416 59.0 1,632 65.6 834 65.7 746 62.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin........................ 396 22.5 984 41.0 856 34.4 436 34.3 441 37.1
Selling, general and administrative
expenses.......................... 292 16.6 769 32.0 684 27.5 300 23.6 295 24.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $ 104 5.9% $ 215 9.0% $ 172 6.9% $ 136 10.7% $ 146 12.3%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Net Revenue. Net revenue decreased $83,000, or 6.6%, from $1.3 million for
the six months ended September 30, 1995 to $1.2 million for the six months ended
September 30, 1996.
Cost of Goods Sold. Cost of goods sold decreased $87,000, or 10.5%, from
$834,000 for the six months ended September 30, 1995 to $746,000 for the six
months ended September 30, 1996. As a percentage of net revenue, cost of goods
sold decreased from 65.7% for the six months ended September 30, 1995 to 62.9%
for the six months ended September 30, 1996. 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 $4,000, or .9%, from $436,000
for the six months ended September 30, 1995 to $441,000 for the six months ended
September 30, 1996. As a percentage of net revenue, gross margin increased from
34.3% for the six months ended September 30, 1995 to 37.1% for the six months
ended September 30, 1996. The increase as a percentage of net revenue was
primarily attributable to increased emphasis on higher margin products and
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $6,000, or 1.9%, from $300,000 for the six
months ended September 30, 1995 to $295,000 for the six months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 23.6% for the six months ended September 30, 1995 to
24.8% for the six months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations increased $10,000, or 7.0%,
from $136,000 for the six months ended September 30, 1995 to $146,000 for the
six months ended September 30, 1996. As a percentage of net revenue, income from
operations increased from 10.7% for the six months ended September 30, 1995 to
12.3% for the six months ended September 30, 1996.
Year Ended March 31, 1996 Compared to March 31, 1995
Net Revenue. Net revenue increased $88,000, or 3.6%, from $2.4 million in
1995 to $2.5 million in 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $216,000, or 15.2%, from
$1.4 million in 1995 to $1.6 million in 1996. As a percentage of net revenue,
cost of goods sold increased from 59.0% in 1995 to 65.6% in 1996. The increase
as a percentage of net revenue was primarily attributable to product mix.
61
<PAGE> 63
Gross Margin/Profit. Gross margin decreased $128,000, or 13.0%, from $1.0
million in 1995 to $856,000 in 1996. As a percentage of net revenue, gross
margin decreased from 41.0% in 1995 to 34.4% in 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $85,000, or 11.1%, from $769,000 in 1995 to
$684,000 in 1996. As a percentage of net revenue, selling, general and
administrative expenses decreased from 32.0% in 1995 to 27.5% in 1996. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations decreased $43,000, or
20.1%, from $215,000 in 1995 to $172,000 in 1996. As a percentage of net
revenue, income from operations decreased from 9.0% in 1995 to 6.9% in 1996.
Year Ended March 31, 1995 Compared to March 31, 1994
Net Revenue. Net revenue increased $637,000, or 36.1%, from $1.8 million
in 1994 to $2.4 million in 1995. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $49,000, or 3.6%, from
$1.4 million in 1994 to $1.4 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 77.5% in 1994 to 59.0% 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 $589,000, or 148.7%, from
$396,000 in 1994 to $1.0 million in 1995. As a percentage of net revenue, gross
margin increased from 22.5% in 1994 to 41.0% in 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 $477,000, or 163.8%, from $292,000 in 1994 to
$769,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 16.6% in 1994 to 32.0% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $111,000, or
106.5%, from $104,000 in 1994 to $215,000 in 1995. As a percentage of net
revenue, income from operations increased from 5.9% in 1994 to 9.0% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Sylvester's Corp.:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------- -------------
1994 1995 1996 1995 1996
---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities...... $112 $ 213 $ 191 $136 $123
Net cash provided by (used in) investing
activities........................................ (66) (108) (137) 2 7
Net cash provided by (used in) financing
activities........................................ 12 (102) (31) (15) (39)
---- ----- ----- ---- ----
Increase in cash and cash equivalents............... $ 58 $ 3 $ 23 $123 $ 91
==== ===== ===== ==== ====
</TABLE>
From 1994 through the six months ended September 30, 1996, Sylvester's
Corp. generated $639,000 in net cash from operating activities. Cash used in
investing activities was primarily attributable to the purchase and replacement
of service and delivery trucks.
62
<PAGE> 64
COMBINED AUTOMATED AIR, INC. AND BAUER 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 periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------- ------------------------------------
1993 1994 1995 1995 1996
-------------- ------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue.......... $1,735 100.0% $1,732 100% $2,472 100.0% $1,866 100.0% $2,060 100%
Cost of Goods Sold... 842 48.5 896 51.7 1,298 52.5 976 52.3 1,096 53.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin......... 893 51.5 837 48.3 1,174 47.5 890 47.7 964 46.8
Selling, general and
administrative
expenses........... 864 49.8 820 47.4 1,042 42.1 818 43.9 932 45.3
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from
operations......... $ 29 1.7% $ 16 .9% $ 133 5.4% $ 72 3.9% $ 31 1.5%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue increased $194,000, or 10.4%, from $1.9 million
for the nine months ended September 30, 1995 to $2.1 million for the nine months
ended September 30, 1996. Management believes that the increase in net revenue
was primarily attributable to continued focus on the promotion of service
contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $120,000, or 12.3%, from
$1.0 million for the nine months ended September 30, 1995 to $1.1 million for
the nine months ended September 30, 1996. As a percentage of net revenue, cost
of goods sold increased from 52.3% for the nine months ended September 30, 1995
to 53.2% for the nine months ended September 30, 1996. The increase as a
percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin increased $73,000, or 8.2%, from
$890,000 for the nine months ended September 30, 1995 to $1.0 million for the
nine months ended September 30, 1996. As a percentage of net revenue, gross
margin decreased from 47.7% for the nine months ended September 30, 1995 to
46.8% for the nine months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $114,000, or 13.9%, from $818,000 for the nine
months ended September 30, 1995 to $932,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 43.9% for the nine months ended September 30, 1995 to
45.3% for the nine months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations decreased $40,000, or
56.3%, from $72,000 for the nine months ended September 30, 1995 to $31,000 for
the nine months ended September 30, 1996. As a percentage of net revenue, income
from operations decreased from 3.9% for the nine months ended September 30, 1995
to 1.5% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $740,000, or 42.7%, from $1.7 million
in 1994 to $2.5 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 $402,000, or 44.9%, from
$896,000 in 1994 to $1.3 million in 1995. As a percentage of net revenue, cost
of goods sold increased from 51.7% in 1994 to 52.5% in 1995. The increase as a
percentage of net revenue was primarily attributable to product mix.
63
<PAGE> 65
Gross Margin/Profit. Gross margin increased $338,000, or 40.4%, from
$837,000 in 1994 to $1.2 million in 1995. As a percentage of net revenue, gross
margin decreased from 48.3% in 1994 to 47.5% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $221,000, or 27.0%, from $820,000 in 1994 to
$1.0 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 47.4% in 1994 to 42.1% in 1995. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $116,000, or
716.7%, from $16,000 in 1994 to $133,000 in 1995. As a percentage of net
revenue, income from operations increased from .9% in 1994 to 5.4% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue remained unchanged at $1.7 million in 1993 and in
1994.
Cost of Goods Sold. Cost of goods sold increased $53,000, or 6.3%, from
$842,000 in 1993 to $896,000 in 1994. As a percentage of net revenue, cost of
goods sold increased from 48.5% in 1993 to 51.7% in 1994. The increase as a
percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin decreased $56,000, or 6.3%, from
$893,000 in 1993 to $837,000 in 1994. As a percentage of net revenue, gross
margin decreased from 51.5% in 1993 to 48.3% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $43,000, or 5.0%, from $864,000 in 1993 to
$820,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 49.8% in 1993 to 47.4% in 1994.
Income from Operations. Income from operations decreased $13,000, or
44.7%, from $29,000 in 1993 to $16,000 in 1994. As a percentage of net revenue,
income from operations decreased from 1.7% in 1993 to .9% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Combined Automated Air, Inc. and Bauer Heating & Air Conditioning,
Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------- -----------
1993 1994 1995 1995 1996
---- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities...... $ 77 $ 21 $ 212 $ 86 $ 19
Net cash used in investing activities............... (16) (128) (43) (14) (44)
Net cash provided by financing activities........... (24) 108 (158) (39) 41
---- ----- ----- ---- ----
Increase in cash and cash equivalents............... $ 37 $ 1 $ 11 $ 33 $ 16
==== ===== ===== ==== ====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Combined
Automated Air, Inc. and Bauer Heating & Air Conditioning, Inc. generated
$329,000 in net cash from operating activities. Cash used in investing
activities was primarily attributable to the purchase and replacement of service
and delivery trucks.
64
<PAGE> 66
GADDIS CO.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------- ----------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue................... $1,230 100.0% $1,374 100.0% $1,577 100.0% $1,372 100.0% $1,256 100.0%
Cost of Goods Sold............ 950 77.2 1,017 74.0 1,101 69.8 945 68.9 833 66.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin.................. 281 22.8 357 26.0 476 30.2 427 31.1 422 33.6
Selling, general and
administrative expenses..... 272 22.1 286 20.8 397 25.2 281 20.5 306 24.4
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations........ $ 9 .7% $ 71 5.2% $ 79 5.0% $ 146 10.6% $ 116 9.3%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue decreased $117,000, or 8.5%, from $1.4 million
for the nine months ended September 30, 1995 to $1.3 million for the nine months
ended September 30, 1996.
Cost of Goods Sold. Cost of goods sold decreased $112,000, or 11.8%, from
$945,000 for the nine months ended September 30, 1995 to $833,000 for the nine
months ended September 30, 1996. As a percentage of net revenue, cost of goods
sold decreased from 68.9% for the nine months ended September 30, 1995 to 66.4%
for the nine months ended September 30, 1996. 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 decreased $5,000, or 1.1%, from $427,000
for the nine months ended September 30, 1995 to $422,000 for the nine months
ended September 30, 1996. As a percentage of net revenue, gross margin increased
from 31.1% for the nine months ended September 30, 1995 to 33.6% for the nine
months ended September 30, 1996. The increase as a percentage of net revenue was
primarily attributable to increased emphasis on higher margin products and
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $25,000, or 8.8%, from $281,000 for the nine
months ended September 30, 1995 to $306,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 20.5% for the nine months ended September 30, 1995 to
24.4% for the nine months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations decreased $29,000, or
20.1%, from $146,000 for the nine months ended September 30, 1995 to $116,000
for the nine months ended September 30, 1996. As a percentage of net revenue,
income from operations decreased from 10.6% for the nine months ended September
30, 1995 to 9.3% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $203,000, or 14.7%, from $1.4 million
in 1994 to $1.6 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 $84,000, or 8.2%, from
$1.0 million in 1994 to $1.1 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 74.0% in 1994 to 69.8% 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 $119,000, or 33.2%, from
$357,000 in 1994 to $476,000 in 1995. As a percentage of net revenue, gross
margin increased from 26.0% in 1994 to 30.2% in 1995. The
65
<PAGE> 67
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 $111,000, or 38.6%, from $286,000 in 1994 to
$397,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 20.8% in 1994 to 25.2% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $8,000, or 11.6%,
from $71,000 in 1994 to $79,000 in 1995. As a percentage of net revenue, income
from operations decreased from 5.2% in 1994 to 5.0% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $144,000, or 11.7%, from $1.2 million
in 1993 to $1.4 million in 1994. 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 $67,000 to $1.0 million
in 1994. As a percentage of net revenue, cost of goods sold decreased from 77.2%
in 1993 to 74.0% in 1994. The decrease as a percentage of net revenue was
primarily attributable to a focus on higher margin products.
Gross Margin/Profit. Gross margin increased $77,000, or 73.7%, from
$281,000 in 1993 to $357,000 in 1994. As a percentage of net revenue, gross
margin increased from 22.8% in 1993 to 26.0% in 1994. 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 $14,000, or 5.3%, from $272,000 in 1993 to
$286,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 22.1% in 1993 to 20.8% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $62,000, or
718.6%, from $9,000 in 1993 to $71,000 in 1994. As a percentage of net revenue,
income from operations increased from .7% in 1993 to 5.2% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Gaddis Co.:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in)
operating activities.............. $ 12 $ 61 $ 74 $ 149 $ 77
Net cash used in investing
activities........................ (8) (50) (11) (6) (18)
Net cash provided by (used in)
financing
activities........................ (24) (1) (45) (45) (76)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents....................... $ (20) $ 10 $ 18 $ 98 $ (17)
======== ======== ======== ======== ========
</TABLE>
From 1993 through the nine months ended September 30, 1996, Gaddis Co.
generated $224,000 in net cash from operating activities. Cash used in
investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks.
66
<PAGE> 68
EISENBACH ENTERPRISES, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Revenue........................... $1,280 100.0% $1,292 100.0% $1,437 100.0%
Cost of Goods Sold.................... 792 61.9 895 69.3 900 62.6
------- ------ ------- ----- ------ -----
- -- -
Gross Margin.......................... 488 38.1 397 30.7 537 37.4
Selling, general and administrative
expenses............................ 444 34.7 480 37.2 589 41.0
------- ------ ------- ----- ------ -----
- -- -
Income (loss) from operations......... $ 44 3.5% $ (84) (6.5)% $ (52) (3.6)%
======== ======== ======== ====== ======= ======
</TABLE>
Year Ended September 30, 1996 Compared to September 30, 1995
Net Revenue. Net revenue increased $145,000, or 11.2%, from $1.3 million
in 1995 to $1.4 million in 1996. Management believes that the increase in net
revenue was primarily attributable to continued focus on the promotion of
service contracts, continued implementation of CSG programs and techniques, and
increased advertising.
Cost of Goods Sold. Cost of goods sold increased $5,000, or .5%, from
$895,000 in 1995 to $900,000 in 1996. As a percentage of net revenue, cost of
goods sold decreased from 69.3% in 1995 to 62.6% in 1996. 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 $140,000, or 35.4%, from
$397,000 in 1995 to $537,000 in 1996. As a percentage of net revenue, gross
margin increased from 30.7% in 1994 to 37.4% in 1995. The increase as a
percentage of net revenue was primarily attributable to a focus on higher margin
products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $108,000, or 22.6%, from $480,000 in 1995 to
$589,000 in 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 37.2% in 1995 to 41.0% in 1996. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $32,000, or
38.2%, from $(84,000) in 1995 to $(52,000) in 1996. As a percentage of net
revenue, income from operations increased from (6.5)% in 1995 to (3.6)% in 1996.
Year Ended September 30, 1995 Compared to September 30, 1994
Net Revenue. Net revenue remained unchanged at $1.3 million in 1994 and in
1995.
Cost of Goods Sold. Cost of goods sold increased $103,000, or 13.0%, from
$792,000 in 1994 to $895,000 in 1995. As a percentage of net revenue, cost of
goods sold increased from 61.9% in 1994 to 69.3% in 1995. The increase as a
percentage of net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin decreased $92,000, or 18.8%, from
$488,000 in 1994 to $397,000 million in 1995. As a percentage of net revenue,
gross margin decreased from 38.1% in 1994 to 30.7% in 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $37,000, or 8.3%, from $444,000 in 1994 to
$480,000 in 1995. As a percentage of net revenue, selling, general
67
<PAGE> 69
and administrative expenses increased from 34.7% in 1994 to 37.2% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $128,000, or
289.0%, from $44,000 in 1994 to $(84,000) in 1995. As a percentage of net
revenue, income from operations decreased from 3.5% in 1994 to (6.5)% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Eisenbach Enterprises, Inc.:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net cash flow provided by (used in) operating activities.......... $ 68 $ 52 $(1 )
Net cash used in investing activities............................. (63) (35) --
Net cash provided by (used in) financing activities............... (16) (10) 6
---- ---- ----
Increase (decrease) in cash and cash equivalents.................. $(11) $ 7 $ 5
==== ==== ====
</TABLE>
For the three years ended August 31, 1996, Eisenbach Enterprises, Inc.
generated $121,000 in net cash from operating activities. Cash used in investing
activities was primarily attributable to the purchase and replacement of service
and delivery trucks.
68
<PAGE> 70
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
RESULTS OF OPERATIONS
The following table sets forth certain selected financial data and data as
a percentage of net revenue for periods indicated (dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ ----------------------------------
1993 1994 1995 1995 1996
------------ -------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Revenue......................... $825 100.0% $1,173 100.0% $1,384 100.0% $1,117 100.0% $1,060 100.0%
Cost of Goods Sold.................. 605 73.4 868 74.0 959 69.3 735 65.7 725 68.4
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross Margin........................ 220 26.6 305 26.0 424 30.7 383 34.3 335 31.6
Selling, general and administrative
expenses.......................... 194 23.5 302 25.7 321 23.2 214 19.2 257 24.3
----- ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations.............. $ 26 3.1% $ 3 .3% $ 103 7.4% $ 168 15.1% $ 78 7.3%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Net Revenue. Net revenue remained relatively unchanged at $1.1 million for
the nine months ended September 30, 1995 and the nine months ended September 30,
1996.
Cost of Goods Sold. Cost of goods sold decreased $10,000, or 1.3%, from
$735,000 for the nine months ended September 30, 1995 to $725,000 for the nine
months ended September 30, 1996. As a percentage of net revenue, cost of goods
sold increased from 65.7% for the nine months ended September 30, 1995 to 68.4%
for the nine months ended September 30, 1996. The increase as a percentage of
net revenue was primarily attributable to product mix.
Gross Margin/Profit. Gross margin decreased $48,000, or 12.5%, from
$383,000 for the nine months ended September 30, 1995 to $335,000 for the nine
months ended September 30, 1996. As a percentage of net revenue, gross margin
decreased from 34.3% for the nine months ended September 30, 1995 to 31.6% for
the nine months ended September 30, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $43,000, or 19.9%, from $214,000 for the nine
months ended September 30, 1995 to $257,000 for the nine months ended September
30, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 19.2% for the nine months ended September 30, 1995 to
24.3% for the nine months ended September 30, 1996. The increase as a percentage
of net revenue was primarily attributable to increased compensation expense.
Income from Operations. Income from operations decreased $90,000, or
53.8%, from $168,000 for the nine months ended September 30, 1995 to $78,000 for
the nine months ended September 30, 1996. As a percentage of net revenue, income
from operations decreased from 15.1% for the nine months ended September 30,
1995 to 7.3% for the nine months ended September 30, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $210,000, or 17.9%, from $1.2 million
in 1994 to $1.4 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 $91,000, or 10.5%, from
$868,000 in 1994 to $959,000 in 1995. As a percentage of net revenue, cost of
goods sold decreased from 74.0% in 1994 to 69.3% in 1995. The decrease as a
percentage of net revenue was primarily attributable to a focus on higher margin
products.
Gross Margin/Profit. Gross margin increased $119,000, or 39.1%, from
$305,000 in 1994 to $424,000 in 1995. As a percentage of net revenue, gross
margin increased from 26.0% in 1994 to 30.7% in 1995. The
69
<PAGE> 71
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 $19,000, or 6.4%, from $302,000 in 1994 to
$321,000 in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 25.7% in 1994 to 23.2% in 1995. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue.
Income from Operations. Income from operations increased $100,000, or
3,209.0%, from $3,000 in 1994 to $103,000 in 1995. As a percentage of net
revenue, income from operations increased from .3% in 1994 to 7.4% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $349,000, or 42.3%, from $825,000 in
1993 to $1.2 million in 1994. 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 $263,000, or 43.5%, from
$605,000 in 1993 to $868,000 in 1994. As a percentage of net revenue, cost of
goods sold increased from 73.4% in 1993 to 74.0% in 1994.
Gross Margin/Profit. Gross margin increased $85,000, or 38.9%, from
$220,000 in 1993 to $305,000 in 1994. As a percentage of net revenue, gross
margin decreased from 26.6% in 1993 to 26.0% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $108,000, or 55.7%, from $194,000 in 1993 to
$302,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 23.5% in 1993 to 25.7% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $23,000, or
87.9%, from $26,000 in 1993 to $3,000 in 1994. As a percentage of net revenue,
income from operations decreased from 3.1% in 1993 to .3% in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of
cash flows of Quality Air Conditioning & Heating of West Monroe, Inc.:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ------------
1993 1994 1995 1995 1996
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by (used in) operating
activities......................................... $ 29 $ 5 $162 $109 $ 8
Net cash used in investing activities................ (42) (104) (23) (5) (31)
Net cash provided by (used in) financing
activities......................................... (9) 119 (57) (19) (2)
---- ----- ---- ---- ----
Increase (decrease) in cash and cash equivalents..... $(22) $ 20 $ 82 $ 85 $(25)
==== ===== ==== ==== ====
</TABLE>
From 1993 through the nine months ended September 30, 1996, Quality Air
Conditioning & Heating of West Monroe, Inc. generated $204,000 in net cash from
operating activities. Cash used in investing activities was primarily
attributable to the purchase and replacement of service and delivery trucks.
70
<PAGE> 72
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.
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.
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."
71
<PAGE> 73
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."
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.
72
<PAGE> 74
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 plans to offer 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.
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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. A portion of any operating efficiencies
will be offset by increased general and administrative expenses at the Company's
corporate headquarters.
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,
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residential maintenance, service contracts, residential installation, business
planning and service dispatch. In 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 formed in 1991 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 1994, 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
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and repair of HVAC units, (iii) diagnostic analysis of the condition of existing
unit and (iv) the sale of 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
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during the year at an average cost to the customer of approximately $135 per
year. 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. 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 and Air Conditioning Company,
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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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 will be 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. 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 12 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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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.
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 stricter future standards. In addition,
installers must comply with local building codes when installing HVAC units in
residences and commercial buildings.
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.
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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The Company utilizes for its corporate headquarters in Nashville, Tennessee
office space leased by the Acquiring Company. 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 15 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.
THE PENDING ACQUISITIONS
OVERVIEW
The Company has entered into definitive agreements to acquire the Combining
Companies. The Company has entered into Merger Agreements with 18 of the
Combining Companies pursuant to which such Combining Companies will be merged
with wholly-owned subsidiaries of the Company. The Company has entered into
Combination Agreements with four of the Combining Companies pursuant to which
the Company will acquire all of the issued and outstanding capital stock of such
Combining Companies.
Pursuant to the terms of the Merger Agreements, the shares of capital stock
of the Combining Companies outstanding immediately prior to the closing, other
than treasury shares and shares held by dissenting stockholders, will be
converted into the right to receive shares of Common Stock and cash. Pursuant to
the terms of the Combination Agreements, the Company will acquire all of the
issued and outstanding capital stock of the Combining Companies in exchange for
shares of Common Stock.
The aggregate consideration to be paid by the Company in connection with
the Pending Acquisitions is estimated to be approximately 2,929,000 shares of
Common Stock and $10.3 million cash. In general, the purchase price to be paid
to each of the Combining Companies is based on the Combining Company's after tax
net income for its most recent fiscal year or such other 12 month period as
agreed to by the parties (the "Valuation Period"), adjusted to exclude all
nonrecurring income and expense and to include (i) all adjustments necessary to
present rents at market, (ii) such adjustments to salary as are agreed to by the
parties, (iii) all adjustments necessary to give effect to federal and state
income taxes as if a Combining Company that is not a C corporation had been a C
corporation during the year, and (iv) certain other adjustments agreed to by the
parties.
Prior to the closing of a Pending Acquisition, the Company will make an
initial adjustment to the purchase price based on the difference between the
Combining Company's net income for the Valuation Period, as presented in the
Combining Company's financial statements for such period, with such adjustments
as set forth above, and the Combining Company's net income for the Valuation
Period, as presented in the Final Valuation Statement (as defined in the
Agreements) to be prepared by the Company's independent certified public
accountants. Promptly following the closing of a Pending Acquisition, final
adjustments to the
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purchase price for each Combining Company will be made based on a Closing
Balance Sheet (as defined in the Agreements) to be prepared by the Company's
independent certified public accountants. In the event a Combining Company's
stockholders' equity as a percentage of net revenue is less than 10% (based on
the Final Valuation Statement and Closing Balance Sheet), the consideration to
be paid by the Company will be reduced by an amount equal to the capital
contribution required to result in stockholders' equity as a percentage of net
revenue equaling 10%. The consideration to be paid by the Company also will be
reduced by (i) the amount of outstanding indebtedness of a Combining Company at
the time of the closing of a Pending Acquisition, other than indebtedness
incurred subsequent to the Valuation Period for the purchase of fixed assets,
and (ii) in the case of any stockholder, the amount of any indebtedness of such
stockholder payable to the Combining Company at the time of closing.
The following table sets forth the consideration to be paid by the Company
to the stockholders of each of the Combining Companies in connection with the
Pending Acquisitions:
<TABLE>
<CAPTION>
PURCHASE
COMBINING COMPANY PRICE(1)
- --------------------------------------------------------------------------------- -----------
<S> <C>
Air-Conditioning and Heating Unlimited, Inc.(2).................................. $ 4,200,000
Automated Air, Inc.(2)........................................................... 1,405,050
B & B Air Conditioning, Inc.(2).................................................. 1,805,000
B. W. Heating & Cooling, Inc.(2)................................................. 2,176,440
Bauer Heating & Air Conditioning, Inc.(2)........................................ 999,310
Comfortech, Inc.(2).............................................................. 2,398,750
Custom Air Conditioning, Inc.(2) ................................................ 4,023,520
Dial One Service Champions, ET AL.(2)............................................ 3,448,290
Eisenbach Enterprises, Inc.(3)................................................... 435,610
Falso Heating and Sheet Metal Co., Inc.(2)....................................... 7,505,620
Frees Service Experts, Inc.(3)................................................... 2,584,350
Freschi Air Systems, Inc.(2)..................................................... 2,933,120
Gaddis Co.(2).................................................................... 1,371,140
Gordon's Specialty Company, Inc.(2).............................................. 3,536,320
Island Air Conditioning, Inc.(2)................................................. 820,854
Pardee Refrigeration Company Incorporated(2)..................................... 5,500,000
Parker Heating & Air Conditioning, Incorporated(2)............................... 3,417,740
Paul E. Smith Co., Inc.(3)....................................................... 2,000,000
Quality Air Conditioning & Heating of West Monroe, Inc.(2)(4).................... 490,000
Sanders Indoor Comfort, Inc.(2).................................................. 682,884
Sylvester's Corp.(3)............................................................. 2,422,250
The 1589 Niagara Street Corporation(2)........................................... 4,867,770
----------
Total.................................................................. $59,024,018
==========
</TABLE>
- ---------------
(1) Assumes that there is no adjustment (as described above) to the
consideration to be paid by the Company. The shares of Common Stock to be
issued to the stockholders of the Combining Companies will be valued at per
share prices ranging from $15.50 to $20.00.
(2) The stockholders of this Combining Company will receive consideration
consisting of shares of Common Stock and, at such stockholder's election,
cash of up to 25% of the purchase price.
(3) The stockholders of this Combining Company will receive only shares of
Common Stock.
(4) Purchase price is estimated because it is based on the fair market value of
tangible assets as of closing.
The consideration to be paid to each Combining Company was determined
through arm's length negotiations between the parties. The terms of the
Agreements entered into by each of the Combining Companies are substantially the
same, including the procedures used to determine the consideration to be paid to
each Combining Company, other than Quality Air Conditioning & Heating of West
Monroe, Inc. ("Quality") and Paul E. Smith Co., Inc. ("Smith"), based on the
adjusted net income of the Combining Company. With respect to Quality and Smith,
the purchase price was based on a determination of the value of
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their respective assets. The factors considered by the Company in determining
the consideration to be paid included, among others, the historical operating
results, the net worth, the levels and type of indebtedness and the future
prospects of each of the Combining Companies.
Upon consummation of the Pending Acquisitions, each of the Combining
Companies will become a wholly-owned subsidiary of the Company.
THE AGREEMENTS
Representations and Warranties of the Combining Companies
Each of the Agreements contains customary representations and warranties
relating to, among other things, due organization and good standing of the
Combining Company, good and marketable title to the shares of capital stock of
the Combining Company, the absence of preemptive rights, the absence of any
options, warrants or other rights to acquire the stock of the Combining Company,
good and marketable title to all of the Combining Company's assets, adequate
insurance, the accuracy of the Combining Company's financial statements, the
absence of litigation and compliance with applicable laws.
Common Stock Issued to Affiliates
Certain stockholders of the Combining Companies may be deemed to be
"affiliates" for purposes of Rule 145 of the Securities Act. Pursuant to the
Agreements, the Combining Companies acknowledge and agree with respect to each
person who is deemed to be an affiliate that (i) the Common Stock issuable to
such person will be held pursuant to the provisions of the Securities Act and
the rules and regulations thereunder, (ii) no sale or disposition of such shares
of Common Stock will be made except pursuant to the terms of the Registration
Statement, the Securities Act and Rule 145(d) thereunder, and (iii) the
certificates representing the Common Stock issued to such person will bear a
restrictive legend setting forth the restrictions on transfer referred to above.
In addition, persons deemed affiliates of certain Combining Companies the
acquisition of which will be accounted for as poolings of interests will be
subject to further limitations. See "Accounting Treatment." Each such person
will be required to deliver to the Company a letter agreement pertaining to the
limitations on the transferability of such affiliate's shares of Common Stock
received in the Pending Acquisition, and whereby such affiliate shall represent
and warrant, among other things, that he or she shall not sell, pledge,
transfer, or otherwise dispose of such shares of Common Stock (i) in violation
of the Securities Act or the rules and regulations thereunder, and (ii) until
such time as financial results covering at least 30 days of combined operations
of the respective Combining Company and the Company have been published within
the meaning of Section 201.01 of the Commission's Codification of Financial
Reporting Policies.
Indemnification
Pursuant to the terms of the Agreements, each Combining Company agrees to
indemnify and hold harmless the Company and its officers, directors, employees
or agents thereof against any and all claims, losses, damages, liabilities and
expenses, including reasonable attorney's fees, suffered because of (i) the
untruth, inaccuracy, misrepresentation, omission, or breach or nonfulfillment by
the Combining Company of any representation, warranty, covenant or other
agreement contained in the Agreement or (ii) any untrue statement of a material
fact relating to the Combining Company that is contained in any preliminary
prospectus, the Registration Statement or any prospectus forming a part thereof,
or any amendment thereof or supplement thereto, or any omission to state therein
a material fact relating to the Combining Company required to be stated therein
or necessary to make such statements therein not misleading.
Pursuant to indemnification agreements ("Indemnification Agreements") to be
entered into between the stockholders of the Combining Companies and the Company
on or prior to closing, the stockholders of the Combining Companies will agree
to indemnify and hold harmless the Company and its officers, directors,
employees and agents thereof against any and all claims, losses, damages,
liabilities and expenses, including reasonable attorney's fees, suffered because
of (i) the untruth, inaccuracy, misrepresentation, omission, or
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breach or nonfulfillment by the Combining Company of any representation,
warranty, covenant or other agreement contained in the Agreement, (ii) any
untrue statement of a material fact relating to the Combining Company that is
contained in any preliminary prospectus, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto, or any omission to state therein a material fact relating to the
Combining Company required to be stated therein or necessary to make such
statements therein not misleading, (iii) any and all amounts of federal, state
and/or local income, franchise, property and/or sales and use taxes that may be
assessed against the Company with respect to any taxable period ending on or
before the date of the Agreement, for which adequate provisions therefor have
not been made through the date of closing, and the amount of any interest and/or
penalties relating to such tax assessments or (iv) any claim or demand by any
person asserting any interest in any share of capital stock of the Combining
Company. Each Combining Company and its stockholders have indemnification
obligations only to the extent that the aggregate of all indemnifiable claims,
losses, damages, liabilities and expenses, including reasonable attorney's fees,
for such Combining Company or stockholder exceeds $25,000.
The Company agrees to indemnify, defend and hold harmless each of the
stockholders of the Combining Companies against any and all claims, losses,
damages, liabilities and expenses, including reasonable attorney's fees,
suffered because of (i) the untruth, inaccuracy, misrepresentation, omission,
breach or nonfulfillment by the Company of any representation, warranty,
covenant or other agreement contained in the Agreements or (ii) any untrue
statement of a material fact relating to the Company that is contained in the
preliminary prospectus, the Registration Statement or any prospectus forming a
part thereof, or any amendment thereof or supplement thereto, or arising out of
or based on any omission or alleged omission to state therein a material fact
relating to the Company required to be stated therein or necessary to make the
statements therein not misleading.
Employment Agreements and Covenants Not to Compete
In connection with the Pending Acquisitions, the president and/or general
manager of each Combining Company will enter into an employment agreement with
the Company. The annual salaries pursuant to such agreements will range from
$52,000 to $175,000 based upon the size of the market served by such service
center and the duties of the president/general manager. In addition, each
president/general manager will be eligible for cash bonuses based on the
performance of his service center and the Company relative to established goals
set by the president/general manager and the Company. Most employment agreements
will have a term of three years and generally provide, among other things, that
such employee will not compete with the Company during the term of such
employment and for a period of two years thereafter within 50 miles of any
Service Center.
Escrow Agreement
Pursuant to the terms of the Agreements, each of the stockholders of the
Combining Companies is required to enter into an escrow agreement (the "Escrow
Agreement") with the Company and an escrow agent to be selected by the Company
(the "Escrow Agent"). Each Escrow Agreement provides that the stockholders of a
Combining Company will deliver to the Escrow Agent stock certificates (the
"Escrow Stock") representing 10% of the shares of Common Stock issued to such
stockholders in the Pending Acquisition. Under the terms of the Escrow
Agreement, the Escrow Agent will hold the Escrow Stock for a period of one year
commencing upon consummation of the Pending Acquisition, and during such period,
the Company will be entitled to receive reimbursement and recovery from the
Escrow Stock for any loss, liability, damage or expense for which the Company is
indemnified under the Agreement or for any reduction in purchase price after the
closing. The Escrow Stock will not be the Company's exclusive remedy in the
event of such loss, liability, damage, expense or reduction. During the period
the Escrow Stock is held by the Escrow Agent, the stockholders of the Combining
Companies will be entitled to receive any dividends paid on the Escrow Stock and
have the right to vote the Escrow Stock.
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Lockup Agreement
Pursuant to the terms of the Agreements, certain stockholders of the
Combining Companies will be required to enter into a lockup agreement (the
"Lockup Agreement") with the Company. The Lockup Agreements generally provide
that the stockholders of a Combining Company will not sell, offer to sell, grant
any option for the sale of, or otherwise dispose of any shares of Common Stock,
any options, rights or warrants to purchase any shares of Common Stock, or any
other securities convertible into or exchangeable for shares of Common Stock
owned directly by such stockholder or with respect to which he has the power of
disposition, for a period of six months following the effective time of the
Pending Acquisition, without the prior written consent of the Company. Beginning
six months after the closing of the Pending Acquisition, the stockholders of the
Combining Company will be entitled to sell or otherwise dispose of up to 25% of
the shares of Common Stock held by such stockholder, and an additional 25% of
the shares of Common Stock held by such stockholder during each of the three
successive six month periods until the twenty-fourth month following the closing
of the Pending Acquisition, at which time such stockholder will be entitled to
sell all shares of Common Stock held by such stockholder.
Conditions Precedent to Closing of the Agreements
The obligation of the Company to consummate each Pending Acquisition is
subject to certain conditions, including a satisfactory due diligence review of
the operations and financial condition of the Combining Company, delivery of the
schedules to the Agreement and a satisfactory review thereof, the stockholders
of the Combining Company having good and marketable title, free and clear of any
material liens, encumbrances or restrictions, to the capital stock of such
Combining Company, the Combining Company's audited financial statements
complying in all material respects with all applicable accounting requirements
and being fairly presented in conformity with generally accepted accounting
principles, delivery of a favorable opinion of counsel to the stockholders of
the Combining Company, the receipt of all necessary consents, the execution of
Lockup Agreements, Indemnification Agreements and Escrow Agreements by the
stockholders of the Combining Company, the approval of the transaction by the
Company's board of directors and the effectiveness of the Registration
Statement. The obligation of a Combining Company and its stockholders to
consummate a Pending Acquisition is subject to certain conditions, including the
approval of the transaction by the stockholders of the Combining Company, the
accuracy of the representations and warranties of the Company contained in the
Agreement and delivery of a favorable opinion of counsel to the Company.
Expenses
Each of the Agreements provides that each of the parties shall bear its
respective expenses incurred in connection with the preparation, execution and
performance of the Agreement and the transactions contemplated therein, provided
that the Company will reimburse each of the Combining Companies for fees paid by
it for professional accounting services upon closing.
ACCOUNTING TREATMENT
The Company expects to account for 20 of the Pending Acquisitions pursuant
to the purchase method of accounting. One effect of such accounting treatment is
that the earnings of such Combining Companies will be combined with the earnings
of the Company only from and after the closing of such Pending Acquisitions.
Furthermore, the earnings of such Combining Companies will, for purposes of the
earnings or losses of the Company, be reduced by certain depreciation and
amortization changes arising out of purchase accounting adjustments.
The Company expects to account for two of the Pending Acquisitions as
poolings of interests. Under the pooling of interests method of accounting, the
recorded amounts of the assets and liabilities of such Combining Companies and
the Company will be carried forward at their previously recorded amounts. For
information concerning certain restrictions to be imposed on the transferability
of the shares of Common Stock received by the affiliates of such Combining
Companies in the Pending Acquisitions in order, among other things, to assure
the availability of pooling of interests accounting treatment, see "Common Stock
Issued to Affiliates."
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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............................ 49 President, Chief Operating Officer and
Director
Anthony M. Schofield....................... 42 Chief Financial Officer, Secretary and
M 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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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 to its executive officers options to purchase
120,000 shares of Common Stock under the 1996 Incentive Stock Plan (the
"Incentive Plan"). These options are exercisable at various prices ranging from
$13.00 to $17.25 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
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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 517,811 shares of Common Stock under the
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Incentive Plan. These options are exercisable at prices ranging from $13.00 to
$17.25 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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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 the
Acquiring Company, 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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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 the
Acquiring Company 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 the Acquiring Company 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 the
Acquiring Company 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. The Acquiring Company 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. The Acquiring
Company purchased the residential property in 1994 for approximately $61,000.
The sale price for such properties was determined by the board of directors of
the Acquiring Company. The Acquiring Company has entered into a lease with
Messrs. Sielbeck and Hutton whereby the Acquiring Company 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 the Acquiring Company 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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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 9.57
John R. Young(3)..................................................... 970,727(4) 11.32
R. Edward Hutton, Jr.(2)............................................. 820,256 9.57
Anthony M. Schofield................................................. 3,000 *
Raymond J. De Riggi.................................................. 5,000(5) *
Timothy G. Wallace................................................... 5,000(5) *
William G. Roth...................................................... 5,000(5) *
Norman T. Rolf, Jr................................................... 138,958 1.62
All executive officers and directors as a group (seven persons)...... 1,969,127(4)(5) 22.93
</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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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>
NINE MONTHS
ENDED
SEPTEMBER
YEAR ENDED DECEMBER 31, 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 9.03 12.21
</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.
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)............................ $20.75 $13.75
Fourth Quarter (through November 15, 1996)........................... $28.50 $18.50
</TABLE>
On November 15, 1996, the last reported sale price for the Common Stock on
the Nasdaq National Market was $28.50 per share. As of November 15, 1996, there
were approximately 94 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> 94
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 October 31, 1996, the Company had
8,572,236 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 532,811 shares have been granted as of the date
hereof. As of November 15, 1996, there were approximately 94 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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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> 96
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.
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<PAGE> 97
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;
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<PAGE> 98
(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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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,
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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
99
<PAGE> 101
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 October 31, 1996, the Company had outstanding 8,572,236 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.
100
<PAGE> 102
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. See "The Pending
Acquisitions -- Overview" and "The Pending Acquisitions -- The
Agreements -- Common Stock Issued to Affiliates."
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.
101
<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
Basis of Presentation................................................................ F-5
Unaudited Pro Forma Combining Balance Sheet as of September 30, 1996................. F-7
Unaudited Pro Forma Combining Statement of Income for the Twelve Months ended
December 31, 1995.................................................................. F-8
Unaudited Pro Forma Combining Statement of Income for the Six Months ended September
30, 1996........................................................................... F-9
Notes to Unaudited Pro Forma Combining Financial Statements.......................... F-10
SERVICE EXPERTS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-12
Balance Sheets....................................................................... F-13
Statements of Income................................................................. F-14
Statements of Stockholders' Equity................................................... F-15
Statements of Cash Flows............................................................. F-16
Notes to Financial Statements........................................................ F-17
FALSO HEATING AND SHEET METAL CO., INC. -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED), AND 1995 AND PERIOD
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-24
Balance Sheets....................................................................... F-25
Statements of Income................................................................. F-26
Statements of Stockholders' Equity................................................... F-27
Statement of Cash Flows.............................................................. F-28
Notes to Financial Statements........................................................ F-29
COMBINED PARDEE REFRIGERATION COMPANY INCORPORATED, ISLAND AIR CONDITIONING, INC. AND
SANDERS INDOOR COMFORT, INC. -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 1993 (UNAUDITED), 1994 AND 1995 AND PERIOD ENDED AUGUST 31,
1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-35
Combined Balance Sheets.............................................................. F-36
Combined Statements of Income........................................................ F-37
Combined Statements of Stockholders' Equity.......................................... F-38
Combined Statements of Cash Flows.................................................... F-39
Notes to Combined Financial Statements............................................... F-40
FREES SERVICE EXPERTS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994 (UNAUDITED), 1995 (UNAUDITED), AND 1996
Report of Independent Auditors....................................................... F-46
Balance Sheets....................................................................... F-47
Statements of Income................................................................. F-48
Statements of Stockholders' Equity................................................... F-49
Statements of Cash Flows............................................................. F-50
Notes to Financial Statements........................................................ F-51
</TABLE>
F-1
<PAGE> 104
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CUSTOM AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-57
Balance Sheets....................................................................... F-58
Statements of Income................................................................. F-59
Statements of Stockholders' Equity................................................... F-60
Statements of Cash Flows............................................................. F-61
Notes to Financial Statements........................................................ F-62
GORDON'S SPECIALTY COMPANY, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-67
Balance Sheets....................................................................... F-68
Statements of Operations............................................................. F-69
Statements of Stockholders' Equity................................................... F-70
Statements of Cash Flows............................................................. F-71
Notes to Financial Statements........................................................ F-72
DIAL ONE SERVICE CHAMPIONS, ET AL. -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-77
Combined Balance Sheets.............................................................. F-78
Combined Statements of Income........................................................ F-79
Combined Statements of Stockholders' Equity.......................................... F-80
Combined Statements of Cash Flows.................................................... F-81
Notes to Combined Financial Statements............................................... F-82
COMFORTECH, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-88
Balance Sheets....................................................................... F-89
Statements of Income................................................................. F-90
Statements of Stockholders' Equity................................................... F-91
Statements of Cash Flows............................................................. F-92
Notes to Financial Statements........................................................ F-93
AIR-CONDITIONING AND HEATING UNLIMITED, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996
Report of Independent Auditors....................................................... F-98
Balance Sheets....................................................................... F-99
Statements of Income................................................................. F-100
Statements of Stockholder's Equity................................................... F-101
Statements of Cash Flows............................................................. F-102
Notes to Financial Statements........................................................ F-103
THE 1589 NIAGARA STREET CORPORATION --
YEARS ENDED AUGUST 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996
Report of Independent Auditors....................................................... F-108
Combined Balance Sheets.............................................................. F-109
Combined Statements of Operations.................................................... F-110
Combined Statements of Stockholders' Equity.......................................... F-111
Combined Statements of Cash Flows.................................................... F-112
Notes to Combined Financial Statements............................................... F-113
</TABLE>
F-2
<PAGE> 105
<TABLE>
<CAPTION>
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<S> <C>
HVAC DIVISION OF PAUL E. SMITH CO., INC. -- UNAUDITED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996 (UNAUDITED) AND
PERIOD ENDED SEPTEMBER 30, 1996 (UNAUDITED)
Balance Sheets....................................................................... F-118
Statements of Operations............................................................. F-119
Statements of Division Equity........................................................ F-120
Statements of Cash Flows............................................................. F-121
Notes to Financial Statements........................................................ F-122
FRESCHI AIR SYSTEMS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-126
Balance Sheets....................................................................... F-127
Statements of Operations............................................................. F-128
Statements of Stockholder's Equity................................................... F-129
Statements of Cash Flows............................................................. F-130
Notes to Financial Statements........................................................ F-131
PARKER HEATING & AIR CONDITIONING, INCORPORATED -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-136
Balance Sheets....................................................................... F-137
Statements of Income................................................................. F-138
Statements of Stockholders' Equity................................................... F-139
Statements of Cash Flows............................................................. F-140
Notes to Financial Statements........................................................ F-141
B.W. HEATING & COOLING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-147
Balance Sheets....................................................................... F-148
Statements of Income................................................................. F-149
Statements of Stockholders' Equity................................................... F-150
Statements of Cash Flows............................................................. F-151
Notes to Financial Statements........................................................ F-152
B & B AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-157
Balance Sheets....................................................................... F-158
Statements of Income................................................................. F-159
Statements of Stockholders' Equity................................................... F-160
Statements of Cash Flows............................................................. F-161
Notes to Financial Statements........................................................ F-162
</TABLE>
F-3
<PAGE> 106
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SYLVESTER'S CORP. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED))
Report of Independent Auditors....................................................... F-167
Balance Sheets....................................................................... F-168
Statements of Income................................................................. F-169
Statements of Stockholders' Equity (Deficit)......................................... F-170
Statements of Cash Flows............................................................. F-171
Notes to Financial Statements........................................................ F-172
COMBINED AUTOMATED AIR, INC. AND BAUER HEATING & AIR CONDITIONING, INC. -- AUDITED
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-179
Combined Balance Sheets.............................................................. F-180
Combined Statements of Income........................................................ F-181
Combined Statements of Stockholders' Equity.......................................... F-182
Combined Statements of Cash Flows.................................................... F-183
Notes to Financial Combined Statements............................................... F-184
GADDIS CO. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-190
Balance Sheets....................................................................... F-191
Statements of Operations............................................................. F-192
Statements of Stockholders' Equity (Deficit)......................................... F-193
Statements of Cash Flows............................................................. F-194
Notes to Financial Statements........................................................ F-195
EISENBACH ENTERPRISES, INC. -- UNAUDITED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996 (UNAUDITED)
Balance Sheets....................................................................... F-200
Statements of Operations............................................................. F-201
Statements of Stockholders' Equity................................................... F-202
Statements of Cash Flows............................................................. F-203
Notes to Financial Statements........................................................ F-204
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC. -- AUDITED FINANCIAL
STATEMENTS
YEARS ENDED DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND PERIOD ENDED
SEPTEMBER 30, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-209
Balance Sheets....................................................................... F-210
Statements of Operations............................................................. F-211
Statements of Stockholders' Equity................................................... F-212
Statements of Cash Flows............................................................. F-213
Notes to Financial Statements........................................................ F-214
</TABLE>
F-4
<PAGE> 107
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
The Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneous with the closing of the IPO, the Company acquired the Subsidiaries
in the Combination. In accordance with the provisions of SAB 97, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of the Acquiring Company. The operations of the
Subsidiaries have been included in the Company's financial statements from the
date of acquisition. The above mentioned acquisitions have been accounted for
using the historical cost basis of the Subsidiaries in accordance with SAB 48.
The Subsidiaries are the Acquiring Company; Hardwick Air Masters, Inc. d/b/a
Airmasters, Inc.; Norrell Heating and Air Conditioning Company, 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.; and Service Experts of Palm Springs, Inc.
The following unaudited pro forma combining financial statements give
effect to the acquisition by the Company of the following Combining Companies in
exchange for shares of the Company's Common Stock, cash, and the assumption of
certain debt:
- Falso Heating and Sheet Metal Co., Inc.
- Combined Pardee's Refrigeration Company Incorporated, Island Air
Conditioning, Inc., Sanders Indoor Comfort, Inc., and Southern States
Comfort Corporation
- Frees Service Experts, Inc.
- Custom Air Conditioning, Inc.
- Gordon's Specialty Company, Inc.
- Dial One Service Champions, ET AL.
- Comfortech, Inc.
- Air-Conditioning and Heating Unlimited, Inc.
- The 1589 Niagara Street Corporation
- HVAC Division of Paul E. Smith Co., Inc.
- Freschi Air Systems, Inc.
- Parker Heating & Air Conditioning, Incorporated
- B.W. Heating & Cooling, Inc.
- B & B Air Conditioning, Inc.
- Sylvester's Corp.
- Combined Automated Air, Inc. and Bauer Heating & Air Conditioning, Inc.
- Gaddis Co.
- Eisenbach Enterprises, Inc.
- Quality Air Conditioning & Heating of West Monroe, Inc.
The unaudited pro forma combining financial statements have been prepared
by the Company based on the historical financial statements of the Company, the
Subsidiaries, and the Combining 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 Combination and the Pending
Acquisitions had occurred on the dates indicated or which may be realized in the
future. Neither expected benefits nor cost reductions anticipated by the Company
following consummation of the acquisitions of the Subsidiaries and the Combining
Companies have been reflected in such pro forma combining financial statements.
The pro forma combining balance sheet as of September 30, 1996, gives effect to
the acquisition of the Combining Companies as if such transactions had occurred
on September 30, 1996. The pro forma combining statements of income for the nine
months ended September 30, 1996 and year ended December 31, 1995, assume the
acquisitions of the Subsidiaries and the Combining Companies were completed on
January 1, 1995.
F-5
<PAGE> 108
The pro forma combining financial statements should be read in conjunction
with the historical financial statements of the Company and the Combining
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-6
<PAGE> 109
PRO FORMA COMBINING BALANCE SHEET OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SERVICE COMBINING PRO FORMA COMBINED
EXPERTS, INC. COMPANIES ADJUSTMENTS PRO FORMA
------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 12,904,442 $ 4,483,509 $ (3,680,272)(b) $ 3,367,339
(10,340,340)(c)
Receivables:
Trade, net........................................ 5,289,164 5,506,002 -- 10,795,166
Related Party..................................... 46,989 596,349 (596,349)(a) 46,989
Employee.......................................... 88,791 58,943 -- 147,734
Other............................................. 256,075 169,513 -- 425,588
----------- ----------- ------------ -----------
5,681,019 6,330,807 (596,349) 11,415,477
Inventories......................................... 1,883,501 2,140,233 -- 4,023,734
Cost and estimated earnings in excess of billings... 199,395 149,466 -- 348,861
Investments......................................... -- 1,244,713 -- 1,244,713
Prepaid expenses and other current assets........... 437,291 227,210 -- 664,501
Current portion of notes receivable, net............ 277,604 -- -- 277,604
Deferred income taxes............................... 567,484 181,578 -- 749,062
----------- ----------- ------------ -----------
Total Current Assets....................... 21,950,736 14,757,516 (14,616,961) 22,091,291
Property, buildings and equipment, net.............. 3,320,458 4,747,330 -- 8,067,788
Notes receivable -- related parties, net............ 393,609 745,494 (745,494)(a) 393,609
Notes receivable -- other, net...................... 287,919 267,836 -- 555,755
Equity investment in Future University, Inc......... 592,775 -- -- 592,775
Deferred income taxes............................... -- 6,248 -- 6,248
Goodwill, net....................................... 821,548 57,105 48,246,911(c) 49,125,564
Other assets........................................ 274,182 418,898 -- 693,080
----------- ----------- ------------ -----------
Total assets............................... $ 27,641,227 $21,000,427 $ 32,884,456 $81,526,110
=========== =========== ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Short-term debt................................... $ -- $ -- $ -- $ --
Trade accounts payable and accrued liabilities.... 3,034,801 2,923,443 -- 5,958,244
Accrued compensation.............................. 1,499,604 1,989,848 -- 3,489,452
Accrued taxes, other than income.................. 161,436 236,109 -- 397,545
Accrued warranties................................ 473,352 678,417 -- 1,151,769
Income taxes payable.............................. 949,638 866,212 -- 1,815,850
Deferred revenue.................................. 1,895,578 1,923,145 -- 3,818,723
Billings in excess of costs and estimated
earnings........................................ 287,777 144,268 -- 432,045
Liability to Company benefit plan................. 94,349 126,051 -- 220,400
Notes payable to related parties -- current....... -- 205,615 (205,615)(a) --
Current portion of long-term debt................. 149,811 1,098,203 (1,098,203)(a) 149,811
----------- ----------- ------------ -----------
Total current liabilities.................. 8,546,346 10,191,311 (1,303,818) 17,433,839
Long-term debt...................................... 174,679 964,634 (964,634)(a) 174,679
Notes payable to related parties, net............... -- 534,233 (534,233)(a) --
Deferred compensation............................... 112,557 -- -- 112,557
Deferred income taxes............................... 119,100 210,519 -- 329,619
Stockholders' equity................................
Common Stock........................................ 85,722 29,291(c) 115,013
Additional paid-in capital.......................... 16,049,932 9,099,730 1,460,842(a) 60,446,772
(3,680,272)(b)
44,339,427(c)
(6,822,887)(c)
Retained earnings................................... 2,552,891 360,740(c) 2,913,631
----------- ----------- ------------ -----------
$ 27,641,227 $21,000,427 $ 32,884,456 $81,526,110
=========== =========== ============ ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-7
<PAGE> 110
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>
PRO FORMA
COMBINED PRO FORMA
SERVICE PRO FORMA SERVICE COMBINING
SERVICE ACQUIRED EXPERTS, COMBINED EXPERTS, COMBINING PRO FORMA
EXPERTS, INC. COMPANIES INC. ADJUSTMENTS INC. COMPANIES ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues....... $16,452,622 $43,198,541 $59,651,163 $59,651,163 $68,120,965 $ -- $127,772,128
Cost of goods
sold............. 11,122,350 25,093,693 36,216,043 (120,333 )(d) 36,095,710 46,642,669 (154,077 )(i) 82,584,302
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Gross margin....... 5,330,272 18,104,848 23,435,120 120,333 23,555,453 21,478,296 154,077 45,187,826
Selling, general
and
administrative
expenses......... 4,591,636 14,114,960 18,706,596 (3,035,621 )(e) 15,670,975 19,845,834 (2,375,041 )(j) 33,141,768
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Income from
operations....... 738,636 3,989,888 4,728,524 3,155,954 7,884,478 1,632,462 2,529,118 12,046,058
Other income
(expense):
Interest
expense........ (77,149) (281,753) (358,902) 358,902 (f) -- (234,070) 234,070 (k) --
Interest
income......... 23,186 233,020 256,206 256,206 223,968 -- 480,174
Other income..... 25,569 182,161 207,730 91,006 (g) 298,736 290,054 -- 586,790
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
(28,394) 133,428 105,034 449,908 554,942 279,952 234,070 1,066,964
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Income before
taxes............ 710,242 4,123,316 4,833,558 3,605,862 8,439,420 1,912,414 2,763,188 13,113,022
Provision for
income taxes..... 81,688 532,224 613,912 2,623,721 (h) 3,237,633 724,533 1,052,195 (l) 5,014,361
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Net income......... $ 628,554 $ 3,591,092 $ 4,219,646 $ 982,141 $ 5,201,787 $ 1,187,881 $1,710,993 $ 8,098,661
=========== =========== =========== =========== =========== =========== =========== ============
Pro forma net
income per
share............ $ 0.61 $ 0.70
=========== ============
Pro forma weighted
average shares
outstanding...... 8,572,236 11,501,350
=========== ============
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-8
<PAGE> 111
PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
SERVICE PRO FORMA PRO FORMA COMBINING
SERVICE ACQUIRED EXPERTS, COMBINED SERVICE COMBINING PRO FORMA
EXPERTS, INC. COMPANIES INC. ADJUSTMENTS EXPERTS, INC. COMPANIES ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ----------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues... $ 18,325,043 $30,127,938 $48,452,981 $ $ 48,452,981 $56,776,673 $ $105,229,654
Cost of goods
sold......... 11,942,161 17,879,821 29,821,982 29,821,982 37,855,751 (115,558)(i) 67,562,175
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Gross margin... 6,382,882 12,248,117 18,630,999 18,630,999 18,920,922 115,558 37,667,479
Selling,
general and
administrative
expenses..... 5,389,188 9,841,628 15,230,816 (2,445,207)(e) 12,785,609 16,001,304 (2,781,281)(j) 26,005,632
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Income from
operations... 993,694 2,406,489 3,400,183 2,445,207 5,845,390 2,919,618 2,896,839 11,661,847
Other income
(expense):
Interest
expense.... (56,364) (215,654) (272,018) 211,679(f) (60,339) (221,563) 221,563(k) (60,339)
Interest
income..... 76,648 178,710 255,358 -- 255,358 97,391 352,749
Other
income..... 10,389 16,883 27,272 39,820(g) 67,092 119,947 -- 187,039
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
30,673 (20,061) 10,612 251,499 262,111 (4,225) 221,563 479,449
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Income before
taxes........ 1,024,367 2,386,428 3,410,795 2,696,706 6,107,501 2,915,393 3,118,402 12,141,296
Provision for
income
taxes........ 153,259 869,364 1,022,623 1,472,790(h) 2,495,413 300,183 1,816,096(l) 4,613,692
----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
Net income..... $ 871,108 $ 1,517,064 $ 2,388,172 $ 1,223,916 $ 3,612,088 $ 2,615,210 $ 1,300,306 $ 7,527,604
=========== =========== =========== =========== =========== =========== =========== ============
Pro forma net
income per
share........ $ 0.42 $ .65
=========== ============
Pro forma
weighted
average
shares
outstanding... 8,572,236 11,501,350
=========== ============
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-9
<PAGE> 112
SERVICE EXPERTS, INC.
