<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
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) 367-0003
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
ALAN R. SIELBECK
CHIEF EXECUTIVE OFFICER
SERVICE EXPERTS, INC.
1134 MURFREESBORO ROAD
NASHVILLE, TENNESSEE 37217
(615) 367-0003
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
<TABLE>
<S> <C>
J. CHASE COLE, ESQ. DONALD I.N. MCKENZIE, ESQ.
WALLER LANSDEN DORTCH & DAVIS SHERRARD & ROE, PLC
2100 NASHVILLE CITY CENTER 424 CHURCH STREET
511 UNION STREET SUITE 2000
NASHVILLE, TENNESSEE 37219-1760 NASHVILLE, TENNESSEE 37219
(615) 244-6380 (615) 742-4200
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH AMOUNT MAXIMUM MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share......................... 2,587,500 shares $14.00 $36,225,000 $12,492
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</TABLE>
(1) Includes 337,500 shares of Common Stock which the Underwriters have the
option to purchase from the Company solely to cover over-allotments, if any.
(2) Estimated in accordance with Rule 457(a) solely for the purpose of
calculating the registration fee.
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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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
SERVICE EXPERTS, INC.
CROSS-REFERENCE TABLE
CROSS-REFERENCE SHEET SHOWING LOCATION IN THE PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF PART I OF FORM S-1
(PURSUANT TO ITEM 501 OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM REGISTRATION STATEMENT ITEM CAPTION OR LOCATION
NUMBER AND HEADING IN PROSPECTUS
- ------ ----------------------------------------- -----------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus............................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover
Pages; "Available Information"
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... "Prospectus Summary;" "Risk Factors"
4. Use of Proceeds.......................... "Use of Proceeds"
5. Determination of Offering Price.......... "Underwriting"
6. Dilution................................. "Dilution"
7. Selling Security Holders................. Not Applicable
8. Plan of Distribution..................... Outside Front Cover Page; "Underwriting"
9. Description of Securities to be
Registered............................. "Description of Capital Stock"
10. Interests of Named Experts and Counsel... Not Applicable
11. Information with Respect to the
Registrant............................. "Prospectus Summary;" "Risk Factors;"
"Use of Proceeds;" "S Corporation
Distributions;" "Dividend Policy;"
"Dilution;" "Capitalization;" "Pro
Forma Combining Financial Statements;"
"Selected Combined Financial Data;"
"Management's Discussion and Analysis
of Financial Condition and Results of
Operations;" "Business;" "The
Combination;" "Management;" "Certain
Transactions;" "Principal
Stockholders;" "Description of Capital
Stock;" "Shares Eligible for Future
Sale;" Index to Combined Financial
Statements; Report of Independent
Accountants; Combined Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 27, 1996
2,250,000 SHARES
SERVICE EXPERTS, INC.
COMMON STOCK
---------------------
All of the shares of Common Stock of Service Experts, Inc. (the "Company"
or "Service Experts") offered hereby (the "Offering") are being offered by the
Company. Prior to this Offering, there has been no public market for the Common
Stock of the Company (the "Common Stock"). It is currently anticipated that the
initial offering price will be between $ and $ per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial offering price. The Company has submitted an application
for the Common Stock to be quoted and traded on the Nasdaq National Market under
the symbol "SEXP."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share....................................... $ $ $
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Total(3)........................................ $ $ $
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</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses estimated at $ payable by the Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 337,500 shares of Common Stock at the Price to Public,
less the Underwriting Discount, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them. The
Underwriters reserve the right to reject orders in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
, 1996.
EQUITABLE SECURITIES CORPORATION MORGAN KEEGAN & COMPANY, INC.
The date of this Prospectus is , 1996
<PAGE> 4
[INSERT MAP AND/OR PHOTOGRAPHS]
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 5
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, and as a condition to, the closing of the Offering, the
Company will acquire, in separate transactions, 12 heating, ventilating and air
conditioning ("HVAC") service and replacement businesses and Contractor Success
Group, Inc. ("CSG") (collectively, the "Predecessor Companies") 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 Predecessor
Companies, taken as a whole, and assume that the Combination has been
consummated. The term "Service Centers" refers to HVAC service and replacement
businesses owned and operated by the Company after the Offering. Unless
otherwise indicated, the information in this Prospectus (i) does not give effect
to the Underwriters' over-allotment option, (ii) gives effect to a 1.4621 for 1
stock split effected as of July 11, 1996, (iii) assumes an initial offering
price of $14.00 per share and (iv) assumes that consideration of 4,537,900
shares of Common Stock and $18.3 million is paid by the Company pursuant to the
Combination. See "The Combination."
THE COMPANY
Simultaneously with, and as a condition to, the completion of the Offering,
the Company will purchase all of the outstanding capital stock of the
Predecessor Companies. Upon completion of the Combination, the Company will be
one of the leading providers of residential HVAC services and replacement
equipment in the United States. See "The Combination." The Company's 1995 pro
forma revenues were approximately $59.7 million. The Predecessor Companies have
experienced compounded annual revenue growth of approximately 33.5% from 1991 to
1995.
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 steadily in size over the past ten years 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
3
<PAGE> 6
dependent upon referrals to generate businesses. In many cases, these businesses
are operated by service technicians who lack the business and marketing
expertise to expand their businesses, increase their profitability and compete
effectively with larger operators.
Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. The
Company intends to implement an aggressive acquisition strategy which will
target 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 COMBINATION
Simultaneously with, and as a condition to, the closing of the Offering,
the Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock and cash as
set forth in the agreements that the Company has entered into with the
Predecessor Companies and their owners (the "Combination Agreements"), which
provide for the allocation of the shares of Common Stock among the Predecessor
Companies and their owners based primarily on the respective amounts of adjusted
after tax net income of the Predecessor Companies for the 1995 calendar year, as
defined in the Combination Agreements. The aggregate consideration to be paid by
the Company in the Combination will consist of 4,537,900 shares of Common Stock
and $18.3 million in cash, assuming an initial offering price of $14.00 per
share. Approximately 2,090,993 shares of Common Stock and $9.8 million in cash
will be paid to owners of the Predecessor Companies who are executive officers,
directors or 5% stockholders of the Company (assuming an initial offering price
of $14.00 per share) as a result of which such persons will beneficially own
approximately 41.1% of the outstanding Common Stock immediately following the
Offering. See "Risk Factors -- Control by Management and Principal
Stockholders," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Combined Predecessor
Companies -- Liquidity and Capital Resources," "Certain Transactions," "The
Combination," "Shares Eligible for Future Sale," and the Pro Forma Combining
Financial Statements of the Company and notes thereto appearing elsewhere in
this Prospectus.
The Company's principal executive offices are located at 1134 Murfreesboro
Road, Nashville, Tennessee 37217, and its telephone number is (615) 367-0003.
THE OFFERING
Common Stock offered hereby......... 2,250,000 shares
Common Stock to be outstanding after
the Offering........................ 8,250,000 shares(1)
Use of Proceeds..................... To fund the cash portion of the
purchase price for the Predecessor
Companies, to finance the development
and acquisition of additional Service
Centers, to repay certain indebtedness
arising from the Combination and for
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
Symbol.............................. SEXP
- ---------------
(1) Does not include 82,500 shares of Common Stock issuable upon the exercise of
warrants and stock options granted under the Company's stock option plans.
See "Management -- Compensation Pursuant to Plans" and "Underwriting."
4
<PAGE> 7
SUMMARY COMBINED FINANCIAL DATA
The following table presents summary combined financial and operating data
of the Combined Predecessor Companies. Prior to the Combination, each of the
Combined Predecessor Companies operated independently and were not under common
control or management and some were not taxable entities; accordingly, the data
may not be comparable to or indicative of post-combination results. The
following should be read with the historical financial statements, the Pro Forma
Combining Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
COMBINED PREDECESSOR COMPANIES(1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------------- --------------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1995(2) 1995 1996 1996(2)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.......... $35,784,297 $48,476,838 $59,651,163 $59,651,163 $12,727,435 $13,972,106 $13,972,106
Gross margin......... 13,271,998 17,558,677 23,435,120 23,555,453 4,747,263 5,565,856 5,565,856
Income from
operations......... 1,091,965 2,289,998 4,728,524 7,884,478 701,077 672,257 1,400,839
Interest (expense)
income, net........ (49,276) (109,826) (102,696) 256,206 (20,404) (19,377) 90,009
Pro forma net
income(3).......... 883,339 1,426,427 2,966,153 5,201,787 465,053 493,414 1,025,298
Pro forma net income
per share(4)....... $ 0.66 $ 0.13
Pro forma weighted
average shares
outstanding(4)..... 7,827,122 7,827,122
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1996 1996(2) 1996(2)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)................................... $ 4,513,735 $(15,918,011) $ 9,124,025
Total assets................................................... 19,024,010 16,882,601 21,809,060
Total debt..................................................... 3,823,297 3,226,611 --
Stockholders' equity (deficit)................................. 7,913,393 (12,051,886) 14,448,114
</TABLE>
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(1) The Combination will be accounted for using historical cost, in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 48
("SAB 48"), because no single owner group from any of the Combined
Predecessor Companies will hold more than a 50% equity interest in the
Company as of the completion of the Offering. Accordingly, the Company will
record the net assets acquired at the Combined Predecessor Companies'
historical cost basis, as determined by generally accepted accounting
principles.
(2) Pro forma information gives effect to the Combination, prior to the
Offering. Pro forma, as adjusted, gives effect to the sale of the shares of
Common Stock offered hereby and the application of the net proceeds
therefrom as described in "Use of Proceeds" as if such sale had occurred at
the beginning of the periods presented. In addition, the pro forma
information is based on certain assumptions and adjustments. See "The
Combination" and 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 due to different tax status of the Predecessor
Companies. Pro forma net income represents the effect of taxing the entity
under Subchapter C of the Internal Revenue Code.
(4) The calculation of pro forma net income per share was based upon weighted
average common shares outstanding assuming that 6,000,000 shares will be
outstanding immediately prior to the Offering. For purposes of calculating
pro forma net income per share, the shares to be issued in the Offering have
been reduced to 1,827,122 from 2,250,000 to reflect the effect of 422,878
shares for which the use of proceeds will be general corporate purposes. In
the future, all 2,250,000 shares to be issued in the Offering will be used
in calculating weighted average shares outstanding.
5
<PAGE> 8
CERTAIN INDIVIDUAL PREDECESSOR COMPANIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONTRACTOR SUCCESS GROUP, INC.
Net revenue........................................ $ 2,414,497 $ 2,740,976 $ 3,229,558 $ 791,635 $ 810,950
Income from operations............................. 723,482 869,614 1,275,092 339,205 356,109
Pro forma net income(1)............................ 555,749 602,151 861,187 228,465 237,666
COMBINED AC SERVICE & INSTALLATION CO., INC. AND
DONELSON AIR CONDITIONING COMPANY, INC.
Net revenue........................................ $10,292,295 $14,298,906 $16,452,622 $3,134,448 $3,098,023
Income from operations............................. 103,479 267,646 738,636 35,994 10,689
Pro forma net income(1)............................ 88,746 162,129 423,354 22,433 20,462
HARDWICK AIR MASTERS, INC.
Net revenue........................................ $ 3,989,626 $ 4,797,873 $ 6,377,285 $1,306,200 $1,663,251
Income from operations............................. 85,128 68,844 243,827 50,679 53,571
Net income......................................... 35,217 8,319 138,060 25,842 26,678
NORRELL HEATING & AIR CONDITIONING, INC.
Net revenue........................................ $ 3,274,267 $ 3,508,903 $ 4,265,726 $ 854,250 $ 979,565
Income (loss) from operations...................... (3,840) 179 29,087 14,710 29,350
Net income......................................... 34,527 27,088 79,550 20,014 43,372
VISION HOLDING COMPANY, INC.(2)
Net revenue........................................ $ 2,792,574 $ 3,525,119 $ 4,261,485 $ 880,337 $ 987,907
Income (loss) from operations...................... 269,491 277,491 430,288 (8,943 ) 16,391
Net income (loss).................................. 189,957 163,388 261,881 (13,961 ) 9,747
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
Net revenue........................................ $ 3,532,089 $ 3,715,214 $ 4,232,962 $ 978,382 $1,190,500
Income (loss) from operations...................... (359,140) 133,525 308,846 37,120 172,299
Pro forma net income (loss)(1)..................... (190,963) 95,174 187,629 24,128 111,059
ROLF COAL AND FUEL CORP.
Net revenue........................................ $ 3,036,009 $ 3,977,013 $ 4,104,580 $1,262,027 $1,322,043
Income (loss) from operations...................... (48,299) 95,657 95,195 (52,826 ) (95,405 )
Net income (loss).................................. (19,954) 69,952 44,107 (40,152 ) (61,595 )
ALL REMAINING PREDECESSOR COMPANIES(3)(4)
Net revenue........................................ $ 6,592,940 $12,052,834 $16,866,945 $3,555,156 $3,954,867
Income from operations............................. 321,664 577,042 1,607,553 285,138 129,253
Pro forma net income(1)............................ 190,060 298,226 970,385 198,284 106,025
</TABLE>
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(1) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
(2) 1993 represents period from March 1, 1993 through December 31, 1993.
(3) Air Experts, a United Services Co., Inc., Arrow Heating & Air Conditioning,
Inc., Brand Heating & Air Conditioning, Inc., Coastal Air Conditioning
Service, Inc., Gilley's Heating & Cooling, Inc., and Service Experts of Palm
Springs, Inc.
(4) The selected financial data above represents the six smallest (by revenue)
Predecessor Companies which have been combined for the period from January
1, 1993 through March 31, 1996 except for the following Predecessor
Companies which are included from the date operations commenced as follows:
Air Experts, a United Services Co., Inc. -- January 1, 1994; Arrow Heating &
Air Conditioning, Inc. -- January 29, 1993; and Service Experts of Palm
Springs, Inc. -- October 15, 1993.
6
<PAGE> 9
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. 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 Predecessor Companies, 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
Although the Company was founded in March 1996, it will not conduct any
operations of the Predecessor Companies as a combined entity until the
Combination is consummated. Accordingly, there can be no assurance that the
Company will be able to integrate successfully the businesses of the Predecessor
Companies or to operate profitably. In addition, 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 Predecessor 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. See
"Business -- Strategy" and "The Combination."
RISKS ASSOCIATED WITH EXPANSION
The success of the Company's acquisition strategy will depend on a number
of factors, including (i) the Company's ability to locate existing HVAC service
and replacement businesses for acquisitions and to successfully integrate the
operations of companies acquired in the future into the Company's operations and
(ii) the availability of adequate financing to develop or acquire additional
HVAC service and replacement businesses. 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
"Business -- Strategy."
COMPETITION
The HVAC service and replacement industry is highly competitive. The
Company's Service Centers will 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, 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; CONFLICTS OF INTEREST
The success of the Company will depend 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. Certain executive officers of the
Company are owners of HVAC companies that are not affiliated with the Company
and may have conflicts of interest. See "Management" and "Certain Transactions."
7
<PAGE> 10
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 will be 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 "Business -- HVAC
Service and Replacement Industry."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Following completion of the Offering, directors, officers and existing
stockholders of the Company will beneficially own approximately 41.1% 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.
BENEFITS TO MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Approximately $18.3 million of the net proceeds of the Offering will be
used to pay the cash portion of the purchase price payable to the stockholders
of the Predecessor Companies at closing. Approximately $9.8 million of such
amount, representing approximately 37.0% of the estimated net proceeds, will be
paid in cash to former stockholders of the Predecessor Companies who are
executive officers, directors or 5% stockholders of the Company as consideration
for the Combination and in payment of indebtedness of certain Predecessor
Companies to such persons. In addition, these individuals will receive an
aggregate of 2,090,993 shares of Common Stock as consideration in the
Combination, assuming an initial offering price of $14.00 per share. Because of
their positions as executive officers and directors of the Company, conflicts of
interest existed with respect to the Combination Agreements between the Company
and entities controlled by such persons. See "Use of Proceeds" and "Certain
Transactions." See "The Combination" for a discussion of the consideration being
paid to the stockholders of each Predecessor Company.
ABSENCE OF INTEGRATED OPERATING SYSTEMS
After the closing of the Combination and the Offering, the Company intends
to implement and integrate certain information and operating systems of the
Predecessor Companies. The Company may experience delays, complications and
expenses in implementing, integrating and operating such systems, any of which
could have a material adverse affect on the Company's operations, net revenue
and earnings. See "Business -- Services and Operations."
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
8
<PAGE> 11
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. These provisions include certain super-majority voting requirements
and other provisions contained in the Company's Restated Certificate of
Incorporation and Bylaws. 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."
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock has been determined by negotiation among the Company,
Equitable Securities Corporation and Morgan Keegan & Company, Inc., as the
representatives of the Underwriters (the "Representatives"), and may not be
indicative of the market price for shares of Common Stock after the Offering.
Prices for the shares of Common Stock after the Offering will be determined in
the market and may be influenced by many factors, including the depth and
liquidity of the market for the Common Stock, investor perception of the
Company, the HVAC industry as a whole and general economic and market
conditions. See "Underwriting."
VOLATILITY OF MARKET PRICE
From time to time after the Offering, 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.
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and significant dilution of $12.36 per share, the amount by which the purchase
price of the Common Stock offered hereby will exceed the net tangible book value
of the Common Stock immediately following the Offering. See "Dilution." In the
event the Company issues additional Common Stock in the future, including shares
which may be issued in
9
<PAGE> 12
connection with future acquisitions, purchasers of Common Stock in this Offering
may experience further dilution in net tangible book value per share of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. The number of shares of Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act"), and lock-up agreements under which the holders
of such shares have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this Prospectus without the
prior written consent of Equitable Securities Corporation on behalf of the
Underwriters. On the date of this Prospectus, no shares other than the 2,250,000
shares offered hereby will be eligible for sale. A total of 3,351,722 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 the date of this Prospectus. See "Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,250,000 shares of
Common Stock offered hereby (assuming an initial public offering price of $14.00
per share and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company) are estimated to be
approximately $ million ($ million if the Underwriters' over-allotment
option is exercised in full).
In connection with the Combination, the Company plans to use approximately
$19.7 million of the net proceeds of the Offering to pay cash to the
stockholders of the Predecessor Companies in connection with the Combination, to
repay approximately $1.0 million of certain indebtedness arising from the
Combination and to purchase for $604,000 approximately 38% of the outstanding
common stock of Future University, Inc. ("Future University(R)"). See
"Business -- Contractor Success Group." At March 31, 1996, such indebtedness had
a weighted average interest rate of 11.7%. Such indebtedness, if not repaid,
would otherwise mature at various dates through December 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Predecessor Companies -- Liquidity and Capital Resources"
and "The Combination."
The remaining net proceeds are expected to be used, together with
internally generated funds and proposed borrowings, to fund the acquisition and
development of additional Service Centers and for general corporate purposes.
The Company is not engaged in any negotiations with respect to any acquisitions,
and there can be no assurance that any such developments or acquisitions will be
completed or that the terms of any such transactions will be favorable to the
Company.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade or
government, interest-bearing securities.
10
<PAGE> 13
S CORPORATION DISTRIBUTIONS
Certain of the Predecessor Companies have been treated for federal and
certain state income tax purposes as S corporations under the Internal Revenue
Code of 1986, as amended (the "Code"). As a result, earnings of such
corporations have been subject to taxation at the stockholder rather than the
corporate level for federal and certain state income tax purposes. Prior to the
completion of the Combination, the Predecessor Companies that are S corporations
made distributions to their stockholders of previously earned and undistributed
earnings through June 30, 1996, subject to the terms of the Combination
Agreements. The Company will make another distribution as promptly as
practicable after the closing of the Combination to each of the stockholders of
the Predecessor Companies that are S corporations equal to such corporations'
earned but undistributed earnings in accordance with each such corporation's
final tax return, subject to the terms of the Combination Agreement.
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, except as described under "S Corporation Distributions" above,
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 -- Combined
Predecessor Companies -- Liquidity and Capital Resources."
11
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 (i) on a pro forma basis to reflect the Combination and (ii) on a
pro forma as adjusted basis to give effect to the Combination and the sale of
the 2,250,000 shares of Common Stock offered by the Company in the Offering at
an assumed offering price of $14.00 per share and the application of the net
proceeds therefrom, which are estimated to be approximately $26.5 million (after
deducting underwriting discounts and commissions and estimated Offering
expenses). The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Predecessor Companies" and the Combined Financial
Statements of the Company and the related Notes thereto included elsewhere in
this Supplement.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
PRO FORMA
COMBINED AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt, including current portion of long-term debt,
capital lease obligations and notes payable to related
parties....................................................... $ 1,082,039 $ --
========== ==========
Long-term debt and capital lease obligations, less current
portion....................................................... 1,124,004 --
Notes payable to related parties................................ 1,637,254 --
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; 8,250,000 shares outstanding, pro forma........ 82,500
Additional paid-in capital...................................... 7,913,393 14,365,614
----------- -----------
Total stockholders' equity............................ 7,913,393 14,448,114
----------- -----------
Total capitalization.................................. $10,674,651 $14,448,114
========== ==========
</TABLE>
12
<PAGE> 15
DILUTION
At March 31, 1996, after giving effect to the Combination, the pro forma
net tangible combined book deficit of the Company was $(12,866,930), or $(2.14)
per share. Such pro forma net tangible book combined deficit is the tangible net
worth (tangible assets less total liabilities) of the Combined Predecessor
Companies prior to the Combination, less $19,965,279 in cash and other items to
be distributed to the owners of the Predecessor Companies. The number of shares
used for the per share calculation includes the 6,000,000 shares outstanding
prior to the Offering. After giving effect to the Combination, the sale by the
Company of the 2,250,000 shares of Common Stock offered hereby (assuming an
initial public offering price of $14.00 per share and after deducting
underwriting discounts and commissions and estimated Offering expenses payable
by the Company) and the distribution of the cash portion of the purchase price
of the Predecessor Companies, the pro forma combined net tangible book value of
the Company would have been $13,550,570, or $1.64 per share. This represents an
immediate increase in pro forma net tangible book value of $3.79 per share to
existing stockholders and an immediate dilution in net tangible book value of
$12.36 per share to new investors purchasing the shares of Common Stock in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $14.00
------
Pro forma net tangible book deficit prior to the Offering.......... $(2.14)
Increase attributable to new investors............................. 3.79
------
Pro forma net tangible book value after the Offering................. 1.64
------
Dilution in net tangible book value to new investors................. $12.36
======
</TABLE>
The following table sets forth, at March 31, 1996, the number of shares of
Common Stock purchased from the Company, the total consideration and the average
price per share paid to the Company by existing stockholders and by the new
investors purchasing shares of Common Stock in the Offering at an assumed
initial public offering price of $14.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 6,000,000 72.7% $(12,051,886)(1) (62.0)% $ (2.01)
New investors.................... 2,250,000 27.3 31,500,000 162.0 14.00
--------- ------- ------------ -------
Total(2)............... 8,250,000 100.0% $ 19,448,114 100.0%
======== ===== =========== =====
</TABLE>
- ---------------
(1) Total consideration for the owners of the Predecessor Companies represents
the combined stockholders' investment before the Offering, less $19,965,279
in cash and other items to be distributed to the existing stockholders.
13
<PAGE> 16
SELECTED COMBINED FINANCIAL DATA
Simultaneously with, and as a condition to, the closing of the Offering,
the Company will acquire the Predecessor Companies (as combined, the "Combined
Predecessor Companies"). The Combination will be accounted for using historical
cost, in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 48, because no single owner group from any of the Predecessor
Companies will hold more than a 50% equity interest in the Company as of the
closing of the Offering. Accordingly, the Company will record the net assets
acquired at the Predecessor Companies' historical cost basis, as determined by
generally accepted accounting principles. Prior to the Combination, each of the
Predecessor Companies operated independently and were not under common control
or management and some were not taxable entities; accordingly, the data may not
be comparable to or indicative of post-combination results. The Company has
adopted a December 31 fiscal year and has obtained audits for all of the
Predecessor Companies' financial statements for the years ended December 31,
1993, 1994 and 1995, or from the date operations commenced if subsequent to
January 1, 1993.
The Selected Combined Financial Data for the fiscal years ended December
31, 1993, 1994 and 1995 (except for pro forma amounts) have been derived from
the financial statements of the Predecessor Companies which have been audited by
Ernst & Young LLP, independent auditors. The Selected Combined Financial Data
for the three months ended March 31, 1995 and 1996 have been derived from
unaudited combined financial statements that appear elsewhere in this
Prospectus. The Selected Combined Financial Data for the fiscal years ended
December 31, 1991 and 1992 have been derived from unaudited combined financial
statements not included elsewhere in this Prospectus. The unaudited combined
financial statements have been prepared on the same basis as the audited
combined financial statements and, in the opinion of management, contain all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the combined financial position and combined results of
operations for the periods presented. The pro forma data gives effect to the
merger and promoter distributions. The pro forma data, as adjusted, gives effect
to the sale of the shares of Common Stock offered hereby and the application of
the net proceeds thereof as described in "Use of Proceeds" and the consummation
of the Combination, as if each transaction had occurred at the beginning of the
periods presented. In addition, the pro forma information is based on available
information and certain assumptions and adjustments. See Notes to the Pro Forma
Combining Financial Statements. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements of the Combined Predecessor
Companies, including the related Notes thereto, that appear elsewhere in this
Prospectus.
The selected financial data presented for each of the Predecessor Companies
for the years ended December 31, 1993, 1994 and 1995, or from the date
operations commenced if subsequent to January 1, 1993, have been derived from
the audited financial statements of each of these companies that have been
audited by Ernst & Young LLP, independent auditors. The selected financial data
presented for each of the Predecessor Companies for the three months ended March
31, 1995 and 1996 have been derived from the unaudited financial statements of
each of these companies that appear elsewhere in this Prospectus. The selected
financial data presented for each of the Predecessor Companies for the years
ended December 31, 1991 and 1992, or from the date operations commenced if
subsequent to January 1, 1991, have been derived from the unaudited financial
statements of each of these companies not included elsewhere in this Prospectus.
The unaudited financial statements have been prepared on the same basis as the
audited financial statements, and in the opinion of the Predecessor 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 Predecessor Companies have been presented as follows:
- Combined Predecessor Companies, including pro forma information
- Contractor Success Group, Inc.
- Combined AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc.
- Hardwick Air Masters, Inc.
- Norrell Heating & Air Conditioning, Inc.
- Vision Holding Company, Inc.
- Comerford's Heating and Air Conditioning, Inc.
- Rolf Coal and Fuel Corp.
- All remaining Predecessor Companies are included on a combined basis and
include the following:
- Air Experts, a United Services Co., Inc.
- Arrow Heating & Air Conditioning, Inc.
- Brand Heating & Air Conditioning, Inc.
- Coastal Air Conditioning Service, Inc.
- Gilley's Heating & Cooling, Inc.
- Service Experts of Palm Springs, Inc.
14
<PAGE> 17
COMBINED PREDECESSOR COMPANIES(1)(2)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------------------------ -------------------------
PRO FORMA
AS ADJUSTED(3)
1991 1992 1993 1994 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net revenue.... $19,868,724 $26,447,455 $35,784,297 $48,476,838 $59,651,163 $ 59,651,163 $12,727,435 $13,972,106
Cost of goods
sold......... 12,496,200 16,650,146 22,512,299 30,918,161 36,216,043 36,095,710 7,980,172 8,406,250
----------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
Gross margin... 7,372,524 9,797,309 13,271,998 17,558,677 23,435,120 23,555,453 4,747,263 5,565,856
Selling,
general and
administrative
expenses..... 6,661,535 8,796,135 12,180,033 15,268,679 18,706,596 15,670,975 4,046,186 4,893,599
----------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
Income from
operations... 710,989 1,001,174 1,091,965 2,289,998 4,728,524 7,884,478 701,077 672,257
Other income
(expense):
Interest
expense.... (137,002) (134,504) (217,695) (298,359) (358,902) -- (75,027) (109,386)
Interest
income..... 63,983 157,007 168,419 188,533 256,206 256,206 54,623 90,009
Other
income..... (12,881) 81,388 311,387 178,296 207,730 298,736 38,295 89,468
----------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
85,900 103,891 262,111 68,470 105,034 554,942 17,891 70,091
Income before
tax.......... 625,089 1,105,065 1,354,076 2,358,468 4,833,558 8,439,420 718,968 742,348
Pro forma
income tax
expense(4)... 198,007 431,347 470,737 932,041 1,867,405 3,237,633 253,915 248,934
----------- ----------- ----------- ----------- ----------- -------------- ----------- -----------
Pro forma net
income(4).... $ 427,082 $ 673,718 $ 883,339 $ 1,426,427 $ 2,966,153 $ 5,201,787 $ 465,053 $ 493,414
========== ========== ========== ========== ========== ============ ========== ==========
Pro forma net
income per
share(5)..... $ 0.66
Pro forma
weighted
average
shares
outstanding(5).. 7,827,122
<CAPTION>
PRO FORMA
AS ADJUSTED(3)
1996
--------------
<S> <C>
INCOME STATEMEN
DATA:
Net revenue.... $ 13,972,106
Cost of goods
sold......... 8,406,250
--------------
Gross margin... 5,565,856
Selling,
general and
administrative
expenses..... 4,165,017
--------------
Income from
operations... 1,400,839
Other income
(expense):
Interest
expense.... --
Interest
income..... 90,009
Other
income..... 109,378
--------------
199,387
Income before
tax.......... 1,600,226
Pro forma
income tax
expense(4)... 574,928
--------------
Pro forma net
income(4).... $ 1,025,298
============
Pro forma net
income per
share(5)..... $ 0.13
Pro forma
weighted
average
shares
outstanding(5 7,827,122
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-----------
DECEMBER 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)...... $ 1,570,674 $ 2,407,192 $ 2,293,460 $ 1,988,586 $ 4,184,173 $ 4,513,735
Total assets........ 5,403,858 8,149,778 12,414,642 15,147,321 19,330,594 19,024,010
Total debt.......... 1,374,654 2,388,607 3,325,092 3,791,329 4,096,175 3,823,297
Stockholders' equity
(deficit)......... 2,223,977 3,416,677 3,558,984 4,783,815 7,275,395 7,913,393
<CAPTION>
PRO FORMA
PRO FORMA(3) AS ADJUSTED(3)
1996 1996
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)...... $(15,918,011) 9,124,025
Total assets........ 16,882,601 21,809,060
Total debt.......... 3,226,611 --
Stockholders' equity
(deficit)......... (12,051,886) 14,448,114
</TABLE>
15
<PAGE> 18
- ---------------
(1) The selected financial data above represents the Combined Predecessor
Companies for the period from January 1, 1991 through March 31, 1996 except
for the following Predecessor Companies which are included from the date
operations commenced as follows: Donelson Air Conditioning Company, Inc.,
December 2, 1991; Air Experts, a United Services Co., Inc., January 1, 1994;
Arrow Heating & Air Conditioning, Inc., January 29, 1993; Service Experts of
Palm Springs, Inc., October 15, 1993; and Vision Holding Company, Inc.,
March 1, 1993.
(2) The Combination will be accounted for using historical cost, in accordance
with SAB 48, because no single owner group from any of the Predecessor
Companies will hold more than a 50% equity interest in the Company as of the
closing of the Offering. Accordingly, the Company will record the net assets
acquired at the Predecessor Companies' historical cost basis, as determined
by generally accepted accounting principles.
(3) Pro forma information gives effect to the Combination prior to the Offering.
Pro forma data, as adjusted, gives effect to the Offering, the sale of the
shares of Common Stock offered hereby and the application of the net
proceeds therefrom as described in "Use of Proceeds" as if such sale had
occurred at the beginning of the periods presented. See "The Combination"
and 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
Predecessor Companies. Pro forma net income represents the effect of taxing
the entity under Subchapter C of the Internal Revenue Code.
(5) The calculation of pro forma net income per share was based upon weighted
average common shares outstanding assuming that 6,000,000 shares will be
outstanding immediately prior to the Offering. For purposes of calculating
pro forma net income per share, the shares to be issued in the Offering have
been reduced to 1,827,122 from 2,250,000 to reflect the effect of 422,878
shares for which the use of proceeds will be general corporate purposes. In
the future, all 2,250,000 shares to be issued in the Offering will be used
in calculating weighted average shares outstanding.
16
<PAGE> 19
CONTRACTOR SUCCESS GROUP, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue....................... $1,105,805 $2,445,839 $2,414,497 $2,740,976 $3,229,558 $ 791,635 $ 810,950
Cost of goods sold................ 341,823 195,161 466,196 414,938 615,245 138,920 110,396
----------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin...................... 763,982 2,250,678 1,948,301 2,326,038 2,614,313 652,715 700,554
Selling, general and
administrative expenses......... 397,106 1,422,338 1,224,819 1,456,424 1,339,221 313,510 344,445
----------- ---------- ---------- ---------- ---------- ---------- ----------
Income from operations............ 366,786 828,340 723,482 869,614 1,275,092 339,205 356,109
Interest (expense) income,
net............................. -- 101,341 118,004 104,537 115,295 28,478 23,594
Pro forma net income(1)........... 226,276 576,402 555,749 602,151 861,187 228,465 237,666
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
----------- ---------- ---------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 35,613 $ 337,829 $ 314,315 $ 418,050 $ 250,703 $ 637,774
Total assets.................. 42,449 795,452 788,063 995,212 1,410,691 1,365,440
Total debt.................... -- 1,658 5,295 5,835 263,277 113,739
Stockholders' equity.......... 42,449 736,044 660,821 784,972 731,159 1,116,825
</TABLE>
- ---------------
(1) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
COMBINED AC SERVICE & INSTALLATION CO., INC. AND
DONELSON AIR CONDITIONING COMPANY, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------------------------- -----------------------
1991(1) 1992 1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ---------- ----------
<S> <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 $3,134,448 $3,098,023
Cost of goods sold........... 3,977,827 5,991,098 7,280,075 10,245,039 11,122,350 2,186,991 2,071,421
----------- ----------- ----------- ----------- ----------- ---------- ----------
Gross margin................. 1,803,941 2,206,592 3,012,220 4,053,867 5,330,272 947,457 1,026,602
Selling, general and
administrative expenses.... 1,602,061 2,163,084 2,908,741 3,786,221 4,591,636 911,463 1,015,913
----------- ----------- ----------- ----------- ----------- ---------- ----------
Income from operations....... 201,880 43,508 103,479 267,646 738,636 35,994 10,689
Interest (expense) income,
net........................ (14,071 ) (19,413 ) (69,637) (64,541) (53,963) (12,605) (2,396)
Pro forma net income(2)...... 101,377 32,912 88,746 162,129 423,354 22,433 20,462
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............ $ 527,905 $ 870,155 $ 758,049 $ 614,770 $ 1,182,653 $1,260,991
Total assets............... 1,507,497 2,796,279 3,313,115 3,931,581 4,569,910 4,784,136
Total debt................. 356,982 1,163,006 1,141,709 1,070,812 1,289,602 1,220,401
Stockholders' equity....... 471,858 940,514 921,060 1,100,104 1,728,658 1,745,120
</TABLE>
- ---------------
(1) The selected financial data above includes AC Service & Installation Co.,
Inc. from the period January 1, 1991 through March 31, 1996 and Donelson Air
Conditioning Company, Inc. from the period beginning December 2, 1991
through March 31, 1996.
(2) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
17
<PAGE> 20
HARDWICK AIR MASTERS, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue..................... $2,595,495 $3,007,132 $3,989,626 $4,797,873 $6,377,285 $1,306,200 $1,663,251
Cost of goods sold.............. 1,975,923 2,315,556 2,986,702 3,418,062 4,556,146 924,435 1,230,671
----------- ----------- ---------- ---------- ---------- ---------- ----------
Gross margin.................... 619,572 691,576 1,002,924 1,379,811 1,821,139 381,765 432,580
Selling, general and
administrative expenses....... 563,099 720,758 917,796 1,310,967 1,577,312 331,086 379,009
----------- ----------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations... 56,473 (29,182 ) 85,128 68,844 243,827 50,679 53,571
Interest (expense) income,
net........................... (49,607 ) (40,493 ) (57,064) (68,947) (71,587) (16,618) (19,012)
Net income (loss)............... 32,060 (31,175 ) 35,217 8,319 138,060 25,842 26,678
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
----------- ----------- ---------- ---------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $ 36,209 $ 87,376 $ (114,513) $ (32,955) $ 164,691 $ 38,333
Total assets................ 812,860 935,769 1,398,397 1,494,644 1,979,439 2,007,623
Total debt.................. 323,226 351,278 520,662 473,094 607,237 610,253
Stockholders' equity........ 101,471 70,296 105,513 113,832 251,892 278,570
</TABLE>
NORRELL HEATING & AIR CONDITIONING, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- ---------------------
1991 1992 1993 1994 1995 1995 1996
----------- ----------- ---------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue.................... $2,010,678 $2,752,019 $3,274,267 $3,508,903 $4,265,726 $854,250 $979,565
Cost of goods sold............. 1,262,311 1,963,704 2,285,621 2,436,732 2,852,690 619,658 686,837
----------- ----------- ---------- ---------- ---------- -------- --------
Gross margin................... 748,367 788,315 988,646 1,072,171 1,413,036 234,592 292,728
Selling, general and
administrative expenses...... 745,321 781,042 992,486 1,071,992 1,383,949 219,882 263,378
----------- ----------- ---------- ---------- ---------- -------- --------
Income (loss) from
operations................... 3,046 7,273 (3,840) 179 29,087 14,710 29,350
Interest (expense) income,
net.......................... (2,171 ) 3,251 10,360 17,949 26,772 3,137 14,347
Net income..................... 16,716 22,702 34,527 27,088 79,550 20,014 43,372
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................... $ (43,564) $ (6,634) $ 23,270 $ 46,105 $ 171,001 $ 224,344
Total assets.......................... 431,936 514,769 770,727 776,738 1,594,242 1,075,986
Total debt............................ 40,000 -- -- -- -- --
Stockholders' equity.................. 138,275 120,977 155,504 177,812 268,300 311,672
</TABLE>
18
<PAGE> 21
VISION HOLDING COMPANY, INC.
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED THREE MONTHS ENDED
MARCH 1, 1993 DECEMBER 31, MARCH 31,
THROUGH ----------------------- -----------------------
DECEMBER 31, 1993 1994 1995 1995 1996
----------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue....................................... $ 2,792,574 $3,525,119 $4,261,485 $ 880,337 $ 987,907
Cost of goods sold................................ 1,751,998 2,400,309 2,738,022 626,418 653,086
----------------- ---------- ---------- ---------- ----------
Gross margin...................................... 1,040,576 1,124,810 1,523,463 253,919 334,821
Selling, general and administrative expenses...... 771,085 847,319 1,093,175 262,862 318,430
----------------- ---------- ---------- ---------- ----------
Income (loss) from operations..................... 269,491 277,491 430,288 (8,943) 16,391
Interest (expense) income, net.................... (14,518) (58,068) (49,919) (13,494) (24,704)
Net income (loss)................................. 189,957 163,388 261,881 (13,961) 9,747
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1993 1994 1995 1996
----------------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 188,308 $ 46,537 $ 348,606 $ 384,595
Total assets...................................... 1,883,541 1,952,778 2,128,703 2,330,623
Total debt........................................ 1,091,136 906,688 783,431 771,261
Stockholders' equity.............................. 209,557 372,945 634,826 644,573
</TABLE>
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $1,748,734 $2,542,455 $3,532,089 $3,715,214 $4,232,962 $ 978,382 $1,190,500
Cost of goods sold................. 944,305 1,555,190 2,031,910 2,113,176 2,271,332 562,161 641,960
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 804,429 987,265 1,500,179 1,602,038 1,961,630 416,221 548,540
Selling, general and administrative
expenses......................... 859,036 857,398 1,859,319 1,468,513 1,652,784 379,101 376,241
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... (54,607) 129,867 (359,140) 133,525 308,846 37,120 172,299
Interest (expense) income,
net.............................. 39,375 23,470 17,007 32,677 21,142 3,148 6,846
Pro forma net income (loss)(1)..... 1,984 98,982 (190,963) 95,174 187,629 24,128 111,059
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 629,897 $ 709,011 $ 316,350 $ 466,420 $ 655,395 $ 726,605
Total assets....................... 786,820 1,127,656 1,633,407 1,277,526 1,348,321 1,461,324
Total debt......................... -- -- -- 43,185 31,699 28,644
Stockholders' equity............... 722,077 840,627 542,391 717,884 851,038 1,028,934
</TABLE>
- ---------------
(1) Pro forma net income (loss) represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
19
<PAGE> 22
ROLF COAL AND FUEL CORP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue........................ $2,880,070 $2,860,888 $3,036,009 $3,977,013 $4,104,580 $1,262,027 $1,322,043
Cost of goods sold................. 1,539,195 1,527,438 1,516,213 1,940,213 1,866,607 627,526 557,762
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin....................... 1,340,875 1,333,450 1,519,796 2,036,800 2,237,973 634,501 764,281
Selling, general and administrative
expenses......................... 1,269,951 1,361,967 1,568,095 1,941,143 2,142,778 687,327 859,686
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations...... 70,924 (28,517) (48,299) 95,657 95,195 (52,826) (95,405)
Interest (expense) income, net..... (16,881) (16,113) (13,576) (7,560) (2,043) (1,951) 835
Net income (loss).................. 40,045 (33,836) (19,954) 69,952 44,107 (40,152) (61,595)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 123,514 $ 182,473 $ 205,142 $ 110,102 $ 93,231 $ (28,942)
Total assets....................... 794,309 760,296 761,224 1,031,011 1,405,081 1,233,331
Total debt......................... 278,000 175,518 83,424 118,148 39,037 88,440
Stockholders' equity............... 285,544 251,708 231,754 301,706 345,813 254,218
</TABLE>
ALL REMAINING PREDECESSOR COMPANIES(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------------- -----------------------
1991(2) 1992(2) 1993(2) 1994(2) 1995 1995 1996
---------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................... $3,746,174 $4,641,432 $6,592,940 $12,052,834 $16,866,945 $3,555,156 $3,954,867
Cost of goods sold............... 2,454,816 3,101,999 4,193,584 7,949,692 10,193,651 2,294,063 2,454,117
---------- ---------- ---------- ----------- ----------- ---------- ----------
Gross margin..................... 1,291,358 1,539,433 2,399,356 4,103,142 6,673,294 1,261,093 1,500,750
Selling, general and
administrative expenses........ 1,224,871 1,489,548 2,077,692 3,526,100 5,065,741 975,955 1,371,497
---------- ---------- ---------- ----------- ----------- ---------- ----------
Income from operations........... 66,487 49,885 321,664 577,042 1,607,553 285,138 129,253
Interest (expense) income,
net............................ (29,664) (29,540) (39,852) (65,873) (88,393) (10,499) (18,887)
Pro forma net income(3).......... 8,624 7,732 190,060 298,226 970,385 198,284 106,025
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ----------- ----------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............... $ 261,100 $ 226,982 $ 602,539 $ 319,557 $ 1,317,893 $1,270,035
Total assets.................. 1,028,014 1,219,557 1,866,168 3,709,972 4,992,214 4,887,258
Total debt.................... 376,446 697,147 482,866 1,173,567 1,081,892 990,559
Stockholders' equity.......... 462,303 456,511 732,384 1,214,560 2,463,709 2,533,481
</TABLE>
- ---------------
(1) Air Experts, a United Services Co., Inc., Arrow Heating & Air Conditioning,
Inc., Brand Heating & Air Conditioning, Inc., Coastal Air Conditioning
Service, Inc., Gilley's Heating & Cooling, Inc., and Service Experts of Palm
Springs, Inc.
(2) The selected financial data above represents the six smallest (by revenue)
Predecessor Companies which have been combined for the period from January
1, 1991 through March 31, 1996 except for the following Predecessor
Companies which are included from the date operations commenced as follows:
Air Experts, a United Services Co., Inc. -- January 1, 1994; Arrow Heating &
Air Conditioning, Inc. -- January 29, 1993; Service Experts of Palm Springs,
Inc. -- October 15, 1993.
(3) Pro forma net income represents the effect of taxing the entity under
Subchapter C of the Internal Revenue Code.
20
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the combined Financial Statements and Pro Forma Combining Financial
Information, including the Notes thereto, and the other financial information
appearing elsewhere in this Prospectus.
COMBINED PREDECESSOR COMPANIES
Overview
Simultaneously with, and as a condition to, the completion of the Offering,
the Company will acquire all of the outstanding capital stock of the Predecessor
Companies. Because the Predecessor Companies are independent entities that have
not been operated by the Company's management prior to the Combination, the
historical combined results do not reflect the Company's actual operations on a
consolidated basis and therefore may not be indicative of future performance.
For all periods presented, the Combined Financial Statements include the
financial information of the Predecessor Companies on a historical basis, as if
they had always been members of the same operating entity without giving effect
to the Combination, the Offering, or the realization of any operating
efficiencies that the Company believes typically would be attainable in an
integrated organization.
Management believes that the Predecessor 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. Management
further believes that certain efficiencies will be derived once the Predecessor
Companies are consolidated. These efficiencies will include centralized
negotiation of contracts with major suppliers and insurance carriers,
consolidation of certain accounting and administration functions, implementation
of a more efficient cash management system and consolidation of employee
benefits programs. A portion of any operating efficiencies will be offset by
increased general and administrative expenses at the Company's corporate
headquarters. There can be no assurance that the Company will be able to
integrate successfully the businesses of the Predecessor Companies or to operate
profitably. In addition, there can be no assurance that management will be able
to effectively manage the combined entity and effectively implement the
Company's operating and acquisition strategies. Failure to integrate
successfully the Predecessor 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.
The Predecessor Companies have been managed throughout the periods
presented as independent private companies, and, as such, their results of
operations reflect different tax structures which have influenced, among other
things, their historical levels of owner's compensation. These owners and
certain key employees have agreed to certain reductions in their compensation in
connection with the Combination. These reductions equaled approximately $3.5
million based upon 1995 actual compensation expense.
Management believes that the Company will, upon completion of the
Combination, be positioned to capitalize on the fragmentation and growth of the
HVAC service and replacement industry. The Company intends to implement an
aggressive acquisition strategy which will target for acquisition as "hubs" CSG
members with strong management that are within a desirable geographic area,
financially stable, experienced in the industry and familiar with CSG operating
methods. The Company also plans to increase its market presence through
acquisitions of other HVAC businesses that have long operating histories, large
customer bases, experienced management and who present opportunities to reduce
overhead expenses or dispose of fixed assets to improve profitability. In
addition, management believes that it will be able to improve the financial
performance of acquired companies through the implementation of the methods and
procedures developed by CSG. There can be no assurance the Company's acquisition
strategy will be successful, that modifications to the Company's strategy will
not be required or that the Company will be able to obtain adequate financing on
reasonable terms to develop or acquire additional HVAC service businesses.
21
<PAGE> 24
Components of Income
Net revenue of the Predecessor Companies has been derived primarily from
the following sources (i) the installation of central air conditioners, furnaces
and heat pumps primarily in existing homes; (ii) the service and maintenance of
central air conditioners, furnaces and heat pumps primarily in existing homes;
and (iii) the marketing of proprietary products by CSG. 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 consist 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.
Results of Operations
The following tables set forth certain income statement items as a
percentage of net revenue for the fiscal years ended December 31, 1993, 1994,
and 1995 and for the three months ended March 31, 1995 and 1996 for the combined
Predecessor Companies.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................................... 62.9 63.8 60.7 62.7 60.2
----- ----- ----- ----- -----
Gross margin........................................... 37.1 36.2 39.3 37.3 39.8
Selling, general and administrative expenses........... 34.0 31.5 31.4 31.8 35.0
----- ----- ----- ----- -----
Income from operations................................. 3.1% 4.7% 7.9% 5.5% 4.8%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $1.3 million, or 9.8%, from $12.7
million for the three months ended March 31, 1995 to $14.0 million for the three
months ended March 31, 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 $426,000, or 5.3%, from
$8.0 million for the three months ended March 31, 1995 to $8.4 million for the
three months ended March 31, 1996. As a percentage of net revenue, cost of goods
sold decreased 2.5% from 62.7% for the three months ended March 31, 1995 to
60.2% for the three months ended March 31, 1996. The decrease as a percentage of
net revenue is attributable to increased control of the fixed component of cost
of goods sold, the increase in net revenue and a favorable product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $847,000, or 20.9%, from $4.0 million for the
three months ended March 31, 1995 to $4.9 million for the three months ended
March 31, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased 3.2% from 31.8% for the three months ended
March 31, 1995 to 35.0% for the three months ended March 31, 1996. This increase
as a percentage of net revenue is primarily attributable to an increase in
compensation expense.
Income from Operations. Income from operations for the three months ended
March 31, 1996 decreased $29,000, or 4.1%, compared to the three months ended
March 31, 1995. Increases in selling, general and administrative expenses
described above offset gains in gross margin from revenue increases.
22
<PAGE> 25
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $11.2 million, or 23.1%, from $48.5
million for the twelve months ended December 31, 1994 to $59.7 million for the
twelve months ended December 31, 1995. Management believes that the increase in
net revenues was primarily attributable to the Company's 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 $5.3 million, or 17.1%,
from $30.9 million for the twelve months ended December 31, 1994 to $36.2
million for the twelve months ended December 31, 1995. As a percentage of net
revenue, cost of goods sold decreased 3.1% from 63.8% for the twelve months
ended December 31, 1994 to 60.7% for the twelve months ended December 31, 1995.
The decrease as a percentage of net revenue is attributable to increased control
of the fixed component of cost of goods sold, the increase in net revenue and
favorable product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.4 million, or 22.5%, from $15.3 million for
the twelve months ended December 31, 1994 to $18.7 million for the twelve months
ended December 31, 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased marginally to 31.4% for the twelve months
ended December 31, 1995.
Income from Operations. Income from operations for the twelve months ended
December 31, 1995 increased $2.4 million, or 106.5%, from $2.3 million for the
twelve months ended December 31, 1994 to $4.7 million for the twelve months
ended December 31, 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $12.7 million, or 35.5%, from $35.8
million for the twelve months ended December 31, 1993 to $48.5 million for the
twelve months ended December 31, 1994. Management believes that the increase in
net revenues was primarily attributable to continued focus on the promotion of
service contracts and increased advertising.
Cost of Goods Sold. Cost of goods sold increased $8.4 million, or 37.3%,
from $22.5 million for the twelve months ended December 31, 1993 to $30.9
million for the twelve months ended December 31, 1994. As a percentage of net
revenue, cost of goods sold increased slightly to 63.8% for the twelve months
ended December 31, 1994. The decrease as a percentage of net revenue is
attributable to increased control of the fixed component of cost of goods sold,
the increase in net revenue and favorable product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $3.1 million, or 25.4%, from $12.2 million for
the twelve months ended December 31, 1993 to $15.3 million for the twelve months
ended December 31, 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased 2.5% from 34.0% for the twelve months ended
December 31, 1993 to 31.5% for the twelve months ended December 31, 1994. The
decrease as a percentage of net revenue was attributable to the increase in net
revenues and the relatively fixed nature of these expenses.