PRO FORMA COMBINING FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the elimination of all debt assumed to be paid by sellers prior to
closing
(b) Reflects the distribution of equity in excess of minimum required per merger
agreements
(c) Reflects the payments to owners of the Subsidiaries of $10,340,340 in cash
and 2,929,114 shares of common stock
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS -- SERVICE EXPERTS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<C> <C> <S> <C> <C>
(d) REFLECTS THE FOLLOWING ADJUSTMENTS TO COST OF GOODS SOLD:
(i) Elimination of discretionary employee bonuses.............. $ (120,333) $ --
----------- -----------
(e) 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-compensation 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
(ix) 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 are
part of the corporate office adjustments................... (71,720) (35,860)
----------- -----------
$ (3,035,621) $ (2,445,207)
=========== ===========
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE
RELATED TO:
(i) Elimination of debt distributed to shareholder of Vision
Holding Company, Inc....................................... 72,830 44,678
(ii) Elimination of interest on debt distributed to shareholders
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
=========== ===========
(g) REFLECTS THE FOLLOWING ADJUSTMENT TO OTHER INCOME:
(i) The addition of income from its 37% investment in Future
University................................................. $ 91,006 $ 39,820
=========== ===========
</TABLE>
F-10
<PAGE> 113
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
----------- -----------
<C> <C> <S> <C> <C>
(h) 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 certain Predecessor
Companies previously were taxed as Subchapter S
corporations............................................... $ 1,253,493 $ 448,042
(ii) Additional income taxes on adjustments (d) thru (g)........ 1,370,228 1,024,748
----------- -----------
$ 2,623,721 $ 1,472,790
=========== ===========
</TABLE>
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS -- ACQUISITIONS
<TABLE>
<C> <C> <S> <C> <C>
(i) REFLECTS THE FOLLOWING ADJUSTMENTS TO COST OF GOODS SOLD:
(i) Adjust rent expense per new leases......................... $ (132,647) $ (99,485)
(ii) Elimination of real estate depreciation.................... (21,430) (16,073)
------------ -------------
$ (154,077) $ (115,558)
========== ==========
(j) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owner's compensation............. $ (6,262,052) $ (5,696,540)
(ii) Additional compensation relating to new agreements with
previous owners............................................ 1,911,170 $ 1,433,378
(iii) Three regional vp's and one MIS director................... 682,000 511,500
(iv) Goodwill amortization...................................... 1,293,841 970,381
------------ -------------
$ (2,375,041) $ (2,781,281)
------------ -------------
(k) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE:
(i) Elimination of interest expense on debt retired............ $ 234,070 $ 221,563
========== ==========
(l) 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 certain Acquisition
Companies previously were taxed as Subchapter S
corporations............................................... $ 2,184 $ 807,666
(ii) Additional income taxes on adjustments (i) thru (k)........ $ 1,050,011 $ 1,010,430
------------ -------------
$ 1,052,195 $ 1,818,096
========== ==========
</TABLE>
F-11
<PAGE> 114
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Service Experts, Inc.
We have audited the accompanying balance sheets of Service Experts, Inc.
(formerly AC Service & Installation Co., Inc. and Donelson Air Conditioning
Company -- see Note 1) 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.
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 from
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 Service Experts,
Inc. (formerly AC Service & Installation Co., Inc. and Donelson Air Conditioning
Company -- see Note 1) 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 5, 1996,
except for the first paragraph
of Note 1, and the second and
third paragraphs of Note 11,
as to which the date is
November 14, 1996
F-12
<PAGE> 115
SERVICE EXPERTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 91,096 $ 275,720 $12,904,442
Receivables:
Trade, net of allowance for doubtful accounts of $135,786 in
1994 and $135,000 in 1995.................................. 1,944,403 1,975,449 5,289,164
Related party................................................ -- 207,259 46,989
Employee..................................................... 13,411 63,092 88,791
Other........................................................ 140,593 77,473 256,075
---------- ---------- -------------
2,098,407 2,323,273 5,681,019
Inventories.................................................... 209,340 234,439 1,883,501
Costs and estimated earnings in excess of billings............. 55,936 30,740 199,395
Prepaid expenses and other current assets...................... 12,264 9,143 437,291
Current portion of notes receivable, net....................... -- -- 277,604
Deferred income taxes.......................................... -- 16,817 567,484
---------- ---------- -------------
Total current assets.................................... 2,467,043 2,890,132 21,950,736
Property, buildings and equipment:
Land........................................................... 105,000 105,000 --
Buildings...................................................... 707,999 766,677 --
Furniture and fixtures......................................... 182,516 396,278 1,050,579
Machinery and equipment........................................ 121,500 162,883 1,837,051
Vehicles....................................................... 1,047,710 1,300,369 4,676,919
Leasehold improvements......................................... 77,451 67,224 442,330
---------- ---------- -------------
2,242,176 2,798,431 8,006,879
Less accumulated depreciation and amortization................. (872,184) (1,183,066) (4,686,421)
---------- ---------- -------------
1,369,992 1,615,365 3,320,458
Notes receivable -- related parties, net of current portion...... -- -- 393,609
Notes receivable -- other, net of current portion................ -- -- 287,919
Investments...................................................... -- -- 592,775
Goodwill......................................................... -- -- 821,548
Other assets..................................................... 94,546 64,413 274,182
---------- ---------- -------------
Total assets............................................ $3,931,581 $4,569,910 $27,641,227
========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities................. $ 665,209 $ 403,442 $ 3,034,801
Accrued compensation........................................... 463,995 487,900 1,499,604
Accrued taxes, other than income............................... 39,293 12,728 161,436
Accrued warranties............................................. 54,174 98,379 473,352
Income taxes payable........................................... 25,641 66,793 949,638
Deferred revenue............................................... 215,585 189,108 1,895,578
Billings in excess of costs and estimated earnings............. 235,450 228,283 287,777
Liability to Company benefit plan.............................. 46,332 56,581 94,349
Current portion of long-term debt.............................. 106,594 164,265 149,811
---------- ---------- -------------
Total current liabilities............................... 1,852,273 1,707,479 8,546,346
Long-term debt, net of current portion........................... 516,010 463,529 174,679
Notes payable to stockholders.................................... 448,208 661,808 --
Deferred compensation............................................ -- -- 112,557
Deferred income taxes............................................ 14,986 8,436 119,100
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized,
no shares issued and outstanding............................. -- -- 85,722
Additional paid-in-capital..................................... -- -- 16,049,932
Retained earnings.............................................. -- -- 2,552,891
---------- ---------- -------------
Total stockholders' equity.............................. 1,100,104 1,728,658 18,688,545
---------- ---------- -------------
Total liabilities and stockholders' equity.............. $3,931,581 $4,569,910 $27,641,227
========== ========== ============
</TABLE>
See accompanying notes.
F-13
<PAGE> 116
SERVICE EXPERTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $10,292,295 $14,298,906 $16,452,622 $12,500,548 $18,325,043
Cost of goods sold.............. 7,280,075 10,245,039 11,122,350 8,674,991 11,942,161
----------- ----------- ----------- ----------- -----------
Gross margin.................... 3,012,220 4,053,867 5,330,272 3,825,557 6,382,882
Selling, general and
administrative expenses....... 2,865,476 3,701,883 4,563,134 3,414,471 5,317,278
Bad debt expense................ 43,265 84,338 28,502 20,000 71,910
----------- ----------- ----------- ----------- -----------
Income (loss) from operations... 103,479 267,646 738,636 391,086 993,694
Other income (expense):
Interest expense.............. (74,631) (71,600) (77,149) (48,632) (56,364)
Interest income............... 4,994 7,059 23,186 21,995 76,648
Other income.................. 68,450 17,065 25,569 26,176 10,389
----------- ----------- ----------- ----------- -----------
(1,187) (47,476) (28,394) (461) 30,673
----------- ----------- ----------- ----------- -----------
Income (loss) before federal and
state income taxes............ 102,292 220,170 710,242 390,625 1,024,367
Provision (benefit) for income
taxes:
Current....................... 19,505 48,525 105,055 72,374 443,119
Deferred...................... 2,241 (7,399) (23,367) (37,804) (242,985)
----------- ----------- ----------- ----------- -----------
21,746 41,126 81,688 34,570 200,134
----------- ----------- ----------- ----------- -----------
Net income...................... $ 80,546 $ 179,044 $ 628,554 $ 356,055 $ 824,233
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE> 117
SERVICE EXPERTS, INC.
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
Issuance of common stock in public offering, net of underwriting discounts
and commissions........................................................... 31,007,875
Initial public offering costs................................................ (2,834,016)
Issuance of stock portion of consideration to Predecessor Companies and
Promoters................................................................. --
Cash distributions paid to Predecessor Companies............................. (18,533,241)
Equity acquired in connection with combination............................... 6,495,036
Net income (unaudited)....................................................... 824,233
------------
Balance at September 30, 1996 (unaudited)...................................... $ 18,688,545
===========
</TABLE>
See accompanying notes.
F-15
<PAGE> 118
SERVICE EXPERTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- --------- --------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 80,546 $ 179,044 $ 628,554 $ 356,055 $ 824,233
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 214,789 286,988 411,438 272,779 153,544
Provision (benefit) for deferred income taxes....... 2,241 (7,399) (23,367) (37,804) (242,985)
Provisions for loss on accounts receivable.......... 43,265 84,338 28,502 52,701 --
Gain on asset disposals............................. (53,455) (3,711) (14,018) (14,335) --
Changes in assets and liabilities:
Receivables....................................... (260,964) (731,644) (253,368) (475,327) 420,185
Inventories....................................... (44,848) (76,656) (25,099) 15,618 219,237
Prepaid expenses and other current
assets.......................................... 8,026 27,581 3,121 1,528 749,921
Trade accounts payable and accrued liabilities.... (83,156) 193,280 (261,767) 17,890 (140,070)
Accrued compensation.............................. 458,326 24,734 34,154 679,846 97,305
Accrued taxes, other than income.................. 6,184 9,272 (26,565) (5,656) (5,352)
Accrued warranties................................ 20,516 28,439 44,205 (7,759) (637)
Deferred revenue.................................. 12,767 187,768 (26,477) 54,922 --
Income taxes payable.............................. (10,779) 3,604 41,152 34,921 162,188
Costs and estimated earnings in excess of billings
and billings in excess of costs and estimated
earnings........................................ 155,052 58,864 18,029 309,989 (15,918)
--------- --------- --------- ---------- ------------
Net cash flow provided by operating activities........ 548,510 264,502 578,494 1,255,368 2,221,651
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment........ (283,278) (508,769) (642,470) (580,541) (55,440)
Proceeds from sale of property, buildings, and
equipment........................................... 165,685 4,491 29,810 19,441 --
Purchase of investments............................... -- -- -- -- (590,000)
Cash acquired through purchase of business............ -- -- -- -- 2,499,509
Payment of cash portion of consideration to
predecessor companies............................... -- -- -- -- (18,533,241)
Decrease (increase) in other assets................... (124,162) -- -- 22,623 5,942
--------- --------- --------- ---------- ------------
Net cash used in investing activities................. (241,755) (504,278) (612,660) (538,477) (16,673,230)
FINANCING ACTIVITIES
Retirement of stock................................... (100,000) -- -- -- --
Issuance of stock, net of issuance costs.............. -- 28,173,859
Proceeds of long-term debt and capital leases......... 205,845 119,000 266,139 266,139 --
Payments of long-term debt and capital leases......... (336,545) (192,922) (260,949) (257,387) (481,710)
Proceeds on notes payable to stockholders............. 9,403 220,378 280,000 -- --
Payments on notes payable to stockholders............. -- (83,248) (66,400) -- --
Proceeds on notes payable to related parties.......... -- -- -- 159,990 --
Payments on notes payable to related parties.......... -- -- -- (105,013) (611,848)
--------- --------- --------- ---------- ------------
Net cash provided by (used in) financing activities... (221,297) 63,208 218,790 63,729 27,080,301
--------- --------- --------- ---------- ------------
Increase (decrease) in cash and cash equivalents...... 85,458 (176,568) 184,624 780,620 12,628,722
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 $ 871,716 $ 12,904,442
========== ========== ========== ========== =============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................................... $ 62,053 $ 84,178 $ 77,054 $ 48,632 $ 56,364
========== ========== ========== ========== =============
Income tax paid....................................... $ 9,490 $ 49,460 $ 67,003 $ 38,032 $ --
========== ========== ========== ========== =============
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-16
<PAGE> 119
SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
The Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneously with the closing of the IPO, the Company acquired the
Subsidiaries in the Combination. The Subsidiaries are the Acquiring Company;
Hardwick Air Masters, Inc. d/b/a Airmasters, Inc.; Norrell Heating and Air
Conditioning Company, 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.; and Service Experts of
Palm Springs, Inc. In accordance with the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 97 ("SAB 97"), the historical financial
statements of the Company for periods prior to August 21, 1996 are the combined
financial statements of the Acquiring Company. The operations of the
Subsidiaries have been included in the Company's financial statements from the
date of acquisition. The above mentioned acquisitions have 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").
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 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
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 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," represents
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.
F-17
<PAGE> 120
SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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 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
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.
INCOME TAXES
Donelson Air Conditioning Company, Inc. used 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 former stockholders of AC Service & Installation Co., Inc. elected
under Subchapter S of the Internal Revenue Code to include the Company's income
in their own income for federal income tax
F-18
<PAGE> 121
SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. used the
liability method of accounting for Tennessee state income taxes.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993, 1994 and
1995, the 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-19
<PAGE> 122
SERVICE EXPERTS, INC.
NOTES TO 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 Company has a mortgage note payable to Free Will Baptist, Inc. that is
secured by the 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 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 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 Company
for working capital needs. The 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:
<TABLE>
<S> <C>
1996............................................................. $ 164,265
1997............................................................. 1,159,442
----------
$1,323,707
=========
</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. Employees of the
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 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 Company's accrued matching
contributions totaled $16,160, $30,340 and $45,678 as of December 31, 1993, 1994
and 1995, respectively.
F-20
<PAGE> 123
SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. 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 or results of operations 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.
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-21
<PAGE> 124
SERVICE EXPERTS, INC.
NOTES TO 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.
<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.
operated under Subchapter S of the Internal Revenue Code and was not subject to
corporate federal income tax. In connection with the initial public offering
(See Note 9), the Subchapter S election was terminated. As a result, the Company
is subject to corporate income taxes subsequent to the termination of S
corporation status. AC Service and Installation Co., Inc. had net operating
income (loss) for income tax purposes of $74,800, $(142,000), $521,000 and
$1,024,367 for 1993, 1994, 1995 and the nine months ended September 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 nine
months ended September 30, 1996, income tax expense (benefit) under the
provisions of Financial Accounting Standard No. 109 would have been $(8,200),
$16,915, $205,200 and $388,850, respectively.
At the date of termination of S corporation status, AC Service &
Installation Co., Inc. was required to provide deferred taxes for cumulative
temporary differences between financial reporting and tax reporting basis of
assets and liabilities. Such deferred taxes was based on the cumulative
temporary differences at the date of termination of S corporation status.
The effect of recognizing the deferred taxes was included in income from
continuing operations. The termination of S corporation status occurred on
August 21, 1996, and a deferred tax asset of $331,800 was recorded.
8. RELATED PARTY TRANSACTIONS
The Company has two outstanding notes receivable of $100,000 each from the
two stockholders of the Company as of December 31, 1995. The notes are payable
upon demand and bear annual interest of 5%.
9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Acquiring Company exchanged 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, in exchange for shares of its common stock
and cash. The combination was effected in accordance with executed combination
agreements with air conditioning and heating companies and Service Experts, Inc.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by
F-22
<PAGE> 125
SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. SUBSEQUENT EVENT
At 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.
Between October 24, 1996 and November 14, 1996, the Company entered into
definitive agreements to acquire 22 heating, ventilation and air conditioning
(HVAC) service centers throughout the United States. Pursuant to these
agreements, the Company will merge with or acquire the stock of the 22 companies
for an aggregate of approximately $10.3 million cash and approximately 2,929,000
shares of Common Stock. Closing of the transactions is subject to customary
conditions and is expected to take place prior to year end.
The Company has a commitment from a bank to borrow up to $20 million to be
used for acquisitions, working capital and capital expenditures. Management
believes that its existing cash balances and cash generated from operations will
be sufficient to fund the Company's planned capital expenditures through the
remainder of 1996.
F-23
<PAGE> 126
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Falso Heating and Sheet Metal Co., Inc.
We have audited the accompanying balance sheets of Falso Heating and Sheet
Metal Co., Inc. as of December 31, 1995, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. 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 Falso Heating and Sheet
Metal Co., Inc. at December 31, 1995, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 8, 1996
F-24
<PAGE> 127
FALSO HEATING AND SHEET METAL CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1994 1995 1996
----------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 58,450 $ 219,579 $ 608,657
Receivables:
Trade................................................ 1,243,304 1,208,319 1,292,713
Related party........................................ -- 3,931 1,931
Employee............................................. -- 192 --
Other................................................ -- -- 40,000
----------- ---------- ----------
1,243,304 1,212,442 1,334,644
Inventories............................................. 179,098 117,639 59,083
Costs and estimated earnings in excess of billings...... 152,899 166,329 78,100
Prepaid income taxes.................................... -- 16,291 8,710
Prepaid expenses and other current assets............... 20,608 40,327 26,527
Deferred income taxes................................... 1,400 1,399 --
----------- ---------- ----------
Total current assets............................ 1,655,759 1,774,006 2,115,721
Property, buildings and equipment:
Furniture and fixtures.................................. 212,205 238,733 276,251
Machinery and equipment................................. 260,962 268,240 274,292
Vehicles................................................ 425,806 450,044 477,625
Leasehold improvements.................................. 186,189 186,189 195,898
----------- ---------- ----------
1,085,162 1,143,206 1,224,066
Less accumulated depreciation and amortization.......... (705,119) (828,279) (900,956)
----------- ---------- ----------
380,043 314,927 323,110
Other assets.............................................. 4,060 8,275 7,585
----------- ---------- ----------
Total assets.................................... $ 2,039,862 $2,097,208 $ 2,446,416
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt......................................... $ 100,000 $ -- $ --
Trade accounts payable and accrued liabilities.......... 626,962 691,984 208,712
Accrued compensation.................................... 110,689 144,215 864,875
Accrued taxes, other than income........................ 10,675 14,426 37,152
Accrued warranties...................................... 17,871 93,750 84,720
Income taxes payable.................................... 61,612 9,759 --
Billings in excess of costs and estimated earnings...... 23,462 30,521 57,400
Liability to Companies' benefit plans................... 43,921 57,373 42,250
Current portion of long-term debt and capital lease
obligations.......................................... 76,651 65,494 67,103
----------- ---------- ----------
Total current liabilities....................... 1,071,843 1,107,522 1,362,212
Long-term debt, net of current portion.................... 110,778 80,535 56,945
Note payable -- stockholder............................... 100,000 19,094 13,162
Deferred income taxes..................................... 10,400 20,334 22,445
Stockholders' equity:
Common stock (A), no par value, voting, 10 shares
authorized, issued and outstanding................... 3,450 3,450 3,450
Common stock (B), no par value, non-voting, 990 shares
authorized, issued and outstanding................... 273,240 273,240 273,240
Retained earnings....................................... 470,151 593,033 714,962
----------- ---------- ----------
Total stockholders' equity...................... 746,841 869,723 991,652
----------- ---------- ----------
Total liabilities and stockholders' equity...... $ 2,039,862 $2,097,208 $ 2,446,416
=========== ========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE> 128
FALSO HEATING AND SHEET METAL CO., INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $6,687,694 $8,213,510 $8,223,966 $5,652,907 $7,296,387
Cost of goods sold................... 5,066,431 6,209,046 5,993,600 4,166,619 5,286,970
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,621,263 2,004,464 2,230,366 1,486,288 2,009,417
Selling, general and administrative
expenses........................... 1,461,382 1,637,052 2,005,800 1,343,122 1,836,567
Bad debt expense..................... 24,306 112,244 6,170 1,274 --
---------- ---------- ---------- ---------- ----------
Income from operations............... 135,575 255,168 218,396 141,892 172,850
Other income (expense):
Interest expense................... (29,044) (32,097) (21,924) (18,233) (9,987)
Interest income.................... 53 376 9,261 3,130 6,139
Other income (expense)............. (8,366) 1,804 5,772 5,772 3,507
---------- ---------- ---------- ---------- ----------
(37,357) (29,917) (6,891) (9,331) (341)
---------- ---------- ---------- ---------- ----------
Income before taxes.................. 98,218 225,251 211,505 132,561 172,509
Provision (benefit) for income taxes:
Current............................ 27,219 74,482 78,688 40,888 47,071
Deferred........................... 10,900 (1,900) 9,935 9,936 3,509
---------- ---------- ---------- ---------- ----------
38,119 72,582 88,623 50,824 50,580
---------- ---------- ---------- ---------- ----------
Net income........................... $ 60,099 $ 152,669 $ 122,882 $ 81,737 $ 121,929
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-26
<PAGE> 129
FALSO HEATING AND SHEET METAL CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK(A)
COMMON STOCK(B)
NO PAR VALUE NO PAR VALUE
--------------- ----------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------ ------ -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 (unaudited).... 10 $3,450 990 $273,240 $ 257,383 $534,073
Net income (unaudited)...................... 60,099 60,099
-- ----- --- -------- -------- --------
Balance at December 31, 1993 (unaudited).... 10 3,450 990 273,240 317,482 594,172
Net income (unaudited)...................... 152,669 152,669
-- ----- --- -------- -------- --------
Balance at December 31, 1994 (unaudited).... 10 3,450 990 273,240 470,151 746,841
Net income.................................. 122,882 122,882
-- ----- --- -------- -------- --------
Balance at December 31, 1995................ 10 3,450 990 273,240 593,033 869,723
Net income (unaudited)...................... 121,929 121,929
-- ----- --- -------- -------- --------
Balance at September 30, 1996 (unaudited)... 10 $3,450 990 $273,240 $ 714,962 $991,652
== ===== === ======== ======== ========
</TABLE>
See accompanying notes.
F-27
<PAGE> 130
FALSO HEATING AND SHEET METAL CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 60,099 $ 152,669 $ 122,882 $ 81,737 $ 121,929
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization...... 91,294 120,261 142,333 101,310 79,179
Provision (benefit) for deferred
income taxes..................... 10,900 (1,900) 9,935 9,936 3,509
(Gain) loss on asset disposals..... 8,366 (1,804) (107) (107) (3,507)
Changes in assets and liabilities:
Receivables................... 113,279 (317,835) 30,862 164,179 (122,202)
Inventories................... (29,665) (42,871) 61,459 129,147 58,556
Prepaid expenses and other
current
assets...................... (7,463) 8,119 (19,719) (33,361) 13,800
Trade accounts payable and
accrued liabilities......... (108,339) 367,097 78,474 (303,353) (498,395)
Accrued compensation.......... 27,269 28,704 33,526 304,611 720,660
Accrued taxes, other than
income...................... (5,334) (9,000) 20,968 149,190 310,187
Accrued warranties............ (1,834) 16,714 75,879 60,849 (9,030)
Income taxes payable.......... 19,600 49,470 (85,361) (210,557) (289,638)
Costs and estimated earnings
in excess of billings and
billings in excess of costs
and estimated earnings...... 5,237 (84,131) (6,371) 142,837 115,108
----------- ----------- ---------- ----------- -----------
Net cash flow provided by operating
activities........................... 183,409 285,493 464,760 596,424 500,156
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................ (153,379) (188,572) (77,893) (46,534) (90,230)
Proceeds from sale of property,
buildings, and equipment............. 34,251 2,250 783 783 6,375
(Increase) decrease in other assets.... -- 3,217 (4,215) (4,215) 690
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities........................... (119,128) (183,105) (81,325) (49,966) (83,165)
FINANCING ACTIVITIES
Payments on short-term debt............ (40,000) (40,000) (100,000) (100,000) --
Proceeds from long-term debt........... 86,285 113,194 39,753 39,753 34,200
Payments of long-term debt............. (65,826) (67,878) (81,153) (66,272) (56,181)
Payments on notes payable officers..... (52,916) (110,923) (80,906) (77,608) (5,932)
----------- ----------- ----------- ----------- -----------
Net cash used in financing
activities........................... (72,457) (105,607) (222,306) (204,127) (27,913)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents.......................... (8,176) (3,219) 161,129 342,331 389,078
Cash and cash equivalents at beginning
of period............................ 69,845 61,669 58,450 58,450 219,579
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period............................... $ 61,669 $ 58,450 $ 219,579 $ 400,781 $ 608,657
=========== =========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid.......................... $ 30,344 $ 32,097 $ 21,924 $ 18,233 $ 9,987
=========== =========== =========== =========== ===========
Income taxes paid...................... $ -- $ 41,919 $ 146,833 $ 113,833 $ 49,248
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-28
<PAGE> 131
FALSO HEATING AND SHEET METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Falso Heating and Sheet Metal Co., 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
upstate New York.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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,
1995 audited financial statements appearing herein. The results of the nine
months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
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, which is
usually within one to two days.
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 $137,796 and $206,424 at December 31, 1994 (unaudited) 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, 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.
F-29
<PAGE> 132
FALSO HEATING AND SHEET METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
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, 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>
Furniture and fixtures..................................................... 5-7
Machinery and equipment.................................................... 5-7
Vehicles................................................................... 5
Leasehold improvements..................................................... 31.5-39
</TABLE>
WARRANTIES
The Company provides the retail customer with a one year warranty or five
year extended 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 for five years. 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
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.
F-30
<PAGE> 133
FALSO HEATING AND SHEET METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Company 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995 amounts charged to bad debt expense totaled $24,306, $115,644 and $10,166,
respectively, and accounts written off, net of recoveries, were $24,306,
$112,244 and $6,170, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Company expensed $54,157, $50,075
and $72,357, 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
----------- -----------
(UNAUDITED)
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts..................... $1,070,514 $ 1,491,708
Estimated earnings....................................... 460,538 467,790
---------- ----------
1,531,052 1,959,498
Less applicable billings................................... (1,401,615 ) (1,823,690)
---------- ----------
$ 129,437 $ 135,808
========== ==========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 152,899 $ 166,329
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (23,462 ) (30,521)
---------- ----------
$ 129,437 $ 135,808
========== ==========
</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-31
<PAGE> 134
FALSO HEATING AND SHEET METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Lines of credit.............................................. $ 190,577 $ 39,129
Installment and equipment notes.............................. 96,852 106,900
-------- --------
287,429 146,029
Less current portion......................................... (176,651) (65,494)
-------- --------
$ 110,778 $ 80,535
======== ========
</TABLE>
The Company has two lines of credit with a bank, one for operational
purposes with a total borrowing limit of $400,000. Borrowings under this line
were $100,000 and $-0-at December 31, 1994 (unaudited) and 1995, respectively.
The Company's second line of credit is for equipment purchases and has a total
borrowing limit of $150,000. Borrowings under this line were $90,578 and $39,129
at December 31, 1994 (unaudited) and 1995, respectively and are collateralized
by the equipment purchased. Monthly principal payments can fluctuate based on
the amount of equipment financed and interest rates and were $2,917 as of
December 31, 1995. These lines of credit bear interest at a function of the
prime rate, ranging from prime plus .25% to prime plus .75% and the terms of the
lines of credit are renegotiated on an annual basis.
The Company has installment loans with various lenders which are secured by
vehicles. These loans bear interest at fixed rates ranging from 6.5% to 10.75%
per annum. These loans require monthly payments ranging from $267 to $4,662 and
are due through March, 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 65,494
1997........................................................... 51,721
1998........................................................... 27,411
1999........................................................... 1,403
--------
$146,029
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $100,718, $116,091 and
$117,609 for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The
Company leases certain vehicles and office and warehouse facilities under terms
of noncancelable operating lease agreements which expire at various dates
through June, 2001. Minimum rental commitments at December 31, 1995 under
operating leases having an initial noncancelable term of one year or more are as
follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996........................................................... $ 114,559
1997........................................................... 103,334
1998........................................................... 102,120
1999........................................................... 102,120
2000........................................................... 102,120
--------
$ 524,253
========
</TABLE>
F-32
<PAGE> 135
FALSO HEATING AND SHEET METAL CO., 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 ("the Code"). During
1995 the Company combined the 401(k) plan with their profit sharing plan.
Substantially all employees of the Company 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 by the Internal Revenue Service. The Company provides matching
contributions of 25% of the total contributions by a plan member, not to exceed
6% of the employee's total calendar year compensation. In addition, the Company
can contribute a discretionary portion approved by the Board of Directors. The
Company's matching and profit sharing contributions totaled $50,780, $66,107 and
$76,924 for the years ended December 31, 1993 (unaudited), 1994 (unaudited) 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 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 maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their 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 $479,674,
$500,200 and $685,100 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
8. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal......................................... $18,772 $56,749 $60,138
State........................................... 8,447 17,733 18,550
Deferred.......................................... 10,900 (1,900) 9,935
------- ------- -------
$38,119 $72,582 $88,623
======= ======= =======
</TABLE>
F-33
<PAGE> 136
FALSO HEATING AND SHEET METAL CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................. $10,400 $20,334
------- -------
Deferred tax liabilities........................................ 10,400 20,334
Deferred tax assets:
Accrued expenses.............................................. 1,400 1,399
------- -------
Total gross deferred tax assets................................. 1,400 1,399
------- -------
Valuation allowance............................................. -- --
------- -------
Net deferred tax liabilities.................................... $ 9,000 $18,935
======= =======
</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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate....................... $ 33,394 $76,585 $71,912
State income tax less applicable federal tax
benefit............................................. 7,276 11,407 13,794
Effects of graduated tax rates........................ (2,551) (15,410) --
Other, net............................................ -- -- 2,917
-------- ------- -------
$ 38,119 $72,582 $88,623
======== ======= =======
</TABLE>
9. RELATED PARTY TRANSACTIONS
Notes Payable to Related Parties
The Company has a note payable to a shareholder which bears annual interest
at the prime rate. There is no maturity date stated and has been classified as
long-term on the balance sheet.
Other Related Party Transaction
The Company leases facility space from a stockholder of the Company. Rental
expense on this related party operating lease amount to $93,320, $102,120 and
$102,120 for the years 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
10. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-34
<PAGE> 137
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Combined Pardee Refrigeration Company, Incorporated, Island Air Conditioning,
Inc., and Sanders Indoor Comfort, Inc.
We have audited the accompanying combined balance sheets of Pardee
Refrigeration Company, Incorporated, Island Air Conditioning, Inc., and Sanders
Indoor Comfort, Inc. as of November 30, 1994 and 1995, and the related combined
statements of income, stockholders' equity, and cash flows for the years then
ended. 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 Pardee
Refrigeration Company, Incorporated, Island Air Conditioning, Inc., and Sanders
Indoor Comfort, Inc. at November 30, 1994 and 1995, and the combined results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
October 11, 1996
F-35
<PAGE> 138
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------- AUGUST 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 344,168 $ 710,766 $ 683,988
Receivables:
Trade, net of allowance for doubtful accounts of
$41,356 and $23,257 in 1995 and 1994,
respectively........................................ 186,481 328,677 348,868
Related party......................................... 48,980 36,247 19,450
Employee.............................................. 1,409 2,158 5,778
Other................................................. 856 4,717 1,999
---------- ---------- ----------
237,726 371,799 376,095
Inventories.............................................. 97,029 100,332 79,009
Investments.............................................. 98,402 78,460 117,383
Prepaid expenses and other current assets................ 2,330 3,033 8,870
Deferred income taxes.................................... 44,373 36,140 21,186
---------- ---------- ----------
Total current assets............................. 824,028 1,300,530 1,286,531
Property and equipment, at cost:
Furniture and fixtures................................... 146,222 180,568 200,532
Machinery and equipment.................................. 37,526 67,088 73,093
Vehicles................................................. 441,459 604,773 716,867
---------- ---------- ----------
625,207 852,429 990,492
Less accumulated depreciation and amortization........... (309,988) (418,293) (550,422)
---------- ---------- ----------
315,219 434,136 440,070
Other assets............................................... 20,091 51,114 51,114
Intangible assets, net of accumulated amortization of $726
in 1995.................................................. -- 6,774 6,774
---------- ---------- ----------
Total assets..................................... $1,159,338 $1,792,554 $ 1,784,489
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 199,702 $ 330,794 $ 273,029
Accrued compensation..................................... 102,925 316,296 348,942
Accrued warranties....................................... 111,061 91,169 56,798
Income taxes payable..................................... 43,486 28,642 10,622
Deferred revenue......................................... 160,176 209,202 243,399
Current portion of long-term debt and capital lease
obligations........................................... 97,685 174,427 151,950
---------- ---------- ----------
Total current liabilities........................ 715,035 1,150,530 1,084,740
Long-term debt and capital lease obligations, net of
current portion.......................................... 118,888 169,737 140,262
Notes payable to related parties........................... 29,000 -- --
Deferred income taxes...................................... 5,810 9,791 9,791
Total Stockholders' equity....................... 290,605 462,496 549,696
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,159,338 $1,792,554 $ 1,784,489
========== ========== ==========
</TABLE>
See accompanying notes.
F-36
<PAGE> 139
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 4,109,632 $ 4,929,808 $ 6,385,477 $ 4,589,179 $ 5,625,751
Cost of goods sold................... 3,130,771 3,754,505 4,465,504 3,098,051 3,854,156
--------- --------- --------- --------- ---------
Gross margin......................... 978,861 1,175,303 1,919,973 1,491,128 1,771,595
Selling, general and administrative
expenses........................... 853,005 1,145,187 1,741,749 1,279,788 1,629,896
--------- --------- --------- --------- ---------
Income from operations............... 125,856 30,116 178,224 211,340 141,699
Other income (expense):
Interest expense................... (16,888) (17,635) (24,169) (15,381) (19,866)
Interest income.................... 19,064 7,548 23,080 15,785 18,238
Other income....................... 4,992 31,170 37,413 26,172 9,994
--------- --------- --------- --------- ---------
7,168 21,083 36,324 26,576 8,366
--------- --------- --------- --------- ---------
Income before income taxes........... 133,024 51,199 214,548 237,916 150,065
Provision (benefit) for income taxes:
Current............................ 29,672 11,203 31,793 87,422 13,347
Deferred........................... (15,520) (12,317) 12,214 12,214 14,954
--------- --------- --------- --------- ---------
14,152 (1,114) 44,007 99,636 28,301
--------- --------- --------- --------- ---------
Net income........................... $ 118,872 $ 52,313 $ 170,541 $ 138,280 $ 121,764
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-37
<PAGE> 140
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Balance at December 1, 1992 (unaudited)........................................... $118,420
Net income (unaudited).......................................................... 118,872
--------
Balance at November 30, 1993 (unaudited).......................................... 237,292
Issuance of stock............................................................... 1,000
Net income...................................................................... 52,313
--------
Balance at November 30, 1994...................................................... 290,605
Issuance of stock............................................................... 1,350
Net income...................................................................... 170,541
--------
Balance at November 30, 1995...................................................... 462,496
Capital distributions (unaudited)............................................... (34,564)
Net income (unaudited).......................................................... 121,764
--------
Balance at August 31, 1996 (unaudited)............................................ $549,696
========
</TABLE>
See accompanying notes.
F-38
<PAGE> 141
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED NOVEMBER 30, AUGUST 31,
----------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 118,872 $ 52,313 $ 170,541 $ 138,280 $ 121,764
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 86,175 89,000 126,265 91,670 132,129
Provision (benefit) for deferred income taxes.......... (15,520) (12,317) 12,214 12,214 14,954
Provisions for loss on accounts receivable............. 23,573 4,636 37,232 4,636 13,937
(Gain) loss on asset disposals......................... (4,516) 422 (5,802) (5,802) --
Changes in assets and liabilities:
Receivables............................................ (7,693) 54,564 (171,305) (245,539) (18,233)
Inventories............................................ (38,203) 23,096 (3,303) (512) 21,323
Prepaid expenses and other current assets.............. 32 (2,330) (702) (1,049) (5,837)
Trade accounts payable and accrued liabilities......... (42,673) 62,079 131,090 93,981 (57,765)
Accrued compensation................................... 60,684 16,925 213,371 293,329 32,646
Accrued warranties..................................... 41,456 25,807 (19,892) (11,950) (34,371)
Deferred revenue....................................... (5,683) 54,231 49,026 37,110 34,197
Income taxes payable................................... 29,868 (7,205) (14,844) 38,203 (18,020)
--------- --------- --------- --------- ---------
Net cash flow provided by operating activities........... 246,372 361,221 523,891 444,571 236,724
INVESTING ACTIVITIES
Purchase of property and equipment....................... (229,313) (161,069) (248,654) (194,292) (157,499)
Proceeds from sale of property and equipment............. 6,000 -- 10,000 10,000 19,436
Purchase of intangibles.................................. -- -- (7,500) (7,500) --
Purchase of investments.................................. -- (98,402) (24,811) (14,358) (38,923)
Proceeds from sale of investments........................ -- -- 44,754 44,754 --
(Increase) in other assets............................... -- (20,091) (31,023) (28,267) --
--------- --------- --------- --------- ---------
Net cash used in investing activities.................... (223,313) (279,562) (257,234) (189,663) (176,986)
FINANCING ACTIVITIES
Issuance of common stock................................. -- 1,000 1,350 1,350 --
Distributions to stockholders............................ -- -- -- -- (34,564)
Proceeds of long-term debt and capital lease
obligations............................................ 153,042 119,460 293,400 236,591 45,000
Payments on long-term debt and capital lease
obligations............................................ (65,057) (106,750) (165,809) (134,051) (96,952)
Proceeds of notes payable to related parties............. -- 29,000 -- -- --
Payments on notes payable to related parties............. -- (35,874) (29,000) (15,000) --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities...... 87,985 6,836 99,941 88,890 (86,516)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents......... 111,044 88,495 366,598 343,798 (26,778)
Cash and cash equivalents at beginning of period......... 144,629 255,673 344,168 344,168 710,766
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period............... $ 255,673 $ 344,168 $ 710,766 $ 687,966 $ 683,988
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................ $ 16,888 $ 17,635 $ 24,169 $ 15,381 $ 19,866
========= ========= ========= ========= =========
Income taxes paid........................................ $ 5,259 $ 19,946 $ 12,540 $ 9,405 $ 14,895
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-39
<PAGE> 142
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1994 AND 1995 AND AUGUST 31, 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Pardee Refrigeration Company, Incorporated, Island Air Conditioning, Inc.,
and Sanders Indoor Comfort, Inc., hereafter referred to as the "Combined
Company," are under common ownership. These companies operate in one industry
segment and are primarily engaged in the installation and servicing of air
conditioning and heating systems for commercial and residential customers in the
greater Charleston, South Carolina area.
PRINCIPLES OF COMBINATION
The combined financial statements of the Combined Company include the
accounts of Pardee Refrigeration Company Incorporated for the three years ended
November 30, 1995; Island Air Conditioning, Inc. for the period from September
1, 1994 (first day of operations) through December 31, 1994 and the year ended
December 31, 1995; and Sanders Indoor Comfort, Inc. for the period from August
23, 1995 (first day of operations) through December 31, 1995. The two latter
companies report on a calendar year. All significant intercompany accounts and
transactions have been eliminated in consolidation.
UNAUDITED FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income, stockholders' equity and cash flows for
the year ended November 30, 1993 has been prepared by the Company's management
and are unaudited. These financial statements include all adjustments necessary
for a fair presentation.
The combined balance sheet of August 31, 1996 and the related combined
statements of income and cash flows for the nine months ended August 31, 1995
and 1996 (interim financial statements) have been prepared by the Combined
Company's 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 November 30,
1995 audited consolidated financial statements appearing herein. The results of
the nine months ended August 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
CASH EQUIVALENTS
The Combined Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
RECOGNITION OF INCOME
Revenues on all of the Combined Company's heating and air conditioning
installation, service and maintenance for residential and commercial buildings
are recognized upon completion of services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
F-40
<PAGE> 143
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 Combined 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 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
Vehicles...................................................................... 5
</TABLE>
WARRANTIES
The Combined 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 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
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.
INCOME TAXES
Pardee Refrigeration Company, Incorporated 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 Island Air Conditioning, Inc. and Sanders Indoor
Comfort, Inc. have elected under Subchapter S of the Internal Revenue Code to
include each respective company's income in their own income for federal and
state income tax purposes. Accordingly, these companies are not subject to
federal and state income taxes.
F-41
<PAGE> 144
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Combined Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 and 1995, the Combined Company expensed $74,858, $119,530 and
$164,706, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Combined 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
Combined Company's financial statements.
2. SHORT-TERM INVESTMENTS
Short-term investments include investments in mutual funds and equity
securities. 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 Combined Company's intent
not to hold these investments to maturity.
The Combined Company's investment securities are classified as available
for sale under SFAS No. 115. On securities classified as available-for-sale, the
carrying amount is a reasonable estimate of fair value. The cost of
available-for-sale securities was $98,402 and $78,460 at November 30, 1994 and
1995, respectively. The adoption of SFAS No. 115 did not have a significant
impact on the Combined Company's financial statements.
3. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
NOVEMBER 30,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Vehicle and equipment notes.................................... $202,183 $283,463
Line of credit................................................. -- 50,000
-------- --------
Total long-term debt........................................... 202,183 333,463
Less current portion........................................... 93,994 170,124
-------- --------
$108,189 $163,339
======== ========
</TABLE>
The Combined Company has various vehicle and equipment notes which require
monthly payments ranging from $129 to $620 including principle and interest at
fixed rates ranging from 6.5% to 10.5% through 1999.
The Combined Company has an outstanding line of credit with a bank which
allows a maximum borrowing of $100,000. Interest is payable monthly at the
bank's prime rate plus 0.75% (9.25% at November 30, 1995) and expires June 29,
1997.
F-42
<PAGE> 145
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of November 30, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $170,124
1997.............................................................. 88,690
1998.............................................................. 55,858
1999.............................................................. 18,521
--------
$333,193
========
</TABLE>
In 1996, the Combined Company paid in full all of its outstanding long-term
debt and capital lease obligations.
4. LEASES
Total rental expense for all leases was $36,000, $47,483 and $57,892 for
1993 (unaudited), 1994 and 1995, respectively. The Combined Company leases
certain vehicles, equipment, and office and warehouse facilities under terms of
noncancellable operating and capital lease agreements which expire at various
dates through 1999. Minimum rental commitments at November 30, 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>
1997............................................................ $ 5,659 $30,897
1998............................................................ 5,659 17,325
1999............................................................ 1,415 --
------- -------
$12,733 $48,222
=======
Amounts representing interest................................... 2,032
-------
Present value of net minimum rentals (including $4,303
classified as current)........................................ $10,701
=======
</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>
NOVEMBER 30,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Machinery and equipment........................................ $ 7,777 $ --
Furniture and fixtures......................................... 16,748 16,748
Less accumulated amortization.................................. (13,085) (11,925)
-------- --------
Net equipment under capital leases............................. $ 11,440 $ 4,823
======== ========
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
5. RELATED PARTY TRANSACTIONS
The Combined Company leases office and warehouse facilities as well as
certain equipment under a capitalized lease obligation from a company owned by
the stockholders and officers. Lease payments of $38,604, $38,841 and $38,368
were paid for the years ended November 30, 1993 (unaudited), 1994 and 1995,
respectively.
F-43
<PAGE> 146
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------
1993 1994 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal.............................................. $ 24,152 $ 8,385 $26,021
State................................................ 5,520 2,818 5,772
Deferred............................................... (15,520) (12,317) 12,214
-------- -------- -------
$ 14,152 $ (1,114) $44,007
======== ======== =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
-----------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................... $ 5,810 $ 9,791
Deferred tax assets:
Accrued warranties............................................... 41,426 34,006
Deferred revenue and other....................................... 2,947 2,134
------- -------
Total deferred tax assets.......................................... 44,373 36,140
Valuation allowance................................................ -- --
------- -------
Net deferred tax assets............................................ $38,563 $26,349
======= =======
</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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED NOVEMBER 30,
----------------------------------
1993 1994 1995
----------- ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate...................... $ 45,228 $17,408 $ 72,946
State income tax less applicable federal tax
benefit............................................ 3,643 770 4,890
Income taxes of S Corporations....................... -- (3,469) (24,442)
Effect of graduated tax rates and other, net......... (34,719) (15,823) (9,387)
----------- ------- ---------
$ 14,152 $(1,114) $ 44,007
=========== ======= =========
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Island Air Conditioning, Inc. and Sanders Indoor Comfort, Inc. operate
under Subchapter S of the Internal Revenue Code and are not subject to corporate
federal and state income tax. In connection with the contemplated merger (see
Note 10), the Subchapter S election will be terminated. As a result, these
companies will be subject to corporate income taxes subsequent to the
termination of S Corporation status. These companies had net operating income
(loss) for income tax purposes of $(6,344), $68,397, and $72,169 for 1994, 1995,
and the nine months ended August 31, 1996, respectively. Had these companies
filed federal
F-44
<PAGE> 147
PARDEE REFRIGERATION COMPANY, INCORPORATED,
ISLAND AIR CONDITIONING, INC., AND SANDERS INDOOR COMFORT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
and state income tax returns as a regular corporation for 1994, 1995 and the
nine months ended August 31, 1996, income tax expense under the provisions of
Financial Accounting Standard No. 109 would have been $3,469, $24,442, and
$8,537, respectively.
At the date of termination of S corporation status, these companies 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. If the termination of S corporation
status had occurred at August 31, 1996, the deferred tax liability would have
been approximately $6,928.
7. 401(K) SAVINGS PLAN
Substantially all employees of the Company with one year of service and 21
years of age or older are eligible for participation in the Pardee Heating and
Air Conditioning 401(k) and Profit Sharing Plan (the "Plan") which became
effective December 1, 1993. Participation in the Plan is on a voluntary basis
and employee contributions to the Plan are made through payroll deduction.
Combined Company contributions to the Plan are discretionary and
established by the Board of Directors on a yearly basis. For the years ended
November 30, 1994 and 1995, the Combined Company made matching contributions of
$6,986 and $25,000, respectively.
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Combined Company maintains general liability insurance coverage and
umbrella policies to ensure itself against any liabilities occurring in the
normal course of business. The Combined Company believes that its insurance
coverage is adequate.
The Company is a party to a number of legal proceedings arising in the
ordinary course of 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.
9. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $209,054,
$384,370 and $636,778 in 1993 (unaudited), 1994 and 1995, respectively.
10. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-45
<PAGE> 148
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Frees Service Experts, Inc.
We have audited the accompanying balance sheet of Frees Service Experts,
Inc. as of September 30, 1995 and the related statements of income,
stockholder's equity, and cash flows for the year then ended. 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 Frees Service Experts, Inc.
at September 30, 1996, and the results of operations and cash flows for the year
then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 8, 1996
F-46
<PAGE> 149
FREES SERVICE EXPERTS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 194,122 $ 104,731
Receivables:
Trade, net of allowance for doubtful accounts of $12,520 in 1995 and $64,913 in
1996............................................................................... 828,299 736,381
Related party....................................................................... 75,504 89,407
Employee............................................................................ 4,743 22,435
Other............................................................................... -- 14,676
----------- -----------
908,546 862,899
Inventories........................................................................... 197,515 201,874
Costs and estimated earnings in excess of billings.................................... 27,494 71,366
Investments........................................................................... 300,000 305,716
Prepaid expenses and other current assets............................................. 9,185 2,995
----------- -----------
Total current assets............................................................ 1,636,862 1,549,581
Property, buildings and equipment:
Land.................................................................................. 37,418 37,418
Buildings and improvements............................................................ 234,302 246,856
Furniture and fixtures................................................................ 357,821 405,575
Machinery and equipment............................................................... 300,312 327,192
Vehicles.............................................................................. 475,872 732,990
Leasehold improvements................................................................ 36,586 36,586
----------- -----------
1,442,311 1,786,617
Less accumulated depreciation and amortization........................................ (923,459) (1,010,967)
----------- -----------
518,852 775,650
Goodwill, net........................................................................... 6,643 6,449
Other assets............................................................................ 15,153 13,099
----------- -----------
Total assets.................................................................... $2,177,510 $ 2,344,779
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........................................ $ 352,794 $ 314,664
Accrued compensation.................................................................. 44,503 233,130
Accrued taxes, other than income...................................................... 163,470 36,513
Accrued warranties.................................................................... 13,397 14,765
Income taxes payable.................................................................. 22,688 222,888
Deferred revenue...................................................................... 56,998 65,430
Billings in excess of costs and estimated earnings.................................... 164,407 82,268
Liability to Companies' benefit plans................................................. 25,000 --
Deferred income taxes................................................................. 110,564 16,873
Notes payable to related parties -- current portion................................... 355,055 156,851
Current portion of long-term debt..................................................... 45,261 197,509
----------- -----------
Total current liabilities....................................................... 1,354,137 1,340,891
Notes payable to related parties, net of current portion................................ 464,945 429,123
Deferred income taxes................................................................... 32,602 44,300
Stockholders' equity
Common stock, $100 par value, authorized 300 shares; issued 201 shares; outstanding 72
shares.............................................................................. 20,100 20,100
Additional paid-in capital............................................................ 12,814 12,814
Retained earnings..................................................................... 828,254 1,032,893
Treasury stock........................................................................ (535,342) (535,342)
----------- -----------
Total Stockholders' equity...................................................... 325,826 530,465
----------- -----------
Total liabilities and stockholders' equity...................................... $2,177,510 $ 2,344,779
=========== ==========
</TABLE>
See accompanying notes.
F-47
<PAGE> 150
FREES SERVICE EXPERTS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenues........................................... $5,081,939 $5,769,098 $5,409,547
Cost of goods sold..................................... 3,729,137 3,904,284 3,588,717
---------- ---------- ----------
Gross margin........................................... 1,352,802 1,864,814 1,820,830
Selling, general and administrative expenses........... 1,291,921 1,766,381 1,391,314
---------- ---------- ----------
Income from operations................................. 60,881 98,433 429,516
Other income (expense):
Interest expense.................................. (17,540) (11,920) (65,116)
Interest income................................... 0 5,268 3,951
Other income (expense)............................ (26,417) 292,963 2,189
---------- ---------- ----------
(43,957) 286,311 (58,976)
---------- ---------- ----------
Income before taxes.................................... 16,924 384,744 370,540
Provision (benefit) for income taxes:
Current........................................... 2,581 26,039 247,894
Deferred.......................................... (1,877) 122,357 (81,993)
---------- ---------- ----------
704 148,396 165,901
---------- ---------- ----------
Net income............................................. $ 16,220 $ 236,348 $ 204,639
========= ========= =========
</TABLE>
See accompanying notes.
F-48
<PAGE> 151
FREES SERVICE EXPERTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$100 PAR VALUE ADDITIONAL
---------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL
------ ------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993
(unaudited)....................... 201 $20,100 $ 12,814 $ 575,686 $ (35,342) $573,258
Net income (unaudited)......... -- -- -- 16,220 -- 16,220
--- ------- ------- ---------- --------- --------
Balance at September 30, 1994
(unaudited)....................... 201 20,100 12,814 591,906 (35,342) 589,478
Net income (unaudited)......... -- -- -- 236,348 -- 236,348
Purchase of treasury shares.... -- -- -- -- (500,000) (500,000)
--- ------- ------- ---------- --------- --------
Balance at September 30, 1995
(unaudited)....................... 201 20,100 12,814 828,254 (535,342) 325,826
Net income..................... -- -- -- 204,639 -- 204,639
--- ------- ------- ---------- --------- --------
Balance at September 30, 1996....... 201 $20,100 $ 12,814 $1,032,893 $(535,342) $530,465
=== ======= ======= ========== ========= ========
</TABLE>
See accompanying notes.
F-49
<PAGE> 152
FREES SERVICE EXPERTS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996
----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 16,220 $ 236,348 $ 204,639
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 100,838 107,806 133,297
Provision for deferred income taxes (benefit)............ (1,877) 122,357 (81,993)
Provisions for loss on accounts receivable............... 1,595 22,349 64,532
(Gain) loss on asset disposals........................... (1,170) (6,599) (4,100)
Equity in income of limited partnership.................. -- -- (5,716)
Changes in assets and liabilities:
Receivables......................................... (245,421) (103,752) (4,982)
Inventories......................................... (46,300) 54,407 (4,359)
Prepaid expenses and other current assets........... 1,167 (6,297) 6,190
Trade accounts payable and accrued liabilities...... 428,828 (327,261) (38,130)
Accrued compensation................................ (81,451) 49,964 163,627
Accrued taxes, other than income.................... (57,459) 117,811 (126,957)
Accrued warranties.................................. 426 1,679 1,368
Deferred revenue.................................... (7,551) 11,682 8,432
Income taxes payable................................ (17,072) 19,986 200,200
Costs and estimated earnings in excess of billings
and billings in excess of costs and estimated
earnings.......................................... 111,783 83,239 (126,011)
-------- -------- --------
Net cash flow provided by operating activities................ 202,556 383,719 390,037
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment................ $ (73,601) $(184,972) $(313,956)
Proceeds from sale of property, buildings, and equipment...... 1,170 4,767 4,100
Purchase of investments....................................... -- (300,000) --
(Increase) decrease in other assets........................... 11,214 4,746 (2,946)
-------- -------- --------
Net cash used in investing activities......................... (61,217) (475,459) (312,802)
FINANCING ACTIVITIES
Proceeds from short-term debt................................. -- -- 125,000
Payments on short-term debt................................... (26,734) (68,163) (43,696)
Payments of long-term debt.................................... (13,120) -- --
Proceeds on notes payable to related parties.................. 320,000 --
Payments on notes payable to related parties.................. (31,858) (58,248) (234,027)
Accounts receivable and accounts payable to related parties... (10,956) (43,284) (13,903)
-------- -------- --------
Net cash provided by (used in) financing activities........... (82,668) 150,305 (166,626)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.............. 58,671 58,565 (89,391)
Cash and cash equivalents at beginning of period.............. 76,886 135,557 194,122
-------- -------- --------
Cash and cash equivalents at end of period.................... $ 135,557 $ 194,122 $ 104,731
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................................. $ 16,057 $ 10,773 $ 57,697
======== ======== ========
Income taxes paid............................................. $ 43,111 $ 6,053 $ 24,960
======== ======== ========
Financing of purchase of equipment............................ $ 54,505 $ -- $ 70,945
======== ======== ========
</TABLE>
See accompanying notes.
F-50
<PAGE> 153
FREES SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Frees Service Experts, Inc. ("the Company") is a Louisiana corporation
engaged in the design and installation of ventilation systems at locations
across the United States. It is also engaged in the installation and maintenance
of commercial and residential heating, ventilating, and air conditioning (HVAC)
systems primarily in northwest Louisiana and east Texas.
UNAUDITED YEAR END FINANCIAL STATEMENTS
The balance sheet as of September 30, 1994 and 1995 and the related
statements of income, stockholders' equity, and cash flows for the two years
then ended have been prepared by the Company's management and are unaudited.
These financial statements include all adjustments necessary for a fair
presentation.
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, which is
usually within one to two days.
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 12 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 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" represents
billings in excess of revenue recognized on in-progress contracts.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
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 and certificates of deposit approximate fair value.
F-51
<PAGE> 154
FREES SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 the lower of cost or market. Cost represents
current purchase price applied using a weighted average method.
INVESTMENTS
The Company's investment in a real estate limited partnership is accounted
for under the equity method.
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.................................................. 15-25
Furniture and fixtures..................................... 5-10
Machinery and equipment.................................... 5-10
Vehicles................................................... 5
Leasehold improvements..................................... 7-15
</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
for the first year 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.
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.
INCOME TAXES
The Company 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.
F-52
<PAGE> 155
FREES SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended September 30, 1994 (unaudited), 1995 (unaudited) and
1996 amounts charged to bad debt expense totaled $1,595, $22,349 and $10,532,
respectively, and accounts written off, net of recoveries, were $1,595, $9,829
and $12,139, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited) and 1996, the Company expensed $77,063, $73,934
and $61,431, 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>
SEPTEMBER 30,
------------------------
1995 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contracts................... $ 818,630 $363,216
Estimated earnings...................................... 438,341 194,700
---------- ----------
1,256,971 557,916
Less applicable billings..................................... 1,393,884 568,818
---------- ----------
$ (136,913) $(10,902)
========== ==========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 27,494 $ 71,366
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (164,407) (82,268)
---------- ----------
$ (136,913) $(10,902)
========== ==========
</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-53
<PAGE> 156
FREES SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Lines of credit.............................................. $ -- $124,194
Note payable to former stockholder........................... 500,000 465,974
Notes payable to majority stockholder........................ 320,000 120,000
Installment and equipment notes.............................. 45,261 73,315
---------- ----------
865,261 783,483
Less current portion......................................... 400,316 354,360
---------- ----------
$ 464,945 $429,123
========== ==========
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $200,000. This line of credit matures on May 17, 1997 and bears interest at a
fixed rate of 8.25%.
The Company has a note payable to a former stockholder payable in 120
monthly installments of $6,053 including interest at 8% with the final payment
due September 30, 2005. The note is secured by a life insurance policy on the
President of the Company.
The Company has two unsecured notes payable to the majority stockholder,
payable on demand with interest at 8%.
The Company has various equipment loans which are secured by vehicles.
These loans bear interest at various fixed rates ranging from 8.25% to 10.91%
per annum at September 30, 1995. These loans require monthly payments ranging
from $1,230 to $1,923 and are due through September 30, 1997.
As of September 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997.................................................... $354,360
1998.................................................... 39,821
1999.................................................... 43,126
2000.................................................... 45,670
2001.................................................... 54,709
Thereafter.............................................. 245,797
--------
$783,483
========
</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 ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts not to exceed the maximum established by the
Internal Revenue Service. For 1995, the Company made a discretionary
contribution allocated based on each employee's percentage of total
compensation. For 1996, the Company made a discretionary matching of 100% of
total contributions by a plan member, to a maximum of 4% of the employee's total
year compensation. The Company made no contribution for the year ended September
30, 1994. The Company's contributions totaled $25,000, and $31,445 for the years
ended September 30, 1995 (unaudited) and 1996, respectively.
F-54
<PAGE> 157
FREES SERVICE EXPERTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of 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 is self-insured for health insurance with an individual
stop-loss of $7,500 and an aggregate stop-loss of approximately $84,000.
6. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $125,049,
$490,783 and $100,000 in 1994 (unaudited), 1995 (unaudited) and 1996,
respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal..................................... $ 2,530 $ 24,955 $216,456
State....................................... 51 1,084 31,438
Deferred......................................... (1,877) 122,357 (81,993)
------- -------- --------
$ 704 $ 148,396 $165,901
======= ======== ========
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.............................. $ 32,602 $ 44,300
Contract billings.......................................... 148,988 66,163
---------- ----------
Deferred tax liabilities..................................... 181,590 110,463
Deferred tax assets:
Deferred revenue and warranty reserve...................... 23,934 27,266
Bad debts.................................................. -- 22,024
Contributions carry forward................................ 14,490 --
---------- ----------
Total gross deferred tax assets.............................. 38,424 49,290
Valuation allowance.......................................... -- --
---------- ----------
Net deferred tax assets...................................... 38,424 49,290
---------- ----------
Net deferred tax liabilities................................. $ 143,166 $ 61,173
========== ==========
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and liabilities and believes that the
deferred tax assets will more likely than not be realized during the carry
forward period. Accordingly, no valuation allowance has been recorded.
F-55
<PAGE> 158
FREES SERVICE EXPERTS, 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>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1994 1995 1996
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate.................. $ 5,754 $ 130,814 $125,984
State income tax less applicable federal tax
benefit........................................ (167) 13,779 11,995
Effect of graduated tax rates and other -- net... (4,883) 3,803 27,922
------- -------- --------
$ 704 $ 148,396 $165,901
======= ======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
Notes Payable to Related Parties
Effective September 30, 1995, 41 1/2 shares of common stock were acquired
by the Company for $500,000 by issuing a note to the former stockholder. (See
Note 4.)