Income from Operations. Income from operations increased $1.2 million, or
109.7%, from $1.1 million for the twelve months ended December 31, 1993 to $2.3
million for the twelve months ended December 31, 1994.
Liquidity and Capital Resources
Historically, the operations and growth of the Predecessor Companies have
been financed through internally generated working capital and borrowings from
commercial banks or other lenders. Management expects that approximately $1.0
million of the net proceeds of the Offering will be used to repay substantially
all of the outstanding indebtedness of the Predecessor Companies. These
borrowings are generally secured by substantially all of the assets of the
respective Predecessor Company as well as personal guarantees of the respective
owners. The Company intends to enter into an agreement with a commercial bank to
establish a revolving credit facility upon the completion of the Offering. The
Company has had no negotiations regarding
23
<PAGE> 26
such credit facility, and no assurance can be given that a credit facility can
be obtained on terms acceptable to the Company.
For the years ended December 31, 1993, 1994 and 1995, net cash provided by
operating activities was $3.1 million, $2.3 million and $5.0 million,
respectively. For the three months ended March 31, 1996, net cash provided by
operating activities was approximately $840,000.
The Company's primary requirements for capital (other than those related to
acquisitions) consist of purchasing inventory, supplies and vehicles used in the
operation of the business. For the years ended December 31, 1993, 1994 and 1995,
net cash used by investing activities was $793,000, $1.7 million and $1.6
million, respectively. For the three months ended March 31, 1996, net cash used
by investing activities was approximately $543,000.
Management intends to increase the Company's service area primarily through
the acquisition of additional Service Centers. Because of the fragmented nature
of the industry and the size of CSG's membership, management believes that a
number of acquisition opportunities are available within the residential HVAC
service industry. Acquisitions will vary in size and the Company may consider
larger acquisition opportunities which could be material to the Company. There
can be no assurance that the Company will be able to acquire additional Service
Centers, or that any Service Centers that might be acquired would be
successfully and profitably integrated into the Company's operations.
Management believes that the proceeds of the Offering, together with
internally generated working capital and any additional borrowings, will be
adequate to fund operations and expansion plans of the Company. To provide any
additional funds necessary for the continued pursuit of the Company's growth
strategy, the Company may incur, from time to time, additional bank indebtedness
and may issue, in public or private transactions, its equity and debt
securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available on terms acceptable to the Company.
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.
24
<PAGE> 27
CERTAIN INDIVIDUAL PREDECESSOR COMPANIES
The following presents management's discussion of the results of
operations, as presented in the financial statements of certain Predecessor
Companies appearing elsewhere in this Prospectus, of CSG and the six largest
Predecessor Companies for the fiscal years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996.
CONTRACTOR SUCCESS GROUP, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue..................... $2,414 100.0% $2,741 100.0% $3,229 100.0% $792 100.0% $811 100.0%
Cost of goods sold.............. 466 19.3 415 15.2 615 19.1 139 17.5 110 13.6
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Gross margin.................... 1,948 80.7 2,326 84.8 2,614 80.9 653 82.5 701 86.4
Selling, general and
administrative expenses....... 1,225 50.7 1,456 53.1 1,339 41.5 314 39.6 345 42.5
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Income from operations.......... $ 723 30.0% $ 870 31.7% $1,275 39.5% $339 42.8% $356 43.9%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. CSG derives its net revenue from initial membership fees,
quarterly dues from members and from sales of proprietary products. Net revenue
increased $19,000, or 2.4%, from $792,000 for the three months ended March 31,
1995 to $811,000 for the three months ended March 31, 1996. The increase in net
revenue was primarily attributable to expanding the number of licensed
territories and increased marketing of new products.
Cost of Goods Sold. Cost of goods sold decreased $29,000, or 20.5%, from
$139,000 for the three months ended March 31, 1995 to $110,000 for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 17.5% for the three months ended March 31, 1995 to 13.6% for the
three months ended March 31, 1996. The decrease as a percentage of net revenue
was primarily attributable to the increase in net revenue and the relatively
fixed nature of CSG's expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $31,000, or 9.9%, from $314,000 for the three
months ended March 31, 1995 to $345,000 for the three months ended March 31,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 39.6% for the three months ended March 31, 1995 to 42.5%
for the three months ended March 31, 1996. The increase as a percentage of net
revenue was primarily attributable to the increase in compensation expense.
Income from Operations. Income from operations increased $17,000, or 5.0%,
from $339,000 for the three months ended March 31, 1995 to $356,000 for the
three months ended March 31, 1996. As a percentage of net revenue, income from
operations increased from 42.8% for the three months ended March 31, 1995 to
43.9% for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $489,000, or 17.8%, from $2.7 million
in 1994 to $3.2 million in 1995. The increase in net revenue was primarily
attributable to expanding the number of licensed territories and increased
marketing of new products.
25
<PAGE> 28
Cost of Goods Sold. Cost of goods sold increased $200,000, or 48.3%, from
$415,000 in 1994 to $615,000 in 1995. As a percentage of net revenue, cost of
goods sold increased from 15.2% in 1994 to 19.1% in 1995. The increase as a
percentage of net revenue was primarily attributable to costs associated with
several new products produced during 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $117,000, or 8.0%, from $1.5 million in 1994
to $1.3 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 53.1% in 1994 to 41.5% in 1995. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of CSG's expenses.
Income from Operations. Income from operations increased $405,000, or
46.6%, from $870,000 in 1994 to $1.3 million in 1995. As a percentage of net
revenue, income from operations increased from 31.7% in 1994 to 39.5% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $326,000, or 13.5%, from $2.4 million
in 1993 to $2.7 million in 1994. The increase in net revenue was primarily
attributable to expanding the number of territories licensed and increased
marketing of proprietary products.
Cost of Goods Sold. Cost of goods sold decreased $51,000, or 11.0%, from
$466,000 in 1993 to $415,000 in 1994. As a percentage of net revenue, cost of
goods sold decreased from 19.3% in 1993 to 15.2% in 1994. The decrease as a
percentage of net revenue was primarily attributable to the increase in net
revenue and the relatively fixed nature of CSG's expenses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $231,000, or 18.9%, from $1.2 million in 1993
to $1.5 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 50.7% in 1993 to 53.1% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations increased $147,000, or
20.2%, from $723,000 in 1993 to $870,000 in 1994. As a percentage of net
revenue, income from operations increased from 30.0% in 1993 to 31.7% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from CSG's statement of
cash flows (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------- -------------
1993 1994 1995 1995 1996
----- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.......... $ 995 $ 1,063 $ 1,552 $ 301 $ 205
Net cash provided by (used in) investing activities..... (34) (10) (127) (4) (2)
Net cash provided by (used in) financing activities..... (957) (1,014) (1,290) (362) (153)
----- ------- ------- ----- -----
Increase (decrease) in cash and cash equivalents........ $ 4 $ 39 $ 135 $ (65) $ 50
====== ======== ======== ====== ======
</TABLE>
From 1993 through the three months ended March 31, 1996, CSG generated $3.8
million in net cash from operating activities. During this period, $3.8 million
was generated from net income plus non-cash charges. Cash used in investing
activities was primarily attributable to the purchase and replacement of office
equipment and other property and equipment. Cash used in financing activities
consists primarily of distributions to stockholders. From 1993 through the three
months ended March 31, 1996, CSG distributed $3.3 million to stockholders.
26
<PAGE> 29
AC SERVICE & INSTALLATION CO., INC. AND DONELSON AIR CONDITIONING COMPANY, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -------------------------------
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% $3,134 100.0% $3,098 100.0%
Cost of goods sold......... 7,280 70.7 10,245 71.6 11,122 67.6 2,187 69.8 2,071 66.9
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Gross margin............... 3,012 29.3 4,054 28.4 5,331 32.4 947 30.2 1,027 33.1
Selling, general and
administrative
expenses................. 2,909 28.3 3,786 26.5 4,592 27.9 911 29.1 1,016 32.8
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Income from operations..... $ 103 1.0% $ 268 1.9% $ 739 4.5% $ 36 1.1% $ 11 0.3%
======== ===== ======== ===== ======== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue was relatively unchanged at $3.1 million for the
three months ended March 31, 1996 as compared to the three months ended March
31, 1995.
Cost of Goods Sold. Cost of goods sold decreased $116,000, or 5.3%, from
$2.2 million for the three months ended March 31, 1995 to $2.1 million for the
three months ended March 31, 1996. As a percentage of net revenue, cost of goods
sold decreased from 69.8% for the three months ended March 31, 1995 to 66.9% for
the three months ended March 31, 1996. The decrease as a percentage of net
revenue was primarily attributable to the promotion of higher margin service
contracts and volume purchasing discounts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $104,000, or 11.5%, from $911,000 for the
three months ended March 31, 1995 to $1.0 million for the three months ended
March 31, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 29.1% for the three months ended March
31, 1995 to 32.8% for the three months ended March 31, 1996. The increase as a
percentage of net revenue was primarily attributable to increases in costs while
net revenue was relatively unchanged.
Income from Operations. Income from operations decreased $25,000, or
70.3%, from $36,000 for the three months ended March 31, 1995 to $11,000 for the
three months ended March 31, 1996. As a percentage of net revenue, income from
operations decreased from 1.1% for the three months ended March 31, 1995 to 0.3%
for the three months ended March 31, 1996.
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.
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.
27
<PAGE> 30
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 in
1993 to $14.3 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.
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.
Liquidity and Capital Resources
The following table sets forth selected information from the combined
statement of cash flows of AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- -------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities... $ 548 $ 264 $ 579 $ 268 $ 614
Net cash provided by (used in) investing
activities..................................... (242) (504) (613) (190) 5
Net cash provided by (used in) financing
activities..................................... (221) 63 219 222 (69)
----- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents.................................... $ 85 $(177) $ 185 $ 300 $ 550
===== ===== ===== ===== =====
</TABLE>
From 1993 through the three months ended March 31, 1996, AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. generated
$2.0 million in net cash from operating activities. During this period, $2.0
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.
28
<PAGE> 31
HARDWICK AIR MASTERS, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue.................. $3,990 100.0% $4,798 100.0% $6,377 100.0% $1,306 100.0% $1,663 100.0%
Cost of goods sold........... 2,987 74.9 3.418 71.2 4,556 71.4 924 70.8 1,230 74.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin................. 1,003 25.1 1,380 28.8 1,821 28.6 382 29.2 433 26.0
Selling, general and
administrative expenses.... 918 23.0 1,311 27.4 1,577 24.8 331 25.3 379 22.8
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income from operations....... $ 85 2.1% $ 69 1.4% $ 244 3.8% $ 51 3.9% $ 54 3.2%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $357,000, or 27.3%, from $1.3 million
for the three months ended March 31, 1995 to $1.7 million for the three months
ended March 31, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $307,000, or 33.1%, from
$924,000 for the three months ended March 31, 1995 to $1.2 million for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
increased from 70.8% for the three months ended March 31, 1995 to 74.0% for the
three months ended March 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $48,000, or 14.5%, from $331,000 for the three
months ended March 31, 1995 to $379,000 for the three months ended March 31,
1996. As a percentage of net revenue, selling, general and administrative
expenses decreased from 25.3% for the three months ended March 31, 1995 to 22.8%
for the three months ended March 31, 1996. The decrease as a percentage of net
revenue was primarily attributable to the increase in net revenue and the
relatively fixed nature of these expenses.
Income from Operations. Income from operations increased $3,000, or 5.7%,
from $51,000 for the three months ended March 31, 1995 to $54,000 for the three
months ended March 31, 1996. As a percentage of net revenue, income from
operations decreased from 3.9% for the three months ended March 31, 1995 to 3.2%
for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $1.6 million, or 32.9%, from $4.8
million in 1994 to $6.4 million in 1995. The increase in net revenue was
primarily attributable to increased advertising, sales training and a focus on
providing customers a complete service package, resulting in higher average
revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $1.2 million, or 33.3%,
from $3.4 million in 1994 to $4.6 million in 1995. As a percentage of net
revenue, cost of goods sold remained relatively constant at 71.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $266,000, or 20.3%, from $1.3 million in 1994
to $1.6 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.4% in 1994 to 24.8% in 1995. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of these expenses.
29
<PAGE> 32
Income from Operations. Income from operations increased $175,000, or
254.2%, from $69,000 in 1994 to $244,000 in 1995. As a percentage of net
revenue, income from operations increased from 1.4% in 1994 to 3.9% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $808,000, or 20.3%, from $4.0 million
in 1993 to $4.8 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $431,000, or 14.4%, from
$3.0 million in 1993 to $3.4 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 74.9% in 1993 to 71.2% in 1994. The decrease
as a percentage of net revenue was primarily attributable to increased emphasis
on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $393,000, or 42.8%, from $918,000 in 1993 to
$1.3 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses increased from 23.0% in 1993 to 27.4% in 1994. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
Income from Operations. Income from operations decreased $16,000, or
19.1%, from $85,000 in 1993 to $69,000 in 1994. As a percentage of net revenue,
income from operations decreased from 2.1% in 1993 to 1.4% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Hardwick Air Masters, Inc. (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- ------------
1993 1994 1995 1995 1996
----- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 60 $154 $ 133 $ 8 $ 53
Net cash provided by (used in) investing
activities....................................... (192) (90) (290) (114) (87)
Net cash provided by (used in) financing
activities....................................... 169 (48) 134 78 3
----- ---- ----- ----- ----
Increase (decrease) in cash and cash equivalents... $ 37 $ 16 $ (23) $ (28) $(31)
===== ==== ===== ===== ====
</TABLE>
From 1993 through the three months ended March 31, 1996, Hardwick Air
Masters, Inc. generated $400,000 in net cash from operating activities. During
this period, $664,000 was generated from net income plus non-cash charges, and
was reduced by $264,000 of cash used to fund increases in working capital. Cash
used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks. Cash provided by (used in) financing
activities consists primarily of proceeds from long-term debt.
30
<PAGE> 33
NORRELL HEATING & AIR CONDITIONING, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue..................... $3,274 100.0% $3,509 100.0% $4,266 100.0% $854 100.0% $979 100.0%
Cost of goods sold.............. 2,286 69.8 2,437 69.4 2,853 66.9 619 72.5 687 70.1
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Gross margin.................... 988 30.2 1,072 30.6 1,413 33.1 235 27.5 292 29.9
Selling, general and
administrative expenses....... 992 30.3 1,072 30.6 1,384 32.4 220 25.8 263 26.9
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Income (loss) from operations... $ (4) (0.1)% $ 0 0.0% $ 29 0.7% $ 15 1.7% $ 29 3.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $125,000, or 14.7%, from $854,000 for
the three months ended March 31, 1995 to $979,000 for the three months ended
March 31, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $68,000, or 10.8%, from
$619,000 for the three months ended March 31, 1995 to $687,000 for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 72.5% for the three months ended March 31, 1995 to 70.1% for the
three months ended March 31, 1996. The decrease as a percentage of net revenue
was primarily attributable to a focus on higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $43,000, or 19.8%, from $220,000 for the three
months ended March 31, 1995 to $263,000 for the three months ended March 31,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 25.8% for the three months ended March 31, 1995 to 26.9%
for the three months ended March 31, 1996.
Income from Operations. Income from operations increased $14,000, or
99.5%, from $15,000 for the three months ended March 31, 1995 to $29,000 for the
three months ended March 31, 1996. As a percentage of net revenue, income from
operations increased from 1.7% for the three months ended March 31, 1995 to 3.0%
for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $757,000, or 21.6%, from $3.5 million
in 1994 to $4.3 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $416,000, or 17.1%, from
$2.4 million in 1994 to $2.9 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 69.4% in 1994 to 66.9% in 1995. The decrease
as a percentage of net revenue was primarily attributable to a focus on higher
margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $312,000, or 29.1%, from $1.1 million in 1994
to $1.4 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 30.6% in 1994 to 32.4% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
compensation expense.
31
<PAGE> 34
Income from Operations. Income from operations increased $29,000 from $0
in 1994 to $29,000 in 1995. As a percentage of net revenue, income from
operations increased from 0.0% in 1994 to 0.7% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $235,000, or 7.2%, from $3.3 million in
1993 to $3.5 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $151,000, or 6.6%, from
$2.3 million in 1993 to $2.4 million in 1994. As a percentage of net revenue,
cost of goods sold was relatively unchanged at 69.4%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased slightly to $1.1 million in 1994.
Income (Loss) from Operations. Income (loss) from operations increased
$4,000 from ($4,000) in 1993 to $0 in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Norrell Heating & Air Conditioning, Inc. (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------ ------------
1993 1994 1995 1995 1996
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities....... $310 $ 27 $639 $25 $(204)
Net cash provided by (used in) investing
activities......................................... (80) (85) (56) (2 ) (1)
Net cash provided by (used in) financing
activities......................................... -- -- -- -- --
---- ---- ---- ---- -----
Increase (decrease) in cash and cash equivalents..... $230 $(58) $583 $23 $(205)
==== ==== ==== ==== =====
</TABLE>
From 1993 through the three months ended March 31, 1996, Norrell Heating &
Air Conditioning, Inc. generated $772,000 in net cash from operating activities.
During this period, $424,000 was generated from net income plus non-cash
charges, and was enhanced by $348,000 of cash from reductions in working
capital. Cash used in investing activities was primarily attributable to the
purchase and replacement of service and delivery trucks.
32
<PAGE> 35
VISION HOLDING COMPANY, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- -----------------------------
1993(1) 1994 1995 1995 1996
-------------- -------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................ $2,792 100.0% $3,525 100.0% $4,261 100.0% $880 100.0% $988 100.0%
Cost of goods sold......... 1,752 62.7 2,401 68.1 2,738 64.3 626 71.1 653 66.1
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Gross margin............... 1,040 37.3 1,124 31.9 1,523 35.7 254 28.9 335 33.9
Selling, general and
administrative
expenses................. 771 27.6 847 24.0 1,093 25.6 263 29.9 319 32.2
------ ----- ------ ----- ------ ----- ---- ----- ---- -----
Income (loss) from
operations............... $ 269 9.7% $ 277 7.9% $ 430 10.1% $ (9) (1.0)% $ 16 1.7%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Period from March 1, 1993 through December 31, 1993.
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $108,000, or 12.2%, from $880,000 for
the three months ended March 31, 1995 to $988,000 for the three months ended
March 31, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $27,000, or 4.3%, from
$626,000 for the three months ended March 31, 1995 to $653,000 for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 71.1% for the three months ended March 31, 1995 to 66.1% for the
three months ended March 31, 1996. The decrease as a percentage of net revenue
was primarily attributable to an emphasis on higher margin products and
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $56,000, or 21.1%, from $263,000 for the three
months ended March 31, 1995 to $319,000 for the three months ended March 31,
1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 29.9% for the three months ended March 31, 1995 to 32.2%
for the three months ended March 31, 1996.
Income (Loss) from Operations. Income (loss) from operations increased
from ($9,000) for the three months ended March 31, 1995 to $16,000 for the three
months ended March 31, 1996. As a percentage of net revenue, income (loss) from
operations increased from (1.0%) for the three months ended March 31, 1995 to
1.7% for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $736,000, or 20.9%, from $3.5 million
in 1994 to $4.3 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $338,000, or 14.1%, from
$2.4 million in 1994 to $2.7 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 68.1% in 1994 to 64.3% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.
33
<PAGE> 36
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $246,000, or 29.0%, from $847,000 in 1994 to
$1.1 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 24.0% in 1994 to 25.6% in 1995.
Income from Operations. Income from operations increased $153,000, or
55.1%, from $277,000 in 1994 to $430,000 in 1995. As a percentage of net
revenue, income from operations increased from 7.9% in 1994 to 10.1% in 1995.
1994 Compared to Period from March 1, 1993 through December 31, 1993
Net Revenue. Net revenue increased $732,000, or 26.2%, from $2.8 million
in 1993 to $3.5 million in 1994. The increase in net revenue was primarily
attributable to an additional three months of operation in 1994.
Cost of Goods Sold. Cost of goods sold increased $648,000, or 37.0%, from
$1.8 million in 1993 to $2.4 million in 1994. As a percentage of net revenue,
cost of goods sold increased from 62.7% in 1993 to 68.1% in 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $76,000, or 9.9%, from $771,000 in 1993 to
$847,000 in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 27.6% in 1993 to 24.0% in 1994. The
decrease as a percentage of net revenue was primarily attributable to increased
net revenue in 1994.
Income from Operations. Income from operations increased $8,000, or 3.0%,
from $269,000 in 1993 to $277,000 in 1994. As a percentage of net revenue,
income from operations decreased from 9.7% in 1993 to 7.9% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Vision Holding Company, Inc. (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------- -----------
1993(1) 1994 1995 1995 1996
------- ----- ----- ---- ----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 317 $ 445 $ 531 $(33) $ 61
Net cash provided by (used in) investing
activities....................................... (33) (330) 113 (30) (6)
Net cash provided by (used in) financing
activities....................................... (88) (250) (123) 31 (12)
------- ----- ----- ---- ----
Increase (decrease) in cash and cash equivalents... $ 196 $(135) $ 521 $(32) $ 43
====== ===== ===== ==== ====
</TABLE>
- ---------------
(1) Period from March 1, 1993 through December 31, 1993.
From March 1, 1993 through the three months ended March 31, 1996, Vision
Holding Company, Inc. generated $1.4 million in net cash from operating
activities. During this period, $1.2 million was generated from net income plus
non-cash charges, and was enhanced by $200,000 of cash from reductions in
working capital. Cash used in investing activities was primarily attributable to
the purchase and replacement of service and delivery trucks. Cash used in
financing activities consists primarily of payments on long-term debt.
34
<PAGE> 37
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
-------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue...................... $3,532 100.0% $3,715 100.0% $4,233 100.0% $978 100.0% $1,190 100.0%
Cost of goods sold............... 2,032 57.6 2,113 56.9 2,271 53.7 562 57.5 642 53.9
------ ----- ------ ----- ------ ----- ---- ----- ------ -----
Gross margin..................... 1,500 42.4 1,602 43.1 1,962 46.3 416 42.5 548 46.1
Selling, general and
administrative expenses........ 1,859 52.6 1,468 39.5 1,653 39.0 379 38.7 376 31.6
------ ----- ------ ----- ------ ----- ---- ----- ------ -----
Income (loss) from operations.... $ (359) (10.2)% $ 134 3.6% $ 309 7.3% $ 37 3.8% $ 172 14.5%
====== ===== ====== ===== ====== ===== ===== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $212,000, or 21.7%, from $978,000 for
the three months ended March 31, 1995 to $1.2 million for the three months ended
March 31, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $80,000, or 14.2%, from
$562,000 for the three months ended March 31, 1995 to $642,000 for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 57.5% for the three months ended March 31, 1995 to 53.9% for the
three months ended March 31, 1996. The decrease as a percentage of net revenue
was primarily attributable to an emphasis on higher margin products and
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained relatively constant at $376,000 for the three
months ended March 31, 1996. As a percentage of net revenue, selling, general
and administrative expenses decreased from 38.7% for the three months ended
March 31, 1995 to 31.6% for the three months ended March 31, 1996. The decrease
as a percentage of net revenue was primarily attributable to the increase in net
revenue.
Income from Operations. Income from operations increased $135,000, or
364.2%, from $37,000 for the three months ended March 31, 1995 to $172,000 for
the three months ended March 31, 1996. As a percentage of net revenue, income
from operations increased from 3.8% for the three months ended March 31, 1995 to
14.5% for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $518,000, or 13.9%, from $3.7 million
in 1994 to $4.2 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $158,000, or 7.5%, from
$2.1 million in 1994 to $2.3 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 56.9% in 1994 to 53.7% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $184,000, or 12.5%, from $1.5 million in 1994
to $1.7 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses remained relatively constant at 39.0%.
35
<PAGE> 38
Income from Operations. Income from operations increased $175,000, or
131.3%, from $134,000 in 1994 to $309,000 in 1995. As a percentage of net
revenue, income from operations increased from 3.6% in 1994 to 7.3% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $183,000, or 5.2%, from $3.5 million in
1993 to $3.7 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $81,000, or 4.0%, from
$2.0 million in 1993 to $2.1 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 57.6% in 1993 to 56.9% in 1994. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products and services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $391,000, or 21.0%, from $1.9 million in 1993
to $1.5 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 52.6% in 1993 to 39.5% in 1994.
Income (Loss) from Operations. Income (loss) from operations increased
$493,000 to $134,000 in 1994 from ($359,000) in 1993. As a percentage of net
revenue, income (loss) from operations increased from (10.2%) in 1993 to 3.6% in
1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Comerford's Heating and Air Conditioning, Inc. (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
--------------------- ------------
1993 1994 1995 1995 1996
----- ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.... $ 294 $(275) $ 614 $ 26 $ 161
Net cash provided by (used in) investing
activities...................................... (135) (104) (104) (5) (116)
Net cash provided by (used in) financing
activities...................................... (6) (10) (213) (3) (3)
----- ----- ----- ---- -----
Increase (decrease) in cash and cash
equivalents..................................... $ 153 $(389) $ 297 $ 18 $ 42
===== ===== ===== ==== =====
</TABLE>
From 1993 through the three months ended March 31, 1996, Comerford's
Heating and Air Conditioning, Inc. generated $794,000 in net cash from operating
activities. During this period, $635,000 was generated from net income plus
non-cash charges, and was enhanced by $159,000 of cash from reductions in
working capital. Cash used in investing activities was primarily attributable to
the purchase and replacement of service and delivery trucks. Cash used in
financing activities consists primarily of distributions to shareholders. In
1995, Comerford's Heating and Air Conditioning, Inc. distributed $201,000 to
shareholders.
36
<PAGE> 39
ROLF COAL AND FUEL CORP.
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue..................... $3,036 100.0% $3,977 100.0% $4,105 100.0% $1,262 100.0% $1,322 100.0%
Cost of goods sold.............. 1,516 50.0 1,940 48.8 1,867 45.5 628 49.7 558 42.2
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Gross margin.................... 1,520 50.0 2,037 51.2 2,238 54.5 634 50.3 764 57.8
Selling, general and
administrative expenses..... 1,568 51.6 1,941 48.8 2,143 52.2 687 54.5 859 65.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from operations... $ (48) (1.6%) $ 96 2.4% $ 95 2.3% $ (53) (4.2%) $ (95) (7.2%)
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue was relatively unchanged at $1.3 million for the
three months ended March 31, 1996 as compared to the three months ended March
31, 1996.
Cost of Goods Sold. Cost of goods sold decreased $70,000, or 11.1%, from
$628,000 for the three months ended March 31, 1995 to $558,000 for the three
months ended March 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 49.7% for the three months ended March 31, 1995 to 42.2% for the
three months ended March 31, 1996. The decrease as a percentage of net revenue
was primarily attributable to an emphasis on higher margin products,
particularly service contracts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $172,000, or 25.1%, from $687,000 for the
three months ended March 31, 1995 to $859,000 for the three months ended March
31, 1996. As a percentage of net revenue, selling, general and administrative
expenses increased from 54.5% for the three months ended March 31, 1995 to 65.0%
for the three months ended March 31, 1996. The increase as a percentage of net
revenue was primarily attributable to increased compensation expense.
Income (Loss) from Operations. Income (loss) from operations was ($95,000)
for the three months ended March 31, 1996 as compared to ($53,000) for the three
months ended March 31, 1995.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $128,000, or 3.2%, from $4.0 million in
1994 to $4.1 million in 1995. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold was relatively unchanged at $1.9
million in 1995. As a percentage of net revenue, cost of goods sold decreased
from 48.8% in 1994 to 45.5% in 1995. The decrease as a percentage of net revenue
was primarily attributable to the increase in net revenue and a focus on higher
margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $202,000, or 10.4%, from $1.9 million in 1994
to $2.1 million in 1995. As a percentage of net revenue, selling, general and
administrative expenses increased from 48.8% in 1994 to 52.2% in 1995. The
increase as a percentage of net revenue was primarily attributable to the
increase in compensation expense.
Income from Operations. Income from operations remained relatively
unchanged at $95,000.
37
<PAGE> 40
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $941,000, or 31.0%, from $3.0 million
in 1993 to $4.0 million in 1994. The increase in net revenue was primarily
attributable to increased advertising, sales training and a focus on providing
customers a complete service package, resulting in higher average revenue per
service visit.
Cost of Goods Sold. Cost of goods sold increased $424,000, or 28.0%, from
$1.5 million in 1993 to $1.9 million in 1994. As a percentage of net revenue,
cost of goods sold decreased from 50.0% in 1993 to 48.8% in 1994. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on
higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $373,000, or 23.8%, from $1.6 million in 1993
to $1.9 million in 1994. As a percentage of net revenue, selling, general and
administrative expenses decreased from 51.6% in 1993 to 48.8% in 1994. The
decrease as a percentage of net revenue was primarily attributable to the
increase in net revenue and the relatively fixed nature of these expenses.
Income (Loss) from Operations. Income (loss) from operations increased to
$96,000 in 1994 from ($48,000) in 1993. As a percentage of net revenue, income
(loss) from operations increased from (1.6%) in 1993 to 2.4% in 1994.
Liquidity and Capital Resources
The following table sets forth selected information from the statement of
cash flows of Rolf Coal and Fuel Corp. (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- -------------
1993 1994 1995 1995 1996
----- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities..... $ 249 $313 $210 $(164) $(175)
Net cash provided by (used in) investing
activities....................................... (24) (76) (62) (6) (36)
Net cash provided by (used in) financing
activities....................................... (103) (52) (79) 50 19
----- ---- ---- ----- -----
Increase (decrease) in cash and cash equivalents... $ 122 $185 $ 69 $(120) $(192)
===== ==== ==== ===== =====
</TABLE>
From 1993 through the three months ended March 31, 1996, Rolf Coal and Fuel
Corp. generated $597,000 in net cash from operating activities. During this
period, $56,000 was generated from net income plus non-cash charges, and was
enhanced by $541,000 of cash from reductions in working capital. Cash used in
investing activities was primarily attributable to the purchase and replacement
of service and delivery trucks. Cash used in financing activities consists
primarily of proceeds from and payments on long-term debt.
REMAINING COMPANIES
The following presents management's discussion of the results of
operations, as presented in the financial statements of certain Predecessor
Companies appearing elsewhere in the Prospectus. The companies which are
combined are Air Experts, a United Services Co., Inc., Arrow Heating & Air
Conditioning, Inc., Brand Heating & Air Conditioning, Inc., Coastal Air
Conditioning Service, Inc., Gilley's Heating & Cooling, Inc. and Service Experts
of Palm Springs, Inc. (collectively, the "Remaining Companies").
38
<PAGE> 41
Results of Operations
The following table sets forth certain selected financial data and data as
a percentage of net revenue for the periods indicated (dollar amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue........ $6,593 100.0% $12,053 100.0% $16,867 100.0% $3,555 100.0% $3,955 100.0%
Cost of goods
sold............. 4,193 63.6 7,950 65.9 10,194 60.4 2,294 64.5 2,454 62.0
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Gross margin....... 2,400 36.4 4,103 34.1 6,673 39.6 1,261 35.5 1,501 38.0
Selling, general
and
administrative
expenses....... 2,078 31.5 3,526 29.3 5,065 30.1 976 27.5 1,372 34.7
------ ----- ------- ----- ------- ----- ------ ----- ------ -----
Income from
operations....... $ 322 4.9% $ 577 4.8% $ 1,608 9.5% $ 285 8.0% $ 129 3.3%
====== ===== ======== ===== ======== ===== ====== ===== ====== =====
</TABLE>
Three Months Ended March 31, 1996 Compared to Three Months Ended March 31,
1995
Net Revenue. Net revenue increased $400,000, or 11.2%, from $3.6 million
for the three months ended March 31, 1995 to $4.0 million for the three months
ended March 31, 1996. The increase in net revenue was primarily attributable to
increased advertising, sales training and a focus on providing customers a
complete service package, resulting in higher average revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $160,000, or 7.0%, from
$2.3 million for the three months ended March 31, 1995 to $2.5 million for the
three months ended March 31, 1996. As a percentage of net revenue, cost of goods
sold decreased from 64.5% for the three months ended March 31, 1995 to 62.0% for
the three months ended March 31, 1996. The decrease as a percentage of net
revenue was primarily attributable to an emphasis on higher margin products and
services.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $396,000, or 40.5%, from $976,000 for the
three months ended March 31, 1995 to $1.4 million for the three months ended
March 31, 1996. As a percentage of net revenue, selling, general and
administrative expenses increased from 27.5% for the three months ended March
31, 1995 to 34.7% for the three months ended March 31, 1996. The increase as a
percentage of net revenue was primarily attributable to increase in compensation
expense.
Income from Operations. Income from operations decreased $156,000, or
54.7%, from $285,000 for the three months ended March 31, 1995 to $129,000 for
the three months ended March 31, 1996. As a percentage of net revenue, income
from operations decreased from 8.0% for the three months ended March 31, 1995 to
3.3% for the three months ended March 31, 1996.
Year Ended December 31, 1995 Compared to December 31, 1994
Net Revenue. Net revenue increased $4.8 million, or 39.9%, from $12.1
million in 1994 to $16.9 million in 1995. The increase in net revenue was
primarily attributable to increased advertising, sales training and a focus on
providing customers a complete service package, resulting in higher average
revenue per service visit.
Cost of Goods Sold. Cost of goods sold increased $2.2 million, or 28.2%,
from $8.0 million in 1994 to $10.2 million in 1995. As a percentage of net
revenue, cost of goods sold decreased from 65.9% in 1994 to 60.4% in 1995. The
decrease as a percentage of net revenue was primarily attributable to an
emphasis on higher margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 43.7%, from $3.5 million in
1994 to $5.1 million in 1995. As a percentage of net revenue, selling, general
and administrative expenses increased slightly from 29.3% in 1994 to 30.1% in
1995.
39
<PAGE> 42
Income from Operations. Income from operations increased $1.0 million, or
178.6%, from $577,000 in 1994 to $1.6 million in 1995. As a percentage of net
revenue, income from operations increased from 4.8% in 1994 to 9.5% in 1995.
Year Ended December 31, 1994 Compared to December 31, 1993
Net Revenue. Net revenue increased $5.5 million, or 82.8%, from $6.6
million in 1993 to $12.1 million in 1994. The increase in net revenue was
primarily attributable to the start-up of several of the Remaining Companies in
1994.
Cost of Goods Sold. Cost of goods sold increased $3.8 million, or 89.6%,
from $4.2 million in 1993 to $8.0 million in 1994. As a percentage of net
revenue, cost of goods sold increased from 63.6% in 1993 to 65.9% in 1994. The
increase as a percentage of net revenue is attributable to an emphasis on higher
margin products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 69.7%, from $2.1 million in
1993 to $3.5 million in 1994. As a percentage of net revenue, selling, general
and administrative expenses decreased from 31.5% in 1993 to 29.3% in 1994.
Income from Operations. Income from operations increased $255,000, or
79.4%, from $322,000 in 1993 to $577,000 in 1994. As a percentage of net
revenue, income from operations remained relatively constant at 4.8%.
Liquidity and Capital Resources
The following table sets forth selected information from the Remaining
Companies' combined statement of cash flows (dollar amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
-------------------- -------------
1993 1994 1995 1995 1996
---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net cash flow provided by operating activities.... $360 $ 314 $ 755 $ 219 $ 217
Net cash provided by (used in) investing
activities...................................... (85) (526) (456) (61) (283)
Net cash provided by (used in) financing
activities...................................... 109 275 (163) (220) (246)
---- ----- ----- ----- -----
Increase (decrease) in cash and cash
equivalents..................................... $384 $ 63 $ 136 $ (62) $(312)
==== ===== ===== ===== =====
</TABLE>
From 1993 through the three months ended March 31, 1996, the Remaining
Companies generated $1.6 million in net cash from operating activities. Cash
used in investing activities was primarily attributable to the purchase and
replacement of service and delivery trucks. Cash used in financing activities
consists primarily of distributions to shareholders and proceeds from long-term
notes.
40
<PAGE> 43
BUSINESS
GENERAL
Simultaneously with, and as a condition to, the completion of the Offering,
the Company will acquire all of the outstanding capital stock of the Predecessor
Companies. Upon completion of the Combination, the Company will be one of the
leading providers of residential HVAC services and replacement equipment in the
United States. See "The Combination." The Company's 1995 pro forma revenues were
approximately $59.7 million. The Predecessor Companies have experienced
compounded annual revenue growth of approximately 33.5% from 1991 to 1995.
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 intends to implement an aggressive acquisition strategy which will
target 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
steadily in size over the past ten years 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
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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."
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 intends to implement an aggressive acquisition program
utilizing a "hub and spoke" strategy for expansion into new geographic areas and
further penetration into existing markets. The U.S. residential HVAC service
industry is currently highly fragmented. Management believes that many HVAC
businesses, which lack the capital necessary to expand operations and the
ability to exit their business profitably, will desire to affiliate with the
Company because the Company will provide (i) business and marketing systems that
enable a company to operate more profitably, (ii) the opportunity to increase
the operator's focus on customer service rather than administration, (iii) the
potential for national name recognition and (iv) the opportunity for the owner
to gain liquidity while, in some cases, continuing to manage the operations of
the business. By expanding geographically, management believes the Company will
be able to offset certain seasonal and economic trends that affect different
regions of the country periodically. See "Risk Factors -- Seasonal and Cyclical
Nature of the Industry" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Combined Predecessor Companies."
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. 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.
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Operating Strategy
The Company intends to implement an operating strategy that incorporates
the successful methods developed by CSG and capitalizes on the operating
efficiencies resulting from the integration of the operations of the Predecessor
Companies. The key elements of the Company's operating strategy are as follows:
Providing Superior, High Quality Service in a Professional Manner. The
Service Centers provide superior, high quality service at a competitive price
and in a friendly, professional manner. In order to provide such service, the
Company requires that all service technicians, maintenance technicians and
installers employed by the Company complete comprehensive training programs
designed to teach employees the Company's operating procedures. Such procedures
are described in CSG's training manuals which provide detailed instructions in
areas such as residential replacement sales, residential installation,
preventive maintenance agreements, service and routine maintenance. The Company
has standard policies and operating procedures intended to result in a uniform
level of professional, high quality service, including installation and
maintenance procedures, random drug-testing of all employees, the technician's
appearance and the use of "Carpet Saver" shoe coverings when inside a customer's
home. The Service Centers utilize a flat rate billing system that advises the
customer of the cost of service before work begins and charges the quoted price
regardless of the actual time necessary to repair the system. The Service
Centers are generally open for business from 8:00 a.m. to 8:00 p.m. on weekdays,
and most are open on Saturday from 8:00 a.m. to 4:00 p.m. Management believes
that by providing evening and Saturday service, in addition to 24 hour emergency
service, the Service Centers are able to better accommodate customers than most
of its competitors. In addition, the Company guarantees complete customer
satisfaction and offers a toll-free "Customer Can't Lose" phone line to address
customer complaints and questions.
Increasing Revenue at Service Centers. The Company intends to actively
promote 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 Predecessor Companies prior to the
Combination. In addition, the Company expects to achieve increased operating
efficiencies by consolidating certain functions at the corporate level,
including negotiating purchase terms for HVAC equipment, sales management,
purchasing and leasing of service vehicles and accounting, insurance, financial
management, marketing and legal support.
The Company intends to implement 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 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.
Attracting and Retaining Quality Employees. Management believes the
Service Centers attract and retain quality employees by providing (i) an
environment that emphasizes professionalism and customer satisfaction, (ii)
extensive training that allows employees to advance to higher-earning positions
and (iii) stability of income because the Service Centers do not experience the
cyclical lay-offs typically found in the HVAC industry. The Company has a cash
bonus program for each Service Center pursuant to which managers may earn
bonuses based on the performance of the Service Center and the Company relative
to established goals set by the Service Center's president and the Company. The
Service Centers are operated by managers who are trained in the CSG operating
methods and procedures and who management believes are better educated than a
typical HVAC service business operator.
Potential employees must pass extensive interviews and background checks,
where permitted, as well as technical tests prior to being hired. All service
technicians, maintenance technicians and installers employed by the Company are
required to complete comprehensive training programs designed to teach employees
the Company's operating procedures. Such training programs are conducted both at
the Service Centers and at CSG sponsored seminars. Management believes that its
policies have resulted in a low rate of employee turnover. See "Contractor
Success Group."
Developing a National Reputation. Management believes that successful
implementation of the Company's operating strategy will enable it to establish a
national reputation for superior, high quality service. By developing a national
reputation, management believes the Company will appeal to a large number of
customers who are familiar with and rely upon a large, stable company with a
national reputation for providing high quality service.
CONTRACTOR SUCCESS GROUP
CSG, a wholly-owned subsidiary of the Company, was formed in 1991 to offer
HVAC companies proprietary products and marketing, management, educational and
advisory services not available from industry trade associations. Currently,
there are over 270 members of CSG serving distinct market areas in the United
States and Canada defined primarily by zip codes. CSG offers its members a
competitive edge over other contractors in the market by providing useful
management and technical skills, training programs and proprietary products. In
exchange, CSG members pay an initial fee upon joining CSG and a quarterly fee
thereafter. In 1995, CSG collected fees totaling approximately $3.1 million. CSG
members are granted exclusive rights to the territory in which they operate. The
Company intends to continue to build and expand the membership of CSG.
CSG licenses to its members copyrighted training manuals that cover in
specific detail every aspect of owning and operating an HVAC service and
replacement company, including residential replacement sales, residential
maintenance, service contracts, residential installation, business planning and
service dispatch. In
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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
Future University is a corporation that offers to CSG members for an
additional enrollment fee technical and operational educational programs
designed to improve the profitability of the CSG member's business. The
technical programs offer installers and technicians a combination of classroom
and on-the-job-training during one and two week sessions. Technicians receive
skills training that will enable them to effectively analyze customer problems
and offer efficient solutions. In the maintenance training classes, for example,
technicians are trained to maximize the operating efficiency of HVAC systems,
assure safe operation of systems and reduce the chances of future breakdowns. In
the sales training classes, technicians are trained to deal with customer
expectations, use and promote various products and services, develop leads,
explain financing programs and improve on various customer relations skills. In
sending technicians to the Future University program, CSG members are able to
develop a high level of commitment in their employees. The technical programs
are held in Little Rock, Arkansas under an exclusive licensing arrangement with
Hardwick Air Masters, Inc., one of the Predecessor Companies. Pursuant to the
current licensing arrangement, Hardwick Air Masters, Inc. receives 70% of the
revenue from the technical programs and Future University receives 30% of such
revenue. The operational programs offer to general managers and salespeople a
variety of classes covering residential sales training, replacement sales,
marketing and promotions, telemarketing and general operations. These programs
are held in Houston, Texas.
Management believes that Future University is the only comprehensive
training school for management, salespeople, installers and technicians in the
residential HVAC industry. Since its formation in 1991, over 1,000 students per
year have completed Future University's technical and operational training
programs.
SERVICE CENTERS
General
Management estimates that during 1995 the Service Centers' service and
maintenance technicians responded to over 120,000 maintenance, repair and
service calls. The services offered by each Service Center include (i) the sale
of replacement central air conditioners, furnaces and heat pumps, (ii) the
maintenance and repair of HVAC units, (iii) diagnostic analysis of the condition
of existing unit and (iv) the sale of ancillary products such as IAQ devices and
monitors. Most of the Service Centers employ an in-house sales
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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 some Service
Centers will continue to offer plumbing services, but currently does not intend
to further develop 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 before work begins and charges the
quoted price regardless of the time necessary to repair the system. 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 30,000 maintenance agreements with
customers. These agreements are for a term of one to three years and provide for
two diagnostic and precision maintenance visits during the year at an average
cost 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
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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 currently has approximately 1,000 service agreements with
customers. These agreements are generally for a term of one year and provide for
the repair of any problem with the customer's system at no additional cost to
the customer. Pursuant to the terms of such service agreements, if the cost of
repair exceeds the value of the customer's HVAC system, the Company is not
required to repair the system and the customer receives a $300 discount if he
purchases a replacement unit from the Company. In some states, warranties
provided for in the Company's service agreements may be deemed insurance
contracts by applicable state insurance regulatory agencies thereby subjecting
the Company and the service agreements to the insurance laws and regulations of
any such state. In such states, the Company insures its service agreements
through licensed insurers. Management believes that the Company has made
adequate provision for potential claims under these agreements. See
"Regulation."
Locations
The Company currently operates 12 Service Centers in nine states. The
following table sets forth certain information regarding these Service Centers:
<TABLE>
<CAPTION>
AREA OF YEAR
SERVICE CENTER STATE OPERATION FOUNDED
------------------------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
Norrell Heating & Air Conditioning, Inc.......... Alabama Birmingham 1953
Hardwick Air Masters, Inc........................ Arkansas Little Rock 1970
Service Experts of Palm Springs, Inc............. California Palm Springs 1993
Comerford's Heating and Air Conditioning, Inc.... California Pleasanton 1974
Coastal Air Conditioning Service, Inc............ Georgia Savannah 1976
Rolf Coal and Fuel Corp.......................... Indiana Fort Wayne 1904
Brand Heating & Air Conditioning, Inc............ Indiana Lafayette 1991
Gilley's Heating & Cooling, Inc.................. Louisiana Monroe 1980
Vision Holding Company, Inc...................... Missouri Kansas City 1982
Air Experts, a United Services Co., Inc.......... Missouri St. Louis 1981
AC Service & Installation Co., Inc./
Donelson Air Conditioning Company, Inc....... Tennessee Nashville 1974/1968
Arrow Heating & Air Conditioning, Inc............ Wisconsin Racine 1992
</TABLE>
Commercial Service and Replacement
Some of the Service Centers offer HVAC services to small and medium-sized
businesses. In 1995, revenues generated from the provision of services and sale
of products to commercial customers represented less than 20% of the Company's
pro forma net revenue. The Service Centers target restaurants, small office
buildings, warehouses and theaters as potential prospects for its commercial
services. The Company's commercial sales representatives receive extensive
training designed to enable the representatives to promote the Company's
services and products effectively. The services offered to commercial customers
are generally the same as services offered to residential customers, including
the analysis, maintenance and repair of existing HVAC systems, the sale of
replacement systems and the sale of ancillary products, including IAQ devices
and services. The Company does not plan to further develop this business.
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SERVICES AND OPERATIONS
The Company provides management, financial and accounting services for all
of the Service Centers' operations. Management intends to provide 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 intends to provide 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.
Each Service Center will order products from the manufacturers or distributors
at the discounted rate negotiated by the Company. The Service Centers generally
order equipment only upon receipt of a contract for purchase from a customer,
enabling them to maintain low inventory.
Management Information Systems
The Service Centers currently utilize various compatible management and
financial information systems. The Company intends to convert the Service
Centers' current systems to an integrated system within the next 18 months. The
implementation of an integrated system will allow the Company to maintain
greater control over the operations of its Service Centers. The Company intends
to track important data related to the Service Centers' operations and financial
performance and to monitor all advertising expenditures. In addition, the
Service Centers will generate and provide to the Company a daily management
report of revenue and expense information and certain billing and collection
data. The Company will use such information to prepare and provide to each
Service Center monthly and quarterly comparative financial data, which will
enable each Service Center to track and compare its performance with the other
Service Centers.
Employee Screening and Training
Prior to employment, potential employees of the Company must take
comprehensive tests to determine their technical expertise. In addition, all
employees of the Company are required to pass a drug test prior to employment
and are thereafter subject to random drug testing. Failure to take or pass a
drug test results in immediate termination of employment. Once hired, employees
of the Company are required to complete various training programs covering
technical skills and communication and sales techniques. In addition, employees
periodically attend educational seminars and conventions conducted by CSG. See
"Contractor Success Group."
Advertising and Marketing
The Company's advertising and marketing programs are designed to attract
new customers and to stimulate increased demand from existing customers. Each
Service Center, utilizing materials produced by CSG, develops customized
marketing programs tailored to meet the needs of its local customer base.
Emphasizing superior, high quality service, the Service Centers market directly
to prospective and existing customers through local print advertising, yellow
page advertising and direct mail campaigns followed up by telemarketing. In
1995, advertising and marketing expenditures were 1.6% as a percentage of the
Company's pro forma net revenue.
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
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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 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 38% 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 will
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 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
Upon completion of the Combination, Management estimates that the Company
will have 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 each of its 12 Service Centers is 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. The Company plans to continue to lease
rather than purchase space for the Service Centers to maximize the Company's
available capital.
The Company leases approximately 24,000 square feet of office space in
Nashville, Tennessee for its corporate headquarters. The remaining term of the
lease on this office space is approximately 10 years, and the Company pays
annual rent of $140,000. The Company also maintains an office in approximately
3,600 square feet of office space leased in Chesterfield, Missouri. The
remaining term of the lease on this office space is approximately 18 months, and
the Company pays annual rent of approximately $60,000.
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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 Predecessor Companies prior to the Combination.
While management believes, based upon its claims experience, that the Company's
present insurance coverage is adequate for its current operations, there can be
no assurance that the coverage is sufficient for all future claims or will
continue to be available in adequate amounts or at reasonable rates.
LEGAL PROCEEDINGS
The Company does not have pending any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on the
Company. The Company and its Service Centers may, from time to time, be a party
to litigation or administrative proceedings which arise in the normal course of
its business.
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THE COMBINATION
OVERVIEW
Simultaneously with, and as a condition to, the closing of the Offering,
the Company will consummate the Combination. The consideration to be paid by the
Company in the Combination will consist of shares of Common Stock and cash, as
set forth in the Combination Agreements, which provide for the allocation of
shares of Common Stock among the Predecessor Companies and their owners based on
the relative amounts of "Adjusted Net Income" of the Predecessor Companies for
the 1995 calendar year. Adjusted Net Income is defined in the Combination
Agreements as the Predecessor Company's net income presented in its financial
statements for the 1995 calendar year, 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 Predecessor Company that is not a C corporation had been a C corporation
during the 1995 calendar year and (iv) certain other adjustments agreed to by
the parties. In the event a Predecessor Company's stockholders' equity as a
percentage of net revenue was less than 10% as presented in its financial
statements for the 1995 calendar year, 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 equal to 10%.
The consideration to be paid by the Company also will be reduced by (i) the
amount of outstanding indebtedness of the Predecessor Companies at the time of
the closing of the Combination, other than indebtedness incurred after December
31, 1995 for the purchase of fixed assets, and (ii) in the case of any
shareholder, the amount of any indebtedness of such shareholder payable to the
Predecessor Company at the time of closing. The aggregate consideration to be
paid by the Company in the Combination will consist of 4,537,900 shares of
Common Stock and $18.3 million in cash, assuming an initial offering price of
$14.00 per share and that there is no reduction in the consideration to be paid
by the Company as described above. The Company plans to use approximately $19.7
million of the net proceeds from the Offering to pay the cash portion of the
consideration due at closing and certain outstanding indebtedness arising from
the Combination. Approximately 2,090,993 shares of Common Stock and $9.8 million
in cash will be paid to stockholders of the Predecessor Companies who are
executive officers, directors or 5% stockholders of the Company (assuming an
initial offering price of $14.00 per share) as a result of which such persons
will beneficially own approximately 41.1% of the outstanding Common Stock
immediately following the Offering. See "Risk Factors -- Control by Management
and Principal Stockholders," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Combined
Predecessor Companies -- Liquidity and Capital Resources," "Certain
Transactions," "Shares Eligible for Future Sale," and the Pro Forma Combining
Financial Statements and notes thereto appearing elsewhere in this Prospectus.