There are two notes payable to the majority stockholder with balances
totaling $320,000 and $120,000 at September 30, 1995 and 1996 at 8% interest due
on demand. (See Note 4.)
Other Related Party Transaction
There are accounts receivable from the majority stockholder totaling
$58,644 and $64,064 at September 30, 1995 and 1996, respectively.
The Company leases facility space from the majority stockholder of the
Company. Rental expense on this related party operating lease amount to $21,600,
$111,600 and $90,353 for the years 1994 (unaudited), 1995 (unaudited) and 1996,
respectively. Minimum rental commitments are $21,600 per year through 2004. The
agreement also provides for rent in addition to the base amount equal to 2.8% of
sales for the contracting division of the Company.
The Company has a non-compete agreement with a former stockholder through
September 30, 1997 who will also serve as an advisor to the Company's board of
directors through September 30, 1998 for consideration of $1,000 per month. The
Company also has accounts receivable from the former stockholder totaling
$16,860 and $18,320 at September 30, 1996.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with
Service Experts, Inc. to sell all of the Company's stock in exchange for Service
Experts, Inc.'s stock. In accordance with the Combination Agreement, the Company
will become a wholly-owned subsidiary of Service Experts, Inc.
F-56
<PAGE> 159
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Custom Air Conditioning, Inc.
We have audited the accompanying balance sheets of Custom Air Conditioning,
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.
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 financial position of Custom 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
November 8, 1996
F-57
<PAGE> 160
CUSTOM AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 186,144 $ 102,661 $ 343,637
Receivables:
Trade................................................. 50,675 67,111 87,347
Related party......................................... 17,696 -- 14,652
Employee.............................................. 2,087 425 2,847
--------- --------- ----------
70,458 67,536 104,846
Inventories.............................................. 122,027 89,673 126,616
Investments.............................................. 100,000 210,095 295,883
Prepaid expenses and other current assets................ 4,622 10,466 26,540
--------- --------- ----------
Total current assets............................. 483,251 480,431 897,522
Property, buildings and equipment:
Furniture and fixtures................................... 38,464 60,505 72,370
Machinery and equipment.................................. 96,375 74,977 74,977
Vehicles................................................. 331,022 402,749 496,533
--------- --------- ----------
465,861 538,231 643,880
Less accumulated depreciation............................ (301,938) (370,182) (431,214)
--------- --------- ----------
163,923 168,049 212,666
Other assets............................................... 22,540 13,260 7,091
--------- --------- ----------
Total assets..................................... $ 669,714 $ 661,740 $ 1,117,279
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 94,634 $ 93,577 $ 232,524
Accrued compensation..................................... -- -- 81,237
Accrued warranties....................................... 46,033 51,685 37,477
Deferred revenue......................................... 286,423 247,702 238,225
Liability to Company's benefit plan...................... 55,000 66,639 --
Current portion of long-term debt........................ 51,530 52,811 89,507
--------- --------- ----------
Total current liabilities........................ 533,620 512,414 678,970
Long-term debt, net of current
portion.................................................. 38,816 65,967 76,569
Stockholders' equity:
Common stock, $1 par value; 1,000 shares authorized,
issued and outstanding................................ 1,000 1,000 1,000
Retained earnings........................................ 96,278 68,235 306,432
Unrealized gain on equity securities..................... -- 14,124 54,308
--------- --------- ----------
Total stockholders' equity....................... 97,278 83,359 361,740
--------- --------- ----------
Total liabilities and stockholders' equity....... $ 669,714 $ 661,740 $ 1,117,279
========= ========= ==========
</TABLE>
See accompanying notes.
F-58
<PAGE> 161
CUSTOM AIR CONDITIONING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $3,472,491 $4,638,254 $5,168,461 $ 4,181,302 $ 4,295,566
Cost of goods sold................. 2,486,568 3,309,300 3,571,102 2,863,532 2,939,851
---------- ---------- ---------- ----------- -----------
Gross margin....................... 985,923 1,328,954 1,597,359 1,317,770 1,355,715
Selling, general and administrative
expenses......................... 967,783 1,070,717 1,428,206 837,375 1,106,059
---------- ---------- ---------- ----------- -----------
Income from operations............. 18,140 258,237 169,153 480,395 249,656
Other income (expense):
Interest expense................. (13,783) (11,668) (11,605) (7,948) (14,592)
Interest income.................. 2,088 7,142 11,178 8,601 1,333
Other income (expense)........... 4,224 (8,949) 4,124 3,524 1,800
---------- ---------- ---------- ----------- -----------
(7,471) (13,475) 3,697 4,177 (11,459)
---------- ---------- ---------- ----------- -----------
Income before taxes................ 10,669 244,762 172,850 484,572 238,197
Provision (benefit) for income
taxes:
Current.......................... 2,362 -- -- -- --
Deferred......................... (5,905) -- -- -- --
---------- ---------- ---------- ----------- -----------
(3,543) -- -- -- --
---------- ---------- ---------- ----------- -----------
Net income......................... $ 14,212 $ 244,762 $ 172,850 $ 484,572 $ 238,197
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-59
<PAGE> 162
CUSTOM AIR CONDITIONING, 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 (unaudited)................. 1,000 $1,000 $ 121,654 $ 122,654
Net income............................................. -- -- 14,212 14,212
----- ------ --------- ---------
Balance at December 31, 1993............................. 1,000 1,000 135,866 136,866
Dividends paid......................................... -- -- (284,350) (284,350)
Net income............................................. -- -- 244,762 244,762
----- ------ --------- ---------
Balance at December 31, 1994............................. 1,000 1,000 96,278 97,278
Dividends paid......................................... -- -- (200,893) (200,893)
Adjustment to unrealized gain on investments available
for sale............................................ -- -- 14,124 14,124
Net income............................................. -- -- 172,850 172,850
----- ------ --------- ---------
Balance at December 31, 1995............................. 1,000 1,000 82,359 83,359
Adjustment to unrealized gain on investments available
for sale............................................ -- -- 40,184 40,184
Net income (unaudited)................................. -- -- 238,197 238,197
----- ------ --------- ---------
Balance at September 30, 1996 (unaudited)................ 1,000 $1,000 $ 360,740 $ 361,740
===== ====== ========= =========
</TABLE>
See accompanying notes.
F-60
<PAGE> 163
CUSTOM AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- --------------------------
1993 1994 1995 1995 1996
-------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 14,212 $ 244,762 $ 172,850 $ 484,572 $ 238,197
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................. 100,820 106,372 97,451 77,370 67,201
Provision (benefit) for deferred income
taxes........................................ (5,905) -- -- -- --
Provisions for loss on accounts receivable..... 6,000 8,878 10,031 4,500 4,500
(Gain) loss on asset disposals................. (1,824) 11,349 1,471 1,471 --
Changes in assets and liabilities:
Receivables.................................. 14,487 (11,485) (7,109) (55,164) (37,384)
Inventories.................................. (47,178) 7,138 32,354 47,080 (36,943)
Prepaid expenses and other current assets.... 12,283 (4,842) (5,844) (1,852) (16,074)
Trade accounts payable and accrued
liabilities................................ 26,775 8,747 (1,057) 117,050 134,521
Accrued compensation......................... -- -- -- 84,816 81,237
Accrued warranties........................... 8,612 2,853 5,652 (5,389) (14,208)
Income taxes payable......................... 5,905 -- -- -- --
Deferred revenue............................. 44,325 30,958 (38,721) (6,638) (9,477)
Liability to Company's benefit plan.......... -- 55,000 11,639 (55,000) (66,639)
--------- --------- --------- --------- ---------
Net cash flow provided by operating
activities............................ 178,512 459,730 278,717 692,816 344,931
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment... (87,345) (93,307) (93,768) (71,726) (105,649)
Proceeds from sale of property, buildings, and
equipment...................................... 6,379 4,800 -- -- --
Purchase of investments.......................... -- (100,000) (100,000) -- (50,000)
Principal payments received on debt securities... -- -- 4,029 4,029 4,396
Increase in other assets......................... -- (20,000) -- -- --
--------- --------- --------- --------- ---------
Net cash used in investing activities.... (80,966) (208,507) (189,739) (67,697) (151,253)
FINANCING ACTIVITIES
Proceeds of debt................................. 82,916 64,656 101,727 71,727 103,783
Payments of debt................................. (98,742) (78,934) (73,295) (48,508) (56,485)
Dividends paid................................... -- (284,350) (200,893) -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities............................ (15,826) (298,628) (172,461) 23,219 47,298
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................... 81,720 (47,405) (83,483) 648,338 240,976
Cash and cash equivalents at beginning of
period......................................... 151,829 233,549 186,144 186,144 102,661
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....... $233,549 $ 186,144 $ 102,661 $ 834,482 $ 343,637
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................... $ 13,783 $ 11,668 $ 11,605 $ 7,948 $ 10,196
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-61
<PAGE> 164
CUSTOM AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995,
AND SEPTEMBER 30, 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Custom 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 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
nine months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
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
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.
F-62
<PAGE> 165
CUSTOM AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings 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
Machinery and equipment....................................................... 3
Vehicles...................................................................... 5
</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
for two years 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
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.
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", for the year ended December 31, 1993. 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.
Effective January 1, 1994, the stockholders of the Company 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, the Company is
not subject to federal or state income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $6,000, $8,878 and $10,031, respectively, and accounts
written off, net of recoveries, were $450, $8,878 and $10,400, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993, 1994 and
1995, the Company expensed $107,157, $147,288 and $201,383, 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-63
<PAGE> 166
CUSTOM 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. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities.". The Company's
investment in securities are classified as available-for-sale under SFAS No.
115. On securities classified as available-for-sale, the carrying amount is a
reasonable estimate of fair value. The adoption of SFAS No. 115 did not have a
significant impact on the Company's financial statements. The securities
available-for-sale were as follows:
<TABLE>
<CAPTION>
1994 1995
---------------------- ----------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Other debt securities...................... $100,000 $ 100,000 $ 95,971 $ 95,971
Equity securities.......................... -- -- 100,000 114,124
-------- -------- -------- --------
$100,000 $ 100,000 $195,971 $ 210,095
======== ======== ======== ========
</TABLE>
There were no gross realized gains or losses from the sale of
available-for-sale securities.
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Lines of credit................................................. $ 1 $ 1
Installment and equipment notes................................. 90,345 118,777
------- --------
90,346 118,778
Less current portion............................................ 51,530 52,811
------- --------
$38,816 $ 65,967
======= ========
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $75,000. This line of credit bears interest at the prime rate plus 1% (9.5%
at December 31, 1995).
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 7.5% to 13% per annum. These loans require
monthly payments ranging from $575 to $967 and are due through February, 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 52,811
1997........................................................... 46,945
1998........................................................... 17,443
1999........................................................... 1,579
--------
$118,778
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $71,367, $89,544 and
$102,490 for 1993, 1994 and 1995, respectively. The Company leases certain
vehicles and office and warehouse facilities under terms of noncancelable
operating lease agreements which expire at various dates through 1999. Minimum
rental
F-64
<PAGE> 167
CUSTOM AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
commitments at December 31, 1995 under operating leases having an initial
noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996...................................................................... $ 97,490
1997...................................................................... 64,862
1998...................................................................... 18,653
1999...................................................................... 7,800
--------
$ 188,805
========
</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 ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 15% of total compensation, not
to exceed the maximum established 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 8% of the employee's total calendar year
compensation. The Company's matching contributions totaled $ -0- , $32,841 and
$87,518 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 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 maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their 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 $281,834,
$301,897 and $513,462 in 1993, 1994 and 1995, respectively.
8. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 3,134 $ -- $ --
State............................................... (772) -- --
Deferred.............................................. (5,905) -- --
------- ------- -------
$(3,543) $ -- $ --
======= ======= =======
</TABLE>
F-65
<PAGE> 168
CUSTOM 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. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate....................... $ 3,627 $ -- $ --
State income tax less applicable federal tax
benefit............................................. (510) -- --
Other -- net.......................................... 1,279 -- --
Effect of graduated tax rates......................... (7,939) -- --
------- ------- -------
$(3,543) $ -- $ --
======= ======= =======
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Effective January 1, 1994, 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 merger (see Note 10), 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 $282,199, $202,093 and $226,021 for
1994, 1995, and the nine months ended September 30, 1996, respectively. Had the
Company filed federal and state income tax returns as a regular corporation for
1994, 1995 and the nine months ended September 30, 1996, income tax expense
under the provisions of Financial Accounting Standard No. 109 would have been
$100,941, $64,020 and $87,840, 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 based on the cumulative temporary differences at the date
of termination of S corporation status. If the termination of S corporation
status had occurred at September 30, 1996, the deferred tax liability would have
been approximately $9,073.
9. RELATED PARTY TRANSACTIONS
The Company leases facility space from a partnership which is 50% owned by
a stockholder of the Company. Rental expense on these related party operating
leases amount to $55,302, $67,129 and $77,193 for the years 1993, 1994 and 1995,
respectively.
10. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. whereby the Company would merge with Service Experts,
Inc. for an exchange of voting equity securities between the combining
companies. The transaction will be accounted for under the provisions of APB No.
16, Accounting for Business Combinations as a pooling of interests and the
assets, liabilities, and retained earnings of each of the combining companies
will be carried forward at the historical carrying amounts. In accordance with
the agreement and plan of merger, Service Experts, Inc. will issue stock in
exchange for the outstanding stock of the Company which will reflect the
Company's merged interest in the combined corporation.
F-66
<PAGE> 169
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Gordon's Specialty Company, Inc.
We have audited the accompanying balance sheets of Gordon's Specialty
Company 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.
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 financial position of Gordon's Specialty Company
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 24, 1996
F-67
<PAGE> 170
GORDON'S SPECIALTY COMPANY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
-------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 596,327 $ 195,842 $ 652,474
Receivables:
Trade, net of allowance for doubtful accounts of
$45,549 in 1994 and $48,938 in 1995................ 135,931 272,708 139,582
Officer and employee................................. 12,700 -- --
Other................................................ 33,696 -- --
---------- ---------- -------------
182,327 272,708 139,582
Inventories............................................... 128,703 133,875 116,801
Costs and estimated earnings in excess of billings........ 57,997 62,578 --
Short-term investments.................................... -- 315,814 100,000
Prepaid expenses and other current assets................. 17,447 13,146 5,600
Deferred income taxes..................................... 31,141 33,685 36,257
---------- ---------- -------------
Total current assets............................ 1,013,942 1,027,648 1,050,714
Property and equipment:
Furniture and fixtures.................................. 51,441 83,581 98,129
Machinery and equipment................................. 129,700 63,656 63,656
Vehicles................................................ 331,802 430,381 420,197
Leasehold improvements.................................. 18,000 76,773 76,773
---------- ---------- -------------
530,943 654,391 658,755
Less accumulated depreciation and amortization.......... (336,453) (337,631) (356,008)
---------- ---------- -------------
Net property and equipment........................... 194,490 316,760 302,747
Notes receivable -- related parties....................... 133,434 264,301 438,569
Notes receivable -- other................................. 195,471 191,780 249,071
Other assets.............................................. 174,058 153,523 242,966
---------- ---------- -------------
Total assets.................................... $1,711,395 $1,954,012 $ 2,284,067
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................. $ 212,321 $ 184,386 $ 164,042
Accrued compensation.................................... 113,907 99,541 85,707
Accrued taxes, other than income........................ 46,274 54,273 15,901
Accrued warranty reserve................................ 21,107 25,044 24,000
Income taxes payable.................................... 13,527 98,448 250,105
Deferred revenue........................................ 94,127 113,029 112,428
Billings in excess of costs and estimated earnings...... 1,558 23,733 --
---------- ---------- -------------
Total current liabilities....................... 502,821 598,454 652,183
Deferred income taxes..................................... 30,232 29,081 19,596
Stockholders' equity:
Common stock ($100 par value, 500 shares authorized, 200
shares issued and outstanding)....................... 20,000 20,000 20,000
Retained earnings....................................... 1,158,342 1,306,477 1,592,288
---------- ---------- -------------
Total stockholders' equity...................... 1,178,342 1,326,477 1,612,288
---------- ---------- -------------
Total liabilities and stockholders' equity...... $1,711,395 $1,954,012 $ 2,284,067
========= ========= ==========
</TABLE>
See accompanying notes.
F-68
<PAGE> 171
GORDON'S SPECIALTY COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $5,093,279 $4,604,132 $4,952,159 $3,777,426 $3,546,598
Cost of goods sold................... 3,891,576 3,289,148 3,386,183 2,648,620 2,449,422
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,201,703 1,314,984 1,565,976 1,128,806 1,097,176
Selling, general and administrative
expenses........................... 1,182,778 1,261,801 1,355,086 985,942 687,217
Bad debt expense..................... 54,563 33,998 8,619 7,503 11,884
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (35,638) 19,185 202,271 135,361 398,075
Other income (expense):
Interest income.................... 35,430 31,394 42,401 19,201 24,756
Other.............................. (3,193) 18,683 (14,170) 5,404 23,749
---------- ---------- ---------- ---------- ----------
32,237 50,077 28,231 24,605 48,505
---------- ---------- ---------- ---------- ----------
Income (loss) before provision
(benefit) for income taxes......... (3,401) 69,262 230,502 159,966 446,580
Provision (benefit) for income taxes:
Current............................ 3,750 20,408 86,062 70,910 172,826
Deferred........................... (4,200) (6,193) (3,695) (13,749) (12,057)
---------- ---------- ---------- ---------- ----------
(450) 14,215 82,367 57,161 160,769
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (2,951) $ 55,047 $ 148,135 $ 102,805 $ 285,811
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-69
<PAGE> 172
GORDONS SPECIALTY COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
$100 PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993............................. 200 $20,000 $1,106,246 $1,126,246
Net loss............................................. -- -- (2,951) (2,951)
------ ------- ---------- ----------
Balance at December 31, 1993........................... 200 20,000 1,103,295 1,123,295
Net income........................................... -- -- 55,047 55,047
------ ------- ---------- ----------
Balance at December 31, 1994........................... 200 20,000 1,158,342 1,178,342
Net income........................................... -- -- 148,135 148,135
------ ------- ---------- ----------
Balance at December 31, 1995........................... 200 20,000 1,306,477 1,326,477
Net income (unaudited)............................... -- -- 285,811 285,811
------ ------- ---------- ----------
Balance at September 30, 1996 (unaudited).............. 200 $20,000 $1,592,288 $1,612,288
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-70
<PAGE> 173
GORDON'S SPECIALTY COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ (2,951) $ 55,047 $ 148,135 $ 102,805 $ 285,811
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 60,212 62,295 66,627 32,400 51,408
Provision (benefit) for deferred
income taxes...................... (4,200) (6,193) (3,695) (13,749) (12,057)
Provision for bad debt expense....... 54,563 33,998 8,619 7,503 11,884
(Gain) loss on asset disposals....... 4,819 (4,560) 594 -- --
Changes in operating assets and
liabilities:
Receivables....................... (237,991) 249,043 (132,696) (141,192) 121,242
Inventories....................... 23,264 (2,047) (5,172) 9,136 17,074
Prepaid expenses and other current
assets.......................... (8,375) 950 4,582 2,284 7,546
Trade accounts payable............ 122,728 (98,906) (27,935) 139,443 (20,344)
Accrued compensation.............. 20,423 3,627 (14,366) 311,199 (13,834)
Accrued taxes, other than
income.......................... 1,777 290 7,999 24,680 (38,372)
Accrued warranty reserve.......... -- 21,107 3,937 2,853 (1,044)
Deferred revenue.................. (2,692) 9,793 18,902 26,376 (601)
Income taxes payable.............. (3,437) 16,964 84,921 70,910 151,657
Costs and estimated earnings in
excess of billings and billings
in excess of costs and estimated
earnings........................ (118,041) 94,331 17,594 59,599 38,845
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities................. (89,901) 435,739 178,046 634,347 599,215
INVESTING ACTIVITIES
Purchases of property and equipment.... (103,077) (74,796) (189,491) (130,719) (37,395)
Proceeds from asset disposals.......... -- 5,750 -- -- --
Purchases of investments............... -- -- (315,814) (315,814) --
Proceeds from sale of investments...... -- -- -- -- 215,814
Advances on notes receivable........... (313,793) (19,349) (130,867) (130,867) (231,559)
Collections on notes receivable........ 71,706 63,016 34,671 -- --
(Increase) decrease in other assets.... (42,524) 12,995 22,970 2,494 (89,443)
--------- --------- --------- --------- ---------
Net cash used in investing
activities........................... (387,688) (12,384) (578,531) (574,906) (142,583)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... (477,589) 423,355 (400,485) 59,441 456,632
Cash and cash equivalents at beginning
of period............................ 650,561 172,972 596,327 596,327 195,842
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period............................... $ 172,972 $ 596,327 $ 195,842 $ 655,768 $ 652,474
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid...................... $ 7,187 $ 3,444 $ 1,141 $ -- $ 21,169
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-71
<PAGE> 174
GORDON'S SPECIALTY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Gordon's Specialty Company, Inc. (the "Company") (an Oklahoma corporation)
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 located in central Oklahoma.
UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet at September 30, 1996 and the related statements of
income (operations) and cash flows for the nine months ended September 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 nine months ended September 30, 1995 and 1996 may not be indicative of
operating results for the full respective years.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
contracts ("Contracts") for residential and commercial 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. The Company has service agreements with various
customers which generally require the customer to prepay a portion of the total
service agreement amount. Such prepayments are deferred and recognized over the
term of agreement which also specifies the nature and timing of future 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 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 and billed retainage on
Contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $13,549 at December 31, 1995 (none at December 31, 1994). The Company
classifies these amounts as current assets because all balances are expected to
be collected in the current year and terms of the receivables generally requires
payment by the customer upon receipt of the billing. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
commercial and residential customers comprising the Company's customer base as
well as the short-term nature of the receivables.
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-72
<PAGE> 175
GORDON'S SPECIALTY COMPANY, INC.
NOTES TO 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
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
Short-term investments include investments in both fixed and variable rate
securities consisting primarily of mutual funds and certificates of deposits.
These investments have been 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
these investments to maturity. However, due to the short-term maturity of
applicable investments and since the Company views its investment portfolio as
available for use in current operations, such assets are classified as current.
The fair value of the short-term investments approximates the carrying amount of
such investments.
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........................................................ 5-11
Machinery and equipment....................................................... 5-11
Vehicles...................................................................... 5- 7
Leasehold improvements........................................................ 40
</TABLE>
WARRANTIES
The Company provides retail customers with a five-year warranty on parts
and labor from the date of installation of "premium" heating and air
conditioning units and a one-year warranty on parts and labor for all other
units installed. These warranties are not priced separately from the total sales
price of the unit. These warranties run concurrent with manufacturer warranties
for the first year on parts and the first 90 days on labor. The Company provides
an accrual for future warranty costs based upon the historical relationship of
sales to actual warranty costs. It is the Company's practice to classify the
entire warranty accrual as a current liability.
F-73
<PAGE> 176
GORDON'S SPECIALTY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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 in process:
Expenditures on uncompleted contacts.............................. $45,752 $152,125
Estimated earnings................................................ 34,503 61,318
------- --------
80,255 213,443
Less applicable billings.......................................... 23,816 174,598
------- --------
$56,439 $ 38,845
======= ========
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts........................................ $57,997 $ 62,578
Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ 1,558 23,733
------- --------
$56,439 $ 38,845
======= ========
</TABLE>
Estimated earnings on contracts in process bear a relation to costs
incurred, but are not indicative of the ultimate profit or loss on a contract.
3. NOTES RECEIVABLE AND OTHER ASSETS
Notes receivable -- other is comprised primarily of four notes, from two
separate parties, aggregating approximately $190,000 at December 31, 1995
($192,000 at December 31, 1994). These notes are principally secured by first
mortgages on developed residential real estate located in central and west
central Oklahoma. These notes, which bear interest at rates ranging from 10% to
11%, matured in 1993. The Company is presently pursuing various courses of
action to collect these receivables, which may include legal action. Based upon
management's estimate of the value of the underlying collateral, it does not
believe that a reduction to
F-74
<PAGE> 177
GORDON'S SPECIALTY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the carrying amount of the notes receivable is warranted. However, the Company
is not presently recognizing interest on these receivables. Inasmuch as the
timing of collection of these receivables cannot presently be determined, the
receivables are classified as noncurrent assets.
Other assets include an investment in an Oklahoma general partnership
("Colonial") engaged in the development of residential real estate. The carrying
amount of the investment (which is accounted for under the equity method) is
approximately $96,000 at December 31, 1995 ($122,000 at December 31, 1994). As
described in Note 8, the Company has guaranteed a portion of Colonial's
long-term debt. Management of the Company expects the carrying amount of its
investment in Colonial to be recoverable through future distributions from
Colonial.
4. EMPLOYEE BENEFIT PLANS
In September 1994, the Company adopted 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 20% of total compensation, not to exceed the maximum established
annually by the Internal Revenue Service. For each plan year, the Company will
contribute to the plan an amount of matching contributions determined by the
Company at its discretion. The Company's matching contributions totaled $10,058
and $23,569 for the years ended December 31, 1994 and 1995, respectively.
5. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 2,895 $15,217 $72,465
State................................................... 855 5,191 13,597
Deferred.................................................. (4,200) (6,193) (3,695)
------- ------- -------
$ (450) $14,215 $82,367
======= ======= =======
</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.................................. $30,232 $29,081
------- -------
Total deferred tax liabilities................................... 30,232 29,081
Deferred tax assets:
Reserve for bad debts.......................................... 17,764 19,085
Compensation and warranty reserves............................. 13,377 14,600
------- -------
Total gross deferred tax assets.................................. 31,141 33,685
Valuation allowance.............................................. -- --
------- -------
Net deferred tax assets.......................................... $ 909 $ 4,604
======= =======
</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 carry forward period.
Accordingly, no valuation allowance has been recorded.
F-75
<PAGE> 178
GORDON'S SPECIALTY COMPANY, 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 (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................ $(1,156) $ 23,549 $78,371
State income tax less applicable federal tax benefit..... 26 2,631 7,210
Effects of graduated tax rates........................... 680 (11,965) (3,214)
------- -------- -------
$ (450) $ 14,215 $82,367
======= ======== =======
</TABLE>
6. SHAREHOLDERS' COMPENSATION
Shareholders' compensation which consisted of salaries and cash bonuses is
included in selling, general and administrative expenses and totaled
approximately $490,000, $550,000 and $575,000 in 1993, 1994 and 1995,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company rents office and warehouse facilities from a stockholder under
a verbal month-to-month operating lease agreement. The Company paid rental fees
of $69,508, $75,360 and $75,600 during 1993, 1994 and 1995, respectively, under
such verbal agreement.
Notes receivable -- related parties include cash advances and expenses paid
on behalf of certain stockholders of the Company. Except for a receivable for
approximately $123,000, these advances are unsecured and bear interest at 8%.
Approximately $123,000 of the notes receivable is secured by life insurance
policies on certain stockholders and is noninterest bearing. Inasmuch as the
Company will not demand repayment of the notes receivable within the next year
such receivables are classified as noncurrent assets.
8. CONTINGENCIES
The Company has guaranteed a portion of Colonial's note payable to a bank.
The balance of this note payable is approximately $148,000 at December 31, 1995
(approximately $20,000 guaranteed by the Company). The Company does not believe
it will be required to fund this guarantee.
The Company maintains general liability, automobile and workers'
compensation insurance coverage and an umbrella policy to insure itself against
any liabilities occurring in the normal course of its business. The Company
believes that its insurance coverage is adequate to cover losses that may arise.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-76
<PAGE> 179
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Dial One Service Champions, ET AL.
We have audited the accompanying combined balance sheet of Dial One Service
Champions, ET AL., (see Note 1) as of December 31, 1995, and the related
combined statements of income, stockholders' equity, and cash flows for the year
then ended. 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 Dial One Service Champions,
ET AL. at December 31, 1995, and the combined results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 1, 1996
F-77
<PAGE> 180
DIAL ONE SERVICE CHAMPIONS, ET AL.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER
1994 1995 30, 1996
---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 199,847 $ 354,276 $ 455,531
Receivables:
Trade................................................. 255,076 182,629 329,040
Related party......................................... 291,112 18,582 18,582
Employee.............................................. 2,322 5,652 14,819
Note receivable, current portion......................... 18,672 11,400 76,249
---------- ---------- ----------
567,182 218,263 438,690
Inventories.............................................. 185,198 181,043 220,119
Investments.............................................. 124,866 111,243 132,412
Prepaid expenses and other current assets................ 23,260 17,755 20,085
---------- ---------- ----------
Total current assets............................. 1,100,353 882,580 1,266,837
Property and equipment:
Office equipment......................................... 265,531 371,112 364,807
Machinery and equipment.................................. 220,627 210,433 229,096
Vehicles................................................. 232,874 231,324 304,506
Leasehold improvements................................... 93,991 94,492 94,492
---------- ---------- ----------
813,023 907,361 992,901
Less accumulated depreciation and amortization........... (453,080) (507,057) (597,991)
---------- ---------- ----------
359,943 400,304 394,910
Note receivable, net of current portion.................... -- 45,301 18,765
Intangible, net of amortization............................ 10,801 7,051 6,800
---------- ---------- ----------
Total assets..................................... $1,471,097 $1,335,236 $1,687,312
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 265,499 $ 178,861 $ 261,400
Accrued compensation..................................... 30,788 21,357 29,766
Accrued taxes, other than income......................... 15,591 13,309 14,352
Accrued warranties....................................... -- 18,468 34,273
Deferred revenue......................................... 263,781 373,971 365,320
Notes payable to related parties -- current portion...... 249,181 232,204 17,107
Current portion of long-term debt........................ 29,592 39,102 16,870
---------- ---------- ----------
Total current liabilities........................ 854,432 877,272 739,088
Long-term debt, net of current portion..................... 32,294 49,980 --
Notes payable to related parties, net of current portion... 29,630 63,266 60,113
Stockholders' equity....................................... 554,741 344,718 888,111
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,471,097 $1,335,236 $1,687,312
========== ========== ==========
</TABLE>
See accompanying notes.
F-78
<PAGE> 181
DIAL ONE SERVICE CHAMPIONS, ET AL.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION> NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 5,810,849 $ 5,338,173 $4,887,446 $ 3,720,947 $ 4,097,290
Cost of goods sold................... 4,019,582 3,596,556 3,317,584 2,488,342 2,608,479
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,791,267 1,741,617 1,569,862 1,232,605 1,488,811
Selling, general and administrative
expenses........................... 1,515,191 1,546,566 1,424,697 1,032,358 1,176,728
---------- ---------- ---------- ---------- ----------
Income from operations............... 276,076 195,051 145,165 200,247 312,083
Other income (expense):
Interest expense................... (88,746) (52,327) (35,333) (28,412) (28,746)
Interest and dividend income....... 15,482 19,649 54,695 45,268 5,185
Other income (expense)............. (38,687) (19,377) (27,720) (12,998) 17,661
---------- ---------- ---------- ---------- ----------
(111,951) (52,055) (8,358) 3,858 (5,900)
---------- ---------- ---------- ---------- ----------
Income before taxes.................. 164,125 142,996 136,807 204,105 306,183
Provision for income taxes........... 4,568 800 1,804 2,440 4,003
---------- ---------- ---------- ---------- ----------
Net income........................... $ 159,557 $ 142,196 $ 135,003 $ 201,665 $ 302,180
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-79
<PAGE> 182
DIAL ONE SERVICE CHAMPIONS, ET AL.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Balance at December 31, 1992 (unaudited).......................................... $286,779
Capital contributions (unaudited)............................................... 2,398
Net income (unaudited).......................................................... 159,557
---------
Balance at December 31, 1993 (unaudited).......................................... 448,734
Capital distributions (unaudited)............................................... (4,700)
Adjustment to unrealized losses on available-for-sale securities (unaudited).... (31,489)
Net income (unaudited).......................................................... 142,196
---------
Balance at December 31, 1994 (unaudited).......................................... 554,741
Capital distributions........................................................... (384,350)
Adjustment to unrealized gains on available-for-sale securities................. 39,324
Net income...................................................................... 135,003
---------
Balance at December 1995.......................................................... 344,718
Capital distributions -- net (unaudited)........................................ (31,753)
Assumption of notes payable by stockholder...................................... 256,019
Adjustment to unrealized gains on available-for-sale securities (unaudited)..... 16,947
Net income (unaudited).......................................................... 302,180
---------
Balance at September 30, 1996 (unaudited)......................................... $888,111
=========
</TABLE>
See accompanying notes.
F-80
<PAGE> 183
DIAL ONE SERVICE CHAMPIONS, ET AL.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1993 1994 1995 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 159,557 $ 142,196 $135,003 $ 201,665 $ 302,180
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 106,233 125,007 120,036 80,125 91,186
Loss on asset disposals............................. -- -- 27,643 -- --
Loss on sale of investments......................... -- 19,378 13,431 12,998 --
Changes in assets and liabilities:
Receivables....................................... (56,613) (62,331) 69,117 36,174 (155,578)
Inventories....................................... 67,064 31,727 4,155 6,418 (39,076)
Prepaid expenses and other current assets......... (1,732) 5,749 5,505 318 (4,789)
Trade accounts payable and accrued liabilities.... (14,565) 58,080 (86,638) (91,946) 82,539
Accrued compensation.............................. -- (9,642) (9,431) (598) 8,409
Accrued taxes, other than income.................. -- 2,060 (2,282) (4,077) 1,043
Accrued warranties................................ -- -- 18,468 11,911 15,805
Deferred revenue.................................. 80,448 88,335 110,190 73,491 (8,651)
Income taxes payable.............................. (1,537) -- --
-------- -------- -------- -------- --------
Net cash flow provided by operating activities........ 338,855 400,559 405,197 326,479 293,068
INVESTING ACTIVITIES
Purchase of property and equipment.................... (171,771) (181,189) (195,061) (186,858) (99,190)
Purchase of investments............................... -- (294,925) (16,651) (2,185) (5,060)
Proceeds from sale of investments..................... -- 115,000 57,900 50,000 --
Advances on notes receivable.......................... (26,978) (112,517) (54,072) (31,446) (69,597)
Collections on notes receivable....................... 156 -- 343,656 10,852 --
(Increase) in other assets............................ (11,050) -- -- -- --
-------- -------- -------- -------- --------
Net cash used in (provided by) investing
activities.......................................... (209,643) (473,631) 135,772 (159,637) (173,847)
FINANCING ACTIVITIES
Proceeds of long-term debt............................ 15,771 78,579 -- -- --
Payments of long-term debt............................ (7,010) (43,445) (27,562) (22,917) (26,646)
Proceeds on notes payable to related parties.......... 50,000 6,740 98,600 88,720 60,731
Payments on notes payable to related parties.......... (21,158) (127,451) (73,228) (61,891) (27,677)
Distribution to stockholders.......................... 2,398 (4,700) (384,350) (31,000) (24,374)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.......................................... 40,001 (90,277) (386,540) (27,088) (17,966)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents...... 169,213 (163,349) 154,429 139,754 101,255
Cash and cash equivalents at beginning of period...... 193,983 363,196 199,847 199,847 354,276
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period............ $ 363,196 $ 199,847 $354,276 $ 339,601 $ 455,531
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................................... $ 88,746 $ 49,539 $ 54,078 $ 24,363 $ 27,046
======== ======== ======== ======== ========
Income taxes paid..................................... $ 4,568 $ 800 $ 1,804 $ -- $ --
======== ======== ======== ======== ========
NON CASH TRANSACTIONS
Employee financed vehicles (increase in installment
note receivable and payable)........................ $ -- $ -- $ 54,759 $ -- $ --
======== ======== ======== ======== ========
Assumption of notes payable by shareholder............ $ -- $ -- $ -- $ -- $ 250,685
======== ======== ======== ======== ========
Reduction of debt via write down of phone system from
AT&T................................................ $ -- $ -- $ -- $ -- $ 15,000
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-81
<PAGE> 184
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Dial One Service Champions, ET AL. consists of Dial One Service Champions
and certain operating divisions of its affiliates TCB Enterprises and
International Marketing Group, hereafter referred to as ("the Combined
Company"). All of these entities are under common ownership. The financial
statements of these companies have been combined for all periods presented. Dial
One Service Champions, ET AL. operates in one industry segment and is primarily
engaged in the installation and servicing of air conditioning and heating
systems for residential customers. TCB Enterprises is a leasing company that
leases equipment and vehicles primarily to Dial One Service Champions.
International Marketing Group buys and sells Contractor Success Group
territories.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
INFORMATION
The combined balance sheet as of December 31, 1994 and the related
statements of income, stockholders' equity and cash flows for the two years then
ended have been prepared by the Combined Company's Management and are unaudited.
These financial statements include all adjustments necessary for a fair
presentation.
The combined balance sheet as of September 30, 1996 and the related
statements of income and cash flows for the nine months ended September 30, 1995
and 1996 (interim financial statements) have been prepared by the Combined
Company's 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 statement should be read in conjunction with the December 31,
1995 audited financial statements appearing herein. The results of the nine
months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
RECOGNITION OF INCOME
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, which is usually within one to
two days.
Trade accounts receivable includes billings on heating and air conditioning
installation and service and maintenance. 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.
CASH EQUIVALENTS
The Combined Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
F-82
<PAGE> 185
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Cash Equivalents
The carrying amounts reported in the balance sheets for cash and cash
equivalents and certificates of deposit 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.
Long-Term Debt
Based upon the borrowing rates currently available to the Combined Company,
the carrying amount reported in the balance sheets for long-term debt
approximates 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 straight-line and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Office equipment........................................................... 5
Machinery and equipment.................................................... 5
Vehicles................................................................... 5
Leasehold improvements..................................................... 31.5-39
</TABLE>
WARRANTIES
The Combined 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 for two years 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
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.
INCOME TAXES
TCB Enterprises and International Marketing Group are part of a Limited
Liability Company which passes income through to the members. Accordingly, TCB
Enterprises and International Marketing Group are not subject to federal or
state income taxes.
F-83
<PAGE> 186
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The stockholders of Dial One Service Champions 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, Dial One Service
Champions is not subject to federal income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Bad debts and uncollectible accounts are recognized by the specific
charge-off method. As such, uncollectible accounts are charged to expense in the
period that they were identified as uncollectible.
ADVERTISING COSTS
The Combined Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Combined Company expensed $350,114,
$373,331 and $408,582, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Combined 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
Combined Company's financial statements.
2. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Combined Company adopted SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's investment in securities are classified as available-for-sale under
SFAS No. 115. On securities classified as available-for-sale, the carrying
amount is a reasonable estimate of fair value. The adoption of SFAS No. 115 did
not have a significant impact on the Combined Company's financial statements.
The securities available-for-sale were as follows:
<TABLE>
<CAPTION>
1994 1995
------------------------- ----------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Equity securities.......................... $ 156,355 124,866 $103,408 111,243
======== ======== ======== ========
</TABLE>
During 1994 (unaudited) and 1995, gross realized losses from the sale of
available-for-sale securities amounted to $19,378 and $77, respectively. Net
unrealized gains or losses from available-for-sale securities are included in
the shareholders' equity section of the balance sheet.
3. LONG-TERM DEBT
Long-term debt (including Notes Payable to Related Parties) consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes................................ $ 61,886 $ 89,082
Related Party Notes............................................ 278,811 295,470
----------- --------
340,697 384,552
Less current portion (including related party portion of
$232,204 and $249,181 for 1995 and 1994)..................... 278,773 271,306
----------- --------
$ 61,924 $113,246
=========== ========
</TABLE>
F-84
<PAGE> 187
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Combined Company has various installment and equipment loans to various
lenders which are secured by vehicles and equipment. These loans bear interest
at various fixed rates ranging from 10.0% to 15.0% per annum. These loans
require monthly payments ranging from $327 to $2,698 and are due through
February, 1997.
The Combined Company also has various notes payable to related parties
ranging from installment to demand type arrangements. These notes are generally
unsecured with interest rates at 10-12.75% and maturities ranging from July 1996
to February 1997.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
TOTAL RELATED PARTIES
-------- ---------------
<S> <C> <C>
1996.................................................. $271,306 $ 232,531
1997.................................................. 32,805 17,674
1998.................................................. 29,022 17,420
1999.................................................. 32,123 19,244
2000.................................................. 19,296 8,601
-------- --------
$384,552 $ 295,470
======== ========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $66,050, $59,424 and
$94,719 for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The
Company leases certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating lease agreements which expire at various
dates through November, 1999. Minimum rental commitments at December 31, 1995
under operating leases having an initial noncancelable term of one year or more
are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996....................................................................... $22,281
1997....................................................................... 22,281
1998....................................................................... 13,834
1999....................................................................... 10,659
-------
$69,055
=======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Combined Company had a defined-contribution employee benefit plan
incorporating provisions of section 401(k) of the Internal Revenue Code (the
"Code"). Substantially all employees of the Combined Company were eligible to
participate in the plan. Under the plan's provisions, a plan member could
annually contribute, on a tax deferred basis, amounts typically from 1% to 25%
of total compensation, not to exceed the maximum established by the Internal
Revenue Service. The Combined Company provided for discretionary profit sharing
contributions. No employer contributions were made or accrued to the plan for
the year ended December 31, 1993, 1994. The 401(k) plan was terminated on
December 31, 1994.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Combined Company maintains general liability insurance coverage and
umbrella policies to ensure themselves against any liabilities occurring in the
normal course of business. The Combined Company believes that their insurance
coverage is adequate.
F-85
<PAGE> 188
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' COMPENSATION
Shareholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $200,279,
$365,665 and $308,101 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
8. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
----------- ----------- ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
State................................................ $ 4,568 $ 800 $1,804
------ ---- ------
$ 4,568 $ 800 $1,804
====== ==== ======
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Combined Company operates under Subchapter S of the Internal Revenue
Code or as a Limited Liability Company and is not subject to corporate federal
or state income tax. In connection with the agreement and plan of merger with
Service Experts, Inc., the Subchapter S election will be terminated. As a
result, the Combined Company will be subject to corporate income taxes
subsequent to the termination of S corporation status. The Combined Company had
net operating income for income tax purposes of $215,217, $174,314, $329,377 and
$292,336 for 1993, 1994, 1995 and the nine months ended September 30, 1996,
respectively. Had the Combined Company filed federal and state income tax
returns as a regular corporation for 1993, 1994, 1995, and the nine months ended
September 30, 1996, income tax expense under the provisions of Financial
Accounting Standard No. 109 would have been $76,978, $54,834, $78,300 and
$115,955, respectively.
At the date of termination of S corporation status, the Combined 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 based on the cumulative temporary differences at the
date of termination of S corporation status. If the termination of S corporation
status had occurred at September 30, 1996, the deferred tax asset would have
been approximately $49,673.
9. NOTES RECEIVABLE FROM RELATED PARTIES
The Combined Company has notes receivable from related parties, including
current stockholders. These notes have various payment terms and bear annual
interest ranging at 6.5%
The Combined Company has signed note receivables in the amount of $54,759
from two key employees for the personal purchase of vehicles. The Combined
Company is liable for the two notes to GMAC and a note payable is recorded at
December 31, 1995. The Combined Company is withholding the payment amounts from
the employees' commissions.
OTHER RELATED PARTY TRANSACTION
The Combined Company leases facility space from a relative of the majority
shareholder of the Combined Company. Rental expense on these related party
operating leases amount to $41,200, $35,665 and $36,347 for the years 1993
(unaudited), 1994 (unaudited) and 1995, respectively.
F-86
<PAGE> 189
DIAL ONE SERVICE CHAMPIONS, ET AL.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. SUBSEQUENT EVENT
Effective June 1, 1996, Bill Raymond, majority shareholder, personally
assumed the Combined Company's outstanding notes payable with Merv Hall and Merv
Hall Investments in the amount of $256,019.
Effective July 22, 1996, the Combined Company entered into a purchase
option agreement with Daniel Messerer of Horizon Heating and Air Conditioning,
Inc. ("Horizon") in the amount of $50,000. In consideration of this sum, the
Combined Company was granted an irrevocable option to purchase seventy percent
of any and all shares from Horizon for one dollar. The Combined Company
terminated this agreement on October 8, 1996 and the fifty thousand was
expensed. At September 30, 1996, the Combined Company has a note receivable from
Horizon in the amount of $43,830. No payments have been made on this note and
the Combined Company intends to seek legal action.
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-87
<PAGE> 190
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Comfortech, Inc.
We have audited the accompanying combined balance sheet of Comfortech, Inc.
as of March 31, 1996, and the related statements of income, stockholders'
equity, and cash flows for the year then ended March 31, 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 Comfortech, Inc. at March
31, 1996, and the combined results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 6, 1996
F-88
<PAGE> 191
COMFORTECH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------- SEPTEMBER 30,
1995 1996 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 60,852 $ 25,267 $ 147,448
Receivables:
Trade, net of allowance for doubtful accounts of
$8,000 in 1995 and $8,000 in 1996.................. 469,088 409,896 748,453
Employee................................................ 1,042 409 --
Other................................................... 2,749 -- --
---------- --------- ----------
472,879 410,305 748,453
Inventories............................................. 200,520 188,261 168,266
Investments............................................. 2,000 6,000 7,300
Deferred income taxes................................... 4,971 6,869 8,407
Prepaid expenses and other current assets............... 25,696 23,239 19,169
---------- --------- ----------
Total current assets............................ 766,918 659,941 1,099,043
Property, buildings and equipment:
Furniture and fixtures.................................. 143,700 147,598 152,008
Machinery and equipment................................. 144,239 156,771 165,006
Vehicles................................................ 475,860 571,730 622,315
Leasehold improvements.................................. 7,217 7,217 8,543
---------- --------- ----------
771,016 883,316 947,872
Less accumulated depreciation and amortization.......... (488,218) (585,935) (560,876)
---------- --------- ----------
282,798 297,381 386,996
Other assets.............................................. 275 275 275
---------- --------- ----------
Total assets.................................... $ 1,049,991 $ 957,597 $ 1,486,314
========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities.......... $ 225,636 $ 156,303 $ 245,085
Accrued taxes, other than income........................ 56,900 64,546 40,324
Accrued warranties...................................... 18,162 19,477 25,629
Income taxes payable.................................... -- 12,768 145,934
Deferred revenue........................................ 52,250 33,472 25,516
Billings in excess of costs and estimated earnings...... -- -- 4,600
Liability to Companies' benefit plans................... 3,467 5,754 5,112
Current portion of long-term debt....................... 196,246 139,231 134,132
---------- --------- ----------
Total current liabilities....................... 552,661 431,551 626,332
Long-term debt, net of current portion.................... 162,452 114,973 190,405
Deferred income taxes..................................... 14,837 21,240 21,041
---------- --------- ----------
729,950 567,764 837,778
Stockholders' equity
Common stock, $1 par value, 30,000 shares authorized,
7,000 shares issued and outstanding.................. 7,000 7,000 7,000
Retained earnings....................................... 313,041 382,833 641,536
---------- --------- ----------
Total stockholders' equity...................... 320,041 389,833 648,536
---------- --------- ----------
Total liabilities and stockholders' equity...... $ 1,049,991 $ 957,597 $ 1,486,314
========== ========= ==========
</TABLE>
See accompanying notes.
F-89
<PAGE> 192
COMFORTECH, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION> SIX MONTH ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------------- ---------------------------
1994 1995 1996 1995 1996
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $ 4,325,415 $ 4,362,501 $4,538,263 $ 2,682,047 $ 3,072,811
Cost of goods sold................. 3,092,738 3,108,993 3,200,252 1,821,374 2,067,852
---------- ---------- ---------- ----------- -----------
Gross margin....................... 1,232,677 1,253,508 1,338,011 860,673 1,004,959
Selling, general and administrative
expenses......................... 1,088,166 1,143,448 1,201,850 577,435 584,038
Bad debt expense................... 9,421 12,624 10,229 6,152 (621)
---------- ---------- ---------- ----------- -----------
Income from operations............. 135,090 97,436 125,932 277,086 421,542
Other income (expense):
Interest expense................. (33,676) (32,285) (27,097) (15,886) (12,221)
Interest income.................. -- -- -- -- 122
Other income..................... 12,362 10,965 2,372 -- 6,741
---------- ---------- ---------- ----------- -----------
(21,314) (21,320) (24,725) (15,886) (5,358)
---------- ---------- ---------- ----------- -----------
Income before taxes................ 113,776 76,116 101,207 261,200 416,184
Provision (benefit) for income
taxes:
Current.......................... 15,419 12,691 26,910 92,411 159,218
Deferred......................... 6,252 3,614 4,505 2,405 (1,737)
---------- ---------- ---------- ----------- -----------
21,671 16,305 31,415 94,816 157,481
---------- ---------- ---------- ----------- -----------
Net income......................... $ 92,105 $ 59,811 $ 69,792 $ 166,384 $ 258,703
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-90
<PAGE> 193
COMFORTECH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$1 PAR VALUE RETAINED
SHARES AMOUNT EARNINGS TOTAL
------------ ------ -------- --------
<S> <C> <C> <C> <C>
Balance at March 31, 1993 (unaudited)................ 7,000 $7,000 $161,125 $168,125
Net income (unaudited)............................. -- -- 92,105 92,105
----- ------ -------- --------
Balance at March 31, 1994 (unaudited)................ 7,000 7,000 253,230 260,230
Net income (unaudited)............................. -- -- 59,811 59,811
----- ------ -------- --------
Balance at March 31, 1995 (unaudited)................ 7,000 7,000 313,041 320,041
Net income......................................... -- -- 69,792 69,792
----- ------ -------- --------
Balance at March 31, 1996............................ 7,000 7,000 382,833 389,833
Net income (unaudited)............................. -- -- 258,703 258,703
----- ------ -------- --------
Balance at September 30, 1996 (unaudited)............ 7,000 $7,000 $641,536 $648,536
===== ====== ======== ========
</TABLE>
See accompanying notes.
F-91
<PAGE> 194
COMFORTECH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -------------------------
1994 1995 1996 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $ 92,105 $ 59,811 $ 69,792 $ 166,384 $ 258,703
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 84,995 100,163 106,662 51,681 61,151
Provision for deferred income taxes
(benefit)................................. 6,252 3,614 4,505 2,405 (1,737)
Gain on asset disposals..................... (1,500) (10,624) (900) -- (6,741)
Changes in assets and liabilities:
Receivables............................... (109,207) (41,990) 59,825 66,781 (338,148)
Inventories............................... (6,096) 68,455 12,259 13,190 19,995
Prepaid expenses and other current
assets.................................. (5,208) (4,270) 2,457 13,042 4,070
Trade accounts payable and accrued
liabilities............................. 22,950 (110,961) (69,333) (49,466) 88,782
Accrued compensation...................... -- -- -- 26,106 --
Accrued taxes, other than income.......... 61,821 (51,516) 9,933 (28,843) (24,864)
Accrued warranties........................ (22,583) (667) 1,315 (3,839) 6,152
Deferred revenue.......................... 2,627 10,017 (18,778) (7,507) (7,956)
Income taxes payable...................... (21,875) 3,212 15,517 85,080 133,166
Costs and estimated earnings in excess of
billings and billings in excess of costs
and estimated earnings.................. -- -- -- -- 4,600
--------- --------- -------- -------- ---------
Net cash flow provided by operating
activities.................................. 104,281 25,244 193,254 335,014 197,173
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment................................... (76,317) (141,536) (121,245) (85,373) (156,400)
Proceeds from sale of property, buildings, and
equipment................................... 1,500 17,738 900 -- 12,375
Purchase of investments....................... (2,000) -- (4,000) (4,000) (1,300)
--------- --------- -------- -------- ---------
Net cash used in investing activities......... (76,817) (123,798) (124,345) (89,373) (145,325)
FINANCING ACTIVITIES
Payments on short-term debt................... -- -- (50,000) (50,000) --
Proceeds of long-term debt and capital
leases...................................... 63,209 206,429 103,449 69,372 150,721
Payments of long-term debt and capital
leases...................................... (154,317) (209,038) (157,943) (79,434) (80,388)
--------- --------- -------- -------- ---------
Net cash provided by (used in) financing
activities.................................. (91,108) (2,609) (104,494) (60,062) 70,333
--------- --------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents................................. (63,644) (101,163) (35,585) 185,579 122,181
Cash and cash equivalents at beginning of
period...................................... 225,659 162,015 60,852 60,852 25,267
--------- --------- -------- -------- ---------
Cash and cash equivalents at end of period.... $ 162,015 $ 60,852 $ 25,267 $ 246,431 $ 147,448
========= ========= ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................. $ 33,676 $ 32,285 $ 27,097 $ 15,886 $ 12,221
========= ========= ======== ======== =========
Income taxes paid............................. $ 37,294 $ 10,132 $ 11,765 $ 5,045 $ 26,948
========= ========= ======== ======== =========
</TABLE>
See accompanying notes.
F-92
<PAGE> 195
COMFORTECH, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994 (UNAUDITED), 1995 (UNAUDITED), AND 1996 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Comfortech, 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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of March 31, 1996 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the six months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the Company's 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 statement should be read in conjunction with the March 31,
1996 audited financial statements appearing herein. The results of the six
months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
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, which is
usually within one to two days.
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 1 to 4 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. 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 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-93
<PAGE> 196
COMFORTECH, INC.
NOTES TO 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
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt obligations
approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the average cost method for all inventories.
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>
Furniture and fixtures........................................................ 5-7
Machinery and equipment....................................................... 5
Vehicles...................................................................... 5
Leasehold improvements........................................................ 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
and labor 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.
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.
INCOME TAXES
The Company 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.
F-94
<PAGE> 197
COMFORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended March 31, 1994 (unaudited), 1995 (unaudited) and
1996 amounts charged to bad debt expense totaled $9,421, $12,624 and $10,229,
respectively, and accounts written off, net of recoveries, were $9,421, $12,624
and $10,229, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited) and 1996, the Company expensed $47,475, $67,277
and $56,763, 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
There were no contracts in progress at March 31, 1995 (unaudited) and 1996.
3. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115 "Accounting for
Certain Investments in Debt and Equity Securities." The Company's investment in
securities are classified as available-for-sale under SFAS No. 115. On
securities classified as available-for-sale, the carrying amount is a reasonable
estimate of fair value. The adoption of SFAS No. 115 did not have a significant
impact on the Company's financial statements. The securities available-for-sale
were as follows:
<TABLE>
<CAPTION>
1995 1996
------------------------- --------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
----------- ----------- ------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Equity securities............................ $ 2,000 $ 2,000 $6,000 $ 6,000
====== ====== ====== ======
</TABLE>
There were no gross realized gains or losses from the sale of
available-for-sale securities.
4. DEBT
Debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1995 1996
----------- ---------
(UNAUDITED)
<S> <C> <C>
Lines of credit..................................................... $ 50,000 $ --
Installment and equipment notes..................................... 308,698 254,204
--------- ---------
358,698 254,204
Less current portion................................................ (196,246) (139,231)
--------- ---------
$ 162,452 $ 114,973
========= =========
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $100,000. This line of credit bears interest at the prime rate plus 1% (9.25%
at March 31, 1996). The line is secured by the accounts
F-95
<PAGE> 198
COMFORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
receivable, inventory, furniture and fixtures, certain term life insurance
policies, and deeds of trust on the stockholders' residences.
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 4.8% to 9.75% per annum at March 31, 1996.
These loans require monthly payments ranging from $232 to $616 and are due
through March 5, 2000.
As of March 31, 1996, the aggregate amounts of annual principal maturities
of long-term debt are as follows:
<TABLE>
<S> <C>
1997.............................................................. $139,231
1998.............................................................. 62,564
1999.............................................................. 38,260
2000.............................................................. 14,149
--------
$254,204
========
</TABLE>
5. LEASES
Total rental expense for all operating leases was $22,840, $50,865 and
$58,000 for 1994 (unaudited), 1995 (unaudited) and 1996, respectively. The
Company leases the office and warehouse facilities on a month to month lease
arrangement with a partnership formed by the two stockholders. There are no
capital leases at March 31, 1995 (unaudited) and 1996.
6. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 15% of total compensation, not
to exceed the maximum established by the Internal Revenue Service. The Company
contributes an amount equal to 1% of compensation for all eligible employees
contributing at least 2% on a tax deferred basis. In addition, the Company can
make discretionary profit sharing contributions based on profits. The Company's
contributions totaled $32,168, $7,381 and $7,448 for the years ended March 31,
1994 (unaudited), 1995 (unaudited) and 1996, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of 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 maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate
8. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $325,330,
$236,666 and $293,896 in 1994 (unaudited), 1995 (unaudited) and 1996,
respectively.
F-96
<PAGE> 199
COMFORTECH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
1994 1995 1996
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal............................................. $11,998 $ 9,745 $22,479
State............................................... 3,421 2,946 4,431
Deferred.............................................. 6,252 3,614 4,505
----------- -------- --- -------
$21,671 $16,305 $31,415
=========== =========== =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1995 1996
----------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization......................................... $14,837 $21,240
------- -------
Deferred tax liabilities................................................ 14,837 21,240
Deferred tax assets:
Compensation and warranty reserves.................................... 3,451 4,869
Bad debt reserve...................................................... 1,520 2,000
------- -------
Total gross deferred tax assets......................................... 4,971 6,869
Valuation allowance..................................................... -- --
------- -------
Net deferred tax liabilities............................................ $ 9,866 $14,371
======= =======
</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 that not be realized during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED MARCH 31,
------------------------------------
1994 1995 1996
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate...................... $ 38,684 $ 25,879 $ 34,410
State income tax less applicable federal tax
benefit............................................ 2,258 1,944 2,924
Effects of graduated tax rates....................... (19,271) (11,518) (5,919)
------- ------- -------
$ 21,671 $ 16,305 $ 31,415
======= ======= =======
</TABLE>
10. RELATED PARTY TRANSACTIONS
OTHER RELATED PARTY TRANSACTION
The Company leases facility space from a partnership formed by the
stockholders of the Company. Rental expense on these related party operating
leases amount to $22,840, $50,865 and $58,000 for the years 1994 (unaudited),
1995 (unaudited) and 1996, respectively.
11. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-97
<PAGE> 200
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Air-Conditioning and Heating Unlimited, Inc.