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The following table sets forth the consideration to be paid by the Company
to the stockholders of each of the Predecessor Companies in the Combination:
<TABLE>
<CAPTION>
SHARES OF
COMMON
PREDECESSOR COMPANY STOCK CASH(1)(2)
-------------------------------------------------------------- --------- -----------
<S> <C> <C>
AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc................................... 1,152,718 $ 5,379,355
Air Experts, a United Services Co., Inc....................... 114,044 532,204
Arrow Heating & Air Conditioning, Inc......................... 223,701 1,043,939
Brand Heating & Air Conditioning, Inc......................... 185,102 863,808
Coastal Air Conditioning Service, Inc......................... 243,907 179,721
Comerford's Heating and Air Conditioning, Inc................. 350,063 1,526,504
Contractor Success Group, Inc................................. 775,059 3,616,940
Gilley's Heating & Cooling, Inc............................... 164,691 576,418
Hardwick Air Masters, Inc..................................... 350,471 63,367
Norrell Heating & Air Conditioning, Inc....................... 356,167 1,662,114
Rolf Coal and Fuel Corp....................................... 274,582 1,281,384
Service Experts of Palm Springs, Inc.......................... 91,674 427,811
Vision Holding Company, Inc................................... 255,721 1,193,365
--------- -----------
Total............................................... 4,537,900 $18,346,930
======== ==========
</TABLE>
- ---------------
(1) Assumes an initial offering price of $14.00 per share and that there is no
reduction in the consideration to be paid by the Company as described
above.
(2) All of the cash consideration payable in the Combination will be paid from
the proceeds of the Offering and, in accordance with SAB 48, will for
accounting purposes be treated as a dividend distribution to the owners of
the Predecessor Companies. See "Use of Proceeds" and the Pro Forma
Combining Financial Statements and the Notes thereto.
Although the former owners of certain of the Predecessor Companies are
directors and/or executive officers of the Company and the consideration to be
paid to such Predecessor Companies may not have been determined by arm's length
negotiations, the terms of the Combination Agreements entered into by each of
the Predecessor Companies are the same in all respects, including the procedures
used to determine the consideration to be paid to each Predecessor Company,
other than CSG, based on its Adjusted Net Income. The same procedures were used
to determine the consideration to be paid to CSG, except that the Company has
agreed to pay at least $2.5 million to CSG in exchange for its copyrights,
trademarks and other proprietary interests. See "Certain Transactions." 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
Predecessor Companies.
Upon consummation of the Combination, each of the Predecessor Companies
will become a wholly owned subsidiary of the Company.
THE COMBINATION AGREEMENTS
Restricted Stock
The Common Stock issued to the Predecessor Companies will not be registered
under the Securities Act, in reliance upon exemptions from registration
contained in the Securities Act. Accordingly, the Common Stock received by the
Predecessor Companies will be subject to certain resale restrictions, including
a two-year holding period prior to any public resales (three years in the case
of "affiliates", or controlling persons, of the Company). In addition, certain
of the shares received will be subject to a 180 day restriction imposed by the
Underwriters. See "Shares Eligible for Future Sale" and "Underwriting."
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<PAGE> 55
Representations and Warranties of the Predecessor Companies
Each of the Combination Agreements contains customary representations and
warranties relating to, among other things, due organization and good standing
of the Predecessor Company, good and marketable title to the shares of stock in
the Predecessor Company exchanged in the Combination, the investment intent of
the stockholders of the Predecessor Company, the absence of preemptive rights,
the absence of any options, warrants or other rights to acquire the stock of the
Predecessor Company, good and marketable title to all of the Predecessor
Company's assets, adequate insurance, the accuracy of the Predecessor Company's
financial statements, the absence of litigation and compliance with applicable
laws.
Indemnification
Pursuant to the Combination Agreements, each Predecessor Company and its
stockholders agree to indemnify, defend and hold harmless the Company and its
officers, directors, shareholders and affiliates against any and all damages,
liabilities and expenses, including reasonable attorney's fees, suffered because
of (i) the untruth, inaccuracy, misrepresentation, omission, or breach or
nonfulfillment by the Predecessor Company or its stockholders of any
representation, warranty, covenant or other agreement contained in the
Combination Agreement or (ii) any untrue statement of a material fact relating
to the Predecessor Company or its stockholders 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 Predecessor Company or its
stockholders required to be stated therein or necessary to make such statements
therein not misleading. Each Predecessor Company and its stockholders have
indemnification obligations only to the extent that the aggregate of all
indemnifiable damages, losses, settlement payments, obligations and liabilities,
including reasonable attorney's fees, for such Predecessor Company exceeds
$25,000.
The Company agrees to indemnify, defend and hold harmless each of the
stockholders of the Predecessor Companies and their respective successors and
assigns 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
Combination 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.
Escrow Agreement
Pursuant to the Combination Agreements, each of the stockholders of the
Predecessor Companies entered into an escrow agreement (the "Escrow Agreement")
with the Company and (the "Escrow Agent"). Each Escrow Agreement
provides that the stockholders of the Predecessor Companies 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 Combination. 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 Combination, 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 Combination Agreement. The Escrow Stock will
not be the Company's exclusive remedy in the event of such loss, liability,
damage or expense. During the period the Escrow Stock is held by the Escrow
Agent, the stockholders of the Predecessor Companies will be entitled to receive
any dividends paid on the Escrow Stock and have the right to vote the Escrow
Stock.
Conditions Precedent to Closing of the Combination Agreements
The obligation of the Company to consummate the Combination is subject to
certain conditions, including the stockholders of a Predecessor Company having
good and marketable title, free and clear of any
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<PAGE> 56
material liens, encumbrances or restrictions, to the stock of such Predecessor
Company, that the Predecessor Company's audited financial statements for the
fiscal years 1993, 1994 and 1995 complying in all material respects with all
applicable accounting requirements and being fairly presented in conformity with
generally accepted accounting principles, favorable opinions of counsel to the
stockholders of the Predecessor Company, the spin-off of real estate and other
non-operating assets owned by the Predecessor Company, the receipt of all
necessary consents, the closing of the Combination resulting in revenue and net
income before income taxes on a pro forma basis for the Company of at least $50
million and $7.5 million, respectively, and the effectiveness of the
Registration Statement. The obligation of a Predecessor Company and its
stockholders to consummate the Combination is subject to certain conditions,
including the accuracy of the representations and warranties of the Company
contained in the Combination Agreement, a favorable opinion of counsel to the
Company and receipts of consideration in the Combination of at least nine (9)
times such Predecessor Company's Adjusted Net Income.
Expenses
Each of the Combination Agreements provides that each of the parties shall
bear its respective expenses incurred in connection with the preparation,
execution and performance of the Combination Agreement and the transactions
contemplated therein, provided that the Company will, from the net proceeds of
the Offering, reimburse each of the Predecessor Companies for fees paid by it
for professional accounting services.
EMPLOYMENT AGREEMENTS AND COVENANTS NOT TO COMPETE
In connection with the Combination, the president/general manager of each
Service Center has entered into an employment agreement with the Company. The
annual salaries pursuant to such agreements range from $40,000 to $250,000 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. Such employment agreements 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. The obligations of the parties
under the employment agreements are conditioned upon the consummation of the
Combination and the closing of the Offering. For a discussion of the employment
agreements between the Company and its executive officers, see "Management --
Employment Agreements."
DISPOSAL OF REAL ESTATE
Prior to the Combination, the buildings and underlying real estate owned by
certain of the Predecessor Companies were sold or otherwise disposed of.
Management expects that such Predecessor Companies will lease back from the
owners thereof the buildings and underlying real estate necessary for the
operation of its Service Centers.
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<PAGE> 57
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth certain information concerning each of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ---- -------------------------------------------
<S> <C> <C>
Alan R. Sielbeck........................... 43 Chairman of the Board and Chief Executive
Officer
James D. Abrams............................ 48 President, Chief Operating Officer and
Director
Anthony M. Schofield....................... 42 Chief Financial Officer and Treasurer
Raymond J. De Riggi........................ 48 Director
Timothy G. Wallace......................... 38 Director
</TABLE>
Prior to the completion of the Offering, the Company anticipates increasing
the size of the Board of Directors from four to eight directors. The Company has
not yet determined who will serve as additional directors in the event of such
increase in size. In addition, the Company will divide its Board of Directors
into three classes, with directors being elected for staggered three-year terms.
Each class is to consist, as nearly as practicable, of one-third of the total
number of directors serving on the Board of Directors.
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 of which is a
Combining Company, 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 Chief Executive Officer and a director of CSG, one of the Combining
Companies, since 1990. Mr. Abrams has served as President and sole director of
Air Experts and Service Experts of Palm Springs, Inc., each a Combining Company,
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 has served, since 1992, as Chairman and
President of Service Now, Inc. ("Service Now"), a holding company that owns
several HVAC businesses, including Air Experts and Service Experts of Palm
Springs, Inc. He plans to resign from his positions with Service Now prior to
the closing of the Combination and the Offering. 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 of the Company
and Treasurer 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 since November 1995. From 1992
to 1995, Mr. De Riggi served as Executive Vice President of Pet, Incorporated,
and from 1990 to 1992, 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
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<PAGE> 58
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.
The Board of Directors of the Company has established an Executive
Committee, Compensation Committee and an Audit Committee. The Executive
Committee of the Board of Directors is authorized by the Board of Directors to
take all action which may be delegated by the Board of Directors under Delaware
law. The Compensation Committee 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 recommends the annual appointment of the Company's auditors and
reviews 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 was organized in March 1996, and its operation since that time
has related primarily to its formation and to the Combination. Messrs.
have been granted stock options under the Service Experts, Inc. 1996
Incentive Stock Plan (the "Incentive Plan") to purchase shares,
respectively, of Common Stock. Such options are exercisable at the initial
public offering price and vest one-third per year commencing on the second
anniversary of the date of grant.
The Company has not awarded stock appreciation rights to any of 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 the closing of the
Combination, Messrs. Sielbeck, Abrams and Schofield (the "executive officers")
are employed as executive officers of the Company. The employments 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 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.
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<PAGE> 59
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 options to be granted under the Incentive Plan. Under
the Incentive Plan and pursuant to action of the Board, the Compensation
Committee appointed by the Board of Directors will administer the Incentive Plan
and may grant to officers and key employees non-transferable options to purchase
shares of Common Stock. The options are for terms not longer than ten years
(five years in the case of incentive stock options granted to an individual who,
at the time of the grant, owns more than 10% of the total combined voting power
of all classes of stock of the Company), at prices to be determined by the Board
of Directors or the Compensation Committee. Such prices may not be less than
100% of the fair market value of the Common Stock on the date of grant (110% in
the case of an individual who, at the time of grant of incentive stock options,
owns more than 10% of the total combined voting power of all classes of stock of
the Company) in the case of incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Incentive stock options
may be granted only to employees and may not be less than 85% of the fair market
value of the Common Stock on the date of grant in the case of non-qualified
stock options. Options granted under the Incentive Plan may be exercisable in
installments. The Company is authorized to loan, or guarantee loans of, the
purchase price of shares issuable upon exercise of options granted under the
Incentive Plan. Unless terminated earlier, the Incentive Plan will terminate in
2006. The aggregate fair market value of Common Stock with regard to which
incentive stock options are exercisable by an individual for the first time
during any calendar year may not exceed $100,000. The Company has granted
options to purchase shares of Common Stock under the Incentive Plan. Such
options are exercisable at the initial public offering price and vest one-third
per year commencing on the second anniversary of the date of grant.
Non-Employee Director Stock Option Plan. In June 1996, the Company adopted
the Director Plan. The Company has reserved for issuance under the Director Plan
100,000 shares of Common Stock. The Director Plan provides for the granting of
nonqualified stock options and awards of restricted stock to each director of
the Company who is not also an employee or officer of the Company ("Non-Employee
Directors") at an exercise price, in the case of options, equal to the fair
market value of the Common Stock on the date the options are granted. The
Director Plan contains provisions providing for adjustment of the number of
shares available for option and subject to unexercised options in the event of
stock splits, dividends payable in Common Stock, business combinations or
certain other events. The Board shall have no authority, discretion or power to
select the participants who will receive options or restricted stock pursuant to
the Director Plan, to
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<PAGE> 60
set the number of shares of Common Stock to be covered by each option or
issuance of restricted stock, to set the exercise price or the period within
which the options may be exercised or modify the restrictions applicable to
restricted stock awards or to alter other terms or conditions specified in the
options.
The Director Plan provides for the grant of options to purchase 5,000
shares of Common Stock to (i) each nonemployee director of the Company on the
effective date of this Offering at an exercise price equal to the public
offering price and (ii) each non-employee director elected after the effective
date of this Offering on the date of such director's election to the Board of
Directors at an exercise price equal to the fair market value of the Common
Stock on the date the options are granted. In addition, the Director Plan
provides for the grant to each non-employee director of the Company of options
to purchase 1,000 shares of Common Stock on each January 1 (each date of grant
being referred to as the "Grant Date"). The Board of Directors may revoke, on or
prior to each January 1, the next automatic grant of options otherwise provided
for by the Director Plan if no options have been granted to employees since the
preceding January 1 under the Incentive Plan or any other employee stock option
plan that the Company might adopt. Each option shall be exercisable in full
beginning one year after the Grant Date and shall expire ten years after the
Grant Date (the "Option Period"), unless cancelled sooner due to termination of
service or death, or unless the option is fully exercised prior to the end of
the Option Period.
Employee Stock Purchase Plan. The Service Experts, Inc. Employee Stock
Purchase Plan (the "Purchase Plan") was adopted in June 1996 and will become
effective simultaneously with the Offering. 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.
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.
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<PAGE> 61
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 Offering, Mr. Abrams, Mr. Sielbeck, John R. Young, a principal
stockholder of CSG, and R. Edward Hutton, Jr., a principal stockholder of AC
Service & Installation Co., Inc. and Donelson Air Conditioning Company, Inc.,
two of the Service Centers, received 500,695, 243,706, 473,992 and 243,707
shares of Common Stock, respectively, as founders of the Company for their
services in forming the Company, developing its business plans and procedures
and in acquiring the Predecessor Companies. These shares do not include the
shares of Common Stock to be received in exchange for their interests in the
Predecessor Companies.
Pursuant to the Combination, and as consideration for their interests in
the Predecessor Companies, certain officers, directors and holders of 5% or more
of the outstanding Common Stock will receive cash and shares of Common Stock as
follows: Mr. Sielbeck -- $2,689,678 and 576,359 shares; Mr. Abrams -- $2,199,772
and 471,380 shares; Mr. Young -- $2,178,843 and 466,895 shares; and Mr.
Hutton -- $2,689,678 and 576,359 shares, assuming an initial offering price of
$14.00 per share. See "The Combination." Such amounts were determined on the
basis of the evaluation by the Company and the Representatives of the following
factors: the financial and operational history and trends of the Predecessor
Company, 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 38%
of the issued and outstanding common stock of Future University in exchange for
$2,000 per share in cash, an aggregate of $604,000. The consideration paid was
determined by arms length negotiations between the Company and the stockholders
of Future University who sold their shares to the Company. Mr. Abrams and Mr.
Young, who are 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
"Business -- Contractor Success Group."
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 Predecessor Companies.
See "Business -- 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. After the
Combination, Service Now will continue 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 Predecessor
Companies. The Company has not entered into any definitive agreements with
Fusion, but may purchase filters from Fusion in the future.
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<PAGE> 62
At March 31, 1996, Mr. Sielbeck had outstanding indebtedness payable to AC
Service & Installation Co., Inc. and Donelson Air Conditioning Company, Inc. in
the amount of $133,800, consisting of a note payable in the principal amount of
$100,000, bearing annual interest at 5% and payable upon demand, and an
interest-free advance of $33,800. At March 31, 1996, Mr. Hutton had outstanding
indebtedness payable to AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. 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.
The Board of Directors has adopted a policy that any transactions between
the Company and any of its officers, directors or principal stockholders or
affiliates thereof, must be on terms no less favorable than those which could be
obtained from unaffiliated parties and must be approved by a majority of the
disinterested members of the Board of Directors. The Audit Committee of the
Board of Directors will be responsible for reviewing all related party
transactions on a continuing basis and potential conflict of interest situations
where appropriate.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof and giving effect to the Combination
and the Offering (assuming an initial offering price of $14.00 per share), 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 SHARES TO BE
OWNED PRIOR TO THE BENEFICIALLY OWNED
OFFERING AFTER THE OFFERING
------------------- ---------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ----------------------------------------------------- ------- ------- --------- -------
<S> <C> <C> <C> <C>
James D. Abrams(1)................................... 397,282 27.17% 990,530(4) 12.01%
Alan R. Sielbeck(2).................................. 243,706 16.67 820,065 9.94
John R. Young(3)..................................... 376,034 25.72 969,282(4) 11.75
R. Edward Hutton, Jr.(2)............................. 243,707 16.67 820,066 9.94
Anthony M. Schofield................................. -- --
Raymond J. De Riggi.................................. -- --
Timothy G. Wallace................................... -- --
All executive officers and directors as a group (five
persons)........................................... 640,988 43.84 1,810,595(4) 21.95
</TABLE>
- ---------------
(1) Mr. Abrams's address is c/o Contractor Success Group, 16141 North Outer
Forty Drive, Suite 310, Chesterfield, Missouri 63017.
(2) The indicated person's address is c/o AC Service & Installation Co., 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 205,718 shares to be issued to Service Now, the sole stockholder of
two of the Predecessor Companies, in connection with the Combination.
Messrs. Abrams and Young are principal shareholders of Service Now.
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<PAGE> 64
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"). Upon completion of the Offering and giving
effect to the Combination, the Company will have 8,250,000 shares of Common
Stock (assuming an initial offering price of $14.00 per share) 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 shares
have been granted as of the date hereof. See "Management -- Compensation
Pursuant to Plans." As of June 15, 1996, there are approximately 40 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. For a description of
certain registration rights attached to warrants to purchase Common Stock, see
"Underwriting."
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.
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<PAGE> 65
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.
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. See "Management -- Executive Officers and Directors."
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 .
63
<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock and no
precise predictions can be made as to the effect, if any, that sales of shares
or the availability of such 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.
Upon completion of the Offering, the Company will have outstanding
2,250,000 shares of Common Stock (assuming an initial offering price of $14.00
per share) of which the 2,250,000 shares sold in the Offering (2,587,500 shares
if the Underwriters' over-allotment option is exercised in full) will be 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 the Offering 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 the date of this Prospectus without the prior written consent of
Equitable Securities Corporation on behalf of the Underwriters. See
"Underwriting."
64
<PAGE> 67
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Equitable
Securities Corporation and Morgan Keegan & Company, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of an underwriting agreement (the "Underwriting
Agreement"), to purchase from the Company the numbers of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Equitable Securities Corporation..........................................
Morgan Keegan & Company, Inc. ............................................
---------
Total........................................................... 2,250,000
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the shares of
Common Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock being
purchased directly to the public at the initial offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the Offering, the offering price and other selling
terms may be changed.
The Company has granted the Underwriters a 30-day option to purchase up to
an additional 337,500 shares of Common Stock at the initial offering price less
the underwriting discount set forth on the cover page of this Prospectus to
cover over-allotments, if any. If the Underwriters exercise their over-allotment
option to purchase any of the 337,500 additional shares of Common Stock from the
Company, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them as shown in the above table
bears to the 2,250,000 shares of Common Stock offered hereby. The Underwriters
may exercise this option only to cover over-allotments made in connection with
the sale of the Common Stock offered hereby.
Prior to this Offering, there has been no market for the Common Stock. The
initial offering price will be determined by negotiations between the Company
and the Representatives. The factors considered in determining such initial
offering price will include the financial and operational history and trends of
the Company, the history of and the prospects for the industry in which the
Company competes, an assessment of the Company's management, its past and
present operations, its past and present earnings and the trend of such
earnings, the general condition of the securities markets at the time of the
Offering and the price-earnings multiples and market prices of publicly traded
securities of comparable companies. The Representatives have informed the
Company that the Underwriters do not intend to confirm sales of Common Stock to
any accounts over which they exercise discretionary authority. The
Representatives intend to make a market in the Common Stock after completion of
the offering.
The Company, its directors and executive officers and certain other persons
have agreed that they will not offer, pledge, issue, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock for a period of 180 days after the date of this
Prospectus without the prior written consent of Equitable Securities Corporation
on behalf of the Representatives; provided, however, the Company may grant stock
65
<PAGE> 68
options under, and issue shares of Common Stock upon the exercise of outstanding
stock options granted under, the Company's Incentive Stock Plan.
The Company has agreed to indemnify the Underwriters and controlling
persons, if any, against, certain liabilities, including liabilities under the
Securities Act or will contribute to the payments the Underwriters or any
controlling persons may be required to make in respect thereof.
Equitable Securities Corporation ("ESC") was engaged jointly by AC Service
& Installation Co., Inc. and CSG to provide financial advisory and investment
banking services in the formation of the Company and the structuring of the
Combination. The Company assumed the obligations of AC Service & Installation
Co., Inc. and CSG after its formation. In connection with the engagement, ESC
has received a financial advisory fee of $25,000. Upon completion of the
Combination, ESC will receive an additional financial advisory fee of $250,000,
and warrants (the "ESC Warrants") to purchase that number of shares of the
Common Stock which equals 1% of the Common Stock outstanding after the Offering
(before exercise of the Underwriters' over-allotment option), at a per share
price equal to the initial offering price. The ESC Warrants will be exercisable
for a period of five years, in whole or in part, will be subject to
anti-dilution adjustments resulting from stock splits, stock dividends and
recapitalizations, will not be transferable during the initial 12 months (except
in certain limited circumstances), and will grant one demand registration right
for the underlying Common Stock exercisable for five years from the date of
issuance of the ESC Warrants and incidental registration rights exercisable for
seven years from the date of the issuance of the ESC Warrants. As a result of
the advisory fees paid and to be paid to ESC in connection with the Combination
and receipt of the ESC Warrants, ESC will be deemed to have received $650,375 in
additional compensation in connection with this Offering.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Waller Lansden Dortch & Davis,
Nashville, Tennessee, counsel to the Company. Certain legal matters will be
passed upon for the Underwriters by Sherrard & Roe, PLC, Nashville, Tennessee.
EXPERTS
The financial statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
66
<PAGE> 69
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information with respect to the Company and
the Common Stock, reference is hereby made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. A copy of the Registration Statement,
including the exhibits and schedules thereto, may be inspected without charge at
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, 13th
Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and the exhibits and schedules thereto can be obtained from the Public
Reference Section of the Commission upon payment of prescribed fees. The
Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements
and other information with the Commission. Such periodic reports, proxy
statements and other information will be available for inspection and copying at
the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports for the first
three fiscal quarters of each fiscal year containing unaudited interim financial
information.
67
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
Basis of Presentation................................................................ F-4
Unaudited Pro Forma Combining Balance Sheet as of March 31, 1996..................... F-5
Unaudited Pro Forma Combining Statement of Income for the Twelve Months ended
December 31, 1995.................................................................. F-6
Unaudited Pro Forma Combining Statement of Income for the Three Months ended March
31, 1996........................................................................... F-7
Notes to Unaudited Pro Forma Combining Financial Statements.......................... F-8
SERVICE EXPERTS, INC. -- AUDITED BALANCE SHEET
MARCH 31, 1996
Report of Independent Auditors....................................................... F-11
Balance Sheet........................................................................ F-12
Notes to Balance Sheet............................................................... F-13
COMBINED PREDECESSOR COMPANIES -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-14
Combined Balance Sheets.............................................................. F-15
Combined Statements of Income........................................................ F-16
Combined Statements of Stockholders' Equity.......................................... F-17
Combined Statements of Cash Flows.................................................... F-18
Notes to Combined Financial Statements............................................... F-19
AC SERVICE & INSTALLATION CO., INC. AND DONELSON AIR CONDITIONING COMPANY,
INC. -- AUDITED COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-29
Combined Balance Sheets.............................................................. F-30
Combined Statements of Income........................................................ F-31
Combined Statements of Stockholders' Equity.......................................... F-32
Combined Statements of Cash Flows.................................................... F-33
Notes to Combined Financial Statements............................................... F-34
HARDWICK AIR MASTERS, INC. D/B/A AIRMASTERS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-41
Balance Sheets....................................................................... F-42
Statements of Income................................................................. F-43
Statements of Stockholders' Equity................................................... F-44
Statements of Cash Flows............................................................. F-45
Notes to Financial Statements........................................................ F-46
NORRELL HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-53
Balance Sheets....................................................................... F-54
Statements of Income................................................................. F-55
Statements of Stockholders' Equity................................................... F-56
Statements of Cash Flows............................................................. F-57
Notes to Financial Statements........................................................ F-58
</TABLE>
F-1
<PAGE> 71
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
VISION HOLDING COMPANY, INC. -- AUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MARCH 1, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-63
Consolidated Balance Sheets.......................................................... F-64
Consolidated Statements of Operations................................................ F-65
Consolidated Statements of Stockholder's Equity...................................... F-66
Consolidated Statements of Cash Flows................................................ F-67
Notes to Consolidated Financial Statements........................................... F-68
COMERFORD'S HEATING AND AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-75
Balance Sheets....................................................................... F-76
Statements of Operations............................................................. F-77
Statements of Stockholders' Equity................................................... F-78
Statements of Cash Flows............................................................. F-79
Notes to Financial Statements........................................................ F-80
ROLF COAL AND FUEL CORP. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-84
Balance Sheets....................................................................... F-85
Statements of Operations............................................................. F-86
Statements of Stockholders' Equity................................................... F-87
Statements of Cash Flows............................................................. F-88
Notes to Financial Statements........................................................ F-89
BRAND HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-95
Balance Sheets....................................................................... F-96
Statements of Operations............................................................. F-97
Statements of Stockholders' Equity................................................... F-98
Statements of Cash Flows............................................................. F-99
Notes to Financial Statements........................................................ F-100
COASTAL AIR CONDITIONING SERVICE, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-105
Balance Sheets....................................................................... F-106
Statements of Income................................................................. F-107
Statements of Stockholder's Equity................................................... F-108
Statements of Cash Flows............................................................. F-109
Notes to Financial Statements........................................................ F-110
CONTRACTOR SUCCESS GROUP, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-117
Balance Sheets....................................................................... F-118
Statements of Income................................................................. F-119
Statements of Stockholders' Equity................................................... F-120
Statements of Cash Flows............................................................. F-121
Notes to Financial Statements........................................................ F-122
</TABLE>
F-2
<PAGE> 72
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ARROW HEATING & AIR CONDITIONING, INC. -- AUDITED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 29, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-127
Balance Sheets....................................................................... F-128
Statements of Income................................................................. F-129
Statements of Stockholders' Equity................................................... F-130
Statements of Cash Flows............................................................. F-131
Notes to Financial Statements........................................................ F-132
AIR EXPERTS, A UNITED SERVICES CO., INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
Report of Independent Auditors....................................................... F-137
Balance Sheets....................................................................... F-138
Statements of Operations............................................................. F-139
Statements of Stockholders' Equity................................................... F-140
Statements of Cash Flows............................................................. F-141
Notes to Financial Statements........................................................ F-142
GILLEY'S HEATING & COOLING, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-147
Balance Sheets....................................................................... F-148
Statements of Income................................................................. F-149
Statements of Stockholder's Equity................................................... F-150
Statements of Cash Flows............................................................. F-151
Notes to Financial Statements........................................................ F-152
SERVICE EXPERTS OF PALM SPRINGS, INC. -- AUDITED FINANCIAL STATEMENTS
PERIOD FROM OCTOBER 15, 1993 (DATE OPERATIONS COMMENCED) THROUGH DECEMBER 31, 1993,
AND YEARS ENDED DECEMBER 31, 1994 AND 1995 AND PERIOD ENDED MARCH 31, 1996
(UNAUDITED)
Report of Independent Auditors....................................................... F-156
Balance Sheets....................................................................... F-157
Statements of Operations............................................................. F-158
Statements of Stockholders' Equity................................................... F-159
Statements of Cash Flows............................................................. F-160
Notes to Financial Statements........................................................ F-161
</TABLE>
F-3
<PAGE> 73
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
The following unaudited pro forma combining financial statements give
effect to the acquisition by Service Experts, Inc., a Delaware Corporation, of
the following companies ("Predecessor Companies"), in exchange for shares of the
Company's common stock, cash, and the assumption of certain debt (the
"Combination").
Combined AC Service & Installation Co., Inc. and Donelson Air Conditioning
Company, Inc.
Hardwick Air Masters, Inc.
Norrell Heating & Air Conditioning, Inc.
Vision Holding Company, Inc.
Comerford's Heating and Air Conditioning, Inc.
Rolf Coal and Fuel Corp.
Brand Heating & Air Conditioning, Inc.
Coastal Air Conditioning Service, Inc.
Contractor Success Group, Inc.
Arrow Heating & Air Conditioning, Inc.
Air Experts, a United Services Co., Inc.
Gilley's Heating & Cooling, Inc.
Service Experts of Palm Springs, Inc.
The unaudited pro forma combining financial statements have been prepared
by the Company based on the historical financial statements of Service Experts,
Inc. and the Predecessor Companies included elsewhere in this Prospectus, and
certain preliminary estimates and assumptions deemed appropriate by management
of the Company. These pro forma combining financial statements may not be
indicative of actual results as if the transaction had occurred on the dates
indicated or which may be realized in the future. Neither expected benefits nor
cost reductions anticipated by the Predecessor Companies following consummation
of the Combination have been reflected in such pro forma combining financial
statements. The pro forma combining balance sheet as of March 31, 1996, gives
effect to the Combination and this Offering as if such transactions had occurred
on March 31, 1996. The pro forma combining statements of income for the three
months ended March 31, 1996 and year ended December 31, 1995, assume the
Combination was completed on January 1, 1996 and January 1, 1995, respectively.
The pro forma combining financial statements should be read in conjunction
with the historical combined financial statements of the Combined Predecessor
Companies, including the related notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" that appear elsewhere
in this prospectus.
F-4
<PAGE> 74
PRO FORMA COMBINING BALANCE SHEET OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
COMBINING COMPANIES
---------------------------
COMBINED PRO FORMA PRO FORMA
SERVICE PREDECESSOR COMBINATION OFFERING PRO FORMA
EXPERTS, INC. COMPANIES COMBINED ADJUSTMENTS PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ $ 3,841,017 $ 3,841,017 $(1,915,229)(a) $ 1,925,788 $26,500,000(g) $7,743,053
(18,346,930)(i)
890,806 (j)
(993,830 )(k)
(2,232,781 )(l)
Certificates of
deposit.............. 200,000 200,000 200,000 200,000
Receivables:
Trade, net........... 3,974,204 3,974,204 3,974,204 3,974,204
Related Party........ 758,755 758,755 758,755 (758,755 )(j) --
Employee............. 138,647 138,647 138,647 138,647
Other................ 174,104 174,104 174,104 174,104
------------- ----------- ----------- ----------- ----------- ----------- -----------
5,045,710 5,045,710 5,045,710 (758,755 ) 4,286,955
Inventories............ 2,129,668 2,129,668 2,129,668 2,129,668
Costs and estimated
earnings in excess of
billings............. 215,119 215,119 215,119 215,119
Investments............ 339,479 339,479 339,479 339,479
Prepaid expenses and
other current
assets............... 25,000 189,509 214,509 214,509 214,509
Current portion of
notes receivable,
net.................. 237,866 237,866 384,970 (d) 622,836 622,836
Deferred income
taxes................ 302,454 302,454 302,454 302,454
------------- ----------- ----------- ----------- ----------- ----------- -----------
Total current
assets......... 25,000 12,500,822 12,525,822 (1,530,259 ) 10,995,563 5,058,510 16,054,073
Property, buildings and
equipment, net......... 4,821,614 4,821,614 (855,180 )(c) 3,581,464 3,581,464
(384,970 )(d)
Notes
receivable -- related
parties, net........... 132,051 132,051 132,051 (132,051 )(j) --
Notes
receivable -- other,
net.................... 319,198 319,198 319,198 319,198
Equity investment in
Future University,
Inc.................... 604,000 (b) 604,000 604,000
Deferred income taxes.... 40,344 40,344 40,344 40,344
Goodwill, net............ 815,044 815,044 815,044 815,044
Other assets............. 394,937 394,937 394,937 394,937
------------- ----------- ----------- ----------- ----------- ----------- -----------
Total assets..... $25,000 $19,024,010 $19,049,010 $(2,166,409) $16,882,601 $4,926,459 $21,809,060
=========== ========== ========== =========== ========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........ $ $ 138,891 $ 138,891 $ $ 138,891 $ (138,891 )(l) $ --
Trade accounts payable
and accrued
liabilities.......... 25,000 2,403,805 2,428,805 2,428,805 2,428,805
Accrued compensation... 1,279,447 1,279,447 1,279,447 1,279,447
Accrued taxes, other
than income.......... 110,298 110,298 110,298 110,298
Accrued warranties..... 415,202 415,202 415,202 415,202
Income taxes payable... 605,130 605,130 605,130 605,130
Deferred revenue....... 1,583,979 1,583,979 1,583,979 1,583,979
Billings in excess of
costs and estimated
earnings............. 356,378 356,378 356,378 356,378
Liabilities to
Companies' benefit
plans................ 150,809 150,809 150,809 150,809
Due to related
parties.............. 20,000 20,000 20,000 (20,000 )(k)
Notes payable to
related parties --
current.............. 107,837 107,837 604,000 (b) 680,259 (604,000 )(l) --
(31,578 )(d) (76,259 )(k)
Current portion of
long-term debt and
capital lease
obligations.......... 815,311 815,311 (17,865 )(c) 797,446 (797,446 )(l) --
Distributions payable
to Founders.......... 18,346,930 (a) 18,346,930 (18,346,930)(i) --
------------- ----------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities.... 25,000 7,987,087 8,012,087 18,901,487 26,913,574 (19,983,526) 6,930,048
Long-term debt and
capital lease
obligations, net of
current portion........ 1,124,004 1,124,004 (431,560 )(c) 692,444 (692,444 )(l) --
Notes payable to related
parties, net........... 1,637,254 1,637,254 (739,683 )(d) 897,571 (897,571 )(k) --
Deferred compensation.... 108,874 108,874 (108,874 )(f) -- --
Deferred income taxes.... 253,398 253,398 177,500 (e) 430,898 430,898
Stockholders' equity:
Common stock........... 22,500 (g) 82,500
60,000 (h)
Additional paid-in
capital (owners'
equity).............. 7,913,393 7,913,393 (20,262,159)(a) (12,051,886) $26,477,500(g) 14,365,614
(405,755 )(c) (60,000 )(h)
771,261 (d)
(177,500 )(e)
108,874 (f)
------------- ----------- ----------- ----------- ----------- ----------- -----------
$25,000 $19,024,010 $19,049,010 $(2,166,409) $16,882,601 $4,926,459 $21,809,060
=========== ========== ========== =========== ========== =========== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-5
<PAGE> 75
PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMBINING COMPANIES
-------------------------
SERVICE COMBINED
EXPERTS, PREDECESSOR PRO FORMA PRO FORMA
INC. COMPANIES PRO FORMA ADJUSTMENTS AS ADJUSTED
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues................. $ $59,651,163 $59,651,163 $59,651,163
Cost of goods sold........... 36,216,043 36,216,043 (120,333)(m) 36,095,710
----------- ----------- ----------- ----------- -----------
Gross margin................. -- 23,435,120 23,435,120 120,333 23,555,453
Selling, general and
administrative expenses.... 18,706,596 18,706,596 (3,035,621)(n) 15,670,975
----------- ----------- ----------- ----------- -----------
Income from operations....... -- 4,728,524 4,728,524 3,155,954 7,884,478
Other income (expense):
Interest expense........... (358,902) (358,902) 358,902(o) --
Interest income............ 256,206 256,206 256,206
Other income............... 207,730 207,730 91,006(p) 298,736
----------- ----------- ----------- ----------- -----------
-- 105,034 105,034 449,908 554,942
----------- ----------- ----------- ----------- -----------
Income before taxes.......... -- 4,833,558 4,833,558 3,605,862 8,439,420
Provision for income
taxes:..................... 613,912 613,912 2,623,721(q) 3,237,633
----------- ----------- ----------- ----------- -----------
Net income................... $ -- $ 4,219,646 $ 4,219,646 $ 982,141 $ 5,201,787
========== ========== ========== ========== ==========
Pro forma net income per
share...................... $ 0.66
Pro forma weighted average
shares outstanding......... 7,827,122
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-6
<PAGE> 76
PRO FORMA COMBINING FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
COMBINING COMPANIES
---------------------------
COMBINED
SERVICE PREDECESSOR PRO FORMA PRO FORMA
EXPERTS, INC. COMPANIES PRO FORMA ADJUSTMENTS AS ADJUSTED
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues.................. $ -- $13,972,106 $13,972,106 $ -- $13,972,106
Cost of goods sold............ 8,406,250 8,406,250 8,406,250
------------- ----------- ----------- ----------- -----------
Gross margin.................. -- 5,565,856 5,565,856 -- 5,565,856
Selling, general and
administrative expenses..... 4,893,599 4,893,599 (728,582)(n) 4,165,017
------------- ----------- ----------- ----------- -----------
Income from operations........ -- 672,257 672,257 728,582 1,400,839
Other income (expense):
Interest expense............ (109,386) (109,386) 109,386(o) --
Interest income............. 90,009 90,009 90,009
Other income................ 89,468 89,468 19,910(p) 109,378
------------- ----------- ----------- ----------- -----------
-- 70,091 70,091 129,296 199,387
------------- ----------- ----------- ----------- -----------
Income before taxes........... -- 742,348 742,348 857,878 1,600,226
Provision for income taxes.... 57,697 57,697 517,231(q) 574,928
------------- ----------- ----------- ----------- -----------
Net income.................... $ -- $ 684,651 $ 684,651 $ 340,647 $ 1,025,298
========== ========== ========== ========= ==========
Pro forma net income per
share....................... $ 0.13
Pro forma weighted average
shares outstanding.......... 7,827,122
</TABLE>
See accompanying notes to Unaudited Pro Forma Combining Financial Statements.
F-7
<PAGE> 77
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the liability for payments to owners of Predecessor Companies of
$20,262,159 in connection with the Combination, which in accordance with
Staff Accounting Bulletin No. 48, are accounted for as distributions to the
owners of the Predecessor Companies. This results in: (i) $20,262,159
reduction in additional paid-in capital, (ii) $18,346,930 increase in
distributions payable to the owners of the Predecessor Companies and
reduction of cash of $1,915,229. A detail of such distributions is as
follows:
DIVIDENDS
<TABLE>
<CAPTION>
CASH
CASH FROM RETAINED TOTAL CASH
PREDECESSOR COMPANIES OFFERING BY OWNERS DISTRIBUTION
------------------------------------------------- ------------ ---------- -----------
<S> <C> <C> <C>
Combined AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc......... $ 5,379,355 $ 136,866 $ 5,516,221
Hardwick Air Masters, Inc........................ 63,367 -- 63,367
Norrell Heating & Air Conditioning, Inc.......... 1,662,114 -- 1,662,114
Vision Holding Company, Inc...................... 1,193,365 -- 1,193,365
Comerford's Heating and Air Conditioning, Inc.... 1,526,504 605,638 2,132,142
Rolf Coal and Fuel Corp.......................... 1,281,384 -- 1,281,384
Brand Heating & Air Conditioning, Inc............ 863,808 -- 863,808
Coastal Air Conditioning Service, Inc............ 179,721 166,847 346,568
Contractor Success Group, Inc.................... 3,616,940 493,131 4,110,071
Arrow Heating & Air Conditioning, Inc............ 1,043,939 132,369 1,176,308
Air Experts, a United Services Co., Inc.......... 532,204 -- 532,204
Gilley's Heating & Cooling, Inc.................. 576,418 380,378 956,796
Service Experts of Palm Springs, Inc............. 427,811 -- 427,811
------------ ---------- -----------
$18,346,930 $1,915,229 $20,262,159
============ ========== ==========
</TABLE>
(b) Reflects the purchase of a 38% interest in Future University in exchange
for a note payable that will be repaid from the net proceeds of the
Offering, resulting in: (i) $604,000 investment in Future University, Inc.,
and (ii) $604,000 in notes payable to related parties.
(c) Reflects the distribution of AC Service & Installation Co., Inc.'s building
and the assumption of the mortgage payable by the stockholders of AC
Service & Installation Co., Inc. This results in (i) a reduction in
property, buildings and equipment of $855,180; (ii) a reduction in mortgage
payable of $449,425; and (iii) a decrease in equity of $405,755.
(d) Reflects the distribution of Vision Holding Company, Inc.'s building to a
stockholder in exchange for a note receivable and the elimination of the
mortgage payable to a former stockholder that is assumed by the stockholder
of Vision Holding Company, Inc. This results in (i) an increase in note
receivable from stockholder of $384,970, (ii) a decrease in property, plant
and equipment of $384,970; (iii) a decrease in notes payable of $771,261
and an increase in equity of $771,261 to reflect the assumption by the
stockholder.
(e) Reflects the resulting deferred tax liability in accordance with SFAS 109
for the Predecessor Companies organized as Subchapter S corporations and
not subject to federal income tax under the Internal Revenue Code. This
results in: (i) $177,500 increase in the liability for deferred taxes and
(ii) $177,500 reduction of additional paid-in capital.
F-8
<PAGE> 78
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS -- (CONTINUED)
(f) Reflects the reversal of deferred compensation at Norrell Heating & Air
Conditioning, Inc. resulting in: (i) a reduction of deferred compensation
of $108,874 and (ii) an increase in additional paid-in capital of $108,874.
(g) Reflects the proceeds of the Offering, net of estimated expenses and
underwriting discounts and commissions. The net proceeds are reflected as:
(i) $26,500,000 of cash, (ii) $22,500 of 2,225,000 shares of common stock,
and (iii) $26,477,500 of additional paid-in capital.
(h) Reflects the reclassification of Owners' equity of the Predecessor
Companies into 6,000,000 shares of Common Stock, resulting in: (i) $60,000
increase in Common Stock, and (ii) $60,000 reduction of additional paid-in
capital (owners' equity).
(i) Reflects the use of net proceeds from the Offering for payment of
distributions payable to Predecessor owners (see pro forma balance sheet
adjustment a), resulting in: (i) $18,346,930 reduction in dividends payable
to Predecessor stockholders, and (ii) $18,346,930 reduction in cash.
(j) Reflects the collection of receivables to related parties. This results in
(i) a decrease in accounts receivable from related parties of $758,755;
(ii) a decrease in notes receivable from related parties of $132,051; and
(iii) an increase in cash of $890,806.
(k) Reflects the payment to the stockholders for the notes payable due them.
This results in (i) a decrease of $973,830 in notes payable to related
parties; (ii) a decrease in due to related parties of $20,000; and (iii) a
decrease in cash of $993,830.
(l) Reflects the use of proceeds from the Offering for the repayment of
$1,628,781 of debt assumed in the Combination and $604,000 of notes payable
to related parties, resulting in: (i) a reduction in total debt of
$1,628,781, of which $797,446 is current and $138,891 classified as
short-term debt, (ii) reduction in notes payable to related parties of
$604,000 and (iii) $2,232,781 reduction in cash.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------ ---------------
<C> <C> <S> <C> <C>
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(m)
Reflects the following adjustment to cost of goods sold:
(i) Elimination of extra payment to employee profit sharing
plan.................................................... $ (120,333) $ --
(n)
Reflects the following adjustments to selling, general, and
administrative:
(i) Elimination of historical owner's compensation.......... (5,990,468) (1,497,617)
(ii) Additional compensation relating to new agreements with
previous owners......................................... 1,773,006 443,252
(iii) Additional lease expense on real estate sold by AC
Service & Installation Co., Inc. and Vision Holding
Company, Inc............................................ 178,690 44,673
(iv) Elimination of depreciation expense on real estate sold
by
AC Service & Installation Co., Inc. and Vision Holding
Company, Inc............................................ (48,239) (12,060)
(v) Elimination of non-competition fees resulting from
buyout of non-competition agreements.................... (85,723) (6,900)
(vi) Elimination of extra payment to employee profit sharing
plan.................................................... (60,167) --
(vii) Corporate office overhead expenses...................... 540,000 135,000
(viii) Corporate office compensation........................... 729,000 183,000
(ix) Elimination of management fees paid by Air Experts, a
United Services Co., Inc. and Service Experts of Palm
Springs, Inc............................................ (71,720) (17,930)
------------ ---------------
(3,035,621) (728,582)
</TABLE>
F-9
<PAGE> 79
PRO FORMA COMBINING FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1995 1996
------------ ---------------
<C> <C> <S> <C> <C>
(o) Reflects the following adjustments to interest expense related
to:
(i) Elimination of debt distributed to shareholder of Vision
Holding Company, Inc.................................... $ 72,830 $ 33,852
(ii) Elimination of interest on debt distributed to
shareholders of AC Service & Installation Co., Inc...... 33,499 7,361
(iii) Elimination of all other debt assumed in the transaction
to be paid at closing................................... 252,573 68,173
------------ ---------------
358,902 109,386
(p) Reflects the following adjustment to other income
(i) The addition of income from its 38% investment in Future
University.............................................. 91,006 19,910
(q) Reflects the following adjustment to income taxes
(i) Additional income tax provision for state and federal
taxes at a combined effective rate of 38% as the
Predecessor Companies previously were taxed as
Subchapter S corporations............................... 1,253,493 191,237
(ii) Additional income taxes on adjustments m-p.............. 1,370,228 325,994
------------ ---------------
$ 2,623,721 $ 517,231
(r) The computation of pro forma net income per share is based upon 7,827,122 weighted average
shares of Common Stock outstanding, which includes (i) 6,000,000 shares to be outstanding prior
to the Offering and (ii) 1,827,122 shares being sold in the Offering to cover the cash portion
of the purchase price to be paid in connection with the Combination, costs of the Offering and
debt to be paid off at closing.
</TABLE>
F-10
<PAGE> 80
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
Service Experts, Inc.
We have audited the accompanying balance sheet of Service Experts, Inc. as
of March 31, 1996. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Service Experts, Inc. at March 31,
1996 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
June 7, 1996
F-11
<PAGE> 81
SERVICE EXPERTS, INC.
BALANCE SHEET
MARCH 31, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Prepaid expenses................................................................ $ 25,000
--------
$ 25,000
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued expenses................................................................ $ 25,000
Stockholders' equity:
Preferred stock -- $.01 par value:
Authorized -- 10,000,000 shares; outstanding -- none......................... --
Common Stock, $.01 par value;
Authorized -- 30,000,000; outstanding -- 1,000,000 shares.................... 10,000
Less: Notes receivable from stockholders........................................ (10,000)
Retained earnings............................................................... --
--------
Total stockholders' equity.............................................. --
--------
$ 25,000
========
</TABLE>
See accompanying notes.
F-12
<PAGE> 82
SERVICE EXPERTS, INC.
NOTES TO BALANCE SHEET
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Service Experts, Inc. (of Delaware) ("the Company") was formed on March 27,
1996, primarily for the purpose of acquiring 14 unrelated heating and air
conditioning companies, in exchange for shares of its common stock and cash from
the proceeds of sale of its stock in the initial public offering of the Company
("the Offering"). The Offering is to be effected in accordance with executed
combination agreements with the 14 heating and air conditioning companies and is
subject to the closing of the Offering. The companies to be acquired are
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential and commercial customers in the United States.
The 14 unrelated businesses to be acquired and their city of operations, are as
follows:
<TABLE>
<CAPTION>
COMPANY NAME LOCATION
----------------------------------------------------------- ------------------------
<S> <C>
Combined AC Service & Installation Co., Inc. and Donelson
Air Conditioning Company, Inc............................ Nashville, Tennessee
Air Experts, a United Services Co., Inc.................... St. Louis, Missouri
Hardwick Air Masters, Inc.................................. Little Rock, Arkansas
Arrow Heating & Air Conditioning, Inc...................... Racine, Wisconsin
Brand Heating & Air Conditioning, Inc...................... Lafayette, Indiana
Coastal Air Conditioning Service, Inc...................... Savannah, Georgia
Contractor Success Group, Inc.............................. St. Louis, Missouri
Comerford's Heating and Air Conditioning, Inc.............. Pleasanton, California
Gilley's Heating & Cooling, Inc............................ Monroe, Louisiana
Norrell Heating & Air Conditioning, Inc.................... Birmingham, Alabama
Rolf Coal and Fuel Corp.................................... Fort Wayne, Indiana
Service Experts of Palm Springs, Inc....................... Palm Springs, California
Vision Holding Company, Inc................................ Kansas City, Missouri
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Notes Receivable from Stockholders and Accrued Expenses
The carrying amounts reported in the balance sheet for notes receivable and
accrued expenses approximates fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to
Be Disposed Of" and does not believe the adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
2. RELATED PARTY TRANSACTIONS
The Company has notes receivable outstanding of $10,000 from four
stockholders of the Company as of March 31, 1996. The notes are payable on July
31, 1996 and bear interest at 7.5%.
F-13
<PAGE> 83
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Stockholders
The Combined Predecessor Companies
We have audited the accompanying combined balance sheets of the Combined
Predecessor Companies (see Note 1) as of December 31, 1994 and 1995, and the
related combined statements of income, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Companies' 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 Combined
Predecessor Companies (see Note 1) at December 31, 1994 and 1995, and the
combined results of their operations and their cash flows for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
June 7, 1996
F-14
<PAGE> 84
COMBINED PREDECESSOR COMPANIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 1,995,001 $ 3,896,182 $ 3,841,017
Certificates of deposit......................................... 100,000 200,000 200,000
Receivables:
Trade, net of allowance for doubtful accounts of $239,814 in
1994 and $255,983 in 1995................................... 3,926,742 4,831,380 3,974,204
Related party................................................. 481,599 876,753 758,755
Employee...................................................... 74,838 128,072 138,647
Other......................................................... 163,292 366,553 174,104
----------- ----------- -----------
4,646,471.. 6,202,758 5,045,710
Inventories..................................................... 1,572,875 1,720,313 2,129,668
Costs and estimated earnings in excess of billings.............. 187,569 187,280 215,119
Investments..................................................... 294,217 136,541 339,479
Prepaid expenses and other current assets....................... 145,240 172,532 189,509
Current portion of notes receivable, net of allowance for
doubtful accounts of $56,387 in 1995.......................... 270,795 231,232 237,866
Deferred income taxes........................................... 122,810 265,126 302,454
----------- ----------- -----------
Total current assets..................................... 9,334,978 13,011,964 12,500,822
Property, buildings and equipment:
Land............................................................ 130,000 130,000 130,000
Buildings....................................................... 1,301,058 1,373,658 1,378,134
Furniture and fixtures.......................................... 734,076 1,016,014 1,021,075
Machinery and equipment......................................... 1,231,252 1,637,984 1,749,030
Vehicles........................................................ 3,728,727 4,471,458 4,761,260
Leasehold improvements.......................................... 281,289 292,640 309,200
----------- ----------- -----------
7,406,402 8,921,754 9,348,699
Less accumulated depreciation and amortization.................. (3,438,062) (4,316,880) (4,527,085)
----------- ----------- -----------
3,968,340 4,604,874 4,821,614
Notes receivable -- related parties, net of current portion....... 150,763 135,944 132,051
Notes receivable -- other, net of current portion................. 309,725 310,294 319,198
Deferred income taxes............................................. 31,423 39,092 40,344
Goodwill, net..................................................... 877,780 833,898 815,044
Other assets...................................................... 474,312 394,528 394,937
----------- ----------- -----------
Total assets............................................. $15,147,321 $19,330,594 $19,024,010
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt................................................. $ 131,138 $ 334,034 $ 138,891
Trade accounts payable and accrued liabilities.................. 2,695,658 2,658,019 2,403,805
Accrued compensation............................................ 1,026,927 1,888,202 1,279,447
Accrued taxes, other than income................................ 246,181 84,120 110,298
Accrued warranties.............................................. 265,476 405,323 415,202
Income taxes payable............................................ 263,503 604,838 605,130
Deferred revenue................................................ 1,309,232 1,545,998 1,583,979
Billings in excess of costs and estimated earnings.............. 263,204 235,797 356,378
Liability to Companies' benefit plans........................... 133,082 158,770 150,809
Due to related parties.......................................... 20,000 20,000 20,000
Notes payable to related parties -- current portion............. 162,891 173,586 107,837
Current portion of long-term debt and capital lease
obligations................................................... 829,100 719,104 815,311
----------- ----------- -----------
Total current liabilities................................ 7,346,392 8,827,791 7,987,087
Long-term debt and capital lease obligations, net of current
portion......................................................... 1,070,587 1,202,196 1,124,004
Notes payable to related parties, net of current portion.......... 1,597,613 1,667,255 1,637,254
Deferred compensation............................................. 91,725 105,191 108,874
Deferred income taxes............................................. 244,370 252,766 253,398
Deferred credit................................................... 12,819 -- --
Stockholders' equity.............................................. 4,783,815 7,275,395 7,913,393
----------- ----------- -----------
Total liabilities and stockholders' equity............... $15,147,321 $19,330,594 $19,024,010
============ ============ ============
</TABLE>
See accompanying notes.
F-15
<PAGE> 85
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.................... $35,784,297 $48,476,838 $59,651,163 $12,727,435 $13,972,106
Cost of goods sold.............. 22,512,299 30,918,161 36,216,043 7,980,172 8,406,250
----------- ----------- ----------- ----------- -----------
Gross margin.................... 13,271,998 17,558,677 23,435,120 4,747,263 5,565,856
Selling, general and
administrative expenses....... 12,180,033 15,268,679 18,706,596 4,046,186 4,893,599
----------- ----------- ----------- ----------- -----------
Income from operations.......... 1,091,965 2,289,998 4,728,524 701,077 672,257
Other income (expense):
Interest expense.............. (217,695) (298,359) (358,902) (75,027) (109,386)
Interest income............... 168,419 188,533 256,206 54,623 90,009
Other income.................. 311,387 178,296 207,730 38,295 89,468
----------- ----------- ----------- ----------- -----------
262,111 68,470 105,034 17,891 70,091
----------- ----------- ----------- ----------- -----------
Income before taxes............. 1,354,076 2,358,468 4,833,558 718,968 742,348
Provision (benefit) for income
taxes:
Current....................... 46,700 360,112 760,841 15,138 96,620
Deferred...................... 146,310 42,995 (146,929) (14,001) (38,923)
----------- ----------- ----------- ----------- -----------
Total income taxes.... 193,010 403,107 613,912 1,137 57,697
----------- ----------- ----------- ----------- -----------
Net income............ $ 1,161,066 $ 1,955,361 $ 4,219,646 $ 717,831 $ 684,651
========== ========== ========== ========== ==========
Pro Forma income taxes
(Unaudited -- See Note 9)..... 277,727 528,934 1,253,493 252,778 191,237
----------- ----------- ----------- ----------- -----------
Pro Forma Net Income
(Unaudited)................... $ 883,339 $ 1,426,427 $ 2,966,153 $ 465,053 $ 493,414
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-16
<PAGE> 86
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<S> <C>
Balance at December 31, 1992.................................................... $ 3,416,677
Capital distributions......................................................... (1,008,359)
Issuance of stock............................................................. (10,400)
Net income............................................................ 1,161,066
-----------
Balance at December 31, 1993.................................................... 3,558,984
Capital distributions......................................................... (906,000)
Issuance of stock............................................................. 181,500
Adjustment to unrealized losses on available-for-sale securities, net of
tax........................................................................ (6,030)
Net income............................................................ 1,955,361
-----------
Balance at December 31, 1994.................................................... 4,783,815
Capital distributions......................................................... (1,745,498)
Adjustment to unrealized gains on available-for-sale securities, net of tax... 17,432
Net income............................................................ 4,219,646
-----------
Balance at December 31, 1995.................................................... 7,275,395
Capital distributions (unaudited)............................................. (46,000)
Adjustment to unrealized losses on available-for-sale securities, net of tax
(unaudited)................................................................ (653)
Net income (unaudited)................................................ 684,651
-----------
Balance at March 31, 1996 (unaudited)........................................... $ 7,913,393
==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 87
COMBINED PREDECESSOR COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 1,161,066 $ 1,955,361 $ 4,219,646 $ 717,831 $ 684,651
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 650,028 948,523 1,212,891 280,737 296,283
Provision for deferred income taxes (benefit)......... 146,310 42,995 (146,929) (14,001) (38,923)
Provisions for loss on accounts receivable............ 117,775 184,591 210,592 23,738 24,480
(Gain) loss on asset disposals........................ (63,962) 10,724 (28,676) -- (10,425)
Changes in assets and liabilities:
Receivables......................................... (960,086) (1,188,907) (1,679,651) 316,868 921,553
Inventories......................................... (123,261) (439,111) (147,438) (203,113) (409,355)
Prepaid expenses and other current assets........... 20,481 4,047 23,358 (134,403) (24,194)
Trade accounts payable and accrued liabilities...... 772,192 (121,026) (139,218) 88,633 (165,160)
Accrued compensation................................ 770,922 79,437 900,429 (162,898)( (609,950)
Accrued taxes, other than income.................... 58,872 59,354 (162,061) (157,566) 26,178
Accrued warranties.................................. 60,631 95,751 139,847 81,067 9,879
Deferred revenue.................................... 296,122 464,733 236,766 36,017 37,981
Income taxes payable................................ (33,431) 247,645 341,334 (202,264) 4,570
Costs and estimated earnings in excess of billings
and billings in excess of costs and estimated
earnings.......................................... 228,227 (59,706) (27,118) (5,349) 92,742
----------- ----------- ----------- ---------- ----------
Net cash flow provided by operating
activities.................................... 3,101,886 2,284,411 4,953,772 665,297 840,310
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment.......... (935,240) (1,564,491) (1,707,310) (407,416) (333,498)
Proceeds from sale of property, buildings, and
equipment............................................. 236,199 34,640 76,618 11,847 14,261
Purchase of investments................................. (34,185) (222,476) (23,719) (3,112) (257,412)
Proceeds from sale of investments....................... -- -- 200,994 -- 53,601
Purchases of certificates of deposit.................... (100,000) (100,000) (200,000) -- --
Proceeds from sale of certificates of deposit........... 100,000 100,000 100,000 -- --
Advances on notes receivable............................ -- -- (40,222) (15,178) (15,538)
Collections on notes receivable......................... 32,514 20,663 -- -- --
Cash acquired through purchase of business.............. -- 76,906 -- -- --
Other deferred credits.................................. 65,350 -- -- -- --
(Increase) decrease in other assets..................... (157,735) (50,332) (41,549) (12,522) (4,251)
----------- ----------- ----------- ---------- ----------
Net cash used in investing activities........... (793,097) (1,705,090) (1,635,188) (426,381) (542,837)
FINANCING ACTIVITIES
Proceeds from short-term debt........................... 15,000 -- 250,000 -- --
Payments on short-term debt............................. (6,060) (236,231) (71,474) -- (149,174)
Retirement of stock..................................... (100,000) -- -- -- --
Issuance of stock....................................... 60,000 -- -- -- --
Proceeds of long-term debt and capital leases........... 1,315,946 2,058,415 1,704,877 640,718 288,137
Payments of long-term debt and capital leases........... (1,370,909) (1,850,462) (1,909,999) (475,837) (519,052)
Proceeds on notes payable to related parties............ 29,039 376,058 479,879 33,332 57,470
Payments on notes payable to related parties............ (49,187) (275,889) (238,281) (12,058) (100,000)
Distribution to stockholders............................ (1,008,359) (906,000) (1,745,498) (383,000) (46,000)
Accounts receivable and accounts payable to related
parties............................................... 17,292 (200,679) 113,093 (6,956) 115,981
----------- ----------- ----------- ---------- ----------
Net cash provided by (used in) financing
activities.................................... (1,097,238) (1,034,788) (1,417,403) (203,801) (352,638)
----------- ----------- ----------- ---------- ----------
Increase (decrease) in cash and cash equivalents........ 1,211,551 (455,467) 1,901,181 35,115 (55,165)
Cash and cash equivalents at beginning of period........ 1,238,917 2,450,468 1,995,001 1,995,001 3,896,182
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of period...... $ 2,450,468 $ 1,995,001 $ 3,896,182 $2,030,116 $3,841,017
========== ========== ========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................... $ 215,460 $ 314,289 $ 325,435 $ 72,611 $ 95,177
========== ========== ========== ========= =========
Income taxes paid....................................... $ 65,975 $ 82,704 $ 419,301 $ 75,321 $ 66,158
========== ========== ========== ========= =========
Purchase of equipment through capital leases............ $ 139,456 $ 155,694 $ 93,910 $ -- $ 149,742
========== ========== ========== ========= =========
Covenant not-to-compete exchanged for debt.............. $ 90,000 $ -- $ -- $ -- $ --
========== ========== ========== ========= =========
ACQUISITION OF COMPANY
Fair value of assets acquired excluding cash......................... $ 717,883
Fair value of liabilities assumed.................................... (613,289)
Stock issued......................................................... (181,500)
-----------
Cash acquired................................................ $ 76,906
==========
</TABLE>
See accompanying notes.
F-18
<PAGE> 88
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Service Experts, Inc. (of Delaware) ("the Company") was formed on March 27,
1996, primarily for the purpose of acquiring 13 unrelated heating and air
conditioning companies, in exchange for shares of its common stock and cash from
the proceeds of the sale of its stock in the initial public offering of the
Company ("the Offering"). The Combination is to be effected in accordance with
executed combination agreements with the 13 heating and air conditioning
companies and is subject to the closing of the Offering. The 13 unrelated
businesses to be acquired, first day of operations presented, and their city of
operations, are as follows:
<TABLE>
<CAPTION>
FIRST DAY
COMPANY NAME PRESENTED LOCATION
------------------------------------------ ----------------- ------------------------
<S> <C> <C>
Combined AC Service & Installation Co.,
Inc. and Donelson Air Conditioning
Company, Inc............................ January 1, 1993 Nashville, Tennessee
Hardwick Air Masters, Inc................. January 1, 1993 Little Rock, Arkansas
Air Experts, a United Services Co.,
Inc..................................... January 1, 1994 St. Louis, Missouri
Arrow Heating & Air Conditioning, Inc..... January 29, 1993 Racine, Wisconsin
Brand Heating & Air Conditioning, Inc..... January 1, 1993 Lafayette, Indiana
Coastal Air Conditioning Service, Inc..... January 1, 1993 Savannah, Georgia
Contractor Success Group, Inc............. January 1, 1993 St. Louis, Missouri
Comerford's Heating and Air Conditioning,
Inc..................................... January 1, 1993 Pleasanton, California
Gilley's Heating & Cooling, Inc........... January 1, 1993 Monroe, Louisiana
Norrell Heating & Air Conditioning,
Inc..................................... January 1, 1993 Birmingham, Alabama
Rolf Coal and Fuel Corp................... January 1, 1993 Fort Wayne, Indiana
Service Experts of Palm Springs, Inc...... October 15, 1993 Palm Springs, California
Vision Holding Company, Inc............... March 1, 1993 Kansas City, Missouri
</TABLE>
The financial statements of these companies have been combined for all
periods presented. The companies operate in one industry segment and are
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential and commercial customers in their respective
cities.
The Combined Predecessor Companies were not under common control or
management and some were not subject to corporate income taxes (see Note 9);
accordingly, the data may not be comparable to or indicative of post-combination
results.
RECOGNITION OF INCOME
Revenues on all of the Combined Predecessor Companies' 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 for all of the Combined
Predecessor Companies' 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.
F-19
<PAGE> 89
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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 $134,986 and $118,130 at December 31, 1994 and 1995, respectively.
The Combined Predecessor Companies classify 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 Predecessor Companies
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.
Contractor Success Group, Inc. provides management consulting, marketing
services, reporting mechanisms, lead generation tools, sales techniques,
implementation materials and customized training for its member companies in the
heating, ventilation and air conditioning contracting ("HVAC") industry. This
company currently has over 270 members throughout the United States and Canada.
Initial membership fees paid to Contractor Success Group, Inc., less a
provision for estimated uncollectible amounts, are recognized on the date the
membership agreement is signed given that the fees are nonrefundable, and all
obligations have been substantially performed. Initial membership fees included
in net revenue totaled $1,071,000, $1,120,000 and $900,000 during 1993, 1994 and
1995, respectively. Quarterly dues, less a provision for estimated uncollectible
amounts, are recognized in the same period the services and obligations are
performed. Revenue from sales of copyrighted literature is recognized on the
date of sale.
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 Combined
Predecessor Companies, the carrying amounts reported in the balance sheets for
long-term debt and capital lease obligations approximate fair value.
CASH EQUIVALENTS
The Combined Predecessor Companies considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
F-20
<PAGE> 90
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTES RECEIVABLE
Contractor Success Group, Inc. accepts notes receivable from members who
desire to finance a portion of their initial membership fee. The original
principal balance generally does not exceed $15,000 and the notes typically
involve a three-year term, accrue interest at 18% and are payable in equal
monthly installments of principal and interest. The notes are periodically
reviewed for collectibility and reserves are established at the time it appears
that collectibility is uncertain. Included in current portion of notes
receivable is $270,795 and $231,232 at December 31, 1994 and 1995, respectively,
related to these notes. Included in notes receivable -- other is $309,725 and
$310,294 at December 31, 1994 and 1995, respectively, related to these notes.
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $53,358, $2,611 and $79,216, respectively and accounts
written off, net of recoveries were $0, $0 and $79,216, respectively.
PROPERTY, 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................................................................... 31.5
Furniture and fixtures...................................................... 3-11
Machinery and equipment..................................................... 3-11
Vehicles.................................................................... 3-10
Leasehold improvements...................................................... 7-40
</TABLE>
WARRANTIES
The Combined Predecessor Companies provide the retail customer with a one,
two, three, or ten-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 Predecessor Companies provide an accrual for
future warranty costs based upon the relationship of prior years' sales to
actual warranty costs. It is the Combined Predecessor Companies 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
Those Combined Predecessor Companies subject to corporate income taxes use
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 shareholders of the other Combined Predecessor Companies have elected
under Subchapter S of the Internal Revenue Code to include their respective
company's income in their own income for federal income tax purposes.
Accordingly, these companies are not subject to federal income taxes. This
election is not
F-21
<PAGE> 91
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
available for some state income tax reporting; accordingly, the Combined
Predecessor Companies uses the liability method of accounting for state income
taxes in these jurisdictions.
ADVERTISING COSTS
Certain of the Combined Predecessor Companies expense advertising costs as
incurred. During 1993, 1994 and 1995, the Combined Predecessor Companies
expensed $696,180, $884,318 and $906,326, respectively. Advertising costs for
Air Experts, Inc. primarily relate to brochures which are accounted for as
prepaid supplies and expensed as distributed. This company had no prepaid
advertising at December 31, 1994. This company had $20,014 of prepaid
advertising at December 31, 1995. Advertising expense was $87,175 and $158,350
in 1994 and 1995, respectively for this company.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $126,354, $178,414 and $137,674, respectively and
accounts written off, net of recoveries were $142,121, $57,963 and $121,505,
respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Combined Predecessor Companies have 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 Predecessor Companies' 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........................ $1,721,557 $1,424,905
Estimated earnings.......................................... 751,727 769,823
---------- ----------
2,473,284 2,194,728
Less applicable billings...................................... 2,548,919 2,243,245
---------- ----------
$ (75,635) $ (48,517)
========= =========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 187,569 $ 187,280
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (263,204) (235,797)
---------- ----------
$ (75,635) $ (48,517)
========= =========
</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-22
<PAGE> 92
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Combined Predecessor Companies adopted SFAS
No. 115. The Combined Predecessor Companies' 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
Predecessor Companies' financial statements. The securities available-for-sale
as of December 31 were as follows:
<TABLE>
<CAPTION>
1994 1995
--------------------- ---------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Bills........................... $200,994 $ 200,994 $ -- $ --
Other debt securities......................... 63,575 48,496 72,428 59,943
Equity securities............................. 38,379 44,727 54,852 76,598
-------- ---------- -------- ----------
$302,948 $ 294,217 $127,280 $ 136,541
======== ======== ======== ========
</TABLE>
There were no gross realized gains or losses from the sale of
available-for-sale securities.
4. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Lines of credit............................................... $ 274,116 $ 177,821
Mortgage note payable......................................... 616,998 516,010
Installment and equipment notes............................... 727,414 952,615
Other long-term debt.......................................... 97,015 59,693
---------- ----------
1,715,543 1,706,139
Less current portion.......................................... 827,025 625,723
---------- ----------
$ 888,518 $1,080,416
========= =========
</TABLE>
The Combined Predecessor Companies have various lines of credit with
various financial institutions with a total borrowing limit of $1,625,000. These
lines of credit bear interest at various fixed rates ranging from 8.5% to 10.25%
and variable rates ranging from 8.5% to 9.75% at December 31, 1995.
One of the Combined Predecessor Companies has a mortgage note payable which
is secured by the related office building and land. This loan requires monthly
installments of $8,400, including principal and imputed interest (6.1% at
December 31, 1995) through July 15, 1997.
The Combined Predecessor Companies have 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 6.45% to 9.4% per annum
or at variable rates ranging from 7.5% to 11.0% at December 31, 1995. These
loans require monthly payments ranging from $339 to $6,458 and are due through
December 1999.
F-23
<PAGE> 93
COMBINED PREDECESSOR COMPANIES
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............................................................. $ 625,723
1997............................................................. 821,781
1998............................................................. 160,836
1999............................................................. 79,601
2000............................................................. 18,198
----------
$1,706,139
=========
</TABLE>
5. LEASES
Total rental expense for all operating leases was $434,210, $609,128 and
$650,542 for 1993, 1994 and 1995, respectively. The Companies lease certain
vehicles, equipment, and office and warehouse facilities under terms of
noncancelable operating and capital lease agreements which expire at various
dates through January 2000. Minimum rental commitments at December 31, 1995
under capital and operating leases having an initial noncancelable term of one
year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1996........................................................... $112,184 $ 555,500
1997........................................................... 72,399 359,882
1998........................................................... 41,588 224,648
1999........................................................... 16,554 166,918
2000........................................................... 3,581 52,594
-------- ----------
246,306 $1,359,542
=========
Amounts representing interest.................................. 31,145
--------
Present value of net minimum rentals (including $93,381
classified as current)....................................... $215,161
========
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ---------
<S> <C> <C>
Machinery and equipment........................................ $ 310,633 $ 395,858
Less accumulated amortization.................................. (115,655) (161,897)
--------- ---------
Net equipment under capital leases............................. $ 194,978 $ 233,961
========= =========
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
6. EMPLOYEE BENEFIT PLANS
Several of the Combined Predecessor Companies have various
defined-contribution employee benefit plans incorporating provisions of section
401(k) of the Internal Revenue Code ("the Code"). Substantially all employees of
these companies are eligible to participate in the plans. Under the various
plans' provisions, a plan member may annually contribute, on a tax deferred
basis, amounts typically ranging from 1% to 20% of total compensation, not to
exceed the maximum established by the Internal Revenue Service. Certain
companies provide discretionary or do not match contributions while others
provide matching contributions ranging from 25% to 50% of total contributions by
a plan member, to a maximum ranging from 2% to 6% of
F-24
<PAGE> 94
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the employee's total calendar year compensation. The Combined Predecessor
Companies' matching contributions totaled $179,656, $199,678 and $250,164 for
the years ended December 31, 1993, 1994 and 1995, respectively.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Combined Predecessor Companies are parties to a number of legal
proceedings arising in the ordinary course of their 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
Predecessor Companies.
The Combined Predecessor Companies maintain general liability insurance
coverage and umbrella policies to ensure themselves against any liabilities
occurring in the normal course of business. The Combined Predecessor Companies
believe that their insurance coverage is adequate.
One of the companies within the Combined Predecessor Companies has entered
into a salary continuation agreement with the President of that company. Under
this agreement, the president will be paid $1,667 per month for 180 months
following the retirement date of August 1, 2003. The amount charged to expense
was $6,356, $7,347 and $8,466 at December 31, 1993, 1994 and 1995, respectively.
The liability classified as long-term is $45,191 at December 31, 1995.
8. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $4,340,482,
$3,889,251 and $5,618,455 in 1993, 1994 and 1995, respectively.
9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal............................................. $ 33,032 $303,593 $ 619,245
State............................................... 13,668 56,519 141,596
Deferred.............................................. 146,310 42,995 (146,929)
-------- -------- ---------
$193,010 $403,107 $ 613,912
======== ======== =========
</TABLE>
F-25
<PAGE> 95
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED 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
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $224,542 $234,177
Unrealized gain on available-for-sale securities............... -- 2,463
Deferred revenue............................................... 52,200 29,700
Contract billings.............................................. 34,068 21,918
Capitalized overhead........................................... 24,631 20,210
Prepaids....................................................... 10,508 6,506
-------- --------
Deferred tax liabilities......................................... 345,949 314,974
Deferred tax assets:
Net operating loss carryforwards............................... 39,500 --
Accounts receivable............................................ 40,799 50,882
Unrealized loss on available-for-sale securities............... 2,879 --
Compensation and warranty reserves............................. 65,183 156,196
Deferred revenue............................................... 72,697 57,011
Accrued expenses............................................... 10,152 13,562
Depreciation and amortization.................................. 16,143 18,828
Passive activity loss carryforwards............................ 9,490 9,490
Employee compensation.......................................... 17,587 22,165
Contributions.................................................. 33,340 46,097
Other.......................................................... 31,882 38,292
-------- --------
Total gross deferred tax assets........................ 339,652 412,523
Valuation allowance............................................ (83,840) (46,097)
-------- --------
Net deferred tax assets........................................ 255,812 366,426
-------- --------
Net deferred tax liabilities (assets).......................... $ 90,137 $(51,452)
======== ========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995
-------- ---------- ---------
<S> <C> <C> <C>
Tax provision at statutory rate...................... $211,241 $ 364,841 $ 771,219
State income tax less applicable federal tax
benefit............................................ 16,857 48,184 93,110
Effects of graduated tax rates....................... (17,451) (52,333) (199,263)
Surtax exemption..................................... (2,152) (15,490) (26,672)
Change in valuation allowance........................ -- 29,500 (37,743)
NOL for which no benefit recognized.................. 14,700 24,800 --
Goodwill amortization................................ -- 11,346 11,346
Other, net........................................... (30,185) (7,741) 1,915
-------- ---------- ---------
$193,010 $ 403,107 $ 613,912
======== ========= =========
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed previously in this note, certain of the Combined Predecessor
Companies operate under Subchapter S of the Internal Revenue Code and are not
subject to corporate federal income tax. In connection
F-26
<PAGE> 96
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
with the contemplated initial public offering (See Note 1), the Subchapter S
election will be terminated for these companies. 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 for income tax
purposes of $744,179, $708,003 and $2,642,912 for 1993, 1994 and 1995,
respectively. Had these companies filed federal and state income tax returns as
regular corporations for 1993, 1994 and 1995, income tax expense under the
provisions of Financial Accounting Standard No. 109 would have been $277,727,
$528,934 and $1,253,493, 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. 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 March 31, 1996, the deferred tax
liability would have been approximately $177,500.
The following unaudited pro forma information reflects income tax expense
of the Combined Predecessor Companies as if the S corporation companies had been
subject to federal and state income taxes:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal............................................. $352,632 $668,793 $1,518,729
State............................................... 57,668 106,706 292,664
Deferred.............................................. 60,437 156,542 56,012
-------- -------- ----------
Pro forma income taxes................................ 470,737 932,041 1,867,405
Income taxes as reported.............................. 193,010 403,107 613,912
-------- -------- ----------
Pro forma income tax adjustment....................... $277,727 $528,934 $1,253,493
======== ======== =========
</TABLE>
10. RELATED PARTY TRANSACTIONS
Notes Payable to Related Parties
Certain of the Combined Predecessor Companies have notes payable to related
parties, including current and former shareholders, which bear annual interest
ranging from 0.0% to 12.5% and are due through January 2009. The aggregate
amount of principal maturities are $173,586, $737,013, $97,163, $93,990, $69,488
and $669,601 in 1996, 1997, 1998, 1999, 2000, and thereafter, respectively.
Notes Receivable from Related Parties
Certain of the Combined Predecessor Companies have various notes receivable
from related parties, including current shareholders. These notes have various
payment terms and bear annual interest ranging from 5.0% to 8.0%.
Other Related Party Transaction
Certain of the Combined Predecessor Companies lease facility space from
stockholders and employees of those companies and from various corporations and
partnerships which are owned by stockholders of the Combined Predecessor
Companies. Rental expense on these related party operating leases amount to
$286,292, $347,258 and $348,935 for the years 1993, 1994 and 1995, respectively.
F-27
<PAGE> 97
COMBINED PREDECESSOR COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income and cash flows for the three months ended
March 31, 1995 and 1996 (interim financial statements) have been prepared by the
Combined Predecessor Companies' 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,
1993, 1994 and 1995 audited financial statements appearing herein. The results
of the three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
12. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
F-28
<PAGE> 98
REPORT OF INDEPENDENT AUDITORS
The Stockholders
AC Service & Installation Co., Inc.
and Donelson Air Conditioning Company, Inc.
We have audited the accompanying combined balance sheets of AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. as of
December 31, 1994 and 1995, and the related combined statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of AC Service &
Installation Co., Inc. and Donelson Air Conditioning Company, Inc. at December
31, 1994 and 1995, and the combined results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 5, 1996
F-29
<PAGE> 99
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 91,096 $ 275,720 $ 825,444
Receivables:
Trade, net of allowance for doubtful accounts of
$135,786 in 1994 and $135,000 in 1995............... 1,944,403 1,975,449 1,608,433
Related party......................................... -- 207,259 264,657
Employee.............................................. 13,411 63,092 69,189
Other................................................. 140,593 77,473 60,791
---------- ---------- -----------
2,098,407 2,323,273 2,003,070
Inventories.............................................. 209,340 234,439 266,000
Costs and estimated earnings in excess of billings....... 55,936 30,740 76,249
Prepaid expenses and other current assets................ 12,264 9,143 10,623
Deferred income taxes.................................... -- 16,817 16,817
---------- ---------- -----------
Total current assets............................. 2,467,043 2,890,132 3,198,203
Property, buildings and equipment:
Land..................................................... 105,000 105,000 105,000
Buildings................................................ 707,999 766,677 771,153
Furniture and fixtures................................... 182,516 396,278 396,278
Machinery and equipment.................................. 121,500 162,883 162,883
Vehicles................................................. 1,047,710 1,300,369 1,290,074
Leasehold improvements................................... 77,451 67,224 67,224
---------- ---------- -----------
2,242,176 2,798,431 2,792,612
Less accumulated depreciation and amortization........... (872,184) (1,183,066) (1,264,192)
---------- ---------- -----------
1,369,992 1,615,365 1,528,420
Other assets............................................... 94,546 64,413 57,513
---------- ---------- -----------
Total assets..................................... $3,931,581 $4,569,910 $ 4,784,136
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 665,209 $ 403,442 $ 395,067
Accrued compensation..................................... 463,995 487,900 657,949
Accrued taxes, other than income......................... 39,293 12,728 45,709
Accrued warranties....................................... 54,174 98,379 79,518
Income taxes payable..................................... 25,641 66,793 39,748
Deferred revenue......................................... 215,585 189,108 174,391
Billings in excess of costs and estimated earnings....... 235,450 228,283 353,157
Liability to Company benefit plan........................ 46,332 56,581 64,640
Current portion of long-term debt........................ 106,594 164,265 127,033
---------- ---------- -----------
Total current liabilities........................ 1,852,273 1,707,479 1,937,212
Long-term debt, net of current portion..................... 516,010 463,529 431,560
Notes payable to stockholders.............................. 448,208 661,808 661,808
Deferred income taxes...................................... 14,986 8,436 8,436
Stockholders' equity....................................... 1,100,104 1,728,658 1,745,120
---------- ---------- -----------
Total liabilities and stockholders' equity....... $3,931,581 $4,569,910 $ 4,784,136
========= ========= =========
</TABLE>
See accompanying notes.
F-30
<PAGE> 100
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $10,292,295 $14,298,906 $16,452,622 $3,134,448 $3,098,023
Cost of goods sold................ 7,280,075 10,245,039 11,122,350 2,186,991 2,071,421
----------- ----------- ----------- ---------- ----------
Gross margin...................... 3,012,220 4,053,867 5,330,272 947,457 1,026,602
Selling, general and
administrative expenses......... 2,865,476 3,701,883 4,563,134 897,567 998,909
Bad debt expense.................. 43,265 84,338 28,502 13,896 17,004
----------- ----------- ----------- ---------- ----------
Income from operations............ 103,479 267,646 738,636 35,994 10,689
Other income (expense):
Interest expense................ (74,631) (71,600) (77,149) (13,725) (13,292)
Interest income................. 4,994 7,059 23,186 1,120 10,896
Other income.................... 68,450 17,065 25,569 3,223 14,171
----------- ----------- ----------- ---------- ----------
(1,187) (47,476) (28,394) (9,382) 11,775
----------- ----------- ----------- ---------- ----------
Income before federal and state
income taxes.................... 102,292 220,170 710,242 26,612 22,464
Provision (benefit) for income
taxes:
Current......................... 19,505 48,525 105,055 2,279 6,002
Deferred........................ 2,241 (7,399) (23,367) -- --
----------- ----------- ----------- ---------- ----------
21,746 41,126 81,688 2,279 6,002
----------- ----------- ----------- ---------- ----------
Net income........................ $ 80,546 $ 179,044 $ 628,554 $ 24,333 $ 16,462
========== ========== ========== ========= =========
</TABLE>
See accompanying notes.
F-31
<PAGE> 101
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C>
Balance at December 31, 1992..................................................... $ 940,514
Retirement of stock............................................................ (100,000)
Net income..................................................................... 80,546
----------
Balance at December 31, 1993..................................................... 921,060
Net income..................................................................... 179,044
----------
Balance at December 31, 1994..................................................... 1,100,104
Net income..................................................................... 628,554
----------
Balance at December 31, 1995..................................................... 1,728,658
Net income (unaudited)......................................................... 16,462
Balance at March 31, 1996 (unaudited)............................................ $1,745,120
=========
</TABLE>
See accompanying notes.
F-32
<PAGE> 102
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ 80,546 $ 179,044 $ 628,554 $ 24,333 $ 16,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 214,789 286,988 411,438 101,964 96,489
Current deferred income taxes.............. 2,241 (7,399) (23,367) -- --
Provisions for loss on accounts
receivable.............................. 43,265 84,338 28,502 13,896 17,004
Gain on asset disposals.................... (53,455) (3,711) (14,018) -- (7,225)
Changes in assets and liabilities:
Receivables............................. (260,964) (731,644) (253,368) 253,303 303,199
Inventories............................. (44,848) (76,656) (25,099) (8,105) (31,561)
Prepaid expenses and other current
assets................................ 8,026 27,581 3,121 8,157 (1,480)
Trade accounts payable and accrued
liabilities........................... (83,156) 193,280 (261,767) (44,738) (8,375)
Accrued compensation.................... 458,326 24,734 34,154 (20,218) 178,108
Accrued taxes, other than income........ 6,184 9,272 (26,565) (4,448) 32,981
Accrued warranties...................... 20,516 28,439 44,205 (10,498) (18,861)
Deferred revenue........................ 12,767 187,768 (26,477) (7,221) (14,717)
Income taxes payable.................... (10,779) 3,604 41,152 4,532 (27,045)
Costs and estimated earnings in excess
of billings and billings in excess of
costs and estimated earnings.......... 155,052 58,864 18,029 (42,992) 79,365
--------- --------- --------- --------- --------
Net cash flow provided by operating
activities................................. 548,510 264,502 578,494 267,965 614,344
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment.................................. $(283,278) $(508,769) $(642,470) $(190,585) $ (6,480)
Proceeds from sale of property, buildings,
and equipment.............................. 165,685 4,491 29,810 -- 11,061
Increase in other assets..................... (124,162) -- -- -- --
--------- --------- --------- --------- --------
Net cash provided by (used in) investing
activities................................. (241,755) (504,278) (612,660) (190,585) 4,581
FINANCING ACTIVITIES
Retirement of stock.......................... (100,000) -- -- -- --
Proceeds of long-term debt................... 205,845 119,000 266,139 266,138 --
Payments of long-term debt................... (336,545) (192,922) (260,949) (43,700) (69,201)
Proceeds on notes payable to stockholders.... 9,403 220,378 280,000 -- --
Payments on notes payable to stockholders.... -- (83,248) (66,400) -- --
--------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities................................. (221,297) 63,208 218,790 222,438 (69,201)
--------- --------- --------- --------- --------
Increase (decrease) in cash and cash
equivalents................................ 85,458 (176,568) 184,624 299,818 549,724
Cash and cash equivalents at beginning of
period..................................... 182,206 267,664 91,096 91,906 275,720
--------- --------- --------- --------- --------
Cash and cash equivalents at end of period... $ 267,664 $ 91,096 $ 275,720 $ 391,724 $825,444
========= ========= ========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................ $ 62,053 $ 84,178 $ 77,054 $ 13,725 $ 13,292
========= ========= ========= ========= ========
Income tax paid.............................. $ 9,490 $ 49,460 $ 67,003 $ -- $ 17,250
========= ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-33
<PAGE> 103
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
AC Service & Installation Co., Inc. and Donelson Air Conditioning Company,
Inc. hereafter referred to as ("the Combined Company") are under common
ownership. The financial statements of these companies have been combined for
all periods presented. The Combined Company operates in one industry segment and
is primarily engaged in the installation and servicing of air conditioning and
heating systems for residential and commercial customers in Nashville,
Tennessee.
RECOGNITION OF INCOME
Revenues on all of the Combined Company's heating and air conditioning
installation contracts (Contracts) for commercial buildings are recognized on
the percentage of completion method in the ratio that total incurred costs bear
to total estimated costs. Revenues on all of the Combined Company's heating and
air conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 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 $124,298 and $75,504 at December 31, 1994 and 1995, respectively. The
Combined Company classifies these amounts as current assets because all balances
are expected to be collected in the current year. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Combined Company's customer base, and their dispersions
across many different industries and geographies.
The asset, "costs and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings" represent
billings in excess of revenue recognized on in-progress contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
F-34
<PAGE> 104
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
CASH EQUIVALENTS
The Combined Company considers all highly liquid inventory investments with
an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
PROPERTY, BUILDING AND EQUIPMENT
Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................... 31.5
Furniture and fixtures....................................................... 5-7
Machinery and equipment...................................................... 5
Vehicles..................................................................... 5
</TABLE>
WARRANTIES
The Combined Company provides the retail customer with a two-year warranty
on parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the manufacturer's
warranty on parts and for the first year on labor. The Combined Company provides
an accrual for future warranty costs based upon the relationship of prior years'
sales to actual warranty costs. It is the Combined Company's practice to
classify the entire warranty accrual as a current liability.
USE OF ESTIMATES
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. uses the liability method of
accounting for federal and state income taxes as provided by SFAS No. 109,
"Accounting for Income Taxes." Under the liability method, the deferred tax
liability or asset is based on temporary differences between the financial
statement and income tax bases of assets and liabilities, measured at tax rates
that will be in effect when the differences reverse.
The stockholders of AC Service & Installation Co., Inc. have elected under
Subchapter S of the Internal Revenue Code to include the Company's income in
their own income for federal income tax purposes. Accordingly, AC Service &
Installation Co., Inc. is not subject to federal income taxes. This election is
not available for Tennessee state income tax reporting; accordingly, AC Service
& Installation Co., Inc. uses the liability method of accounting for Tennessee
state income taxes.
F-35
<PAGE> 105
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Combined Company expenses advertising costs as incurred. During 1993,
1994 and 1995, the Combined Company expensed $235,360, $304,417 and $207,802,
respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $43,265, $84,338 and $28,502, respectively and accounts
written off, net of recoveries were $22,057, $(77) and $29,288, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts........................ $1,264,339 $ 911,195
Estimated earnings.......................................... 420,053 486,693
---------- ----------
1,684,392 1,397,888
Less applicable billings...................................... 1,863,906 1,595,431
---------- ----------
$ (179,514) $ (197,543)
========= =========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 55,936 $ 30,740
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... (235,450) (228,283)
---------- ----------
$ (179,514) $ (197,543)
========= =========
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
F-36
<PAGE> 106
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Mortgage note payable......................................... $ 582,350 $ 516,010
Notes payable -- stockholders................................. 482,313 695,913
Installment note -- SunTrust Bank............................. -- 68,884
Installment note -- Bank of Nashville......................... 28,921 19,158
Other......................................................... 11,333 23,742
---------- ----------
1,104,917 1,323,707
Less current portion.......................................... 106,594 164,265
---------- ----------
$ 998,323 $1,159,442
========= =========
</TABLE>
The Combined Company has a mortgage note payable to Free Will Baptist, Inc.
that is secured by the Combined Company's office building and related land. The
loan requires monthly installments of $8,400, including fixed principal and
imputed interest (6.1% at December 31, 1995), through July 15, 1997, at which
time the remaining balance of $403,160 is due.
The Combined Company has an installment note payable to SunTrust Bank that
expires April 15, 1997. The loan is secured by vehicles and requires monthly
payments of $4,593, including principal and interest at the SunTrust Bank base
rate plus .25% (8.75% at December 31, 1995).
The Combined Company has an installment note payable to the Bank of
Nashville that expires March 16, 1996. The loan is secured by vehicles and
requires monthly payments of $6,458, including principal and interest at 8.50%.
The notes payable to stockholders represents amounts loaned to the Combined
Company for working capital needs. The Combined Company has signed unsecured
promissory notes payable to the stockholders for $482,313 and $695,913 at
December 31, 1994 and 1995, respectively, all due December 31, 1997. The notes
bear interest of 4.8% per year.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 164,265
1997............................................................. 1,159,442
----------
$1,323,707
=========
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Combined Company has a defined-contribution employee benefit plan
incorporating provisions of section 401(k) of the Internal Revenue Code.
Employees of the Combined Company must have one year of service and work 500
hours during the plan year to be eligible. Under the plan's provisions, a plan
member may make contributions, on a tax-deferred basis, not to exceed the
maximum established annually by the Internal Revenue Service. Matching
contributions are made by the Combined Company equal to 1/3 of total
contributions by a plan member, to a maximum of 6% of the employee's total
calendar year compensation. The Combined Company's accrued matching
contributions totaled $16,160, $30,340 and $45,678 as of December 31, 1993, 1994
and 1995, respectively.
F-37
<PAGE> 107
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Combined Company is a party to a number of legal proceedings arising in
the ordinary course of its business. In the opinion of management, the
resolution of these proceedings will not have a material adverse effect on the
financial position or results of operations of the Combined Company.
The Combined Company maintains general liability insurance coverage and an
umbrella policy to ensure itself against any liabilities occurring in the normal
course of business. The Combined Company believes that its insurance coverage is
adequate.
6. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $1,402,085,
$1,674,280 and $2,093,240 in 1993, 1994 and 1995, respectively.
7. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $12,675 $39,913 $ 64,582
State.................................................. 6,830 8,612 40,473
Deferred................................................. 2,241 (7,399) (23,367)
------- ------- --------
$21,746 $41,126 $ 81,688
======= ======= ========
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Contract billings.............................................. $34,068 $21,918
------- -------
Deferred tax liabilities......................................... 34,068 21,918
Deferred tax assets:
Depreciation and amortization.................................. 2,307 1,901
Bad debts...................................................... 12,375 17,754
Warranty reserves.............................................. 4,400 10,644
------- -------
Total gross deferred tax assets.................................. 19,082 30,299
Valuation allowance.............................................. -- --
------- -------
Net deferred tax assets.......................................... 19,082 30,299
------- -------
Net deferred tax liabilities (assets)............................ $14,986 $(8,381)
======= =======
</TABLE>
F-38
<PAGE> 108
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized. Accordingly, no valuation allowance has
been recognized for the year ended December 31, 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Tax provision at statutory rate............................... $ 34,689 $ 74,858 $ 241,482
State income tax less applicable federal tax benefit.......... 4,508 5,684 26,712
Less benefit of graduated tax notes and adjustments to
eliminate S corporation..................................... (17,451) (39,416) (186,506)
-------- -------- ---------
$ 21,746 $ 41,126 $ 81,688
======== ======== =========
</TABLE>
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed previously in this note, AC Service & Installation Co., Inc.
operates under Subchapter S of the Internal Revenue Code and is not subject to
corporate federal income tax. In connection with the contemplated initial public
offering (See Note 9), the Subchapter S election will be terminated. As a
result, AC Service and Installation Co., Inc. will be subject to corporate
income taxes subsequent to the termination of S corporation status. AC Service
and Installation Co., Inc. had net operating income for income tax purposes of
$74,800, $(142,000), $521,000 and $(18,600) for 1993, 1994, 1995 and the three
months ended March 31, 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 three months ended March 31, 1996, income tax expense
under the provisions of Financial Accounting Standard No. 109 would have been
$(8,200), $16,915, $205,200 and $(4,000), respectively.
At the date of termination of S corporation status, AC Service &
Installation Co., Inc. will be required to provide deferred taxes for cumulative
temporary differences between financial reporting and tax reporting basis of
assets and liabilities. Such deferred taxes will be based on the cumulative
temporary differences at the date of termination of S corporation status.
The effect of recognizing the deferred taxes will be included in income
from continuing operations. If the termination of S corporation status had
occurred at March 31, 1996, the deferred tax liability would have been
approximately $53,400.
8. RELATED PARTY TRANSACTIONS
The Combined Company has two outstanding notes receivable of $100,000 each
from the two stockholders of the Combined Company as of December 31, 1995 and
March 31, 1996. The notes are payable upon demand and bear annual interest of
5%.
9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Combined Company, in exchange
for shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
F-39
<PAGE> 109
AC SERVICE & INSTALLATION CO., INC.
AND
DONELSON AIR CONDITIONING COMPANY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income (operations) and cash flows for the three
months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
11. SUBSEQUENT EVENT
In May 1996, the Company entered into an agreement to sell its building for
$1,230,000 in cash. The sale is to be effective June 14, 1996. The sale will
result in a gain of approximately $530,000.
F-40
<PAGE> 110
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Hardwick Air Masters, Inc.
d/b/a Airmasters, Inc.
We have audited the accompanying balance sheets of Hardwick Air Masters,
Inc. d/b/a Airmasters, Inc. as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Hardwick Air Masters, Inc.
d/b/a Airmasters, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 10, 1996
F-41
<PAGE> 111
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 80,896 $ 57,512 $ 26,896
Receivables:
Trade, net of allowance for doubtful accounts of
$48,716 in 1994 and $60,299 in 1995................. 588,707 985,311 898,276
Related party......................................... 43,725 39,914 49,777
Employee.............................................. 16,377 22,517 31,244
---------- ---------- ----------
648,809 1,047,742 979,297
Inventories.............................................. 238,250 178,739 202,917
Costs and estimated earnings in excess of billings....... 72,477 83,203 103,793
Prepaid income taxes..................................... 22,141 401 13,324
Prepaid expenses and other current assets................ 7,609 17,437 31,511
Deferred income taxes.................................... 69,026 58,693 54,047
---------- ---------- ----------
Total current assets............................. 1,139,208 1,443,727 1,411,785
Property, buildings and equipment:
Furniture and fixtures................................... 83,733 108,262 114,516
Machinery and equipment.................................. 294,995 313,300 324,234
Vehicles................................................. 463,196 681,641 751,690
Leasehold improvements................................... 28,212 36,348 42,130
---------- ---------- ----------
870,136 1,139,551 1,232,570
Less accumulated depreciation and amortization........... (521,448) (610,220) (643,021)
---------- ---------- ----------
348,688 529,331 589,549
Other assets............................................... 6,748 6,381 6,289
---------- ---------- ----------
Total assets..................................... $1,494,644 $1,979,439 $2,007,623
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 554,430 $ 796,322 $ 774,551
Accrued compensation..................................... 67,910 66,641 108,194
Accrued warranties....................................... 26,717 35,689 38,078
Deferred revenue......................................... 192,326 154,454 136,517
Billings in excess of costs and estimated earnings....... 24,901 7,514 3,221
Liability to Company benefit plan........................ 1,855 13,270 5,627
Current portion of long-term debt........................ 304,024 205,146 307,264
---------- ---------- ----------
Total current liabilities........................ 1,172,163 1,279,036 1,373,452
Long-term debt, net of current portion..................... 169,070 402,091 302,989
Deferred income taxes...................................... 39,579 46,420 52,612
Stockholders' equity:
Common stock -- $5 par value, 10,000 shares authorized,
2,600 shares issued and outstanding................... 13,000 13,000 13,000
Retained earnings........................................ 100,832 238,892 265,570
---------- ---------- ----------
Total stockholders' equity....................... 113,832 251,892 278,570
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,494,644 $1,979,439 $2,007,623
========= ========= =========
</TABLE>
See accompanying notes.
F-42
<PAGE> 112
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $3,989,626 $4,797,873 $6,377,285 $1,306,200 $1,663,251
Cost of goods sold................... 2,986,702 3,418,062 4,556,146 924,435 1,230,671
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,002,924 1,379,811 1,821,139 381,765 432,580
Selling, general and administrative
expenses........................... 912,694 1,250,029 1,535,155 320,105 372,338
Bad debt expense..................... 5,102 60,938 42,157 10,981 6,671
---------- ---------- ---------- ---------- ----------
Income from operations............... 85,128 68,844 243,827 50,679 53,571
Other income (expense):
Interest expense................... (59,591) (71,875) (73,788) (17,191) (19,512)
Interest income.................... 2,527 2,928 2,201 573 500
Other income....................... 19,989 16,363 10,482 938 3,452
---------- ---------- ---------- ---------- ----------
(37,075) (52,584) (61,105) (15,680) (15,560)
---------- ---------- ---------- ---------- ----------
Income before federal and state
income taxes....................... 48,053 16,260 182,722 34,999 38,011
Provision (benefit) for income taxes:
Current............................ 5,471 16,656 27,488 (168) 495
Deferred........................... 7,365 (8,715) 17,174 9,325 10,838
---------- ---------- ---------- ---------- ----------
12,836 7,941 44,662 9,157 11,333
---------- ---------- ---------- ---------- ----------
Net income........................... $ 35,217 $ 8,319 $ 138,060 $ 25,842 $ 26,678
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-43
<PAGE> 113
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
$5 PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............................. 2,600 $13,000 $ 57,296 $ 70,296
Net income.............................................. -- -- 35,217 35,217
------ ------- -------- --------
Balance at December 31, 1993.............................. 2,600 13,000 92,513 105,513
Net income.............................................. -- -- 8,319 8,319
------ ------- -------- --------
Balance at December 31, 1994.............................. 2,600 13,000 100,832 113,832
Net income.............................................. -- -- 138,060 138,060
------ ------- -------- --------
Balance at December 31, 1995.............................. 2,600 13,000 238,892 251,892
Net income (unaudited).................................. -- -- 26,678 26,678
------ ------- -------- --------
Balance at March 31, 1996
(unaudited)............................................. 2,600 $13,000 $265,570 $278,570
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-44
<PAGE> 114
HARDWICK AIRMASTERS, INC.
D/B/A AIRMASTERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 35,217 $ 8,319 $ 138,060 $ 25,842 $ 26,678
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 87,052 95,771 109,777 29,897 24,021
Deferred income taxes................. 7,365 (8,715) 17,174 9,325 10,838
Provisions for loss on accounts
receivable......................... 5,102 60,938 42,157 10,981 6,671
(Gain) loss on asset disposals........ (2,750) 751 -- -- --
Changes in assets and liabilities:
Receivables........................ (308,735) (55,999) (441,090) 7,219 61,774
Inventories........................ (40,040) (22,630) 59,511 9,399 (24,178)
Prepaid income taxes............... (19,719) (1,275) 21,740 (168) (9,927)
Prepaid expenses and other current
assets........................... (3,171) 30,214 (9,828) (22,102) (14,074)
Trade accounts payable and accrued
liabilities...................... 247,015 29,017 241,892 (10,787) 25,146
Accrued compensation............... 15,723 14,794 10,146 (13,617) (13,007)
Accrued warranties................. 4,821 5,294 8,972 3,176 2,389
Deferred revenue................... 8,543 64,210 (37,872) (38,164) (17,937)
Costs and estimated earnings in
excess of billings and billings
in excess of costs and estimated
earnings......................... 23,701 (66,976) (28,113) (3,024) (24,883)
--------- --------- --------- --------- --------
Net cash flow provided by operating
activities............................ 60,124 153,713 132,526 7,977 53,511
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................. (195,719) (98,577) (301,533) (125,286) (87,235)
Proceeds from sale of property,
buildings, and equipment.............. 2,750 7,776 11,847 11,847 --
(Increase) decrease in other assets..... 372 367 (367) -- 92
--------- --------- --------- --------- --------
Net cash used in investing activities... (192,597) (90,434) (290,053) (113,439) (87,143)
FINANCING ACTIVITIES
Proceeds of long-term debt.............. 268,284 110,749 324,260 144,584 77,970
Payments of long-term debt and capital
leases................................ (98,898) (158,318) (190,117) (66,980) (74,954)
--------- --------- --------- --------- --------
Net cash provided by (used in) financing
activities............................ 169,386 (47,569) 134,143 77,604 3,016
--------- --------- --------- --------- --------
Increase (decrease) in cash and cash
equivalents........................... 36,913 15,710 (23,384) (27,858) (30,616)
Cash and cash equivalents at beginning
of year............................... 28,273 65,186 80,896 80,896 57,512
--------- --------- --------- --------- --------
Cash and cash equivalents at end of
year.................................. $ 65,186 $ 80,896 $ 57,512 $ 53,038 $ 26,896
========= ========= ========= ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 71,402 $ 74,082 $ 64,922 $ 20,719 $ 20,675
========= ========= ========= ========= ========
Income tax paid (refunded).............. $ 25,900 $ (2,196) $ 6,497 $ -- $ 6,423
========= ========= ========= ========= ========
</TABLE>
See accompanying notes.