We have audited the accompanying balance sheet of Air-Conditioning and
Heating Unlimited, Inc. as of September 30, 1996, and the related statements of
income, stockholder's equity, and cash flows for the year then ended. 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 from
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 Air-Conditioning and Heating
Unlimited, Inc. at September 30, 1996, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 6, 1996
F-98
<PAGE> 201
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1995 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 390,812 $ 193,562
Receivables:
Trade.................................................................................. 275,099 359,819
Related party.......................................................................... 24,089 27,055
Employee............................................................................... 1,278 535
--------- ---------
300,466 387,409
Inventories.............................................................................. 75,548 94,548
Prepaid federal income taxes............................................................. 35,632 11,132
Prepaid state income taxes............................................................... 979 1,296
Investments.............................................................................. 107,670 218,684
Prepaid expenses and other current assets................................................ 4,311 4,969
Deferred income taxes.................................................................... 14,892 12,789
--------- ---------
Total current assets............................................................... 930,310 924,389
Property, buildings and equipment:
Furniture and fixtures................................................................... 187,071 190,391
Machinery and equipment.................................................................. 54,354 54,354
Vehicles................................................................................. 372,899 374,952
Leasehold improvements................................................................... 112,888 115,582
--------- ---------
727,212 735,279
Less accumulated depreciation and amortization........................................... (539,904 ) (584,303)
--------- ---------
187,308 150,976
Other assets............................................................................... 56,356 62,192
--------- ---------
Total assets....................................................................... $1,173,974 $1,137,557
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........................................... $ 276,137 $ 191,443
Accrued compensation..................................................................... 79,582 35,127
Accrued taxes, other than income......................................................... 7,402 17,003
Accrued warranties....................................................................... 28,347 32,495
Deferred revenue......................................................................... 190,257 237,811
Liability to Companies' benefit plans.................................................... 4,212 11,760
Current portion of long-term debt........................................................ 35,890 27,626
--------- ---------
Total current liabilities.......................................................... 621,827 553,265
Long-term debt, net of current portion..................................................... 36,748 21,759
Deferred income taxes...................................................................... 7,114 4,983
--------- ---------
Stockholder's equity:
Common stock -- Authorized 2,000 Shares
$1 Par Value, Issued 500 Shares........................................................ 500 500
Retained earnings........................................................................ 507,785 557,050
--------- ---------
Total stockholder's equity......................................................... 508,285 557,550
--------- ---------
Total liabilities and stockholder's equity......................................... $1,173,974 $1,137,557
========= =========
</TABLE>
See accompanying notes.
F-99
<PAGE> 202
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996
---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenues............................................... $3,500,213 $3,780,200 $4,333,010
Cost of goods sold......................................... 2,681,908 2,759,778 3,056,918
---------- ---------- ----------
Gross margin............................................... 818,305 1,020,422 1,276,092
Selling, general and administrative expenses............... 655,187 979,119 1,223,132
---------- ---------- ----------
Income from operations..................................... 163,118 41,303 52,960
Other income (expense):
Interest expense......................................... (7,550) (6,895) (5,049)
Interest income.......................................... 8,932 12,782 8,489
Other income............................................. 18 12,184 6,109
---------- ---------- ----------
1,400 18,071 9,549
---------- ---------- ----------
Income before taxes........................................ 164,518 59,374 62,509
Provision (benefit) for income taxes
Current.................................................. 69,005 15,128 13,271
Deferred................................................. (5,839) 6,508 (27)
---------- ---------- ----------
63,166 21,636 13,244
---------- ---------- ----------
Net income................................................. $ 101,352 $ 37,738 $ 49,265
========== ========== ==========
</TABLE>
See accompanying notes.
F-100
<PAGE> 203
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
$1 PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 (unaudited)................. 500 $ 500 $ 368,695 $ 369,195
Net income............................................. -- -- 101,352 101,352
----- ------ --------- ---------
Balance at September 30, 1994 (unaudited)................ 500 500 470,047 470,547
Net income............................................. -- -- 37,738 37,738
----- ------ --------- ---------
Balance at September 30, 1995............................ 500 500 507,785 508,285
Net income............................................. -- -- 49,265 49,265
----- ------ --------- ---------
Balance at September 30, 1996............................ 500 $ 500 $ 557,050 $ 557,550
===== ====== ========= =========
</TABLE>
See accompanying notes.
F-101
<PAGE> 204
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------
1994 1995 1996
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................... $ 101,352 $ 37,738 $ 49,265
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 101,868 77,473 55,683
Provision (benefit) for deferred income taxes.......... (5,839) 6,508 (27)
(Gain) loss on marketable securities................... 7,775 (5,818) (3,215)
Gain on asset disposals................................ -- -- 8,115
Changes in assets and liabilities:
Receivables......................................... (87,485) (65,831) (86,943)
Inventories......................................... 7,457 2,433 (19,000)
Prepaid expenses and other current assets........... (12,285) 14,914 (658)
Trade accounts payable and accrued liabilities...... 9,658 106,669 (77,146)
Accrued compensation................................ 24,713 8,866 (44,455)
Accrued taxes, other than income.................... 9,601
Accrued warranties.................................. 3,997 2,097 4,148
Deferred revenue.................................... 17,727 18,175 47,554
Income taxes payable................................ 19,792 (98,150) 24,182
-------- -------- --------
Net cash flow provided by (used in) operating
activities............................................. 188,730 105,074 (32,896)
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment........... (51,074) (20,581) (27,466)
Purchase of investments.................................. (4,487) (8,743) (325,803)
Proceeds from sale of investments........................ -- -- 218,004
Decrease in other assets................................. (5,836) (6,836) (5,836)
----------- ----------- --------
Net cash used in investing activities.................... (61,397) (36,160) (141,101)
FINANCING ACTIVITIES
Proceeds of long-term debt and capital leases............ 18,777 -- 16,671
Payments of long-term debt and capital leases............ (36,850) (38,791) (39,924)
----------- ----------- --------
Net used in financing activities......................... (18,073) (38,791) (23,253)
----------- ----------- --------
Increase (decrease) in cash and cash equivalents......... 109,260 30,123 (197,250)
Cash and cash equivalents at beginning of period......... 251,429 360,689 390,812
----------- ----------- --------
Cash and cash equivalents at end of period............... $ 360,689 $ 390,812 $193,562
========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................ $ 7,550 $ 6,895 $ 5,049
========= ========= ========
Income taxes paid........................................ $ 50,915 $ 58,720 $ 16,410
========= ========= ========
</TABLE>
See accompanying notes.
F-102
<PAGE> 205
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Air-Conditioning and Heating Unlimited, 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.
UNAUDITED YEAR ENDED FINANCIAL STATEMENTS
The balance sheet as of September 30, 1995 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
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, which is
usually within one to two days.
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. There are no unbilled retainage amounts included in trade accounts
receivable at September 30, 1995 (unaudited) and 1996, respectively.
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.
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-103
<PAGE> 206
AIR-CONDITIONING AND HEATING UNLIMITED, 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 straight line and declining balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 7
Machinery and equipment....................................................... 5-7
Vehicles...................................................................... 5
Leasehold improvements........................................................ 31.5
</TABLE>
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
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
for two years 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
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.
INCOME TAXES
The Company 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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited) and 1996, the Company expensed $69,971, $88,239
and $70,928, respectively.
F-104
<PAGE> 207
AIR-CONDITIONING AND HEATING UNLIMITED, 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.
2. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The Company's
investments in securities are classified as available-for-sale under SFAS No.
115. On securities classified as available-for-sale, the carrying amount is a
reasonable estimate of fair value. The adoption of SFAS No. 115 did not have a
significant impact on the Company's financial statements. The securities
available-for-sale were all equity securities in which the cost approximated
estimated fair value at September 30, 1995 (unaudited) and 1996. There were no
gross realized gains or losses from the sale of available-for-sale securities.
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
----------- -------
(UNAUDITED)
<S> <C> <C>
Lines of credit................................................. $ -- $ --
Installment and equipment notes................................. 72,638 49,385
------- -------
72,638 49,385
Less current portion............................................ 35,890 27,626
------- -------
Long-term debt, net of current portion.......................... $36,748 $21,759
======= =======
</TABLE>
The Company has two lines of credit with a bank totaling $300,000. Both
lines of credit bear interest at the current available prime rate plus 1%. The
$250,000 line of credit is secured by accounts receivable and the personal
guaranty of the shareholder. The $50,000 line of credit is unsecured. Both lines
of credit expire February 24, 1997. There were no amounts outstanding as of
September 30, 1995 (unaudited), and 1996.
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 6.40% to 13.16% per annum. These loans require
monthly payments ranging from $358 to $518 and are due through February, 1999.
As of September 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997....................................................................... $27,626
1998....................................................................... 17,581
1999....................................................................... 4,178
2000....................................................................... --
2001....................................................................... --
-------
$49,385
=======
</TABLE>
F-105
<PAGE> 208
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLANS
The Company has a non-contributory fully discretionary plan covering
substantially all employees. The amounts contributed to the plan are set
annually by management. The Company's contributions totaled $21,127, $22,334 and
$ 26,865 for the years ended September 30, 1994 (unaudited), 1995 (unaudited),
and 1996, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of 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 maintains general liability insurance coverage and umbrella
policies to insure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
6. STOCKHOLDER'S COMPENSATION
Stockholder's compensation, which consist of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $250,214
(unaudited), $316,094 (unaudited) and $728,067 in 1994, 1995 and 1996,
respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------
1994 1995 1996
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal............................................. $56,944 $11,034 $ 9,555
State............................................... 12,061 4,094 3,716
Deferred.............................................. (5,839) 6,508 (27)
------- ------- -------
$63,166 $21,636 $13,244
======= ======= =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................... $ 7,114 $ 4,983
------- -------
Deferred tax liabilities........................................ 7,114 4,983
Deferred tax assets:
Compensation and warranty reserves.............................. $14,892 $12,789
------- -------
Total deferred tax assets......................................... 14,892 12,789
Valuation allowance............................................... -- --
------- -------
Net deferred tax assets........................................... $ 7,778 $ 7,806
======= =======
</TABLE>
F-106
<PAGE> 209
AIR-CONDITIONING AND HEATING UNLIMITED, INC.
NOTES TO 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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1994 1995 1996
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate...................... $55,936 $20,187 $ 21,253
State income tax less applicable federal tax
benefit............................................ 7,222 3,525 2,449
Effects of graduated tax rates....................... (1,257) (3,419) (12,147)
Other -- net......................................... 1,265 1,343 1,689
-------- -------- --------
$63,166 $21,636 $ 13,244
======== ======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
ACCOUNTS RECEIVABLE FROM RELATED PARTIES
The Company has accounts receivable from related parties, including current
shareholders. The balances of related party accounts receivable were $24,089,
and $27,055 at September 30, 1995 (unaudited), and 1996 respectively.
OTHER RELATED PARTY TRANSACTION
The Company leases facility space from the stockholder of the Company.
Rental expense on this related party operating lease amounts to $51,300, $52,800
and $52,800 for the years ended September 30, 1994 (unaudited), 1995 (unaudited)
and 1996, respectively. The future obligation of the Company under this lease is
$52,800 for each of the years ended September 30, 1997 and 1998.
The Company also had dealings with entities that are related to Service
Experts, Inc. (see Note 9). The Company paid Future Now University $4,463, $562,
and $6,048 during the year ended September 30, 1994 (unaudited), 1995
(unaudited) and 1996, respectively for tuition for some Company employees.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-107
<PAGE> 210
REPORT OF INDEPENDENT AUDITORS
The Stockholders
The 1589 Niagara Street Corporation
We have audited the accompanying balance sheet of The 1589 Niagara Street
Corporation as of August 31, 1996, and the related combined statements of
operations, stockholders' equity, and cash flows for the year then ended. 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 combined financial position of The 1589 Niagara
Street Corporation at August 31, 1996, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
October 25, 1996
F-108
<PAGE> 211
THE 1589 NIAGARA STREET CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1995 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 57,445 $120,664
Receivables:
Trade, net of allowance for doubtful accounts of $4,600 in 1995
and $4,600 in 1996............................................... 71,284 124,683
Due from Shareholder.............................................. 152,324 128,645
Employee.......................................................... 847 --
-------- --------
224,455 253,328
Inventories.......................................................... 78,960 107,706
Investments.......................................................... -- 26,618
Deferred income taxes................................................ 21,973 21,807
Prepaid expenses and other current assets............................ 1,953 6,547
-------- --------
Total current assets......................................... 384,786 536,670
Property, buildings and equipment:
Furniture, fixtures, machinery and equipment......................... 157,390 213,398
Vehicles............................................................. 237,002 315,996
Leasehold improvements............................................... 63,000 106,288
-------- --------
457,392 635,682
Less accumulated depreciation and amortization....................... (318,353) (364,550)
-------- --------
139,039 271,132
Deferred income taxes................................................ 10,046 2,917
-------- --------
Total assets................................................. $ 533,871 $810,719
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities....................... $ 181,610 $211,614
Accrued compensation................................................. 50,897 119,658
Accrued taxes, other than income..................................... 26,937 22,601
Income taxes payable................................................. 23,761 61,777
Deferred revenue..................................................... 50,000 50,000
Current portion of long-term debt.................................... 24,653 28,965
-------- --------
Total current liabilities.................................... 357,858 494,615
Long-term debt, net of current portion................................. 70,558 75,926
Stockholders' equity................................................... 105,455 240,178
-------- --------
Total liabilities and stockholders' equity................... $ 533,871 $810,719
======== ========
</TABLE>
See accompanying notes.
F-109
<PAGE> 212
THE 1589 NIAGARA STREET CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------
1994 1995 1996
----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenues............................................... $ 2,462,955 $ 2,913,881 $3,785,399
Cost of goods sold......................................... 1,758,003 2,058,467 2,301,244
---------- ---------- ----------
Gross margin............................................... 704,952 855,414 1,484,155
Selling, general and administrative expenses............... 703,017 773,653 1,272,756
---------- ---------- ----------
Income from operations..................................... 1,935 81,761 211,399
Other income (expense):
Interest expense......................................... (3,351) (6,418) (4,314)
Interest income.......................................... 60 5,381 10,353
Other income (expense)................................... 6,952 (12,868) 19,795
---------- ---------- ----------
3,661 (13,905) 25,834
---------- ---------- ----------
Income before taxes........................................ 5,596 67,856 237,233
Provision (benefit) for income taxes:
Current.................................................. 4,385 21,480 90,415
Deferred................................................. 1,262 (1,860) 7,295
---------- ---------- ----------
5,647 19,620 97,710
---------- ---------- ----------
Net (loss) income.......................................... $ (51) $ 48,236 $ 139,523
========== ========== ==========
</TABLE>
See accompanying notes.
F-110
<PAGE> 213
THE 1589 NIAGARA STREET CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Balance at September 1, 1993 (unaudited)......................................... $ 60,470
Net loss for the year ended August 31, 1994 (unaudited)........................ (51)
--------
Balance at August 31, 1994 (unaudited)........................................... 60,419
Net income for the year ended August 31, 1995 (unaudited)...................... 48,236
Purchase of treasury stock (unaudited)......................................... (3,200)
--------
Balance at August 31, 1995 (unaudited)........................................... 105,455
Purchase of treasury stock..................................................... (4,800)
Net income for the year ended August 31, 1996.................................. 139,523
--------
Balance at August 31, 1996....................................................... $ 240,178
========
</TABLE>
See accompanying notes.
F-111
<PAGE> 214
THE 1589 NIAGARA STREET CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1994 1995 1996
----------- ----------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income................................................... $ (51) $ 47,100 $ 139,523
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization..................................... 30,544 63,837 46,177
Provision (benefit) for deferred income taxes..................... 1,262 (1,860) 7,295
Provisions for loss on prior period adjustment.................... (12,035) -- --
(Gain) loss on asset disposals.................................... (6,338) 15,047 --
Changes in assets and liabilities:
Employee receivable............................................. -- -- 847
Receivables..................................................... 392 15,761 (53,399)
Inventories..................................................... 2,000 (34,460) (28,746)
Prepaid expenses and other current assets....................... (3,956) 6,625 (4,594)
Trade accounts payable and accrued
liabilities................................................... 53,970 51,937 30,004
Accrued compensation............................................ 48,864 (9,103) 68,761
Accrued taxes, other than income................................ 43,625 (44,787) (4,316)
Deferred revenue................................................ 50,000 -- --
Income taxes payable............................................ 3,684 1,432 38,016
-------- -------- --------
Net cash flow provided by operating activities...................... 211,961 111,529 239,568
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment...................... (56,597) (160,190) (178,290)
Proceeds from sale of property, buildings, and equipment............ 19,871 28,030 --
Purchase of investments............................................. -- -- (26,618)
Increase in other assets............................................ (35,210) (64,279) --
-------- -------- --------
Net cash used in investing activities............................... (71,936) (196,439) (204,908)
FINANCING ACTIVITIES
Retirement of stock................................................. -- -- (4,800)
Proceeds of long-term debt.......................................... -- 109,924 104,167
Payments of long-term debt.......................................... (55,676) (14,713) (94,487)
Due from Stockholder................................................ (35,546) (24,473) 23,679
-------- -------- --------
Net cash provided by (used in) financing
activities........................................................ (91,222) 70,738 28,559
-------- -------- --------
Increase (decrease) in cash and cash equivalents.................... 48,803 (14,172) 63,219
Cash and cash equivalents at beginning of period.................... 22,814 71,617 57,445
-------- -------- --------
Cash and cash equivalents at end of period.......................... $ 71,617 $ 57,445 $ 120,664
======== ======== ========
SUPPLEMENTAL CASH FLOW
INFORMATION
Interest paid....................................................... $ 3,351 $ 6,418 $ 4,314
======== ======== ========
Income taxes paid................................................... $ 15,835 $ 28,479 $ 104,410
======== ======== ========
</TABLE>
See accompanying notes.
F-112
<PAGE> 215
THE 1589 NIAGARA STREET CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1994 (UNAUDITED), 1995 (UNAUDITED) AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
The 1589 Niagara Street Corporation ("the Company") operate in one industry
segment and are primarily engaged in the installation and servicing of air
conditioning and heating systems for residential customers in the Buffalo, New
York area.
UNAUDITED YEAR END FINANCIAL STATEMENTS
The balance sheet as of August 31, 1995 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
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, which is usually within one day.
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 and certificates of deposit 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.
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.
F-113
<PAGE> 216
THE 1589 NIAGARA STREET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
Furniture and fixtures........................................................ 5-7
Machinery and equipment....................................................... 7
Vehicles...................................................................... 5
Leasehold improvements........................................................ 39
</TABLE>
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.
INCOME TAXES
The Company 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended August 31, 1994 (unaudited), 1995 (unaudited), and
1996 amounts charged to bad debt expense totaled $4,743, $4,963 and $2,902,
respectively, and accounts written off, net of recoveries, were $143, $4,963 and
$2,902, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited), and 1996, the Company expensed $78,427, $55,709
and $132,858, 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. INVESTMENTS
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-114
<PAGE> 217
THE 1589 NIAGARA STREET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's investment in securities are classified as
available-for-sale. On securities classified as available-for-sale, the carrying
amount is a reasonable estimate of fair value. The securities available-for-sale
as of August 31, 1996 were as follows:
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
------- ----------
<S> <C> <C>
Equity securities................................................. $24,894 $ 26,618
======= =======
</TABLE>
There were no gross realized gains or losses from the sale of
available-for-sale securities.
3. DEBT
Debt at August 31, 1995 and 1996 consists of:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------
1995 1996
----------- --------
(UNAUDITED)
<S> <C> <C>
Vehicle notes.................................................. $39,938 $104,891
Other debt..................................................... 55,273 --
------- -------
95,211 104,891
Less current portion........................................... 24,653 28,965
------- -------
Long-term debt................................................. $70,558 $ 75,926
======= =======
</TABLE>
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 8.59% to 9.75% per annum at December 31, 1995.
These loans require monthly payments ranging from $240 to $1,500 and are due
through August 2001.
As of August 31, 1996, the aggregate amounts of annual principal maturities
of long-term debt are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 28,965
1998........................................................... 24,273
1999........................................................... 18,287
2000........................................................... 16,269
2001........................................................... 17,097
--------
$104,891
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $60,768, $58,012 and
$73,844 for 1994 (unaudited), 1995 (unaudited) and 1996, respectively. The
Companies lease certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating agreements which expire at various dates
through
F-115
<PAGE> 218
THE 1589 NIAGARA STREET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December, 2000. Minimum rental commitments at August 31, 1996 under operating
leases having an initial noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1997...................................................................... $ 55,747
1998...................................................................... 55,746
1999...................................................................... 46,930
2000...................................................................... 42,000
2001...................................................................... 14,000
--------
$ 214,423
========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
As of September 1, 1995, the Company instituted a defined-contribution
employee benefit plan incorporating provisions of section 401(k) of the Internal
Revenue Code ("the Code"). Substantially all employees of the Company are
eligible to participate in the plan. Under the plan's provisions, a plan member
may annually contribute, on a tax deferred basis, amounts typically from 1% to
15% of total compensation, not to exceed the maximum established by the Internal
Revenue Service. The Company provides matching contributions determined by the
Company to a maximum ranging from 2% to 6% of the employee's total calendar year
compensation. The Company's matching contribution totaled $6,507 for the year
ended August 31, 1996.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure themselves against any liabilities occurring in the normal
course of business. The Company believes that their 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 $265,063,
$271,942 and $621,659 in 1994 (unaudited), 1995 (unaudited) and 1996,
respectively.
8. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------
1994 1995 1996
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal............................................. $ 2,642 $13,883 $68,548
State............................................... 1,743 7,597 21,867
Deferred.............................................. 1,262 (1,860) 7,295
----------- -------- --- --------
$ 5,647 $19,620 $97,710
=========== =========== ========
</TABLE>
F-116
<PAGE> 219
THE 1589 NIAGARA STREET CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................ $ 6,922 $14,051
------- -------
Deferred tax assets:
Deferred revenue............................................. 19,970 19,970
Intangible assets............................................ 17,134 16,968
Bad debt reserve............................................. 1,837 1,837
------- -------
Total deferred tax assets...................................... 38,941 38,775
Valuation allowance............................................ -- --
------- -------
Net deferred tax assets........................................ $32,019 $24,724
======= =======
</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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED AUGUST 31,
--------------------------------
1994 1995 1996
------- -------- -------
<S> <C> <C> <C>
Tax provision at statutory rate...................... $ 1,903 $ 23,071 $80,659
State income tax less applicable federal tax
benefit............................................ 1,337 4,737 15,517
Other nondeductible expenses......................... 5,753 5,119 8,158
Effects of graduated tax rates....................... (3,346) (13,307) (6,624)
-------- ---------- --------
$ 5,647 $ 19,620 $97,710
=========== =========== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
Due From Shareholders
The Company has notes receivable from current shareholders. These notes
have various payment terms and bear annual interest ranging at 11.75%.
Other Related Party Transaction
The Company leases facility space from stockholders of the Company and from
various corporations and partnerships which are owned by stockholders of the
Company. Rental expense on these related party operating leases amount to
$25,500, $26,500 and $48,234 for the years 1994 (unaudited), 1995 (unaudited),
and 1996, respectively.
10. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-117
<PAGE> 220
HVAC DIVISION OF PAUL E. SMITH CO., INC.
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
MARCH 31,
--------------------- SEPTEMBER 30,
1995 1996 1996
--------- --------- -------------
<S> <C> <C> <C>
ASSETS
Inventories................................................ $ 161,529 $ 219,083 $ 151,057
Refundable income taxes.................................... 7,638 7,589 9,329
Deferred tax asset......................................... 6,095 12,425 16,040
--------- --------- ---------
Total Current Assets............................. 175,262 239,097 176,426
Property and equipment:
Vehicles................................................. 325,623 402,122 402,122
Furniture................................................ 86,070 87,969 87,969
Machinery and equipment.................................. 53,299 67,608 67,608
--------- --------- ---------
464,992 557,699 557,699
Less accumulated depreciation............................ (330,027) (391,352) (420,904)
--------- --------- ---------
................................................. 134,965 166,347 136,795
--------- --------- ---------
Total assets..................................... $ 310,227 $ 405,444 $ 313,221
========= ========= =========
LIABILITIES AND DIVISION EQUITY
Current liabilities:
Accrued warranties....................................... $ 30,475 $ 62,125 $ 80,200
Deferred revenue......................................... 97,400 117,640 127,640
--------- --------- ---------
Total current liabilities........................ 127,875 179,765 207,840
Division equity............................................ 182,352 225,679 105,381
--------- --------- ---------
Total liabilities and division equity...................... $ 310,227 $ 405,444 $ 313,221
========= ========= =========
</TABLE>
See accompanying notes.
F-118
<PAGE> 221
HVAC DIVISION OF PAUL E. SMITH CO., INC.
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............................ $2,536,110 $2,604,559 $3,584,158 $1,919,861 $1,693,759
Cost of goods sold................... 2,237,426 2,186,744 3,088,877 1,619,046 1,444,374
------ ------ ------ ------ ------
Gross margin......................... 298,684 417,815 495,281 300,815 249,385
Selling, general and administrative
expenses........................... 354,888 368,125 489,320 253,843 213,966
------ ------ ------ ------ ------
Income (loss) from operations........ (56,204) 49,690 5,961 46,972 35,419
Other income:
Interest income.................... 362 291 800 330 1,476
Other income....................... 3,361 1,190 3,703 3,160 954
------ ------ ------ ------ ------
3,723 1,481 4,503 3,490 2,430
------ ------ ------ ------ ------
Income (loss) before taxes........... (52,481) 51,171 10,464 50,462 37,849
Provision (benefit) for income taxes:
Current............................ -- 2,363 9,138 15,876 12,286
Deferred........................... (10,496) 8,056 (6,330) (3,415) (3,615)
------ ------ ------ ------ ------
(10,496) 10,419 2,808 12,461 8,671
------ ------ ------ ------ ------
Net income (loss).................... $ (41,985) $ 40,752 $ 7,656 $ 38,001 $ 29,178
====== ====== ====== ====== ======
</TABLE>
See accompanying notes.
F-119
<PAGE> 222
HVAC DIVISION OF PAUL E. SMITH CO., INC.
STATEMENTS OF DIVISION EQUITY
UNAUDITED
<TABLE>
<CAPTION>
TOTAL
---------
<S> <C>
Balance at April 1, 1993......................................................... $ 306,816
Net loss....................................................................... (41,985)
---------
Balance at March 31, 1994........................................................ 264,831
Transfer to Corporate.......................................................... (123,231)
Net income..................................................................... 40,752
---------
Balance at March 31, 1995........................................................ 182,352
Transfer from Corporate........................................................ 35,671
Net income..................................................................... 7,656
---------
Balance at March 31, 1996........................................................ 225,679
Transfer to Corporate.......................................................... (149,476)
Net income..................................................................... 29,178
---------
Balance at September 30, 1996.................................................... $ 105,381
=========
</TABLE>
See accompanying notes.
F-120
<PAGE> 223
HVAC DIVISION OF PAUL E. SMITH CO., INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------- --------------------
1994 1995 1996 1995 1996
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................. $ (41,985) $ 40,752 $ 7,656 $ 38,001 $ 29,178
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation..................................... 48,607 61,116 61,325 25,466 29,552
Provision (benefit) for deferred income taxes.... (10,496) 8,056 (6,330) (3,415) (3,615)
Changes in assets and liabilities:
Inventories.................................... 180,138 98,038 (57,554) (5,862) 68,026
Refundable income taxes........................ 14,386 (15,289) 49 (2,677) (1,740)
Accrued warranties............................. 6,250 5,950 31,650 17,075 18,075
Deferred revenue............................... 16,720 16,160 20,240 11,120 10,000
---------- ---------- --------- --------- ----------
Net cash flow provided by operating activities..... 213,620 214,783 57,036 79,708 149,476
INVESTING ACTIVITIES
Purchase of property and equipment................. (28,065) (91,552) (92,707) (36,586) --
---------- ---------- --------- --------- ----------
Net cash used in investing activities.............. (28,065) (91,552) (92,707) (36,586) --
FINANCING ACTIVITIES
Transfer from (to) Corporate....................... (185,555) (123,231) 35,671 (43,122) (149,476)
---------- ---------- --------- --------- ----------
Net cash provided by (used in) financing
activities....................................... (185,555) (123,231) 35,671 (43,122) (149,476)
---------- ---------- --------- --------- ----------
Increase (decrease) in cash and cash equivalents... -- -- -- -- --
Cash and cash equivalents at beginning of year..... -- -- -- -- --
---------- ---------- --------- --------- ----------
Cash and cash equivalents at end of year........... $ -- $ -- $ -- -- $ --
========== ========== ========= ========= ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Income tax paid.................................... $ -- $ 5,095 $ 27,822 $ 10,971 $ 3,335
========== ========== ========= ========= ==========
</TABLE>
See accompanying notes.
F-121
<PAGE> 224
HVAC DIVISION OF PAUL E. SMITH CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED)
MARCH 31, 1994, 1995 AND 1996
AND SEPTEMBER 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
The HVAC Division of Paul E. Smith Co., Inc. ("Company") operates in
central Indiana and is primarily engaged in the installation and servicing of
air conditioning and heating systems for residential and commercial customers.
These financial statements reflect the operations of the HVAC Division of Paul
E. Smith Co., Inc. and the HVAC Division has no separate legal status or
existence. Transfers to Corporate reflected in Division Equity represents the
changes in cash receipts and disbursements, accounts receivable, prepaids, other
current assets, accounts payable and accrued liabilities. These balances at the
corporate level are not separated by the different divisions.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of March 31, 1996 and the related statements of
income, division equity, and cash flows for the two years then ended have been
prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet at September 30, 1996 and the related statements of
income and cash flows for the six months ended September 30, 1995 and 1995
(interim financial statements) have been prepared by the company's 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 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 March 31, 1996
audited financial statements appearing herein. The results of the six months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
REVENUE RECOGNITION
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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited) and 1996 (unaudited), the Company expensed
$35,300, $60,900, and $115,300, respectively.
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-122
<PAGE> 225
HVAC DIVISION OF PAUL E. SMITH CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
provided on the straight-line and declining balance methods over the following
useful lives:
<TABLE>
<CAPTION>
YEARS
----------
<S> <C>
Vehicles.................................................................. 3-5 years
Furniture and fixtures.................................................... 5-7 years
Machinery and equipment................................................... 3-7 years
</TABLE>
WARRANTIES
The Company provides the retail customer with a 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 for two years
and labor for one 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.
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.
INCOME TAXES
Paul E. Smith Co., 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.
Paul E. Smith Co., Inc. allocates taxes for financial statement purposes
between divisions based on net income generated by the specific division.
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-123
<PAGE> 226
HVAC DIVISION OF PAUL E. SMITH CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED)
2. INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal...................................... $ -- $ 1,505 $ 5,819
State........................................ -- 858 3,319
Deferred....................................... (10,496) 8,056 (6,330)
-------- ------- -------
$ (10,496) $10,419 $ 2,808
======== ======= =======
</TABLE>
Significant components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Warranty reserves...................................... $ 6,095 $12,425
-------- -------
Total deferred tax assets................................... 6,095 12,425
Valuation allowance......................................... -- --
-------- -------
Net deferred tax assets..................................... $ 6,095 $12,425
======== =======
</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 during the carryforward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED MARCH 31,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate................ $ (17,844) $17,398 $ 3,558
State income tax less applicable federal tax
benefit...................................... (1,012) 1,343 1,580
Other, net and effect of graduated tax rates... 8,360 (8,322) (2,330)
-------- ------- -------
$ (10,496) $10,419 $ 2,808
======== ======= =======
</TABLE>
3. STOCKHOLDERS' COMPENSATION
Stockholders' compensation, which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $184,395,
$161,260 and $180,898 in 1994 (unaudited), 1995 (unaudited) and 1996
(unaudited), respectively.
4. 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 its insurance coverage is adequate.
F-124
<PAGE> 227
HVAC DIVISION OF PAUL E. SMITH CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED)
5. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with
Service Experts, Inc. to sell all of the Company's stock in exchange for Service
Experts, Inc.'s stock. In accordance with the Combination Agreement, the Company
will become a wholly-owned subsidiary of Service Experts, Inc.
F-125
<PAGE> 228
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Freschi Air Systems, Inc.
We have audited the accompanying balance sheet of Freschi Air Systems, Inc.
as of December 31, 1995 and the related statements of operations, stockholder's
equity, and cash flows for the year then ended. 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 Freschi Air Systems, Inc. at
December 31, 1995, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 7, 1996
F-126
<PAGE> 229
FRESCHI AIR SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 84,488 $ 66,740 $ 409,123
Receivables:
Trade............................................... 295,190 291,024 453,968
Related party....................................... 90,930 90,930 90,930
Employee............................................ 4,221 2,190 --
----------- ---------- -----------
390,341 384,144 544,898
Inventories............................................ 138,693 148,073 154,224
Investments............................................ -- -- 40,717
Prepaid expenses and other current assets.............. 28,553 34,999 26,752
----------- ---------- -----------
Total current assets........................... 642,075 633,956 1,175,714
Property and equipment:
Furniture and fixtures................................. 15,563 15,563 15,563
Machinery and equipment................................ 111,694 126,147 155,395
Vehicles............................................... 453,155 445,588 474,415
Leasehold improvements................................. 13,117 13,117 13,117
----------- ---------- -----------
593,529 600,415 658,490
Less accumulated depreciation and amortization......... (408,136) (448,605) (487,888)
----------- ---------- -----------
185,393 151,810 170,602
Other assets............................................. 2,427 2,427 2,427
----------- ---------- -----------
Total assets................................... $ 829,895 $ 788,193 $ 1,348,743
=========== ========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities......... $ 148,490 $ 224,416 $ 163,486
Accrued compensation................................... 55,889 56,559 110,794
Accrued taxes, other than income....................... 19,227 5,778 20,650
Accrued warranties..................................... 12,844 19,091 110,319
Deferred revenue....................................... 12,971 34,253 64,239
Accrued employer contribution to 401(k) plan........... 71,425 75,000 66,929
Notes payable to related party, current portion........ 6,511 6,789 25,658
Current portion of long-term debt...................... 28,695 26,903 28,514
----------- ---------- -----------
Total current liabilities...................... 356,052 448,789 590,589
Long-term debt, net of current portion................... 107,250 80,347 58,756
Notes payable to related party, net of current portion... 13,489 6,701 29,445
Stockholder's equity:
Common stock, no par value; 10,000 shares authorized;
3,300 shares issued and outstanding................. 10,000 10,000 10,000
Retained earnings...................................... 343,104 242,356 659,953
----------- ---------- -----------
Total stockholder's equity..................... 353,104 252,356 669,953
----------- ---------- -----------
Total liabilities and stockholder's equity..... $ 829,895 $ 788,193 $ 1,348,743
=========== ========== ===========
</TABLE>
See accompanying notes.
F-127
<PAGE> 230
FRESCHI AIR SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS
-------------------------------------- ENDED
1993 1994 1995 SEPTEMBER 30,
----------- ----------- ---------- -------------------------
1995 1996
(UNAUDITED) (UNAUDITED) ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 2,574,930 $ 3,256,328 $3,254,462 $ 2,431,991 $ 3,336,481
Cost of goods sold................... 1,949,658 2,444,587 2,222,997 1,687,967 2,024,587
---------- ---------- ---------- ---------- ----------
Gross margin......................... 625,272 811,741 1,031,465 744,024 1,311,894
Selling, general and administrative
expenses........................... 707,314 866,644 1,142,142 810,520 912,523
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ (82,042) (54,903) (110,677) (66,496) 399,371
Other income (expense):
Interest expense................... (2,524) (6,661) (11,119) (8,542) (10,071)
Interest income.................... 8,606 11,797 10,146 2,351 6,418
Other income....................... 25,002 9,026 17,836 14,991 21,879
---------- ---------- ---------- ---------- ----------
31,084 14,162 16,863 8,800 18,226
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (50,958) $ (40,741) $ (93,814) $ (57,696) $ 417,597
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-128
<PAGE> 231
FRESCHI AIR SYSTEMS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
NO PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 (unaudited).................. 3,300 $10,000 $ 450,431 $ 460,431
Dividends paid.......................................... (15,628) (15,628)
Net loss (unaudited).................................... (50,958) (50,958)
----- ------- --------- ---------
Balance at December 31, 1993 (unaudited)................ 3,300 10,000 383,845 393,845
Net loss (unaudited).................................... (40,741) (40,741)
----- ------- --------- ---------
Balance at December 31, 1994 (unaudited)................ 3,300 10,000 343,104 353,104
Dividends paid.......................................... (6,934) (6,934)
Net income.............................................. (93,814) (93,814)
----- ------- --------- ---------
Balance at December 31, 1995............................ 3,300 10,000 242,356 252,356
Net income (unaudited).................................. 417,597 417,597
----- ------- --------- ---------
Balance at September 30, 1996 (unaudited)............... 3,300 $10,000 $ 659,953 $ 669,953
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-129
<PAGE> 232
FRESCHI AIR SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1993 1994 1995 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ (50,958) $ (40,741) $(93,814) $ (57,696) $ 417,597
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 35,854 55,527 63,478 43,322 39,283
Loss on asset disposals.............. -- 654 85 -- --
Changes in assets and liabilities:
Trade receivables................. 63,535 (101,887) 4,166 21,851 (162,944)
Inventories....................... 18,852 (6,533) (9,380) 26,497 (6,151)
Prepaid expenses and other current
assets.......................... (15,887) 5,701 (4,415) (9,692) 10,437
Trade accounts payable and accrued
liabilities..................... (33,155) 4,023 75,926 (22,054) (60,930)
Accrued compensation.............. 10,168 25,196 670 35,013 54,235
Accrued taxes, other than
income.......................... 144 11,447 (13,449) 4,219 14,872
Accrued warranties................ (5,403) (15,891) 6,247 145 91,228
Deferred revenue.................. 6,860 6,111 21,282 19,444 29,986
Accrued employer contribution to
401(k) plan..................... 20,000 51,425 3,575 (18,924) (8,071)
-------- --------- -------- -------- ---------
Net cash flow provided by (used in)
operating activities................. 50,010 (4,968) 54,371 42,125 419,542
INVESTING ACTIVITIES
Purchase of property and equipment..... (33,868) (28,346) (29,980) (2,490) (58,075)
Purchase of investments................ -- -- -- -- (40,717)
Collections on notes receivable from
related party........................ -- 23,458 -- -- --
-------- --------- -------- -------- ---------
Net cash used in investing
activities........................... (33,868) (4,888) (29,980) (2,490) (98,792)
FINANCING ACTIVITIES
Proceeds on long-term debt............. 33,100 -- -- -- --
Payments of long-term debt............. (3,017) (10,194) (28,695) (22,290) (19,980)
Proceeds on notes payable to related
party................................ -- 20,000 -- -- 58,800
Payments on notes payable to related
party................................ -- -- (6,510) (4,942) (17,187)
Dividends paid......................... (15,628) -- (6,934) -- --
-------- --------- -------- -------- ---------
Net cash provided by (used in)
financing activities................. 14,455 9,806 (42,139) (27,232) 21,633
-------- --------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents.......................... 30,597 (50) (17,748) 12,403 342,383
Cash and cash equivalents at beginning
of period............................ 53,941 84,538 84,488 84,488 66,740
-------- --------- -------- -------- ---------
Cash and cash equivalents at end of
period............................... $ 84,538 $ 84,488 $ 66,740 $ 96,891 $ 409,123
======== ========= ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 3,075 $ 6,661 $ 11,119 $ 8,542 $ 10,071
======== ========= ======== ======== =========
</TABLE>
See accompanying notes.
F-130
<PAGE> 233
FRESCHI AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Freschi Air Systems, 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.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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,
1995 audited financial statements appearing herein. The results of the nine
months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
RECOGNITION OF INCOME
Revenues on the Company's heating and air conditioning installation,
service and maintenance are generally 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 and Cash Equivalents
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Receivables and Trade Accounts Payable
The carrying amounts reported in the balance sheets for receivables and
trade accounts payable approximate fair value.
Long-Term Debt and Notes Payable to Related Party
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and notes
payable to related party approximate fair value.
F-131
<PAGE> 234
FRESCHI AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
TRADE RECEIVABLES
The Company does not believe there were any material amounts considered to
be uncollectible at December 31, 1994 and 1995. Accordingly, an allowance for
doubtful accounts has not been made.
During the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995 amounts charged to bad debt expense totaled $37,638, $1,917 and $3,217,
respectively, and accounts written off, net of recoveries, were $37,638, $1,917
and $3,217, respectively.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.
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 and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures....................................................... 7
Machinery and equipment...................................................... 5-7
Vehicles..................................................................... 5
Leasehold improvements....................................................... 31.5
</TABLE>
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
WARRANTIES
The Company provides a one-year warranty and offers extended warranties up
to ten years on parts and labor from the date of installation of the heating and
air conditioning unit. The one-year 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.
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.
INCOME TAXES
The shareholder of the Company has elected under Subchapter S of the
Internal Revenue Code to include the Company's income in his own income for
federal and state income tax purposes. Accordingly, the Company is not subject
to federal and state income taxes.
F-132
<PAGE> 235
FRESCHI AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During the years ended
December 31, 1993 (unaudited), 1994 (unaudited) and 1995, the Company expensed
$77,943, $78,553 and $114,761, 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. LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes.............................. $ 135,945 $107,250
Less current portion......................................... (28,695) (26,903)
-------- --------
$ 107,250 $ 80,347
======== ========
</TABLE>
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 6.9% to 8.5% per annum at December 31, 1995.
These loans require monthly payments ranging from $280 to $385 and are due
through December 12, 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 26,903
1997........................................................... 29,073
1998........................................................... 27,951
1999........................................................... 22,567
2000........................................................... 756
--------
$107,250
========
</TABLE>
3. LEASES
Total rental expense for all operating leases was $84,500, $84,669 and
$88,533 for the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995, respectively. The Company leases office and warehouse facilities under
terms of a noncancelable operating lease agreement on a month to month basis
F-133
<PAGE> 236
FRESCHI AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
from the Company's stockholder. Minimum rental commitments at December 31, 1995
under operating leases having an initial noncancelable term of one year or more
are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996....................................................................... $ 4,521
1997....................................................................... 3,767
------
$ 8,288
======
</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 ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 15% of total compensation, not
to exceed the maximum established by the Internal Revenue Service. The Company
provides matching contributions of 1% of total contributions by a plan member,
to a maximum of $400. The Company's matching contributions totaled $4,920,
$7,151, and $7,461 for the years ended December 31, 1993 (unaudited), 1994
(unaudited) and 1995, respectively. In addition, the Company made contributions
to the plan from its operating funds in the amounts of $20,000, $62,378 and
$67,539 for the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to insure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
6. STOCKHOLDER'S COMPENSATION
Stockholder's compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $118,972,
$158,250 and $163,000 for the years ended December 31, 1993 (unaudited), 1994
(unaudited) and 1995, respectively.
7. INCOME TAXES
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
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
merger (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 $(7,572), $(7,634), $(40,930), and $411,461 for the
years ended December 31, 1993, 1994, 1995, and the nine months ended September
30, 1996, respectively. Had the Company filed federal and state income tax
returns as a regular corporation for 1993, 1994, 1995, and the nine months ended
September 30, 1996, income tax expense (benefit) under the provisions of
Statement of Financial Accounting Standards No. 109 would have been $(25,895),
$(16,354), $(27,622), and $187,685, 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 based on the cumulative temporary differences at the date
of termination of S corporation status. If the termination of S corporation
status had occurred at September 30, 1996, the deferred tax liability would have
been approximately $27,000.
F-134
<PAGE> 237
FRESCHI AIR SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
The Company had a note receivable, including accrued interest, due from the
stockholder of $90,930 at December 31, 1994 (unaudited) and 1995. Interest
income recognized from this note was $5,628, $8,480 and $6,934 at December 31,
1993, 1994 and 1995, respectively.
The Company had debt obligations to its stockholder of $20,000 and $13,490
at 10.5% interest at December 31, 1994 (unaudited) and 1995, respectively.
Subsequent to December 31, 1995, the Company borrowed additional amounts from
its stockholder under long-term debt agreements totaling $58,800 bearing
interest at 10.5%.
The Company paid rental fees for its office and warehouse facilities of
$84,500, $84,000 and $84,013 for the years ended December 31, 1993 (unaudited),
1994 (unaudited) and 1995, respectively, to the Company's stockholder.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-135
<PAGE> 238
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Parker Heating & Air Conditioning, Incorporated
We have audited the accompanying balance sheet of Parker Heating & Air
Conditioning, Incorporated as of December 31, 1995, and the related statements
of income, stockholders' equity, and cash flows for the year then ended. 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 Parker Heating & Air
Conditioning, Incorporated at December 31, 1995, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 7, 1996
F-136
<PAGE> 239
PARKER HEATING & AIR CONDITIONING, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 58,798 $ 8,310 $ 35,074
Receivables:
Trade................................................. 140,069 65,671 127,757
Related party......................................... 14,858 15,385 16,095
Employee.............................................. 4,106 11,125 7,909
Other................................................. -- 5,954 11,708
--------- --------- ---------
159,033 98,135 163,469
Inventories.............................................. 30,971 47,029 51,050
Deferred income taxes.................................... 8,095 5,957 4,185
Prepaid expenses and other current assets................ 52 49,800 19,766
--------- --------- ---------
Total current assets............................. 256,949 209,231 273,544
Property and equipment:
Furniture and fixtures................................... 7,770 12,880 12,880
Machinery and equipment.................................. 104,459 86,610 86,610
Vehicles................................................. 389,162 380,557 357,501
Leasehold improvements................................... 6,162 -- --
--------- --------- ---------
507,553 480,047 456,991
Less accumulated depreciation and amortization........... (207,550) (214,056) (209,715)
--------- --------- ---------
300,003 265,991 247,276
Notes receivable -- related party.......................... 282,309 286,613 306,925
Other assets............................................... -- 4,451 4,451
--------- --------- ---------
Total assets..................................... $ 839,261 $ 766,286 $ 832,196
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 114,916 $ 147,067 $ 192,613
Accrued compensation..................................... 49,922 9,634 8,001
Accrued taxes, other than income......................... 12,148 18,003 2,343
Accrued warranties....................................... 14,500 15,300 10,750
Income taxes payable..................................... 24,135 -- --
Current portion of notes payable and capital lease
obligation............................................ 87,788 88,248 75,060
--------- --------- ---------
Total current liabilities........................ 303,409 278,252 288,767
Notes payable and capital lease obligation, net of current
portion.................................................. 211,244 144,947 112,112
Deferred income taxes...................................... 40,453 45,842 44,715
Stockholders' equity
Common stock; no par value; 5,000 shares authorized; 64
shares issued and outstanding......................... 3,200 3,200 3,200
Retained earnings........................................ 280,955 294,045 383,402
--------- --------- ---------
Total stockholders' equity....................... 284,155 297,245 386,602
--------- --------- ---------
Total liabilities and stockholders' equity....... $ 839,261 $ 766,286 $ 832,196
========= ========= =========
</TABLE>
See accompanying notes.
F-137
<PAGE> 240
PARKER HEATING & AIR CONDITIONING, INCORPORATED
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 2,207,450 $ 2,789,553 $2,904,779 $ 2,255,388 $ 2,334,106
Cost of goods sold................... 1,248,494 1,508,385 1,635,236 1,229,658 1,299,566
---------- ---------- ---------- ---------- ----------
Gross margin......................... 958,956 1,281,168 1,269,543 1,025,730 1,034,540
Selling, general and administrative
expenses........................... 892,079 1,100,879 1,215,126 864,436 899,400
---------- ---------- ---------- ---------- ----------
Income from operations............... 66,877 180,289 54,417 161,294 135,140
Other income (expense):
Interest expense................... (20,472) (22,215) (24,255) (17,552) (16,542)
Interest income.................... 15,137 11,631 23,225 8,482 7,347
Other income (expense)............. (6,649) (15,971) (25,907) (20,768) (5,799)
---------- ---------- ---------- ---------- ----------
(11,984) (26,555) 26,937 (29,838) (14,994)
---------- ---------- ---------- ---------- ----------
Income before taxes.................. 54,893 153,734 27,480 131,456 120,146
Provision for income taxes:
Current............................ 17,476 59,935 6,863 32,392 30,144
Deferred........................... 1,280 1,435 7,527 (330) 645
---------- ---------- ---------- ---------- ----------
18,756 61,370 14,390 32,062 30,789
---------- ---------- ---------- ---------- ----------
Net income........................... $ 36,137 $ 92,364 $ 13,090 $ 99,394 $ 89,357
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-138
<PAGE> 241
PARKER HEATING & AIR CONDITIONING, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
ISSUED
AND OUTSTANDING
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 (unaudited)............... 64 $3,200 $152,454 $155,654
Net income (unaudited)............................. -- -- 36,137 36,137
--
------ -------- --------
Balance at December 31, 1993 (unaudited)............. 64 3,200 188,591 191,791
Net income (unaudited)............................. -- -- 92,364 92,364
--
------ -------- --------
Balance at December 31, 1994 (unaudited)............. 64 3,200 280,955 284,155
Net income......................................... -- -- 13,090 13,090
--
------ -------- --------
Balance at December 31, 1995......................... 64 3,200 294,045 297,245
Net income (unaudited)............................. -- -- 89,357 89,357
--
------ -------- --------
Balance at September 30, 1996 (unaudited)............ 64 $3,200 $383,402 $386,602
== ====== ======== ========
</TABLE>
See accompanying notes.
F-139
<PAGE> 242
PARKER HEATING & AIR CONDITIONING, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................... $36,137 $ 92,364 $13,090 $ 99,394 $ 89,357
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization.......... 35,270 52,839 58,791 43,908 46,236
Provision (benefit) for deferred income
taxes............................... 1,280 1,435 7,527 (330) 645
Loss on asset disposals................ -- 8,268 8,434 7,685 10,790
Changes in operating assets and
liabilities:
Receivables......................... (14,063) (97,215) 56,595 (6,195) (85,646)
Inventories......................... 4,145 15,796 (16,058) (46,517) (4,021)
Prepaid expenses and other current
assets............................ 225 422 (39,572) (37,681) --
Trade accounts payable and accrued
liabilities....................... (13,339) (15,082) 32,151 47,203 45,546
Accrued compensation................ (1,048) 48,048 (40,288) (49,922) (1,633)
Accrued taxes, other than income.... 1,618 3,527 5,855 3,436 (15,660)
Accrued warranties.................. 11,400 3,100 800 (8,457) (4,550)
Income taxes payable................ (3,573) 45,521 (34,311) 314 30,034
----------- ----------- ------- ----------- -----------
Net cash flow provided by operating
activities............................. 58,052 159,023 53,014 52,838 111,098
INVESTING ACTIVITIES
Purchase of property and equipment....... (2,673) (48,085) (23,446) (23,446) --
Proceeds from sale of property and
equipment.............................. -- 9,279 5,760 3,584 --
Increase in other assets................. -- (4,451) (4,451) --
----------- ----------- ------- ----------- -----------
Net cash used in investing activities.... (2,673) (38,806) (22,137) (24,313) --
FINANCING ACTIVITIES
Proceeds of notes payable and capital
lease.................................. -- 5,000 5,000 -- --
Payments of notes payable and capital
lease.................................. (61,174) (80,181) (86,365) (65,290) (84,334)
----------- ----------- ------- ----------- -----------
Net cash provided by (used in) financing
activities............................. (61,174) (75,181) (81,365) (65,290) 84,334
----------- ----------- ------- ----------- -----------
Increase (decrease) in cash and cash
equivalents............................ (5,795) 45,036 (50,488) (36,765) 26,764
Cash and cash equivalents at beginning of
period................................. 19,557 13,762 58,798 58,798 8,310
----------- ----------- ------- ----------- -----------
Cash and cash equivalents at end of
period................................. $13,762 $ 58,798 $ 8,310 $ 22,033 $ 35,074
========= ========= ======= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................ $20,472 $ 22,215 $24,255 $ 17,552 $ 16,542
========= ========= ======= ========= =========
Income taxes paid........................ $21,049 $ 38,354 $80,798 $ 60,598 $ 110
========= ========= ======= ========= =========
Purchase of equipment through notes
payable................................ $20,441 $ 164,309 $15,528 $ 15,528 $ 38,311
========= ========= ======= ========= =========
</TABLE>
See accompanying notes.
F-140
<PAGE> 243
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Parker Heating & Air Conditioning, Incorporated ("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.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the Company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet at September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 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, 1995
audited financial statements appearing herein. The results of the nine months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
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, which is usually within one to two days.
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.
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 Cash Equivalents
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.
F-141
<PAGE> 244
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Notes Payable and Capital Lease Obligation
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for notes payable and the
capital lease obligation approximate fair value.
INVENTORIES
Inventories consist of heating and air conditioning equipment and related
parts and 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........................................................ 7-10
Machinery and equipment....................................................... 7-10
Vehicles...................................................................... 5-7
Leasehold improvements........................................................ 20
</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
for two years 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
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.
INCOME TAXES
The Company 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.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Company expensed $52,389, $60,108
and $93,520, 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-142
<PAGE> 245
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
any other newly issued pronouncements would have a significant impact on the
Company's financial statements.
2. NOTES PAYABLE AND CAPITAL LEASE OBLIGATION
Notes Payable and capital lease obligation at December 31, 1994 and 1995
consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Line of credit............................................. $ -- $ 5,000
Installment and equipment notes............................ 299,032 228,195
-------- --------
299,032 233,195
Less current portion....................................... (87,788) (88,248)
-------- --------
$ 211,244 $144,947
======== ========
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of the lessor of $50,000 or 75% of eligible accounts receivable. This line of
credit bears interest at the prime rate plus 3/4% (8.5% at December 31, 1995)
and is secured by accounts receivable and inventory.
The Company has various installment and equipment loans, including an
obligation under capital lease, to various lenders which are secured by vehicles
and equipment. These loans bear interest at various fixed or variable rates
ranging from 6 3/4% to 14% per annum at December 31, 1995. These loans require
monthly payments ranging from $312 to $570 and are due through August 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of notes payable and capital lease obligation are as follows:
<TABLE>
<S> <C>
1996...................................................................... $ 88,248
1997...................................................................... 70,388
1998...................................................................... 47,298
1999...................................................................... 23,167
2000...................................................................... 4,094
--------
$233,195
========
</TABLE>
3. LEASES
The Company leased an office facility under a lease agreement which expired
on February 28, 1995 and provided for monthly rental payments of $2,125,
excluding real estate taxes. The Company entered into a ten year lease agreement
beginning April 1, 1995 for office and warehouse space at a new location. The
lease provides for monthly rental payments of approximately $4,450, excluding
real estate taxes. Total rental expense was approximately $27,500, $29,800 and
$47,600 for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The
Company leases certain equipment under terms of a noncancelable capital lease
agreement
F-143
<PAGE> 246
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
through March 1997. Minimum rental commitments at December 31, 1995 under the
capital lease and operating leases having an initial noncancelable term of one
year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASES
------- ---------
<S> <C> <C>
1996............................................................... $ 5,050 $ 55,008
1997............................................................... 1,263 57,209
1998............................................................... -- 59,497
1999............................................................... -- 61,877
2,000.............................................................. -- 64,352
Thereafter......................................................... -- 296,826
------ --------
6,313 $ 594,769
========
Amounts representing interest...................................... (553)
------
Present value of net minimum rentals (including $4,608 classified
as current)...................................................... $ 5,760
======
</TABLE>
The carrying value of assets under the capital lease, which are included
with owned assets in the accompanying balance sheets was approximately 12,400
and 9,900 in 1994 (unaudited) and 1995, respectively. Amortization of the assets
under capital leases is included in depreciation expense.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
5. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $262,520,
$269,841 and $332,402 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
----------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal.......................................... $ 11,996 $ 46,799 $ 4,464
State............................................ 5,480 13,136 2,399
Deferred........................................... 1,280 1,435 7,527
----------- ----------- ----------
$ 18,756 $ 61,370 $ 14,390
========= ========= =========
</TABLE>
F-144
<PAGE> 247
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities as of
December 31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................... $40,453 $45,842
-------
Deferred tax liabilities...................................... 40,453 45,842
Deferred tax assets:
Warranty reserves........................................... 5,645 5,956
Accrued expenses............................................ 2,450 --
-------
Total gross deferred tax assets............................... 8,095 5,957
Valuation allowance........................................... -- --
-------
Net deferred tax liabilities.................................. $32,358 $39,885
=======
</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 in the carry forward period. Accordingly,
no valuation allowance has been recorded.
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>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate....................... $18,664 $52,270 $ 9,343
State income tax less applicable federal tax
benefit............................................. 3,778 8,851 2,535
Effects of graduated tax rates........................ (5,144) (2,651) --
Other, net............................................ 1,458 2,900 2,512
------- ------- -------
$18,756 $61,370 $14,390
======= ======= =======
</TABLE>
7. RELATED PARTY TRANSACTIONS
Notes Receivable from Related Parties
The Company has notes receivable from stockholders' which bear annual
interest ranging from 6.2% to 7% and are due through September 2009. As of
December 31, 1995, the aggregate amount of principal maturities are as follows:
<TABLE>
<S> <C>
1996.................................................... $ 15,385
1997.................................................... 16,360
1998.................................................... 17,475
1999.................................................... 18,665
2000.................................................... 19,936
Thereafter.............................................. 214,177
--------
301,998
Less current portion.................................... (15,385)
--------
$286,613
========
</TABLE>
F-145
<PAGE> 248
PARKER HEATING & AIR CONDITIONING, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger,
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-146
<PAGE> 249
REPORT OF INDEPENDENT AUDITORS
The Stockholders
B.W. Heating & Cooling, Inc.
We have audited the accompanying balance sheet of B.W. Heating & Cooling,
Inc. as of January 31, 1996 and the related statements of income, stockholders'
equity, and cash flows for the year then ended. 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 B.W. Heating & Cooling, Inc.
at January 31, 1996, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
October 29, 1996
F-147
<PAGE> 250
B.W. HEATING & COOLING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31,
---------------------- SEPTEMBER 30,
1995 1996 1996
----------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 68,644 $179,529 $ 313,783
Receivables:
Trade, net of allowance for doubtful accounts of $5,500
in 1996.............................................. 204,136 225,421 262,979
Related party.......................................... -- -- 24,000
-------- -------- --------
204,136 225,421 286,979
Inventories............................................... 116,784 165,480 200,052
Other current assets...................................... -- -- 6,533
Refundable income taxes................................... 4,472 13,683 --
Deferred income taxes..................................... -- 1,700 --
-------- -------- --------
Total current assets.............................. 394,036 585,813 807,347
Property and equipment:
Vehicles.................................................. 236,663 236,227 236,227
Furniture and fixtures.................................... 78,659 90,668 123,714
Machinery and equipment................................... 47,761 53,761 31,915
Leasehold improvements.................................... 21,348 21,348 48,942
-------- -------- --------
384,431 402,004 440,798
Less accumulated depreciation............................. (208,353) (238,706) (259,746)
-------- -------- --------
176,078 163,298 181,052
-------- -------- --------
Total assets...................................... $ 570,114 $749,111 $ 988,399
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ -- $ 24,246 $ --
Trade accounts payable and accrued liabilities............ 84,191 159,427 124,583
Deferred revenue.......................................... 96,805 170,341 182,461
Accrued warranties........................................ 54,125 81,947 79,511
Accrued taxes, other than income.......................... 16,535 20,449 12,463
Accrued compensation...................................... 12,000 5,000 21,925
Liability to company benefit plan......................... 20,000 -- --
Income taxes payable...................................... -- -- 112,728
Current portion of capital lease obligations.............. 49,635 26,516 27,154
-------- -------- --------
Total current liabilities......................... 333,291 487,926 560,825
Capital lease obligations, net of current portion........... 52,369 47,143 29,163
Deferred income taxes....................................... 4,625 8,209 10,248
-------- -------- --------
390,285 543,278 600,236
Stockholders' equity:
Common stock, no par value, 100 shares issued, 1,000 shares
authorized................................................ 18,746 18,746 18,746
Retained earnings........................................... 161,083 187,087 369,417
-------- -------- --------
Total stockholders' equity........................ 179,829 205,833 388,163
-------- -------- --------
Total liabilities and stockholders' equity........ $ 570,114 $749,111 $ 988,399
======== ======== ========
</TABLE>
See accompanying notes.