F-45
<PAGE> 115
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Hardwick Air Masters, Inc. d/b/a Airmasters, Inc. ("the Company") operates
in one industry segment and is primarily engaged in the installation and
servicing of air conditioning and heating systems for residential and commercial
customers.
Effective April 1, 1996, AMT Enterprises, Inc. ("AMT") was merged with and
into the Company. AMT is under common control, with the Company's shareholders
owning 100% of AMT. The merger was effected by an exchange of stock whereby the
Company exchanged 600 shares of its common stock for 100% of the outstanding
common stock (40 shares) of AMT. This transaction was accounted for similar to a
pooling-of-interests and, accordingly, the accompanying financial statements
have been restated to include the accounts of AMT.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
contracts (Contracts) for commercial buildings are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues on all of the Company's heating and air
conditioning installation for residential installation and service and
maintenance revenue are recognized upon completion of the services.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within 6 to 18 months. Nonidentifiable
selling, general, and administrative expenses are charged to income as incurred
and are not allocated to Contract costs.
Trade accounts receivable includes billings and billed retainage on
Contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $10,688 and $42,626 at December 31, 1994 and 1995, respectively. The
Company classifies these amounts as current assets because all balances are
expected to be collected in the current year. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base.
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 inventory investments with an
original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
F-46
<PAGE> 116
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, BUILDING AND EQUIPMENT
Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line method over the
following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 3-10
Machinery and equipment....................................................... 3-10
Vehicles...................................................................... 3-10
Leasehold improvements........................................................ 31
</TABLE>
WARRANTIES
The Company provides the retail customer with a choice of one, three or
ten-year warranties on parts and labor from the date of installation of the
heating and air conditioning unit. This warranty runs concurrent with the
manufacturer's warranty on parts and for the first year on labor. The Company
provides an accrual for future warranty costs based upon the relationship of
prior years' sales to actual warranty costs. It is the Company's practice to
classify the entire warranty accrual as a current liability.
USE OF ESTIMATES
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents -- The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value.
Long and Short-Term Debt -- The carrying amounts of the Company's
borrowings under its revolving credit agreements and other debt agreements
are estimated using discounted cash flow analyses, using interest rates
currently being offered by banks for similar types of borrowing
arrangements.
The carrying amounts and fair value of the Company's financial instruments
at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................ $ 80,896 $ 80,896
Long-term debt, including current portion........................ 607,237 607,237
</TABLE>
F-47
<PAGE> 117
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $5,102, $60,938 and $42,157, respectively and accounts
written off, net of recoveries were $2,214, $28,437 and $30,574, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
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 completed contracts............................ $105,885 $308,300
Estimated earnings............................................. 65,670 115,070
-------- --------
171,555 423,370
Less applicable billings....................................... 123,979 347,681
-------- --------
$ 47,576 $ 75,689
======== ========
Included in the accompanying balance sheets under the following
captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... $ 72,477 $ 83,203
Billings in excess of costs and estimated earnings on
uncompleted contracts....................................... 24,901 7,514
-------- --------
$ 47,576 $ 75,689
======== ========
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
F-48
<PAGE> 118
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Lines of credit with a bank(1)................................... $109,721 $121,721
Notes payable to banks and finance companies(2).................. 282,242 409,716
Debentures payable to stockholder(3)............................. 75,800 75,800
Other............................................................ 5,331 --
-------- --------
473,094 607,237
Less current portion............................................. 304,024 205,146
-------- --------
$169,070 $402,091
======== ========
</TABLE>
- ---------------
(1) The Company has two secured lines of credit with a bank that expire February
5, 1997. Under their terms, the Company can borrow up to $150,000 at
10.25%. The agreement is secured by accounts receivable, inventory, and
real estate.
(2) Notes payable are due in installments through December 2000, with a weighted
average interest rate of 8.9% with substantially all notes collateralized
by vehicles and equipment.
(3) The debentures are payable to the Company's majority shareholder, with
interest at 10.0% and maturing from August 1997 to March 1999.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $205,146
1997.............................................................. 223,765
1998.............................................................. 90,534
1999.............................................................. 69,594
2000.............................................................. 18,198
--------
$607,237
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $27,232, $32,303 and
$42,957 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities under terms of noncancelable operating lease agreements
which expire at various dates through 2000. Minimum rental commitments at
December 31, 1995 under operating leases having an initial noncancelable term of
one year or more are as follows:
<TABLE>
<S> <C>
1996............................................................... $37,881
1997............................................................... 14,091
1998............................................................... 7,491
1999............................................................... 6,891
2000............................................................... 4,594
-------
$70,948
=======
</TABLE>
F-49
<PAGE> 119
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, multiples of 2%
to 15% maximum allowable of total compensation, not to exceed the maximum
established annually by the Internal Revenue Service. Matching contributions are
made by the Company equal to 50% of total contributions by a plan member, to a
maximum of 2% of the employee's total calendar year compensation. The Company's
matching contributions totaled $12,237, $11,540 and $21,312 for the years ended
December 31, 1993, 1994 and 1995, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position of the Company.
The Company maintains general liability insurance coverage and an umbrella
policy to ensure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
7. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $184,275,
$271,527 and $425,650 in 1993, 1994 and 1995, respectively.
8. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109 "Accounting for
Income Taxes." Under the provisions of SFAS No. 109, deferred tax assets and
liabilities are determined based upon differences between financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The adoption of this statement had no significant impact on the
Company's financial statements.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 3,838 $12,251 $21,286
State................................................... 1,633 4,405 6,202
------- ------- -------
5,471 16,656 27,488
Deferred.................................................. 7,365 (8,715) 17,174
------- ------- -------
$12,836 $ 7,941 $44,662
======= ======= =======
</TABLE>
F-50
<PAGE> 120
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $(39,579) $(46,420)
-------- --------
Deferred tax liabilities......................................... (39,579) (46,420)
Deferred tax assets:
Deferred revenue............................................... 40,364 22,218
Accrued expenses............................................... 10,152 13,562
Allowance for doubtful accounts................................ 18,510 22,913
-------- --------
Deferred tax assets.............................................. 69,026 58,693
-------- --------
Net deferred tax assets................................ $ 29,447 $ 12,273
======== ========
</TABLE>
Management has evaluated the need for valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely than not be realized. Accordingly, no valuation allowance has
been recorded for the years ended December 31, 1994 and 1995.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 38% to income before provision
for deferred income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Tax provision at statutory rate......................... $ 18,260 $ 6,179 $ 69,434
State income tax less applicable federal tax benefit.... 1,078 2,731 3,845
Impact of surtax exemptions............................. (11,052) (3,740) (14,922)
Other, net.............................................. 4,550 2,771 (13,695)
-------- ------- --------
$ 12,836 $ 7,941 $ 44,662
======== ======= ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company paid rental fees of approximately $6,600 for the years ended
December 31, 1993, 1994 and 1995, to a stockholder in the Company and a company
with common ownership.
10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
11. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income (operations) and cash flows for the three
months ended March 31, 1995 and 1996 (interim financial statements) have been
prepared by management and are unaudited. The interim financial statements
include all adjustments, consisting of only normal recurring adjustments
necessary for a fair presentation of the interim results.
F-51
<PAGE> 121
HARDWICK AIR MASTERS, INC.
D/B/A AIRMASTERS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
12. SUBSEQUENT EVENTS
Effective May 1, 1996, the Company's stockholders purchased all of the
outstanding common stock of Cummings Air Conditioning, Inc. ("Cummings") for
approximately $135,000, with the final purchase price subject to final
negotiations. This stock was then contributed to capital of the Company, with
Cummings becoming a wholly owned subsidiary of the Company. This transaction
will be treated as a purchase. Pro forma unaudited information, as if the
acquisition were completed at the beginning of 1995 for the year ended December
31, 1995 and the quarter ended March 31, 1996 is reflected as follows:
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, MARCH 31,
1995 1996
------------ -------------
(UNAUDITED)
<S> <C> <C>
Operating revenues........................................... $7,148,718 $ 1,840,656
========== ==========
Net income................................................... $ 189,691 $ 44,366
========== ==========
</TABLE>
F-52
<PAGE> 122
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Norrell Heating & Air Conditioning, Inc.
We have audited the accompanying balance sheets of Norrell Heating & Air
Conditioning Company, Inc. as of December 31, 1994 and 1995, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Norrell Heating & Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 6, 1996
F-53
<PAGE> 123
NORRELL HEATING & AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31,
---------------------- ----------
1994 1995 1996
--------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 233,214 $ 815,975 $ 610,870
Receivables:
Trade, net of allowance for doubtful accounts of $8,000,
$3,000 and $3,000 for 1994, 1995 and 1996,
respectively.......................................... 62,636 148,374 122,272
Related party............................................ 2,394 64,421 --
--------- ---------- ----------
65,030 212,795 122,272
Note receivable from related party....................... -- 200,000 --
Inventories.............................................. 192,805 86,727 70,387
Investments.............................................. 57,075 75,946 75,946
Deferred income taxes.................................... 5,182 309 309
--------- ---------- ----------
Total current assets............................. 553,306 1,391,752 879,784
Property, buildings and equipment:
Furniture and fixtures................................... 44,267 45,079 45,079
Machinery and equipment.................................. 57,653 57,653 57,653
Vehicles................................................. 460,509 484,366 484,366
Leasehold improvements................................... 12,290 12,290 12,290
--------- ---------- ----------
574,719 599,388 599,388
Less accumulated depreciation and amortization........... (408,466) (466,781) (475,560)
--------- ---------- ----------
166,253 132,607 123,828
Deferred income taxes...................................... 31,423 39,092 40,344
Other assets............................................... 25,756 30,791 32,030
--------- ---------- ----------
Total assets..................................... $ 776,738 $1,594,242 $1,075,986
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 96,455 $ 122,679 $ 99,259
Accrued compensation..................................... 11,274 646,202 94,273
Accrued taxes, other than income......................... 143,811 11,701 14,434
Income taxes payable..................................... 466 24,755 42,934
Accrued warranties....................................... 80,066 139,747 152,383
Deferred revenue......................................... 125,129 225,667 252,157
Liability to profit sharing plan......................... 50,000 50,000 --
--------- ---------- ----------
Total current liabilities........................ 507,201 1,220,751 655,440
Deferred compensation...................................... 91,725 105,191 108,874
Commitments and contingent liabilities..................... -- -- --
Stockholders' equity:
Common stock, par value $2 per share; 2,000 shares
authorized and issued................................. 2,000 2,000 2,000
Paid-in capital.......................................... 52,400 52,400 52,400
Unrealized gain (loss) on investments.................... (4,780) 6,158 6,158
Retained earnings........................................ 168,192 247,742 291,114
Treasury stock (300 shares, at cost)..................... (40,000) (40,000) (40,000)
--------- ---------- ----------
Total stockholders' equity....................... 177,812 268,300 311,672
--------- ---------- ----------
Total liabilities and stockholders' equity....... $ 776,738 $1,594,242 $1,075,986
========= ========= =========
</TABLE>
See accompanying notes.
F-54
<PAGE> 124
NORRELL HEATING & AIR CONDITIONING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $3,274,267 $3,508,903 $4,265,726 $854,250 $979,565
Cost of goods sold...................... 2,285,621 2,436,732 2,852,690 619,658 686,837
---------- ---------- ---------- -------- --------
Gross margin............................ 988,646 1,072,171 1,413,036 234,592 292,728
Selling, general and administrative
expenses.............................. 990,601 1,066,158 1,380,306 219,100 263,408
Bad debt expense........................ 1,885 5,834 3,643 782 (30)
---------- ---------- ---------- -------- --------
Income (loss) from operations........... (3,840) 179 29,087 14,710 29,350
Other income (expense):
Interest expense...................... -- (1,412) (110) (698) --
Interest income....................... 10,360 19,361 26,882 3,835 14,347
Other income.......................... 34,650 12,898 64,207 5,790 16,602
---------- ---------- ---------- -------- --------
45,010 30,847 90,979 8,927 30,949
---------- ---------- ---------- -------- --------
Income before income taxes.............. 41,170 31,026 120,066 23,637 60,299
Provision (benefit) for income taxes:
Current............................... 8,961 5,058 46,485 5,107 18,179
Deferred.............................. (2,318) (1,120) (5,969) (1,484) (1,252)
---------- ---------- ---------- -------- --------
6,643 3,938 40,516 3,623 16,927
---------- ---------- ---------- -------- --------
Net income.............................. $ 34,527 $ 27,088 $ 79,550 $ 20,014 $ 43,372
========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-55
<PAGE> 125
NORRELL HEATING & AIR CONDITIONING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAINS
COMMON STOCK, (LOSSES) ON
$2 PAR VALUE AVAILABLE-
--------------- PAID-IN FOR-SALE RETAINED TREASURY
SHARES AMOUNT CAPITAL SECURITIES EARNINGS STOCK TOTAL
------ ------ ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ 1,000 $2,000 $52,400 $ -- $106,577 $(40,000) $120,977
Net income.................. -- -- -- 34,527 -- 34,527
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1993........................ 1,000 2,000 52,400 -- 141,104 (40,000) 155,504
Net income.................. -- -- -- -- 27,088 -- 27,088
Adjustment to unrealized
losses on
available-for-sale
securities, net of tax... -- -- -- (4,780) -- -- (4,780)
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1994........................ 1,000 2,000 52,400 (4,780) 168,192 (40,000) 177,812
Net income.................. -- -- -- -- 79,550 -- 79,550
Adjustment to unrealized
gains on
available-for-sale
securities, net of tax... -- -- -- 10,938 -- -- 10,938
------ ------ ------- ----------- -------- -------- --------
Balance at December 31,
1995........................ 1,000 2,000 52,400 6,158 247,742 (40,000) 268,300
Net income (unaudited)...... -- -- -- -- 43,372 -- 43,372
------ ------ ------- ----------- -------- -------- --------
Balance at March 31, 1996
(unaudited)................. 1,000 $2,000 $52,400 $ 6,158 $291,114 $(40,000) $311,672
===== ====== ======= ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-56
<PAGE> 126
NORRELL HEATING & AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1993 1994 1995 1995 1996
-------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 34,527 $ 27,088 $ 79,550 $ 20,014 $ 43,372
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 68,756 56,666 77,989 11,838 8,779
Deferred income taxes................. (2,318) (1,120) (5,969) (1,484) (1,252)
Provisions for loss on (recoveries of)
accounts receivable................ 1,885 5,834 3,643 782 (30)
Loss (gain) on asset disposals........ 1,462 25,099 (1,300) -- --
Changes in assets and liabilities:
Receivables........................ 9,343 (5,793) (348,235) 705 290,553
Inventories........................ (24,311) (65,065) 106,078 62,858 16,340
Prepaid expenses and other current
assets........................... (1,039) 1,039 -- -- --
Trade accounts payable and accrued
liabilities...................... 88,251 (114,536) 26,224 37,782 (73,420)
Accrued compensation............... 49,757 (34,371) 648,394 (7,908) (548,246)
Accrued taxes, other than income... 27,932 58,353 (132,110) (129,330) 2,733
Accrued warranties................. 31,082 38,985 59,681 11,552 12,636
Deferred revenue................... 30,936 34,806 100,538 14,433 26,490
Income taxes payable............... (6,527) 466 24,289 3,868 18,179
-------- --------- --------- --------- ---------
Net cash flow provided by (used in)
operating activities.................. 309,736 27,451 638,772 25,110 (203,866)
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................. $(67,648) $ (74,757) $ (44,343) $ (812) $ --
Proceeds from sale of property,
buildings, and equipment.............. -- -- 1,300 -- --
Purchase of investments................. (8,978) (7,877) (7,933) -- --
Increase in other assets................ (3,546) (2,408) (5,035) (1,258) (1,239)
-------- --------- --------- --------- ---------
Net cash used in investing activities... (80,172) (85,042) (56,011) (2,070) (1,239)
-------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents........................... 229,564 (57,591) 582,761 23,040 (205,105)
Cash and cash equivalents at beginning
of period............................. 61,241 290,805 233,214 233,214 815,975
-------- --------- --------- --------- ---------
Cash and cash equivalents at end of
period................................ $290,805 $ 233,214 $ 815,975 $ 256,254 $ 610,870
======== ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ -- $ 1,412 $ 110 $ 698 $ --
======== ========= ========= ========= =========
Income tax paid......................... $ 16,527 $ 8,853 $ 25,539 $ 4,585 $ 36
======== ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-57
<PAGE> 127
NORRELL HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Norrell Heating & Air Conditioning, Inc. ("the Company") is a "C"
corporation and operates in one industry segment. The Company is primarily
engaged in the installation and servicing of air conditioning and heating
systems for residential and commercial customers. The Company purchases
inventories from two suppliers. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
SHORT-TERM INVESTMENTS
Short-term investments include investments in mutual funds. These
investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." It is the Company's intent not to hold these
investments to maturity.
F-58
<PAGE> 128
NORRELL HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY, BUILDING AND EQUIPMENT
Property, building and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 5
Machinery and equipment....................................................... 5
Vehicles...................................................................... 5
Leasehold improvements........................................................ 10
</TABLE>
WARRANTIES
The Company provides the residential customer a one-year warranty and
offers extended warranties for select models on parts and labor from the date of
installation of the heating and air conditioning unit. These warranties run
concurrent with the manufacturer's warranty on parts. The Company provides an
accrual for future warranty costs based upon historical experience. It is the
Company's practice to classify the entire warranty accrual as a current
liability.
USE OF ESTIMATES
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.
ADVERTISING
The cost of advertising is expensed as incurred. The Company incurred
$200,255, $176,014 and $167,595 in such costs during 1993, 1994 and 1995,
respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $1,884, $5,834 and $3,644, respectively and accounts
written off, net of recoveries were $7,884, $(1,166) and $8,644, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
F-59
<PAGE> 129
NORRELL HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available for sale under SFAS No. 115
and, as a result, the carrying amount is a reasonable estimate of fair value.
The cost of available-for-sale securities was $64,139 and $73,679 at December
31, 1994 and 1995, respectively. The adoption of SFAS No. 115 did not have a
significant impact on the Company's financial statements in 1994.
All investments are classified as current because the Company views its
portfolio as available for use in its current operations.
3. LONG-TERM DEBT
The Company has the ability to borrow up to $100,000 under the terms of an
unsecured line of credit that expires September 13, 1996. At December 31, 1994
and 1995, the Company had no borrowings outstanding under the agreement.
4. LEASES
Total rental expense for all operating leases was $68,013, $87,485 and
$89,833 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities and vehicles under terms of noncancelable operating
lease agreements which expire at various dates through the year 1999. Minimum
rental commitments at December 31, 1995 under operating leases having an initial
noncancellable term of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996........................................................... $ 106,056
1997........................................................... 5,196
1998........................................................... 3,528
1999........................................................... 3,528
---------
$ 118,308
========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are eligible to participate in
a profit sharing plan. Contributions are made to the plan at the discretion of
the Board of Directors. Contributions to the plan totaled $100,000, $50,000 and
$50,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to legal proceedings arising in the ordinary course
of its business. In the opinion of management, the resolution of these
proceedings will not have a material adverse effect on the financial position or
results of operations of the Company.
The Company 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.
The Company has entered into a salary continuation agreement with the
President of the Company whereby the Company will pay the President following
the retirement date of August 1, 2003, $1,667 per month for 180 months. The
amount charged to expense was $6,356, $7,347 and $8,466 at December 31, 1993,
1994 and 1995, respectively. The liability classified as long-term is $45,191 at
December 31, 1995.
F-60
<PAGE> 130
NORRELL HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into a deferred compensation agreement with an
employee (nonshareholder) whereby the Company makes $5,000 payments through
December 31, 1997 into an account designated by the employer. Beginning December
31, 1998, additional payments of $23,000 are to be made until the earlier of the
termination of the agreement, termination of employment or a change in control
of the Company. Such amounts are expensed as earned.
7. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $390,000,
$442,000 and $727,000 in 1993, 1994 and 1995, respectively.
8. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................. $ 6,902 $ 3,896 $40,861
State................................................... 2,059 1,162 5,624
Deferred.................................................. (2,318) (1,120) (5,969)
------- ------- -------
$ 6,643 $ 3,938 $40,516
======= ======= =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on investments................................... $ -- $ 711
------- -------
Deferred tax liabilities........................................... -- 711
Deferred tax assets:
Employee compensation............................................ 17,587 22,165
Depreciation and amortization.................................... 13,836 16,927
Accounts receivable.............................................. 2,720 1,020
Unrealized loss on investment.................................... 2,462 --
------- -------
Total deferred tax assets.......................................... 36,605 40,112
Valuation allowance................................................ -- --
------- -------
Net deferred tax assets............................................ $36,605 $39,401
======= =======
</TABLE>
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-61
<PAGE> 131
NORRELL HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes and cumulative effect of accounting change. The differences are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $13,998 $10,549 $40,822
State income tax less applicable federal tax benefit...... 1,359 2,170 3,712
Other, net -- principally effects of graduated rates...... (8,714) (8,781) (4,018)
------- ------- -------
$ 6,643 $ 3,938 $40,516
======= ======= =======
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company leases the office building and real estate from the president
and majority shareholder under one year operating lease agreements during 1993,
1994 and 1995. The Company paid rental fees of $60,000, $84,000 and $86,000
during 1993, 1994 and 1995, respectively, to the president and majority
stockholder.
10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
11. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income (operations) and cash flows for the three
months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-62
<PAGE> 132
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Vision Holding Company, Inc.
We have audited the accompanying consolidated balance sheets of Vision
Holding Company, Inc. as of December 31, 1994 and 1995, and the related
statements of operations, stockholder's equity, and cash flows for the period
from March 1, 1993 (date operations commenced) through December 31, 1993, and
the years ended December 31, 1994 and 1995. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vision
Holding Company, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for the period from March 1, 1993 (date
operations commenced) through December 31, 1993, and the years ended December
31, 1994 and 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 24, 1996
F-63
<PAGE> 133
VISION HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 94,543 $ 615,873 $ 658,964
Receivables:
Trade, net of allowance for doubtful accounts of
$3,800 in 1994, 1995 and 1996....................... 174,177 163,678 220,993
Related party......................................... 10,276 11,273 11,273
Employee.............................................. 2,352 1,044 1,571
Other................................................. 242 -- --
---------- ---------- ----------
187,047 175,995 233,837
Inventories.............................................. 105,516 116,175 258,203
Investments.............................................. 200,994 -- --
Prepaid expenses and other current assets................ 28,802 17,837 17,976
---------- ---------- ----------
Total current assets............................. 616,902 925,880 1,168,980
Property, buildings and equipment:
Land..................................................... 25,000 25,000 25,000
Buildings and leasehold improvements..................... 593,059 606,981 606,981
Furniture and fixtures................................... 36,396 37,192 37,192
Machinery and equipment.................................. 73,524 102,697 108,922
Vehicles................................................. 149,047 193,830 193,830
---------- ---------- ----------
877,026 965,700 971,925
Less accumulated depreciation and amortization........... (125,522) (230,015) (261,822)
---------- ---------- ----------
751,504 735,685 710,103
Goodwill, net of accumulated amortization of $19,272 in
1994, $29,784 in 1995, and $40,296 in 1996............... 410,604 400,092 389,580
Other intangible assets, net of accumulated amortization of
$55,000 in 1994, $85,000 in 1995, and $90,000 in 1996.... 35,000 5,000 --
Other assets............................................... 138,768 62,046 61,960
---------- ---------- ----------
Total assets..................................... $1,952,778 $2,128,703 $2,330,623
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 186,598 $ 148,480 $ 305,342
Accrued compensation..................................... 82,195 90,936 21,515
Accrued warranties....................................... 3,085 3,940 8,842
Income taxes payable..................................... 60,012 108,239 107,172
Deferred revenue......................................... 162,558 178,281 269,394
Liability to profit sharing plan......................... 4,443 8,919 40,542
Current portion of long-term debt and capital leases..... 71,474 38,479 31,578
---------- ---------- ----------
Total current liabilities........................ 570,365 577,274 784,385
Long-term debt, net of current portion..................... 783,431 744,952 739,683
Due to former stockholder.................................. 51,783 -- --
Deferred income taxes...................................... 174,254 171,651 161,982
Stockholder's equity:
Common Stock, $10 par value; 3,000 shares authorized,
1,960 shares issued and outstanding................... 19,600 19,600 19,600
Retained earnings........................................ 353,345 615,226 624,973
---------- ---------- ----------
Total stockholder's equity....................... 372,945 634,826 644,573
---------- ---------- ----------
Total liabilities and stockholder's equity....... $1,952,778 $2,128,703 $2,330,623
========= ========= =========
</TABLE>
See accompanying notes.
F-64
<PAGE> 134
VISION HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1993 THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------- -------------------
1993 1994 1995 1995 1996
------------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................... $ 2,792,574 $3,525,119 $4,261,485 $880,337 $987,907
Cost of goods sold..................... 1,751,998 2,400,309 2,738,022 626,418 653,086
------------- ---------- ---------- -------- --------
Gross margin........................... 1,040,576 1,124,810 1,523,463 253,919 334,821
Selling, general and administrative
expenses............................. 762,505 851,348 1,090,916 259,369 316,045
Bad debt expense....................... 8,580 (4,029) 2,259 3,493 2,385
------------- ---------- ---------- -------- --------
Income from operations................. 269,491 277,491 430,288 (8,943) 16,391
Other income (expense):
Interest expense..................... (14,767) (60,278) (72,830) (18,254) (33,852)
Interest income...................... 249 2,210 22,911 4,760 9,148
Other income......................... 44,550 55,450 49,034 13,072 11,123
------------- ---------- ---------- -------- --------
30,032 (2,618) (885) (422) (13,581)
------------- ---------- ---------- -------- --------
Income (loss) before income taxes...... 299,523 274,873 429,403 (9,365) 2,810
Provision (benefit) for income taxes:
Current.............................. -- 76,755 170,125 20,596 2,731
Deferred............................. 109,566 34,730 (2,603) (16,000) (9,668)
------------- ---------- ---------- -------- --------
109,566 111,485 167,522 4,596 (6,937)
------------- ---------- ---------- -------- --------
Net income (loss)...................... $ 189,957 $ 163,388 $ 261,881 $(13,961) $ 9,747
========== ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-65
<PAGE> 135
VISION HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at March 1, 1993.................................. -- $ -- $ -- $ --
Issuance of common stock................................ 1,960 19,600 -- 19,600
Net income.............................................. -- -- 189,957 189,957
------ ------- -------- --------
Balance at December 31, 1993.............................. 1,960 19,600 189,957 209,557
Net income.............................................. -- -- 163,388 163,388
------ ------- -------- --------
Balance at December 31, 1994.............................. 1,960 19,600 353,345 372,945
Net income.............................................. -- -- 261,881 261,881
------ ------- -------- --------
Balance at December 31, 1995.............................. 1,960 19,600 615,226 634,826
Net income (unaudited).................................. -- -- 9,747 9,747
------ ------- -------- --------
Balance at March 31, 1996 (unaudited)..................... 1,960 $19,600 $624,973 $644,573
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-66
<PAGE> 136
VISION HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 1, 1993 YEAR ENDED DECEMBER THREE MONTHS ENDED
THROUGH 31, MARCH 31,
DECEMBER 31, --------------------- --------------------
1993 1994 1995 1995 1996
------------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ 189,957 $ 163,388 $ 261,881 $(13,961) $ 9,747
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 81,207 131,252 144,346 55,564 47,319
Deferred income taxes................ 109,566 34,730 (2,603) (16,000) (9,669)
Other assets......................... 18,694 (45,178) 76,722 (18,342) 86
Changes in assets and liabilities:
Receivables....................... (129,831) 9,025 11,052 (10,299) (57,842)
Inventories....................... 5,595 2,941 (10,659) (43,024) (142,028)
Prepaid expenses and other current
assets.......................... (4,188) 1,065 10,965 (1,105) (139)
Trade accounts payable and accrued
liabilities..................... (72,403) 67,120 (38,118) (11,872) 156,862
Accrued compensation.............. 59,432 14,419 8,741 (75,410) (69,421)
Accrued warranties................ (340) 425 855 20,575 4,902
Income taxes payable.............. -- 59,976 48,227 16,091 (1,067)
Deferred revenue.................. 64,319 4,876 15,723 60,960 91,113
Liability to profit sharing
plan............................ (5,080) 468 4,476 3,891 31,623
------------- --------- --------- -------- ---------
Net cash flow provided by (used in)
operating activities................. 316,928 444,507 531,608 (32,932) 61,486
INVESTING ACTIVITIES
Purchase of property, buildings, and
equipment............................ (56,368) (128,615) (88,015) (29,675) (6,225)
Proceeds from sale of fixed assets..... 23,402 -- -- -- --
Purchase of investments................ -- (200,994) -- -- --
Proceeds from sale of investments...... -- -- 200,994 -- --
------------- --------- --------- -------- ---------
Net cash provided by (used in)
investing activities................. (32,966) (329,609) 112,979 (29,675) (6,225)
FINANCING ACTIVITIES
Proceeds from short-term debt.......... 15,000 -- -- -- --
Payments on short-term debt............ (6,060) -- -- -- --
Proceeds from long-term debt........... 30,069 -- -- -- --
Payments of long-term debt and capital
leases............................... (102,720) (236,231) (71,474) (2,598) (12,170)
Due to former stockholder.............. (24,500) (13,717) (51,783) 33,332 --
------------- --------- --------- -------- ---------
Net cash used in (provided by)
financing activities................. (88,211) (249,948) (123,257) 30,734 (12,170)
------------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents.......................... 195,751 (135,050) 521,330 (31,873) 43,091
Cash at beginning of year.............. 33,842 229,593 94,543 94,543 615,873
------------- --------- --------- -------- ---------
Cash at end of year.................... $ 229,593 $ 94,543 $ 615,873 $ 62,670 $ 658,964
========== ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 19,056 $ 60,278 $ 72,830 $ 18,254 $ 33,852
========== ========= ========= ======== =========
Income tax paid........................ $ 800 $ 14,470 $ 141,204 $ 1,540 $ 18,760
========== ========= ========= ======== =========
Covenant not-to-compete exchanged for
debt................................. $ 90,000 $ -- $ -- $ -- $ --
========== ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-67
<PAGE> 137
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
On March 1, 1993, Vision Holding Company, Inc. (the Company), a
newly-formed corporation, purchased all of the outstanding common stock of Neal
Harris Heating and Air Conditioning Company, Inc. (NHHACC), an existing
business, for $938,600. The acquisition was financed from the issuance of 1,960
shares of the Company's common stock for $19,600, from $19,000 in cash and from
seller debt totaling $900,000.
The acquisition was accounted for as a purchase in accordance with
generally accepted accounting principles, with goodwill of approximately
$430,000 recorded for the excess of the purchase price over the fair market
values of the net assets at the date of acquisition. The goodwill is being
amortized over 40 years using the straight-line method. The Company periodically
reviews goodwill to assess recoverability, and impairments would be recognized
in operating results if a permanent diminution in value were to occur.
NHHACC operates in one industry segment and is primarily engaged in the
installation and servicing of air conditioning and heating systems for
residential and commercial customers in eastern Kansas and western Missouri.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All material intercompany
transactions and balances have been eliminated.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
contracts (Contracts) for commercial buildings are recognized on the
percentage-of-completion method in the ratio that incurred costs bear to total
estimated costs. Revenues on all of the Company's heating and air conditioning
installation and service and maintenance revenue are recognized upon completion
of the services.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the period in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within three to six months.
Nonidentifiable selling, general and administrative expenses are charged to
income as incurred and are not allocated to contract costs. As of December 31,
1994 and 1995 and March 31, 1996, all Contracts were complete and billed and
there were no billings in excess of costs and estimated earnings.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base, and
their dispersions across many different industries and geographies. The Company
does not require collateral for its receivables.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-68
<PAGE> 138
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. Treasury Bills. U.S. Treasury Bills
have maturity dates of one year from the date of purchase and are accounted for
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." It is the
Company's intent to hold the Treasury Bills to maturity.
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated on the basis of cost.
Depreciation and amortization are provided on the straight-line and
declining-balance methods over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.................................................................... 25
Furniture and fixtures....................................................... 7
Machinery and equipment...................................................... 5
Vehicles..................................................................... 5
Leasehold improvements....................................................... 20-25
</TABLE>
OTHER INTANGIBLE ASSETS
Intangible assets include an agreement not-to-compete with a former
stockholder and are recorded at cost, net of accumulated amortization. Such
assets are amortized on a straight-line basis over the term of the agreement.
WARRANTIES
The Company provides retail customers with a one-year warranty on parts and
labor from the date of installation of the heating and air conditioning unit.
This warranty runs concurrent with the manufacturer's warranty on parts and for
the first year on labor. The Company provides an accrual for future warranty
costs based upon the relationship of prior years' sales to actual warranty
costs. It is the Company's practice to classify the entire warranty accrual as a
current liability.
F-69
<PAGE> 139
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFERRED REVENUE
The Company offers extended service agreements to its customers to provide
periodic maintenance on heating and air conditioning units. The full amount of
the revenues associated with these agreements is initially deferred and
recognized as income over the life of the agreement.
ADVERTISING COSTS
Costs associated with advertising are expensed at the time of the
advertisement's first showing. Advertising expenses totaled approximately
$77,000 for the ten months ended December 31, 1993 and $116,000 and $79,000 for
the years ended December 31, 1994 and 1995, respectively.
USE OF ESTIMATES
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the period March 1, 1993 (date operations commenced), through December
31, 1993, and the years ended December 31, 1994 and December 31, 1995 amounts
charged to bad debt expense totaled $8,580, $(4,029) and $2,259, respectively
and accounts written off, net of recoveries were $8,485, $2,449 and $2,259,
respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
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. The Company's
investment securities are classified as available for sale under SFAS No. 115.
On securities classified as available for sale, carrying amount is a reasonable
estimate of fair value. The adoption of SFAS No. 115 had no effect on the
Company's financial statements in 1994.
The securities available for sale were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
U.S. Treasury Bills (cost equals fair value)...................... $200,994 $ --
</TABLE>
There were no gross realized gains or gross realized losses from the sale
of available-for-sale securities. The Company's proceeds from the sale of
available-for-sale securities were $-0- for the ten months ended December 31,
1993, $-0- and $200,994 in 1994 and 1995, respectively.
3. AGREEMENT NOT-TO-COMPETE
The Company has a covenant not-to-compete with a former stockholder dated
March 1, 1993. The agreement is for a three-year period ending February 1996.
Total consideration paid under the noncompete
F-70
<PAGE> 140
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement was $90,000, payable in the form of $30,000 cash paid in equal monthly
installments over the first twelve months, a vehicle valued at $8,217
transferred in 1994, and $51,783 of life insurance cash surrender value
transferred in 1995. The asset is being amortized evenly over the term of the
agreement. Amortization expense for the ten months ended December 31, 1993 and
the years ended December 31, 1994 and 1995 was $25,000, $30,000 and $30,000,
respectively. Amounts reported as due to former stockholder at December 31, 1994
and 1995 of $51,783 and $-0-, respectively, represent the remaining portion of
the initial $90,000 liability due the former stockholder under this agreement.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable to former stockholder of NHHACC due in equal
installments from March 1994 through January 2009, interest
at prime plus 1%, collateralized by the common stock of
NHHACC....................................................... $852,307 $783,431
Capital lease obligation, secured by data processing equipment,
expiring in 1995............................................. 2,075 --
Note payable, collateralized by vehicle, paid in 1995.......... 523 --
-------- --------
854,905 783,431
Less current portion........................................... 71,474 38,479
-------- --------
$783,431 $744,952
======== ========
</TABLE>
The Company has a $200,000 revolving line of credit secured by accounts
receivable, inventory and equipment. The line matures October 8, 1996. Interest
is at the bank's prime rate (8.5% at December 31, 1995). There were no
borrowings against this line at December 31, 1994 or 1995.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 38,479
1997........................................................... 34,855
1998........................................................... 38,219
1999........................................................... 41,908
2000........................................................... 45,954
Thereafter..................................................... 584,016
--------
$783,431
========
</TABLE>
The interest paid to the former stockholder of NHHACC was $-0-, $43,286 and
$70,019 for the ten months ended December 31, 1993, and the years ended December
31, 1994 and 1995, respectively.
5. LEASES
Total rental expense for all operating leases was $3,654, $5,117 and $4,701
for the ten months ended at December 31, 1993, and in 1994 and 1995,
respectively.
F-71
<PAGE> 141
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheet, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
-------- ----
<S> <C> <C>
Tools and equipment............................................... $ 33,570 $ --
Less accumulated depreciation..................................... (15,325) --
-------- ----
Net equipment under capital leases................................ $ 18,245 $ --
======== ====
</TABLE>
Depreciation of the assets under capital leases is included in depreciation
expense.
5. LEASES
The Company leases a portion of its building to another company. The lease
is noncancelable and expires in January 1998. Minimum future rentals receivable
under this lease at December 31, 1995 are follows:
<TABLE>
<S> <C>
1996............................................................... $44,118
1997............................................................... 45,004
1998............................................................... 3,756
Thereafter......................................................... --
-------
$92,878
=======
</TABLE>
6. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 50% of total contributions by a plan member, to a maximum of 3% of the
employee's total calendar year compensation. The Company's matching
contributions totaled $12,529, $33,224 and $29,214 for the ten months ended
December 31, 1993, and the years ended 1994 and 1995, respectively. In addition,
the Company made a contribution to the Plan from its profits during 1995 in the
amount of $20,000.
7. COMMITMENTS AND CONTINGENT LIABILITIES
The Company 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 the results of operations of the Company.
The Company maintains general liability insurance coverage and an umbrella
policy to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
8. STOCKHOLDER'S COMPENSATION
Compensation to the stockholder of the Company consisting of salary and
cash bonuses, is included in selling, general and administrative expenses and
totaled approximately $58,900, $89,900, and $151,700 for the ten months ended
December 31, 1993 and in 1994, and 1995, respectively.
F-72
<PAGE> 142
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The Company is a C corporation and accounts for income taxes under the
liability method. Under this method, deferred tax assets and liabilities are
determined based upon differences between financial reporting and tax basis of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
TEN MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, -------------------
1993 1994 1995
------------ -------- --------
<S> <C> <C> <C>
Current:
Federal............................................ $ -- $ 71,766 $159,067
State.............................................. -- 4,989 11,058
------------ -------- --------
$ -- $ 76,755 $170,125
========== ======== ========
Deferred:
Federal............................................ $102,444 $ 32,473 $ (2,434)
State.............................................. 7,122 2,257 (169)
------------ -------- --------
$109,566 $ 34,730 $ (2,603)
========== ======== ========
Provision for income taxes........................... $109,566 $111,485 $167,522
========== ======== ========
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $168,912 $170,850
Prepaids....................................................... 10,508 6,506
-------- --------
Deferred tax liabilities......................................... 179,420 177,356
Deferred tax assets:
Other.......................................................... 5,166 5,705
-------- --------
Deferred tax assets.............................................. 5,166 5,705
-------- --------
Net deferred tax liabilities........................... $174,254 $171,651
======== ========
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before provision
for deferred income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 31, 1993
THROUGH DECEMBER 31,
DECEMBER 31, -------------------
1993 1994 1995
-------------- -------- --------
<S> <C> <C> <C>
Tax provision at federal statutory rate............. $101,838 $ 93,456 $145,996
State income tax less applicable federal tax
benefit........................................... 12,850 11,792 18,421
Other, net.......................................... (5,122) 6,237 3,105
-------------- -------- --------
$109,566 $111,485 $167,522
=========== ======== ========
</TABLE>
F-73
<PAGE> 143
VISION HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED-PARTY TRANSACTIONS
As discussed in Note 3 and in Note 4, the Company has a noncompete
agreement and a note payable with a former stockholder. The former stockholder
is the father of the present owner.
11. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
12. UNAUDITED INTERIM FINANCIAL INFORMATION
The consolidated statements of operations and cash flows for the three
months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-74
<PAGE> 144
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Comerford's Heating and Air Conditioning, Inc.
We have audited the accompanying balance sheets of Comerford's Heating and
Air Conditioning, Inc. as of December 31, 1994 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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 Comerford's Heating and Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 15, 1996
F-75
<PAGE> 145
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 449,298 $ 745,979 $ 787,843
Certificates of deposit.................................. 100,000 200,000 200,000
Receivables:
Trade................................................. 92,378 89,496 57,132
Related party......................................... 204,269 -- --
Employee.............................................. -- 147 (2,053)
Other................................................. 1,348 -- --
---------- ---------- -----------
297,995 89,643 55,079
Inventories.............................................. 137,172 97,172 97,172
Prepaid expenses and other current assets................ 9,898 874 5,892
---------- ---------- -----------
Total current assets............................. 994,363 1,133,668 1,145,986
Property and equipment:
Furniture and fixtures................................... 24,402 28,567 28,676
Machinery and equipment.................................. 196,830 199,898 199,898
Vehicles................................................. 477,843 469,696 583,924
Leasehold improvements................................... 39,858 43,353 44,834
---------- ---------- -----------
738,933 741,514 857,332
Less accumulated depreciation............................ (455,870) (526,961) (542,094)
---------- ---------- -----------
283,063 214,553 315,238
Other assets............................................... 100 100 100
---------- ---------- -----------
Total assets..................................... $1,277,526 $1,348,321 $ 1,461,324
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........... $ 160,547 $ 112,099 $ 91,217
Accrued compensation..................................... 31,393 27,879 27,879
Accrued taxes, other than income......................... 20,711 3,133 3,052
Accrued warranties....................................... 8,000 13,000 13,000
Income taxes payable..................................... 2,669 1,239 1,239
Deferred revenue......................................... 293,137 308,234 267,359
Current portion capital leases........................... 11,486 12,689 15,635
---------- ---------- -----------
Total current liabilities........................ 527,943 478,273 419,381
Capital lease obligations, less current portion............ 31,699 19,010 13,009
Stockholders' equity:
Common stock, no par value, 1,000,000 shares authorized,
75,000 shares issued and outstanding.................. 7,500 7,500 7,500
Retained earnings........................................ 710,384 843,538 1,021,434
---------- ---------- -----------
Total stockholders' equity....................... 717,884 851,038 1,028,934
---------- ---------- -----------
Total liabilities and stockholders' equity....... $1,277,526 $1,348,321 $ 1,461,324
========= ========= =========
</TABLE>
See accompanying notes.
F-76
<PAGE> 146
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $3,532,089 $3,715,214 $4,232,962 $978,382 $1,190,500
Cost of goods sold.................... 2,031,910 2,113,176 2,271,332 562,161 641,960
---------- ---------- ---------- -------- ----------
Gross margin.......................... 1,500,179 1,602,038 1,961,630 416,221 548,540
Selling, general and administrative
expenses............................ 1,855,038 1,463,587 1,651,773 379,101 376,241
Bad debt expense...................... 4,281 4,926 1,011 -- --
---------- ---------- ---------- -------- ----------
Income (loss) from operations......... (359,140) 133,525 308,846 37,120 172,299
Other income (expense):
Interest expense.................... (4,017) (5,130) (3,802) (1,057) (767)
Interest income..................... 21,024 37,807 24,944 4,205 7,613
Other income........................ 44,697 12,673 9,253 38 --
---------- ---------- ---------- -------- ----------
(61,704) 45,350 30,395 3,186 6,846
---------- ---------- ---------- -------- ----------
Income (loss) before income taxes..... (297,436) 178,875 339,241 40,306 179,145
Provision for income taxes............ 800 3,382 4,819 -- 1,249
---------- ---------- ---------- -------- ----------
Net income (loss)..................... $ (298,236) $ 175,493 $ 334,422 $ 40,306 $ 177,896
========= ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-77
<PAGE> 147
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992........................... 75,000 $7,500 $ 833,127 $ 840,627
Net loss............................................. -- -- (298,236) (298,236)
------ ------ ---------- ----------
Balance at December 31, 1993........................... 75,000 7,500 534,891 542,391
Net income........................................... -- -- 175,493 175,493
------ ------ ---------- ----------
Balance at December 31, 1994........................... 75,000 7,500 710,384 717,884
Capital distributions................................ -- -- (201,268) (201,268)
Net income........................................... -- -- 334,422 334,422
------ ------ ---------- ----------
Balance at December 31, 1995........................... 75,000 7,500 843,538 851,038
Net income (unaudited)............................... -- -- 177,896 177,896
------ ------ ---------- ----------
Balance at March 31, 1996 (unaudited).................. 75,000 $7,500 $1,021,434 $1,028,934
====== ====== ========= =========
</TABLE>
See accompanying notes.
F-78
<PAGE> 148
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $(298,236) $ 175,493 $ 334,422 $ 40,306 $ 177,896
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization......... 57,665 89,608 72,867 17,468 15,133
Provision for bad debts............... 4,281 4,926 1,011 -- --
Changes in assets and liabilities:
Receivables........................ (163,316) 15,065 207,341 38,952 34,564
Inventories........................ (57,720) (32,547) 40,000 (15,213) --
Prepaid expenses and other current
assets........................... 1,493 (6,284) 9,024 (373) (5,018)
Trade accounts payable and accrued
liabilities...................... 612,139 (636,823) (48,448) (3,541) (20,882)
Accrued compensation............... 9,160 1,464 (3,514) (22,984) --
Accrued taxes, other than income... (4,778) 20,711 (17,578) (20,962) (81)
Accrued warranties................. (276) (1,000) 5,000 -- --
Deferred revenue................... 135,737 92,003 15,097 (7,922) (40,875)
Income taxes payable............... (1,578) 2,669 (1,430) -- --
--------- --------- --------- -------- ---------
Net cash flow provided by (used in)
operating activities.................. 294,571 (274,715) 613,792 25,731 160,737
INVESTING ACTIVITIES
Purchase of certificates of deposit..... (100,000) (100,000) (200,000) -- --
Sales of certificates of deposit........ 100,000 100,000 100,000 -- --
Purchase of property and equipment...... (165,147) (106,098) (10,728) (4,529) (115,818)
Proceeds from sale of property and
equipment............................. 29,935 2,553 6,371 -- --
--------- --------- --------- -------- ---------
Net cash used in investing activities... (135,212) (103,545) (104,357) (4,529) (115,818)
FINANCING ACTIVITIES
Payments of capital leases.............. (6,378) (10,398) (11,486) (2,765) (3,055)
Distributions to shareholders........... -- -- (201,268) -- --
--------- --------- --------- -------- ---------
Net cash used in financing activities... (6,378) (10,398) (212,754) (2,765) (3,055)
--------- --------- --------- -------- ---------
Increase (decrease) in cash and cash
equivalents........................... 152,981 (388,658) 296,681 18,437 41,864
Cash and cash equivalents at beginning
of period............................. 684,975 837,956 449,298 449,298 745,979
--------- --------- --------- -------- ---------
Cash and cash equivalents at end of
period................................ $ 837,956 $ 449,298 $ 745,979 $467,735 $ 787,843
========= ========= ========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................... $ 3,814 $ 4,890 $ 3,802 $ 1,057 $ 767
========= ========= ========= ======== =========
Income tax paid......................... $ $ $ $ $
========= ========= ========= ======== =========
Purchase of equipment through capital
leases................................ $ 59,961 $ -- $ -- $ -- $ --
========= ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-79
<PAGE> 149
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Comerford's Heating and Air Conditioning, Inc. ("the Company") operates in
one industry segment and is primarily engaged in the installation and servicing
of air conditioning and heating systems for residential and commercial customers
in Northern California.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.
USE OF ESTIMATES
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and Certificates of Deposit
The carrying amounts reported in the balance sheets for cash and cash
equivalents and certificates of deposit approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
TRADE RECEIVABLES
At December 31, 1994 and 1995, the Company does not believe there were any
material amounts considered to be uncollectible. Accordingly, an allowance for
doubtful accounts has not been made.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
F-80
<PAGE> 150
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Furniture and fixtures..................................................... 5-7
Machinery and equipment.................................................... 5-15
Vehicles................................................................... 5
Leasehold improvements..................................................... 20-31.5
</TABLE>
WARRANTIES
The Company provides the retail customer with a one-year warranty and
offers extended warranties for up to ten years on parts and labor from the date
of installation of the heating and air conditioning unit. The warranty runs
concurrent with the manufacturer's warranty on parts for the first year. The
Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
INCOME TAXES
The stockholders of the Company have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and California state income tax purposes.
Accordingly, the Company is not subject to federal income taxes.
DEFERRED REVENUE
The Company offers extended service agreements to its customers to provide
periodic maintenance on heating and air conditioning units. The full amount of
the revenues associated with these agreements is initially deferred and
recognized as income over the life of the agreement.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $4,281, $4,926 and $1,011, respectively and accounts
written off, net of recoveries were $4,281, $4,926 and $1,011, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
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-81
<PAGE> 151
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LEASES
Total rental expense for all operating leases was $51,900, $48,356 and
$52,272 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities and vehicles under terms of noncancellable operating
lease agreements which expire at various dates through 2000. Minimum rental
commitments at December 31, 1995 under capital and operating leases having an
initial noncancellable term of one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $15,288 $ 52,272
1997.............................................................. 15,288 52,272
1998.............................................................. 5,096 52,272
1999.............................................................. -- 52,272
2000.............................................................. -- 48,000
Thereafter........................................................ -- --
------- ---------
35,672 $ 257,088
========
Amounts representing interest..................................... 3,973
-------
Present value of net minimum rentals (including $12,689 classified
as current)..................................................... $31,699
=======
</TABLE>
The carrying values of equipment under capital leases, which are included
with owned assets in the accompanying balance sheets at December 31, 1994 and
1995, are $26,383 and $15,850, net of accumulated amortization of $33,578 and
$44,111, respectively. Amortization of the assets under capital leases is
included in depreciation expense.
3. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 25% of total contributions by a plan member, to a maximum of 4% of the
employee's total calendar year compensation. The Company's matching
contributions totaled $9,993, $5,717 and $14,773 for the years ended December
31, 1993, 1994 and 1995, respectively.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and an umbrella
policy to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
5. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $1,000,000,
$347,000, and $574,203 in 1993, 1994 and 1995, respectively.
6. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
In connection with the contemplated initial public offering (see Note 9),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the
F-82
<PAGE> 152
COMERFORD'S HEATING AND AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
termination of S corporation status. The Company had net operating income (loss)
for income tax purposes of $(276,621), $(91,297), $247,012 and $147,579 for
1993, 1994, 1995 and the three months ended March 31, 1996, respectively. Had
the Company filed federal and state income tax returns as a regular corporation
for 1993, 1994, 1995 and the three months ended March 31, 1996, income tax
expense (benefit) under the provisions of Statement of Financial Accounting
Standards No. 109 would have been $(107,273), $80,319, $146,793 and $66,837,
respectively.
At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and tax reporting bases of assets and liabilities. Such
deferred taxes will be based on the cumulative temporary difference at the date
of termination of S corporation status. The effect of recognizing the deferred
taxes will be included in income from continuing operations. If the termination
of S corporation status had occurred at March 31, 1996, the net deferred tax
asset would have been approximately $1,200.
7. STOCKHOLDERS' EQUITY
On December 26, 1995, the Company amended and restated its articles of
incorporation to, among other things, authorize the Company to issue two classes
of common stock, the designations and authorized shares of which are Class A
Common Stock (100,000 shares) and Class B Common Stock (900,000 shares). Upon
amendment and restatement of the articles of incorporation, each share of the
then outstanding common stock was split and converted into one share of Class A
Common Stock and nine shares of Class B Common Stock. All share information
presented herein has been adjusted to reflect the stock split. The rights,
preferences, privileges and restrictions of both classes of stock are identical
except that the holders of Class A Common Stock have exclusive voting rights.
There are 7,500 shares of Class A and 67,500 shares of Class B Common Stock
outstanding.
8. RELATED PARTY TRANSACTIONS
The Company paid rental fees of $62,092, $63,644 and $67,560 at December
31, 1993, 1994 and 1995, respectively, to the Company's stockholders.
9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income and cash flows for the three months ended
March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-83
<PAGE> 153
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Rolf Coal and Fuel Corp.
We have audited the accompanying balance sheets of Rolf Coal and Fuel Corp.
as of December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 Rolf Coal and Fuel Corp. at
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 17, 1996
F-84
<PAGE> 154
ROLF COAL AND FUEL CORP.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 429,875 $ 498,608 $ 306,614
Receivables:
Trade, net of allowance for doubtful accounts of
$17,021 in 1994 and $2,410 in 1995.................. 139,343 183,801 162,632
Related party............................................ -- 62,324 --
Employee................................................. 12,891 24,590 18,729
---------- ---------- ----------
152,234 270,715 181,361
Inventories.............................................. 128,941 164,623 259,889
Costs and estimated earnings in excess of billings....... 37,978 63,362 23,459
Prepaid expenses and other current assets................ 13,547 27,048 14,073
Deferred tax asset....................................... 2,900 112,000 149,775
---------- ---------- ----------
Total current assets............................. 765,475 1,136,356 935,171
Property and equipment:
Furniture and fixtures................................... 159,652 164,542 147,507
Machinery and equipment.................................. 113,090 129,528 125,791
Vehicles................................................. 345,391 320,087 328,386
Leasehold improvements................................... 7,107 7,107 7,107
---------- ---------- ----------
625,240 621,264 608,791
Less accumulated depreciation and amortization........... (416,504) (412,880) (371,198)
---------- ---------- ----------
208,736 208,384 237,543
Other assets............................................... 56,800 60,341 60,567
---------- ---------- ----------
Total assets..................................... $1,031,011 $1,405,081 $1,233,331
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable -- related party............................ $ 20,219 $ -- $ 57,470
Trade accounts payable and accrued liabilities........... 186,093 114,620 114,901
Accrued compensation..................................... 229,824 369,167 179,806
Accrued taxes, other than income......................... 13,506 15,439 16,700
Accrued warranties....................................... 8,238 25,000 25,000
Income taxes payable..................................... 20,480 156,484 194,190
Deferred revenue......................................... 144,563 329,321 345,076
Billings in excess of costs and estimated earnings....... 2,853 -- --
Current portion of long-term debt and capital lease
obligations........................................... 29,597 33,094 30,970
---------- ---------- ----------
Total current liabilities........................ 655,373 1,043,125 964,113
Long-term debt, net of current portion..................... 29,395 100 --
Capital lease obligations, net of current portion.......... 38,937 5,843 --
Deferred income taxes...................................... 5,600 10,200 15,000
Stockholders' equity:
Common stock, $100 par value, 750 shares authorized, 310
shares issued and outstanding......................... 31,000 31,000 31,000
Retained earnings........................................ 270,706 314,813 223,218
---------- ---------- ----------
Total Stockholders' Equity....................... 301,706 345,813 254,218
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,031,011 $1,405,081 $1,233,331
========= ========= =========
</TABLE>
See accompanying notes.
F-85
<PAGE> 155
ROLF COAL AND FUEL CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $3,036,009 $3,977,013 $4,104,580 $1,262,027 $1,322,043
Cost of goods sold................... 1,516,213 1,940,213 1,866,607 627,526 557,762
---------- ---------- ---------- ---------- ----------
Gross margin......................... 1,519,796 2,036,800 2,237,973 634,501 764,281
Selling, general and administrative
expenses........................... 1,538,777 1,924,815 2,137,108 687,327 859,686
Bad debt expense..................... 29,318 16,328 5,670 -- --
---------- ---------- ---------- ---------- ----------
Income from operations............... (48,299) 95,657 95,195 (52,826) (95,405)
Other income (expense):
Interest expense................... (15,320) (14,333) (18,721) (10,105) (14,562)
Interest income.................... 1,744 6,773 16,678 8,154 15,397
Other income....................... 14,917 12,345 9,955 -- --
---------- ---------- ---------- ---------- ----------
1,341 4,785 7,912 (1,951) 835
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... (46,958) 100,442 103,107 (54,777) (94,570)
Provision (benefit) for income taxes:
Current............................ 5,396 28,690 163,500 (32,843) --
Deferred........................... (32,400) 1,800 (104,500) 18,218 (32,975)
---------- ---------- ---------- ---------- ----------
(27,004) 30,490 59,000 (14,625) (32,975)
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ (19,954) $ 69,952 $ 44,107 $ (40,152) $ (61,595)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-86
<PAGE> 156
ROLF COAL AND FUEL CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
$100 PAR VALUE
---------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.............................. 310 $31,000 $220,708 $251,708
Net loss................................................ -- -- (19,954) (19,954)
------ ------- -------- --------
Balance at December 31, 1993.............................. 310 31,000 200,754 231,754
Net income.............................................. -- -- 69,952 69,952
------ ------- -------- --------
Balance at December 31, 1994.............................. 310 31,000 270,706 301,706
Net income.............................................. -- -- 44,107 44,107
------ ------- -------- --------
Balance at December 31, 1995.............................. 310 31,000 314,813 345,813
Capital distribution (unaudited)........................ -- -- (30,000) (30,000)
Net loss (unaudited).................................... -- -- (61,595) (61,595)
------ ------- -------- --------
Balance at March 31, 1996 (unaudited)..................... 310 $31,000 $223,218 $254,218
===== ======= ======== ========
</TABLE>
See accompanying notes.
F-87
<PAGE> 157
ROLF COAL AND FUEL CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (19,954) $ 69,952 $ 44,107 $ (40,152) $ (61,595)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 49,002 46,934 67,039 9,892 10,272
Deferred income taxes.......................... (32,400) 1,800 (104,500) 18,218 (32,975)
(Gain) loss on asset disposals................. (13,888) (7,353) (8,650) -- (3,200)
Provision for bad debts........................ 29,318 16,328 5,670 -- --
Changes in assets and liabilities:
Receivables.................................. 4,193 (10,419) (124,151) (34,315) 89,354
Inventories.................................. 10,630 28,452 (35,682) (84,553) (95,266)
Prepaid expenses and other current assets.... 17,777 (10,875) (13,501) 13,249 12,975
Trade accounts payable and accrued
liabilities................................ 12,255 87,402 (71,473) 32,920 281
Accrued compensation......................... 111,095 62,199 139,343 -- (189,361)
Accrued taxes, other than income............. 2,943 (263) 1,933 -- 1,261
Accrued warranties........................... (2,347) 2,067 16,762 10,587 --
Deferred revenue............................. 39,361 26,923 184,758 (5,359) 15,755
Income taxes payable......................... (14,527) 8,980 136,004 (145,052) 37,706
Costs and estimated earnings in excess of
billings and billings in excess of costs
and estimated earnings..................... 56,021 (8,803) (28,237) 60,536 39,903
--------- --------- --------- --------- ---------
Net cash flow provided by (used in) operating
activities..................................... 249,479 313,324 209,422 (164,029) (174,890)
INVESTING ACTIVITIES
Purchase of property, buildings and equipment.... (16,400) (87,930) (76,995) (4,105) (39,481)
Proceeds from sale of property, buildings and
equipment...................................... 11,827 14,120 18,958 -- 3,200
Increase in other assets......................... (19,484) (2,555) (3,541) (1,773) (226)
--------- --------- --------- --------- ---------
Net cash (used in) investing activities.......... (24,057) (76,365) (61,578) (5,878) (36,507)
FINANCING ACTIVITIES
Proceeds from long-term debt and capital
leases......................................... 119,918 170,687 131,414 69,655 --
Payments on long-term debt and capital leases.... (217,956) (199,279) (190,306) (7,212) (8,067)
Distribution to stockholders..................... -- -- -- -- (30,000)
Proceeds from note payable -- related party...... 44,136 169,397 151,662 -- 57,470
Payment on note payable -- related party......... (49,187) (192,641) (171,881) (12,058) --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities..................................... (103,089) (51,836) (79,111) 50,385 19,403
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.................................... 122,333 185,123 68,733 (119,522) (191,994)
Cash and cash equivalents at beginning of year... 122,419 244,752 429,875 429,875 498,608
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of year......... $ 244,752 $ 429,875 $ 498,608 $ 310,353 $ 306,614
========== ========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.................................... $ 9,866 $ 19,231 $ 9,241 $ 2,675 $ 911
========== ========== ========== ========== ==========
Income tax paid.................................. $ 7,405 $ 3,496 $ 6,243 $ -- $ 575
========== ========== ========== ========== ==========
Purchase of equipment through capital leases..... $ -- $ 92,442 $ -- $ -- $ --
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
F-88
<PAGE> 158
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Rolf Coal and Fuel Corp. ("the Company") operates in one industry segment
and is primarily engaged in the installation and servicing of air conditioning
and heating systems for residential and commercial customers.
RECOGNITION OF INCOME
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 three to six months.
Nonidentifiable selling, general, and administrative expenses are charged to
income as incurred and are not allocated to Contract costs.
Trade accounts receivable includes billings on Contracts. The Company
classifies these amounts as current assets because all balances are expected to
be collected in the current year. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base, and their dispersions across many different
industries and geographies. The Company does not require collateral for its
receivables.
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 inventory investments with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
F-89
<PAGE> 159
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Furniture and fixtures...................................................... 3-10
Machinery and equipment..................................................... 3-8
Vehicles.................................................................... 3-5
Leasehold improvements...................................................... 7-31.5
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
WARRANTIES
The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and labor. The Company provides an accrual for future warranty costs based upon
the relationship of prior years' sales to actual warranty costs. It is the
Company's practice to classify the entire warranty accrual as a current
liability.
ADVERTISING COSTS
Advertising costs, consisting principally of print advertising, are
expensed as incurred. Net advertising expenses for 1993, 1994 and 1995 was
$52,777, $74,114 and $75,548, respectively.
USE OF ESTIMATES
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." Under the
liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $29,318, $16,328 and $5,670, respectively and accounts
written off, net of recoveries were $94,738, $3,344 and $20,281, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-
F-90
<PAGE> 160
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Lived Assets and for Long-Lived Assets to Be Disposed Of," and does not believe
that adoption of this and any other newly issued pronouncements would have a
significant impact on the Company's financial statements.
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts................ $214,792 $118,825 $ 134,234
Estimated earnings.................................. 200,787 114,352 124,802
-------- -------- -----------
415,579 233,177 259,036
Less applicable billings.............................. 380,454 169,815 235,577
-------- -------- -----------
$ 35,125 $ 63,362 $ 23,459
======== ======== =========
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... $ 37,978 $ 63,362 $ 23,459
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... (2,853) -- --
-------- -------- -----------
$ 35,125 $ 63,362 $ 23,459
======== ======== =========
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1994 1995
------- ------------
<S> <C> <C>
Secured line of credit.......................................... $29,395 $100
</TABLE>
The Company has three secured lines of credit with a bank that aggregate
$225,000 and that expire in April 1997. The agreements are secured by
substantially all the Company's assets. At December 31, 1994 and 1995, the
Company had aggregate borrowings of $29,395 and $100, respectively, under these
agreements and these are classified as long term.
The Company can borrow at the bank's prime rate plus 2%. At December 31,
1995, the interest rate was 9.75%.
4. LEASES
Total rental expense for all operating leases was $103,396, $107,980 and
$113,348 for 1993, 1994 and 1995, respectively. The Company leases certain
office and warehouse facilities from an entity related through common ownership
and vehicles under terms of noncancelable operating lease agreements which
expire at various dates through September 1999. The building lease has an option
for renewal, in two five-year
F-91
<PAGE> 161
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
increments. Minimum rental commitments at December 31, 1995 under capital and
operating leases having an initial noncancelable term of one year or more are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $35,498 $ 107,920
1997.............................................................. 5,916 91,200
1998.............................................................. -- 84,000
1999.............................................................. -- 63,000
------- ---------
41,414 $ 346,120
========
Amounts representing interest..................................... 2,477
-------
Present value of net minimum rentals (including $33,094 classified
as current)..................................................... $38,937
=======
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Tools and equipment................................................ $92,442 $92,442
Less accumulated amortization...................................... 13,866 32,355
------- -------
Net property, plant and equipment under capital leases............. $78,576 $60,087
======= =======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company equal
to 50% of total contributions by a plan member, to a maximum of 6% of the
employee's total calendar year compensation. The Company may also elect to make
discretionary contributions. The Company's matching contributions totaled
$22,237, $28,879 and $32,987 for the years ended December 31, 1993, 1994 and
1995, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and an umbrella
policy to insure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
7. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $277,752,
$397,644 and $619,341 in 1993, 1994 and 1995, respectively.
F-92
<PAGE> 162
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
-------- ------- ---------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 4,356 $23,180 $ 132,790
State................................................ 1,040 5,510 30,710
-------- ------- ---------
5,396 28,690 163,500
Deferred:
Federal.............................................. (26,170) 1,450 (85,130)
State................................................ (6,230) 350 (19,370)
-------- ------- ---------
(32,400) 1,800 (104,500)
-------- ------- ---------
$(27,004) $30,490 $ 59,000
======== ======= =========
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- ---------
<S> <C> <C>
Deferred tax liabilities:
Depreciation................................................... $ 4,300 $ 2,600
Deferred revenues.............................................. 52,200 29,700
------- ---------
Deferred tax liabilities......................................... 56,500 32,300
Deferred tax assets:
Compensation and related....................................... 47,200 127,000
Reserve for bad debts.......................................... 4,400 600
Warranty reserve............................................... 2,200 6,500
------- ---------
Deferred tax assets.............................................. 53,800 134,100
------- ---------
Net deferred tax liabilities (assets)............................ $ 2,700 $(101,800)
======= =========
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely than not be realized. Accordingly, no valuation allowance has
been recorded for the years ended December 31, 1994 and 1995.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income (loss) before
income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Tax provision (benefit) at statutory rate.............. $(16,000) $ 34,150 $ 35,100
State income tax less applicable federal tax benefit... (2,400) 5,000 5,200
Surtax exemption....................................... 8,900 (11,750) (11,750)
Other, net............................................. (17,504) 3,090 30,450
-------- -------- --------
$(27,004) $ 30,490 $ 59,000
======== ======== ========
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company paid rental fees of $84,000, $84,000 and $84,000 at December
31, 1993, 1994 and 1995, respectively, to a related partnership, whose partners
are stockholders in the Company.
F-93
<PAGE> 163
ROLF COAL AND FUEL CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
11. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income (operations) and cash flows for the three
months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-94
<PAGE> 164
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Brand Heating & Air Conditioning, Inc.
We have audited the accompanying balance sheets of Brand Heating & Air
Conditioning, Inc., as of December 31, 1994 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Brand Heating & Air
Conditioning, Inc., at December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 14, 1996
F-95
<PAGE> 165
BRAND HEATING & AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 5,384 $ 6,871 $ 38,221
Receivables:
Trade, net of allowance for doubtful accounts of
$14,950 in 1994 and $18,732 in 1995.................. 296,372 551,475 151,966
Related party.......................................... 16,479 186,985 231,202
Employee............................................... 6,202 8,572 11,225
--------- ---------- ---------
319,053 747,032 394,393
Inventories............................................... 122,904 238,853 220,181
Prepaid expenses and other current assets................. 2,931 135 135
--------- ---------- ---------
Total current assets.............................. 450,272 992,891 652,930
Property and equipment:
Furniture and fixtures.................................... 43,107 50,876 57,474
Machinery and equipment................................... 68,947 77,026 77,026
Vehicles.................................................. 172,029 289,175 289,175
Leasehold improvements.................................... 30,000 30,000 30,000
--------- ---------- ---------
314,083 447,077 453,675
Less accumulated depreciation and amortization............ (105,491) (193,728) (213,589)
--------- ---------- ---------
208,592 253,349 240,086
Other assets................................................ 7,212 11,025 12,520
--------- ---------- ---------
Total assets...................................... $ 666,076 $1,257,265 $ 905,536
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft............................................ $ 55,772 $ 41,060 $ --
Trade accounts payable and accrued liabilities............ 115,551 171,208 116,577
Accrued compensation...................................... 35,202 38,079 42,300
Note payable to related party............................. -- 100,000 --
Current portion of long-term debt and capital leases...... 193,923 131,018 105,680
--------- ---------- ---------
Total current liabilities......................... 400,448 481,365 264,557
Long-term debt, net of current portion...................... 118,247 75,977 54,718
Stockholders' equity........................................ 147,381 699,923 586,261
--------- ---------- ---------
Total liabilities and stockholders' equity........ $ 666,076 $1,257,265 $ 905,536
========= ========= =========
</TABLE>
See accompanying notes.
F-96
<PAGE> 166
BRAND HEATING & AIR CONDITIONING, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -----------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues......................... $1,225,040 $1,841,040 $4,001,461 $1,116,861 $ 610,837
Cost of goods sold................... 889,327 1,584,826 2,754,527 810,759 560,122
---------- ---------- ---------- ---------- ----------
Gross margin......................... 335,713 256,214 1,246,934 306,102 50,715
Selling, general and administrative
expenses........................... 278,717 231,829 661,193 113,636 163,031
Bad debt expense..................... 9,950 -- 18,732 -- --
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 47,046 24,385 567,009 192,466 (112,316)
Other income (expense):
Interest expense................... (6,381) (17,159) (19,157) (2,578) (2,727)
Interest income.................... 3,099 233 3,198 237 1,381
Other income....................... 3,103 -- 1,492 6,439 --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 46,867 $ 7,459 $ 552,542 $ 196,564 $ (113,662)
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-97
<PAGE> 167
BRAND HEATING & AIR CONDITIONING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ --------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1992............................. 200 $1,940 $ 102,002 $ 103,942
Capital distributions.................................. -- -- (10,887) (10,887)
Net income............................................. -- -- 46,867 46,867
------ ------ --------- ---------
Balance at December 31, 1993............................. 200 1,940 137,982 139,922
Net income............................................. -- -- 7,459 7,459
------ ------ --------- ---------
Balance at December 31, 1994............................. 200 1,940 145,441 147,381
Net income............................................. -- -- 552,542 552,542
------ ------ --------- ---------
Balance at December 31, 1995............................. 200 1,940 697,983 699,923
Net loss (unaudited)................................... -- -- (113,662) (113,662)
------ ------ --------- ---------
Balance at March 31, 1996 (unaudited).................... 200 $1,940 $ 584,321 $ 586,261
===== ====== ========= =========
</TABLE>
See accompanying notes.
F-98
<PAGE> 168
BRAND HEATING & AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $ 46,867 $ 7,459 $ 552,542 $ 196,564 $(113,662)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 25,846 58,103 95,816 3,158 19,866
Provision for bad debts.............. 9,950 -- 18,732 -- --
(Gain) loss on asset disposals....... 3,140 -- (1,492) -- --
Changes in assets and liabilities:
Receivables....................... (65,951) (160,944) (446,711) 92,373 347,221
Inventories....................... (32,253) (69,251) (115,949) (19,575) 18,672
Prepaid expenses and other current
assets.......................... -- (2,931) 2,796 2,810 --
Trade accounts payable and accrued
liabilities..................... 39,989 88,517 40,945 (43,670) (95,691)
Accrued compensation.............. 4,724 20,711 2,877 283 4,221
--------- --------- --------- --------- ---------
Net cash flow provided by (used in)
operating activities................. 32,312 (58,336) 149,556 231,943 180,627
INVESTING ACTIVITIES
Purchase of property and equipment..... (89,819) (161,586) (141,394) (44,041) (1,180)
Proceeds from sale of property and
equipment............................ 2,600 -- 2,500 -- --
(Increase) in other assets............. (3,000) (4,000) (4,000) -- (1,500)
--------- --------- --------- --------- ---------
Net cash used in investing
activities........................... (90,219) (165,586) (142,894) (44,041) (2,680)
FINANCING ACTIVITIES
Proceeds from notes payable to related
party................................ -- -- 100,000 -- --
Payments on notes payable from related
party................................ -- -- -- -- (100,000)
Proceeds of long-term debt............. 80,125 257,370 42,520 5,868 --
Payments of long-term debt and capital
leases............................... (19,070) (37,242) (147,695) (135,421) (46,597)
Distributions to shareholders.......... (10,887) -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in)
financing activities................. 50,168 220,128 (5,175) (129,553) (146,597)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents.......................... (7,739) (3,794) 1,487 58,349 31,350
Cash at beginning of year.............. 16,917 9,178 5,384 5,384 6,871
--------- --------- --------- --------- ---------
Cash at end of year.................... $ 9,178 $ 5,384 $ 6,871 $ 63,733 $ 38,221
========= ========= ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.......................... $ 6,381 $ 15,132 $ 16,140 $ 2,578 $ 2,727
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-99
<PAGE> 169
BRAND HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Brand Heating & Air Conditioning, Inc., ("the Company") operates in one
industry segment and is primarily engaged in the installation and servicing of
air conditioning and heating systems for residential and commercial customers.
RECOGNITION OF INCOME
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 3 to 18 months. Nonidentifiable
selling, general, and administrative expenses are charged to income as incurred
and are not allocated to Contract costs.
As discussed in Note 4, the Company had one long-term contract outstanding
at December 31, 1995. This contract qualifies for segmentation under SOP 81-1.
Accordingly, each billing is treated as a separate long-term contract. As of
December 31, 1995, all costs incurred have been billed and there were no
billings in excess of costs incurred on the contract.
Trade accounts receivable includes billings on the sole contract. The
Company classifies its trade accounts receivable as current assets because all
balances are expected to be collected in the current year. Except as discussed
in Note 4, concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersions across many different industries and geographies.
The Company does not require collateral for its receivables.
ADVERTISING COSTS
Advertising costs, consisting principally of direct mail advertisements,
are expensed as incurred. Net advertising expense for 1993, 1994 and 1995 was
$32,000, $31,000 and $88,000, respectively.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
F-100
<PAGE> 170
BRAND HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the declining-balance methods over the following
useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 5-7
Machinery and equipment....................................................... 7
Vehicles...................................................................... 5
Leasehold improvements........................................................ 39
</TABLE>
WARRANTIES
The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company provides an accrual for future
warranty costs based upon the relationship of prior years' sales to actual
warranty costs. It is the Company's practice to classify the entire warranty
accrual as a current liability.
USE OF ESTIMATES
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 and state income tax purposes. Accordingly, the
Company is not subject to federal and state income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $9,950, $0 and $18,732, respectively and accounts
written off, net of recoveries were $0, $0 and $14,950, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and
F-101
<PAGE> 171
BRAND HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
any other newly issued pronouncements would have a significant impact on the
Company's financial statements.
2. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Line of credit................................................... $135,000 $ 56,000
Various equipment loans, with interest rates of 6.45% to 11.0%,
with maturity through September 25, 1999, requiring monthly
payments of $339 to $1,292, collateralized by the respective
equipment...................................................... 177,170 150,995
-------- --------
312,170 206,995
Less current portion............................................. 193,923 131,018
-------- --------
$118,247 $ 75,977
======== ========
</TABLE>
The Company has a secured line of credit with a bank that expires June 1,
1996. Under its terms, the Company can borrow up to $150,000 at the prime rate
plus 1.5% (10.25% at December 31, 1995). The agreement is secured by accounts
receivable and inventory, and is personally guaranteed by the stockholders. The
agreement requires the Company to maintain a minimum equity base. At December
31, 1994 and 1995, the Company had borrowings of $135,000 and $56,000,
respectively, under this agreement.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $131,018
1997.............................................................. 46,187
1998.............................................................. 25,651
1999.............................................................. 4,139
--------
$206,995
========
</TABLE>
3. LEASES
Total rental expense for all operating leases was $12,000, $22,000 and
$25,000 for 1993, 1994 and 1995, respectively. The Company leases vehicles under
terms of noncancelable operating lease agreements which expire at various dates
through 1999. Minimum rental commitments at December 31, 1995 under operating
leases having an initial noncancellable term of one year or more are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1996.............................................................. $ 55,702
1997.............................................................. 54,001
1998.............................................................. 39,019
1999.............................................................. 37,807
---------
$ 186,529
========
</TABLE>
The Company leases its office and warehouse space from its stockholders on
a month-to-month basis.
F-102
<PAGE> 172
BRAND HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. MAJOR CUSTOMERS
Approximately 45% of the Company's net revenue for 1995 was from one major
customer. Substantially all revenues under such contract were recognized in
1995. The central location has the authority for purchasing. Approximately 69%
of the accounts receivable was from this customer at December 31, 1995.
5. COMMITMENTS AND CONTINGENT LIABILITIES
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 $42,000,
$45,000 and $84,000 in 1993, 1994 and 1995, respectively.
7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
In connection with the contemplated initial public offering (see Note 9),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income (loss) for income tax purposes of
$(21,000), $(165,000), $216,000 and $262,000 for 1993, 1994, 1995 and the three
months ended March 31, 1996, respectively. Had the Company filed federal and
state income tax returns as a regular corporation for 1993, 1994, 1995 and the
three months ended March 31, 1996, income tax expense under the provisions of
Statement of Financial Accounting Standard No. 109 would have been $26,000,
$3,000, $242,000 and $(45,000), respectively.
At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and tax reporting basis of assets and liabilities. Such
deferred taxes will be provided on the cumulative temporary differences at the
date of termination of S corporation status. The effect of recognizing the
deferred taxes will be included in income from continuing operations. If the
termination of S corporation status had occurred at March 31, 1996, the deferred
tax liability would have been approximately $102,000.
8. RELATED PARTY TRANSACTIONS
The Company is involved in various related party transactions, the majority
of which involve payroll related reimbursements to Brand Electric, Inc., a
company owned by one of the board members of the Company. The Company and owner
also had various transactions. The following summarizes these transactions.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
------- --------
<S> <C> <C>
Notes receivable from owner............................................. $16,479 $186,985
Note receivable from employees.......................................... 6,202 8,572
Note payable to Brand Electric, Inc.
(unsecured and noninterest bearing)................................... -- 100,000
</TABLE>
F-103
<PAGE> 173
BRAND HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Rent expense paid to Brand Electric, Inc............................. $9,200 $9,000 $2,400
Rent expense paid to stockholder..................................... 2,400 2,400 2,400
</TABLE>
In addition, the Company reimbursed an affiliate for payroll payments made
on the Company's behalf.
9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income (operations) and cash flows for the three
months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-104
<PAGE> 174
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Coastal Air Conditioning Service, Inc.
We have audited the accompanying balance sheets of Coastal Air Conditioning
Service, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Coastal Air Conditioning
Service, Inc. at December 31, 1994 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
May 10, 1996
F-105
<PAGE> 175
COASTAL AIR CONDITIONING SERVICE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 60,846 $ 100,833 $ 67,549
Receivables:
Trade, net of allowance for doubtful accounts of
$5,240, $19,750 and $19,750 at December 31, 1994 and
1995, and March 31, 1996, respectively.............. 291,159 311,055 273,255
Employee.............................................. 4,395 6,559 7,531
Other................................................. 14,443 16,562 29,674
--------- ---------- -----------
370,843 435,009 378,009
Inventories........................................... 206,075 205,944 232,722
Costs and estimated earnings in excess of billings.... 21,178 9,975 11,618
Prepaid expenses and other current assets............. 5,104 3,354 2,917
Deferred income taxes................................. 7,429 20,210 25,910
--------- ---------- -----------
Total current assets............................. 610,629 674,492 651,176
Note receivable from stockholder........................... 150,763 135,944 132,051
Property and equipment:
Machinery and equipment.................................. 152,904 188,261 188,261
Vehicles................................................. 215,644 284,524 282,179
Leasehold improvements................................... 46,024 46,024 46,024
--------- ---------- -----------
414,572 518,809 516,464
Less accumulated depreciation and amortization........... (242,844) (259,072) (270,772)
--------- ---------- -----------
171,728 259,737 245,692
Other assets............................................... 25,097 51,169 59,353
--------- ---------- -----------
Total assets..................................... $ 958,217 $1,121,342 $ 1,088,272
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Credit agreement......................................... $ 131,138 $ 82,500 $ 36,531
Trade accounts payable and accrued liabilities........... 64,027 86,588 90,308
Accrued warranties....................................... 17,822 20,875 21,987
Contributions payable to benefit plan.................... 30,000 30,000 40,000
Income taxes payable..................................... 64,009 53,805 47,579
Current portion of amounts due to stockholder............ 15,796 17,107 17,489
Current portion of long-term debt and capital leases..... 45,442 59,186 59,186
--------- ---------- -----------
Total current liabilities........................ 368,234 350,061 313,080
Due to stockholder, net of current portion................. 186,549 169,441 159,963
Long-term debt, net of current portion..................... 45,517 91,751 80,849
Capital lease obligations, net of current portion.......... 19,546 34,409 30,515
Stockholder's equity:
Common stock, par value $5 per share, 20,000 shares
authorized, 980 shares issued and outstanding......... 4,900 4,900 4,900
Additional paid-in capital............................... 54 54 54
Retained earnings........................................ 333,417 470,726 498,911
--------- ---------- -----------
Total stockholders' equity....................... 338,371 475,680 503,865
--------- ---------- -----------
Total liabilities and stockholder's equity....... $ 958,217 $1,121,342 $ 1,088,272
========= ========= =========
</TABLE>
See accompanying notes.
F-106
<PAGE> 176
COASTAL AIR CONDITIONING SERVICE, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $2,648,484 $3,278,151 $3,824,195 $796,986 $870,947
Cost of goods sold...................... 1,533,732 1,854,194 2,072,274 464,553 422,927
---------- ---------- ---------- -------- --------
Gross margin............................ 1,114,752 1,423,957 1,751,921 332,433 448,020
Selling, general and administrative
expenses.............................. 910,950 1,174,933 1,504,150 295,355 395,314
Bad debt expense........................ 19,587 5,240 22,098 5,340 8,540
---------- ---------- ---------- -------- --------
Income from operations.................. 184,215 243,784 225,673 31,738 44,166
Other income (expense):
Interest expense...................... (30,314) (28,581) (29,465) (4,600) (9,463)
Other income.......................... 8,095 13,828 20,937 7,517 10,682
---------- ---------- ---------- -------- --------
Income before provision for income
taxes................................. 161,996 229,031 217,145 34,655 45,385
Provision (benefit) for income taxes:
Current............................... -- 64,009 92,617 9,300 22,900
Deferred.............................. 59,743 16,508 (12,781) 3,800 (5,700)
---------- ---------- ---------- -------- --------
59,743 80,517 79,836 13,100 17,200
---------- ---------- ---------- -------- --------
Net income.............................. $ 102,253 $ 148,514 $ 137,309 $ 21,555 $ 28,185
========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-107
<PAGE> 177
COASTAL AIR CONDITIONING SERVICE, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK $5
PAR VALUE ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992..................... 980 $4,900 $ 54 $ 82,650 $ 87,604
Net income..................................... -- -- -- 102,253 102,253
------ ------ --- -------- --------
Balance at December 31, 1993..................... 980 4,900 54 184,903 189,857
Net income..................................... -- -- -- 148,514 148,514
------ ------ --- -------- --------
Balance at December 31, 1994..................... 980 4,900 54 333,417 338,371
Net income..................................... -- -- -- 137,309 137,309
------ ------ --- -------- --------
Balance at December 31, 1995..................... 980 4,900 54 470,726 475,680
Net income (unaudited)......................... -- -- -- 28,185 28,185
------ ------ --- -------- --------
Balance at March 31, 1996 (unaudited)............ 980 $4,900 $ 54 $498,911 $503,865
===== ====== ======= ======== ========
</TABLE>
See accompanying notes.
F-108
<PAGE> 178
COASTAL AIR CONDITIONING SERVICE, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- ----------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................ $ 102,253 $ 148,514 $ 137,309 $ 21,555 $ 28,185
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization... 27,056 46,525 49,537 11,631 14,045
Provisions for loss on accounts
receivable................... 19,587 5,240 22,098 -- --
Deferred tax asset.............. 59,743 16,508 (12,781) 3,800 (5,700)
Changes in assets and
liabilities:
Receivables.................. (20,725) (141,232) (31,458) 10,203 27,609
Inventories.................. 30,880 (104,781) 131 1,179 (26,778)
Costs and estimated earnings
in excess of billings...... (6,547) (42,791) 11,203 (19,869) (1,643)
Prepaid expenses and other
assets..................... 6,949 (200) (24,322) 437 (7,747)
Contributions payable to
benefit plan............... -- 30,000 -- 10,000 10,000
Trade accounts payable and
accrued liabilities........ (63,943) 9,218 22,561 10,653 3,720
Accrued warranties........... 509 4,275 3,053 -- 1,112
Income taxes payable......... 18,949 64,009 (10,204) (25,706) (6,226)
--------- ----------- --------- --------- ---------
Net cash provided by operating
activities...................... 174,711 35,285 167,127 23,883 36,577
INVESTING ACTIVITIES
Purchase of property and
equipment....................... (4,649) (111,592) (100,039) -- --
--------- ----------- --------- --------- ---------
Net cash used in investing
activities...................... (4,649) (111,592) (100,039) -- --
FINANCING ACTIVITIES
Proceeds from debt and credit
agreement....................... 535,733 1,078,874 686,782 151,312 162,364
Payments on debt and credit
agreement....................... (572,386) (1,077,562) (713,883) (181,980) (232,225)
--------- ----------- --------- --------- ---------
Net cash provided by (used in)
financing activities............ (36,653) 1,312 (27,101) (30,668) (69,861)
--------- ----------- --------- --------- ---------
Increase (decrease) in cash....... 133,409 (74,995) 39,987 (6,785) (33,284)
Cash at beginning of year......... 2,432 135,841 60,846 60,846 100,833
--------- ----------- --------- --------- ---------
Cash at end of year............... $ 135,841 $ 60,846 $ 100,833 $ 54,061 $ 67,549
========= ========== ========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid..................... $ 30,314 $ 28,581 $ 29,465 $ 4,600 $ 8,567
========= ========== ========= ========= =========
Income tax paid................... $ -- $ -- $ 102,819 $ -- $ --
========= ========== ========= ========= =========
Equipment purchase under capital
leases.......................... $ 59,212 $ -- $ 37,507 $ -- $ --
========= ========== ========= ========= =========
</TABLE>
See accompanying notes.
F-109
<PAGE> 179
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Coastal Air Conditioning Service, Inc. ("the Company") is engaged in the
installation and servicing of air conditioning and heating systems primarily for
residential customers in the Savannah, Georgia area.
REVENUE RECOGNITION
Revenues on all of the Company's heating and air conditioning installation
contracts ("Contracts") for customers are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenues related to servicing are recognized upon
completion of those services.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within two months. Nonidentifiable
selling, general and administrative expenses are charged to operations as
incurred and are not allocated to Contract costs.
Trade accounts receivable includes billings on Contracts. The Company
classifies these amounts as current assets because all balances are expected to
be collected in the current year. Concentrations of credit risk with respect to
trade Receivables are limited to the large number of customers comprising the
Company's customer base, and their dispersion across many different industries
and geographies.
The asset, "costs and estimated earnings in excess of billings" represents
revenue recognized in excess of amounts billed on in-progress contracts.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
INVENTORIES
Inventories are stated at the lower of cost or market as determined by the
first-in, first-out (FIFO) method and consist of heating and air conditioning
units ready for installation and related parts and supplies.
F-110
<PAGE> 180
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment....................................................... 8
Vehicles...................................................................... 6
Leasehold improvements........................................................ 10
</TABLE>
WARRANTIES
The Company provides a one-year warranty on parts and labor for all
construction and a two-year warranty on parts and labor for all replacement
service. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company accrues future warranty costs based
upon the relationship of prior year's sales to actual warranty costs. It is the
Company's policy to classify the entire warranty accrual as a current liability.
ADVERTISING
The Company's policy is to expense advertising costs as incurred. Amounts
paid for advertising were approximately $32,300, $24,600 and $59,100 for the
years ended December 31, 1993, 1994 and 1995.
INCOME TAXES
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.
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 inevitably will differ from those estimates,
and such differences may be material to the financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $19,587, $5,240 and $22,098, respectively and accounts
written off, net of recoveries were $0, $19,587 and $7,588, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
opinions, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued opinions would have a significant impact on the Company's financial
statements.
F-111
<PAGE> 181
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS IN PROGRESS
Contracts in process consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contracts........................ $136,541 $ 86,585
Estimated earnings........................................... 65,217 53,708
-------- --------
201,758 140,293
Less applicable progress billings.............................. 180,580 130,318
-------- --------
Costs and estimated earnings in excess of billings............. $ 21,178 $ 9,975
======== ========
</TABLE>
As of December 31, 1994 and 1995, there were no contracts with billings in
excess of costs and estimated earnings.
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
3. CREDIT AGREEMENT
The Company purchases substantially all of its inventory from a major
manufacturer of air conditioners under a credit agreement secured by such
inventory. Payment is due in three equal installments over 90 days following the
receipt of such inventory. Amounts payable under this agreement as of December
31, 1994 and 1995 were $131,138 and $82,500, respectively.
F-112
<PAGE> 182
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Secured line of credit with a bank, borrowings of $50,000
available at 9.5%.............................................. $ -- $ --
Notes payable to a bank, secured by six vehicles bearing interest
at 9.0%. Interest and principal payments of $2,120 are due
through December 1999. ........................................ -- 85,000
Note payable to a bank, secured by two vans, bearing interest at
7.25%. Interest and principal payments of $540 are due monthly
through March 1999. ........................................... 24,469 19,006
Note payable to a bank, secured by a vehicle, software, leasehold
improvements and personal guaranty of stockholder, bearing
interest at 1% above prime (8.5% at December 31, 1995).
Interest and principal payments of $1,241 are due monthly
through November 1997. ........................................ 38,044 26,060
Note payable to a bank, secured by two trucks, bearing interest
at 7.0%. Interest and principal payments of $451 are due
monthly through January 1996. ................................. 5,863 451
Notes payable, secured by two vans, with imputed interest of 10%.
Interest and principal payments of $1,693 were made through
September 1995. ............................................... 9,942 --
Note payable to an employee bearing interest at 10%. Interest and
principal payments of $1,496 were made through April 1996. .... -- 4,854
-------- --------
78,318 135,371
Less current portion............................................. (32,801) (43,620)
-------- --------
$ 45,517 $ 91,751
======== ========
</TABLE>
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 43,620
1997.............................................................. 39,049
1998.............................................................. 26,501
1999.............................................................. 26,201
--------
$135,371
========
</TABLE>
F-113
<PAGE> 183
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain equipment and vehicles under capital leases.
Future lease payments for the capital lease obligations at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 20,395
1997.............................................................. 17,718
1998.............................................................. 8,175
1999.............................................................. 8,175
2000.............................................................. 3,581
--------
Total minimum lease payments...................................... 58,044
Less amount representing interest................................. (8,069)
--------
Present value of net minimum lease payments....................... 49,975
Less current portion.............................................. (15,566)
--------
Long-term capital lease obligations............................... $ 34,409
========
</TABLE>
Equipment with a cost of $59,212 and $96,719 and accumulated amortization
of $19,125 and $31,227 related to these capital leases is included in property
and equipment as of December 31, 1994 and 1995, respectively.
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheet for long-term debt and capital
lease obligations approximate fair value.
4. OPERATING LEASES
Total rental expense for all operating leases was $40,500, $50,502 and
$60,074 for 1993, 1994 and 1995, respectively. The Company leases certain
equipment and vehicles under terms of noncancelable operating lease agreements
which expire at various dates through January 2000 and have an initial
noncancelable term of one year or more. Minimum rental commitments at December
31, 1995 under operating leases are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-------
<S> <C>
1996............................................................... $20,693
1997............................................................... 20,142
1998............................................................... 5,211
-------
$46,046
=======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, up to 15% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Any Company contributions are made at stockholder's
discretion. The Company contributed $30,000 and $40,000 for the years ended
December 31, 1994 and 1995, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has guaranteed a $314,266 personal loan of its stockholder with
a bank dated January 1994 and due January 2004.
F-114
<PAGE> 184
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCKHOLDER'S COMPENSATION
Stockholder's compensation, consisting of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $54,000,
$58,000 and $150,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
8. INCOME TAXES
Income tax provision (benefit) expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $52,650 $ 77,233
State.................................................. -- 11,359 15,384
------- ------- --------
-- 64,009 92,617
Deferred:
Federal and State...................................... 59,743 16,508 (12,781)
------- ------- --------
$59,743 $80,517 $ 79,836
======= ======= ========
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Capitalized overhead........................................... $(21,594) $(11,859)
Other.......................................................... (3,037) (8,351)
-------- --------
Deferred tax liabilities......................................... (24,631) (20,210)
Deferred tax assets:
Bad debt reserve............................................... 1,989 7,496
Passive activity loss carryforwards............................ 9,490 9,490
Other.......................................................... 20,581 23,434
-------- --------
Deferred tax assets.............................................. 32,060 40,420
-------- --------
Net deferred tax assets.......................................... $ 7,429 $ 20,210
======== ========
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will more likely than not be realized. Accordingly, no valuation allowance has
been recorded for the year ended December 31, 1995.
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before provision
for deferred income taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $55,079 $77,871 $73,829
State income tax.......................................... -- 11,520 10,892
Other, net................................................ 4,664 (8,874) (4,885)
------- ------- -------
$59,743 $80,517 $79,836
======= ======= =======
</TABLE>
F-115
<PAGE> 185
COASTAL AIR CONDITIONING SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS
The Company has a note receivable from its stockholder which accrues
interest at 6%. Amounts receivable under this note were $150,763 and $135,944 at
December 31, 1994 and 1995, respectively.
The Company's note payable to its stockholder bears interest at 8% and is
payable through January 2004. Amounts due under this note were $202,345 and
$186,548 at December 31, 1994 and 1995, respectively. The aggregate amounts of
annual principal maturities are $17,107, $18,527, $20,065, $21,730, $23,534 and
$85,585 for 1996, 1997, 1998, 1999, 2000 and thereafter, respectively.
The Company leases its office and warehouse facility from its stockholder.
Rental payments of $40,500, $40,400 and $40,875 related to this lease were made
in the years ended December 31, 1993, 1994 and 1995, respectively. Under the
terms of this lease, the Company paid property taxes related to the lease
facilities of $3,500, $3,800 and $3,600 in the years ended December 31, 1993,
1994 and 1995, respectively.
10. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
11. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying balance sheet as of March 31, 1996 and statements of
operations and cash flows for the three months ended March 31, 1995 and 1996
have been prepared by management and are unaudited. The interim financial
statements include all adjustments, (consisting of normal recurring accruals)
considered necessary for a fair presentation of the interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted from the interim financial statements. The interim financial
statements should be read in conjunction with the audited financial statements
appearing herein. The results of the interim periods may not be indicative of
operating results for the full year.
F-116
<PAGE> 186
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Contractor Success Group, Inc.
We have audited the accompanying balance sheets of Contractor Success
Group, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Contractor Success Group,
Inc. at December 31, 1994 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 10, 1996
F-117
<PAGE> 187
CONTRACTOR SUCCESS GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 83,714 $ 218,228 $ 268,370
Receivables:
Current portion of notes receivable, net of allowance
for doubtful accounts of $79,216 in 1995............. 270,795 231,232 237,866
Trade.................................................. 41,688 69,365 69,365
Related party.......................................... 204,456 389,688 300,738
Employee............................................... 18,000 149 149
Other.................................................. -- 10,000 --
-------- ---------- ----------
534,939 700,434 608,118
Prepaid expenses and other current assets................. 7,421 5,573 3,901
-------- ---------- ----------
Total current assets........................................ 626,074 924,235 880,389
Notes receivable, net of current portion.................... 309,725 310,294 319,198
Property and equipment:
Furniture and fixtures.................................... 68,773 86,656 88,155
Equipment................................................. -- 100,000 100,000
-------- ---------- ----------
68,773 186,656 188,155
Less accumulated depreciation............................. (22,932) (45,267) (57,650)
-------- ---------- ----------
45,841 141,389 130,505
Other assets................................................ 13,572 34,773 35,348
-------- ---------- ----------
Total assets...................................... $995,212 $1,410,691 $1,365,440
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ -- $ 251,534 $ 102,360
Trade accounts payable and accrued liabilities............ 150,435 268,613 80,560
Accounts payable to related parties....................... 8,233 111,346 19,209
Accrued compensation...................................... 31,060 34,672 33,483
Current portion of capital leases......................... 3,619 5,743 5,379
-------- ---------- ----------
Total current liabilities................................... 193,347 671,908 240,991
Capital lease obligations, less current portion............. 2,216 6,000 6,000
Other liabilities........................................... 14,677 1,624 1,624
-------- ---------- ----------
Total liabilities........................................... 210,240 679,532 248,615
Stockholders' equity:
Common stock, $1 par value; authorized, issued and
outstanding -- 5,000 shares............................ 5,000 5,000 5,000
Retained earnings......................................... 779,972 726,159 1,111,825
-------- ---------- ----------
Total stockholders' equity........................ 784,972 731,159 1,116,825
-------- ---------- ----------
Total liabilities and stockholders' equity........ $995,212 $1,410,691 $1,365,440
======== ========= =========
</TABLE>
See accompanying notes.
F-118
<PAGE> 188
CONTRACTOR SUCCESS GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue............................. $2,414,497 $2,740,976 $3,229,558 $791,635 $810,950
Cost of goods sold...................... 466,196 414,938 615,245 138,920 110,396
---------- ---------- ---------- -------- --------
Gross margin............................ 1,948,301 2,326,038 2,614,313 652,715 700,554
Selling, general and administrative
expenses.............................. 1,171,461 1,453,813 1,260,005 313,510 344,445
Bad debt expense........................ 53,358 2,611 79,216 -- --
---------- ---------- ---------- -------- --------
Income from operations.................. 723,482 869,614 1,275,092 339,205 356,109
Other income (expense):
Interest expense...................... (1,015) (1,851) (10,196) (169) (5,893)
Interest income....................... 119,019 106,388 125,491 28,647 29,487
Other income.......................... 56,263 -- 7,800 782 5,963
---------- ---------- ---------- -------- --------
174,267 104,537 123,095 29,260 29,557
---------- ---------- ---------- -------- --------
Net income.............................. $ 897,749 $ 974,151 $1,398,187 $368,465 $385,666
========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-119
<PAGE> 189
CONTRACTOR SUCCESS GROUP, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
$1 PAR VALUE
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1992.......................... 5,000 $5,000 $ 731,044 $ 736,044
Capital distributions............................... -- -- (972,972) (972,972)
Net income.......................................... -- -- 897,749 897,749
------ ------ ----------- -----------
Balance at December 31, 1993.......................... 5,000 5,000 655,821 660,821
Capital distributions............................... -- -- (850,000) (850,000)
Net income.......................................... -- -- 974,151 974,151
------ ------ ----------- -----------
Balance at December 31, 1994.......................... 5,000 5,000 779,972 784,972
Capital distributions............................... -- -- (1,452,000) (1,452,000)
Net income.......................................... -- -- 1,398,187 1,398,187
------ ------ ----------- -----------
Balance at December 31, 1995.......................... 5,000 5,000 726,159 731,159
Net income (unaudited).............................. -- -- 385,666 385,666
------ ------ ----------- -----------
Balance at March 31, 1996 (unaudited)............... 5,000 $5,000 $ 1,111,825 $ 1,116,825
===== ====== ========== ==========
</TABLE>
See accompanying notes.
F-120
<PAGE> 190
CONTRACTOR SUCCESS GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------
1993 1994 1995 1995 1996
-------- ----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $897,749 $ 974,151 $ 1,398,187 $ 368,465 $ 385,666
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 9,115 12,249 22,335 975 12,383
Provisions for loss on notes
receivable...................... -- -- 79,216 -- --
Changes in assets and liabilities:
Receivables..................... (10,074) (19,908) (19,826) -- 10,000
Prepaid expenses and other
current assets................ (3,009) 1,407 1,848 (100,000) 1,672
Notes receivable................ 32,514 20,663 (40,222) (15,178) (15,538)
Trade accounts payable and
accrued liabilities........... 54,960 78,527 118,178 33,294 (188,053)
Accrued compensation............ 5,457 (9,115) 3,612 13,522 (1,189)
Other liabilities............... 8,069 4,810 (11,519) -- --
-------- ----------- ----------- --------- ---------
Net cash flow provided by operating
activities......................... 994,781 1,062,784 1,551,809 301,078 204,941
INVESTING ACTIVITIES
Purchase of property and equipment... (31,666) (5,975) (105,998) -- (1,499)
Increase in other assets............. (2,341) (4,294) (21,201) (4,336) (575)
-------- ----------- ----------- --------- ---------
Net cash used in investing
activities......................... (34,007) (10,269) (127,199) (4,336) (2,074)
FINANCING ACTIVITIES
Proceeds from short-term debt........ -- -- 250,000 -- --
Payments on short-term debt.......... -- -- -- -- (149,174)
Payments of capital leases........... (1,431) (3,020) (5,977) -- (364)
Accounts receivable and accounts
payable to related parties......... 17,292 (160,679) (82,119) (6,956) (3,187)
Distributions to shareholders........ (972,972) (850,000) (1,452,000) (355,000) --
-------- ----------- ----------- --------- ---------
Net cash used in financing
activities......................... (957,111) (1,013,699) (1,290,096) (361,956) (152,725)
-------- ----------- ----------- --------- ---------
Increase in cash and cash
equivalents........................ 3,663 38,816 134,514 (65,214) 50,142
Cash and cash equivalents at
beginning of year.................. 41,235 44,898 83,714 83,714 218,228
-------- ----------- ----------- --------- ---------
Cash and cash equivalents at end of
year............................... $ 44,898 $ 83,714 $ 218,228 $ 18,500 $ 268,370
======== ========== ========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................ $ 1,015 $ 1,851 $ 8,662 $ 169 $ 5,067
======== ========== ========== ========= =========
Income tax paid...................... $ -- $ -- $ -- $ -- $ --
======== ========== ========== ========= =========
Purchase of equipment through capital
leases............................. $ 5,070 $ 3,559 $ 11,885 $ -- $ --
======== ========== ========== ========= =========
</TABLE>
See accompanying notes.