F-148
<PAGE> 251
B.W. HEATING & COOLING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JANUARY 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $ 1,410,587 $ 2,170,302 $ 2,795,817 $ 1,617,781 $ 2,471,140
Cost of goods sold................... 897,489 1,407,005 1,771,363 973,550 1,461,554
----------- ----------- ---------- ---------- ----------
Gross margin......................... 513,098 763,297 1,024,454 644,231 1,009,586
Selling, general and administrative
----------- ----------- ---------- ---------- ----------
Income from operations............... 44,917 62,311 49,824 67,098 315,091
Other income (expense):
Interest income.................... 2,911 832 2,421 -- --
Interest expense................... (14,308) (11,276) (11,549) (8,081) (4,688)
Other expense...................... -- -- (1,755) -- --
----------- ----------- ---------- ---------- ----------
(11,397) (10,444) (10,883) (8,081) (4,688)
----------- ----------- ---------- ---------- ----------
Income before taxes.................. 33,520 51,867 38,941 59,017 310,403
Provision for income taxes:
Current............................ 8,567 13,621 11,053 17,703 124,334
Deferred........................... 136 4,625 1,884 (929) 3,739
----------- ----------- ---------- ---------- ----------
8,703 18,246 12,937 16,774 128,073
----------- ----------- ---------- ---------- ----------
Net income........................... $ 24,817 $ 33,621 $ 26,004 $ 42,243 $ 182,330
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-149
<PAGE> 252
B.W. HEATING & COOLING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
NO PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- --------- --------
<S> <C> <C> <C> <C>
Balance at February 1, 1993 (unaudited)................... 100 $18,746 $ 102,645 $121,391
Net income (unaudited).................................. -- -- 24,817 24,817
--- ------- ------ --------
Balance at January 31, 1994 (unaudited)................... 100 18,746 127,462 146,208
Net income (unaudited).................................. -- -- 33,621 33,621
--- ------- ------ --------
Balance at January 31, 1995 (unaudited)................... 100 18,746 161,083 179,829
Net income.............................................. -- -- 26,004 26,004
--- ------- ------ --------
Balance at January 31, 1996............................... 100 18,746 187,087 205,833
Net income (unaudited).................................. -- -- 182,330 182,330
--- ------- ------ --------
Balance at September 30, 1996 (unaudited)................. 100 $18,746 $ 369,417 $388,163
=== ======= ====== ========
</TABLE>
See accompanying notes.
F-150
<PAGE> 253
B.W. HEATING & COOLING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED JANUARY 31, SEPTEMBER 30,
------------------------------------ -------------------------
1994 1995 1996 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 24,817 $ 33,621 $ 26,004 $ 42,243 $ 182,330
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 21,277 31,123 42,908 15,134 21,040
Provision (benefit) for deferred
income taxes...................... 136 4,625 1,884 (929) 3,739
Provisions for loss on accounts
receivable........................ -- -- 5,500 -- --
Loss on asset disposals.............. -- -- 2,905 -- --
Changes in assets and liabilities:
Receivables....................... 53,664 (49,955) (26,785) 28,029 (34,795)
Inventories....................... (1,150) (13,873) (48,696) (71,933) (34,572)
Other current assets.............. 8,213 -- -- (449) (6,533)
Trade accounts payable and accrued
liabilities..................... 6,705 48,499 55,230 119 (34,844)
Note payable to bank.............. -- -- 24,246 -- --
Deferred revenue.................. 18,204 53,054 73,536 25,836 12,120
Accrued warranties................ 4,085 39,835 27,822 31,038 (2,436)
Accrued taxes, other than
income.......................... 435 2,590 (7,605) 2,549 110,632
Accrued compensation.............. 10,386 (920) (7,000) (6,000) 16,925
Income taxes payable.............. 894 (324) 2,308 (54) 5,030
--------- --------- -------- -------- --------
Net cash flow provided by
operating activities....... 147,666 148,275 172,257 65,583 238,636
INVESTING ACTIVITIES
Purchase of property and equipment..... (11,574) (26,645) (18,009) (2,053) (38,794)
Advances on notes receivable........... -- -- -- -- (24,000)
--------- --------- -------- -------- --------
Net cash used in investing
activities........................... (11,574) (26,645) (18,009) (2,053) (62,794)
FINANCING ACTIVITIES
Payments on short-term debt............ (70,000) (17,000) -- -- (24,246)
Payments of capital lease
obligations.......................... (50,090) (51,988) (43,363) (5,544) (17,342)
--------- --------- -------- -------- --------
Net cash used in financing
activities........................... (120,090) (68,988) (43,363) (5,544) (41,588)
--------- --------- -------- -------- --------
Increase in cash and cash
equivalents.......................... 16,002 52,642 110,885 57,986 134,254
Cash and cash equivalents at beginning
of period............................ -- 16,002 68,644 68,644 179,529
--------- --------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 16,002 $ 68,644 $179,529 $ 126,630 $ 313,783
========= ========= ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 14,308 $ 11,276 $ 11,549 $ 8,081 $ 4,688
--------- --------- -------- -------- --------
Income taxes paid...................... $ 8,260 $ 14,453 $ 19,089 $ 12,009 $ 5,716
--------- --------- -------- -------- --------
Purchase of equipment through capital
leases............................... $ -- $ 81,921 $ 24,802 $ -- $ --
========= ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-151
<PAGE> 254
B.W. HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1994 (UNAUDITED), 1995 (UNAUDITED),
AND 1996 AND SEPTEMBER 30, 1996 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
B.W. Heating & Cooling, Inc. ("Company") operates in one industry and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential and commercial customers.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of January 31, 1995 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the eight months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 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 January 31, 1996
audited financial statements appearing herein. The results of the eight months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
REVENUE RECOGNITION
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, which is usually within one to two days.
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 geographics. 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.
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-152
<PAGE> 255
B.W. HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for 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 AND EQUIPMENT
Property, buildings and equipment are stated on the basis of cost.
Depreciation is provided on the declining balance methods over the following
useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 7
Machinery and equipment....................................................... 7
Vehicles...................................................................... 5
Leasehold improvements........................................................ 7-31 1/2
</TABLE>
WARRANTIES
The Company provides the retail customer with a 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 for two years
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
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.
INCOME TAXES
The Company 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended January 31, 1994 (unaudited), 1995 (unaudited), and
1996, amounts charged to bad debt expense totaled $73,183, $20,200 and $22,554,
respectively, and accounts written off, net of recoveries, were $73,183, $20,200
and $17,054, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Such costs consist
primarily of direct mail advertising. During 1994 (unaudited), 1995 (unaudited),
and 1996, the Company expensed $16,906, $47,895, and $67,738, respectively.
F-153
<PAGE> 256
B.W. HEATING & COOLING, 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.
2. DEBT
The Company has a line of credit with a bank with a total borrowing limit
of $150,000. This line of credit bears interest at 10.0% with no balance due at
January 31, 1996.
The Company has a note payable which is secured by accounts receivable,
inventory, and equipment. This loan requires monthly interest payments at 10.75%
reimbursed by the vendor with the full principal amount of $24,246 due on
February 29, 1996. The amount was outstanding as of January 31, 1996.
3. LEASES
Total rental expense for all operating leases was approximately $45,000,
$42,000 and $88,000 for 1994 (unaudited), 1995 (unaudited), and 1996,
respectively. All rental expense is paid to a related party. See footnote 8 for
further discussion. The Company leases certain vehicles, equipment, and office
and warehouse facilities under terms of noncancelable operating and capital
lease agreements which expire at various dates through March 1999. Minimum
rental commitments at January 31, 1996 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>
1997............................................................. $32,969 $21,959
1998............................................................. 37,501 12,989
1999............................................................. 11,588 7,295
2000............................................................. 1,931 --
------- ---------
83,989 $42,243
=========
Amounts representing interest.................................... 10,330
-------
Present value of net minimum rentals (including $26,516
classified as current)......................................... $73,659
=======
</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>
JANUARY 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Machinery and equipment....................................... $81,920 $ 106,722
Less accumulated amortization................................. 14,654 41,087
----------- --------
Net equipment under capital leases............................ $67,266 $ 65,635
=========== ========
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
F-154
<PAGE> 257
B.W. HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 15% of total compensation, not
to exceed the maximum established by the Internal Revenue Service. The Company,
at their discretion, provides matching contributions effective March of 1995 of
25% of the total contributions by a plan member to a maximum of 6% of the
employee's total calendar year compensation. The Company's matching
contributions were $9,092 for the year ended January 31, 1996. The Company
provided discretionary contributions of $15,000 and $20,000 for the years ended
January 31, 1994 (unaudited) and 1995 (unaudited).
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their 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 $138,600,
$163,500 and $159,900 in 1994 (unaudited), 1995 (unaudited), and 1996,
respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
---------------------------------------
1994 1995 1996
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal......................................... $ 5,450 $ 8,864 $ 7,032
State........................................... 3,117 4,757 4,021
Deferred.......................................... 136 4,625 1,884
------ ------- -------
$ 8,703 $18,246 $12,937
====== ======= =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------
1995 1996
----------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................... $ 4,829 $ 8,209
------ -------
Deferred tax liabilities...................................... 4,829 8,209
Deferred tax assets:
Compensation and warranty reserves.......................... 204 1,700
------ -------
Total gross deferred tax assets............................... 204 1,700
Valuation allowance........................................... -- --
------ -------
Net deferred tax liabilities.................................. $ 4,625 $ 6,509
====== =======
</TABLE>
F-155
<PAGE> 258
B.W. HEATING & COOLING, INC.
NOTES TO 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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
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>
YEAR ENDED JANUARY 31,
-----------------------------------
1994 1995 1996
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate....................... $11,397 $17,635 $13,240
State income tax less applicable federal tax
benefit............................................. 2,078 3,858 2,946
Effects of graduated tax rates........................ (6,925) (10,715) (9,197)
Other, net............................................ 2,153 7,468 5,948
------- ------- -------
$ 8,703 $18,246 $12,937
======= ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company leases facility space from stockholders of the Company and from
various corporations and partnerships which are owned by stockholders of the
Company. Rental expense on these related party operating leases amounted to
$42,000, $45,000 and $39,800 for the years ended January 31, 1994 (unaudited),
1995 (unaudited) and 1996, respectively.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-156
<PAGE> 259
REPORT OF INDEPENDENT AUDITORS
The Stockholders
B & B Air Conditioning, Inc.
We have audited the accompanying balance sheet of B & B Air Conditioning,
Inc. as of December 31, 1995, and the related statements of income,
stockholders' equity, and cash flows for the year then ended. 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 B & B Air Conditioning, Inc.
at December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 8, 1996
F-157
<PAGE> 260
B & B AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 33,129 $ 79,871 $ 74,185
Receivables:
Trade, net of allowance for doubtful accounts of
$5,208 in 1994 and $13,528 in 1995................ 127,618 153,531 158,612
Related party....................................... 38,040 31,040 31,040
Employee............................................ 4,083 996 4,620
----------- --------- -------------
169,741 185,567 194,272
Inventories......................................... 65,908 55,396 70,609
Refundable income taxes............................. 3,597 -- --
Deferred income taxes............................... 12,803 13,042 11,624
Prepaid expenses and other current assets........... 14,917 9,954 9,007
----------- --------- -------------
Total current assets........................... 300,095 343,830 359,697
Property, buildings and equipment:
Furniture and fixtures................................. 58,068 68,405 74,265
Machinery and equipment................................ 96,658 99,883 99,883
Vehicles............................................... 94,297 128,969 202,593
Leasehold improvements................................. 17,262 17,262 22,968
----------- --------- -------------
266,285 314,519 399,709
Less accumulated depreciation and amortization........... (142,327) (170,465) (193,498)
----------- --------- -------------
123,958 144,054 206,211
Other assets............................................. 400 400 400
----------- --------- -------------
Total assets................................... $ 424,453 $ 488,284 $ 566,308
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities......... $ 80,690 $ 89,725 $ 99,054
Accrued compensation................................... 7,810 5,050 13,348
Accrued taxes, other than income....................... 11,041 15,248 10,539
Accrued warranties..................................... 6,213 6,097 2,189
Income taxes payable................................... -- 5,380 3,432
Deferred revenue....................................... 23,522 15,969 15,762
Liability to Companies' benefit plan................... -- 5,000 --
Notes payable to related parties -- current portion.... 6,000 6,000 6,000
Current portion of long-term debt...................... 7,703 5,539 18,489
----------- --------- -------------
Total current liabilities...................... 142,979 154,008 168,813
Long-term debt obligations, net of current portion....... 6,670 667 50,780
Notes payable to related parties, net of current
portion................................................ 6,000 -- --
Deferred income taxes.................................... 25,205 30,730 33,400
Stockholders' equity:
Common Stock, $1.00 par value, 1,000,000 shares
authorized, 94,684 shares issued and 90,746 shares
outstanding......................................... 90,746 90,746 90,746
Additional paid-in capital............................. 44,254 44,254 44,254
Retained earnings...................................... 108,599 167,879 178,315
----------- --------- -------------
Total stockholders' equity..................... 243,599 302,879 313,315
----------- --------- -------------
Total liabilities and stockholders' equity..... $ 424,453 $ 488,284 $ 566,308
========= ========= ==========
</TABLE>
See accompanying notes.
F-158
<PAGE> 261
B & B AIR CONDITIONING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $ 2,056,083 $ 2,160,418 $ 2,557,058 $ 1,948,547 $ 1,928,090
Cost of goods sold.............. 1,278,359 1,257,942 1,531,687 1,362,538 1,173,943
----------- ----------- ----------- ----------- -----------
Gross margin.................... 777,724 902,476 1,025,371 586,009 754,147
Selling, general and
administrative expenses....... 685,841 818,975 947,818 559,668 736,138
----------- ----------- ----------- ----------- -----------
Income from operations.......... 91,883 83,501 77,553 26,341 18,009
Other income (expense):
Interest expense.............. (6,074) (3,248) (2,264) (1,876) (3,614)
Interest income............... -- -- 5 -- --
Other income.................. 5,225 6,312 6,291 4,746 2,797
----------- ----------- ----------- ----------- -----------
(849) 3,064 4,032 2,870 (817)
----------- ----------- ----------- ----------- -----------
Income before taxes............. 91,034 86,565 81,585 29,211 17,192
Provision (benefit) for income
taxes:
Current....................... -- 10,890 17,019 5,505 2,669
Deferred...................... 27,470 22,974 5,286 7,212 4,087
----------- ----------- ----------- ----------- -----------
27,470 33,864 22,305 12,717 6,756
----------- ----------- ----------- ----------- -----------
Net income...................... 63,564 52,701 59,280 16,494 10,436
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-159
<PAGE> 262
B & B AIR CONDITIONING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
$1 PAR VALUE PAID RETAINED
---------------- IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 (unaudited).......... 90,746 $90,746 $44,254 $ (7,666) $127,334
Net income (unaudited)........................ -- -- -- 63,564 63,564
------ ------- ------- -------- --------
Balance at December 31, 1993 (unaudited)........ 90,746 90,746 44,254 55,898 190,898
Net income (unaudited)........................ -- -- -- 52,701 52,701
------ ------- ------- -------- --------
Balance at December 31, 1994 (unaudited)........ 90,746 90,746 44,254 108,599 243,599
Net income.................................... -- -- -- 59,280 59,280
------ ------- ------- -------- --------
Balance at December 31, 1995.................... 90,746 90,746 44,254 167,879 302,879
Net income (unaudited)........................ -- -- -- 10,436 10,436
------ ------- ------- -------- --------
Balance at September 30, 1996 (unaudited)....... 90,746 $90,746 $44,254 $178,315 $313,315
====== ======= ======= ======== ========
</TABLE>
See accompanying notes.
F-160
<PAGE> 263
B & B AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------ ---------------------------
1993 1994 1995 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 63,564 $ 52,701 $ 59,280 $ 16,494 $ 10,436
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 13,230 20,107 28,137 21,103 26,901
Provision for deferred income
taxes........................... 27,470 22,974 5,286 7,212 4,087
Provisions for loss on accounts
receivable...................... 8,250 9,717 29,429 19,494 12,634
Changes in assets and liabilities:
Receivables..................... (72,328) (46,690) (45,255) (54,749) (21,339)
Inventories..................... 21,919 3,663 10,512 10,908 (15,213)
Prepaid expenses and other
current assets................ -- (14,917) 4,963 478 947
Trade accounts payable and
accrued liabilities........... (43,305) 24,001 9,035 24,652 9,329
Accrued compensation............ 3,820 3,990 (2,760) 1,225 8,298
Accrued taxes, other than
income........................ 11,142 (878) 4,207 (1,087) (4,709)
Accrued warranties.............. 2,494 (2,281) (116) (1,139) (3,908)
Deferred revenue................ 4,985 (15,670) (7,553) (3,891) (207)
Income taxes payable............ -- 2,009 8,977 1,558 (1,947)
Liability to Company's benefit
plan.......................... -- -- 5,000 -- (5,000)
----------- ----------- -------- ----------- -----------
Net cash flow provided by operating
activities......................... 41,241 58,726 109,142 42,258 20,309
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment.......................... (30,230) (64,605) (48,233) (48,234) (89,058)
----------- ----------- -------- ----------- -----------
Net cash used in investing
activities......................... (30,230) (64,605) (48,233) (48,234) (89,058)
FINANCING ACTIVITIES
Payments of long-term debt........... (10,047) (13,794) (8,167) (6,088) 63,063
Payments on notes payable to related
parties............................ -- (3,000) (6,000) (6,000) --
----------- ----------- -------- ----------- -----------
Net cash provided by (used in)
financing activities............... (10,047) (16,794) (14,167) (12,088) 63,063
----------- ----------- -------- ----------- -----------
Increase (decrease) in cash and cash
equivalents........................ 964 (22,673) 46,742 (18,064) (5,686)
Cash and cash equivalents at
beginning of period................ 54,838 55,802 33,129 33,129 79,871
----------- ----------- -------- ----------- -----------
Cash and cash equivalents at end of
period............................. $ 55,802 $ 33,129 $ 79,871 $ 15,065 $ 74,185
========= ========= ======== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................ $ 6,074 $ 3,248 $ 2,264 $ 1,876 $ 3,614
----------- ----------- -------- ----------- -----------
Income taxes paid.................... $ -- $ 19,958 $ 8,048 $ 2,559 $ 4,616
========= ========= ======== ========= =========
</TABLE>
See accompanying notes.
F-161
<PAGE> 264
B & B AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995
AND SEPTEMBER 30, 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
B & B Air Conditioning ("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.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the Company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet at September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1995
(interim financial statements) have been prepared by the Company's 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 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, 1995
audited financial statements appearing herein. The results of the nine months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
RECOGNITION OF INCOME
Revenues on the Company's heating and air conditioning installation for
residential replacement and service and maintenance revenue are recognized upon
completion of the services, which is usually within one to two days.
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.
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 and certificates of deposit 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.
F-162
<PAGE> 265
B & B AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 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>
Furniture and fixtures........................................................ 5-10
Machinery and equipment....................................................... 10
Vehicles...................................................................... 6-10
Leasehold improvements........................................................ 10
</TABLE>
WARRANTIES
The Company provides the retail equipment 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 for two years 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
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.
INCOME TAXES
The Company 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995, amounts charged to bad debt expense totaled $8,250, $9,717 and $29,429,
respectively, and accounts written off, net of recoveries, were $4,004, $10,754
and $21,110, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Company expensed $79,716, $100,622
and $163,868, respectively.
F-163
<PAGE> 266
B & B 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.
2. DEBT
Debt at December 31, 1994 and 1995 consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes............................... $14,373 $ 6,206
Other long-term debt.......................................... 12,000 6,000
----------- -------
26,373 12,206
Less current portion.......................................... 13,703 11,539
----------- -------
$12,670 $ 667
========= =======
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $65,000. This line of credit bears interest at 11.0% at December 31, 1995.
The Company has various installment loans to a lender which are secured by
vehicles. These loans bear interest at various fixed rates ranging from 9.5% to
10% per annum. These loans require monthly payments ranging from $363 to $873
and are due through February, 1997.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996....................................................................... $11,539
1997....................................................................... 667
-------
$12,206
=======
</TABLE>
3. LEASES
Total rental expense for all operating leases was $56,448, $57,622 and
$78,827 for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The
Company leases certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating lease agreements which expire in one
year. However, leasehold improvements are amortized over ten years since it is
management's intentions to renew the building leased indefinitely. Minimum
rental commitments at December 31, 1995 under operating leases having an initial
noncancelable term of one year or more are $73,611 due in 1996.
4. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 20% of total compensation, not
to exceed the maximum established by the Internal Revenue Service. The Company
provides matching contributions ranging from 0% to 50% of total contributions by
a plan member, to a maximum ranging from 2% to 6% of the employee's total
F-164
<PAGE> 267
B & B AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
calendar year compensation. The Company's matching contributions totaled $0,
$10,000 and $10,000 for the years ended December 31, 1993 (unaudited), 1994
(unaudited) and 1995, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to certain legal proceedings arising in the ordinary
course of 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 maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their 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 $130,120,
$179,330 and $195,000 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal......................................... $ -- $ 8,620 $13,878
State........................................... -- 2,270 3,141
Deferred.......................................... 27,470 22,974 5,286
------- ------- -------
$27,470 $33,864 $22,305
======= ======= =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization............................... $25,205 $30,730
----------- -------
Deferred tax liabilities...................................... 25,205 30,730
Deferred tax assets:
Bad debt reserve............................................ 1,908 4,957
Compensation and warranty reserves.......................... 2,277 2,234
Deferred revenue............................................ 8,618 5,851
----------- -------
Total gross deferred tax assets............................... 12,803 13,042
Valuation allowance........................................... -- --
----------- -------
Net deferred tax liabilities.................................. $12,402 $17,688
========= =======
</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 during the carry forward period.
Accordingly, no valuation allowance has been recorded.
F-165
<PAGE> 268
B & B 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. The differences are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate....................... $30,952 $29,432 $27,739
State income tax less federal tax benefit............. 1,979 3,153 2,454
Effect of graduated tax rates......................... (7,946) (3,105) (12,556)
Other, net............................................ 2,485 4,384 4,668
------- ------- -------
$27,470 $33,864 $22,305
======= ======= =======
</TABLE>
8. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM RELATED PARTIES
The Company has notes receivable from related parties, including current
shareholders. There are no written agreements specifying the terms of these
notes.
NOTES PAYABLE TO RELATED PARTIES
The Company has notes payable to related parties, which bears no interest.
The note balance of $6,000 was paid in October 1996.
OTHER RELATED PARTY TRANSACTIONS
The Company leases facility space and equipment from stockholders of the
Company and from a corporation which is owned by stockholders of the Company.
Rental expense on these related party operating leases amount to $43,200,
$55,200 and $70,800 for the years 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-166
<PAGE> 269
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Sylvester's Corp.
We have audited the accompanying balance sheet of Sylvester's Corp. as of
March 31, 1996 and the related statements of income, stockholders' equity, and
cash flows for the year then ended. 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 from
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 Sylvester's Corp. at March
31, 1996, and the results of operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
October 29, 1996
F-167
<PAGE> 270
SYLVESTER'S CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------------- -------------
1995 1996 1996
----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 78,229 $ 100,943 $ 191,463
Certificates of deposit................................. 4,524 4,835 4,957
Receivables:
Trade, net of allowance for doubtful accounts of
$1,800 in 1995 and $1,400 in 1996.................. 77,820 71,018 94,364
Related party........................................ -- 60,984 20,984
Employees............................................ 2,715 3,391 --
Other................................................ 2,780 47 1,994
----------- -------- -----------
83,315 135,440 117,342
Inventories............................................... 127,371 161,909 146,966
Prepaid expenses and other current assets................. 5,108 15,978 19,260
Deferred income taxes..................................... 25,401 38,073 --
----------- -------- -----------
Total current assets............................ 323,948 457,178 479,988
Property, buildings and equipment:
Land.................................................... 4,000 4,000 4,000
Buildings............................................... 106,750 103,779 107,787
Furniture and fixtures.................................. 38,997 53,713 53,880
Machinery and equipment................................. 136,523 114,289 114,289
Vehicles................................................ 266,492 284,432 284,432
Leasehold improvements.................................. -- 11,423 40,566
----------- -------- -----------
552,762 571,636 604,954
Less accumulated depreciation and amortization.......... 283,088 258,557 285,821
----------- -------- -----------
269,674 313,079 319,133
Other assets.............................................. -- 22,236 20,498
----------- -------- -----------
Total assets.................................... $ 593,622 $ 792,493 $ 819,619
=========== ======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities.......... $ 67,962 $ 112,487 $ 114,579
Accrued compensation.................................... 26,569 54,126 35,313
Accrued taxes, other than income........................ 12,257 10,557 10,271
Accrued warranties...................................... 25,111 25,126 24,985
Income taxes payable.................................... 1,088 13,417 --
Deferred revenue........................................ 57,377 69,146 83,434
Billings in excess of costs and estimated earnings...... 2,793 2,200 --
Liability to Company benefit plan....................... 16,903 21,832 --
Current portion of long-term debt....................... 31,290 29,973 26,267
----------- -------- -----------
Total current liabilities....................... 241,350 338,864 294,849
Long-term debt, net of current
portion................................................. 57,718 27,745 15,555
Deferred income taxes..................................... 38,328 51,486 --
Stockholders' equity...................................... 256,226 374,398 509,215
----------- -------- -----------
Total liabilities and stockholders' equity...... $ 593,622 $ 792,493 $ 819,619
=========== ======== ===========
</TABLE>
See accompanying notes.
F-168
<PAGE> 271
SYLVESTER'S CORP.
STATEMENTS OF INCOME
<TABLE>
<CAPTION> SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $1,762,946 $2,400,104 $2,487,668 $1,270,474 $1,187,033
Cost of goods sold................... 1,367,126 1,415,771 1,631,608 833,655 746,468
---------- ---------- ---------- ---------- ----------
Gross margin......................... 395,820 984,333 856,060 436,819 440,565
Selling, general and administrative
expenses........................... 291,678 769,327 684,210 300,406 294,628
---------- ---------- ---------- ---------- ----------
Income from operations............... 104,142 215,006 171,850 136,413 145,937
Other income (expense):
Interest expense................... (25,366) (17,953) (6,487) (2,727) (3,053)
Interest income.................... 489 3,091 6,219 2,138 2,469
Other income (expense)............. (2,296) 8,827 14,685 19,118 (549)
---------- ---------- ---------- ---------- ----------
(27,173) (6,035) 14,417 18,529 (1,133)
---------- ---------- ---------- ---------- ----------
Income before taxes.................. 76,969 208,971 186,267 154,942 144,804
Provision (benefit) for income taxes:
Current............................ 6,775 50,351 67,609 51,337 --
Deferred........................... 25,067 19,808 486 (3,337) (13,413)
---------- ---------- ---------- ---------- ----------
Total income taxes......... 31,842 70,159 68,095 48,000 (13,413)
---------- ---------- ---------- ---------- ----------
Net income................. $ 45,127 $ 138,812 $ 118,172 $ 106,942 $ 158,217
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-169
<PAGE> 272
SYLVESTER'S CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR ADDITIONAL RETAINED
--------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993 (unaudited)............ 10 $1,000 $ 74,000 (2,713) $ 72,287
Net income (unaudited)......................... -- -- -- 45,127 45,127
--
------ ------- -------- --------
Balance at March 31, 1994 (unaudited)............ 10 1,000 74,000 42,414 117,414
Net income (unaudited)......................... -- -- -- 138,812 138,812
--
------ ------- -------- --------
Balance at March 31, 1995 (unaudited)............ 10 1,000 74,000 181,226 256,226
Net income (unaudited)......................... -- -- -- 118,172 118,172
Balance at March 31, 1996........................ 10 1,000 74,00 299,398 374,398
Capital distributions (unaudited).............. -- -- -- (23,400) (23,400)
Net income (unaudited)......................... -- -- -- 158,217 158,217
--
------ ------- -------- --------
Balance at September 30, 1996 (unaudited)........ 10 $1,000 $ 74,000 $ 434,215 $509,215
== ====== ======= ======== ========
</TABLE>
See accompanying notes.
F-170
<PAGE> 273
SYLVESTER'S CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------- -------------------
1994 1995 1996 1995 1996
----------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................................... $ 45,127 $138,812 $118,172 $106,942 $158,217
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation...................................... 17,421 29,142 47,515 21,669 27,144
Provision for deferred income taxes (benefit)..... 25,067 19,808 486 (3,337) (13,413)
Provision for loss on accounts receivable......... (100) -- (400) 1,200 800
(Gain) loss on asset disposals.................... 2,296 (8,357) (15,421) (19,398) --
Changes in assets and liabilities:
Receivables..................................... 48,350 (18,888) 6,735 (48,951) (21,118)
Inventories..................................... 14,242 120,011 (34,538) (953) 14,943
Prepaid expenses and other current assets....... (176) 3,032 (33,106) (14,756) (1,424)
Trade accounts payable and accrued
liabilities................................... (59,298) (60,230) 44,524 79,392 2,094
Accrued compensation............................ (8,432) 13,609 27,557 4,718 (18,813)
Accrued taxes, other than income................ 889 (1,362) (1,700) (602) (286)
Accrued warranties.............................. 1,582 6,469 15 8 (141)
Deferred revenue................................ 14,747 (44,292) 11,770 12,714 14,288
Liability to company benefit plan............... 667 2,012 4,929 (12,086) (21,833)
Income taxes payable............................ 6,319 (8,210) 14,853 12,129 (15,001)
Costs and estimated earnings in excess of costs
and estimated earnings........................ 3,388 21,389 (593) (2,793) (2,200)
-------- -------- -------- -------- --------
Net cash flow provided by operating
activities............................... 112,089 212,945 190,798 135,896 123,257
INVESTING ACTIVITIES
Purchase of property, buildings and equipment....... (67,164) (103,236) (101,234) (25,524) (33,318)
Proceeds from sale of property, buildings, and
equipment......................................... 1,000 -- 25,734 27,584 --
Purchase of certificates of deposit................. -- (4,524) (311) (157) (122)
Advances on notes receivable -- related parties..... -- -- (140,000) -- --
Collections on notes receivable -- related
parities.......................................... -- -- 79,016 -- 40,000
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities........................................ (66,164) (107,760) (136,795) 1,903 6,560
FINANCE ACTIVITIES
Payments on short-term debt......................... (45,000) -- -- -- --
Proceeds of long-term debt.......................... 104,823 41,435 -- -- --
Payments of long-term debt.......................... (19,618) (143,616) (31,289) (15,065) (15,897)
Payments on notes payable to related parties........ (27,792) -- -- -- --
Distribution to stockholders........................ -- -- -- -- (23,400)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................... 12,413 (102,181) (31,289) (15,065) (39,297)
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash equivalents.... 58,338 3,004 22,714 122,734 90,520
Cash and cash equivalents at beginning of period.... 16,887 75,225 78,229 78,229 100,943
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period.......... $ 75,225 $ 78,229 $100,943 $200,963 $191,463
======== ======== ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................... $ 24,875 $ 7,902 $ 6,571 $ 2,781 $ 3,101
======== ======== ======== ======== ========
Income taxes paid................................... $ 456 $ 58,562 $ 52,756 $ 39,208 $ 13,417
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-171
<PAGE> 274
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1994, 1995 (UNAUDITED) AND 1996, AND SEPTEMBER 30, 1996 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Sylvester's 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. The Company grants
credit to its customers, most of whom are located in Madison, Delaware, Grant
and Henry counties in Indiana.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of March 31, 1995 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The statements of income and cash flows for the six months ended September
30, 1995 and 1996 (interim financial statements) have been prepared by the
Company's 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 statement should be read in conjunction with the March 31,
1996 audited financial statements appearing herein. The results of the six
months ended September 30, 1995 and 1996 may not be indicative of operating
results for the full respective years.
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, which is
usually within one to two days.
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.
The liability, "billings in excess of costs and estimated earnings"
represent billing in excess of revenue recognized on in-progress contracts.
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 dispersion across many different industries and geographies.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-172
<PAGE> 275
SYLVESTER'S CORP.
NOTES TO 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, Notes Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts
receivable, notes 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 approximates
fair value.
Concentration of Credit Risk
The company's cash on deposit at one local bank exceeded the $100,000
federally insured limit as of March 31, 1996.
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, BUILDINGS AND EQUIPMENT
Property, buildings 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>
Buildings................................................................... 40
Furniture and fixtures...................................................... 5 - 10
Machinery and equipment..................................................... 5 - 10
Vehicles.................................................................... 5
</TABLE>
WARRANTIES
The Company provides the retail customer with warranties on parts and labor
for period ranging from three to ten years from the date of installation of the
heating and air conditioning unit. This warranty runs concurrent with the
manufacturer's warranty on parts for five years. 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.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
F-173
<PAGE> 276
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
INCOME TAXES
The Company 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.
Effective April 1, 1996, 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. Accordingly, the Company is
not subject to federal income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended March 31, 1994, 1995 (unaudited) and 1996, amounts
charged to bad debt expense totaled $3,228, $1,428 and $2,056, respectively, and
accounts written off, net of recoveries were $3,328, $1,428 and $2,456,
respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During the years ended
March 31, 1994, 1995 (unaudited) and 1996, the Company expensed $52,628,
$62,280, and $58,213, 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-174
<PAGE> 277
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS IN PROCESS
Information relative to contract in process at March 31, 1995 (unaudited)
and 1996 is as follows:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures................................................ $ -- $ --
Estimated earnings.......................................... -- --
----------- ------- ----
-- --
Less applicable billings.................................... 2,793 2,200
----------- ------- ----
$ 2,793 $ 2,200
=========== ===========
Included in the accompanying balance sheets under the
following captions:
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... $ 2,793 $ 2,200
=========== ===========
</TABLE>
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1995 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
Lines of credit............................................... $ -- $ --
Installment and equipment notes............................... 89,008 57,718
----------- -------- ---
89,008 57,718
Less current portion.......................................... 31,290 29,973
----------- -------- ---
$57,718 $27,745
=========== ===========
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $100,000. This line of credit bears interest at the prime rate plus 2%
(10 1/4 at March 31, 1996).
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 5.9% to 8.623% per annum at March 31, 1996.
These loans require monthly payments ranging from $88 to $623 are due through
December 1999.
As of March 31, 1996, the aggregate amounts of annual principal maturities
of long-term debt are as follows:
<TABLE>
<S> <C>
March 31, 1997............................................................. $29,973
March 31, 1998............................................................. 26,063
March 31, 1999............................................................. 949
March 31, 2000............................................................. 733
-------
$57,718
=======
</TABLE>
F-175
<PAGE> 278
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. EMPLOYEE BENEFIT PLAN
The Company has a defined-contribution employee benefit plan incorporating
provision of section 401(k) of the Internal Revenue Code (the "Code").
Substantially all employees of the Company are eligible to participate in the
Plan. Under the Plan's provisions, a plan member may annually contribute, on a
tax deferred basis, amounts typically from 1% to 10% of total compensation, not
to exceed the maximum established by the Internal Revenue Service. The Company
provides discretionary matching contributions of up to 3% of the employee's
total fiscal year compensation. The Company's matching contributions totaled
$10,074, $12,085 and $21,832 for the years ended March 31, 1994 and 1995
(unaudited) and 1996, respectively.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business, the Company believes that its insurance coverage is
adequate.
6. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in cost of goods sold and selling, general and administrative expenses
and totaled $130,044, $302,764 and $335,919 in the years ended March 31, 1994
(unaudited), 1995 (unaudited) and 1996, respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal................................................. $ -- $33,159 $52,001
State................................................... 6,775 17,192 15,608
Deferred.................................................. 25,067 19,808 486
------- ------- -------
$31,842 $70,159 $68,095
======= ======= =======
</TABLE>
F-176
<PAGE> 279
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................... $43,716 $48,996
Prepaids......................................................... 1,877 11,030
------- -------
Deferred tax liabilities........................................... 45,593 60,026
------- -------
Deferred tax assets:
Compensation and warranty reserves............................... 18,088 27,738
Deferred revenue................................................. 3,654 5,250
Accrued expenses................................................. 4,056 6,939
Other............................................................ 6,868 6,686
------- -------
Total gross deferred tax assets.................................... 32,666 46,613
Valuation allowance................................................ -- --
------- -------
Net deferred tax liabilities....................................... $12,927 $13,413
======= =======
</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>
YEAR ENDED MARCH 31,
------------------------------
1993 1994 1995
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate........................ $ 26,169 $ 71,050 $ 63,331
State income tax less applicable federal tax benefit... 4,471 11,347 10,301
Effects of graduated tax rates......................... -- (6,301) (7,437)
Other, net............................................. 1,202 (5,937) 1,900
--------- --------- ---------
$ 31,842 $ 70,159 $ 68,095
========= ========= =========
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As of March 31, 1996, the Company operated as a C corporation and was
subject to corporate federal and state income tax. As of April 1, 1996, the
Company began operating under Subchapter S of the Internal Revenue Code and will
not be subject to corporate federal income tax. In connection with the
contemplated merger (see Note 10), the Subchapter S election will be terminated.
As a result, the Company again 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 $128,604 for the six months ended
September 30, 1996. Had the Company filed federal and state income tax returns
as a regular corporation for the six months ended September 30, 1996, income tax
expense under the provisions of Statement of Financial Accounting Standard No.
109 would have been 45,523.
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 based on the cumulative temporary differences at the date
of termination of S corporation status. If the termination of S corporation
status had occurred at September 30, 1996, the deferred tax liability would have
been approximately of $19,083.
F-177
<PAGE> 280
SYLVESTER'S CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Notes Receivable from Related Parties
The Company has notes receivable from related parties, including current
shareholders. These notes are due on demand and bear annual interest at 4%.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with
Service Experts, Inc. to sell all of the Company's stock in exchange for Service
Experts, Inc.'s stock. In accordance with the Combination Agreement, the Company
will become a wholly-owned subsidiary of Service Experts, Inc.
F-178
<PAGE> 281
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Automated Air, Inc. and Bauer Heating & Air Conditioning, Inc.
We have audited the accompanying combined balance sheet of Automated Air,
Inc. and Bauer Heating & Air Conditioning, Inc. as of December 31, 1995 and the
related combined statements of income, stockholders' equity, and cash flows for
the year then ended. 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 from
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 combined financial position of Automated Air, Inc.
and Bauer Heating & Air Conditioning, Inc. at December 31, 1995 and the combined
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
October 29, 1996
F-179
<PAGE> 282
AUTOMATED AIR, INC.
AND
BAUER HEATING & AIR CONDITIONING, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 102,145 $ 112,884 $ 129,101
Receivables:
Trade, net of allowance for doubtful accounts
of $-0-in 1994 and $9,267 in 1995.......... 90,445 79,312 52,497
Other........................................ 8,454 1,761 13,558
--------- --------- ---------
98,899 81,073 66,055
Inventories....................................... 155,228 146,771 170,252
Prepaid expenses and other current assets......... 1,281 5,342 3,452
Deferred income taxes............................. 37,873 46,712 64,804
--------- --------- ---------
Total current assets......................... 395,426 392,782 433,664
Property and equipment:
Furniture and fixtures............................ 85,828 88,533 88,533
Machinery and equipment........................... 62,336 63,037 63,037
Vehicles.......................................... 145,923 129,899 149,631
Leasehold improvements............................ 64,781 29,390 29,390
--------- --------- ---------
358,868 310,859 330,591
Less accumulated depreciation and amortization.... (172,974) (156,824) (177,475)
--------- --------- ---------
185,894 154,035 153,116
Goodwill, net.......................................... 49,832 46,487 43,882
Deferred income taxes.................................. -- 19,421 3,331
--------- --------- ---------
Total assets......................................... $ 631,152 $ 612,725 $ 633,993
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities.... $ 122,733 $ 135,661 $ 116,130
Deferred revenue.................................. 40,126 75,892 62,850
Accrued warranties................................ 40,494 48,304 51,423
Accrued vacation.................................. 5,251 2,025 2,025
Notes payable to related parties -- current
portion......................................... 3,021 -- --
Income taxes payable.............................. 20,207 46,199 54,723
Current portion of long-term debt................. 76,911 53,644 81,917
--------- --------- ---------
Total current liabilities.................... 288,536 361,725 369,068
Long-term debt net of current portion.................. 149,480 130,925 133,451
--------- --------- ---------
Stockholders' equity................................... 172,929 120,075 131,474
--------- --------- ---------
Total liabilities and stockholders' equity........ $ 631,152 $ 612,725 $ 633,993
========= ========= =========
</TABLE>
See accompanying notes.
F-180
<PAGE> 283
AUTOMATED AIR, INC.
AND
BAUER HEATING & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION> NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $1,735,202 $1,732,246 $2,472,360 $1,865,965 $2,059,517
Cost of goods sold............... 842,188 895,576 1,298,021 975,758 1,095,868
---------- ---------- ---------- ---------- ----------
Gross margin..................... 893,014 836,670 1,174,339 890,207 963,649
Selling, general and
administrative expenses........ 863,666 820,430 1,041,707 818,254 932,172
---------- ---------- ---------- ---------- ----------
Income from operations........... 29,348 16,240 132,632 71,953 31,477
Other income (expense):
Interest expense............ (10,097) (11,751) (17,158) (13,165) (12,396)
Interest income............. 4,302 3,810 7,566 5,197 1,871
Other income (expense)...... 3,462 6,504 (45,988) 4,216 2,945
---------- ---------- ---------- ---------- ----------
(2,333) (1,437) (55,580) (3,752) (7,580)
---------- ---------- ---------- ---------- ----------
Income before taxes.............. 27,015 14,803 77,052 68,201 23,897
Provision (benefit) for income
taxes:
Current..................... 9,627 4,169 44,522 1,378 --
Deferred.................... (4,163) 962 (28,260) 4,281 (2,002)
---------- ---------- ---------- ---------- ----------
5,464 5,131 16,262 5,659 (2,002)
---------- ---------- ---------- ---------- ----------
Net income....................... $ 21,551 $ 9,672 $ 60,790 $ 62,542 $ 25,899
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-181
<PAGE> 284
AUTOMATED AIR, INC.
AND
BAUER HEATING & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Balance at December 31, 1992 (unaudited)...................................... $190,706
Dividends paid (unaudited)............................................... (50,000)
Net income (unaudited)................................................... 21,551
--------
Balance at December 31, 1993 (unaudited)...................................... 162,257
Issuance of stock (unaudited)............................................ 1,000
Net income (unaudited)................................................... 9,672
--------
Balance at December 31, 1994 (unaudited)...................................... 172,929
Dividends paid........................................................... (113,644)
Net income............................................................... 60,790
--------
Balance at December 31, 1995.................................................. 120,075
Dividends paid (unaudited)............................................... (14,500)
Net income (unaudited)................................................... 25,899
--------
Balance at September 30, 1996 (unaudited)..................................... $131,474
========
</TABLE>
See accompanying notes.
F-182
<PAGE> 285
AUTOMATED AIR, INC.
AND
BAUER HEATING & AIR CONDITIONING, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION> NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
----------- ----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 21,551 $ 9,672 $ 60,790 $ 62,542 $ 25,899
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization........ 25,378 22,717 32,103 26,009 23,256
Deferred income taxes................ (4,163) 962 (28,260) 4,281 (2,002)
Provision for loss on accounts
receivable......................... -- -- 9,267 -- --
(Gain) loss on asset disposals....... -- -- 45,828 (1,657) --
Changes in assets and liabilities:
Receivables..................... 12,311 (29,816) 8,559 (45,443) 15,018
Inventories..................... 16,781 (77,472) 8,457 25,021 (23,481)
Prepaid expenses and other
current assets................ -- (1,281) (4,061) 1,281 1,890
Trade accounts payable and
accrued liabilities........... (9,005) 87,634 12,928 (23,298) (19,531)
Deferred revenue................ 13,702 1,553 35,766 25,776 (13,042)
Income tax payable.............. -- -- 25,992 (1,393) 8,524
Accrued warranties.............. -- 1,303 7,810 13,425 3,119
Accrued vacation................ -- 5,251 (3,226) -- --
-------- -------- -------- -------- ---------
Net cash flow provided by operating
activities.............................. 76,555 20,523 211,953 86,544 19,650
INVESTING ACTIVITIES
Purchase of property and equipment........ (16,402) (77,256) (52,374) (23,554) (44,306)
Proceeds from sale of property and
equipment............................... -- -- 9,647 9,647 --
Increase in other assets.................. -- (50,700) -- -- --
-------- -------- -------- -------- ---------
Net cash used in investing activities..... (16,402) (127,956) (42,727) (13,907) (44,306)
FINANCING ACTIVITIES
Issuance of stock......................... -- 1,000 -- -- --
Proceeds of long-term debt and capital
leases.................................. -- 155,333 25,553 4,086 --
Payments of long-term debt and capital
leases.................................. (23,538) (48,214) (70,396) (39,344) 55,373
Dividends paid............................ -- -- (113,644) (4,000) (14,500)
-------- -------- -------- -------- ---------
Net cash provided by (used in) financing
activities.............................. (23,538) 108,119 (158,487) (39,258) 40,873
-------- -------- -------- -------- ---------
Increase in cash and cash equivalents..... 36,615 686 10,739 33,379 16,217
Cash and cash equivalents at beginning of
period.................................. 64,844 101,459 102,145 102,145 112,884
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of
period.................................. $ 101,459 $ 102,145 $ 112,884 $ 135,524 $ 129,101
======== ======== ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................. $ 10,097 $ 11,751 $ 17,158 $ 13,165 $ 12,396
======== ======== ======== ======== =========
Income taxes paid......................... $ 22,250 $ -- $ -- $ -- $ 3,121
======== ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-183
<PAGE> 286
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Automated Air, Inc. and Bauer Heating & Air Conditioning, 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 Champaign County and
Macon County, Illinois, respectively.
On September 20, 1994, Bauer Heating & Air Conditioning, Inc. a newly
formed corporation, purchased the inventory of an existing business for $84,200.
The acquisition was financed from the issuance of a note to the seller. The
acquisition was accounted for as a purchase in accordance with generally
accepted accounting principles, with goodwill of $50,000 recorded for the excess
of the purchase price over the fair market value of the net assets acquired at
the date of acquisition. The goodwill is being amortized over 15 years using the
straight-line method. The Combined Company periodically reviews goodwill to
assess recoverability, and impairments would be recognized in operating results
if a permanent diminution in value were to occur.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 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, 1995
audited financial statements appearing herein. The results of the nine months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
RECOGNITION OF INCOME
Revenues on the Combined Companies heating and air conditioning
installation and service and maintenance revenue are recognized upon completion
of the services, which is usually within one to two days.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Combined Companies customer
base, and their dispersions across many employment sectors. The Combined
Companies do not require collateral.
CASH EQUIVALENTS
The Combined Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
F-184
<PAGE> 287
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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, notes receivable and accounts payable approximate fair value.
Long-Term Debt
Based upon the borrowing rates currently available to the Combined 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 straight-line methods over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
-------------------
AUTOMATED BAUER
--------- -----
<S> <C> <C>
Furniture and fixtures.................................. 5-7 5-12
Machinery and equipment................................. 5-7 5-12
Vehicles................................................ 5 5
Leasehold improvements.................................. 15-40 40
</TABLE>
WARRANTIES
The Combined Company, depending on the equipment installed, provides the
retail customer with either a two, five year or ten year warranty on parts and
labor from the date of installation of the heating and air conditioning unit.
The Combined Company also provides a one year warranty on all labor and a two
year warranty on all parts as a result of service work. 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
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.
INCOME TAXES
Automated Air, 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
F-185
<PAGE> 288
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 shareholders of Bauer Heating and Air Conditioning, Inc. have elected
under Subchapter S of the Internal Revenue Code to include income in their own
income for federal income tax purposes. Accordingly, the Company is not subject
to federal income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995 amounts charged to bad debt expense, net of recoveries totaled $1,977, $589
and $11,222, respectively.
ADVERTISING COSTS
The Combined Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Combined Company expensed $48,246,
$40,098 and $65,440, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Combined 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 do not believe that adoption of this
and any other newly issued pronouncements would have a significant impact on the
Combined Company's financial statements.
DEFERRED REVENUES
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
2. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes.................... $ 226,391 $184,569
Less current portion............................... 76,911 53,644
-------- --------
$ 149,480 $130,925
======== ========
</TABLE>
The Combined Company has various installment and equipment loans to various
lenders which are secured by vehicles and equipment. These loans bear interest
at various fixed rates ranging from 2.90% to 10.25% per annum at December 31,
1995. These loans require monthly payments ranging from $85 to $1,461 and are
due through June 8, 2000.
F-186
<PAGE> 289
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 53,644
1997...................................................... 93,205
1998...................................................... 22,233
1999...................................................... 13,772
2000...................................................... 1,715
--------
$184,569
========
</TABLE>
3. LEASES
Total rental expense for operating leases was $39,037, $47,783 and $75,039
for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The Combined
Company leases certain vehicles, equipment, and office and warehouse facilities
under terms of noncancelable operating lease agreements which expire at various
dates through January 31, 2001. The Combined Company has an option to purchase
its based facility for a fixed price. Minimum rental commitments at December 31,
1995 under operating leases having an initial noncancelable term of one year or
more are as follows:
<TABLE>
<S> <C>
1996...................................................... $ 56,526
1997...................................................... 53,678
1998...................................................... 54,628
1999...................................................... 34,133
2000...................................................... 1,500
--------
$200,465
========
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Combined Company maintains cash balances with financial institutions
which, at times, may be in excess of the FDIC limits.
The Combined Company maintains general liability insurance coverage and
umbrella policies to ensure themselves against any liabilities occurring in the
normal course of business. The Combined Company believes that their insurance
coverage is adequate.
5. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $301,290,
$171,709 and $267,324 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
F-187
<PAGE> 290
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1993 1994 1995
----------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal................................. $ 6,402 $ 2,802 $ 34,336
State................................... 3,225 1,367 10,186
Deferred.................................. (4,163) 962 (28,260)
------- ------ --------
$ 5,464 $ 5,131 $ 16,262
======= ====== ========
</TABLE>
Significant components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Deferred tax assets:
Allowance for uncollectible accounts............... $ -- $ 2,769
Depreciation and amortization...................... -- 19,421
Accrued compensation............................... 7,362 --
Warranty reserve................................... 16,562 17,375
Deferred revenue................................... 13,949 26,568
-------- --------
Total gross deferred tax assets...................... 37,873 66,133
Valuation allowance.................................. -- --
-------- --------
Net deferred tax assets.............................. $ 37,873 $ 66,133
======== ========
</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>
YEAR ENDED DECEMBER 31
-------------------------------------
1993 1994 1995
----------- ----------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate............ $ 9,185 $ 5,033 $26,198
State income tax less applicable federal
tax benefit.............................. 1,638 1,016 3,394
Income tax on S corporations............... -- 1,500 (3,000)
Effects of graduated tax rates............. (5,359) (2,418) (10,330)
------ ------ -------
$ 5,464 $ 5,131 $16,262
====== ====== =======
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Bauer Heating & Air Conditioning, Inc. operates under Subchapter S of the
Internal Revenue Code and is not subject to corporate federal income tax. In
connection with the proposed transaction, the Subchapter S election will be
terminated. As a result, Bauer Heating & Air Conditioning, Inc. will be subject
to corporate income taxes subsequent to the termination of S corporation status.
Bauer Heating & Air Conditioning, Inc. had net operating income (loss) for
income tax purposes of $(10,335), $19,947, and $66,792 for 1994 and 1995 and the
nine months ended September 30, 1996, respectively. Had Bauer Heating & Air
Conditioning, Inc. filed federal and state income tax returns as a regular
corporation for 1994, 1995, and the nine months
F-188
<PAGE> 291
AUTOMATED AIR, INC. AND
BAUER HEATING & AIR CONDITIONING, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ended September 30, 1996, income tax expense (benefit) under the provisions of
Financial Accounting Standard No. 109 would have been of $(1,500), $3,000 and
$10,499, respectively.
At the date of termination of S corporation status, Bauer Heating & Air
Conditioning, 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. If the
termination of S corporation status had occurred at September 30, 1996, the
deferred tax liability would have been approximately of $4,800.
7. RELATED PARTY TRANSACTIONS
Accrued Expenses Payable to Related Party
The Company has consulting fees payable to a related party, in the amount
of $46,030 at December 31, 1995. Consulting expense to this party was $52,730 in
1995.
Notes Payable to Related Parties
The Combined Company had a $3,021 note payable to shareholder at December
31, 1994 (unaudited). This note was repaid in 1995.
Other Related Party Transaction
The Combined Company leases facility space from a former stockholder.
Rental expense on this related party operating lease amount to $1,200 and $5,100
for the years 1994 (unaudited) and 1995, respectively.
8. SUBSEQUENT EVENT
Subsequent to year end the Combined Company signed an agreement and plan of
merger with Service Experts, Inc. to sell all of the Combined Company's stock in
exchange for Service Experts, Inc.'s stock and cash. In accordance with the
agreement and plan of merger, the Combined Company will be merged into a
wholly-owned subsidiary of Service Experts, Inc.
F-189
<PAGE> 292
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Gaddis Co.
We have audited the accompanying balance sheet of Gaddis Co. as of December
31, 1995 and the related statements of operations, stockholders' equity, and
cash flows for the year then ended. 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 from
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 Gaddis Co. at December 31,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 11, 1996
F-190
<PAGE> 293
GADDIS CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
----------- -------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 14,005 $ 32,047 $ 15,131
Receivables:
Trade, net of allowance for doubtful accounts of $0 in
1994 and $3,302 in 1995.............................. 95,798 30,956 134,939
Related party.......................................... 3,190 77,862 113,578
Employees.............................................. 850 -- --
-------- -------- --------
99,838 108,818 248,517
Inventories............................................... 61,062 55,161 22,001
-------- -------- --------
Total current assets.............................. 174,905 196,026 285,649
Property and equipment:
Furniture and fixtures.................................... 23,193 34,792 53,186
Machinery and equipment................................... 71,461 73,379 66,299
Vehicles.................................................. 152,457 136,204 129,066
-------- -------- --------
247,111 244,375 248,551
Less accumulated depreciation and amortization............ (154,592) (166,385) (173,663)
-------- -------- --------
92,519 77,990 74,888
-------- -------- --------
Total assets...................................... $ 267,424 $274,016 $ 360,537
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $ 112,109 $ 91,265 $ 125,064
Accrued warranties........................................ 6,925 7,583 8,883
Deferred revenue.......................................... 19,052 31,565 48,630
Current portion of long-term debt and capital lease
obligations............................................ 52,039 11,706 12,560
-------- -------- --------
Total current liabilities......................... 190,125 142,119 195,137
Long-term debt and capital lease obligations, net of current
portion................................................... 22,968 18,468 5,341
Stockholders' equity:
Common Stock, no par 100,000 shares authorized, 10,000
shares issued and outstanding.......................... 62,650 62,650 62,650
Retained earnings (deficit)............................... (8,319) 50,779 97,409
-------- -------- --------
54,331 113,429 160,059
-------- -------- --------
Total liabilities and stockholders' equity........ $ 267,424 $274,016 $ 360,537
======== ======== ========
</TABLE>
See accompanying notes.
F-191
<PAGE> 294
GADDIS CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $ 1,230,274 $ 1,374,176 $1,576,798 $ 1,372,196 $ 1,255,643
Cost of goods sold................... 949,543 1,016,801 1,100,679 945,248 833,316
---------- ---------- ---------- ---------- ----------
Gross margin......................... 280,731 357,375 476,119 426,948 422,327
Selling, general and administrative
expenses........................... 272,070 286,478 397,029 281,192 305,830
---------- ---------- ---------- ---------- ----------
Income from operations............... 8,661 70,897 79,090 145,756 116,497
Other income (expense):
Interest expense................... (11,032) (7,891) (5,225) (11,299) (5,058)
Interest income.................... -- -- 5,489 -- 648
Other income (expense)............. 541 (7,401) (20,256) 5,769 (1,457)
---------- ---------- ---------- ---------- ----------
(10,491) (15,292) (19,992) (5,530) (5,867)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (1,830) $ 55,605 $ 59,098 $ 140,226 $ 110,630
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-192
<PAGE> 295
GADDIS CO.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
NO PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 (unaudited).................. 10,000 $62,650 (62,094) $ 556
Net loss (unaudited)................................. -- -- (1,830) (1,830)
------ ------ -------- --------
Balance at December 31, 1993 (unaudited).................. 10,000 62,650 (63,924) (1,274)
Net income (unaudited)............................... -- -- 55,605 55,605
------ ------ -------- --------
Balance at December 31, 1994 (unaudited).................. 10,000 62,650 (8,319) 54,331
Net income........................................... -- -- 59,098 59,098
------ ------ -------- --------
Balance at December 31, 1995.............................. 10,000 62,650 50,779 113,429
Dividends paid (unaudited)........................... -- -- (64,000) (64,000)
Net income (unaudited)............................... -- -- 110,630 110,630
------ ------ -------- --------
Balance at September 30, 1996 (unaudited)................. 10,000 $62,650 97,409 $160,059
====== ====== ======== ========
</TABLE>
See accompanying notes.
F-193
<PAGE> 296
GADDIS CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------
1993 1994 1995 1995 1996
----------- ----------- -------- -------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................ $ (1,830) $ 55,605 $ 59,098 $140,226 $ 110,630
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation........................... 19,703 19,372 30,595 25,936 21,202
Gain on asset disposals................ (5,179) -- (4,550) (3,000) --
Changes in assets and liabilities:
Receivables......................... 60,814 (8,477) (8,980) (19,040) (139,699)
Inventories......................... (3,247) (49,452) 5,901 44,570 33,160
Prepaid expenses and other current
assets............................ 760 -- -- -- --
Trade accounts payable and accrued
liabilities....................... (66,988) 28,240 (20,844) (50,327) 33,799
Accrued warranties.................. 353 3,740 658 329 1,300
Deferred revenue.................... 7,672 11,380 12,513 10,738 17,065
-------- -------- -------- -------- ---------
Net cash flow provided by
operating activities......... 12,058 60,408 74,391 149,432 77,457
INVESTING ACTIVITIES
Purchase of property equipment........... (15,375) (50,261) (21,016) (9,358) (18,100)
Proceeds from sale of property and
equipment.............................. 6,900 -- 9,500 3,000 --
-------- -------- -------- -------- ---------
Net cash used in investing
activities................... (8,475) (50,261) (11,516) (6,358) (18,100)
FINANCING ACTIVITIES
Proceeds of long-term debt............... -- -- 10,000 10,000 --
Payments of long-term debt............... (25,201) (13,173) (12,694) (13,207) (3,749)
Proceeds on notes payable to related
parties................................ 10,444 16,986 -- -- --
Payments on notes payable to related
parties................................ (9,595) (4,354) (42,139) (42,139) (8,524)
Distribution to stockholders............. -- -- -- -- (64,000)
-------- -------- -------- -------- ---------
Net cash used in financing
activities................... (24,352) (541) (44,833) (45,346) (76,273)
-------- -------- -------- -------- ---------
Increase (decrease) in cash.............. (20,769) 9,606 18,042 97,728 (16,916)
Cash at beginning of period.............. 25,168 4,399 14,005 14,005 32,047
-------- -------- -------- -------- ---------
Cash at end of period.................... $ 4,399 $ 14,005 $ 32,047 $111,733 $ 15,131
======== ======== ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................ $ 11,032 $ 7,891 $ 5,225 $ 11,299 $ 5,058
======== ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-194
<PAGE> 297
GADDIS CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Gaddis Co. ("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. The Company does
business as Desert Air Conditioning.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
income, stockholders' equity, and cash flows for the two years then ended have
been prepared by the company's management and are unaudited. These financial
statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
income and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 with generally accepted accounting principles have been
condensed or omitted form the interim financial statements. The interim
financial statements should be read in conjunction with the December 31, 1995
audited financial statements appearing herein. The results of the nine months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
RECOGNITION OF INCOME
Revenues on all of the Company's air conditioning installation and service
and maintenance revenue are recognized upon completion of the services, which is
usually within one to two days.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash 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.
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.
F-195
<PAGE> 298
GADDIS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
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....................................................... 5-10
Vehicles...................................................................... 5
</TABLE>
WARRANTIES
The Company provides the retail customer with a one, three or ten year
warranty on parts and labor from the date of installation of the air
conditioning unit. This warranty runs concurrent with the manufacturer's
warranty on parts for two years 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.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
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.
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. Accordingly, the Company is not subject to federal
and state income taxes.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Company expensed $44,200, $52,600
and $106,100, 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-196
<PAGE> 299
GADDIS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
----------- -------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes, including capital lease
obligations................................................... $18,521 $18,569
Other long-term debt............................................ 40,165 --
------- -------
58,686 18,569
Less current portion............................................ 47,323 6,598
------- -------
$11,363 $11,971
======= =======
</TABLE>
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 8% to 11.4% per annum. These loans require
monthly payments ranging from $325 to $488 and are due through 1998.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996....................................................................... $11,706
1997....................................................................... 12,853
1998....................................................................... 5,335
1999....................................................................... 280
-------
$30,174
=======
</TABLE>
3. LEASES
Total rental expense for operating leases was $21,600, $20,840 and $25,770
for 1993 (unaudited), 1994 (unaudited) and 1995, respectively. The Company
leases office and warehouse facilities on a month-to-month basis from the
stockholders. The Company leases certain communications equipment under terms of
a noncancelable capital lease agreement which expires February 1, 1998. Such
amounts are included in Debts included in Note 2. Minimum rental commitments at
December 31, 1995 under this capital lease are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------
<S> <C>
1996....................................................................... $ 5,852
1997....................................................................... 5,852
1998....................................................................... 975
-------
12,679
Amounts representing interest.............................................. 1,074
-------
Present value of net minimum rentals (including $5,108 classified as
current)................................................................. $11,605
=======
</TABLE>
F-197
<PAGE> 300
GADDIS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
----------- -------
(UNAUDITED)
<S> <C> <C>
Machinery and equipment......................................... $24,049 $24,039
Less accumulated amortization................................... 6,414 9,711
------- -------
Net equipment under capital leases.................... $17,635 $14,218
======= =======
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a legal proceeding arising in the ordinary course
of business. In the opinion of management, the resolution of this proceeding
will not have a material adverse effect on the financial position or results of
operations of the Company.
The Company maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
5. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $62,500,
$8,200 and $33,500 in 1993 (unaudited), 1994 (unaudited) and 1995, respectively.
6. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
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
acquisition by Service Experts, Inc. (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 $14,670, $71,664, $74,743 and
$130,042 for 1993, 1994, 1995, and the nine months ended September 30, 1996
respectively. Had the Company filed federal and state income tax returns as a
regular corporation for 1993, 1994, 1995, and the nine months ended September
30, 1996, income tax expense under the provisions of Financial Accounting
Standard No. 109 would have been $139, $15,272, $13,575, and $27,280,
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 based on the cumulative temporary differences at the date
of termination of S corporation status. If the termination of S corporation
status had occurred at September 30, 1996, the deferred tax asset would have
been approximately $15,451.
7. RELATED PARTY TRANSACTIONS
NOTES AND ACCOUNTS RECEIVABLE FROM RELATED PARTIES
The Company has notes receivable from related parties, including current
shareholders. These notes (unaudited) are due on demand and bear interest at 5%.
Accounts receivable of $3,190 and $5,862 at
F-198
<PAGE> 301
GADDIS CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 (unaudited) and 1995, respectively, were due from a related
company owned by the stockholders of the Company.
NOTES PAYABLE TO RELATED PARTIES
As of December 31, 1993 and 1994, the Company had notes payable to related
parties, including current shareholders, which carried interest at 5% and were
due in 1995. The aggregate amount of principal maturities was $40,165 in 1995.
OTHER RELATED PARTY TRANSACTION
The Company leases facility space from stockholders of the Company. Rental
expense on these related party operating leases amount to $21,600, $20,840 and
$25,770 for the years 1993 (unaudited), 1994 (unaudited) and 1995, respectively.
8. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-199
<PAGE> 302
EISENBACH ENTERPRISES, INC.
BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Receivables:
Trade, net of allowance for doubtful accounts of $4,329 in 1995 and
$4,642 in 1996..................................................... $ 69,951 $ 57,897
Related party....................................................... 68,160 67,268
Employee............................................................ 11,091 6,704
-------- --------
149,202 131,869
Inventories............................................................ 63,740 61,047
Prepaid expenses and other current assets.............................. 4,759 27,992
-------- --------
Total current assets........................................... 217,701 220,908
Property, buildings and equipment:
Office furniture and fixtures.......................................... 90,198 93,774
Machinery and equipment................................................ 149,652 150,326
Vehicles............................................................... 65,677 61,332
Leasehold improvements................................................. 2,931 2,943
-------- --------
308,458 308,375
Less accumulated depreciation and amortization......................... (168,908) (196,590)
-------- --------
139,550 111,785
Goodwill, net............................................................ 13,750 12,500
Investments.............................................................. 4,800 4,500
-------- --------
Total assets................................................... $375,801 $349,693
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft......................................................... $ 6,189 $ 774
Trade accounts payable and accrued liabilities......................... 132,769 182,141
Accrued compensation................................................... -- 7,138
Accrued taxes, other than income....................................... 29,872 11,230
Accrued warranties..................................................... 25,762 18,837
Current portion of long-term debt and capital lease obligations........ 16,745 45,668
-------- --------
Total current liabilities...................................... 211,337 265,788
Long-term debt and capital lease obligations, net of current portion..... 25,814 3,008
Stockholder's equity:
Common stock, no par value, 10,000 shares authorized, 1,000 shares
issued and outstanding.............................................. 10,000 10,000
Retained earnings (deficit)............................................ 128,650 70,897
-------- --------
138,650 80,897
-------- --------
Total liabilities and stockholder's equity..................... $375,801 $349,693
======== ========
</TABLE>
See accompanying notes.
F-200
<PAGE> 303
EISENBACH ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues....................................... $1,280,438 $1,291,687 $1,436,870
Cost of goods sold................................. 792,268 895,101 899,890
---------- ---------- ----------
Gross margin....................................... 488,170 396,586 536,980
Selling, general and administrative expenses....... 443,810 480,442 588,809
---------- ---------- ----------
Income (loss) from operations...................... 44,360 (83,856) (51,829)
Other income (expense):
Interest expense................................. (2,038) (2,791) (12,931)
Interest income.................................. 4,532 4,588
Other income..................................... 7,103 3,090 2,419
---------- ---------- ----------
5,065 4,831 (5,924)
---------- ---------- ----------
Income (loss) before taxes......................... 49,425 (79,025) (57,753)
Provision for income taxes:
Current.......................................... 2,765 -- --
Deferred......................................... -- -- --
---------- ---------- ----------
2,765 -- --
---------- ---------- ----------
Net income (loss).................................. $ 46,660 $ (79,025) $ (57,753)
========== ========== ==========
</TABLE>
See accompanying notes.
F-201
<PAGE> 304
EISENBACH ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
UNAUDITED
<TABLE>
<CAPTION>
COMMON STOCK -- NO PAR
----------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at September 31, 1993................... 1,000 $ 10,000 $ 161,015 $ 171,015
Net income...................................... -- -- 46,660 46,660
----- ------- -------- --------
Balance at September 31, 1994................... 1,000 10,000 207,675 217,675
Net loss........................................ -- -- (79,025) (79,025)
----- ------- -------- --------
Balance at September 31, 1995................... 1,000 10,000 128,650 138,650
Net loss........................................ -- -- (57,753) (57,753)
----- ------- -------- --------
Balance at September 31, 1996................... 1,000 $ 10,000 $ 70,897 $ 80,897
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-202
<PAGE> 305
EISENBACH ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).............................................. $ 46,660 $(79,025) $(57,753)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 28,854 32,490 30,832
Provisions for loss on accounts receivable................... 5,007 3,452 3,357
Gain on asset disposals...................................... -- (2,150) (650)
Changes in assets and liabilities:
Receivables............................................... (27,967) 6,476 13,083
Inventories............................................... (6,477) (7,568) 2,692
Prepaid expenses and other current assets................. 12,273 10,897 (23,233)
Trade accounts payable and accrued liabilities............ (27,642) 71,270 49,373
Accrued compensation...................................... 2,450 (2,450) 7,138
Accrued taxes, other than income.......................... 1,280 26,177 (18,642)
Accrued warranties........................................ 33,709 (7,947) (6,925)
-------- -------- --------
Net cash flow provided by (used in) operating activities....... 68,147 51,622 (728)
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment................. (34,377) (10,744) (5,616)
Proceeds from sale of property, buildings, and equipment....... -- 2,150 4,450
Purchase of investments........................................ -- (4,000) --
Proceeds from sale of investments.............................. -- -- 300
Advances on notes receivable................................... (28,719) (22,039) --
Collections on notes receivable................................ -- -- 892
-------- -------- --------
Net cash provided by (used in) investing activities............ (63,096) (34,633) 26
FINANCING ACTIVITIES
Proceeds of long-term debt and capital leases.................. 29,327 8,700 37,868
Payments of long-term debt and capital leases.................. (45,196) (18,769) (31,751)
-------- -------- --------
Net cash provided by (used in) financing activities............ (15,869) (10,069) 6,117
-------- -------- --------
Increase (decrease) in cash and cash equivalents............... (10,818) 6,920 5,415
Bank overdraft at beginning of period.......................... (2,291) (13,109) (6,189)
-------- -------- --------
Bank overdraft at end of period................................ $(13,109) $ (6,189) $ (774)
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................................. $ 981 $ 2,130 $ 1,706
======== ======== ========
Income taxes paid.............................................. $ 7,752 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-203
<PAGE> 306
EISENBACH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED
SEPTEMBER 30, 1994, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Eisenbach Enterprises, Inc. (EEI) ("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
Revenues on all of the Company's heating and air conditioning installation
contracts for commercial buildings and for residential installation and service
and maintenance revenue are recognized upon completion of the services, which is
usually within one to two days.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents and certificates of deposit 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.
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 weighted average 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 and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Office furniture and fixtures................................................. 10
Machinery and equipment....................................................... 10
Vehicles...................................................................... 5
Leasehold improvements........................................................ 40
</TABLE>
WARRANTIES
The Company provides the retail customer with a one to five year warranty
on parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the
F-204
<PAGE> 307
EISENBACH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
manufacturer's warranty on parts. The Company provides an accrual for future
warranty costs based on 2% of the respective service and replacement sales. It
is the Company's practice to classify the entire warranty accrual as a current
liability.
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.
INCOME TAXES
The Company 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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended September 30, 1994 (unaudited), 1994 (unaudited) and
1996 (unaudited) amounts charged to bad debt expense totaled $5,007, $3,452 and
$3,357, respectively, and accounts written off, net of recoveries, were $4,754,
$4,969, and $3,044 respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994
(unaudited), 1995 (unaudited) and 1996 (unaudited), the Company expensed
$30,587, $35,445 and $44,055, 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. DEBT
Debt consists of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Line of credit............................................ $ -- $ 5,000
Premium finance note payable.............................. -- 19,507
Installment and equipment notes........................... 23,931 8,989
------- -------
23,931 33,496
Less current portion...................................... 14,942 32,964
------- -------
$ 8,989 $ 532
======= =======
</TABLE>
The Company has a line of credit with a bank with a total borrowing limit
of $5,000 (unaudited). This line of credit bears interest at the prime rate plus
4% (12.25% at September 30, 1996).
F-205
<PAGE> 308
EISENBACH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 7.75% to 13% per annum at September 30,1996.
These loans require monthly payments ranging from $180 (unaudited) to $255
(unaudited) and are due through 12/15/97.
As of September 30, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows (Unaudited):
<TABLE>
<S> <C>
1997....................................................................... $32,964
1998....................................................................... 532
1999....................................................................... --
2000....................................................................... --
2001....................................................................... --
-------
$33,496
=======
</TABLE>
3. LEASES
Total rental expense for all operating leases was $7,800, $7,800 and $7,800
for 1994 (unaudited), 1995 (unaudited) and 1996 (unaudited), respectively. The
Company leases its office and warehouse space from the former owner. The
operating lease expired in 1982 and has continued on a month-to-month basis at
$650 per month. The company leases office equipment under capital lease
agreements which expire in July and October 1997. Minimum rental commitments at
September 30, 1996 (unaudited) under capital leases having an initial
non-cancelable of one year or more are as follows:
<TABLE>
<S> <C>
1997....................................................................... $12,703
1998....................................................................... 2,476
1999....................................................................... --
2000....................................................................... --
2001....................................................................... --
-------
15,179
Amounts representing interest.............................................. --
-------
Present value of net minimum rentals (including $12,703 classified as
current)................................................................. $15,179
=======
</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>
SEPTEMBER 30,
-------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Office equipment.............................................. $41,362 $41,362
Less accumulated amortization................................. 10,507 14,148
------- -------
Net equipment under capital leases............................ $30,855 $27,214
======= =======
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
4. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code ("the Code").
Substantially all employees of the Company are eligible to participate in the
plan. Under the plan's provisions, a plan member may annually contribute, on a
tax
F-206
<PAGE> 309
EISENBACH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
deferred basis, amounts up to 15% of total compensation, not to exceed the
maximum established by the Internal Revenue Service. The Company has plans to
terminate the plan within the next fiscal year.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of 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 maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
6. STOCKHOLDER'S COMPENSATION
Stockholder's compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $62,480,
$80,698 and $85,346 in 1994 (unaudited), 1995 (unaudited) and 1996 (unaudited),
respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal...................................... $ 1,940 $ -- $ --
State........................................ 825 -- --
Deferred....................................... -- -- --
------ ------ ------
$ 2,765 $ -- $ --
====== ====== ======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------
1995 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Deferred tax liabilities.................................. $ -- $ --
Deferred tax assets:
Net operating loss carryforward......................... 27,880 21,417
Accounts receivable..................................... 1,643 1,762
-------- --------
Total gross deferred tax assets........................... 29,523 23,179
Valuation allowance....................................... (29,523) (23,179)
-------- --------
Net deferred tax assets................................... -- --
-------- --------
Net deferred tax liabilities.............................. $ -- $ --
======== ========
</TABLE>
F-207
<PAGE> 310
EISENBACH ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- UNAUDITED -- (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>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Tax provision at statutory rate.................... $ 2,194 $ (26,869) $ (21,186)
State income tax less applicable federal tax
benefit.......................................... 545 -- --
Effects of graduated rates......................... (469) -- --
NOL for which no benefit recognized................ -- 26,444 20,761
Goodwill amortization.............................. 495 425 425
------ -------- --------
$ 2,765 $ -- $ --
====== ======== ========
</TABLE>
8. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE FROM RELATED PARTIES
The Company has notes receivable from related parties, including the
current stockholder. These notes have various payment terms and bear annual
interest at 7%.
OTHER RELATED PARTY TRANSACTION
The Company subcontracts labor to a company which is owned by the
stockholder of the Company. Payments to this Company approximated $30,000,
$43,000 and $45,000 for the years 1994 (unaudited), 1995 (unaudited) and 1996
(unaudited), respectively.
9. SUBSEQUENT EVENT
Subsequent to year end the Company signed a Combination Agreement with
Service Experts, Inc. to sell all of the Company's stock in exchange for Service
Experts, Inc.'s stock. In accordance with the Combination Agreement, the Company
will become a wholly-owned subsidiary of Service Experts, Inc.
F-208
<PAGE> 311
REPORT OF INDEPENDENT AUDITORS
The Stockholder's
Quality Air Conditioning &
Heating of West Monroe, Inc.
We have audited the accompanying balance sheet of Quality Air Conditioning
& Heating of West Monroe, Inc. as of December 31, 1995 and the related
statements of operations, stockholder's equity, and cash flows for the year then
ended. 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 Quality Air Conditioning &
Heating of West Monroe, Inc. at December 31, 1995, and the results of operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
November 11, 1996
F-209
<PAGE> 312
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
----------- --------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 4,396 $ 86,586 $ 61,525
Receivables:
Trade, net of allowance for doubtful accounts of
$8,518 in 1994 and $5,867 in 1995............... 122,223 85,185 130,700
Employee.......................................... 1,521 61 499
----------- --------- -------------
123,744 85,246 131,199
Inventories.......................................... 119,409 143,429 192,120
----------- --------- -------------
Total current assets......................... 247,549 315,261 384,844
Property, buildings and equipment:
Furniture and fixtures............................... 75,578 93,994 93,994
Machinery and equipment.............................. 24,832 31,400 32,350
Vehicles............................................. 174,840 170,841 201,628
Leasehold improvements............................... 20,115 20,115 20,115
----------- --------- -------------
295,365 316,350 348,087
Less accumulated depreciation........................ (180,220) (220,345) (247,349)
----------- --------- -------------
115,145 96,005 100,738
Other assets........................................... 4,682 4,632 4,632
----------- --------- -------------
Total assets........................................... $ 367,376 $ 415,898 $ 490,214
========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities....... $ 39,642 $ 31,816 $ 19,122
Accrued taxes, other than income..................... -- 6,783 6,039
Accrued warranties................................... 7,307 8,485 8,485
Deferred revenue..................................... 33,563 36,377 53,006
Current portion of long-term debt.................... 34,534 37,961 42,040
----------- --------- -------------
Total current liabilities.................... 115,046 121,422 128,692
Long-term debt, net of current portion................. 101,321 70,458 64,682
Stockholders' equity:
Common stock, $100 par value 1,000 shares authorized;
10 shares issued and outstanding.................. 1,000 1,000 1,000
Additional paid in capital........................... 40,070 40,070 40,070
Retained earnings.................................... 109,939 182,948 255,770
----------- --------- -------------
Total stockholders' equity............................. 151,009 224,018 296,840
----------- --------- -------------
Total liabilities and stockholders' equity............. $ 367,376 $ 415,898 $ 490,214
========= ========= ==========
</TABLE>
See accompanying notes.
F-210
<PAGE> 313
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
----------- ----------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues..................... $ 824,714 $ 1,173,338 $1,383,530 $ 1,117,262 $ 1,059,751
Cost of goods sold............... 605,105 868,359 959,365 734,533 724,761
---------- ---------- ---------- ---------- ----------
Gross margin..................... 219,609 304,979 424,165 382,729 334,990
Selling, general and
administrative expenses........ 193,864 301,865 321,122 214,441 257,180
Income from operations........... 25,745 3,114 103,043 168,288 77,810
Other income (expense):
Interest expense............... (171) (9,008) (10,108) (7,206) (6,004)
Interest income................ 703 1,436 2,633 2,351 1,016
Other income................... 6,341 3,073 6,941 6,941 --
---------- ---------- ---------- ---------- ----------
6,873 (4,499) (534) 2,086 (4,988)
---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 32,618 $ (1,385) $ 102,509 $ 170,374 $ 72,822
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-211
<PAGE> 314
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------
$100 PAR VALUE ADDITIONAL
--------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 (unaudited)... 10 $1,000 $ 40,070 $ 95,706 $136,776
Net income (unaudited)................... -- -- -- 32,618 32,618
--
----- ------- --------- ---------
Balance at December 31, 1993 (unaudited)... 10 1,000 40,070 128,324 169,394
Dividends Paid (unaudited)............... -- -- -- (17,000) (17,000)
Net income (unaudited)................... -- -- -- (1,385) (1,385)
--
----- ------- --------- ---------
Balance at December 31, 1994 (unaudited)... 10 1,000 40,070 109,939 151,009
Dividends Paid........................... -- -- -- (29,500) (29,500)
Net income............................... -- -- -- 102,509 102,509
--
----- ------- --------- ---------
Balance at December 31, 1995............... 10 1,000 40,070 182,948 224,018
Net income (unaudited)................... -- -- -- 72,822 72,822
--
----- ------- --------- ---------
Balance at September 30, 1996
(unaudited).............................. 10 $1,000 $ 40,070 $255,770 $296,840
== ===== ======= ========= =========
</TABLE>
See accompanying notes.
F-212
<PAGE> 315
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -------------------------
1993 1994 1995 1995 1996
----------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ 32,618 $ (1,385) $102,509 $ 170,374 $ 72,822
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation........................ 24,182 43,613 48,476 35,667 27,004
Provisions for loss on accounts
receivable....................... 2,591 10,216 8,328 5,312 7,235
(Gain) loss on asset disposals...... -- 29 (6,421) (6,421) --
Changes in assets and liabilities:
Receivables...................... (37,393) (57,712) 30,170 (15,057) (53,188)
Inventories...................... (16,397) (15,852) (24,020) (70,956) (48,691)
Trade accounts payable and
accrued liabilities............ 18,799 8,585 (7,826) (20,709) (19,477)
Accrued warranties............... 1,045 2,525 1,178 884 --
Accrued taxes, other than
income......................... -- -- 6,783 7,610 6,039
Deferred revenue................. 4,003 15,241 2,814 2,110 16,629
-------- --------- -------- -------- ---------
Net cash flow provided by operating
activities.......................... 29,448 5,260 161,991 108,814 8,373
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment........................... (40,721) (102,601) (29,914) (11,498) (31,737)
Proceeds from sale of property,
buildings, and equipment............ -- 500 7,000 7,000 --
(Increase) decrease in other assets... (1,690) (1,981) 50 50 --
-------- --------- -------- -------- ---------
Net cash used in investing
activities.......................... (42,411) (104,082) (22,864) (4,448) (31,737)
FINANCING ACTIVITIES
Proceeds of long-term debt............ 20,000 162,879 7,098 7,098 30,788
Payments of long-term debt............ (2,813) (27,024) (34,535) (26,111) (32,485)
Payments on notes payable to related
party............................... (26,000) -- -- -- --
Dividends paid........................ -- (17,000) (29,500) -- --
-------- --------- -------- -------- ---------
Net cash provided by (used in)
financing activities................ (8,813) 118,855 (56,937) (19,013) (1,697)
-------- --------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents......................... (21,776) 20,033 82,190 85,353 (25,061)
Cash and cash equivalents (overdraft)
at beginning of period.............. 6,139 (15,637) 4,396 4,396 86,586
-------- --------- -------- -------- ---------
Cash and cash equivalents (overdraft)
at end of period.................... $ (15,637) $ 4,396 $ 86,586 $ 89,749 $ 61,525
======== ========= ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid......................... $ 171 $ 9,008 $ 10,108 $ 7,206 $ 6,004
======== ========= ======== ======== =========
</TABLE>
See accompanying notes.
F-213
<PAGE> 316
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 (UNAUDITED), 1994 (UNAUDITED) AND 1995 AND SEPTEMBER 30, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Quality Air Conditioning & Heating of West Monroe, 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 the Monroe, Louisiana vicinity.
UNAUDITED YEAR END FINANCIAL STATEMENTS AND UNAUDITED INTERIM FINANCIAL
STATEMENTS
The balance sheet as of December 31, 1994 and the related statements of
operations, stockholders' equity, and cash flows for the two years then ended
have been prepared by the company's management and are unaudited. These
financial statements include all adjustments necessary for a fair presentation.
The balance sheet as of September 30, 1996 and the related statements of
operations and cash flows for the nine months ended September 30, 1995 and 1996
(interim financial statements) have been prepared by the company's 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 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, 1995
audited financial statements appearing herein. The results of the nine months
ended September 30, 1995 and 1996 may not be indicative of operating results for
the full respective years.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for commercial and residential installation and service and maintenance revenue
are recognized upon completion of the services, which is usually within one to
two days except for commercial contracts which usually one or two months. The
Company has no significant long-term commercial contracts.
Trade accounts receivable includes billings to customers upon completion of
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, and their dispersions across many different industries and geographies.
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-214
<PAGE> 317
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, 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.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated on the basis of cost.
Depreciation is provided on the straight-line and declining-balance methods over
the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................... 7
Machinery and equipment..................................... 7
Vehicles.................................................... 5
Leasehold improvements...................................... 15
</TABLE>
WARRANTIES
The Company provides the retail customer with a ten year manufacturer's
warranty on parts and labor from the date of installation. The Company is liable
for labor costs for ninety days following installation. The Company provides the
retail customer with a two year warranty on parts and labor for individual parts
sold. 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
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.
INCOME TAXES
The stockholders of the Company has elected under Subchapter S of the
Internal Revenue Code to include the Company's income in his own income for
federal and state income tax purposes. Accordingly, the Company is not subject
to federal or state income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993 (unaudited), 1994 (unaudited) and
1995, amounts charged to bad debt expense totaled $2,591, $10,216 and $8,328,
respectively, and accounts written off, net of recoveries, were $196, $6,946 and
$10,979, respectively.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993
(unaudited), 1994 (unaudited) and 1995, the Company expensed $15,170, $28,398
and $18,421, respectively.
F-215
<PAGE> 318
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, 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.
2. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
----------- --------
(UNAUDITED)
<S> <C> <C>
Installment and equipment notes.................... $ 135,855 $108,419
Less current portion............................... (34,534) (37,961)
-------- --------
$ 101,321 $ 70,458
======== ========
</TABLE>
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment with a carrying value of $55,603 at
December 31, 1995. These loans bear interest at various fixed rates ranging from
6.9% to 11.25% per annum at December 31, 1995. These loans require monthly
payments ranging from $327 to $1,284 and are due through 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996.................................................... $ 37,961
1997.................................................... 34,152
1998.................................................... 28,906
1999.................................................... 7,400
2000.................................................... --
--------
$108,419
========
</TABLE>
3. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella
policies to ensure themselves against any liabilities occurring in the normal
course of business. The Company believes that their insurance coverage is
adequate.
4. STOCKHOLDERS' COMPENSATION
Stockholder compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $29,160,
$36,000 and $46,700 in 1993 (unaudited), 1994 (unaudited) and 1995,
respectively.
5. INCOME TAXES
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Company operates under Subchapter S of the Internal Revenue Code and is
not subject to corporate federal income tax. In connection with the proposed
transaction, the Subchapter S election will be terminated. As a result, the
Company will be subject to corporate income taxes subsequent to the termination
of
F-216
<PAGE> 319
QUALITY AIR CONDITIONING & HEATING OF WEST MONROE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
S corporation status. The Company had net operating income for income tax
purposes of $27,920, $12,536, $95,944 and $90,992 for 1993, 1994, 1995 and the
nine months ended September 30, 1996, respectively. Had the Company filed
federal and state income tax returns as a regular corporation for 1993, 1994,
1995 and the nine months ended September 30, 1996, income tax expense under the
provisions of Financial Accounting Standard No. 109 would have been of $6,782,
$239 and $25,172 and $24,245, 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 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 September 30, 1996, the deferred tax
asset would have been approximately of $5,057.
6. RELATED PARTY TRANSACTIONS
The Company leases offices and warehouse facility space from the
stockholder on a monthly basis for $3,000 per month. Rental expense on this
related party operating lease totaled $24,500, $36,000 and $36,000 for the years
1993 (unaudited), 1994 (unaudited) and 1995, respectively.
7. SUBSEQUENT EVENT
Subsequent to year end the Company signed an agreement and plan of merger
with Service Experts, Inc. to sell all of the Company's stock in exchange for
Service Experts, Inc.'s stock and cash. In accordance with the agreement and
plan of merger, the Company will be merged into a wholly-owned subsidiary of
Service Experts, Inc.
F-217
<PAGE> 320
- ------------------------------------------------------
- ------------------------------------------------------
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 Financial Data................ 5
Risk Factors.......................... 11
Dividend Policy....................... 15
Capitalization........................ 15
Selected Combined Financial Data...... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 29
The Company........................... 71
The Pending Acquisitions.............. 80
Management............................ 85
Certain Transactions.................. 89
Principal Stockholders................ 91
Ratio of Earnings to Fixed Charges.... 92
Market and Dividend Information....... 92
Description of Capital Stock.......... 93
Description of Common Stock
Warrants............................ 95
Description of Debt Securities........ 95
Shares Eligible for Future Sale....... 100
Selling Stockholders.................. 101
Legal Matters......................... 101
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(LOGO SERVICE EXPERTS)
$50,000,000
COMMON STOCK
COMMON STOCK WARRANTS
AND DEBT SECURITIES
--------------------
PROSPECTUS
--------------------
November 18, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 321
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
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<PAGE> 322
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>
2.1 -- Form of Agreement and Plan of Merger among certain of the Combining Companies, a
wholly-owned subsidiary of the Registrant and the Registrant
2.2 -- Form of Combination Agreement between certain of the Combining Companies and the
Registrant
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(c)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional Limited Liability
Company(c)
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.(c)
</TABLE>
II-2
<PAGE> 323
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
21 -- List of subsidiaries of the Registrant(d)
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) Filed previously.
(d) 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
II-3
<PAGE> 324
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.
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> 325
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Nashville, State of Tennessee, on November 15, 1996.
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to 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 November 15, 1996
- --------------------------------------------- Chief Executive Officer
Alan R. Sielbeck (principal executive
officer)
* President and Chief November 15, 1996
- --------------------------------------------- Operating Officer;
James D. Abrams Director
/s/ ANTHONY M. SCHOFIELD Chief Financial Officer November 15, 1996
- --------------------------------------------- (principal financial and
Anthony M. Schofield accounting officer)
* Director November 15, 1996
- ---------------------------------------------
Raymond J. DeRiggi
* Director November 15, 1996
- ---------------------------------------------
Norman T. Rolf
* Director November 15, 1996
- ---------------------------------------------
William G. Roth
Director
- ---------------------------------------------
Timothy G. Wallace
* /s/ ANTHONY M. SCHOFIELD November 15, 1996
- ---------------------------------------------
Anthony M. Schofield, Attorney-in-Fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October
___, 1996, by and among Service Experts, Inc., a Delaware corporation ("SEI"),
________________ Acquisition Sub, Inc., a Tennessee corporation and a wholly
owned subsidiary of SEI ("Sub"), and __________________, ______________
corporation (the "Company").
W I T N E S S E T H :
WHEREAS, the Company operates a heating, ventilating and air
conditioning ("HVAC") service and replacement business;
WHEREAS, the Boards of Directors of SEI and the Company each have
determined that a business combination between SEI and the Company is in the
best interests of their respective companies and shareholders and presents an
opportunity for their respective companies to achieve long-term strategic and
financial benefits, and, accordingly, have agreed to effect the merger provided
for herein upon the terms and subject to the conditions set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the
merger provided for herein shall qualify as a reorganization within the meaning
of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, SEI, Sub and the Company desire to make certain
representations, warranties and agreements in connection with the merger.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Section 1. The Merger.
(a) The Merger. Subject to the terms and
conditions of this Agreement, at the Effective Time (as defined in Section
1(c)), the Company shall be merged with and into Sub in accordance with this
Agreement, and the separate corporate existence of the Company shall thereupon
cease (the "Merger"). Sub shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation"). The Merger
shall have the effect set forth under the applicable provisions of the
Tennessee Business Corporation Act and the ___________ Business Corporation Act.
(b) The Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place, following
satisfaction of all of the conditions set forth in Sections 8, 9 and 10 hereof,
or the waiver thereof (the "Closing Date"), at the offices of Waller Lansden
Dortch & Davis, A Professional Limited Liability Company, in Nashville,
Tennessee, or at such other location as the parties shall mutually agree.
<PAGE> 2
(c) Effective Time. If all the conditions to the
Merger set forth in Sections 8, 9 and 10 shall have been fulfilled or waived in
accordance herewith and this Agreement shall not have been terminated as
provided in Section 11, the parties hereto shall cause Articles of Merger to be
properly executed and filed in accordance with the relevant provisions of the
Tennessee Business Corporation Act and the ___________ Business Corporation Act
on the Closing Date. The Merger shall become effective at the time of filing of
the Articles of Merger with the Secretaries of State of each of Tennessee and
_____________, or at such later time which the parties hereto shall have
agreed upon and designated in such filing as the effective time of the Merger
(the "Effective Time").
Section 2. Charter and Bylaws of the Surviving Corporation.
(a) Charter. The Charter of Sub in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
of the Surviving Corporation, until duly amended in accordance with applicable
law.
(b) Bylaws. The Bylaws of Sub in effect
immediately prior to the Effective Time shall be the Bylaws of the Surviving
Corporation, until duly amended in accordance with applicable law.
Section 3. Directors and Officers of the Surviving Corporation.
(a) Directors. The directors of Sub immediately
prior to the Effective Time shall be the directors of the Surviving Corporation
as of the Effective Time and until their successors are duly appointed or
elected in accordance with applicable law.
(b) Officers. The officers of Sub immediately
prior to the Effective Time shall be the officers of the Surviving Corporation
as of the Effective Time and until their successors are duly appointed or
elected in accordance with applicable law.
Section 4. Effect of the Merger on Securities of Sub and the
Company.
(a) Sub Stock. At the Effective Time, each share
of Common Stock, $.01 par value per share, of Sub outstanding immediately prior
to the Effective Time shall be converted into and exchanged for one validly
issued, fully paid and non-assessable share of Common Stock, $.01 par value, of
the Surviving Corporation.
(b) Company Securities.
(i) At the Effective Time, the shares of
Common Stock, $_____ par value per share (the "Company Common Stock"),
of the Company issued and outstanding immediately prior to the
Effective Time, other than shares to be cancelled pursuant to Section
4(b)(iii) and other than Dissenting Shares (as defined in Section
4(b)(iv), shall, by virtue of the Merger and without any action on the
part of the holder
2
<PAGE> 3
thereof, be converted into the right to receive shares of Common
Stock, $.01 par value per share (the "SEI Common Stock"), of SEI and
cash in accordance with Section 4(c) hereof.
(ii) As a result of the Merger and
without any action on the part of the holder thereof, at the Effective
Time all shares of Company Common Stock (other than Dissenting Shares)
shall cease to be outstanding and shall be cancelled and retired and
shall cease to exist, and each holder of shares of Company Common
Stock shall thereafter cease to have any rights with respect to such
shares of Company Common Stock, except the right to receive, without
interest, the SEI Common Stock and cash payable in accordance with
Section 4(c)(i) upon the surrender of a certificate representing such
shares of Company Common Stock.
(iii) Each share of Company Common Stock
issued and held in the Company's treasury at the Effective Time shall,
by virtue of the Merger, cease to be outstanding and shall be
cancelled and retired without payment of any consideration therefor.
(iv) Shares of Company Common Stock (the
"Dissenting Shares") held by a shareholder who has properly exercised
dissenters rights with respect thereto in accordance with Section
_______ of the ____________ Business Corporation Act shall not be
converted into shares of SEI Common Stock or cash, but shall, from and
after the Effective Time, represent only the right to receive such
consideration as may be determined to be due such dissenting
shareholder pursuant to the Business Corporation Act. From and after
the Effective Time, a shareholder of the Company who has properly
exercised such dissenters rights shall no longer retain any rights of
a shareholder of the Company, except those provided by the __________
Business Corporation Act.
(c) Purchase Price; Exchange of Certificates.
(i) As of the Effective Time and except
as provided in Section 4(c)(ii) below, SEI shall deliver to the
holders of shares of Company Common Stock (the "Shareholders") an
aggregate of $_______ (the "Purchase Price"), consisting of the
certificates representing shares of SEI Common Stock based on a per
share price of $_____ per share and the cash to be issued pursuant to
Section 4(b) and paid pursuant to this Section 4(c) in exchange for
certificates representing outstanding shares of Company Common Stock.
The Purchase Price shall be allocated among the Shareholders as set
forth on Schedule 4(c)(i) attached hereto.
(ii) An aggregate of 10% of the shares of
SEI Common Stock to be issued pursuant to this Section 4(c) shall be
held in escrow pursuant to the terms and conditions of the escrow
agreement attached hereto as Schedule 4(c)(ii) (the "Escrow
Agreement").
3
<PAGE> 4
(iii) At or after the Effective Time,
there shall be no transfers on the stock transfer books of the Company
of the shares of Company Common Stock which were outstanding
immediately prior to the Effective Time.
(iv) No fractional shares of SEI Common
Stock shall be issued pursuant hereto. In lieu of the issuance of any
fractional share of SEI Common Stock, cash adjustments will be paid to
holders in respect of any fractional share of SEI Common Stock that
would otherwise be issuable, and the amount of such cash adjustment
shall be equal to such fractional proportion of the "Average Price" of
a share of SEI Common Stock. The "Average Price" of a share of SEI
Common Stock shall be the average of the closing sales prices thereof
as quoted on The Nasdaq Stock Market's National Market (the "Nasdaq
National Market") (as reported by The Wall Street Journal or, if not
reported thereby, by another authoritative source) over the ten (10)
business days immediately preceding the Closing Date.
(d) Adjustment of Shares of Stock. In the event
that, subsequent to the date of this Agreement but prior to the Effective Time,
the outstanding shares of SEI Common Stock shall have been changed into a
different number of shares or a different class as a result of a stock split,
reverse stock split, stock dividend, subdivision, reclassification, split,
combination, exchange, recapitalization or other similar transaction, the
number of shares of SEI Common Stock to be delivered pursuant to this Agreement
shall be appropriately adjusted.
(e) Pre-Closing Adjustments to Purchase Price. As
promptly as practicable after the date hereof, the parties shall make initial
adjustments to the Purchase Price (the "Pre-Closing Adjustments") based on the
differences between (i) the Company's net income for the 12 month period ended
______________ (the "Valuation Period"), as presented in the Company's
financial statements for such period, with such adjustments as are set forth on
Schedule 4(e) attached hereto, and (ii) the Company's net income for the
Valuation Period, as presented in the "Final Valuation Statement" with such
adjustments as are deemed appropriate by SEI's independent certified public
accountants. SEI will cause a restated statement of income for the Valuation
Period (the "Final Valuation Statement") to be prepared utilizing any
adjustments identified as a result of the audit and/or review of the financial
statements of the Company by SEI's independent certified public accountants.
SEI shall deliver a schedule to the Shareholders detailing any Pre-Closing
Adjustments and describing in detail the differences between the Purchase
Price, as adjusted, and the amount set forth as the Purchase Price in this
Agreement. Such schedule shall be delivered to the Shareholders with a copy of
the Final Valuation Statement. The Final Valuation Statement shall be prepared
in accordance with generally accepted accounting principles.
(f) Post Closing Adjustments to Purchase Price.
(i) Promptly following the Closing Date,
SEI will cause to be prepared by its independent certified public
accountants a balance sheet of the Company as of the close of business
on the Closing Date (the "Closing Balance Sheet"). SEI shall
4
<PAGE> 5
furnish to the Shareholders the Closing Balance Sheet within forty-five (45)
days after the Closing Date.
(ii) Subject to the provisions of Section
4(f)(iii) below, within ninety (90) days after the Closing Date (or as
soon thereafter as possible), the parties shall make final adjustments
to the Purchase Price (the "Post Closing Adjustments") based on the
following:
(A) In the event the Company's
shareholders' equity (as presented in the Company's Closing
Balance Sheet) as a percentage of net sales (as presented in
the Company's Final Valuation Statement) is less than ten
percent (10%), the Purchase Price will be reduced by an amount
equal to the capital contribution required to result in
shareholders' equity as a percentage of net sales equaling ten
percent (10%).
(B) In the event the Company's
shareholders' equity (as presented in the Company's Closing
Balance Sheet) as a percentage of net sales (as presented in
the Company's Final Valuation Statement) is greater than ten
percent (10%), the Purchase Price will be increased by an
amount equal to the distribution required to result in
shareholders' equity as a percentage of net sales equaling ten
percent (10%). Any such increase in Purchase Price shall be
offset by the reduction in Purchase Price, if any, set forth
in subparagraph (D) below.
(C) In the event a Shareholder is
indebted to the Company, the Purchase Price payable to such
Shareholder will be reduced by an amount equal to the
indebtedness owing to the Company at the time of the Closing.
Any such reduction shall first be applied to the cash portion
of the Purchase Price and then to the shares of the SEI Common
Stock.
(D) In the event the Company's
Closing Balance Sheet includes any indebtedness, other than
indebtedness incurred in connection with the purchase of fixed
assets subsequent to the Valuation Period, the Purchase Price
will be reduced by an amount equal to the indebtedness
outstanding on the Closing Date. Any such reduction shall
first be applied to the cash portion of the Purchase Price and
then to the shares of the SEI Common Stock.
(E) SEI shall deliver a schedule to
the Shareholders detailing any Post Closing Adjustments and
detailing the differences between the Purchase Price, as
adjusted, and the amount paid as the Purchase Price on the
Closing Date. Such schedule shall be delivered to the
Shareholders with a copy of the Closing Balance Sheet.
(iii) Should the Shareholders dispute the
Post Closing Adjustments proposed by SEI or the accuracy of the
Closing Balance Sheet, they shall
5
<PAGE> 6
promptly (and in no event later than twenty (20) days after receipt of
the Closing Balance Sheet and the required schedule of Post Closing
Adjustments) advise SEI in writing. If after thirty (30) days after
delivery of the Closing Balance Sheet, SEI and the Shareholders are
unable to agree upon the amount of the Post Closing Adjustments, the
Shareholders and SEI shall engage any "Big Six" certified public
accounting firm not under contract with either the Company or SEI (the
"Accountants") to review the Closing Balance Sheet and the proposed
Post Closing Adjustments and determine the amount thereof, such
determination to be made as soon as practicable. In making such review
and determination, the Accountants shall utilize the terms and
provisions of this Agreement including, without limitation, the
provisions of Section 4(f)(v) hereof. The decision of the Accountants
shall be binding on both the Shareholders and SEI. Each of SEI and the
Shareholders shall pay one-half the reasonable expenses of engagement
of the Accountants.
(iv) Within thirty (30) days of the
Shareholders' receipt of the Closing Balance Sheet and the required
schedule of Post Closing Adjustments (or, if the Shareholders dispute
the Post Closing Adjustments, within ten (10) days of the resolution
or determination of the adjustments in accordance with Section
4(f)(iii) above), either (A) the Shareholders shall pay SEI in cash or
in the form of shares of SEI Common Stock (based on a price of $______
per share) the amount by which the Purchase Price paid on the Closing
Date exceeds the Purchase Price, as adjusted, or (B) SEI shall pay the
Company in cash or in the form of shares of SEI Common Stock (based on
a price of $______ per share) the amount by which the Purchase Price
paid on the Closing Date is less than the Purchase Price, as adjusted.
(v) The Closing Balance Sheet shall be
prepared in accordance with generally accepted accounting principles.
Section 5. Representations and Warranties of the Company. The
Company represents and warrants to SEI as follows as of the date hereof and
also as of the Closing Date:
(a) Corporate Organization; Governing Documents
of the Company.
(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of its
state of incorporation. The Company has all requisite corporate power
and authority to own or lease all of its properties or assets and
holds all licenses, permits and other required authorizations from
governmental authorities necessary to conduct its business as it is
now being conducted. The Company is duly qualified to do business and
is in good standing in the jurisdictions set forth in Schedule 5(a),
which includes every jurisdiction in which the failure to be so
qualified or in good standing would have a material adverse effect on
(A) the Company's ability to perform its obligations under this
Agreement and all accompanying documents to be executed and delivered
by the Company in connection with the Merger (the "Transaction
Documents") or (B) the assets, results of operations or prospects of
the Company.
6
<PAGE> 7
(ii) A copy of the Company's Articles of
Incorporation and Bylaws, as amended to the date hereof, the books of
account, minute books, stock record books and other records of the
Company, all of which have been made available to SEI, are complete
and correct and have been maintained in accordance with sound business
practices, including the maintenance of an adequate system of internal
controls. The minute books of the Company contain accurate and
complete records of all meetings of, and corporate action taken by,
the Shareholders, the Board of Directors and committees of the Board
of Directors of the Company, and no meeting of any such Shareholders,
Board of Directors or committee has been held for which minutes have
not been prepared and are not contained in such minute books.
(b) Capitalization.
(i) The authorized capital stock of the
Company consists of ________ shares of Company Common Stock, ________
shares of which are issued and outstanding as of the date hereof.
There are no other classes of securities of the Company outstanding.
All of the shares of Company Common Stock are listed and held of
record as indicated on Schedule 5(b) and have been duly authorized and
validly issued and are fully paid and nonassessable. There are no
contracts relating to the issuance, sale, transfer or registration of
the Company Common Stock or any other securities of the Company. There
are no options, warrants, preemptive rights or other rights to
purchase the shares of Company Common Stock or any other securities of
the Company. None of the shares of Company Common Stock or other
securities of the Company were issued in violation of the Securities
Act or preemptive rights of any past or present holder of the Company
Common Stock. There has been no transaction or action taken with
respect to the Company Common Stock in contemplation of the Merger
that would prevent the Company from accounting for the Merger as a
reorganization within the meaning of Section 368 of the Code.
(ii) There is no plan or intention by any
of the Shareholders who own one percent (1%) or more of the Company
Common Stock, and to the best knowledge of management of the Company,
there is no plan or intention on the part of the remaining
Shareholders to sell, exchange or otherwise dispose of a number of
shares of SEI Common Stock to be received by them in the Merger that
would reduce the Shareholders' ownership of SEI Common Stock to a
number of shares having a value, as of the Effective Time, of less
than seventy-five percent (75%) of the value of all of the formerly
outstanding shares of Company Common Stock as of the Effective Time.
(c) Authorization and Validity. The Company has
full corporate power and authority to execute and deliver this Agreement and,
subject to the approval of the Shareholders, to consummate the transactions
contemplated hereby. The Board of Directors of the Company has duly and validly
approved this Agreement and the transactions contemplated hereby, has
authorized the execution and delivery of this Agreement, has directed that this
Agreement and the transactions contemplated hereby be submitted to the
Shareholders for
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approval at a meeting of such Shareholders and, except for the adoption of this
Agreement by the Shareholders, no other corporate proceedings on the part of
the Company are necessary to consummate the transactions contemplated hereby.
This Agreement, when executed, will constitute the legal, valid and binding
obligation of the Company, enforceable against it in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws and subject to general principles of
equity (regardless of whether such enforceability is considered in a proceeding
in equity or at law).
(d) No Defaults; Absence of Conflicts. The
Company is not in default under, nor has any event occurred which, with the
lapse of time or action by a third party, could result in a default under, any
outstanding indenture, mortgage, contract or agreement to which the Company is
a party. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement will not (i)
violate any provision of, or result in the breach of, or constitute a default
under, or conflict with, (A) any terms or provisions of the Articles of
Incorporation or Bylaws of the Company or any resolution of the Company's Board
of Directors, (B) any law the violation of which would result in a material
liability to the Company, or (C) any order, writ, injunction or decree of any
court, governmental agency or arbitration tribunal; (ii) constitute a violation
of or a default under, or a conflict with, any term or provision of any
contract, commitment, indenture, lease or other agreement, or any other
restriction of any kind to which the Company is a party or by which the Company
is bound; (iii) cause, or give any party grounds to cause (with or without
notice, the passage of time or both) the maturity of any liability or
obligation of the Company to be accelerated, or increase any such liability or
obligation; or (iv) create any lien, encumbrance or restriction upon any of the
assets or properties of the Company.
(e) Subsidiaries, Investments and Predecessors.
Except as set forth on Schedule 5(e), the Company has not owned and does not
currently own, directly or indirectly, beneficially or equitably, any capital
stock or other equity, ownership or proprietary interest in any corporation,
partnership, limited liability company, association, trust, joint venture or
other entity. Set forth on Schedule 5(e) is a listing of all predecessor
companies of the Company, including the names of any entities from whom the
Company previously acquired material assets, and any other entity of which the
Company has been a subsidiary or division. Except as listed on Schedule 5(e),
the Company has not sold or disposed of, by way of asset sale, stock sale,
spin-off or otherwise, any material assets or business of the Company.
(f) Financial Statements. The financial
statements of the Company for the fiscal years ended December 31, 1993, 1994
and 1995 and the audit report thereon of _______________, independent auditors,
copies of which are attached hereto as Schedule 5(f)(i), are true, correct and
complete, have been prepared in accordance with generally accepted accounting
principles, and fairly and accurately present the financial and business
condition of the Company as of the dates thereof and the results of the
operations of the Company for the periods covered thereby. The financial
statements set forth in Schedule 5(f)(i) are collectively, together with the
notes thereto, referred to as the "Financial Statements."
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<PAGE> 9
Except as reflected on Schedule 5(f)(ii), the Financial Statements accurately
reflect or adequately provide for all claims against, and all debts and
liabilities of, the Company, fixed or contingent, existing at the dates
thereof.
(g) Accounts Receivable and Payable. The accounts
receivable reflected on the Financial Statements arose in the ordinary course
of business and, except as reserved against on the Financial Statements, are
collectible in the ordinary course of business and consistent with past
practices, free of any claims, rights or defenses of any account debtor. Except
as set forth on Schedule 5(g), no accounts payable of the Company are, at this
date, over 45 days old and no accounts payable of the Company will be over 45
days old at the Closing Date.
(h) Absence of Certain Changes. Except as
disclosed on Schedule 5(h) or as reflected on the Financial Statements, the
Company has not, since December 31, 1995, except in the ordinary course of
business consistent with past practice:
(i) changed the Company's authorized or
issued capital stock; granted any stock option or right to purchase
shares of capital stock of the Company; issued any security
convertible into such capital stock; granted any registration rights;
purchased, redeemed, retired, or otherwise acquired any shares of any
such capital stock; or declared or paid any dividend or other
distribution or payment in respect of shares of capital stock;
(ii) amended the Articles of
Incorporation, Bylaws or other organizational documents of the
Company;
(iii) incurred any indebtedness or other
liabilities (whether accrued, absolute, contingent or otherwise),
guaranteed any indebtedness or sold any assets;
(iv) suffered any damage, destruction or
loss to any of the tangible assets of the Company, whether or not
covered by insurance;
(v) increased the regular rate of
compensation payable by it to any employee or increased such
compensation by bonus, percentage, compensation service award or
similar arrangement theretofore in effect for the benefit of any of
its employees, and no such increase is required;
(vi) hired, committed to hire or
terminated any employee;
(vii) established or agreed to establish
any pension, retirement or welfare plan for the benefit of its
employees not theretofore in effect;
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<PAGE> 10
(viii) experienced any labor organizational
efforts, strikes or formal complaints or entered into any collective
bargaining agreements with any union;
(ix) suffered any change in its financial
condition, assets, liabilities, business or prospects or suffered any
other event or condition of any character which individually or in the
aggregate has or might reasonably be expected to have a material
adverse effect on its business or prospects;
(x) entered into any commitments or
transactions or made any capital expenditures involving aggregate
amount or value in excess of $25,000 or made any single capital
expenditure which exceeded $10,000;
(xi) disposed of any of its assets,
written down the value of any assets, written off as uncollectible any
accounts receivable or revalued any of its assets;
(xii) subjected any of its assets,
tangible or intangible, to any lien, encumbrance or restriction
whatsoever, except for liens for current property taxes not yet due
and payable;
(xiii) paid, discharged or satisfied any
claims, liabilities or obligations (absolute, accrued, contingent or
otherwise);
(xiv) entered into, terminated or received
notice of termination of (A) any license, distributorship, dealer,
sales representative, joint venture, credit, or similar agreement, or
(B) any contract or transaction involving a total remaining commitment
by or to the Company of at least $10,000;
(xv) cancelled or waived any claims or
rights with a value to the Company in excess of $10,000;
(xvi) made any change in any method of
accounting or accounting practice;
(xvii) canceled, or failed to continue,
insurance coverage; or
(xviii) agreed, whether in writing or
otherwise, to take any action described in this Section 5(h).
(i) Ownership of Properties. Schedule 5(i)(i)
sets forth a list of all of the material assets of the Company owned, leased or
used by the Company in connection with the operation of its business (the
"Assets"), including, as to real property owned or leased by the Company (the
"Real Property"), the legal description of the Real Property. The present
zoning, subdivision, building and other ordinances and regulations applicable
to the Real Property permit the continued operation, use, occupancy and
enjoyment of the Real Property
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consistent with past practices, and the Company is in compliance with, and has
received no notices of violations of, any applicable zoning, subdivision or
building regulation, ordinance or other law, regulation, or requirement. Except
as set forth on Schedule 5(i)(ii), the Company has good and marketable title to
all of the Assets owned by it including furniture, fixtures and equipment,
fixed assets and inventory, and all contract rights and intangible assets, and
good and valid leasehold estates in all of the Assets leased by it, free and
clear of mortgages, security interests, liens, defects, charges, encumbrances,
restrictions and rights of third parties (excluding accounts payable in the
ordinary course of business). Schedule 5(i)(ii) also includes a UCC lien search
for the Company showing security interests of record relating to the Assets in
every place where such security interests are legally required to be filed and
include copies of all such financing statements. All equipment and other
personal property constituting a portion of the Assets is in good operating
condition and repair, ordinary wear and tear excepted. The Assets constitute
all of the operating assets of the Company necessary or appropriate for the
continued operation of the business of the Company. The Company has sufficient
title in and to the Assets necessary or advisable to operate and conduct the
business of the Company in the same fashion as the Company was conducting such
business.
(j) Taxes. The Company has timely filed all
federal, state and local tax returns or information returns required to be
filed by it. All of such returns have been prepared accurately and filed in
accordance with applicable laws and regulations. Except as set forth on
Schedule 5(j), the Company has paid all taxes and assessments (including,
without limitation, income, excise, unemployment, social security, occupation,
franchise, property, sales and use taxes, import duties or charges, and all
penalties and interest in respect thereof) due and payable by it. The Company
and any predecessors in interest have withheld or collected from each payment
made to each of their employees the amount of all taxes required to be withheld
or collected therefrom, and the Company and any predecessors in interest have
paid the same to the proper tax depositories or collecting authorities. Except
as set forth on Schedule 5(j), the Company has not (i) been audited by any
taxing authority, (ii) received notice that any taxing authority contemplates
such an audit, (iii) signed any extension agreement with any taxing authority,
(iv) received notice of any deficiencies, adjustments, assessments or other
charges with respect to taxes paid or payable or (v) made any payment, or
provided any benefit, to any officer, employee, former officer or former
employee that is not allowable as a deduction under the Code or the regulations
thereunder.
(k) Insurance. The Company maintains in full
force and effect, with no premium arrearages, insurance policies bearing the
numbers, for the terms, with the companies, in the amounts and providing the
coverage set forth on Schedule 5(k). True and correct copies of all such
policies, and all endorsements thereto, have been delivered to SEI. All such
policies are valid, outstanding and enforceable and taken together, provide
adequate insurance coverage for the Assets and operations of the Company and
will continue in full force and effect following the consummation of the
Merger. Except as set forth on
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Schedule 5(k), there are no pending claims against such insurance by the
Company as to which insurers are defending under reservation of rights or have
denied liability, and except as set forth on Schedule 5(k), there exists no
claim under such insurance that has not been properly filed by the Company.
(l) Environmental Conditions.
(i) The Company is currently in
compliance with all Environmental Laws (as defined below), which
compliance includes, without limitation, the possession by the Company
of all permits and other governmental authorization required under
applicable Environmental Laws to operate the business as currently
operated, and is in compliance with the terms and conditions thereof.
(ii) The Company has not stored any
Hazardous Substances (as defined below) on any of the Real Property,
except in compliance with applicable Environmental Laws.
(iii) The Company has not disposed of or
released any Hazardous Substances on any of the Real Property.
(iv) The Company has not utilized any
transporters or disposal facilities for the transport or disposal of
Hazardous Substances except as indicated on Schedule 5(l)(iv).
(v) The Company has not received any
communication (written or oral), whether from a governmental
authority, citizen's group, employee or otherwise, that alleges that
such entity is not in full compliance with Environmental Laws, and
there are no circumstances that may prevent or interfere with such
full compliance in the future. There is no Environmental Claim (as
defined below) pending or threatened against the Company.
(vi) There have been no actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or
disposal of any Hazardous Substances that could form the basis of any
Environmental Claim against the Company, and the Company knows of no
such actions, activities, circumstances, conditions, events or
incidents.
(vii) The Real Property and, to the best
knowledge of the Company, adjoining properties, have never been
utilized for any industrial or commercial operation involving any
Hazardous Substance except in the ordinary course of business.
The following terms shall have the following
meanings:
"Environmental Claim" means any claim,
action, cause of action, investigation or notice (written or oral) by
any person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup
costs,
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<PAGE> 13
governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) arising out of, based on or
resulting from (a) the presence, or release into the environment, of
Hazardous Substances at any location which is or has been owned,
leased, operated or utilized by the Company or (b) circumstances
forming the basis of any violation, or alleged violation, of any
Environmental Law.