F-121
<PAGE> 191
CONTRACTOR SUCCESS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Contractor Success Group, Inc. ("the Company") provides management
consulting, marketing services, reporting mechanisms, lead generation tools,
sales techniques, implementation materials and customized training for its
member companies in the heating, ventilation and air conditioning contracting
("HVAC") industry. The Company currently has over 270 members throughout the
United States and Canada.
RECOGNITION OF INCOME
Initial membership fees, less a provision for estimated uncollectible
amounts, are recognized on the date the membership agreement is signed given
that the fees are nonrefundable, and all obligations have been substantially
performed by the Company. Initial membership fees included in net revenue
totaled $1,071,000, $1,120,000 and $900,000 during 1993, 1994 and 1995,
respectively.
Quarterly dues, less a provision for estimated uncollectible amounts, are
recognized in the same period the services and obligations are performed.
Revenue from sales of copyrighted literature is recognized on the date of
sale.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable, Notes Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts
receivable, notes receivable and accounts payable approximate fair value.
Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for capital lease obligations
approximate fair value.
NOTES RECEIVABLE
Notes receivable are accepted from members who desire to finance a portion
of their initial membership fee. The original principal balance generally does
not exceed $15,000 and the notes typically involve a three-year term, accrue
interest at 18% and are payable in equal monthly installments of principal and
interest. The notes are periodically reviewed for collectibility and reserves
are established at the time it appears that collectibility is uncertain.
F-122
<PAGE> 192
CONTRACTOR SUCCESS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $53,358, $2,611 and $79,216, respectively and accounts
written off, net of recoveries were $0, $0 and $79,216, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is
provided on the straight-line method over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 3-7
Equipment..................................................................... 7
</TABLE>
Depreciation expense totaled $9,114, $12,249 and $22,335 during 1993, 1994
and 1995, respectively.
INTANGIBLE AND OTHER ASSETS
Intangible assets, included in other assets, represent the cost of
organization, copyrights, trademarks, and other intangible assets less
accumulated amortization. Amortization is provided on the straight-line method
over five to 15 years. The remaining other assets represent amounts on deposit.
The carrying values of intangible and other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Copyrights......................................................... $10,505 $11,405
Trademarks......................................................... 2,885 6,883
Other intangible assets............................................ 1,500 19,500
Deposits........................................................... 2,000 2,000
------- -------
16,890 39,788
Less accumulated amortization (3,318) (5,015)
------- -------
$13,572 $34,773
======= =======
</TABLE>
USE OF ESTIMATES
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 have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and state income tax purposes. Accordingly, the
Company is not subjected to income taxes.
NEWLY ISSUED ACCOUNTING STANDARDS
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> 193
CONTRACTOR SUCCESS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SHORT-TERM DEBT
During May 1995, the Company secured a line of credit with a bank that
expired May 1, 1996. Based on its terms, the Company could borrow up to $500,000
at a variable rate of interest. The agreement is secured by the notes and
accounts receivable balances of the Company with the Company's stockholders
acting as personal guarantors.
At December 31, 1995, the Company had borrowings of $250,000 and accrued
interest expense of $1,534 in accordance with this agreement. The Company paid
$6,156 of interest during 1995 at a weighted-average interest rate of 9.25%.
At May 1, 1996, the bank began renewing the line of credit on a monthly
basis.
3. LEASES
Total rental expense for all operating leases was $82,798, $82,798 and
$58,036 during 1993, 1994 and 1995, respectively. Portions of this rental
expense totaling $545, $40,427 and $26,175 during 1993, 1994 and 1995,
respectively, were reimbursed by related parties based on allocations using
percentages of total occupancy. The Company leases office facilities under terms
of a noncancelable operating lease agreement which expires during 1997. Minimum
rental commitments at December 31, 1995 under capital and operating leases
having an initial noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $ 7,370 $ 58,620
1997.............................................................. 5,192 56,751
1998.............................................................. 1,652 --
------- ---------
14,214 $ 115,371
========
Amounts representing interest..................................... (2,471)
-------
Present value of net minimum rentals (including $5,743 classified
as current)..................................................... $11,743
=======
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Furniture and fixtures............................................. $10,361 $22,246
Less accumulated amortization...................................... 6,234 11,562
------- -------
Net property, plant and equipment under capital leases............. $ 4,127 $10,684
======= =======
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to various of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position or results of operations of the Company.
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.
F-124
<PAGE> 194
CONTRACTOR SUCCESS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' COMPENSATION
Stockholders' compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $579,231,
$400,000 and $300,000 during 1993, 1994 and 1995, respectively.
Capital distributions to stockholders totaled $972,972, $850,000 and
$1,452,000 during 1993, 1994 and 1995, respectively.
6. INCOME TAXES
The Company is an S corporation; accordingly, income tax liabilities are
the responsibility of the respective owners. Under these provisions, the Company
generally does not pay corporate income taxes; rather the income or loss is
allocated to each stockholder for inclusion in their respective income tax
returns. Because of this practice, provisions for income taxes and deferred tax
assets and liabilities of these taxable entities have not been reflected in
these financial statements.
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed previously in this note, the Company operates under Subchapter
S of the Internal Revenue Code and is not subject to corporate federal income
tax. In connection with the contemplated initial public offering (see Note 8),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income for income tax purposes of
approximately $899,000, $978,000, $1,414,000 and $389,000 for 1993, 1994, 1995
and the three months ended March 31, 1996, respectively. Had the Company filed
federal and state income tax returns as a regular corporation for 1993, 1994,
1995 and the three months ended March 31, 1996, income tax expense under the
provisions of Financial Accounting Standard No. 109 would have been
approximately $342,000, $372,000, $537,000 and $148,000, respectively.
At the date of termination of S corporation status, the Company will be
required to provide for a deferred tax asset for cumulative temporary
differences between financial reporting and tax reporting. Such deferred taxes
will be recognized on the cumulative temporary difference at the date of
termination of S corporation status. The effect of recognizing the deferred
taxes will be included in income from continuing operations. If the termination
of S corporation status had occurred at March 31, 1996, the deferred tax asset
would have been approximately $27,000.
7. RELATED PARTY TRANSACTIONS
During 1995, the Company purchased certain computer equipment for $100,000
from a company owned by one of the stockholders. The Company leases this
equipment to various other companies in which the same stockholder has ownership
interests. The Company received rental fees of $7,500 during 1995 from these
lease agreement.
8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
F-125
<PAGE> 195
CONTRACTOR SUCCESS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. UNAUDITED INTERIM FINANCIAL INFORMATION
The statements of income and cash flows for the three months ended March
31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-126
<PAGE> 196
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Arrow Heating & Air Conditioning, Inc.
We have audited the accompanying balance sheets of Arrow Heating & Air
Conditioning, Inc. as of December 31, 1994 and 1995, and the related statements
of income, stockholders' equity, and cash flows for the period from January 29,
1993 (date operations commenced) through December 31, 1993, and the years ended
December 31, 1994 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 Arrow Heating & Air
Conditioning, Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for the period from January 29, 1993 (date
operations commenced) through December 31, 1993 and the years ended December 31,
1994 and 1995 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 10, 1996
F-127
<PAGE> 197
ARROW HEATING & AIR CONDITIONING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $126,635 $ 64,080 $ 4,825
Receivables:
Trade.................................................... 174,709 159,862 164,363
Other.................................................... 3,730 49,819 59,949
-------- -------- -----------
178,439 209,681 224,312
Inventories................................................. 143,308 231,246 305,433
Prepaid expenses and other current assets................... 5,214 11,436 16,869
-------- -------- -----------
Total current assets................................ 453,596 516,443 551,439
Property and equipment:
Machinery and equipment..................................... 56,106 158,408 170,586
Vehicles.................................................... 150,712 216,203 258,095
Leasehold improvements...................................... 3,495 14,050 14,050
-------- -------- -----------
210,313 388,661 442,731
Less accumulated depreciation and amortization.............. (23,793) (78,941) (97,039)
-------- -------- -----------
186,520 309,720 345,692
Other assets.................................................. 9,398 4,845 4,322
-------- -------- -----------
Total assets........................................ $649,514 $831,008 $ 901,453
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and other accrued liabilities........ $127,352 $132,706 $ 130,069
Accrued compensation........................................ 15,454 23,866 17,787
Accrued taxes, other than income............................ 20,568 29,430 27,614
Accrued warranties.......................................... 22,501 16,009 16,009
Deferred revenue............................................ 32,481 26,710 26,710
Current portion of long-term debt and capital lease
obligations.............................................. 59,943 66,180 112,630
-------- -------- -----------
Total current liabilities........................... 278,299 294,901 330,819
Long-term debt, net of current portion........................ 172,283 104,467 91,342
Capital lease obligations, less current portion............... -- 26,406 24,087
Deferred credit............................................... 12,819 -- --
Stockholders' equity:
Common stock, no par value, 4,500 shares authorized, 100
shares issued and outstanding............................ 10,000 10,000 10,000
Nonvoting common stock, no par value, 4,500 shares
authorized,
100 shares issued and outstanding........................ -- -- --
Retained earnings........................................... 176,113 395,234 445,205
-------- -------- -----------
Total stockholders' equity.......................... 186,113 405,234 455,205
-------- -------- -----------
Total liabilities and stockholders' equity.......... $649,514 $831,008 $ 901,453
======== ======== =========
</TABLE>
See accompanying notes.
F-128
<PAGE> 198
ARROW HEATING & AIR CONDITIONING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 29,
1993 (DATE
OPERATIONS
COMMENCED) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------- -------------------
1993 1994 1995 1995 1996
------------ ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues........................... $906,693 $1,968,756 $3,228,359 $612,812 $886,051
Cost of goods sold..................... 503,322 1,324,454 2,127,976 426,156 543,504
------------ ---------- ---------- -------- --------
Gross margin........................... 403,371 644,302 1,100,383 186,656 342,547
Selling, general and administrative
expenses............................. 315,519 472,722 768,748 145,172 271,832
Bad debt expense (income).............. 446 252 505 (329) 517
------------ ---------- ---------- -------- --------
Income from operations................. 87,406 171,328 331,130 41,813 70,198
Other income (expense):
Interest expense..................... (11,554) (14,854) (21,419) (5,181) (4,844)
Interest income...................... 1,253 1,819 1,811 612 338
Other income (expense)............... 16,226 4,989 (171) 27 279
------------ ---------- ---------- -------- --------
5,925 (8,046) (19,779) (4,542) (4,227)
------------ ---------- ---------- -------- --------
Net income............................. $ 93,331 $ 163,282 $ 311,351 $ 37,271 $ 65,971
========== ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-129
<PAGE> 199
ARROW HEATING & AIR CONDITIONING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NONVOTING
COMMON COMMON
STOCK, STOCK, NO PAR
NO PAR VALUE VALUE
---------------- --------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
------ ------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Issuance of stock for initial capital
contribution.............................. 100 $10,000 -- $ -- $ -- $ 10,000
Capital distributions..................... -- -- -- -- (24,500) (24,500)
Net income................................ -- -- -- -- 93,331 93,331
------ ------- ------ ------ -------- --------
Balance at December 31, 1993................ 100 10,000 -- -- 68,831 78,831
Capital distributions..................... -- -- -- -- (56,000) (56,000)
Net income................................ -- -- -- -- 163,282 163,282
------ ------- ------ ------ -------- --------
Balance at December 31, 1994................ 100 10,000 -- -- 176,113 186,113
Capital distributions..................... -- -- -- -- (92,230) (92,230)
Stock dividend............................ -- -- 100 -- -- --
Net income................................ -- -- -- -- 311,351 311,351
------ ------- ------ ------ -------- --------
Balance at December 31, 1995................ 100 10,000 100 -- 395,234 405,234
Capital distributions (unaudited)......... -- -- -- -- (16,000) (16,000)
Net income (unaudited).................... -- -- -- -- 65,971 65,971
------ ------- ------ ------ -------- --------
Balance at March 31, 1996 (unaudited)....... 100 $10,000 100 $ -- $445,205 $455,205
===== ======= ===== ====== ======== ========
</TABLE>
See accompanying notes.
F-130
<PAGE> 200
ARROW HEATING & AIR CONDITIONING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 29,
1993 (DATE
OPERATIONS
COMMENCED) YEAR ENDED THREE MONTHS ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------- -------------------
1993 1994 1995 1995 1996
------------ --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................... $ 93,331 $ 163,282 $ 311,351 $ 37,271 $ 65,971
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization.............. (2,135) 16,574 49,381 8,728 18,621
Provisions for loss on (recoveries of)
accounts receivable..................... 446 252 505 (329) 517
Gain on asset disposals.................... -- (4,062) -- -- --
Changes in assets and liabilities:
Receivables............................. (6,296) (96,956) (31,747) (869) (15,148)
Inventories............................. (9,245) (82,413) (87,938) (63,792) (74,187)
Prepaid expenses and other current
assets................................ (2,888) 9,467 (6,222) (7,745) (5,433)
Trade accounts payable and other accrued
liabilities........................... (59,367) 100,155 5,354 10,393 (2,637)
Accrued compensation.................... 1,213 7,948 8,412 4,516 (6,079)
Accrued taxes, other than income........ (1,898) 12,349 8,862 1,621 (1,816)
Accrued warranties...................... 8,346 14,155 (6,492) 2,872 --
Deferred revenue........................ 6,773 25,708 (5,771) (912) --
------------ --------- --------- -------- --------
Net cash provided by (used in) operating
activities................................. 28,280 166,459 245,695 (8,246) (20,191)
INVESTING ACTIVITIES
Purchase of property and
equipment.................................. (5,926) (134,869) (140,413) (8,383) (54,070)
Proceeds from sale of property and
equipment.................................. -- 5,700 483 -- --
Purchase of business, net of cash acquired of
$63,753.................................... (8,247) -- -- -- --
Other deferred credits....................... 65,350 -- -- -- --
Increase in other assets..................... -- -- (1,999) -- --
------------ --------- --------- -------- --------
Net cash provided by (used in) investing
activities................................. 51,177 (129,169) (141,929) (8,383) (54,070)
FINANCING ACTIVITIES
Proceeds of long-term debt................... 61,081 79,621 215,378 3,161 47,803
Payments of long-term debt and capital lease
obligations................................ (13,916) (36,398) (289,469) (13,525) (16,797)
Distributions to shareholders................ (24,500) (56,000) (92,230) (28,000) (16,000)
Net cash provided by (used in) financing
activities................................. 22,665 (12,777) (166,321) (38,364) 15,006
------------ --------- --------- -------- --------
Increase (decrease) in cash and cash
equivalents................................ 102,122 24,513 (62,555) (54,993) (59,255)
Cash and cash equivalents at beginning of
year....................................... -- 102,122 126,635 126,635 64,080
------------ --------- --------- -------- --------
Cash and cash equivalents at end of year..... $102,122 $ 126,635 $ 64,080 $ 71,642 $ 4,825
========== ========= ========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid................................ $ 11,554 $ 14,854 $ 21,419 $ 5,181 $ 4,844
========== ========= ========= ======== ========
Purchase of equipment through capital leases
and financing arrangements................. $ 15,213 $ 56,625 $ 38,918 $ -- $ --
========== ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-131
<PAGE> 201
ARROW HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Arrow Heating & Air Conditioning, Inc. (the Company) was incorporated in
December 1992. On January 29, 1993, the Company commenced operations through the
acquisition of a business accounted for as a purchase for $72,000. The fair
value of the assets purchased was $181,221, net of cash acquired of $63,753, and
liabilities of $172,974 were assumed.
NATURE OF OPERATIONS
The Company operates in one industry segment and is primarily engaged in
the installation and servicing of air conditioning and heating systems for
residential customers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECOGNITION OF INCOME
Revenues on the Company's heating and air conditioning installation,
service and maintenance are recognized upon completion of the services.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
F-132
<PAGE> 202
ARROW HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out (FIFO) method for all inventories consist
of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Supplies and materials................................ $ 61,474 $113,162 $ 144,971
Finished goods (primarily heating and air
conditioning units)................................. 81,834 118,084 160,462
-------- -------- -----------
$143,308 $231,246 $ 305,433
======== ======== =========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Machinery and equipment.................................................... 3 to 10
Vehicles................................................................... 3 to 8
Leasehold improvements..................................................... 3 to 10
</TABLE>
WARRANTIES
The Company provides the retail customer with a one-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts.
The Company provides an accrual for future warranty costs based upon the
relationship of sales to actual warranty costs.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1993, 1994 and
1995, the Company expensed $18,500, $55,800 and $79,700 in advertising costs.
USE OF ESTIMATES
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 have elected under Subchapter S of the
Internal Revenue Code to include the Company's income in their own income for
federal income tax purposes and Wisconsin state income tax purposes.
Accordingly, the Company is not subject to federal or state income taxes.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the period January 29, 1993 (date operations commenced), through
December 31, 1993, and the years ended December 31, 1994 and December 31, 1995
amounts charged to bad debt expense totaled $446, $252 and $505, respectively
and accounts written off, net of recoveries were $446, $252 and $505,
respectively.
F-133
<PAGE> 203
ARROW HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
STOCK DIVIDEND
On January 1, 1995, the Board of Directors declared a stock dividend of one
share of nonvoting common stock for each outstanding share of common stock. The
number of shares in the accompanying financial statements have been
retroactively adjusted to reflect the stock dividend.
3. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Vehicle and equipment loans...................................... $123,476 $155,009
Note payable to the Racine County Economic Development
Corporation, bearing interest at 7%............................ 31,333 --
Mortgage loan with the Small Business Association................ 34,648 --
Subordinated related party note payable.......................... 40,000 --
Other............................................................ 2,769 6,976
-------- --------
232,226 161,985
Less current portion............................................. 59,943 57,518
-------- --------
$172,283 $104,467
======== ========
</TABLE>
The Company has a line of credit with a bank that expires December 19,
1996. Under its terms, the Company can borrow up to $200,000 at the prime rate
(8.5% at December 31, 1995) plus 1%. The agreement is secured by substantially
all of the Company's assets. At December 31, 1994 and 1995, the Company had no
borrowings under this agreement. Payment of any outstanding borrowings is
personally guaranteed by the stockholders of the Company.
The Company has various vehicle and equipment loans from a bank that mature
through December 1999. The loans are secured by the related vehicles and
equipment, and require monthly principal payments of $4,000 plus interest at the
prime rate less 0.5% and monthly payments of $413, including principal and
interest at the prime rate plus 1%.
During the period from January 29, 1993 through September 29, 1995, the
Company had a note payable of $40,000 due to an immediate family member of a
stockholder, bearing interest at 9.5%. The related interest expense recognized
by the Company was $3,500, $3,800 and $3,000 in 1993, 1994 and 1995,
respectively.
It was not practicable to estimate the fair market value of the Company's
long-term debt securities because of a lack of quoted market prices and the
inability to estimate fair value without incurring excessive costs.
F-134
<PAGE> 204
ARROW HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 57,518
1997.............................................................. 52,850
1998.............................................................. 46,950
1999.............................................................. 4,667
--------
$161,985
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $19,217, $22,804 and
$26,600 for 1993, 1994 and 1995, respectively. The Company leases certain office
and warehouse facilities under terms of noncancelable operating lease agreements
which expire at various dates through January 1999. Minimum rental commitments
at December 31, 1995 under capital and operating leases having an initial
noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $11,723 $26,917
1997.............................................................. 11,723 23,040
1998.............................................................. 11,723 23,040
1999.............................................................. 6,404 1,920
------- ---------
41,573 $74,917
=======
Amounts representing interest..................................... 6,505
-------
Present value of net minimum rentals (including $8,662 classified
as
current)........................................................ $35,068
=======
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------ -------
<S> <C> <C>
Machinery and equipment............................................. $ -- $38,918
Less accumulated amortization....................................... -- 3,084
------ -------
Net equipment under capital leases.................................. $ -- $35,834
====== =======
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, multiples of 1%
to 20% of total compensation, not to exceed the maximum contributions
established annually by the Internal Revenue Service. Matching contributions are
made by the Company equal to 25% of total contributions by a plan member, to a
maximum of 2.5% of the employee's total calendar year compensation. At its
discretion, the Company may make additional contributions. The Company's
contributions totaled $6,500, $9,978 and $13,200 for 1993, 1994 and 1995,
respectively.
F-135
<PAGE> 205
ARROW HEATING & AIR CONDITIONING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and an umbrella
policy to ensure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
7. STOCKHOLDERS' COMPENSATION
Stockholder's compensation, which consisted of salary and cash bonuses, is
included in selling, general and administrative expenses and totaled $52,239,
$59,900 and $197,321 in 1993, 1994 and 1995, respectively.
8. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
In connection with the contemplated initial public offering (see Note 9),
the Subchapter S election will be terminated. As a result, the Company will be
subject to corporate income taxes subsequent to the termination of S corporation
status. The Company had net operating income for income tax purposes of $68,000,
$128,300, $244,900 and $20,300 for 1993, 1994, 1995 and the three months ended
March 31, 1996, respectively. Had the Company filed federal and state income tax
returns as a regular corporation for 1993, 1994, 1995 and the three months ended
March 31, 1996, income tax expense under the provisions of Financial Accounting
Standards No. 109 would have been $25,200, $56,700, $122,500 and $25,400,
respectively.
At the date of termination of S corporation status, the Company will be
required to provide deferred taxes for cumulative temporary differences between
financial reporting and income tax reporting bases of assets and liabilities.
Such deferred taxes will be based on the cumulative temporary differences at the
date of termination of S corporation status. The effect of recognizing the
deferred taxes will be included in income from continuing operations. If the
termination of S corporation status had occurred at March 31, 1996, the net
deferred tax liability would have been approximately $50,300.
9. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
10. UNAUDITED INTERIM FINANCIAL INFORMATION
The balance sheet as of March 31, 1996 and the statements of income and
cash flows for the three months ended March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-136
<PAGE> 206
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Air Experts, a United Services Co., Inc.
We have audited the accompanying balance sheets of Air Experts, a United
Services Co., Inc. as of December 31, 1994 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for each of the two years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Air Experts, A United
Services Co., Inc. at December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
May 10, 1996
F-137
<PAGE> 207
AIR EXPERTS, A UNITED SERVICES CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.................................................... $ 15,368 $ 76,463 $ 19,406
Receivables:
Trade, net of allowance for doubtful accounts of
$1,534 in 1994, $760 in 1995, and $-0- in 1996..... 37,316 54,708 103,636
Employees............................................ 1,210 521 1,062
Other................................................ 2,936 10,099 23,690
-------- -------- -----------
41,462 65,328 128,388
Inventories............................................. -- 68,241 88,549
Deferred income taxes................................... 37,051 30,998 32,321
Prepaid expenses and other current assets............... 23,291 37,930 39,928
-------- -------- -----------
Total current assets............................ 117,172 278,960 308,592
Property, buildings and equipment:
Furniture and fixtures.................................. 8,931 8,931 16,567
Machinery and equipment................................. 61,216 71,677 158,023
Vehicles................................................ 17,473 2,394 70,368
Leasehold improvements.................................. 17,893 17,285 26,582
-------- -------- -----------
105,513 100,287 271,540
Less accumulated depreciation and amortization.......... (28,451) (45,648) (54,738)
-------- -------- -----------
77,062 54,639 216,802
Goodwill, net............................................. 467,176 433,806 425,464
Other assets.............................................. 7,938 9,479 9,479
-------- -------- -----------
Total assets.................................... $669,348 $776,884 $ 960,337
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities.......... $217,070 $111,615 $ 117,018
Accrued compensation.................................... 34,509 63,211 38,293
Accrued taxes, other than income........................ 4,048 5,942 2,124
Accrued warranties...................................... 29,954 31,715 39,803
Income taxes payable.................................... 34,190 96,526 111,466
Deferred revenue........................................ 98,233 78,718 69,424
Current portion of long-term debt and capital leases.... 43,805 19,008 26,439
Due to related parties.................................. 20,000 117,606 128,387
Liability to Company benefit plan....................... 452 -- --
-------- -------- -----------
Total current liabilities....................... 482,261 524,341 532,954
Long-term debt, net of current portion.................... 6,262 1,965 1,446
Capital lease obligations, less current portion........... 19,685 14,016 143,115
Deferred income taxes..................................... 1,796 1,383 --
Stockholders' equity:
Common stock ($1 per share par value, 30,000 shares
authorized, 4,666 shares issued and outstanding at
December 31, 1995 and 1994 and March 31, 1996)....... 4,666 4,666 4,666
Paid-in capital in excess of par value of common
stock................................................ 176,834 176,834 176,834
Retained earnings....................................... (22,156) 53,679 101,322
-------- -------- -----------
Total stockholders' equity...................... 159,344 235,179 282,822
-------- -------- -----------
Total liabilities and stockholders' equity...... $669,348 $776,884 $ 960,337
======== ======== =========
</TABLE>
See accompanying notes.
F-138
<PAGE> 208
AIR EXPERTS, A UNITED SERVICES CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------
1994 1995 1995 1996
---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues....................................... $2,166,990 $2,554,838 $441,108 $859,118
Cost of goods sold................................. 1,300,590 1,289,891 247,462 511,517
---------- ---------- -------- --------
Gross margin....................................... 866,400 1,264,947 193,646 347,601
Selling, general and administrative expenses....... 878,642 1,112,360 219,144 311,312
---------- ---------- -------- --------
Income (loss) from operations...................... (12,242) 152,587 (25,498) 36,289
Other income (expense):
Interest expense................................. (2,848) (17,012) (690) (3,028)
Interest income.................................. 3 59 55 72
Other income..................................... 31,455 8,176 227 26,630
---------- ---------- -------- --------
28,610 (8,777) (408) 23,674
---------- ---------- -------- --------
Income (loss) before federal and state income
taxes............................................ 16,368 143,810 (25,906) 59,963
Provision (benefit) for income taxes:
Current.......................................... 34,190 62,335 6,087 15,026
Deferred......................................... 4,334 5,640 (19,462) (2,706)
---------- ---------- -------- --------
38,524 67,975 (13,375) 12,320
---------- ---------- -------- --------
Net income (loss).................................. $ (22,156) $ 75,835 $(12,531) $ 47,643
========= ========= ======== ========
</TABLE>
See accompanying notes.
F-139
<PAGE> 209
AIR EXPERTS, A UNITED SERVICES CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Beginning balance............................... -- $ -- $ -- $ -- $ --
Purchase of company........................... 4,666 4,666 176,834 -- 181,500
Net income.................................... -- -- -- (22,156) (22,156)
------ ------ -------- -------- --------
Balance at December 31, 1994.................... 4,666 4,666 176,834 (22,156) 159,344
Net income.................................... -- -- -- 75,835 75,835
------ ------ -------- -------- --------
Balance at December 31, 1995.................... 4,666 4,666 176,834 53,679 235,179
Net income (unaudited)........................ -- -- -- 47,643 47,643
------ ------ -------- -------- --------
Balance at March 31, 1996
(unaudited)................................... 4,666 $4,666 $176,834 $101,322 $282,822
====== ====== ======== ======== ========
</TABLE>
See accompanying notes.
F-140
<PAGE> 210
AIR EXPERTS, A UNITED SERVICES CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
--------------------- -------------------
1994 1995 1995 1996
--------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $ (22,156) $ 75,835 $(12,531) $ 47,643
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization..................... 61,822 59,545 15,466 17,346
Deferred income taxes............................. 4,334 5,640 (19,462) (2,706)
Provisions for loss on (recoveries of) accounts
receivable..................................... 1,534 (774) -- (490)
Gain on asset disposals........................... -- (3,216) -- --
Changes in assets and liabilities:
Receivables.................................... 21,962 (23,092) (9,084) (63,060)
Inventories.................................... 4,221 (68,241) (7,942) (20,308)
Prepaid expenses and other current assets...... 5,827 (14,639) (15,353) (1,998)
Trade accounts payable and accrued
liabilities.................................. (74,948) (105,455) 37,535 5,403
Accrued compensation........................... (5,115) 28,702 (37,215) (24,918)
Accrued taxes, other than income............... (7,461) 1,894 (141) (3,818)
Accrued warranties............................. (9,728) 1,761 42,306 8,088
Deferred revenue............................... (7,111) (19,515) 2,972 (9,294)
Income taxes payable........................... 34,190 62,335 6,087 15,026
Liability to Company benefit plan.............. 452 (452) -- --
--------- --------- -------- --------
Net cash flow provided by (used in) operating
activities........................................ 7,823 328 2,638 (33,086)
INVESTING ACTIVITIES
Purchase of property, buildings, and equipment...... (45,213) (5,884) -- (21,510)
Proceeds from sale of property, buildings, and
equipment......................................... -- 5,349 -- --
Cash received from acquisition of business.......... 76,906 -- -- --
(Increase) decrease in other assets................. 11,212 (1,541) (801) 488
--------- --------- -------- --------
Net cash provided by (used in) investing
activities........................................ 42,905 (2,076) (801) (21,022)
FINANCING ACTIVITIES
Proceeds of long-term debt.......................... 117,105 -- -- --
Payments of long-term debt and capital leases....... (112,465) (34,763) (9,087) (13,730)
Due to related parties.............................. (40,000) 97,606 -- 10,781
--------- --------- -------- --------
Net cash provided by (used in) financing
activities........................................ (35,360) 62,843 (9,087) (2,949)
--------- --------- -------- --------
Increase (decrease) in cash......................... 15,368 61,095 (7,250) (57,057)
Cash at beginning of year........................... -- 15,368 15,368 76,463
--------- --------- -------- --------
Cash at end of year................................. $ 15,368 $ 76,463 $ 8,118 $ 19,406
========= ========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid....................................... $ 2,848 $ 5,051 $ 690 $ 3,029
========= ========= ======== ========
Purchase of equipment through capital leases........ $ 3,068 $ 5,600 $ -- $149,742
========= ========= ======== ========
ACQUISITION OF COMPANY
Common stock issued................................. $ 181,500
Liabilities assumed................................. 613,289
---------
Fair value of asses acquired excluding cash......... (717,883)
---------
Cash received....................................... $ 76,906
=========
</TABLE>
See accompanying notes.
F-141
<PAGE> 211
AIR EXPERTS, A UNITED SERVICES CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Air Experts, a United Services Co., Inc. ("the Company"), a wholly-owned
subsidiary of Service Now, Inc. operates in one industry segment and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential customers in St. Louis. On January 2, 1994,
(effective January 1, 1994) Service Now purchased all the outstanding shares of
stock of the Company and accounted for the transaction by the purchase method
recording goodwill of $500,546. Prior to the purchase, Air Experts was owned by
an individual who is also a shareholder of Service Now, Inc. The aggregate
purchase price included adjustments for the shareholder's basis in the Company.
Amortization is provided on the straight-line basis over 15 years, which totaled
$33,370 and $33,370 in both 1994 and 1995.
RECOGNITION OF INCOME
Revenue on all of the Company's heating and air conditioning installation
for residential and service and maintenance are recognized upon completion of
the services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash approximate
fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
PROPERTY, BUILDING AND EQUIPMENT
Property, building and equipment are stated on the basis of cost.
Depreciation is provided on the straight-line basis over five years, except
leases which are depreciated over five years or the life of the lease, whichever
is shorter.
Depreciation expense was $28,451 and $24,353 and 1995, respectively.
WARRANTIES
The Company provides retail customers with a one-year warranty on labor
from the date of installation of the heating and air conditioning unit. This
warranty runs concurrent with the manufacturer's warranty on parts for the first
year. The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
F-142
<PAGE> 212
AIR EXPERTS, A UNITED SERVICES CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
Advertising costs primarily relate to brochures which are accounted for as
prepaid supplies and expensed as distributed. The Company had no prepaid
advertising at December 31, 1994. The Company had $20,014 of prepaid advertising
at December 31, 1995. Advertising expense was $87,175 and $158,350 in 1994 and
1995, respectively.
USE OF ESTIMATES
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
During 1994 and 1995, the Company used the liability method of accounting
for income taxes as provided by SFAS No. 109, "Accounting for Income Taxes."
Under the liability method, the deferred tax liability or asset is based on
temporary differences between the financial statement and income tax bases of
assets and liabilities, measured at estimated tax rates that will be in effect
when the differences reverse.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1994 and 1995, amounts charged to bad
debt expense totaled ($614) and $541, respectively, and accounts written off,
net of recoveries, were ($2,148) and $1,315, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
opinions, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued opinions would have a significant impact on the Company's financial
statements.
2. LONG-TERM DEBT
Long-term debt, including capital lease obligations consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Note payable to Tokai Financial, monthly payments of $1,000
including principal and interest at 9%, matures July 1996...... $ 21,411 $ 6,262
Term loan with bank, secured by vehicle, monthly payments of $187
including principal and interest at 9.2%, matures November
1997........................................................... -- 3,926
Note payable to Premium Assignment Corporation, monthly payments
of $8,066 including principal and interest at 7%, matured
February 1995.................................................. 16,013 --
Capital lease obligations, payable in monthly installments of
various amounts, maturing February 1996 to March 2001.......... 32,328 19,686
Capital lease obligations -- related party, monthly payments of
$202 including principal and interest at 18%, matures 1998..... -- 5,115
-------- --------
69,752 34,989
Less current portion............................................. (43,805) (19,008)
-------- --------
$ 25,947 $ 15,981
======== ========
</TABLE>
F-143
<PAGE> 213
AIR EXPERTS, A UNITED SERVICES CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1996............................................................... $ 8,223
1997............................................................... 1,965
-------
$10,188
=======
</TABLE>
Based on market interest rates at December 31, 1995 the fair value of the
long-term debt approximates its carrying value.
3. LEASES
Total rental expense for all operating leases was $78,783 and $61,952 for
1994 and 1995, respectively. The Company leases certain office and warehouse
facilities, vehicles, and equipment under terms of noncancelable operating lease
agreements which expire at various dates through March 1999. Minimum rental
commitments at December 31, 1995 under capital and operating leases having an
initial noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $13,480 $48,439
1997.............................................................. 8,132 15,689
1998.............................................................. 7,322 8,787
1999.............................................................. 475 1,500
------- ---------
29,409 $74,415
=======
Amounts representing interest..................................... (4,608)
-------
Present value of net minimum rentals (including $10,785 classified
as current)..................................................... $24,801
=======
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Machinery and equipment.......................................... $ 55,087 $ 60,687
Less accumulated amortization.................................... (27,527) (37,772)
-------- --------
Net property, plant and equipment under capital leases........... $ 27,560 $ 22,915
======== ========
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
4. COMMITMENTS AND CONTINGENT LIABILITIES
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.
F-144
<PAGE> 214
AIR EXPERTS, A UNITED SERVICES CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The Company is included in the consolidated return of Service Now, Inc.
Income tax for the Company is calculated as if the Company filed a separate
return.
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Current:
Federal.......................................................... $27,025 $51,212
State............................................................ 7,165 11,123
------- -------
34,190 62,335
Deferred........................................................... 4,334 5,640
------- -------
$38,524 $67,975
======= =======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.................................. $ 1,796 $ 1,383
-------- --------
Deferred tax liabilities......................................... 1,796 1,383
Deferred tax assets:
Deferred revenue............................................... 23,533 17,593
Accrued warranty............................................... 11,383 12,052
Contributions.................................................. 33,340 46,097
Other.......................................................... 2,135 1,353
-------- --------
Deferred tax assets.............................................. 70,391 77,095
Valuation allowance.............................................. (33,340) (46,097)
-------- --------
Net deferred tax assets.......................................... 37,051 30,998
-------- --------
Net deferred tax liabilities (assets)............................ $(35,255) $(29,615)
======== ========
</TABLE>
A valuation allowance of $46,097 has been provided against the deferred tax
assets as the Company cannot conclude that it is more likely than not that these
deferred tax assets will be realized. In connection with the acquisition as
described in Note 1 (which was treated as a tax-free exchange for tax purposes),
a valuation allowance of $43,429 was recorded against the deferred tax assets.
During 1994, the Company determined that $39,589 of these assets were realizable
and recorded the related tax benefits as a reduction of goodwill. Of the $46,097
reserve at December 31, 1995, $3,840 relates to assets acquired on January 2,
1994. If these assets are realized in the future, the related tax benefits will
be recorded as a reduction of goodwill. The remaining $42,257 relates to assets
which arose after the acquisition. If these assets are realized in the future,
the related tax benefits will reduce income tax expense.
F-145
<PAGE> 215
AIR EXPERTS, A UNITED SERVICES CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Tax provision at statutory rate.................................. $ 5,565 $ 48,895
State income tax less applicable federal tax benefit............. 5,030 7,734
Goodwill amortization............................................ 11,346 11,346
Change in valuation allowance.................................... 29,500 12,757
Rate differential................................................ (12,917) (12,757)
-------- --------
$ 38,524 $ 67,975
======== ========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company paid rental fees for an office building of $35,414 and $30,000
at December 31, 1994 and 1995, respectively, to STEFCO, whose owner is a
shareholder of the Company's Parent, Service Now, Inc.
The Company has an obligation to its Parent of $20,000 at 12.5% interest at
December 31, 1994 and 1995, respectively, for which there is no fixed repayment
schedule.
The Company also has a capital lease for computer software with its Parent
which has an outstanding obligation of $5,115 at December 31, 1995.
The Company has an obligation to Contractor Success Group (CSG) of $97,606
at 8% interest at December 31, 1995. The Company paid CSG $6,775 and $32,293
during 1994 and 1995, respectively, for monthly membership dues and various
sales materials. The shareholders of CSG also are majority interest shareholders
of the Company's Parent.
7. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
8. UNAUDITED INTERIM FINANCIAL INFORMATION
The statements of income (loss) and cash flows for the three months ended
March 31, 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 three months ended March 31, 1995 and 1996, may not be indicative of
operating results for the full respective years.
F-146
<PAGE> 216
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Gilley's Heating & Cooling, Inc.
We have audited the accompanying balance sheets of Gilley's Heating &
Cooling, Inc. as of December 31, 1994 and 1995, and the related statements of
income, stockholder's equity, and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Gilley's Heating & Cooling,
Inc. at December 31, 1994 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 10, 1996
F-147
<PAGE> 217
GILLEY'S HEATING & COOLING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 321,199 $ 338,032 $ 174,409
Receivables:
Trade, net of allowance for doubtful accounts of
$2,367, $3,232 and $808 in 1994, 1995 and 1996,
respectively..................................... 68,291 104,817 104,867
Related party...................................... -- 12,495 9,495
Other.............................................. -- 2,600 --
--------- --------- -----------
68,291 119,912 114,362
Inventories........................................... 67,014 79,379 111,358
Investments........................................... 36,148 60,595 263,533
Prepaid expenses and other current assets............. 2,839 12,305 6,422
Deferred income taxes................................. 1,222 1,099 275
--------- --------- -----------
Total current assets.......................... 496,713 611,322 670,359
Property and equipment:
Furniture and fixtures................................ 75,263 81,269 81,269
Vehicles.............................................. 226,673 226,673 226,673
Leasehold improvements................................ 18,959 18,959 18,959
--------- --------- -----------
320,895 326,901 326,901
Less accumulated depreciation and amortization........ (209,172) (246,442) (255,760)
--------- --------- -----------
111,723 80,459 71,141
Other assets............................................ 8,566 12,431 13,722
--------- --------- -----------
Total assets.................................. $ 617,002 $ 704,212 $ 755,222
========= ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities........ $ 45,975 $ 32,812 $ 65,275
Accrued compensation.................................. 6,645 8,889 37,000
Accrued taxes, other than income...................... 4,244 5,747 665
Accrued warranties.................................... 7,861 11,374 11,374
Income taxes payable.................................. 78,177 56,398 45,626
Deferred revenue...................................... 10,709 13,473 5,905
--------- --------- -----------
Total current liabilities..................... 153,611 128,693 165,845
Deferred income taxes................................... 8,155 9,176 9,868
Stockholder's equity:
Common stock, no par value, 100 shares authorized and
issued............................................. 4,000 4,000 4,000
Unrealized gains (losses) on available-for-sale
securities......................................... (1,250) 5,244 4,591
Retained earnings..................................... 452,486 557,099 570,918
--------- --------- -----------
Total stockholder's equity.................... 455,236 566,343 579,509
--------- --------- -----------
Total liabilities and stockholder's equity.... $ 617,002 $ 704,212 $ 755,222
========= ========= =========
</TABLE>
See accompanying notes.
F-148
<PAGE> 218
GILLEY'S HEATING & COOLING, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1993 1994 1995 1995 1996
---------- ---------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................ $1,758,548 $1,798,733 $1,896,365 $304,641 $410,046
Cost of goods sold...................... 1,224,111 1,253,203 1,241,385 199,524 284,030
---------- ---------- ---------- -------- --------
Gross margin............................ 534,437 545,530 654,980 105,117 126,016
Selling, general and administrative
expenses.............................. 488,396 308,229 510,553 81,034 110,707
Bad debt expense........................ 3,941 2,801 3,232 808 808
---------- ---------- ---------- -------- --------
Income from operations.................. 42,100 234,500 141,195 23,275 14,501
Other income:
Interest income....................... 4,150 3,952 8,845 2,425 830
Other income.......................... 447 756 967 242 566
---------- ---------- ---------- -------- --------
4,597 4,708 9,812 2,667 1,396
---------- ---------- ---------- -------- --------
Income before income taxes.............. 46,697 239,208 151,007 25,942 15,897
Provision (benefit) for income taxes:
Current............................... 6,567 82,847 47,417 4,780 1,538
Deferred.............................. 2,113 2,857 (1,023) 102 540
---------- ---------- ---------- -------- --------
8,680 85,704 46,394 4,882 2,078
---------- ---------- ---------- -------- --------
Net income.............................. $ 38,017 $ 153,504 $ 104,613 $ 21,060 $ 13,819
========= ========= ========= ======== ========
</TABLE>
See accompanying notes.
F-149
<PAGE> 219
GILLEY'S HEATING & COOLING, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK, GAINS (LOSSES)
NO PAR VALUE ON AVAILABLE-
--------------- FOR-SALE RETAINED
SHARES AMOUNT SECURITIES EARNINGS TOTAL
------ ------ -------------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992.................. 100 $4,000 $ -- $260,965 $264,965
Net income.................................. -- -- -- 38,017 38,017
------ ------ -------------- -------- --------
Balance at December 31, 1993.................. 100 4,000 -- 298,982 302,982
Net income.................................. -- -- -- 153,504 153,504
Adjustment to unrealized losses on
available-for-sale securities, net of
tax...................................... -- -- (1,250) -- (1,250)
------ ------ -------------- -------- --------
Balance at December 31, 1994.................. 100 4,000 (1,250) 452,486 455,236
Net income.................................. -- -- -- 104,613 104,613
Adjustment to unrealized gains on
available-for-sale securities, net of
tax...................................... -- -- 6,494 -- 6,494
------ ------ -------------- -------- --------
Balance at December 31, 1995.................. 100 4,000 5,244 557,099 566,343
Net income (unaudited)...................... -- -- -- 13,819 13,819
Adjustment to unrealized losses on
available-for-sale securities, net of tax
(unaudited).............................. -- -- (653) -- (653)
------ ------ -------------- -------- --------
Balance at March 31, 1996 (unaudited)......... 100 $4,000 $ 4,591 $570,918 $579,509
===== ====== =========== ======== ========
</TABLE>
See accompanying notes.
F-150
<PAGE> 220
GILLEY'S HEATING & COOLING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................. $ 38,017 $153,504 $104,613 $ 21,060 $ 13,819
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 31,478 38,256 37,270 9,564 9,318
Current deferred income taxes............ 2,113 2,857 (1,023) 102 540
Provisions for loss on accounts
receivable............................ 3,941 2,801 3,232 808 808
Loss on asset disposals.................. 1,529 -- -- -- --
Changes in assets and liabilities:
Receivables........................... 1,568 (3,363) (54,853) (9,561) 4,742
Inventories........................... 38,576 (357) (12,365) (18,798) (31,979)
Prepaid expenses and other current
assets.............................. 1,242 (170) (9,466) (213) 5,883
Trade accounts payable and accrued
liabilities......................... (14,520) 2,904 (13,163) 23,665 32,463
Accrued compensation.................. 54,394 (59,896) 2,244 (6,645) 28,111
Accrued taxes, other than income...... 28,489 (33,607) 1,503 (4,306) (5,082)
Accrued warranties.................... (2,086) 6,187 3,513
Deferred revenue...................... (2,314) 1,039 2,764 (1,390) (7,568)
Income taxes payable.................. 714 75,026 (21,779) (64,416) (9,576)
-------- -------- -------- -------- ---------
Net cash flow provided by (used in)
operating activities..................... 183,141 185,181 42,490 (50,130) 41,479
INVESTING ACTIVITIES
Purchase of property and equipment......... $(10,760) $(64,347) $ (6,006) $ -- $ --
Purchase of investments.................... (16,960) (13,605) (15,786) (3,112) (257,412)
Sale of investments........................ -- -- -- -- 53,601
Increase in other assets................... (3,174) (3,654) (3,865) (965) (1,291)
-------- -------- -------- -------- ---------
Net cash used in investing activities...... (30,894) (81,606) (25,657) (4,077) (205,102)
-------- -------- -------- -------- ---------
Increase (decrease) in cash and cash
equivalents.............................. 152,247 103,575 16,833 (54,207) (163,623)
Cash and cash equivalents at beginning of
year..................................... 65,377 217,624 321,199 321,199 338,032
-------- -------- -------- -------- ---------
Cash and cash equivalents at end of year... $217,624 $321,199 $338,032 $266,992 $ 174,409
======== ======== ======== ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Income tax paid............................ $ 5,853 $ 7,821 $ 69,196 $ 69,196 $ 11,114
======== ======== ======== ======== =========
</TABLE>
See accompanying notes.
F-151
<PAGE> 221
GILLEY'S HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Gilley's Heating & Cooling, Inc. ("the Company") is a "C" corporation and
operates in one industry segment and is primarily engaged in the installation
and servicing of air conditioning and heating systems for residential customers.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
for residential installation and service and maintenance revenue are recognized
upon completion of the services.
CASH EQUIVALENTS
The Company considers all highly liquid inventory investments with an
original maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
SHORT-TERM INVESTMENTS
Short-term investments include investments in mutual funds. These
investments are accounted for in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." It is the Company's intent not to hold these
investments to maturity.
F-152
<PAGE> 222
GILLEY'S HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures...................................................... 5
Machinery and equipment..................................................... 5
Vehicles.................................................................... 5
Leasehold improvements...................................................... 10
</TABLE>
WARRANTIES
The Company provides the retail customer with a two-year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts
and for the first year on labor. The Company provides an accrual for future
warranty costs based upon the relationship of prior years' sales to actual
warranty costs. It is the Company's practice to classify the entire warranty
accrual as a current liability.
USE OF ESTIMATES
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.
ADVERTISING
The cost of advertising is expensed as incurred. The Company incurred
$47,788, $48,373 and $57,581 is such costs during 1993, 1994 and 1995,
respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1993, 1994 and 1995 amounts charged to
bad debt expense totaled $3,941, $2,801 and $3,232, respectively and accounts
written off, net of recoveries were $2,016, $2,359 and $2,367, respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
F-153
<PAGE> 223
GILLEY'S HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SHORT-TERM INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115. The Company's
investment securities are classified as available for sale under SFAS No. 115
and, as a result, the carrying amount is a reasonable estimate of fair value.
The cost of available-for-sale securities was $37,815 and $53,601 at December
31, 1994 and 1995, respectively. The adoption of SFAS No. 115 did not have a
significant impact on the Company's 1994 financial statements.
All investments are classified as current because the Company views its
portfolio as available for use in its current operations.
3. LINE OF CREDIT
The Company has an unsecured line of credit with a bank that expires in
October 1996. Under its terms, the Company can borrow up to $50,000 at prime
plus 1.25%. At December 31, 1994 and 1995, the Company had no borrowings
outstanding under this agreement.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to a number of legal proceedings arising in the
ordinary course of its business. In the opinion of management, the resolution of
these proceedings will not have a material adverse effect on the financial
position of the Company.
The Company maintains general liability insurance coverage and an umbrella
policy to ensure itself against any liabilities occurring in the normal course
of business. The Company believes that its insurance coverage is adequate.
5. STOCKHOLDER'S COMPENSATION
Stockholder's compensation which consisted of salary and cash bonuses is
included in selling, general and administrative expenses and totaled $300,000,
$104,000 and $296,000 in 1993, 1994 and 1995, respectively.
6. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Current:
Federal.................................................. $5,261 $72,912 $41,214
State.................................................... 1,306 9,935 6,203
Deferred................................................... 2,113 2,857 (1,023)
------ ------- -------
$8,680 $85,704 $46,394
====== ======= =======
</TABLE>
F-154
<PAGE> 224
GILLEY'S HEATING & COOLING, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on available-for-sale securities................... $ -- $1,752
Depreciation and amortization...................................... 8,155 7,424
------ ------
8,155 9,176
Deferred tax assets:
Accounts receivable................................................ 805 1,099
Unrealized loss on available-for-sale securities................... 417 --
------ ------
Deferred tax assets.................................................. 1,222 1,099
Valuation allowance.................................................. -- --
------ ------
Net deferred tax assets.............................................. 1,222 1,099
------ ------
Net deferred tax liabilities......................................... $6,933 $8,077
====== ======
</TABLE>
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% to income before income
taxes. The differences are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Tax provision at statutory rate........................... $15,877 $81,331 $51,342
State income tax less applicable federal tax benefit...... 862 6,557 4,094
Other, net -- principally effects of graduated rates...... (8,059) (2,184) (9,042)
------- ------- -------
$ 8,680 $85,704 $46,394
======= ======= =======
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company paid annual rental fees of $18,000 in 1993, 1994 and 1995 to
the president and sole stockholder of the Company.
8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
9. UNAUDITED INTERIM FINANCIAL INFORMATION
The combined statements of income and cash flows for the three months ended
March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-155
<PAGE> 225
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Service Experts of Palm Springs, Inc.