"Environmental Laws" means the federal,
state, regional, county or local environmental, health or safety laws,
regulations, ordinances, rules and policies and common law in effect
on the date hereof and the Closing Date relating to the use,
refinement, handling, treatment, removal, storage, production,
manufacture, transportation or disposal, emissions, discharges,
releases or threatened releases of Hazardous Substances, or otherwise
relating to protection of human health or the environment (including,
without limitation, ambient air, surface water, ground water, land
surface or subsurface strata), as the same may be amended or modified
to the date hereof and the Closing Date.
"Hazardous Substances" means any toxic or
hazardous waste, pollutants or substances, including, without
limitations, asbestos containing materials ("ACMs"), polychlorinated
biphenyls ("PCBs"), petroleum products, byproducts, or other
hydrocarbon substances, substances defined or listed as a "hazardous
waste", "hazardous substance", "toxic substance", "toxic pollutant",
or similarly identified substance or mixture, in or pursuant to any
Environmental Law and medical or infectious waste.
(m) Contracts and Commitments. Except as
described on Schedule 5(m) hereto, the Company is not a party or subject to any
of the following (whether written or oral, express or implied): (i) any
agreement restricting competition or (ii) any commitments or obligations,
contingent or otherwise, under any contract or agreement (A) for the purchase
or sale of supplies, services or other items in excess of $10,000 in any one
instance, (B) for the purchase or sale of any equipment or machinery which is
capitalized or which is expensed and in excess of $10,000, (C) for the
performance of services for others in excess of $10,000 in any one instance or
for a period of more than 90 days, (D) for the lease of any property, tangible
or intangible, (E) with any Shareholder, partner, officer or director of the
Company or any affiliate of such persons, (F) not in the ordinary course of
business or (G) for any power of attorney, whether limited or general, granted
by or to the Company. The Company has delivered to SEI true and complete copies
of all of the contracts, leases and agreements described on Schedule 5(m) (the
"Company Agreements"). Except as noted in such Schedule, the Company Agreements
are valid and in full force and effect, there has been no threatened
cancellation thereof and there are no outstanding disputes thereunder; each is
with unrelated third parties and was entered into on an arms-length basis in
the ordinary course of business; all will continue to be binding in accordance
with their terms after consummation of the transactions contemplated herein;
and to the knowledge of the Company, there is no pending or threatened
bankruptcy, insolvency or similar proceeding with respect to any other party to
the Company Agreements. There are no contracts, leases, agreements or other
instruments to which the
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Company is a party or is bound (other than insurance policies) which could
either singularly or in the aggregate have an adverse effect on the value of
the Company.
(n) No Undisclosed Liabilities. With the
exception of the liabilities set forth on Schedule 5(n) or as reflected on the
Financial Statements, the Company does not have any material liabilities or
obligations of any nature, whether absolute, accrued, contingent or otherwise
or whether due or to become due, and the Company knows or has no reason to know
of any basis for the assertion against the Company of any such liability or
obligation of any nature not described in Schedule 5(n).
(o) Employees and Labor Matters.
(i) Schedule 5(o) contains a complete
and accurate list of the following information for each employee or
director of the Company: name; job title; current compensation paid or
payable and any change in compensation since December 31, 1995;
vacation accrued; and service credited for purposes of vesting and
eligibility to participate under any pension, retirement,
profit-sharing, thrift-savings, deferred compensation, stock bonus,
stock option, cash bonus, employee stock ownership (including
investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, or any other employee
benefit plan or any director plan.
(ii) No employee or director of the
Company is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee or director and
any other person or entity that in any way adversely affects or will
affect (A) the performance of his duties as an employee or director of
the Company, or (B) the ability of the Company to conduct its
business. To the Company's knowledge, no director, officer, or other
key employee of the Company intends to terminate his employment with
the Company.
(iii) The Company is in compliance in all
material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, wages and
hours, occupational safety and health, including laws concerning
unfair labor practices within the meaning of Section 8 of the National
Labor Relations Act, and the employment of non-residents under the
immigration Reform and Control Act of 1986.
(iv) Except as disclosed on Schedule 5(o),
(A) there are no charges,
governmental audits, investigations, administrative
proceedings or complaints concerning the Company's employment
practices pending or, to the knowledge of the Company,
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threatened before any federal, state or local agency or court,
and, to the knowledge of the Company, no basis for any such
matter exists;
(B) the Company is not a party to
any union or collective bargaining agreement, and, to the
knowledge of the Company, no union attempts to organize the
employees of the Company have been made, nor are any such
attempts now threatened; and
(C) the Company has not experienced
any organized slowdown, work interruption, strike or work
stoppage by its employees.
(p) Employee Benefit Matters. The employee
benefit plans and agreements described in Schedule 5(p) hereto are the only
employee benefit plans and agreements maintained by the Company for the benefit
of its Shareholders, officers, directors, employees, former employees, or
independent contractors, including, without limitation, (i) profit sharing,
pension, ESOP, 401(k) or other retirement plans or programs, (ii) current and
deferred compensation, severance, vacation, stock purchase, stock option, bonus
and incentive compensation benefits and (iii) medical, hospital, life, health,
accident, disability, death and other fringe and welfare benefits, including
any split-dollar life insurance policies, all of which plans, programs,
practices, policies and other individual and group arrangements and agreements,
including any unwritten compensation, fringe benefit, payroll or employment
practices, procedures or policies of any kind or description are hereinafter
referred to as the "Benefit Plans." Except as disclosed on Schedule 5(p), there
are no contributions or payments due with respect to any of the Benefit Plans,
nor will any such contributions or payments be due or required to be paid on or
prior to the Closing Date. Each Benefit Plan of the Company has been operated
and administered in substantial compliance with the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"), and the provisions of the
Code applicable to it. No Benefit Plan of the Company that is subject to the
minimum funding standards of ERISA or the Code, if any, has incurred any
accumulated funding deficiency within the meaning of ERISA or the Code. All
contributions with respect to a Benefit Plan of the Company that is subject to
Code Section 412 or ERISA Section 302 have been timely made and there is no
lien or expected to be a lien under Code Section 412(n) or ERISA Section 302(f)
or tax under Code Section 4971. No Benefit Plan of the Company has a "liquidity
shortfall" as defined in Code Section 412(m)(5). The Company is not subject to
and cannot reasonably be expected to become subject to a lien under Code
Section 401(a)(29). No event has occurred in connection with a Benefit Plan of
the Company that could result in liability to the Company under Title IV of
ERISA. The Company has not incurred any liability to the Pension Benefit
Guaranty Corporation in connection with any Benefit Plan of the Company which
is subject to Title IV of ERISA, if any. The assets of each Benefit Plan of the
Company that is subject to Title IV of ERISA, if any, are sufficient to provide
all "benefit liabilities" (as defined in ERISA Section 4001(a)(16)) under such
Benefit Plan if such Benefit Plan terminated, and are also sufficient to
provide all other benefits due under the Benefit Plan (including, but not
limited to, ancillary, disability, shutdown, early retirement and welfare
benefits). The Company has not had an "obligation to contribute" (as defined in
ERISA Section 4212) to a "multi-employer pension
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plan" (as defined in ERISA Sections 4001(a)(3) and 3(37)(A)) at any time. No
event which constitutes a reportable event as defined in Section 4043 of ERISA
has occurred or is continuing with respect to any Benefit Plan covered by
ERISA. No facts exist which will result in a material increase in the premium
costs of any Benefit Plan for which benefits are insured or a material increase
in benefit costs of any Benefit Plan which provides self-insured benefits. No
"prohibited transaction" (as defined in ERISA Section 406 or Code Section 4975)
has occurred with respect to any Benefit Plan. None of the Benefit Plans has
any current or projected liability in respect of post-employment or
post-retirement health or medical or life insurance benefits for former or
retired employees of the Company, except as required to avoid excise taxes
under Code Section 4980B. All Benefit Plans subject to Code Section 4980B or
Part 6 of Title I of ERISA have been maintained in compliance with the
requirements of Code Section 4980B and Part 6 of Title I of ERISA. There is no
contract, agreement, plan or arrangement covering any employee or former
employee of the Company that could result in the payment of any amount that
would not be deductible under Code Sections 162(m) or 280G. As of the Closing
Date, the Company has no material liabilities under any Benefit Plan that is
not reflected in the Financial Statements.
(q) Trademarks, Trade Names, Etc. Set forth on
Schedule 5(q) is a description of each trademark, trade name, service mark,
patent or copyright held by the Company and any current registration or
application with respect thereto. The Company is not currently in receipt of
any notice of any violation of, and has no reason to believe that the Company's
operations are violating the rights of others with respect to any such matter,
and the Company has taken reasonable measures to protect its rights with
respect to any such matters as are proprietary to the Company.
(r) Litigation. Except as set forth in Schedule
5(r), there is no litigation, arbitration, governmental claim, investigation or
proceeding pending or threatened against the Company, at law or in equity,
before any court, arbitration tribunal or governmental agency. No such
proceeding set forth in Schedule 5(r) concerns the ownership or other rights
with respect to the Company Common Stock. The Company knows of no facts on
which material claims may be hereafter made against the Company. All claims and
litigation against the Company are fully covered by insurance, except as
indicated on Schedule 5(r).
(s) Compliance with Laws, Regulations and Court
Orders. There is not outstanding or threatened any order, writ, injunction or
decree of any court, governmental agency or arbitration tribunal against or
affecting the Company, its Shareholders or the Company Common Stock. The
Company is in compliance with all applicable federal, state and local laws,
regulations and administrative orders, including without limitation those
concerning the sale of insurance in connection with the warranties provided for
pursuant to the Company's service and maintenance agreements, and have received
no notices of alleged violations thereof except as disclosed in Schedule 5(s)
hereof. Neither the Company, nor, to the knowledge of the Company, any
licensed technician or other individual affiliated with the Company has, during
the past three (3) years, been the subject of any inspection, investigation,
survey, audit, monitoring or other form of review by any governmental
regulatory entity, trade association,
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professional review organization, accrediting organization or certifying agency
for the purpose of any alleged improper activity on the part of such
individual, nor has the Company received any notice of deficiency in connection
with its operation. No governmental authorities are currently conducting
proceedings against the Company and no such investigation or proceeding is
pending or being threatened.
(t) Certain Payments. Neither the Company nor any
Shareholder, director, officer, agent, or employee of the Company, or any other
person associated with or acting for or on behalf of the Company, has directly
or indirectly (i) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback or other payment to any person, private or public, regardless
of form, whether in money, property, or services (A) to obtain favorable
treatment in securing business, (B) to pay for favorable treatment for business
secured, (C) to obtain special concessions or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company, or
(D) in violation of any law, or (ii) established or maintained any fund or
asset that has not been recorded in the books and records of the Company.
(u) Consents and Approvals. Except as set forth
on Schedule 5(u), no consents, approvals, authorizations or orders of third
parties, including governmental authorities, are necessary for the
authorization, execution and performance by the Company of this Agreement.
(v) No Broker's Fees. The Company has no
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
(w) Disclosure.
(i) No representation or warranty made
herein by the Company, nor in any statement, certificate or instrument
to be furnished to SEI by the Company pursuant to any Transaction
Document, contains or will contain any untrue statement of material
fact or omits or will omit to state a material fact necessary to make
these statements contained herein and therein not misleading.
(ii) There is no fact known to the
Company that has specific application to the Company (other than
general economic or industry conditions) and that materially adversely
affects the Company Common Stock, the Assets or the business,
prospects, financial condition, or results of operations of the
Company that has not been set forth in this Agreement.
(x) Reliance on Representations. The Company
understands and intends that SEI and its management will rely upon the
representations of the Company made in this Agreement, and they are entitled to
rely upon each and all of the same without further inquiry.
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Section 6. Representations and Warranties of SEI and Sub. SEI
and Sub hereby represent and warrant to the Company as follows as of the date
hereof and as of the Closing Date:
(a) Corporate Organization. Each of SEI and Sub
is a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation, has all requisite corporate power and
authority to execute and deliver this Agreement and holds all licenses, permits
and other required authorizations from governmental authorities necessary to
conduct its business as it is now being conducted.
(b) Capitalization. As of the date hereof, SEI's
authorized capital stock consists of (i) 30,000,000 shares of SEI Common Stock,
8,576,610 of which are issued and outstanding and (ii) 10,000,000 shares of
Preferred Stock, $.01 par value per share, none of which are issued and
outstanding. All issued and outstanding shares of SEI Common Stock have been
duly and validly authorized, issued, fully paid and nonassessable. No
shareholder of SEI has any preemptive rights with respect to the issuance of
shares of SEI Common Stock.
(c) Authorization and Validity. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized and approved by all
necessary corporate action. This Agreement, when executed, will constitute the
legal, valid and binding obligation of SEI and Sub, enforceable against each in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(d) Absence of Conflicting Agreements or Required
Consents. The execution, delivery and performance by SEI and Sub of the
Transaction Documents to be executed and delivered by each (i) do not require
the consent of or notice to any governmental or regulatory authority or any
other third party; (ii) will not conflict with any provision of SEI's Restated
Certificate of Incorporation or Bylaws or Sub's Charter or Bylaws; (iii) will
not conflict with or result in a violation of any law, ordinance regulation,
ruling, judgement, order or injunction of any court or governmental
instrumentality to which SEI or Sub is a party or by which SEI or Sub or any of
their properties are bound; (iv) will not conflict with, constitute grounds for
termination of, result in a breach of, constitute a default under, require any
notice under, or accelerate or permit the acceleration of any performance
required by the terms of any agreement, instrument, license or permit to which
SEI or Sub is a party or by which any of their properties are bound; and (v)
will not create any lien, encumbrance or restriction upon any of the assets or
properties of SEI or Sub.
(e) Governing Documents. True and correct copies
of the organizational documents and all amendments thereto of SEI and Sub
(certified by the applicable Secretary of State) and copies of the Bylaws of
SEI and Sub have been provided to the Company. The Company has previously been
provided with access to SEI's and Sub's minutes,
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and such minutes accurately reflect all proceedings of the shareholders and
board of directors of SEI and Sub (and all committees thereof). The stock
record books of SEI and Sub, which have been made available to the Company for
review, contain true, complete and accurate records of the stock ownership of
SEI and Sub.
(f) Litigation and Claims. There are no claims,
lawsuits, actions, arbitrations, administrative or other proceedings,
governmental investigations or inquiries pending or threatened against SEI or
Sub affecting the performance by SEI or Sub of the Transaction Documents and
there is no basis for any such action or any state of facts or occurrence of
any event which might give rise to the foregoing.
(g) No Broker's Fees. Except as set forth on
Schedule 6(g), SEI and Sub do not have any liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement.
(h) Statements True and Correct. No
representation or warranty made herein by SEI or Sub, nor in any statement,
certificate or instrument to be furnished to the Company by SEI or Sub pursuant
to any Transaction Document, contains or will contain any untrue statement of
material fact or omits or will omit to state a material fact necessary to make
these statements contained herein and therein not misleading.
Section 7. Additional Covenants and Agreements.
(a) Access to Information. The Company shall
accord to SEI and Sub, their counsel, accountants and other representatives
full access throughout the period prior to the Closing to all of the
properties, books, records, contracts, commitments and records of the Company
and furnish SEI and Sub during such period with all such information concerning
the business and properties of the Company as SEI and Sub and their
representatives reasonably may request. Such parties shall also be allowed
access, upon reasonable notice, to consult with the officers, employees,
accountants, counsel and agents of the Company in connection with such
investigation of the properties and business of the Company. In addition, at
all times prior to the Closing, SEI and Sub will afford to the Company and
their representatives access, upon reasonable notice, to all of SEI's and Sub's
properties, books and records as the Company may reasonably request. No such
investigation shall diminish or otherwise affect any of the representations,
warranties, covenants or agreements of any party under the Agreement.
(b) Affirmative Covenants of the Company. During
the period from the date of this Agreement to the Closing Date, the Company
will (i) continue to operate its business in the usual, regular, and ordinary
course of business, consistent with past practices, (ii) obtain the written
approval of SEI prior to making any capital expenditure in excess of $25,000 in
the aggregate, (iii) maintain in effect adequate casualty, public liability,
professional malpractice and workers' compensation insurance coverage, (iv)
maintain the Assets in their present condition, (v) comply with all laws and
regulations of governmental agencies or authorities, including applicable tax
laws and regulations, (vi) operate its business in the manner
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<PAGE> 20
necessary to maintain its reputation and the goodwill of its customers,
vendors, lessors and others having business relations with the Company, and
(vii) to keep in force all licenses, permits and approvals necessary to the
operation of its business as now conducted.
(c) Negative Covenants of the Company. During the
period from the date of this Agreement to the Closing Date, the Company will
not, without the prior written consent of SEI, and unless otherwise expressly
permitted herein:
(i) enter into, renew, amend, breach or
terminate any contract or agreement to which it is a party other than
in the ordinary course of business;
(ii) increase the salary of or declare or
pay any bonus to any employee;
(iii) incur any additional debt obligation
or other obligation for borrowed money in excess of an aggregate of
$25,000 except in the ordinary course of business of the Company
consistent with past practices, or impose, or suffer the imposition,
on any Asset of the Company of any lien or permit any such lien to
exist;
(iv) issue, sell, repurchase, redeem, or
otherwise acquire or exchange, directly or indirectly, any share of
Company Common Stock or any securities convertible into any share of
Company Common Stock, or declare or pay any dividend or make any other
distribution in respect of the share of Company Common Stock;
(v) purchase or acquire any of the
Assets, whether real or personal, tangible or intangible, or sell or
dispose of any of the Assets, whether real or personal, tangible or
intangible, except in the ordinary course of business and consistent
with past practices;
(vi) purchase any securities or make any
material investment, either by purchase of stock or other securities,
contributions to capital, asset transfers, or purchase of any assets,
in any entity, or otherwise acquire direct or indirect control over
any other entity;
(vii) except in the ordinary course of
business (and, even if in the ordinary course of business, then not in
an amount to exceed $25,000 in the aggregate), make or commit to make
any capital expenditure, or enter into any lease of capital equipment
as lessee or lessor;
(viii) make any loan to any person or
increase the aggregate amount of any loan currently outstanding to any
person;
(ix) engage in any transaction other than
in the ordinary course of business and consistent with past practice;
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<PAGE> 21
(x) adopt any new employee benefit plan
or make any material change in or to any Benefit Plan other than any
such change that is required by law or that, in the opinion of
counsel, is necessary or advisable to maintain the tax qualified
status of any such Benefit Plan;
(xi) commence any litigation other than
in accordance with past practice, settle any litigation involving any
liability of the Company for material money damages or restrictions
upon the operations of the Company;
(xii) fail to deliver to SEI any notice or
other information regarding pending or threatened litigation in
respect of it or its operations;
(xiii) take, fail to take, or permit any
action, the result of which would be to make any representation or
warranty of Section 5 untrue, or prevent the satisfaction of any
condition set forth in Sections 8 and 10;
(xiv) change or alter any method of
accounting; or
(xv) change any provision of its Articles
of Incorporation or Bylaws.
(d) Notice of Adverse Change. The Company will
advise SEI in writing of any material adverse change in the Assets, the
business, financial condition or prospects of the Company from the date of this
Agreement to the Closing Date.
(e) Best Efforts. The Company will use its best
efforts to take all action and to do all things necessary, proper or advisable
to consummate the transactions contemplated by this Agreement. The Company will
use its best efforts to secure all consents and approvals required to carry out
the transactions contemplated by this Agreement and to satisfy all other
conditions to the obligations of the Company and SEI hereunder.
(f) Licenses; Permits. The Company will cooperate
in all reasonable respects with SEI in its applications to obtain such licenses
and permits, if any, as may be necessary in order for SEI to operate the
business as it is currently operated.
(g) No Solicitation of Other Offers. The Company,
acting through any director, officer or other agent (including any investment
banker, attorney, accountant or other representative retained by it), shall not
solicit or encourage, including by way of furnishing information, any inquiries
or the making of any proposal which may reasonably be expected to lead to the
acquisition of any of the shares of Company Common Stock or a substantial
portion of the Assets. The Company will not, prior to the Closing, enter into
or conduct any discussions with any other prospective purchaser of any or all
of the Company Common Stock or the Assets regarding such a purchase or enter
into any agreement or negotiations with respect to the disposition of any or
all of the Company Common Stock or the Assets, regardless of the form
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<PAGE> 22
of the transaction, without the consent of SEI, other than in the ordinary
course of business. The Company shall promptly advise SEI in writing of any
such inquiries, proposals or discussions received by the Company after the date
hereof.
(h) Confidentiality and Public Announcements. The
Company shall keep confidential all information concerning the Merger or
provided to it by SEI and, in the event of termination of the Merger pursuant
to Section 11, shall deliver to SEI all documents and other materials
previously delivered (and copies thereof) concerning the transactions
contemplated hereby. Neither the Company nor its Shareholders nor any of their
representatives shall make any public announcement with respect to this
Agreement without the prior written consent of SEI.
(i) Risk of Loss. The Company shall retain all
risk of condemnation, destruction, loss or damage due to fire or other casualty
from the date of this Agreement until the Closing. If the condemnation,
destruction, loss or damage is such that the operation of the Company is
materially interrupted or curtailed or any of the Assets are materially
affected, then SEI shall have the right to terminate this Agreement. If SEI
nonetheless elects to close, the Company shall remit all net condemnation
proceeds or third party insurance proceeds to SEI, and either the number of
shares of SEI Common Stock to be delivered or the cash to be paid pursuant to
Section 4(b)(i) shall be adjusted at the Closing to reflect such condemnation,
destruction, loss or damage to the extent that insurance or condemnation
proceeds are not sufficient to cover such destruction, loss or damage.
(j) Subchapter S Matters. If the Company is an
"S" corporation, the Company shall prepare and file, at its expense, the short
period tax returns of the Company ending on the Closing Date. Such returns
shall be provided for SEI's prior review and approval, which approval shall not
be unreasonably withheld or delayed. The Company shall file as an "S"
corporation for that short period. SEI shall make available any information in
its or the Company's possession which is reasonably required by the Company to
complete such returns at no cost to the Company.
(k) Affiliates. Each person who is an "Affiliate"
of the Company, as that term is defined in the Securities Act of 1933, as
amended (the "Act"), hereby acknowledges and agrees to the following: (i) the
shares of Common Stock issuable to such Affiliate will be held by such
Affiliate pursuant to the provisions of the Act and the rules and regulations
thereunder, (ii) no sale or disposition of such shares of Common Stock will be
made except pursuant to the terms of SEI's "shelf" Registration Statement on
Form S-4 (the "Registration Statement"), the post-effective amendment and the
prospectus contained therein, the Act, and Rule 145(d) thereunder, and (iii)
each such certificate representing the shares of Common Stock issued to an
Affiliate will bear a restrictive legend setting forth the restrictions on
transfer referred to above.
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<PAGE> 23
Section 8. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligation of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) This Agreement and the transactions
contemplated hereby shall have been approved in the manner required by
applicable law, by the applicable regulations of the Nasdaq National Market and
by any regulatory body, as the case may be, and by the requisite vote of the
Shareholders.
(b) Any waiting period applicable to the
consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 shall have expired or been terminated.
(c) Neither of the parties hereto shall be
subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by this Agreement.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(d) SEI's Registration Statement shall have
become effective and shall be effective at the Effective Time, and no stop
order suspending effectiveness of the Registration Statement shall have been
issued, no action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws relating to the issuance or
trading of the SEI Common Stock to be issued to the Shareholders in connection
with the Merger shall have been received.
(e) All consents, authorizations, orders and
approvals of (or filings or registrations with) any governmental commission,
board or other regulatory body required in connection with the execution,
delivery and performance of this Agreement shall have been obtained or made,
except for filings in connection with the Merger and any other documents
required to be filed after the Effective Time and except where the failure to
have obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business of SEI
and the Company (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(f) The SEI Common Stock to be issued to the
Shareholders in connection with the Merger shall have been approved for listing
on the Nasdaq National Market, subject only to official notice of issuance.
Section 9. Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
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<PAGE> 24
(a) Representations and Warranties. The
representations and warranties of SEI and Sub set forth herein in Section 6
above shall be true and correct in all material respects as of the Closing Date
with the same effect as though made on and as of such date.
(b) Performance; Document Delivery. SEI and Sub
shall have performed in all material respects, at or prior to the Closing Date,
all acts in accordance with its covenants set forth herein, including, but not
limited to, delivery to the Company of the following documents:
(i) Certificates for the Shares of SEI
Common Stock and the cash payable pursuant to Section 4;
(ii) A good standing certificate
regarding SEI certified by the Secretary of State of the State of
Delaware dated within five business days prior to Closing;
(iii) A certificate dated as of the
Closing Date signed by a duly authorized officer of SEI certifying
that the representations and warranties of SEI set forth herein are
true and correct in all material respects as of the Closing Date and
that SEI has fulfilled all of the conditions of this Section 9;
(iv) Resolutions adopted by the Board of
Directors of SEI approving the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby, certified by the Secretary of SEI; and
(v) An incumbency certificate certifying
the identity of the officers of SEI.
(c) Opinion of Counsel. SEI shall have delivered
to the Company an opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, counsel to SEI, dated the Closing Date,
substantially in the form attached hereto as Schedule 9(c). In addition, the
Company shall have received an opinion of counsel to the Company in form and
substance satisfactory to the Company concerning the tax consequences of the
Merger to the Company and the Shareholders.
(d) No Injunction, Etc. No action proceeding,
investigation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit or obtain substantial damages in respect of, or which is related to or
arises out of, this Agreement or the consummation of the transactions
contemplated hereby, or which is related to or arises out of the business or
operations of SEI, if such action, proceeding, investigation or legislation, in
the reasonable judgment of the Company or its counsel, would make it
inadvisable to consummate such transactions.
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<PAGE> 25
Section 10. Conditions to Obligation of SEI and Sub to Effect the
Merger. The obligations of SEI and Sub to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions:
(a) Due Diligence Review; Delivery of Schedules.
SEI shall have completed, and in its sole discretion be satisfied with the
results of, its due diligence review of the operations and financial condition
of the Company. The Company shall have delivered to SEI the Schedules called
for by this Agreement, and such Schedules shall be satisfactory to SEI in its
sole discretion.
(b) Representations and Warranties. The
representations and warranties of the Company contained in this Agreement, or
any document or instrument delivered to SEI hereunder, shall be true and
correct in all material respects as of the Closing Date with the same effect as
though made on and as of such date.
(c) Performance; Document Delivery. The Company
shall have performed in all material respects, at or prior to the Closing Date,
all acts in accordance with their covenants herein, including, but not limited
to, delivery to SEI of the following documents:
(i) A good standing certificate
regarding the Company and any Shareholder that is not a natural
person, certified by the Secretary of State of such party's state of
organization dated within five business days prior to Closing;
(ii) A certificate dated as of the
Closing Date signed by the duly authorized officers of the Company
certifying that the representations and warranties of the Company set
forth herein are true and correct in all material respects as of the
Closing Date and that the Company has fulfilled all of the conditions
of this Section 10;
(iii) Resolutions of the Board of
Directors and Shareholders of the Company and any Shareholder that is
not a natural person in form and substance satisfactory to SEI
approving the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby,
certified by an appropriate officer of the Company and any such
Shareholder;
(iv) An incumbency certificate certifying
the identity of the officers of the Company and any Shareholder that
is not a natural person;
(v) Certificates representing the shares
of Company Common Stock being converted, together with accompanying
stock transfer powers or instruments of assignment, duly endorsed in
blank;
(vi) Resignations of each of the officers
and directors of the Company effective as of the Closing Date;
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(vii) Releases of each Shareholder and
each officer and director of the Company concerning any claim against
the Company other than current accrued wages and benefits;
(viii) All books and records of the
Company, including all corporate and other records, minute books,
stock record books, stock registers, books of accounts, contracts,
agreements and such other documents or certificates as shall be
reasonably requested by SEI; and
(ix) Evidence that all agreements or
arrangements, whether written or oral, among the Shareholders and/or
the Company that relate in any manner to the Company Common Stock have
been terminated.
(d) No Adverse Change. There shall not have been
any change between the date of the latest Financial Statements and the Closing
Date which has had or will have a material adverse effect on the business,
operations, financial condition, Assets or prospects of the Company, and a
certificate shall have been delivered to SEI to such effect signed by each of
the Shareholders and such executive officers of the Company as SEI may request.
(e) Opinion of Counsel. SEI shall have been
furnished with a favorable opinion of counsel to the Company, dated the Closing
Date, substantially in the form attached hereto as Schedule 10(e).
(f) Consents and Approvals. The Company shall
have obtained all necessary consents and approvals, in form and substance
satisfactory to SEI, required under all leases and other material contracts
pertaining to the Assets or the business of the Company and satisfying any
approval or permit or licensing requirements for consummation of this
transaction and necessary to carry on the business of the Company as it is
currently being conducted.
(g) No Injunction, Etc. No action, proceeding,
investigation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit or obtain substantial damages in respect of, or which is related to or
arises out of, this Agreement or the consummation of the transactions
contemplated hereby, or which is related to or arises out of the business or
operations of the Company, if such action, proceeding, investigation or
legislation, in the reasonable judgment of SEI or its counsel, would make it
inadvisable to consummate such transactions.
(h) Lockup Agreements. Each person listed on
Schedule 10(h)(i) shall have entered into an agreement with SEI restricting the
resale of shares of Common Stock substantially in the form attached hereto as
Schedule 10(h)(ii).
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(i) Employment Agreements. SEI and certain
employees of the Company shall have entered into employment agreements
substantially in the form attached hereto as Schedule 10(i).
(j) Indemnification Agreements. SEI and each of
the Shareholders shall have entered into Indemnification Agreements
substantially in the form attached hereto as Schedule 10(j).
(k) Escrow Agreements. SEI and each of the
Shareholders shall have entered into the Escrow Agreement pursuant to Section
4(c)(ii).
(l) Pension Plan Liability. SEI shall be
satisfied that it will incur no liability with respect to pension or other
post-retirement benefits, except pursuant to SEI's pension plan in which all
full-time Company employees, who will remain employed by the Company after the
Closing, are eligible to participate.
(m) Board Approval. This Agreement and the Merger
shall have been approved and authorized by the Board of Directors of SEI.
Section 11. Termination.
(a) Means of Termination. This Agreement may
be terminated at any time prior to the Closing in the following ways:
(i) by the mutual consent in writing of
the Company and SEI;
(ii) by SEI if there has been a material
violation or breach by the Company of any of the agreements,
representations or warranties contained in this Agreement which has
not been waived by SEI in writing, or if any of the conditions set
forth in Sections 8 and 10 hereof have not been satisfied within six
(6) months of the date hereof or have not been waived by SEI in
writing;
(iii) by the Company if there has been a
material violation or breach by SEI or Sub of any of the agreements,
representations or warranties contained in this Agreement which has
not been waived by the Company in writing, or if any of the conditions
set forth in Sections 8 and 9 hereof have not been satisfied within
six (6) months of the date hereof or have not been waived by the
Company in writing; or
(b) Effect of Termination. Except as provided
in Section 12(b) hereof, in the event this Agreement is terminated in
accordance with this Section 11, this Agreement shall become void and of no
further force or effect, except the obligations of each party to preserve the
confidentiality of documents, certificates and information furnished to such
party pursuant hereto and for any obligation or liability of any party based on
or arising from
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<PAGE> 28
any breach or default by such party with respect to its representations,
warranties, covenants or agreements contained in the Transaction Documents.
Section 12. Expenses and Remedies.
(a) Expenses. Except as provided in
section 12(b) hereof, each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the Merger,
including its own legal, accounting and audit fees.
(b) Remedies.
(i) The Company agrees that if the
Company terminates this Agreement pursuant to Section 11(a)(iii)
because of the failure to receive approval of the Merger by the
Shareholders, all expenses, including, without limitation, all legal
and accounting expenses, incurred by SEI or Sub in connection with the
negotiations among the parties, and the authorization, preparation,
execution and performance of this Agreement and the transactions
contemplated hereby shall be paid by the Company.
(ii) The Company agrees that in the event
of a termination of this Agreement pursuant to Section 11, for a
period of six months from the date of such termination, neither the
Company nor any of its officers, directors, management employees,
affiliated persons or agents, or the Shareholders, will, directly or
indirectly, (A) negotiate or discuss with any other person or entity
any transaction involving a merger of the Company, or the sale of any
shares in or assets of the Company (except for sales of inventory in
the ordinary course of business) or any other business combination
involving the Company, (B) reveal the terms of this Agreement to any
person or entity except for the purpose of carrying out the
transactions contemplated herein or (C) solicit, encourage, negotiate,
discuss or accept any offer, bid or proposal from any person or entity
respecting any transaction involving a merger of the Company, the sale
of any shares in or assets of the Company (except for sales of
inventory in the ordinary course of business) or any other business
combination involving the Company.
Section 13. Indemnification.
(a) Indemnification of SEI. The Company agrees to
indemnify and hold harmless SEI, each officer, director, employee or agent
thereof, their respective controlling persons, and their respective estates,
successors, and assigns (each an "Indemnified Party"), from and against any and
all claims, losses, damages, liabilities and expenses (including, without
limitation, settlement costs and any legal or other expenses for investigating
or defending any actions or threatened actions) (the "Losses") reasonably
incurred by such Indemnified Party as a result of:
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<PAGE> 29
(i) the untruth, inaccuracy or breach of
any representation or warranty made by the Company pursuant to Section
5 of this Agreement or any other Transaction Document;
(ii) the nonfulfillment or breach of any
covenant, agreement or obligation of the Company contained in this
Agreement or any other Transaction Document;
(iii) any untrue statement of a material
fact relating to the Company that was made in reliance upon and in
conformity with information furnished by the Company to SEI and is
contained in any preliminary prospectus, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or any omission by the Company to state therein a
material fact relating to the Company required to be stated therein or
necessary to make such statements therein not misleading, and which is
not provided in writing to SEI by the Company;
(iv) any and all amounts of federal,
state, and/or local income, franchise, property, and/or sales and use
taxes that may be assessed against SEI with respect to any taxable
period(s) ending on or before the date of this Agreement for which
adequate provisions therefor have not been made through the Closing
Date, as reflected on the Company's books of account and in the
Company's financial statements as of the Closing Date; and the
amount(s) of any interest and/or penalties that may be assessed with
respect to said tax assessments. The amount(s) of any
indemnification(s) arising under this Agreement is to be computed net
of any and all tax benefits received by SEI as a result of the tax
assessment(s);
(v) any matter on any Schedule hereto as
may be specifically identified for indemnification in this Agreement
or any other Transaction Document; and
(vi) any claim or demand by any person
asserting any interest in any share of Company Common Stock or seeking
dissenters' or appraisal rights or any other claim in respect to the
Merger.
(b) Limitations on the Company's Indemnity. The
Company shall be obligated to indemnify and hold harmless SEI pursuant to
Section 13(a) only to the extent that the aggregate of all indemnifiable Losses
exceeds $25,000.
(c) Indemnification of the Shareholders of the
Company. SEI shall indemnify and hold harmless the Shareholders pro rata in
accordance with their holdings of shares of Company Common Stock as of the
Effective Time (each an "Indemnified Party") from and against any and all
Losses reasonably incurred by such Indemnified Party as a result of:
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<PAGE> 30
(i) the untruth, inaccuracy or breach of
any representation or warranty made by SEI in this Agreement or in any
other Transaction Document;
(ii) the nonfulfillment or breach of any
covenant, agreement or obligation of SEI contained in this Agreement
or in any other Transaction Document; or
(iii) any untrue statement or alleged
untrue statement of a material fact relating to SEI (other than those
that relate to the Company) contained in any preliminary prospectus,
the Registration Statement or any prospectus forming a part thereof,
or any amendment thereof or supplement thereto, or arising out of or
based on any omission or alleged omission to state therein a material
fact relating to SEI (other than the Company) required to be stated
therein or necessary to make the statements therein not misleading.
(d) Notification. Whenever any claim shall arise
for indemnification hereunder, the Indemnified Party shall notify the
indemnifying party promptly after such Indemnified Party has actual knowledge
of the facts constituting the basis for such claim, except that, in the event
of any claim for indemnification hereunder resulting from or in connection with
any claim or legal proceedings by a third party, such Indemnified Party shall
give prompt notice to the indemnifying party of such claim or the commencement
of legal proceedings in respect of which recovery may be sought against the
indemnifying party pursuant to the provisions of this Section 13. The notice to
the indemnifying party shall specify, if known, the amount or an estimate of
the amount of the liability arising therefrom. The Indemnified Party shall not
settle or compromise any such claim without the prior written consent of the
indemnifying party unless suit shall have been instituted against the
Indemnified Party and the indemnifying party shall have failed, within fifteen
(15) days after notice of institution of the suit, to take control of such suit
as provided in Section 13(e) below.
(e) Defense of Actions. In connection with any
claim giving rise to indemnity hereunder resulting from or arising out of any
claim or legal proceeding by a person who is not a party to this Agreement, the
indemnifying party, at its sole cost and expense, may, upon written notice to
the Indemnified Party, assume the defense of such claim or legal proceeding, to
the extent that the indemnifying party admits in writing its liability to the
Indemnified Party with respect to all material elements thereof. If the
indemnifying party assumes the defense of any such claim or legal proceeding,
the obligations of the indemnifying party hereunder as to such claim or legal
proceeding shall be limited to taking all steps necessary in the defense or
settlement thereof and to holding the Indemnified Party harmless from and
against any losses, damages, expenses, or liability caused by or arising out of
any settlement approved by the indemnifying party or any judgment in connection
with such claim or legal proceeding. Each Indemnified Party agrees that it will
cooperate with the indemnifying party in the defense of any such action, the
defense of which is assumed by the indemnifying party. Except with the consent
of the Indemnified Party, the indemnifying party shall not consent to the entry
of any judgment arising from any such claim or legal proceeding which, in each
case, does not include as an unconditional term thereof the delivering by the
claimant or the plaintiff
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<PAGE> 31
to the Indemnified Party of a release from all liability in respect thereof,
unless the indemnifying party has actually paid to the Indemnified Party the
full amount of such judgment or settlement. If the indemnifying party does not
assume the defense of any claim or litigation, any Indemnified Party may defend
against such claim or litigation in such manner as it may deem appropriate,
including, but not limited to, settling such claim or litigation, after giving
notice of the same to the indemnifying party, on such terms as the Indemnified
Party may deem appropriate. The indemnifying party will promptly reimburse the
Indemnified Party in accordance with the provisions hereof.
(f) Payment. All indemnification hereunder shall
be effected by payment of cash or delivery of a certified or official bank
check in the amount of the indemnification liability or by set-off against (i)
any amounts otherwise owed by SEI to the Company or by the Company to SEI, as
the case may be, or (ii) the escrowed shares of SEI Common Stock and cash
pursuant to the Escrow Agreement.
Section 14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be personally delivered,
mailed by first-class registered or certified mail, postage prepaid, return
receipt requested or delivered by an overnight courier service, delivery charge
prepaid:
(a) If to the Company, to such address furnished
to SEI or at such other address as may be furnished to SEI by it in writing.
(b) If to SEI, to:
Service Experts, Inc.
P. O. Box 17102
Nashville, Tennessee 37217
Attention: Alan R. Sielbeck
with a copy to:
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street, Suite 2100
Nashville, Tennessee 37219
Attention: J. Chase Cole, Esq.
or at such other address as may have been furnished to the Company by
SEI in writing.
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<PAGE> 32
Section 18. Miscellaneous.
(a) Entire Agreement. This Agreement and the
Schedules, certificates and other documents delivered pursuant hereto contain
and constitute the entire agreement and understanding between the Company and
SEI and supersede and cancel all prior agreements and understandings relating
to the subject matter hereof, whether written or oral, which shall remain in
effect. Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated, except in writing signed by the parties hereto.
(b) Severability. Should any one or more of the
provisions of this Agreement or any agreement entered into pursuant hereto be
determined to be illegal or unenforceable, all other provisions of this
Agreement and such other agreements shall be given effect separately from the
provision or provisions determined to be illegal or unenforceable and shall not
be affected thereby.
(c) Governing Law. This Agreement shall be
construed and enforced in accordance with the laws of the State of Tennessee
without regard to its principles of conflicts of laws.
(d) Further Assurances. Each party covenants that
at any time, and from time to time, after the Closing, it will execute such
additional instruments and take such actions as may be reasonably requested by
the other parties to confirm or perfect or otherwise to carry out the intent
and purposes of this Agreement.
(e) Waiver. Any failure on the part of any party
to comply with any of its obligations, agreements or conditions hereunder may
be waived by any other party to whom such compliance is owed. No waiver of any
provision of this Agreement shall be deemed, or shall constitute, a waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
continuing waiver.
(f) Assignment. SEI and Sub may assign their
rights under this Agreement to any affiliated entity, but otherwise this
Agreement shall not be assignable by any of the parties hereto without the
written consent of all other parties.
(g) Binding Effect. All of the terms of this
Agreement, whether so expressed or not, shall be binding upon the respective
personal representatives, successors and assigns of the parties hereto and
shall inure to the benefit of and be enforceable by the respective personal
representatives, successors and assigns of the parties hereto. This Agreement
shall survive the Closing and not be merged therein.
(h) Headings. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
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<PAGE> 33
(i) Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(j) Survival of Representations and Warranties.
The representations and warranties of the parties contained in this Agreement
or any other Transaction Document shall survive the Closing and shall not be
extinguished thereby notwithstanding any investigation or other examination by
any party.
(k) Construction of Terms. The language used in
the Agreement shall be construed, in all cases, according to its fair meaning,
and not for or against either party hereto. The parties acknowledge that each
party has reviewed this Agreement and that normal rules of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement. Whenever the masculine
gender is used herein, it shall be deemed to include the feminine and the
neuter.
[Signatures on Next Page]
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<PAGE> 34
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the day and date first above written.
SERVICE EXPERTS, INC.
By:
---------------------------------
Title: Chief Executive Officer
ACQUISITION SUB, INC.
-------------
By:
---------------------------------
Title:
------------------------------
By:
--------------------------------
Title:
-----------------------------
34
<PAGE> 35
LIST OF SCHEDULES TO BE PROVIDED BY THE COMPANY
Schedule 4(c)(i) Allocation of Purchase Price
Schedule 5(a) Jurisdictions Where Qualified
Schedule 5(b) Capitalization
Schedule 5(e) Predecessor Companies; Disposition of Assets
Schedule 5(f)(i) Financial Statements
Schedule 5(f)(ii) Exceptions to Financial Statements
Schedule 5(g) Accounts Receivable and Payable
Schedule 5(h) Absence of Certain Changes
Schedule 5(i)(i) Ownership of Properties
Schedule 5(i)(ii) Exceptions to Ownership of Properties
Schedule 5(j) Taxes
Schedule 5(k) Insurance
Schedule 5(l)(iv) Environmental Conditions
Schedule 5(m) Contracts and Commitments
Schedule 5(n) Liabilities
Schedule 5(o) Employees and Labor Matters
Schedule 5(p) Employee Benefit Plans and Agreements
Schedule 5(q) Trademarks, Trade Names, Etc.
Schedule 5(r) Litigation
Schedule 5(s) Compliance with Laws, Regulations and Court
Orders
35
<PAGE> 36
Schedule 5(u) Consents and Approvals
Schedule 10(e) Form of Opinion of Counsel to the Company
Schedule 10(h)(i) Persons Subject to Lockup
36
<PAGE> 37
LIST OF SCHEDULES TO BE PROVIDED BY SEI
Schedule 4(c)(ii) Form of Escrow Agreement
Schedule 4(e) Adjustments to Net Income
Schedule 6(g) No Broker's Fees
Schedule 9(c) Form of Opinion of Waller Lansden
Dortch & Davis, A Professional
Limited Liability Company
Schedule 10(h)(ii) Form of Lockup Agreement
Schedule 10(i) Form of Employment Agreement
Schedule 10(j) Form of Indemnification Agreement
37
<PAGE> 1
EXHIBIT 2.2
COMBINATION AGREEMENT
This COMBINATION AGREEMENT (this Agreement), dated as of __________
___, 1996, by and among Service Experts, Inc., a Delaware corporation (SEI),
and ________________________________, a ______________ corporation (the
Company).
W I T N E S S E T H :
WHEREAS, the Company operates a heating, ventilating and air
conditioning (HVAC) service and replacement business;
WHEREAS, the Boards of Directors of SEI and the Company each have
determined that a business combination (the Combination) between SEI and the
Company is in the best interests of their respective companies and shareholders
and presents an opportunity for their respective companies to achieve long-term
strategic and financial benefits, and, accordingly, have agreed to effect the
transaction provided for herein upon the terms and subject to the conditions
set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the
Combination provided for herein shall qualify as a reorganization within the
meaning of Section 368 of the Internal Revenue Code of 1986, as amended (the
Code); and
WHEREAS, SEI and the Company desire to make certain representations,
warranties and agreements in connection with the Combination.
NOW, THEREFORE, in consideration of the premises, the mutual covenants
set forth herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Section 1. Transfer of Shares. In accordance with the terms
and conditions set forth in this Agreement, the Company will cause the holders
(the Shareholders) of all of the issued and outstanding shares of Common Stock,
$_____ par value per share, of the Company (the Shares) to transfer, convey,
assign and deliver all of the Shares, free and clear of all liens, encumbrances
and claims whatsoever, to SEI in exchange for shares of Common Stock, $.01 par
value per share, of SEI (the SEI Common Stock).
Section 2. Purchase Price; Exchange of Certificates.
(a) Payment of Purchase Price.
(i) The purchase price (the Purchase
Price) for the Shares shall be $_____________. SEI shall acquire all
of the Shares issued and outstanding immediately prior to the
effective time of the Combination contemplated by this Agreement (the
Effective Time) in exchange for that number of shares of SEI Common
Stock which is equal to the quotient of (i) the Purchase Price,
subject to the adjustments
<PAGE> 2
found in Section 2(c) below, divided by (ii) $_______.
(ii) The Purchase Price shall be
allocated among the Shareholders as set forth on Schedule 2(a)(ii)
attached hereto.
(iii) An aggregate of 10% of the shares of
SEI Common Stock to be issued pursuant to this Section 2(a) shall be
held in escrow pursuant to the terms and conditions of the escrow
agreement attached hereto as Schedule 2(a)(iii) (the Escrow
Agreement).
(iv) No fractional shares of SEI Common
Stock shall be issued pursuant hereto. In lieu of the issuance of any
fractional share of SEI Common Stock, cash adjustments will be paid to
holders in respect of any fractional share of SEI Common Stock that
would otherwise be issuable, and the amount of such cash adjustment
shall be equal to such fractional proportion of the Average Price of a
share of SEI Common Stock. The Average Price of a share of SEI Common
Stock shall be the average of the closing sales prices thereof as
quoted on The Nasdaq Stock Market's National Market (the Nasdaq
National Market) (as reported by The Wall Street Journal or, if not
reported thereby, by another authoritative source) over the ten (10)
business days immediately preceding the Closing Date.
(b) Adjustment of Shares of Stock. In the event
that, subsequent to the date of this Agreement but prior to the Effective Time,
the outstanding shares of SEI Common Stock shall have been changed into a
different number of shares or a different class as a result of a stock split,
reverse stock split, stock dividend, subdivision, reclassification, split,
combination, exchange, recapitalization or other similar transaction, the
number of shares of SEI Common Stock to be delivered pursuant to this Agreement
shall be appropriately adjusted.
(c) Pre-Closing Adjustments to Purchase Price. As
promptly as practicable after the date hereof, the parties shall make initial
adjustments to the Purchase Price (the Pre-Closing Adjustments) based on the
differences between (i) the Company's net income for the 12 month period ended
_____________, 1996 (the Valuation Period), as presented in the Company's
financial statements for such period, with such adjustments as are set forth on
Schedule 2(c) attached hereto, and (ii) the Company's net income for the
Valuation Period, as presented in the Final Valuation Statement with such
adjustments as are deemed appropriate by SEI's independent certified public
accountants. SEI will cause a restated statement of income for the Valuation
Period (the Final Valuation Statement) to be prepared utilizing any
2
<PAGE> 3
adjustments identified as a result of the audit and/or review of the financial
statements of the Company by SEI's independent certified public accountants.
SEI shall deliver a schedule to the Shareholders detailing any Pre-Closing
Adjustments and describing in detail the differences between the Purchase
Price, as adjusted, and the amount set forth as the Purchase Price in this
Agreement. Such schedule shall be delivered to the Shareholders with a copy of
the Final Valuation Statement. The Final Valuation Statement shall be prepared
in accordance with generally accepted accounting principles.
(d) Post Closing Adjustments to Purchase Price.
(i) Promptly following the Closing Date,
SEI will cause to be prepared by its independent certified public
accountants a balance sheet of the Company as of the close of business
on the Closing Date (the Closing Balance Sheet). SEI shall furnish to
the Shareholders the Closing Balance Sheet within forty-five (45) days
after the Closing Date.
(ii) Subject to the provisions of Section
2(d)(iii) below, within ninety (90) days after the Closing Date (or as
soon thereafter as possible), the parties shall make final adjustments
to the Purchase Price (the Post Closing Adjustments) based on the
following:
(A) In the event the Company's
shareholders' equity (as presented in the Company's Closing
Balance Sheet) as a percentage of net sales (as presented in
the Company's Final Valuation Statement) is less than ten
percent (10%), the Purchase Price will be reduced by an amount
equal to the capital contribution required to result in
shareholders' equity as a percentage of net sales equaling ten
percent (10%).
(B) In the event the Company's
shareholders' equity (as presented in the Company's Closing
Balance Sheet) as a percentage of net sales (as presented in
the Company's Final Valuation Statement) is greater than ten
percent (10%), the Purchase Price will be increased by an
amount equal to the distribution required to result in
shareholders' equity as a percentage of net sales equaling ten
percent (10%). Any such increase in Purchase Price shall be
offset by the reduction in Purchase Price, if any, set forth
in subparagraph (D) below.
(C) In the event a Shareholder is
indebted to the Company, the Purchase Price payable to such
Shareholder will be reduced by an amount equal to the
indebtedness owing to the Company at the time of the Closing.
Any such reduction shall first be applied to the cash portion
of the Purchase Price and then to the shares of the SEI Common
Stock.
(D) In the event the Company's
Closing Balance Sheet includes any indebtedness, other than
indebtedness incurred in connection with
3
<PAGE> 4
the purchase of fixed assets subsequent to the Valuation
Period, the Purchase Price will be reduced by an amount equal
to the indebtedness outstanding on the Closing Date. Any such
reduction shall first be applied to the cash portion of the
Purchase Price and then to the shares of the SEI Common Stock.
(E) SEI shall deliver a schedule to
the Shareholders detailing any Post Closing Adjustments and
detailing the differences between the Purchase Price, as
adjusted, and the amount paid as the Purchase Price on the
Closing Date. Such schedule shall be delivered to the
Shareholders with a copy of the Closing Balance Sheet.
(iii) Should the Shareholders dispute the
Post Closing Adjustments proposed by SEI or the accuracy of the
Closing Balance Sheet, they shall promptly (and in no event later than
twenty (20) days after receipt of the Closing Balance Sheet and the
required schedule of Post Closing Adjustments) advise SEI in writing.
If after thirty (30) days after delivery of the Closing Balance Sheet,
SEI and the Shareholders are unable to agree upon the amount of the
Post Closing Adjustments, the Shareholders and SEI shall engage any
Big Six certified public accounting firm not under contract with
either the Company or SEI (the Accountants) to review the Closing
Balance Sheet and the proposed Post Closing Adjustments and determine
the amount thereof, such determination to be made as soon as
practicable. In making such review and determination, the Accountants
shall utilize the terms and provisions of this Agreement including,
without limitation, the provisions of Section 2(d)(v) hereof. The
decision of the Accountants shall be binding on both the Shareholders
and SEI. Each of SEI and the Shareholders shall pay one-half the
reasonable expenses of engagement of the Accountants.
(iv) Within thirty (30) days of the
Shareholders' receipt of the Closing Balance Sheet and the required
schedule of Post Closing Adjustments (or, if the Shareholders dispute
the Post Closing Adjustments, within ten (10) days of the resolution
or determination of the adjustments in accordance with Section
2(d)(iii) above), either (A) the Shareholders shall pay SEI in cash or
in the form of shares of SEI Common Stock (based on a per share
price of $_____) the amount by which the Purchase Price paid on the
Closing Date exceeds the Purchase Price, as adjusted, or (B) SEI shall
pay the Company in cash or in the form of shares of SEI Common Stock
(based on a per share price of $_____) the amount by which the
Purchase Price paid on the Closing Date is less than the Purchase
Price, as adjusted.
(v) The Closing Balance Sheet shall be
prepared in accordance with generally accepted accounting principles.
4
<PAGE> 5
Section 3. The Closing. The closing of the transactions
contemplated by this Agreement (the Closing) shall take place, following
satisfaction of all of the conditions set forth in Sections 8, 9 and 10 hereof,
or the waiver thereof (the Closing Date), at the offices of Waller Lansden
Dortch & Davis, A Professional Limited Liability Company, in Nashville,
Tennessee, or at such other location as the parties shall mutually agree.
Section 4. Representations and Warranties as to the
Shareholders. The Company represents and warrants to SEI as follows as of the
date hereof and also as of the Closing Date:
(a) Title to the Shares. The Company represents
that each Shareholder has and will have on the Closing Date good and
marketable title to the Shares with full right and authority to
transfer the Shares hereunder, and on transfer of the Shares, SEI will
receive good and marketable title to the Shares, free and clear of all
liens, encumbrances and claims whatsoever. Each Shareholder owns the
number of Shares set forth opposite its respective name on Schedule
4(a) attached hereto, which Shares collectively represent all of the
outstanding capital stock of the Company.
(b) Organization, Authority and Capacity. The
Company represents that if a Shareholder is a natural person, such
Shareholder has the full authority and capacity necessary to execute,
deliver and perform his or her obligations under all agreements,
instruments and documents to be executed and delivered in connection
with the transactions contemplated hereby (the Transaction Documents)
to be executed and delivered by such Shareholder. If a Shareholder is
not a natural person, (i) such Shareholder is duly organized, validly
existing and in good standing under the laws of its state of
organization and has the full corporate power and authority necessary
to execute, deliver and perform its obligations under the Transaction
Documents to be executed and delivered by such Shareholder, and (ii)
such Shareholder is duly qualified to do business and is in good
standing in each jurisdiction in which the failure to be so qualified
or in good standing could have a material adverse effect on such
Shareholder's ability to perform its obligations under the Transaction
Documents to be executed and delivered by such Shareholder.
(c) Authorization and Validity. The Company
represents that if a Shareholder is a natural person, such Shareholder
has the legal capacity required for executing, delivering and
performing the Transaction Documents to be executed and delivered by
such Shareholder. If a Shareholder is married and such Shareholder's
interest in the Company constitutes community property, the
Transaction Documents to be executed and delivered by such
Shareholder's spouse have been or will be, as the case may be, duly
executed and delivered by such Shareholder's spouse and constitute or
will constitute the legal, valid and binding obligations of such
Shareholder's spouse, enforceable in accordance with their respective
terms, except as may be limited by bankruptcy, insolvency, fraudulent
conveyance or other laws affecting creditors' rights generally, or as
may be modified by a court of equity. If a Shareholder is not a
natural person, (i) the execution, delivery and performance of the
Transaction Documents to be
5
<PAGE> 6
executed and delivered by such Shareholder have been duly authorized
by all necessary action on the part of such Shareholder, and (ii) the
Transaction Documents to be executed and delivered by such Shareholder
have been or will be, as the case may be, duly executed and delivered
by such Shareholder and constitute or will constitute the legal, valid
and binding obligations of such Shareholder, enforceable in accordance
with their respective terms, except as may be limited by bankruptcy,
insolvency, fraudulent conveyance or other laws affecting creditors'
rights generally, or as may be modified by a court of equity.
(d) Absence of Conflicting Agreements or Required
Consents. The execution, delivery and performance by each Shareholder
of the Transaction Documents to be executed and delivered by such
Shareholder (i) do not require the consent of or notice to any
governmental or regulatory authority or any other third party; (ii) if
a Shareholder is not a natural person, will not conflict with any
organizational document of such Shareholder; (iii) will not conflict
with or result in a violation of any law, ordinance, regulation,
ruling, judgment, order or injunction of any court or governmental
instrumentality to which such Shareholder is subject or by which such
Shareholder is bound; (iv) will not conflict with, constitute grounds
for termination of, result in a breach of, constitute a default under,
require any notice under, or accelerate or permit the acceleration of
any performance required by the terms of any agreement, instrument,
license or permit material to the Combination; and (v) will not create
any encumbrance or restriction upon the Shares.
(e) Interested Transaction. The Company
represents that, except as set forth on Schedule 4(e), no Shareholder
is a party to any contract, loan or other transaction with the Company
and no Shareholder has any direct or indirect interest in or
affiliation with any party to any such contract, loan or other
transaction. Except as set forth on Schedule 4(e), no Shareholder is
an employee, consultant, partner, principal, director or owner of, and
no Shareholder has any other direct or indirect interest in or
affiliation with, any person or business entity that is engaged in a
business that competes with or is similar to the business of the
Company.
(f) Access to Information. The Company represents
that each Shareholder has had access during the course of this
transaction to such information relating to SEI as he has desired, has
had the opportunity to ask questions of and receive answers from SEI
and its representatives concerning the terms and conditions of the
Combination and to obtain such additional information about the
business and financial condition of SEI as such Shareholder or his
representative has requested (to the extent SEI possessed such
information or could acquire it without unreasonable effort or
expense).
Section 5. Representations and Warranties of the Company. The
Company represents and warrants to SEI as follows as of the date hereof and
also as of the Closing Date:
6
<PAGE> 7
(a) Corporate Organization; Governing Documents
of the Company.
(i) The Company is a corporation duly
organized, validly existing and in good standing under the laws of its
state of incorporation. The Company has all requisite corporate power
and authority to own or lease all of its properties or assets and
holds all licenses, permits and other required authorizations from
governmental authorities necessary to conduct its business as it is
now being conducted. The Company is duly qualified to do business and
is in good standing in the jurisdictions set forth in Schedule 5(a),
which includes every jurisdiction in which the failure to be so
qualified or in good standing would have a material adverse effect on
(A) the Company's ability to perform its obligations under this
Agreement and all accompanying documents to be executed and delivered
by the Company in connection with the business combination (the
Transaction Documents) or (B) the assets, results of operations or
prospects of the Company.
(ii) A copy of the Company's Articles of
Incorporation and Bylaws, as amended to the date hereof, the books of
account, minute books, stock record books and other records of the
Company, all of which have been made available to SEI, are complete
and correct and have been maintained in accordance with sound business
practices, including the maintenance of an adequate system of internal
controls. The minute books of the Company contain accurate and
complete records of all meetings of, and corporate action taken by,
the Shareholders, the Board of Directors and committees of the Board
of Directors of the Company, and no meeting of any such Shareholders,
Board of Directors or committee has been held for which minutes have
not been prepared and are not contained in such minute books.
(b) Capitalization.
(i) The authorized capital stock of the
Company consists of ________ shares of Common Stock, ________ shares
of which are issued and outstanding as of the date hereof and
constitute the Shares. There are no other classes of securities of the
Company outstanding. All of the Shares are listed and held of record
as indicated on Schedule 5(b) and have been duly authorized and
validly issued and are fully paid and nonassessable. There are no
contracts relating to the issuance, sale, transfer or registration of
the Shares or any other securities of the Company. There are no
options, warrants, preemptive rights or other rights to purchase the
Shares or any other securities of the Company. None of the Shares or
other securities of the Company were issued in violation of the
Securities Act or preemptive rights of any past or present holder of
the Shares. There has been no transaction or action taken with respect
to the Shares in contemplation of the Combination that would prevent
the Company from accounting for the Combination as a reorganization
within the meaning of Section 368 of the Code.
7
<PAGE> 8
(ii) There is no plan or intention by any
of the Shareholders who own one percent (1%) or more of the Shares,
and to the best knowledge of management of the Company, there is no
plan or intention on the part of the remaining Shareholders to sell,
exchange or otherwise dispose of any of the shares of SEI Common Stock
to be received by them in the Combination.
(c) Authorization and Validity. The Company has
full corporate power and authority to execute and deliver this Agreement and,
subject to the approval of the Shareholders, to consummate the transactions
contemplated hereby. The Board of Directors of the Company has duly and validly
approved this Agreement and the transactions contemplated hereby, has
authorized the execution and delivery of this Agreement, has directed that this
Agreement and the transactions contemplated hereby be submitted to the
Shareholders for approval at a meeting of such Shareholders and, except for the
adoption of this Agreement by the Shareholders, no other corporate proceedings
on the part of the Company are necessary to consummate the transactions
contemplated hereby. This Agreement, when executed, will constitute the legal,
valid and binding obligation of the Company, enforceable against it in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(d) No Defaults; Absence of Conflicts. The
Company is not in default under, nor has any event occurred which, with the
lapse of time or action by a third party, could result in a default under, any
outstanding indenture, mortgage, contract or agreement to which the Company is
a party. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated by this Agreement will not (i)
violate any provision of, or result in the breach of, or constitute a default
under, or conflict with, (A) any terms or provisions of the Articles of
Incorporation or Bylaws of the Company or any resolution of the Company's Board
of Directors, (B) any law the violation of which would result in a material
liability to the Company, or (C) any order, writ, injunction or decree of any
court, governmental agency or arbitration tribunal; (ii) constitute a violation
of or a default under, or a conflict with, any term or provision of any
contract, commitment, indenture, lease or other agreement, or any other
restriction of any kind to which the Company is a party or by which the Company
is bound; (iii) cause, or give any party grounds to cause (with or without
notice, the passage of time or both) the maturity of any liability or
obligation of the Company to be accelerated, or increase any such liability or
obligation; or (iv) create any lien, encumbrance or restriction upon any of the
assets or properties of the Company.
(e) Subsidiaries, Investments and Predecessors.
Except as set forth on Schedule 5(e), the Company has not owned and does not
currently own, directly or indirectly, beneficially or equitably, any capital
stock or other equity, ownership or proprietary interest in any corporation,
partnership, limited liability company, association, trust, joint venture or
other entity. Set forth on Schedule 5(e) is a listing of all predecessor
companies of the Company, including the names of any entities from whom the
Company previously acquired material assets,
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<PAGE> 9
and any other entity of which the Company has been a subsidiary or division.
Except as listed on Schedule 5(e), the Company has not sold or disposed of, by
way of asset sale, stock sale, spin-off or otherwise, any material assets or
business of the Company.
(f) Financial Statements. The financial
statements of the Company for the fiscal years ended December 31, 1993, 1994
and 1995 and the audit report thereon of _______________, independent auditors,
copies of which are attached hereto as Schedule 5(f)(i), are true, correct and
complete, have been prepared in accordance with generally accepted accounting
principles, and fairly and accurately present the financial and business
condition of the Company as of the dates thereof and the results of the
operations of the Company for the periods covered thereby. The financial
statements set forth in Schedule 5(f)(i) are collectively, together with the
notes thereto, referred to as the Financial Statements. Except as reflected on
Schedule 5(f)(ii), the Financial Statements accurately reflect or adequately
provide for all claims against, and all debts and liabilities of, the Company,
fixed or contingent, existing at the dates thereof.
(g) Accounts Receivable and Payable. The accounts
receivable reflected on the Financial Statements arose in the ordinary course
of business and, except as reserved against on the Financial Statements, are
collectible in the ordinary course of business and consistent with past
practices, free of any claims, rights or defenses of any account debtor. Except
as set forth on Schedule 5(g), no accounts payable of the Company are, at this
date, over 45 days old and no accounts payable of the Company will be over 45
days old at the Closing Date.
(h) Absence of Certain Changes. Except as
disclosed on Schedule 5(h) or as reflected on the Financial Statements, the
Company has not, since December 31, 1995, except in the ordinary course of
business consistent with past practice:
(i) changed the Company's authorized or
issued capital stock; granted any stock option or right to purchase
shares of capital stock of the Company; issued any security
convertible into such capital stock; granted any registration rights;
purchased, redeemed, retired, or otherwise acquired any shares of any
such capital stock; or declared or paid any dividend or other
distribution or payment in respect of shares of capital stock;
(ii) amended the Articles of
Incorporation, Bylaws or other organizational documents of the
Company;
(iii) incurred any indebtedness or other
liabilities (whether accrued, absolute, contingent or otherwise),
guaranteed any indebtedness or sold any assets;
(iv) suffered any damage, destruction or
loss to any of the tangible assets of the Company, whether or not
covered by insurance;
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<PAGE> 10
(v) increased the regular rate of
compensation payable by it to any employee or increased such
compensation by bonus, percentage, compensation service award or
similar arrangement theretofore in effect for the benefit of any of
its employees, and no such increase is required;
(vi) hired, committed to hire or
terminated any employee;
(vii) established or agreed to establish
any pension, retirement or welfare plan for the benefit of its
employees not theretofore in effect;
(viii) experienced any labor organizational
efforts, strikes or formal complaints or entered into any collective
bargaining agreements with any union;
(ix) suffered any change in its financial
condition, assets, liabilities, business or prospects or suffered any
other event or condition of any character which individually or in the
aggregate has or might reasonably be expected to have a material
adverse effect on its business or prospects;
(x) entered into any commitments or
transactions or made any capital expenditures involving aggregate
amount or value in excess of $25,000 or made any single capital
expenditure which exceeded $10,000;
(xi) disposed of any of its assets,
written down the value of any assets, written off as uncollectible any
accounts receivable or revalued any of its assets;
(xii) subjected any of its assets,
tangible or intangible, to any lien, encumbrance or restriction
whatsoever, except for liens for current property taxes not yet due
and payable;
(xiii) paid, discharged or satisfied any
claims, liabilities or obligations (absolute, accrued, contingent or
otherwise);
(xiv) entered into, terminated or received
notice of termination of (A) any license, distributorship, dealer,
sales representative, joint venture, credit, or similar agreement, or
(B) any contract or transaction involving a total remaining commitment
by or to the Company of at least $10,000;
(xv) cancelled or waived any claims or
rights with a value to the Company in excess of $10,000;
(xvi) made any change in any method of
accounting or accounting practice;
(xvii) canceled, or failed to continue,
insurance coverage; or
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<PAGE> 11
(xviii) agreed, whether in writing or
otherwise, to take any action described in this Section 5(h).
(i) Ownership of Properties. Schedule 5(i)(i)
sets forth a list of all of the material assets of the Company owned, leased or
used by the Company in connection with the operation of its business (the
Assets), including, as to real property owned or leased by the Company (the
Real Property), the legal description of the Real Property. The present zoning,
subdivision, building and other ordinances and regulations applicable to the
Real Property permit the continued operation, use, occupancy and enjoyment of
the Real Property consistent with past practices, and the Company is in
compliance with, and has received no notices of violations of, any applicable
zoning, subdivision or building regulation, ordinance or other law, regulation,
or requirement. Except as set forth on Schedule 5(i)(ii), the Company has good
and marketable title to all of the Assets owned by it including furniture,
fixtures and equipment, fixed assets and inventory, and all contract rights and
intangible assets, and good and valid leasehold estates in all of the Assets
leased by it, free and clear of mortgages, security interests, liens, defects,
charges, encumbrances, restrictions and rights of third parties (excluding
accounts payable in the ordinary course of business). Schedule 5(i)(ii) also
includes a UCC lien search for the Company showing security interests of record
relating to the Assets in every place where such security interests are legally
required to be filed and include copies of all such financing statements. All
equipment and other personal property constituting a portion of the Assets is
in good operating condition and repair, ordinary wear and tear excepted. The
Assets constitute all of the operating assets of the Company necessary or
appropriate for the continued operation of the business of the Company. The
Company has sufficient title in and to the Assets necessary or advisable to
operate and conduct the business of the Company in the same fashion as the
Company was conducting such business.
(j) Taxes. The Company has timely filed all
federal, state and local tax returns or information returns required to be
filed by it. All of such returns have been prepared accurately and filed in
accordance with applicable laws and regulations. Except as set forth on
Schedule 5(j), the Company has paid all taxes and assessments (including,
without limitation, income, excise, unemployment, social security, occupation,
franchise, property, sales and use taxes, import duties or charges, and all
penalties and interest in respect thereof) due and payable by it. The Company
and any predecessors in interest have withheld or collected from each payment
made to each of their employees the amount of all taxes required to be withheld
or collected therefrom, and the Company and any predecessors in interest have
paid the same to the proper tax depositories or collecting authorities. Except
as set forth on Schedule 5(j), the Company has not (i) been audited by any
taxing authority, (ii) received notice that any taxing authority contemplates
such an audit, (iii) signed any extension agreement with any taxing authority,
(iv) received notice of any deficiencies, adjustments, assessments or other
charges with respect to taxes paid or payable or (v) made any payment, or
provided any benefit, to any officer, employee, former officer or former
employee that is not allowable as a deduction under the Code or the regulations
thereunder.
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(k) Insurance. The Company maintains in full
force and effect, with no premium arrearages, insurance policies bearing the
numbers, for the terms, with the companies, in the amounts and providing the
coverage set forth on Schedule 5(k). True and correct copies of all such
policies, and all endorsements thereto, have been delivered to SEI. All such
policies are valid, outstanding and enforceable and taken together, provide
adequate insurance coverage for the Assets and operations of the Company and
will continue in full force and effect following the consummation of the
Combination. Except as set forth on Schedule 5(k), there are no pending claims
against such insurance by the Company as to which insurers are defending under
reservation of rights or have denied liability, and except as set forth on
Schedule 5(k), there exists no claim under such insurance that has not been
properly filed by the Company.
(l) Environmental Conditions.
(i) The Company is currently in
compliance with all Environmental Laws (as defined below), which
compliance includes, without limitation, the possession by the Company
of all permits and other governmental authorization required under
applicable Environmental Laws to operate the business as currently
operated, and is in compliance with the terms and conditions thereof.
(ii) The Company has not stored any
Hazardous Substances (as defined below) on any of the Real Property,
except in compliance with applicable Environmental Laws.
(iii) The Company has not disposed of or
released any Hazardous Substances on any of the Real Property.
(iv) The Company has not utilized any
transporters or disposal facilities for the transport or disposal of
Hazardous Substances except as indicated on Schedule 5(l)(iv).
(v) The Company has not received any
communication (written or oral), whether from a governmental
authority, citizen's group, employee or otherwise, that alleges that
such entity is not in full compliance with Environmental Laws, and
there are no circumstances that may prevent or interfere with such
full compliance in the future. There is no Environmental Claim (as
defined below) pending or threatened against the Company.
(vi) There have been no actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge, presence or
disposal of any Hazardous Substances that could form the basis of any
Environmental Claim against the Company, and the Company knows of no
such actions, activities, circumstances, conditions, events or
incidents.
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(vii) The Real Property and, to the best
knowledge of the Company, adjoining properties, have never been
utilized for any industrial or commercial operation involving any
Hazardous Substance except in the ordinary course of business.
The following terms shall have the following
meanings:
Environmental Claim means any claim, action,
cause of action, investigation or notice (written or oral) by any
person or entity alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resources damages,
property damages, personal injuries, or penalties) arising out of,
based on or resulting from (a) the presence, or release into the
environment, of Hazardous Substances at any location which is or has
been owned, leased, operated or utilized by the Company or (b)
circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law.
Environmental Laws means the federal, state,
regional, county or local environmental, health or safety laws,
regulations, ordinances, rules and policies and common law in effect
on the date hereof and the Closing Date relating to the use,
refinement, handling, treatment, removal, storage, production,
manufacture, transportation or disposal, emissions, discharges,
releases or threatened releases of Hazardous Substances, or otherwise
relating to protection of human health or the environment (including,
without limitation, ambient air, surface water, ground water, land
surface or subsurface strata), as the same may be amended or modified
to the date hereof and the Closing Date.
Hazardous Substances means any toxic or
hazardous waste, pollutants or substances, including, without
limitations, asbestos containing materials (ACMs), polychlorinated
biphenyls (PCBs), petroleum products, byproducts, or other hydrocarbon
substances, substances defined or listed as a hazardous waste,
hazardous substance, toxic substance, toxic pollutant, or similarly
identified substance or mixture, in or pursuant to any Environmental
Law and medical or infectious waste.
(m) Contracts and Commitments. Except as
described on Schedule 5(m) hereto, the Company is not a party or subject to any
of the following (whether written or oral, express or implied): (i) any
agreement restricting competition or (ii) any commitments or obligations,
contingent or otherwise, under any contract or agreement (A) for the purchase
or sale of supplies, services or other items in excess of $10,000 in any one
instance, (B) for the purchase or sale of any equipment or machinery which is
capitalized or which is expensed and in excess of $10,000, (C) for the
performance of services for others in excess of $10,000 in any one instance or
for a period of more than 90 days, (D) for the lease of any property, tangible
or intangible, (E) with any Shareholder, partner, officer or director of the
Company or any affiliate of such persons, (F) not in the ordinary course of
business or (G) for any power of attorney, whether limited or general, granted
by or to the Company. The Company has
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<PAGE> 14
delivered to SEI true and complete copies of all of the contracts, leases and
agreements described on Schedule 5(m) (the Company Agreements). Except as noted
in such Schedule, the Company Agreements are valid and in full force and
effect, there has been no threatened cancellation thereof and there are no
outstanding disputes thereunder; each is with unrelated third parties and was
entered into on an arms-length basis in the ordinary course of business; all
will continue to be binding in accordance with their terms after consummation
of the transactions contemplated herein; and to the knowledge of the Company,
there is no pending or threatened bankruptcy, insolvency or similar proceeding
with respect to any other party to the Company Agreements. There are no
contracts, leases, agreements or other instruments to which the Company is a
party or is bound (other than insurance policies) which could either singularly
or in the aggregate have an adverse effect on the value of the Company.
(n) No Undisclosed Liabilities. With the
exception of the liabilities set forth on Schedule 5(n) or as reflected on the
Financial Statements, the Company does not have any material liabilities or
obligations of any nature, whether absolute, accrued, contingent or otherwise
or whether due or to become due, and the Company knows or has no reason to know
of any basis for the assertion against the Company of any such liability or
obligation of any nature not described in Schedule 5(n).
(o) Employees and Labor Matters.
(i) Schedule 5(o) contains a complete
and accurate list of the following information for each employee or
director of the Company: name; job title; current compensation paid or
payable and any change in compensation since December 31, 1995;
vacation accrued; and service credited for purposes of vesting and
eligibility to participate under any pension, retirement,
profit-sharing, thrift-savings, deferred compensation, stock bonus,
stock option, cash bonus, employee stock ownership (including
investment credit or payroll stock ownership), severance pay,
insurance, medical, welfare, or vacation plan, or any other employee
benefit plan or any director plan.
(ii) No employee or director of the
Company is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee or director and
any other person or entity that in any way adversely affects or will
affect (A) the performance of his duties as an employee or director of
the Company, or (B) the ability of the Company to conduct its
business. To the Company's knowledge, no director, officer, or other
key employee of the Company intends to terminate his employment with
the Company.
(iii) The Company is in compliance in all
material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, wages and
hours, occupational safety and health, including laws concerning
unfair labor practices within the meaning of Section 8 of the National
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<PAGE> 15
Labor Relations Act, and the employment of non-residents under the
immigration Reform and Control Act of 1986.
(iv) Except as disclosed on Schedule
5(o),
(A) there are no charges,
governmental audits, investigations, administrative
proceedings or complaints concerning the Company's employment
practices pending or, to the knowledge of the Company,
threatened before any federal, state or local agency or court,
and, to the knowledge of the Company, no basis for any such
matter exists;
(B) the Company is not a party to
any union or collective bargaining agreement, and, to the
knowledge of the Company, no union attempts to organize the
employees of the Company have been made, nor are any such
attempts now threatened; and
(C) the Company has not experienced
any organized slowdown, work interruption, strike or work
stoppage by its employees.
(p) Employee Benefit Matters. The employee
benefit plans and agreements described in Schedule 5(p) hereto are the only
employee benefit plans and agreements maintained by the Company for the benefit
of its Shareholders, officers, directors, employees, former employees, or
independent contractors, including, without limitation, (i) profit sharing,
pension, ESOP, 401(k) or other retirement plans or programs, (ii) current and
deferred compensation, severance, vacation, stock purchase, stock option, bonus
and incentive compensation benefits and (iii) medical, hospital, life, health,
accident, disability, death and other fringe and welfare benefits, including
any split-dollar life insurance policies, all of which plans, programs,
practices, policies and other individual and group arrangements and agreements,
including any unwritten compensation, fringe benefit, payroll or employment
practices, procedures or policies of any kind or description are hereinafter
referred to as the Benefit Plans. Except as disclosed on Schedule 5(p), there
are no contributions or payments due with respect to any of the Benefit Plans,
nor will any such contributions or payments be due or required to be paid on or
prior to the Closing Date. Each Benefit Plan of the Company has been operated
and administered in substantial compliance with the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA), and the provisions of the Code
applicable to it. No Benefit Plan of the Company that is subject to the minimum
funding standards of ERISA or the Code, if any, has incurred any accumulated
funding deficiency within the meaning of ERISA or the Code. All contributions
with respect to a Benefit Plan of the Company that is subject to Code Section
412 or ERISA Section 302 have been timely made and there is no lien or expected
to be a lien under Code Section 412(n) or ERISA Section 302(f) or tax under
Code Section 4971. No Benefit Plan of the Company has a liquidity shortfall as
defined in Code Section 412(m)(5). The Company is not subject to and cannot
reasonably be expected to become subject to a lien under Code Section
401(a)(29). No event has occurred in connection with a Benefit Plan of the
Company that could result in liability to the Company under Title IV of
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<PAGE> 16
ERISA. The Company has not incurred any liability to the Pension Benefit
Guaranty Corporation in connection with any Benefit Plan of the Company which
is subject to Title IV of ERISA, if any. The assets of each Benefit Plan of the
Company that is subject to Title IV of ERISA, if any, are sufficient to provide
all benefit liabilities (as defined in ERISA Section 4001(a)(16)) under such
Benefit Plan if such Benefit Plan terminated, and are also sufficient to
provide all other benefits due under the Benefit Plan (including, but not
limited to, ancillary, disability, shutdown, early retirement and welfare
benefits). The Company has not had an obligation to contribute (as defined in
ERISA Section 4212) to a multi-employer pension plan (as defined in ERISA
Sections 4001(a)(3) and 3(37)(A)) at any time. No event which constitutes a
reportable event as defined in Section 4043 of ERISA has occurred or is
continuing with respect to any Benefit Plan covered by ERISA. No facts exist
which will result in a material increase in the premium costs of any Benefit
Plan for which benefits are insured or a material increase in benefit costs of
any Benefit Plan which provides self-insured benefits. No prohibited
transaction (as defined in ERISA Section 406 or Code Section 4975) has occurred
with respect to any Benefit Plan. None of the Benefit Plans has any current or
projected liability in respect of post-employment or post-retirement health or
medical or life insurance benefits for former or retired employees of the
Company, except as required to avoid excise taxes under Code Section 4980B. All
Benefit Plans subject to Code Section 4980B or Part 6 of Title I of ERISA have
been maintained in compliance with the requirements of Code Section 4980B and
Part 6 of Title I of ERISA. There is no contract, agreement, plan or
arrangement covering any employee or former employee of the Company that could
result in the payment of any amount that would not be deductible under Code
Sections 162(m) or 280G. As of the Closing Date, the Company has no material
liabilities under any Benefit Plan that is not reflected in the Financial
Statements.
(q) Trademarks, Trade Names, Etc. Set forth on
Schedule 5(q) is a description of each trademark, trade name, service mark,
patent or copyright held by the Company and any current registration or
application with respect thereto. The Company is not currently in receipt of
any notice of any violation of, and has no reason to believe that the Company's
operations are violating the rights of others with respect to any such matter,
and the Company has taken reasonable measures to protect its rights with
respect to any such matters as are proprietary to the Company.
(r) Litigation. Except as set forth in Schedule
5(r), there is no litigation, arbitration, governmental claim, investigation or
proceeding pending or threatened against the Company, at law or in equity,
before any court, arbitration tribunal or governmental agency. No such
proceeding set forth in Schedule 5(r) concerns the ownership or other rights
with respect to the Shares. The Company knows of no facts on which material
claims may be hereafter made against the Company. All claims and litigation
against the Company are fully covered by insurance, except as indicated on
Schedule 5(r).
(s) Compliance with Laws, Regulations and Court
Orders. There is not outstanding or threatened any order, writ, injunction or
decree of any court, governmental agency or arbitration tribunal against or
affecting the Company, its Shareholders or the Shares.
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The Company is in compliance with all applicable federal, state and local laws,
regulations and administrative orders, including without limitation those
concerning the sale of insurance in connection with the warranties provided for
pursuant to the Company's service and maintenance agreements, and have received
no notices of alleged violations thereof except as disclosed in Schedule 5(s)
hereof. Neither the Company, nor, to the knowledge of the Company, any licensed
technician or other individual affiliated with the Company has, during the past
three (3) years, been the subject of any inspection, investigation, survey,
audit, monitoring or other form of review by any governmental regulatory
entity, trade association, professional review organization, accrediting
organization or certifying agency for the purpose of any alleged improper
activity on the part of such individual, nor has the Company received any
notice of deficiency in connection with its operation. No governmental
authorities are currently conducting proceedings against the Company and no
such investigation or proceeding is pending or being threatened.
(t) Certain Payments. Neither the Company nor any
Shareholder, director, officer, agent, or employee of the Company, or any other
person associated with or acting for or on behalf of the Company, has directly
or indirectly (i) made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback or other payment to any person, private or public, regardless
of form, whether in money, property, or services (A) to obtain favorable
treatment in securing business, (B) to pay for favorable treatment for business
secured, (C) to obtain special concessions or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company, or
(D) in violation of any law, or (ii) established or maintained any fund or
asset that has not been recorded in the books and records of the Company.
(u) Consents and Approvals. Except as set forth
on Schedule 5(u), no consents, approvals, authorizations or orders of third
parties, including governmental authorities, are necessary for the
authorization, execution and performance by the Company of this Agreement.
(v) No Broker's Fees. The Company has no
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the transactions contemplated by this Agreement.
(w) Disclosure.
(i) No representation or warranty made
herein by the Company, nor in any statement, certificate or instrument
to be furnished to SEI by the Company pursuant to any Transaction
Document, contains or will contain any untrue statement of material
fact or omits or will omit to state a material fact necessary to make
these statements contained herein and therein not misleading.
(ii) There is no fact known to the
Company that has specific application to the Company (other than
general economic or industry conditions) and that
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materially adversely affects the Shares, the Assets or the business,
prospects, financial condition, or results of operations of the
Company that has not been set forth in this Agreement.
(x) Reliance on Representations. The Company
understands and intends that SEI and its management will rely upon the
representations of the Company made in this Agreement, and they are entitled to
rely upon each and all of the same without further inquiry.
Section 6. Representations and Warranties of SEI. SEI hereby
represents and warrants to the Company as follows as of the date hereof and as
of the Closing Date:
(a) Corporate Organization. SEI is a corporation
duly organized, validly existing and in good standing under the laws of its
state of incorporation, has all requisite corporate power and authority to
execute and deliver this Agreement and holds all licenses, permits and other
required authorizations from governmental authorities necessary to conduct its
business as it is now being conducted.
(b) Capitalization. As of the date hereof, SEI's
authorized capital stock consists of (i) 30,000,000 shares of SEI Common Stock,
8,576,610 of which are issued and outstanding and (ii) 10,000,000 shares of
Preferred Stock, $.01 par value per share, none of which are issued and
outstanding. All issued and outstanding shares of SEI Common Stock have been
duly and validly authorized, issued, fully paid and nonassessable. No
shareholder of SEI has any preemptive rights with respect to the issuance of
shares of SEI Common Stock.
(c) Authorization and Validity. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized and approved by all
necessary corporate action. This Agreement, when executed, will constitute the
legal, valid and binding obligation of SEI, enforceable against SEI in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
and subject to general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(d) Absence of Conflicting Agreements or Required
Consents. The execution, delivery and performance by SEI of the Transaction
Documents to be executed and delivered by it (i) do not require the consent of
or notice to any governmental or regulatory authority or any other third party;
(ii) will not conflict with any provision of SEI's Restated Certificate of
Incorporation or Bylaws; (iii) will not conflict with or result in a violation
of any law, ordinance regulation, ruling, judgement, order or injunction of any
court or governmental instrumentality to which SEI is a party or by which SEI
or any of its properties are bound; (iv) will not conflict with, constitute
grounds for termination of, result in a breach of, constitute a default under,
require any notice under, or accelerate or permit the acceleration of any
performance required by the terms of any agreement, instrument, license or
permit to which SEI
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is a party or by which any of its properties are bound; and (v) will not create
any lien, encumbrance or restriction upon any of the assets or properties of
SEI.
(e) Litigation and Claims. There are no claims,
lawsuits, actions, arbitrations, administrative or other proceedings,
governmental investigations or inquiries pending or threatened against SEI
affecting the performance by SEI of the Transaction Documents and there is no
basis for any such action or any state of facts or occurrence of any event
which might give rise to the foregoing.
(f) No Broker's Fees. Except as set forth on
Schedule 6(f), SEI does not have any liability or obligation to pay any fees or
commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement.
(g) Statements True and Correct. No
representation or warranty made herein by SEI, nor in any statement,
certificate or instrument to be furnished to the Company by SEI pursuant to any
Transaction Document, contains or will contain any untrue statement of material
fact or omits or will omit to state a material fact necessary to make these
statements contained herein and therein not misleading.
Section 7. Additional Covenants and Agreements.
(a) Access to Information. The Company shall
accord to SEI, its counsel, accountants and other representatives full access
throughout the period prior to the Closing to all of the properties, books,
records, contracts, commitments and records of the Company and furnish SEI
during such period with all such information concerning the business and
properties of the Company as SEI and its representatives reasonably may
request. Such parties shall also be allowed access, upon reasonable notice, to
consult with the officers, employees, accountants, counsel and agents of the
Company in connection with such investigation of the properties and business of
the Company. In addition, at all times prior to the Closing, SEI will afford
to the Company and its representatives access, upon reasonable notice, to all
of SEI's properties, books and records as the Company may reasonably request.
No such investigation shall diminish or otherwise affect any of the
representations, warranties, covenants or agreements of any party under the
Agreement.
(b) Affirmative Covenants of the Company. During
the period from the date of this Agreement to the Closing Date, the Company
will (i) continue to operate its business in the usual, regular, and ordinary
course of business, consistent with past practices, (ii) obtain the written
approval of SEI prior to making any capital expenditure in excess of $25,000 in
the aggregate, (iii) maintain in effect adequate casualty, public liability,
professional malpractice and workers' compensation insurance coverage, (iv)
maintain the Assets in their present condition, (v) comply with all laws and
regulations of governmental agencies or authorities, including applicable tax
laws and regulations, (vi) operate its business in the manner necessary to
maintain its reputation and the goodwill of its customers, vendors, lessors and
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others having business relations with the Company, and (vii) to keep in force
all licenses, permits and approvals necessary to the operation of its business
as now conducted.
(c) Negative Covenants of the Company. During the
period from the date of this Agreement to the Closing Date, the Company will
not, without the prior written consent of SEI, and unless otherwise expressly
permitted herein:
(i) enter into, renew, amend, breach or
terminate any contract or agreement to which it is a party other than
in the ordinary course of business;
(ii) increase the salary of or declare or
pay any bonus to any employee;
(iii) incur any additional debt obligation
or other obligation for borrowed money in excess of an aggregate of
$25,000 except in the ordinary course of business of the Company
consistent with past practices, or impose, or suffer the imposition,
on any Asset of the Company of any lien or permit any such lien to
exist;
(iv) issue, sell, repurchase, redeem, or
otherwise acquire or exchange, directly or indirectly, any Shares or
any securities convertible into any Shares, or declare or pay any
dividend or make any other distribution in respect of the Shares;
(v) purchase or acquire any of the
Assets, whether real or personal, tangible or intangible, or sell or
dispose of any of the Assets, whether real or personal, tangible or
intangible, except in the ordinary course of business and consistent
with past practices;
(vi) purchase any securities or make any
material investment, either by purchase of stock or other securities,
contributions to capital, asset transfers, or purchase of any assets,
in any entity, or otherwise acquire direct or indirect control over
any other entity;
(vii) except in the ordinary course of
business (and, even if in the ordinary course of business, then not in
an amount to exceed $25,000 in the aggregate), make or commit to make
any capital expenditure, or enter into any lease of capital equipment
as lessee or lessor;
(viii) make any loan to any person or
increase the aggregate amount of any loan currently outstanding to any
person;
(ix) engage in any transaction other than
in the ordinary course of business and consistent with past practice;
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(x) adopt any new employee benefit plan
or make any material change in or to any Benefit Plan other than any
such change that is required by law or that, in the opinion of
counsel, is necessary or advisable to maintain the tax qualified
status of any such Benefit Plan;
(xi) commence any litigation other than
in accordance with past practice, settle any litigation involving any
liability of the Company for material money damages or restrictions
upon the operations of the Company;
(xii) fail to deliver to SEI any notice or
other information regarding pending or threatened litigation in
respect of it or its operations;
(xiii) take, fail to take, or permit any
action, the result of which would be to make any representation or
warranty of Section 5 untrue, or prevent the satisfaction of any
condition set forth in Sections 8 and 10;
(xiv) change or alter any method of
accounting; or
(xv) change any provision of its Articles
of Incorporation or Bylaws.
(d) Notice of Adverse Change. The Company will
advise SEI in writing of any material adverse change in the Assets, the
business, financial condition or prospects of the Company from the date of this
Agreement to the Closing Date.
(e) Best Efforts. The Company will use its best
efforts to take all action and to do all things necessary, proper or advisable
to consummate the transactions contemplated by this Agreement. The Company will
use its best efforts to secure all consents and approvals required to carry out
the transactions contemplated by this Agreement and to satisfy all other
conditions to the obligations of the Company and SEI hereunder.
(f) Licenses; Permits. The Company will cooperate
in all reasonable respects with SEI in its applications to obtain such licenses
and permits, if any, as may be necessary in order for SEI to operate the
business as it is currently operated.
(g) No Solicitation of Other Offers. The Company,
acting through any director, officer or other agent (including any investment
banker, attorney, accountant or other representative retained by it), shall not
solicit or encourage, including by way of furnishing information, any inquiries
or the making of any proposal which may reasonably be expected to lead to the
acquisition of any of the Shares or a substantial portion of the Assets. The
Company will not, prior to the Closing, enter into or conduct any discussions
with any other prospective purchaser of any or all of the Shares or the Assets
regarding such a purchase or enter into any agreement or negotiations with
respect to the disposition of any or all of the Shares or the Assets,
regardless of the form of the transaction, without the consent of SEI, other
than in the
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ordinary course of business. The Company shall promptly advise SEI in writing
of any such inquiries, proposals or discussions received by the Company after
the date hereof.
(h) Confidentiality and Public Announcements. The
Company shall keep confidential all information concerning the Combination or
provided to it by SEI and, in the event of termination of the Combination
pursuant to Section 11, shall deliver to SEI all documents and other materials
previously delivered (and copies thereof) concerning the transactions
contemplated hereby. Neither the Company nor its Shareholders nor any of their
representatives shall make any public announcement with respect to this
Agreement without the prior written consent of SEI.
(i) Risk of Loss. The Company shall retain all
risk of condemnation, destruction, loss or damage due to fire or other casualty
from the date of this Agreement until the Closing. If the condemnation,
destruction, loss or damage is such that the operation of the Company is
materially interrupted or curtailed or any of the Assets are materially
affected, then SEI shall have the right to terminate this Agreement. If SEI
nonetheless elects to close, the Company shall remit all net condemnation
proceeds or third party insurance proceeds to SEI, and either the number of
shares of SEI Common Stock to be delivered pursuant to Section 2(a) shall be
adjusted at the Closing to reflect such condemnation, destruction, loss or
damage to the extent that insurance or condemnation proceeds are not sufficient
to cover such destruction, loss or damage.
(j) Subchapter S Matters. If the Company is an S
corporation, the Company shall prepare and file, at its expense, the short
period tax returns of the Company ending on the Closing Date. Such returns
shall be provided for SEI's prior review and approval, which approval shall not
be unreasonably withheld or delayed. The Company shall file as an S corporation
for that short period. SEI shall make available any information in its or the
Company's possession which is reasonably required by the Company to complete
such returns at no cost to the Company.
(k) Affiliates. Each person who is an Affiliate
of the Company, as that term is defined in the Securities Act of 1933, as
amended (the Act), hereby acknowledges and agrees to the following: (i) the
shares of Common Stock issuable to such Affiliate will be held by such
Affiliate pursuant to the provisions of the Act and the rules and regulations
thereunder, (ii) no sale or disposition of such shares of Common Stock will be
made except pursuant to the terms of SEI's shelf Registration Statement on Form
S-4 (the Registration Statement), the post-effective amendment and the
prospectus contained therein, the Act, and Rule 145(d) thereunder, and (iii)
each such certificate representing the shares of Common Stock issued to an
Affiliate will bear a restrictive legend setting forth the restrictions on
transfer referred to above.
Section 8. Conditions to Each Party's Obligation to Effect the
Combination. The respective obligation of each party to effect the Combination
shall be subject to the fulfillment at or prior to the Closing Date of the
following conditions:
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<PAGE> 23
(a) This Agreement and the transactions
contemplated hereby shall have been approved in the manner required by
applicable law, by the applicable regulations of the Nasdaq National Market and
by any regulatory body, as the case may be, and by the requisite vote of the
Shareholders.
(b) Any waiting period applicable to the
consummation of the Combination under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 shall have expired or been terminated.
(c) Neither of the parties hereto shall be
subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by this Agreement.
In the event any such order or injunction shall have been issued, each party
agrees to use its reasonable efforts to have any such injunction lifted.
(d) SEI's Registration Statement shall have
become effective and shall be effective at the Effective Time, and no stop
order suspending effectiveness of the Registration Statement shall have been
issued, no action, suit, proceeding or investigation by the SEC to suspend the
effectiveness thereof shall have been initiated and be continuing, and all
necessary approvals under state securities laws relating to the issuance or
trading of the SEI Common Stock to be issued to the Shareholders in connection
with the Combination shall have been received.
(e) All consents, authorizations, orders and
approvals of (or filings or registrations with) any governmental commission,
board or other regulatory body required in connection with the execution,
delivery and performance of this Agreement shall have been obtained or made,
except for filings in connection with the Combination and any other documents
required to be filed after the Effective Time and except where the failure to
have obtained or made any such consent, authorization, order, approval, filing
or registration would not have a material adverse effect on the business of SEI
and the Company (and their respective subsidiaries), taken as a whole,
following the Effective Time.
(f) The SEI Common Stock to be issued to the
Shareholders in connection with the Combination shall have been approved for
listing on the Nasdaq National Market, subject only to official notice of
issuance.
Section 9. Conditions to Obligation of the Company to Effect the
Combination. The obligation of the Company to effect the Combination shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) Representations and Warranties. The
representations and warranties of SEI set forth herein in Section 6 above shall
be true and correct in all material respects as of the Closing Date with the
same effect as though made on and as of such date.
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<PAGE> 24
(b) Performance; Document Delivery. SEI shall
have performed in all material respects, at or prior to the Closing Date, all
acts in accordance with its covenants set forth herein, including, but not
limited to, delivery to the Company of the following documents:
(i) Certificates for the Shares of SEI
Common Stock to be issued pursuant to Section 2;
(ii) A good standing certificate
regarding SEI certified by the Secretary of State of the State of
Delaware dated within five business days prior to Closing;
(iii) A certificate dated as of the
Closing Date signed by a duly authorized officer of SEI certifying
that the representations and warranties of SEI set forth herein are
true and correct in all material respects as of the Closing Date and
that SEI has fulfilled all of the conditions of this Section 9;
(iv) Resolutions adopted by the Board of
Directors of SEI approving the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated
hereby, certified by the Secretary of SEI; and
(v) An incumbency certificate certifying
the identity of the officers of SEI.
(c) Opinion of Counsel. SEI shall have delivered
to the Company an opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company, counsel to SEI, dated the Closing Date,
substantially in the form attached hereto as Schedule 9(c). In addition, the
Company shall have received an opinion of counsel to the Company in form and
substance satisfactory to the Company concerning the tax consequences of the
Combination to the Company and the Shareholders.
(d) No Injunction, Etc. No action proceeding,
investigation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit or obtain substantial damages in respect of, or which is related to or
arises out of, this Agreement or the consummation of the transactions
contemplated hereby, or which is related to or arises out of the business or
operations of SEI, if such action, proceeding, investigation or legislation, in
the reasonable judgment of the Company or its counsel, would make it
inadvisable to consummate such transactions.
Section 10. Conditions to Obligation of SEI to Effect the
Transaction. The obligations of SEI to effect the Combination shall be subject
to the fulfillment at or prior to the Closing Date of the following conditions:
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<PAGE> 25
(a) Due Diligence Review; Delivery of Schedules.
SEI shall have completed, and in its sole discretion be satisfied with the
results of, its due diligence review of the operations and financial condition
of the Company. The Company shall have delivered to SEI the Schedules called
for by this Agreement, and such Schedules shall be satisfactory to SEI in its
sole discretion.
(b) Representations and Warranties. The
representations and warranties of the Company contained in this Agreement, or
any document or instrument delivered to SEI hereunder, shall be true and
correct in all material respects as of the Closing Date with the same effect as
though made on and as of such date.
(c) Performance; Document Delivery. The Company
shall have performed in all material respects, at or prior to the Closing Date,
all acts in accordance with their covenants herein, including, but not limited
to, delivery to SEI of the following documents:
(i) A good standing certificate
regarding the Company and any Shareholder that is not a natural
person, certified by the Secretary of State of such party's state of
organization dated within five business days prior to Closing;
(ii) A certificate dated as of the
Closing Date signed by the duly authorized officers of the Company
certifying that the representations and warranties of the Company set
forth herein are true and correct in all material respects as of the
Closing Date and that the Company has fulfilled all of the conditions
of this Section 10;
(iii) Resolutions of the Board of
Directors and Shareholders of the Company and any Shareholder that is
not a natural person in form and substance satisfactory to SEI
approving the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby,
certified by an appropriate officer of the Company and any such
Shareholder;
(iv) An incumbency certificate certifying
the identity of the officers of the Company and any Shareholder that
is not a natural person;
(v) Certificates representing the Shares
being exchanged, together with accompanying stock transfer powers or
instruments of assignment, duly endorsed in blank;
(vi) Resignations of each of the officers
and directors of the Company effective as of the Closing Date;
(vii) Releases of each Shareholder and
each officer and director of the Company concerning any claim against
the Company other than current accrued wages and benefits;
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(viii) All books and records of the
Company, including all corporate and other records, minute books,
stock record books, stock registers, books of accounts, contracts,
agreements and such other documents or certificates as shall be
reasonably requested by SEI; and
(ix) Evidence that all agreements or
arrangements, whether written or oral, among the Shareholders and/or
the Company that relate in any manner to the Shares have been
terminated.
(d) No Adverse Change. There shall not have been
any change between the date of the latest Financial Statements and the Closing
Date which has had or will have a material adverse effect on the business,
operations, financial condition, Assets or prospects of the Company, and a
certificate shall have been delivered to SEI to such effect signed by each of
the Shareholders and such executive officers of the Company as SEI may request.
(e) Opinion of Counsel. SEI shall have been
furnished with a favorable opinion of counsel to the Company, dated the Closing
Date, substantially in the form attached hereto as Schedule 10(e).
(f) Consents and Approvals. The Company shall
have obtained all necessary consents and approvals, in form and substance
satisfactory to SEI, required under all leases and other material contracts
pertaining to the Assets or the business of the Company and satisfying any
approval or permit or licensing requirements for consummation of this
transaction and necessary to carry on the business of the Company as it is
currently being conducted.
(g) No Injunction, Etc. No action, proceeding,
investigation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or legislative body to enjoin, restrain,
prohibit or obtain substantial damages in respect of, or which is related to or
arises out of, this Agreement or the consummation of the transactions
contemplated hereby, or which is related to or arises out of the business or
operations of the Company, if such action, proceeding, investigation or
legislation, in the reasonable judgment of SEI or its counsel, would make it
inadvisable to consummate such transactions.
(h) Lockup Agreements. Each person listed on
Schedule 10(h)(i) shall have entered into an agreement with SEI restricting the
resale of shares of Common Stock substantially in the form attached hereto as
Schedule 10(h)(ii).
(i) Employment Agreements. SEI and certain
employees of the Company shall have entered into employment agreements
substantially in the form attached hereto as Schedule 10(i).
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<PAGE> 27
(j) Indemnification Agreements. SEI and each of
the Shareholders shall have entered into Indemnification Agreements
substantially in the form attached hereto as Schedule 10(j).
(k) Escrow Agreements. SEI and each of the
Shareholders shall have entered into the Escrow Agreement pursuant to Section
2(a)(iii).
(l) Pension Plan Liability. SEI shall be
satisfied that it will incur no liability with respect to pension or other
post-retirement benefits, except pursuant to SEI's pension plan in which all
full-time Company employees, who will remain employed by the Company after the
Closing, are eligible to participate.
(m) Board Approval. This Agreement and the
Combination shall have been approved and authorized by the Board of Directors
of SEI.
Section 11. Termination.
(a) Means of Termination. This Agreement may
be terminated at any time prior to the Closing in the following ways:
(i) by the mutual consent in writing of
the Company and SEI;
(ii) by SEI if there has been a material
violation or breach by the Company of any of the agreements,
representations or warranties contained in this Agreement which has
not been waived by SEI in writing, or if any of the conditions set
forth in Sections 8 and 10 hereof have not been satisfied within six
(6) months of the date hereof or have not been waived by SEI in
writing;
(iii) by the Company if there has been a
material violation or breach by SEI of any of the agreements,
representations or warranties contained in this Agreement which has
not been waived by the Company in writing, or if any of the conditions
set forth in Sections 8 and 9 hereof have not been satisfied within
six (6) months of the date hereof or have not been waived by the
Company in writing; or
(b) Effect of Termination. Except as provided
in Section 12(b) hereof, in the event this Agreement is terminated in
accordance with this Section 11, this Agreement shall become void and of no
further force or effect, except the obligations of each party to preserve the
confidentiality of documents, certificates and information furnished to such
party pursuant hereto and for any obligation or liability of any party based on
or arising from any breach or default by such party with respect to its
representations, warranties, covenants or agreements contained in the
Transaction Documents.
Section 12. Expenses and Remedies.
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(a) Expenses. Except as provided in
section 12(b) hereof, each of the parties hereto shall bear and pay all costs
and expenses incurred by it or on its behalf in connection with the
Combination, including its own legal, accounting and audit fees.
(b) Remedies.
(i) The Company agrees that if the
Company terminates this Agreement pursuant to Section 11(a)(iii)
because of the failure to receive approval of the Combination by the
Shareholders, all expenses, including, without limitation, all legal
and accounting expenses, incurred by SEI in connection with the
negotiations among the parties, and the authorization, preparation,
execution and performance of this Agreement and the transactions
contemplated hereby shall be paid by the Company.
(ii) The Company agrees that in the event
of a termination of this Agreement pursuant to Section 11, for a
period of six months from the date of such termination, neither the
Company nor any of its officers, directors, management employees,
affiliated persons or agents, or the Shareholders, will, directly or
indirectly, (A) negotiate or discuss with any other person or entity
any transaction involving a merger of the Company, or the sale of any
shares in or assets of the Company (except for sales of inventory in
the ordinary course of business) or any other business combination
involving the Company, (B) reveal the terms of this Agreement to any
person or entity except for the purpose of carrying out the
transactions contemplated herein or (C) solicit, encourage, negotiate,
discuss or accept any offer, bid or proposal from any person or entity
respecting any transaction involving a merger of the Company, the sale
of any shares in or assets of the Company (except for sales of
inventory in the ordinary course of business) or any other business
combination involving the Company.
Section 13. Indemnification.
(a) Indemnification of SEI. The Company agrees to
indemnify and hold harmless SEI, each officer, director, employee or agent
thereof, their respective controlling persons, and their respective estates,
successors, and assigns (each an Indemnified Party), from and against any and
all claims, losses, damages, liabilities and expenses (including, without
limitation, settlement costs and any legal or other expenses for investigating
or defending any actions or threatened actions) (the Losses) reasonably
incurred by such Indemnified Party as a result of:
(i) the untruth, inaccuracy or breach of
any representation or warranty made by the Company in this Agreement
or any other Transaction Document;
(ii) the nonfulfillment or breach of any
covenant, agreement or obligation of the Company contained in this
Agreement or any other Transaction Document;
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(iii) any untrue statement of a material
fact relating to the Company that was made in reliance upon and in
conformity with information furnished by the Company to SEI and is
contained in any preliminary prospectus, the Registration Statement or
any prospectus forming a part thereof, or any amendment thereof or
supplement thereto, or any omission by the Company to state therein a
material fact relating to the Company required to be stated therein or
necessary to make such statements therein not misleading, and which is
not provided in writing to SEI by the Company;
(iv) any and all amounts of federal,
state, and/or local income, franchise, property, and/or sales and use
taxes that may be assessed against SEI with respect to any taxable
period(s) ending on or before the date of this Agreement for which
adequate provisions therefor have not been made through the Closing
Date, as reflected on the Company's books of account and in the
Company's financial statements as of the Closing Date; and the
amount(s) of any interest and/or penalties that may be assessed with
respect to said tax assessments. The amount(s) of any
indemnification(s) arising under this Agreement is to be computed net
of any and all tax benefits received by SEI as a result of the tax
assessment(s);
(v) any matter on any Schedule hereto as
may be specifically identified for indemnification in this Agreement
or any other Transaction Document; and
(vi) any claim or demand by any person
asserting any interest in any of the Shares or seeking dissenters' or
appraisal rights or any other claim in respect to the Combination.
(b) Limitations on the Company's Indemnity. The
Company shall be obligated to indemnify and hold harmless SEI pursuant to
Section 13(a) only to the extent that the aggregate of all indemnifiable Losses
exceeds $25,000.
(c) Indemnification of the Shareholders of the
Company. SEI shall indemnify and hold harmless the Shareholders pro rata in
accordance with their holdings of the Shares as of the Effective Time (each an
Indemnified Party) from and against any and all Losses reasonably incurred by
such Indemnified Party as a result of:
(i) the untruth, inaccuracy or breach of
any representation or warranty made by SEI in this Agreement or in any
other Transaction Document;
(ii) the nonfulfillment or breach of any
covenant, agreement or obligation of SEI contained in this Agreement
or in any other Transaction Document; or
(iii) any untrue statement or alleged
untrue statement of a material fact relating to SEI (other than those
that relate to the Company) contained in any preliminary prospectus,
the Registration Statement or any prospectus forming a part
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<PAGE> 30
thereof, or any amendment thereof or supplement thereto, or arising
out of or based on any omission or alleged omission to state therein a
material fact relating to SEI (other than the Company) required to be
stated therein or necessary to make the statements therein not
misleading.
(d) Notification. Whenever any claim shall arise
for indemnification hereunder, the Indemnified Party shall notify the
indemnifying party promptly after such Indemnified Party has actual knowledge
of the facts constituting the basis for such claim, except that, in the event
of any claim for indemnification hereunder resulting from or in connection with
any claim or legal proceedings by a third party, such Indemnified Party shall
give prompt notice to the indemnifying party of such claim or the commencement
of legal proceedings in respect of which recovery may be sought against the
indemnifying party pursuant to the provisions of this Section 13. The notice to
the indemnifying party shall specify, if known, the amount or an estimate of
the amount of the liability arising therefrom. The Indemnified Party shall not
settle or compromise any such claim without the prior written consent of the
indemnifying party unless suit shall have been instituted against the
Indemnified Party and the indemnifying party shall have failed, within fifteen
(15) days after notice of institution of the suit, to take control of such suit
as provided in Section 13(e) below.
(e) Defense of Actions. In connection with any
claim giving rise to indemnity hereunder resulting from or arising out of any
claim or legal proceeding by a person who is not a party to this Agreement, the
indemnifying party, at its sole cost and expense, may, upon written notice to
the Indemnified Party, assume the defense of such claim or legal proceeding, to
the extent that the indemnifying party admits in writing its liability to the
Indemnified Party with respect to all material elements thereof. If the
indemnifying party assumes the defense of any such claim or legal proceeding,
the obligations of the indemnifying party hereunder as to such claim or legal
proceeding shall be limited to taking all steps necessary in the defense or
settlement thereof and to holding the Indemnified Party harmless from and
against any losses, damages, expenses, or liability caused by or arising out of
any settlement approved by the indemnifying party or any judgment in connection
with such claim or legal proceeding. Each Indemnified Party agrees that it will
cooperate with the indemnifying party in the defense of any such action, the
defense of which is assumed by the indemnifying party. Except with the consent
of the Indemnified Party, the indemnifying party shall not consent to the entry
of any judgment arising from any such claim or legal proceeding which, in each
case, does not include as an unconditional term thereof the delivering by the
claimant or the plaintiff to the Indemnified Party of a release from all
liability in respect thereof, unless the indemnifying party has actually paid
to the Indemnified Party the full amount of such judgment or settlement. If the
indemnifying party does not assume the defense of any claim or litigation, any
Indemnified Party may defend against such claim or litigation in such manner as
it may deem appropriate, including, but not limited to, settling such claim or
litigation, after giving notice of the same to the indemnifying party, on such
terms as the Indemnified Party may deem appropriate. The indemnifying party
will promptly reimburse the Indemnified Party in accordance with the provisions
hereof.
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(f) Payment. All indemnification hereunder shall
be effected by payment of cash or delivery of a certified or official bank
check in the amount of the indemnification liability or by set-off against (i)
any amounts otherwise owed by SEI to the Company or by the Company to SEI, as
the case may be, or (ii) the escrowed shares of SEI Common Stock and cash
pursuant to the Escrow Agreement.
Section 14. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be personally delivered,
mailed by first-class registered or certified mail, postage prepaid, return
receipt requested or delivered by an overnight courier service, delivery charge
prepaid:
(a) If to the Company, to such address furnished
to SEI or at such other address as may be furnished to SEI by it in writing.
(b) If to SEI, to:
Service Experts, Inc.
P. O. Box 17102
Nashville, Tennessee 37217
Attention: Alan R. Sielbeck
with a copy to:
Waller Lansden Dortch & Davis,
A Professional Limited Liability Company
511 Union Street, Suite 2100
Nashville, Tennessee 37219
Attention: J. Chase Cole, Esq.
or at such other address as may have been furnished to the Company by
SEI in writing.
Section 18. Miscellaneous.
(a) Entire Agreement. This Agreement and the
Schedules, certificates and other documents delivered pursuant hereto contain
and constitute the entire agreement and understanding between the Company and
SEI and supersede and cancel all prior agreements and understandings relating
to the subject matter hereof, whether written or oral, which shall remain in
effect. Neither this Agreement nor any term hereof may be changed, waived,
discharged or terminated, except in writing signed by the parties hereto.
(b) Severability. Should any one or more of the
provisions of this Agreement or any agreement entered into pursuant hereto be
determined to be illegal or unenforceable, all other provisions of this
Agreement and such other agreements shall be given
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effect separately from the provision or provisions determined to be illegal or
unenforceable and shall not be affected thereby.
(c) Governing Law. This Agreement shall be
construed and enforced in accordance with the laws of the State of Tennessee
without regard to its principles of conflicts of laws.
(d) Further Assurances. Each party covenants that
at any time, and from time to time, after the Closing, it will execute such
additional instruments and take such actions as may be reasonably requested by
the other parties to confirm or perfect or otherwise to carry out the intent
and purposes of this Agreement.
(e) Waiver. Any failure on the part of any party
to comply with any of its obligations, agreements or conditions hereunder may
be waived by any other party to whom such compliance is owed. No waiver of any
provision of this Agreement shall be deemed, or shall constitute, a waiver of
any other provision, whether or not similar, nor shall any waiver constitute a
continuing waiver.
(f) Assignment. SEI may assign its rights under
this Agreement to any affiliated entity, but otherwise this Agreement shall not
be assignable by any of the parties hereto without the written consent of all
other parties.
(g) Binding Effect. All of the terms of this
Agreement, whether so expressed or not, shall be binding upon the respective
personal representatives, successors and assigns of the parties hereto and
shall inure to the benefit of and be enforceable by the respective personal
representatives, successors and assigns of the parties hereto. This Agreement
shall survive the Closing and not be merged therein.
(h) Headings. The headings in this Agreement are
for convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(i) Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
(j) Survival of Representations and Warranties.
The representations and warranties of the parties contained in this Agreement
or any other Transaction Document shall survive the Closing and shall not be
extinguished thereby notwithstanding any investigation or other examination by
any party.
(k) Construction of Terms. The language used in
the Agreement shall be construed, in all cases, according to its fair meaning,
and not for or against either party hereto. The parties acknowledge that each
party has reviewed this Agreement and that normal rules of construction to the
effect that any ambiguities are to be resolved against the drafting
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party shall not be employed in the interpretation of this Agreement. Whenever
the masculine gender is used herein, it shall be deemed to include the feminine
and the neuter.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the day and date first above written.
SERVICE EXPERTS, INC.
By:
---------------------------------
Title: Chief Executive Officer
-------------------------------------
By:
----------------------------------
Title:
-------------------------------
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LIST OF SCHEDULES TO BE PROVIDED BY THE COMPANY
Schedule 2(a)(ii) Allocation of Purchase Price
Schedule 4(a) Title to the Shares
Schedule 4(e) Interested Transactions
Schedule 5(a) Jurisdictions Where Qualified
Schedule 5(b) Capitalization
Schedule 5(e) Predecessor Companies; Disposition of Assets
Schedule 5(f)(i) Financial Statements
Schedule 5(f)(ii) Exceptions to Financial Statements
Schedule 5(g) Accounts Receivable and Payable
Schedule 5(h) Absence of Certain Changes
Schedule 5(i)(i) Ownership of Properties
Schedule 5(i)(ii) Exceptions to Ownership of Properties
Schedule 5(j) Taxes
Schedule 5(k) Insurance
Schedule 5(l)(iv) Environmental Conditions
Schedule 5(m) Contracts and Commitments
Schedule 5(n) Liabilities
Schedule 5(o) Employees and Labor Matters
Schedule 5(p) Employee Benefit Plans and Agreements
Schedule 5(q) Trademarks, Trade Names, Etc.
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Schedule 5(r) Litigation
Schedule 5(s) Compliance with Laws, Regulations and Court
Orders
Schedule 5(u) Consents and Approvals
Schedule 10(e) Form of Opinion of Counsel to the Company
Schedule 10(h)(i) Persons Subject to Lockup
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LIST OF SCHEDULES TO BE PROVIDED BY SEI
Schedule 2(a)(iii) Form of Escrow Agreement
Schedule 2(c) Adjustments to Net Income
Schedule 6(g) No Broker's Fees
Schedule 9(c) Form of Opinion of Waller Lansden
Dortch & Davis, A Professional
Limited Liability Company
Schedule 10(h)(ii) Form of Lockup Agreement
Schedule 10(i) Form of Employment Agreement
Schedule 10(j) Form of Indemnification Agreement
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 5, 1996, except for the first
paragraph of Note 1 and the second and third paragraphs of Note 11, as to which
the date is November 14, 1996 with respect to the financial statements of
Service Experts, Inc., (formerly AC Service & Installation Co. Inc. and Donelson
Air Conditioning Company), the use of our report dated November 8, 1996 with
respect to the financial statements of Falso Heating and Sheet Metal Co., Inc.,
the use of our report dated October 11, 1996 with respect to the combined
financial statements of Pardee Refrigeration Company, Incorporated, Island Air
Conditioning, Inc. and Sanders Indoor Comfort, Inc., the use of our report dated
November 8, 1996 with respect to the financial statements of Frees Service
Experts, Inc., the use of our report dated November 8, 1996 with respect to the
financial statements of Custom Air Conditioning, Inc., the use of our report
dated May 24, 1996 with respect to the financial statements of Gordon's
Specialty Company, Inc., the use of our report dated November 1, 1996 with
respect to the combined financial statements of Dial One Service Champions, ET
AL., the use of our report dated November 6, 1996 with respect to the financial
statements of Comfortech, Inc., the use of our report dated November 6, 1996
with respect to the financial statements of Air-Conditioning and Heating
Unlimited, Inc., the use of our report dated October 25, 1996 with respect to
the financial statements of The 1589 Niagara Street Corporation, the use of our
report dated November 7, 1996 with respect to the financial statements of
Freschi Air Systems, Inc., the use of our report dated November 7, 1996 with
respect to the financial statements of Parker Heating & Air Conditioning,
Incorporated, the use of our report dated October 29, 1996 with respect to the
financial statements of B. W. Heating & Cooling, Inc., the use of our report
dated November 8, 1996 with respect to the financial statements of B & B Air
Conditioning, Inc., the use of our report dated October 29, 1996 with respect to
the financial statements Sylvester's Corp., the use of our report dated October
29, 1996 with respect to the financial statements of Automated Air, Inc. and
Bauer Heating & Air Conditioning, Inc., the use of our report dated November 11,
1996 with respect to the financial statements of Gaddis Co., the use of our
report dated November 11, 1996 with respect to the financial statements of
Quality Air Conditioning & Heating of West Monroe, 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 $.01 par value common stock,
warrants to purchase its common stock ("Common Stock Warrants") and the shares
of its 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.
Ernst & Young LLP
Nashville, Tennessee
November 18, 1996