We have audited the accompanying balance sheets of Service Experts of Palm
Springs, Inc. as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity (deficit), and cash flows for the period from
October 15, 1993 (date operations commenced) through December 31, 1993, and the
years ended December 31, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 Service Experts of Palm
Springs, Inc. at December 31, 1994 and 1995, and the results of their operations
and their cash flows for the period from October 15, 1993 (date operations
commenced) through December 31, 1993, and for the years ended December 31, 1994
and 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Nashville, Tennessee
May 10, 1996
F-156
<PAGE> 226
SERVICE EXPERTS OF PALM SPRINGS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 2,933 $ 82,008 $ 51,606
Receivables:
Trade, net of allowance for doubtful accounts of $2,400
in 1994, $9,000 in 1995, and $-0- in 1996.............. 15,563 33,989 37,014
Employee................................................. -- 881 --
-------- -------- -----------
15,563 34,870 37,014
Inventories................................................. 21,550 18,775 16,857
Prepaid expenses and other current assets................... 26,320 29,460 39,262
Deferred income taxes....................................... -- 25,000 23,000
-------- -------- -----------
Total current assets................................ 66,366 190,113 167,739
Property and equipment:
Furniture and fixtures...................................... 7,036 8,362 8,362
Machinery and equipment..................................... 34,487 76,653 75,753
Vehicles.................................................... 2,500 2,500 2,500
-------- -------- -----------
44,023 87,515 86,615
Less accumulated depreciation and amortization.............. 5,385 17,859 19,650
-------- -------- -----------
38,638 69,656 66,965
Intangible assets, net of accumulated amortization of $2,589
in 1994 and $5,666 in 1995 and 1996......................... 44,811 41,734 41,734
-------- -------- -----------
Total assets........................................ $149,815 $301,503 $ 276,438
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued liabilities.............. $ 47,234 $ 2,805 $ 2,828
Accrued compensation........................................ 17,466 30,760 20,968
Accrued warranties.......................................... 7,058 9,595 9,208
Income taxes payable........................................ -- 41,000 28,500
Deferred revenue............................................ 34,511 42,032 37,046
Current portion of long-term debt and capital lease
obligations.............................................. 46,069 40,775 26,395
-------- -------- -----------
Total current liabilities........................... 152,338 166,967 124,945
Long-term debt and capital lease obligations, net of current
portion..................................................... 69,362 47,686 20,174
Deferred income taxes......................................... -- 5,500 5,500
Stockholders' equity (deficit):
Common stock, $1 par value; 1,000 shares authorized, 100
shares issued and outstanding............................ 100 100 100
Additional paid-in capital.................................. 59,900 59,900 59,900
(Accumulated deficit) retained earnings..................... (131,885) 21,350 65,819
-------- -------- -----------
Total shareholders' (deficit) equity................ (71,885) 81,350 125,819
-------- -------- -----------
Total liabilities and stockholders' equity
(deficit)......................................... $149,815 $301,503 $ 276,438
======== ======== =========
</TABLE>
See accompanying notes.
F-157
<PAGE> 227
SERVICE EXPERTS OF PALM SPRINGS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, YEAR ENDED DECEMBER THREE MONTHS ENDED
1993 THROUGH 31, MARCH 31,
DECEMBER 31, --------------------- -------------------
1993 1994 1995 1995 1996
------------ -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues............................. $ 54,175 $999,164 $1,361,727 $282,748 $317,868
Cost of goods sold....................... 43,092 632,425 707,598 145,609 132,017
------------ -------- ---------- -------- --------
Gross margin............................. 11,083 366,739 654,129 137,139 185,851
Selling, general and administrative
expenses............................... 50,186 449,052 454,847 115,795 109,436
Bad debt expense......................... -- 2,400 9,323 -- --
------------ -------- ---------- -------- --------
Income (loss) from operations............ (39,103) (84,713) 189,959 21,344 76,415
Other income (expense):
Interest expense....................... (105) (8,438) (15,253) (779) (1,446)
Other income........................... -- 474 29 -- --
------------ -------- ---------- -------- --------
(105) (7,964) (15,224) (779) (1,446)
------------ -------- ---------- -------- --------
Income (loss) before federal and state
income taxes........................... (39,208) (92,677) 174,735 20,565 74,969
(Benefit) provision for income taxes:
Current................................ -- -- 41,000 -- 28,500
Deferred............................... -- -- (19,500) (8,500) 2,000
------------ -------- ---------- -------- --------
-- -- 21,500 (8,500) 30,500
------------ -------- ---------- -------- --------
Net income (loss)........................ $(39,208) $(92,677) $ 153,235 $ 29,065 $ 44,469
========== ======== ========= ======== ========
</TABLE>
See accompanying notes.
F-158
<PAGE> 228
SERVICE EXPERTS OF PALM SPRINGS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK, (ACCUMULATED
$1 PAR VALUE ADDITIONAL DEFICIT)
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Beginning balance............................. -- $ -- $ -- $ -- $ --
Issuance of stock........................... 100 100 59,900 -- 60,000
Net loss.................................... -- -- -- (39,208) (39,208)
------ ------ ---------- ------------ ---------
Balance at December 31, 1993.................. 100 100 59,900 (39,208) 20,792
Net loss.................................... -- -- -- (92,677) (92,677)
------ ------ ---------- ------------ ---------
Balance at December 31, 1994.................. 100 100 59,900 (131,885) (71,885)
Net income.................................. -- -- -- 153,235 153,235
------ ------ ---------- ------------ ---------
Balance at December 31, 1995.................. 100 100 59,900 21,350 81,350
Net income (unaudited)...................... -- -- -- 44,469 44,469
------ ------ ---------- ------------ ---------
Balance at March 31, 1996
(unaudited)................................. 100 $100 $ 59,900 $ 65,819 $ 125,819
===== ====== ======= ========== =========
</TABLE>
See accompanying notes.
F-159
<PAGE> 229
SERVICE EXPERTS OF PALM SPRINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 15, YEAR ENDED DECEMBER THREE MONTHS ENDED
1993 THROUGH 31, MARCH 31,
DECEMBER 31, ---------------------- ---------------------
1993 1994 1995 1995 1996
------------ --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................... $(39,208) $ (92,677) $153,235 $ 29,065 $ 44,469
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization...... 197 7,775 15,551 4,592 2,691
Deferred income taxes.............. -- -- (19,500) (8,500) 2,000
Provisions for loss on (recoveries
of) accounts receivable......... -- 2,400 6,600 (2,400) --
Changes in assets and liabilities:
Receivables..................... (9,262) (8,701) (25,907) (21,759) (3,025)
Inventories..................... (525) (21,025) 2,775 (15,547) 1,918
Prepaid expenses and other
current assets................ (19,405) (6,915) (3,140) 6,177 (8,921)
Trade accounts payable and
accrued liabilities........... 2,903 44,331 (44,429) 16,999 23
Accrued compensation............ 6,721 10,745 13,294 (11,113) (9,792)
Accrued warranties.............. 406 6,652 2,537 497 (387)
Deferred revenue................ -- 34,511 7,521 18,620 (4,986)
Income taxes payable............ -- -- 41,000 2,500 (12,500)
------------ --------- -------- -------- --------
Net cash flows provided by (used in)
operating activities............... (58,173) (22,904) 149,537 19,131 11,490
INVESTING ACTIVITIES
Purchase of property and equipment... (7,860) (36,163) (43,492) -- --
Purchase of customer lists........... (2,400) (45,000) -- (3,389) --
------------ --------- -------- -------- --------
Net cash used in investing
activities......................... (10,260) (81,163) (43,492) (3,389) --
FINANCING ACTIVITIES
Issuance of common stock, including
additional paid-in-capital......... 60,000 -- -- -- --
Proceeds of long-term debt........... 14,891 125,009 38,384 -- --
Payments on long-term debt and
capital leases..................... (1,609) (22,858) (65,354) (12,569) (41,892)
------------ --------- -------- -------- --------
Net cash provided by (used in)
financing activities............... 73,282 102,151 (26,970) (12,569) (41,892)
------------ --------- -------- -------- --------
Increase (decrease) in cash.......... 4,849 (1,916) 79,075 3,173 (30,402)
Cash at beginning of year............ -- 4,849 2,933 2,933 82,008
------------ --------- -------- -------- --------
Cash at end of year.................. $ 4,849 $ 2,933 $ 82,008 $ 6,106 $ 51,606
========== ========= ======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................ $ 105 $ 6,952 $ 16,739 $ 2,265 $ 1,446
========== ========= ======== ======== ========
Income tax paid...................... $ -- $ 800 $ 800 $ -- $ 12,000
========== ========= ======== ======== ========
</TABLE>
See accompanying notes.
F-160
<PAGE> 230
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company was incorporated in the state of California during October of
1993. At that time, 1,000 shares of capital stock were authorized with a par
value of $1 per share. Capital of $60,000 was received in exchange for 100
shares of the Company's stock during 1993, resulting in additional paid-in
capital of $59,900.
REPORTING ENTITY
Service Experts of Palm Springs, Inc. ("the Company") is primarily engaged
in the installation and servicing of air conditioning and heating systems for
residential customers in and around Palm Springs, California. The Company
commenced operations in October of 1993. Accordingly, 1993 includes
approximately three months of operations, compared to twelve months during 1994
and 1995.
RECOGNITION OF INCOME
Revenues on all of the Company's heating and air conditioning installation
and other services are recognized upon completion of the services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amounts reported in the balance sheets for cash and cash
equivalents approximate fair value.
Accounts Receivable and Accounts Payable
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate fair value.
Long-Term Debt and Capital Lease Obligations
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt and capital
lease obligations approximate fair value.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out (FIFO) method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization, including that associated with equipment acquired under capital
leases, are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures........................................................ 5
Machinery and equipment....................................................... 5
Vehicles...................................................................... 5
</TABLE>
F-161
<PAGE> 231
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include customer lists purchased from outside parties and
are recorded at cost, net of accumulated amortization. Such assets are amortized
on a straight-line basis over a period of 15 years.
WARRANTIES
The Company provides customers with a one-year warranty on parts and labor
from the date of installation of the heating and air conditioning unit. This
warranty runs concurrent with the manufacturer's warranty on parts. The Company
provides an accrual for future warranty costs based upon the relationship of
prior years' sales to actual warranty costs. It is the Company's practice to
classify the entire warranty accrual as a current liability.
ADVERTISING COSTS
Costs associated with advertising are expensed at the time of the
advertisement's first showing. Advertising expenses totaled approximately $200,
$54,000 and $92,000 for the period from October 15, 1993 through December 31,
1993 and years ended December 31, 1994 and 1995, respectively.
USE OF ESTIMATES
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.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
For the period October 15, 1993 (date operations commenced), through
December 31, 1993, and the years ended December 31, 1994 and December 31, 1995
amounts charged to bad debt expense totaled $0, $2,400 and $9,323, respectively
and accounts written off, net of recoveries were $0, $0 and $2,723,
respectively.
NEWLY ISSUED ACCOUNTING STANDARDS
The Company has considered the impact of newly issued financial accounting
pronouncements, principally Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and does not believe that adoption of this and any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
F-162
<PAGE> 232
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. LONG-TERM DEBT
Long-term debt consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- -------
<S> <C> <C>
Notes payable to related party.................................. $ 69,842 $33,254
Note payable for insurance coverage............................. 24,838 17,859
Loan payable to a bank.......................................... 20,751 14,410
Capital leases.................................................. -- 22,938
-------- -------
115,431 88,461
Less current portion............................................ 46,069 40,775
-------- -------
$ 69,362 $47,686
======== =======
</TABLE>
The Company has notes payable to a party related through similar ownership.
These notes are due through 1999 and were given in exchange for cash to fund
operations and finance capital purchases. The notes require monthly payments of
$1,500 including principal and interest at 8%. Subsequent to December 31, 1995,
the Company used available funds to pay down a significant portion of these
notes, leaving approximately $1,300 due as of March 31, 1996.
Insurance coverage is financed annually through an outside lending
institution. The Company has a note payable to this institution that requires
monthly payments of $2,575 including principal and interest at 8%.
The Company has a term loan with a bank that expires in 1997. The loan is
secured by equipment and requires monthly payments of approximately $630
including principal and interest at 9.4%.
Certain computer software is leased under capital lease agreements with
parties related to the Company through similar ownership. The leases continue
through 1999. Ownership of this software will transfer to the Company at the end
of the lease term. The leases are payable in monthly installments of
approximately $700 including implicit interest at 8%.
As of December 31, 1995, the aggregate amounts of annual principal
maturities of long-term debt (excluding capital lease obligations) are as
follows:
<TABLE>
<S> <C>
1996............................................................ $33,933
1997............................................................ 16,159
1998............................................................ 10,079
1999............................................................ 5,352
-------
$65,523
=======
</TABLE>
3. LEASES
Total rental expense for all operating leases was approximately $7,500,
$53,000 and $49,000 for the years ended December 31, 1993, 1994 and 1995,
respectively. The Company leases certain office and warehouse facilities and
equipment, as well as vehicles under terms of noncancellable operating lease
agreements which
F-163
<PAGE> 233
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expire at various dates through 1998. Minimum rental commitments at December 31,
1995 under capital and operating leases having an initial noncancellable term of
one year or more are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
1996.............................................................. $ 8,430 $41,000
1997.............................................................. 8,430 27,500
1998.............................................................. 7,620 1,300
1999.............................................................. 1,500 --
------- ---------
25,980 $69,800
=======
Amounts representing interest..................................... 3,042
-------
Present value of net minimum rentals, including $1,588 classified
as current...................................................... $22,938
=======
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C>
Machinery and equipment............................................ $ -- $24,885
Less accumulated amortization...................................... -- 1,786
------- -------
Net property and equipment under capital leases.................... $ -- $23,099
======= =======
</TABLE>
4. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate in the plan. Under the plan's provisions,
a plan member may annually contribute, on a tax-deferred basis, 2% to 12% of
total compensation, not to exceed the maximum established annually by the
Internal Revenue Service. Matching contributions are made by the Company in an
amount determined at the discretion of management. The Company's matching
contributions for 1995 totaled approximately $3,000. No contributions were made
during 1994 or 1993.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage to insure itself
against liabilities occurring in the normal course of business. The Company
believes that its insurance coverage is adequate.
F-164
<PAGE> 234
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization................................. $ 1,800 $ 5,500
-------- -------
Total deferred tax liabilities........................ 1,800 5,500
Deferred tax assets:
Net operating loss carryforwards.............................. 39,500 --
Deferred revenue.............................................. 8,800 17,200
Other......................................................... 4,000 7,800
-------- -------
Total deferred tax assets............................. 52,300 25,000
Valuation allowance for deferred tax assets..................... (50,500) --
-------- -------
Net deferred tax assets......................................... 1,800 25,000
-------- -------
Net deferred tax assets......................................... $ -- $19,500
======== =======
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets and believes that the deferred tax assets
will be more likely than not realized during the carryforward period.
Accordingly, no valuation allowance has been recorded for the year ended
December 31, 1995. The valuation allowance was decreased by $50,500 during the
year ended December 31, 1995.
Significant components of the (benefit) provision for income taxes
attributable to continuing operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ 31,000
State................................................ -- -- 10,000
-------- -------- --------
-- -- 41,000
Deferred:
Federal.............................................. -- -- (16,100)
State................................................ -- -- (3,400)
-------- -------- --------
-- -- (19,500)
-------- -------- --------
Provision for income taxes $ -- $ -- $ 21,500
======== ======== ========
</TABLE>
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 (benefit) provision at federal statutory rate...... $(13,300) $(22,500) $ 59,500
State income tax less applicable federal tax benefit... (1,400) (2,300) 12,500
Change in valuation allowance.......................... -- -- (50,500)
Net operating losses for which no benefit was
recognized........................................... 14,700 24,800 --
-------- -------- --------
$ -- $ -- $ 21,500
======== ======== ========
</TABLE>
F-165
<PAGE> 235
SERVICE EXPERTS OF PALM SPRINGS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The Company paid management and other service fees of approximately $2,000,
$28,500 and $34,500 during the period from October 15, 1993 through December 31,
1993 and for years ended December 31, 1994 and 1995, respectively, to parties
with similar ownership to that of the Company.
8. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
The Company plans to exchange shares of its common stock in exchange for
shares of common stock and cash of Service Experts, Inc. simultaneously with
Service Experts, Inc. closing the initial public offering of its common stock.
Service Experts, Inc. was formed primarily for the purpose of acquiring air
conditioning and heating companies, similar to the Company, in exchange for
shares of its common stock and cash. The combination is to be effected in
accordance with executed combination agreements with air conditioning and
heating companies and Service Experts, Inc.
9. UNAUDITED INTERIM FINANCIAL INFORMATION
The statements of operations and cash flows for the three months ended
March 31, 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 three months ended March 31, 1995 and 1996 may not be indicative of
operating results for the full respective years.
F-166
<PAGE> 236
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE
IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR
TO ANY PERSON TO WHOM 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 TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 10
S Corporation Distributions........... 11
Dividend Policy....................... 11
Capitalization........................ 12
Dilution.............................. 13
Selected Combined Financial Data...... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 41
The Combination....................... 51
Management............................ 55
Certain Transactions.................. 59
Principal Stockholders................ 61
Description of Capital Stock.......... 62
Shares Eligible for Future Sale....... 64
Underwriting.......................... 65
Legal Matters......................... 66
Experts............................... 66
Available Information................. 67
Index to Combined Financial
Statements.......................... F-1
</TABLE>
---------------------
UNTIL , 1996, (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,250,000 SHARES
[LOGO]
SERVICE EXPERTS, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
EQUITABLE SECURITIES
CORPORATION
MORGAN KEEGAN &
COMPANY, INC.
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 237
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Commission Registration Fee........................................................ $12,492
National Association of Securities Dealers, Inc. Fee............................... 4,123
-------
Nasdaq National Market Fee.........................................................
-------
State Qualification Expenses (including legal fees)................................ *
Printing Expenses.................................................................. *
Legal Fees and Expenses............................................................ *
Auditors' Fees and Expenses........................................................ *
Transfer Agent and Registrar Fees.................................................. *
Miscellaneous Expenses............................................................. *
-------
Total.................................................................... $ *
=======
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. 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, or is threatened to be made 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
II-1
<PAGE> 238
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 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 respect to any claim, issue or matter as to which the
indemnitee shall have been 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 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 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 Underwriting Agreement (set forth in Exhibit 1 hereto) provides for
the indemnification by the Underwriters of the Company, each of the Company's
directors, each of the Company's officers who signs this Registration Statement
and each person who controls the Company within the meaning of the Securities
Act, solely with respect to information provided by the Underwriters for
inclusion in this Registration Statement.
(d) The Company intends to obtain insurance which provides general coverage
for its directors and executive officers in amounts to be determined. In
addition, the Company intends to obtain insurance coverage for its directors and
executive officers in amounts to be determined with respect to the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as described in this section, no securities of the Company have been
sold by the Company within the past three years without registration under the
Securities Act.
On March 27, 1996, the Company issued an aggregate of 1,000,000 shares of
Common Stock to Alan R. Sielbeck, James D. Abrams, John R. Young and R. Edward
Hutton, Jr. in a transaction exempt from the registration requirements of the
Securities Act in reliance upon Section 4(2).
In June 1996, the Company entered into the Combination Agreements in a
transaction exempt from the registration requirements of the Securities Act in
reliance upon Section 4(2). In connection with the
II-2
<PAGE> 239
Combination, the Company will issue up to an aggregate of 4,537,900 shares of
its Common Stock to individuals, including Messrs. Sielbeck, Abrams, Young and
Hutton, who were affiliated with certain of the Predecessor Companies prior to
the Combination. No underwriters were utilized in accomplishing the Combination.
The shares were issued in exchange for ownership interests in the Predecessor
Companies.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ ------------------------------------------------------------------------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
2.1 -- Form of Combination Agreement by and among each of the Predecessor Companies, each
of its respective stockholders and the Registrant
3.1 -- Restated Certificate of Incorporation of the Registrant
3.2 -- Bylaws of the Registrant
4.1* -- Specimen of Common Stock certificate
5.1* -- Opinion of Waller Lansden Dortch & Davis
10.1 -- Registrant's 1996 Incentive Stock Plan
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan
10.3 -- Registrant's 1996 Employee Stock Purchase Plan
10.4* -- Registrant's Savings and Profit Sharing Plan
10.5 -- Employment Agreement, dated June 26, 1996, between the Registrant and Alan R.
Sielbeck
10.6 -- Employment Agreement, dated June 26, 1996, between the Registrant and James D.
Abrams
10.7 -- Employment Agreement, dated June 26, 1996, between the Registrant and Anthony M.
Schofield
10.8 -- Form of Employment Agreement between the Registrant and certain of its employees
10.9 -- Form of Escrow Agreement between the Registrant, each of the stockholders of the
Predecessor Companies and the escrow agent
10.10* -- Form of Equitable Securities Corporation Stock Purchase Warrant
11.1* -- Statement re computation of per share earnings
23.1 -- Consent of Ernst & Young LLP
23.2* -- Consent of Waller Lansden Dortch & Davis (included in Exhibit 5)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for Commission use only)
</TABLE>
- ---------------
* To be filed by amendment.
(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 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
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 Commission such indemnification is
against public policy as expressed in the Securities 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 against the
Registrant by such director, officer or controlling person in connection with
II-3
<PAGE> 240
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 Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus 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.
II-4
<PAGE> 241
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on June 26, 1996.
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan Sielbeck and James D. Abrams, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution, and resubstitution, for him in his name, place and stead, in any
and all capacities (until revoked in writing), to sign any and all amendments to
this Registration Statement (including post-effective amendments and amendments
thereto) and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- --------------------------------------------- -------------------------------- --------------
<C> <S> <C>
/s/ ALAN R. SIELBECK Chairman of the Board and Chief June 26, 1996
- --------------------------------------------- Executive Officer (principal
Alan R. Sielbeck executive officer)
/s/ JAMES D. ABRAMS President, Chief Operating June 26, 1996
- --------------------------------------------- Officer and Director
James D. Abrams
/s/ ANTHONY M. SCHOFIELD Chief Financial Officer June 26, 1996
- --------------------------------------------- (principal financial and
Anthony M. Schofield accounting officer)
/s/ RAYMOND J. DE RIGGI Director June 26, 1996
- ---------------------------------------------
Raymond J. De Riggi
/s/ TIMOTHY G. WALLACE Director June 26, 1996
- ---------------------------------------------
Timothy G. Wallace
</TABLE>
II-5
<PAGE> 242
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBITS NUMBER
- ------ -------------------------------------------------------------------------- -------
<C> <S> <C> <C>
1.1 -- Form of Underwriting Agreement
2.1 -- Form of Combination Agreement by and among each of the Predecessor
Companies, each of its respective stockholders and the Registrant
3.1 -- Restated Certificate of Incorporation of the Registrant
3.2 -- Bylaws of the Registrant
4.1* -- Specimen of Common Stock certificate
5.1* -- Opinion of Waller Lansden Dortch & Davis
10.1 -- Registrant's 1996 Incentive Stock Plan
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan
10.3 -- Registrant's 1996 Employee Stock Purchase Plan
10.4* -- Registrant's Savings and Profit Sharing Plan
10.5 -- Employment Agreement, dated June 26, 1996, between the Registrant and Alan
R. Sielbeck
10.6 -- Employment Agreement, dated June 26, 1996, between the Registrant and
James D. Abrams
10.7 -- Employment Agreement, dated June 26, 1996, between the Registrant and
Anthony M. Schofield
10.8 -- Form of Employment Agreement between the Registrant and certain of its
employees
10.9 -- Form of Escrow Agreement between the Registrant, each of the stockholders
of the Predecessor Companies and the escrow agent
10.10* -- Form of Equitable Securities Corporation Stock Purchase Warrant
11.1* -- Statement re computation of per share earnings
23.1 -- Consent of Ernst & Young LLP
23.2* -- Consent of Waller Lansden Dortch & Davis (included in Exhibit 5)
24.1 -- Power of Attorney (included on page II-5)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
2,250,000 SHARES
SERVICE EXPERTS(R), INC.
COMMON STOCK
UNDERWRITING AGREEMENT
Equitable Securities Corporation __________________, 1996
Morgan Keegan & Company, Inc.
As Representatives of the
Several Underwriters
c/o Equitable Securities Corporation
Nashville City Center, Suite 800
511 Union Street
Nashville, Tennessee 37219
Ladies and Gentlemen:
Service Experts(R), Inc., a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule A hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,250,000 shares (the "Firm Shares") of the
common stock, $.01 par value (the "Common Stock"), of the Company. The Company
also proposes to sell to the several Underwriters an aggregate of up to 337,500
additional shares of the Company's Common Stock (the "Option Shares") if
requested by the Underwriters as provided in Section 2 below. The
Underwriters, severally and not jointly, are willing to purchase the number of
Firm Shares set forth opposite their names in Schedule A, and their pro rata
portion of the Option Shares if you elect to exercise the over-allotment option
in whole or in part. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the
"Shares."
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the Underwriters are willing, acting severally and not jointly, to
purchase the number of Firm Shares set forth opposite their names in Schedule
A, plus their pro rata portion of the Option Shares if you elect to exercise
the over-allotment option in whole or in part for the accounts of the
Underwriters.
The proceeds to the Company from the sale to the Underwriters of the
Firm Shares will be used in part to fund the cash consideration payable in
connection with the acquisition of each of the entities named on Schedule B
(each such entity, a "Predecessor Company" and, collectively, the "Predecessor
Companies"). The acquisition of a Predecessor Company (or group of affiliated
Predecessor Companies) is hereinafter referred to as an "Acquisition" and the
acquisition of the Predecessor Companies is hereinafter referred to as the
"Acquisitions." Each Acquisition will be effected pursuant
<PAGE> 2
to a Combination Agreement by and among the Company, the Founding Company, and
the owners of the Founding Company, and the exhibits, agreements, documents and
schedules entered into or delivered in connection therewith (each, a
"Combination Agreement" and collectively, the "Combination Agreements").
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter as follows:
(a) A registration statement on Form S-1 (File No.
333-_____) with respect to the Shares has been filed by the Company
with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended, (the "Securities Act") and the
rules and regulations thereunder (the "Rules and Regulations"),
including a preliminary prospectus, and has filed one or more
amendments thereto. Copies of such registration statement and any
amendments, including any post-effective amendments, and all forms of
the related prospectuses contained therein and any supplements
thereto, have been delivered to the Representatives. Such
registration statement, including the prospectus, Part II, all
financial statements and schedules, exhibits and all other documents
filed as or deemed to be a part thereof, as amended at the time when
it shall become effective and all information deemed to be a part
thereof as of the time of effectiveness pursuant to Rule 430A or Rule
434 of the rules and regulations of the Commission under the
Securities Act, is herein referred to as the "Registration Statement"
and the prospectus included as part of the Registration Statement on
file with the Commission that discloses all the information that was
omitted from the prospectus on the effective date pursuant to Rule
430A or Rule 434 of the Rules and Regulations (as defined below) and
in the form filed pursuant to Rule 424(b) under the Securities Act is
herein referred to as the "Final Prospectus." The prospectus included
as part of the Registration Statement on the date when the
Registration Statement became effective is referred to herein as the
"Effective Prospectus." Any prospectus included as part of the
Registration Statement and in any amendment thereto prior to the
effective date of the Registration Statement is referred to as a
"Preliminary Prospectus."
(b) No order preventing or suspending the use of any
Preliminary Prospectus, Effective Prospectus or Final Prospectus has
been issued and no proceeding for that purpose has been instituted or
threatened by the Commission or the securities authority of any state
or other jurisdiction. If the Registration Statement has become
effective under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement or any part thereof has
been issued and no proceeding for that purpose has been instituted or
threatened or, to the best knowledge of the Company, contemplated by
the Commission or the securities authority of any state of other
jurisdiction.
2
<PAGE> 3
(c) Each Preliminary Prospectus, at the time of filing
thereof, complied with the requirements of the Securities Act and the
Rules and Regulations, and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; except
that the foregoing does not apply to statements or omissions made in
reliance upon and in conformity with written information furnished to
the Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information
described in Section 13 of this Agreement). When the Registration
Statement becomes effective and at all times subsequent thereto up to
and including the First Closing Date (as hereinafter defined), (i) the
Registration Statement, the Effective Prospectus and Final Prospectus
and any amendments or supplements thereto will contain all statements
which are required to be stated therein in accordance with the
Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Rules and Regulations and will comply with
the requirements of the Securities Act, the Exchange Act and the Rules
and Regulations, and (ii) neither the Registration Statement, the
Effective Prospectus nor the Final Prospectus nor any amendment or
supplement thereto will include any untrue statement or material fact
or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading; except that the
foregoing does not apply to statements or omissions made in reliance
upon and in conformity with written information furnished to the
Company by any Underwriter specifically for use therein.
(d) The Company has been duly organized and is and, after
giving effect to the Acquisitions, will be validly existing as a
corporation in good standing under the laws of the State of Delaware,
with full power and authority (corporate and other) to own or lease
its properties and conduct its business as described in the
Registration Statement; the Company is and, after giving effect to the
Acquisitions, will be duly qualified and authorized to transact
business as a foreign corporation in all jurisdictions in which the
conduct of its business or the ownership or leasing of property
requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the financial condition,
results of operations or business of the Company and the Subsidiaries
(as defined below) taken as a whole.
(e) All of the entities that will be subsidiaries of the
Company, direct or indirect, after giving effect to the Acquisitions
are listed on Schedule B. The subsidiaries listed on Schedule B
hereto are hereinafter collectively referred to as the "Subsidiaries."
Each Subsidiary, after giving effect to the Acquisitions, will have
been duly incorporated and will be validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with power or authority to own or lease its properties
and conduct its business as described in the Registration Statement.
Each Subsidiary, after giving effect to the Acquisitions, will be
duly qualified to transact business in all jurisdictions in which the
conduct of its business requires
3
<PAGE> 4
such qualification. The outstanding shares of capital stock of each
of the Subsidiaries, after giving effect to the Acquisitions, will
have been duly authorized and validly issued and will be fully paid
and nonassessable. Such shares of capital stock in each Subsidiary,
after giving effect to the Acquisitions, will be wholly owned by the
Company free and clear of all liens, encumbrances and security
interests. No options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in
the Subsidiaries, after giving effect to the Acquisitions, will be
outstanding, except to the extent set forth in the Registration
Statement, including the exhibits thereto.
(f) The outstanding shares of Common Stock, have been
duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have
been duly authorized and when issued and paid for as contemplated
herein will be validly issued, fully paid and non-assessable. None of
the issued shares of Common Stock of the Company have been issued in
violation of any preemptive or similar rights. No person or entity
holds a right to require or participate in the registration under the
Securities Act of shares of Common Stock of the Company which right
has not been waived by the holder thereof as to the offering
contemplated hereby and by the Registration Statement, or satisfied by
participation by such holder in the offering. No person or entity has
any preemptive or other right of participation or first refusal with
respect to any of the Shares or the issue and sale thereof by the
Company, which rights have not been waived.
(g) The Company's capital stock, including the Shares,
conform with the statements concerning them set forth under the
caption "Description of Capital Stock" in the Effective Prospectus and
the Final Prospectus.
(h) Ernst & Young LLP, who have certified the financial
statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(i) The historical financial statements of the Company
and the Founding Companies, together with related notes and schedules
as set forth in the Registration Statement, present fairly the
combined financial position and the results of operations and cash
flows of the Company and Founding Companies, as the case may be, at
the indicated dates and for the indicated periods. Such financial
statements have been prepared in accordance with generally accepted
accounting principles, consistently applied throughout the periods
involved, and all adjustments necessary for a fair presentation of
results for such periods have been made. The pro forma combined
financial statements set forth in the Registration Statement fairly
present the information required to be presented therein, and such
statements meet the requirements of the Securities Act. No other
financial statements or schedules of the Company or the Founding
Companies are required by the Securities Act or the Rules and
Regulations to be included in the Registration Statement or the
Prospectus. The summary financial and statistical data included in
the Registration Statement presents fairly in all material respects
the information shown therein and has been compiled on a
4
<PAGE> 5
basis consistent with the financial statements presented therein. The
selected financial, operating, and statistical data set forth in the
Prospectus under the captions "Selected Historical Financial and
Operating Data," "Selected Pro Forma Financial Data," and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," fairly present, on the basis stated in the
Preliminary Prospectus, the Effective Prospectus, and the Final
Prospectus, the information set forth therein.
(j) The Company is not and none of the Subsidiaries,
after giving effect to the Acquisitions, will be, or with the giving
of notice or lapse of time or both, will be, in violation of or in
default under its Articles of Incorporation (or similar organizational
instruments) or Bylaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or
by which it or any of its properties is bound except for such defaults
as do not have a material adverse effect on the business or financial
condition of the Company and the Subsidiaries taken as a whole. The
consummation of the transactions contemplated herein and in the
Combination Agreements and the fulfillment of the terms hereof and
thereof will not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, (i) any
indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any Subsidiary is a party, except for any such
breach or default which would not have a material adverse effect on
the Company or any of the Subsidiaries, singly or in the aggregate, or
(ii) the Articles of Incorporation or Bylaws of the Company or any
Subsidiary or any order, rule or regulation applicable to the Company
or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction
over the Company or any Subsidiary or any of their respective
properties or assets.
(k) The Company has full legal right, power and authority
to enter into this Agreement and to sell and deliver the Shares to the
Underwriters as provided herein. The transactions contemplated in
this Agreement have been duly authorized by the Company. This
Agreement has been duly authorized, executed and delivered by the
Company and constitutes a valid and binding agreement of the Company
enforceable against the Company in accordance with its terms.
(l) Each approval, consent, order, authorization,
designation, declaration or filing by or with any court or regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and each
of the Combination Agreements and the consummation of the transactions
contemplated herein and therein (except such additional steps as may
be required by the National Association of Securities Dealers, Inc.
(the "NASD") or may be necessary to qualify the Shares for public
offering by the Underwriters under state securities or Blue Sky laws),
has been or will be obtained or made as of the Closing Date and is or
will be in full force and effect as of the Closing Date (as defined
below). All consents and waivers from all other persons required in
connection with the execution and delivery by the Company of this
Agreement and the Combination Agreements and the consummation of the
transactions contemplated herein and therein have been obtained or
made and are in full force and effect as of the Closing Date.
5
<PAGE> 6
(m) Other than as disclosed in the Preliminary Prospectus
and the Effective Prospectus, there is no litigation, arbitration,
claim, audit, proceeding or investigation pending, or, to the
knowledge of the Company, threatened or contemplated in which the
Company or any of its Subsidiaries is a party or of which any of their
respective properties or assets are the subject which, if determined
adversely to the Company or any such Subsidiary, would individually or
in the aggregate have a material, adverse effect on the condition
(financial or otherwise), results of operations, business or prospects
of the Company and its Subsidiaries taken as a whole. Neither the
Company nor any of its Subsidiaries is in violation of, or in default
with respect to, any statute, rule, regulation, order, judgment or
decree, which violation might have a material adverse effect on the
condition (financial or otherwise), results of operations, business or
prospects of the Company and its Subsidiaries, taken as a whole.
(n) The Company has and the Subsidiaries, after
giving effect to the Acquisitions, will have good and marketable title
in fee simple to all real property, if any, and good title to all
personal property owned by them, in each case free and clear of all
liens, security interests, pledges, charges, encumbrances, mortgages
and defects, except such as are disclosed in the Preliminary
Prospectus and the Effective Prospectus or such as do not materially
and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the
Company and the Subsidiaries; and any real property and buildings held
under lease by the Company or any of its Subsidiaries are held under
valid, existing, and enforceable leases, with such exceptions as are
disclosed in the Preliminary Prospectus and the Effective Prospectus
or are not material and do not interfere with the use made or proposed
to be made of such property and buildings by the Company or such
Subsidiary.
(o) The Company has and the Subsidiaries, after
giving effect to the Acquisitions, will have filed all foreign,
federal, state and local income tax returns which have been required
to be filed and have paid all taxes indicated as due on said returns
and all assessments and charges received by them or any of them to the
extent that such have become due and payable. No deficiency with
respect to any such return has been assessed or proposed.
(p) Since the respective dates as of which information is
given in the Registration Statement and the Effective Prospectus, (i)
neither the Company nor any of the Subsidiaries has incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, other than transactions in the ordinary course business,
that are material to the Company and the Subsidiaries, (ii) the
Company has not purchased any of its outstanding capital stock or
declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock, (iii) there has not been any change in the
capital stock, long-term debt or short-term debt of the Company or any
of the Subsidiaries, and (iv) there has not been any material adverse
change or any development involving a prospective material adverse
change in or affecting the condition (financial or otherwise), results
of operations, business or prospects of the Company and the
Subsidiaries taken as a whole, whether or not occurring in the
ordinary course of business, in each case other than as disclosed in
the
6
<PAGE> 7
Registration Statement and the Effective Prospectus. The Company has
and the Subsidiaries, after giving effect to the Acquisitions,
will have no material contingent obligations which are not disclosed
in the Registration Statement and the Effective Prospectus.
(q) The Company has and each of the Subsidiaries, after
giving effect to the Acquisitions, will have conducted and
operated their businesses in conformity with all the statutes, common
laws, ordinances, decrees, orders, rules and regulations of the
jurisdictions in which each such entity is conducting business.
Without limiting the foregoing, the Company owns or possesses and each
of the Subsidiaries, after giving effect to the Acquisitions, will
own or possess, and the Company is and each of the Subsidiaries,
after giving effect to the Acquisitions, will be in compliance with
the terms, provisions and conditions of all permits, licenses,
franchises, operating certificates, orders, authorizations,
registrations, qualifications, consents or approvals of any court,
arbitrator or arbitral body, or any federal, state, local or foreign
governmental agency, instrumentality or similar organization,
domestic or foreign (hereinafter each individually a "Permit" and
collectively, "Permits") necessary to own and use the properties and
assets of the Company and each of the Subsidiaries, respectively, and
to operate their respective businesses in all locations in which such
businesses are currently being operated and as described in the
Effective Prospectus and the Final Prospectus; as to the Company and
each Subsidiary, each such Permit is and, after giving effect to the
Acquisitions, will be valid and in full force and effect and there is
and, after giving effect to the Acquisitions, will be no litigation,
arbitration, audit, investigation or other proceeding pending or, to
the Company's knowledge, threatened which may cause any such Permit
of and from all authorities to be revoked, withdrawn, canceled,
suspended or not renewed. Neither the Company nor any of the
Subsidiaries is aware of any existing or imminent matter that may
adversely impact any of their operations or business prospects other
than as specifically disclosed in the Effective Prospectus and the
Final Prospectus. No director, officer, agent or employee of the
Company or any of the Subsidiaries, or to the Company's knowledge any
other person associated with or acting for or on behalf of the
Company or any of the Subsidiaries, has directly or indirectly made
any contribution, gift, bribe, rebate, payoff, influence payment,
kickback, or other payment to any person, private or public,
regardless or form, whether in money, property or services (i) to
obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business obtained, or (iii) to obtain special
concessions or for special concessions already obtained for or in
respect of the Company.
(r) The Company is not and none of the Subsidiaries,
after giving effect to the Acquisitions, will be in violation of any
federal or state law or regulation relating to occupational safety
and health or to the storage, handling or transportation of hazardous
or toxic material and the Company has and each Subsidiary, after
giving efffect to the Acquisitions, will have received all
permits, licenses or other approvals required of them under
applicable federal and state occupational safety and health and
environmental laws and regulations to conduct their respective
businesses, and the Company is and each Subsidiary, after giving
effect to the Acquisitions, will be in compliance with all the
terms and conditions of any such permit, license or approval, except
any such violation of law or regulation, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals which
would not, singly or in the aggregate, result in a material adverse
change in or affecting the condition (financial or otherwise), of the
Company and
7
<PAGE> 8
its Subsidiaries taken as a whole, except as described in the
Effective Prospectus and the Final Prospectus.
(s) The Company owns or possesses and each of the
Subsidiaries, after giving effect to the Acquisitions, will own or
possess adequate licenses or other rights to use all patents, patent
applications, trademarks, trademark applications, service marks,
service mark applications, tradenames, copyrights, trade secrets and
know-how or other information (collectively, "Intellectual Property")
described in the Effective Prospectus and the Final Prospectus as
owned by or used by it or which is necessary to the conduct of its
business as now conducted or proposed to be conducted as described in
the Effective Prospectus and the Final Prospectus. The Company
is not and none of the Subsidiaries, after giving effect to the
Acquisitions, will be aware of any infringement of or conflict with
the rights of claims of others with respect to any of the Company's
or any Subsidiaries' Intellectual Property which could have a
material adverse effect on the condition (financial or otherwise),
business or prospects of the Company and the Subsidiaries taken as a
whole. Neither the Company nor any of the Subsidiaries is
aware of any infringement of any of the Company's or any of the
Subsidiaries' Intellectual Property rights by any third party which
could have a material adverse effect on the condition (financial or
otherwise), business or prospects of the Company and the Subsidiaries
taken as a whole.
(t) Neither the Company nor any of its affiliates, has
taken or will take, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the
Shares.
(u) The Company is not and, after giving effect to the
issuance of the Shares and the consummation of the Combination
Agreements, will not be an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the Company is
not, nor will be subject to regulation under said Act.
(v) The Company confirms as of the date hereof that it is
in compliance with all provisions of Section 1 of Laws of Florida,
Chapter 92-198, An Act Relating to Disclosure of Doing Business with
Cuba, and the Company further agrees that if it commences engaging in
business with the government of Cuba or with any person or affiliate
located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or with the Florida
Department of Banking and Finance (the "Department"), whichever date
is later, or if the information reported in t he Prospectus, if any,
concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material way, the Company
will, if required by Florida law, provide the Department notice of
such business or change, as appropriate, in a form acceptable to the
Department.
(w) None of the employees of the Company is and none of
the employees of any Subsidiary, after giving effect to the
Acquisitions, will be covered by collective bargaining agreements. No
labor dispute with the employees of the Company or any Subsidiary
exists or, to the best knowledge of the Company, is threatened or
imminent that could result in a material adverse change in or
affecting the condition, financial or
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<PAGE> 9
otherwise, of the Company and the Subsidiaries taken as a whole,
except as described in or contemplated by the Effective Prospectus and
the Final Prospectus.
(x) The Company is and each of the Subsidiaries,
after giving effect to the Acquisitions, will be insured by insurers
of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in
which they are engaged; all such policies of insurance insuring the
Company and each of the Subsidiaries and their respective businesses,
assets, employees, officers and directors are in full force and
effect; there are no claims by the Company or any Subsidiary under any
such policy as to which any insurer is denying liability or defending
under a reservation of rights clause; neither the Company nor any
Subsidiary has been refused any insurance coverage sought or applied
for; and neither the Company nor any Subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely change or
affect the condition, financial or otherwise, of the Company and the
Subsidiaries taken as a whole, except as described in or contemplated
by the Prospectus.
(y) After giving effect to the Acquisitions, no
Subsidiary will be prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on
such Subsidiary's capital stock, from repaying to the Company any
loans or advances to such Subsidiary from the Company or from
transferring any of such Subsidiary's property or assets to the
Company or any other Subsidiary of the Company, except as described in
or contemplated by the Prospectus.
(z) The Company maintains and each of the Subsidiaries,
after giving effect to the Acquisitions, will maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability of assets; (iii) access to assets is permitted
only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(aa) Each of the Combination Agreements and the
transactions contemplated therein have been duly and validly
authorized by the Company and each of the Founding Companies, and each
of the Combination Agreements has been duly and validly executed and
delivered by the parties thereto, constitutes the valid and binding
obligation of such parties, and there are no (i) statutory dissenters'
rights or (ii) any other contractual rights giving any of the owners
of the Founding Companies rights of acquisition, first offer or first
refusal with respect to any of the Acquisitions which, in any case,
have not been waived or expired by their terms.
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<PAGE> 10
(ab) The Company has delivered to the Representatives true
and correct executed copies of each of the Combination Agreements and
there have been no amendments, alterations, modifications or waivers
thereto or in the exhibits or schedules thereto other than those as to
which you shall previously have been advised and shall not have
reasonably objected by written notice to the Company after being
furnished a copy thereof. The representations and warranties of the
Company set forth in the Combination Agreements, are true and correct
as of the date hereof, and will be true and correct as of the Closing
Date, except to the extent any such representation or warranty was
expressly made as of any other date, in which case such representation
and warranty was true and correct as of such date. The Combination
Agreements conform in all material respects to the descriptions
thereof contained in the Prospectus.
(ac) The shares of Common Stock to be issued and sold in
connection with the Acquisitions (the "Acquisition Common Stock") have
been duly authorized and, when issued and delivered to the purchasers
thereof against payment therefor as provided in the Combination
Agreements, will be validly issued, fully paid and nonassessable, and
the issuance of such shares will not be subject to any preemptive or
similar rights. The sale of the Acquisition Common Stock will be
exempt from the registration requirements of the Securities Act and
will be the subject of an available exemption from the requirements of
all applicable state securities or Blue Sky laws.
(ad) All offers and sales of shares of the Company's
capital stock (including securities convertible into, or exercisable
or exchangeable for, shares of the Company's capital stock) prior to
the date hereof, were at all relevant times exempt from the
registration requirements of the Securities Act, and were the subject
of an available exemption from the requirements of all applicable
state securities or Blue Sky laws.
(ae) The Company has obtained from each of the persons
listed on Schedule C their agreement that for a period of 180 days
from the date of this Agreement they will not, without the prior
consent of the Representatives, offer, sell or dispose of any shares
of Common Stock of the Company, or any securities convertible into,
exercisable for, or exchangeable for any shares of Common Stock or
derivative therefrom owned by them.
(af) Each certificate signed by any officer of the Company
and delivered to the Representatives or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company to
each Underwriter as to the matters covered thereby.
2. Purchase and Sale of the Shares.
(a) On the basis of the representations, warranties, and covenants
contained in this Agreement, and subject to its terms and conditions, the
Company agrees to issue and sell to the Underwriters and each Underwriter
agrees, severally and not jointly, to purchase, at a price of $_____
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<PAGE> 11
per share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule A hereof.
(b) On the basis of the representations, warranties, and covenants
contained in this Agreement, and subject to its terms and conditions, the
Company hereby grants to the several Underwriters an option to purchase, solely
for the purpose of covering over-allotments made in connection with the
distribution and sale of the Firm Shares, the Option Shares at the purchase
price per share as set forth in clause (a) of this Section 2. The maximum
number of Option Shares to be sold by the Company is 337,500. The option
granted hereby may be exercised in whole or in part at any time (but only once)
upon written notice delivered by the Representatives to the Company within 30
days after the date of this Agreement, setting forth the aggregate number of
Option Shares to be purchased and the time and date for delivery and payment
for such Option Shares, as determined by the Representatives, but in no event
earlier than either the First Closing Date (as defined in Section 4 below) or
the second full business day after the exercise of such option, nor later than
the tenth business day after the date of such notice (such time and date being
referred to herein as the "Option Closing Date"). If the date of exercise of
the option is three or more days before the First Closing Date, the notice of
exercise shall set the First Closing Date as the Option Closing Date. Upon
exercise of the option, the Company shall become obligated to sell to the
Underwriters, and, subject to the terms and conditions herein set forth, the
Underwriters shall become obligated, severally and not jointly, to purchase,
for the account of each Underwriter, from the Company, the number of Option
Shares specified in such notice. Option Shares shall be purchased for the
accounts of the Underwriters in proportion to the number of Firm Shares set
forth opposite such Underwriter's name in Schedule A hereto, except that the
respective purchase obligations of each Underwriter shall be adjusted so that
no Underwriter shall be obligated to purchase fractional Option Shares.
3. Offering by the Underwriters. It is understood that the
several Underwriters are to make a public offering of the Firm Shares as soon
after the effective date of the Registration Statement as the Representatives
deem it advisable to do so. The Firm Shares are to be offered to the public at
the initial public offering price set forth in the Prospectus. To the extent,
if at all, that any Option Shares are purchased pursuant to Section 2 hereof,
the Underwriters will offer them to the public on the foregoing terms. It is
further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with an
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Delivery of and Payment for the Shares. Certificates in
definitive form for the Shares to be purchased by each Underwriter hereunder,
and in such denominations and registered in such names as Equitable Securities
Corporation may request upon at least two business days' prior notice to the
Company, shall be delivered by or on behalf of the Company to Equitable
Securities Corporation for the account of such Underwriter, against payment by
such Underwriter on its behalf of the purchase price therefor by: (i) official
bank check or checks (payable in same day funds) payable to the order of the
Company; or (ii) wire transfer of same day available funds to an account
designated in writing by the Company upon at least two business days notice.
In lieu of physical delivery of certificates representing the Shares, the
Shares may be posted to The Depository Trust Company account of Equitable
Securities Corporation for further transfer to the account of the respective
Underwriters against payment of the purchase price for the Shares as described
above. The
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<PAGE> 12
closing of the sale and purchase of the Shares shall be held at the offices of
Sherrard & Roe, PLC, 424 Church Street, Suite 2000, Nashville, Tennessee 37219,
except that if certificates representing the Shares are physically delivered to
the Representatives, such delivery shall be made at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041. The time
and date of such delivery and payment shall be, (a) with respect to the Firm
Shares, at 9:00 a.m., Nashville time, on the third full business day after this
Agreement becomes effective or at such other time and date as the
Representatives and the Company may agree upon in writing, and, (b) with
respect to the Option Shares, at 9:00 a.m., Nashville time, on the date
specified by the Representatives in the written notice given by the
Representatives of the election of the Underwriters to purchase all or part of
such Option Shares, or at such other time and date as the Representatives and
the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the "First Closing Date", such time and date for
delivery of the Option Shares, if not the First Closing Date, is herein called
the "Option Closing Date", and each such time and date for delivery is herein
called a "Closing Date". Such certificates will be available for inspection no
later than 9:30 a.m., New York City time, on the business day preceding the
respective Closing Date at the office of The Depository Trust Company, 55 Water
Street, New York, New York 10041 or at such other location in New York, New
York specified by Equitable Securities Corporation in writing at least two
business days prior to such Closing Date. It is understood that the
Representatives may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for the Shares to be purchased by such
Underwriter or Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
5. Covenants of the Company. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company shall (i) use its best efforts to cause
the Registration Statement to become effective under the Securities
Act as soon as practicable after the execution and delivery of this
Agreement; or (ii) if the Registration Statement has been declared
effective prior to the execution and delivery of this Agreement,
comply with the provisions of and make all requisite filings with the
Commission pursuant to Rules 424, 430A and 434 of the Rules and
Regulations and to notify the Representatives promptly (in writing, if
requested) of all such filings.
(b) The Company will (i) advise the Representatives
promptly when the Registration Statement or any post-effective
amendment thereto shall have become effective; (ii) advise the
Representatives promptly of the receipt of any comments from the
Commission; and (iii) advise the Representatives promptly of any
request by the Commission for any amendment of or supplement to the
Registration Statement, the Effective Prospectus or the Final
Prospectus or for additional information; (iv) prepare and file with
the Commission, promptly upon the Representatives' request, any
amendments of or supplements to the Registration Statement, the
Effective Prospectus or the Final Prospectus which, in the
Representatives' opinion, may be necessary or advisable in connection
with the distribution of the Shares and will use its best efforts to
cause any such amendment to the Registration Statement to be declared
effective as promptly as possible; (v) not file any amendment of the
Registration Statement, or supplement to the Effective
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<PAGE> 13
Prospectus or the Final Prospectus unless the Representatives have
received a reasonable time to review any such proposed amendment or
supplement or to which the Representatives shall have objected in
writing; (vi) advise the Representatives promptly of the issuance by
the Commission or any jurisdiction or other regulatory body of any
stop order or other order suspending the effectiveness of the
Registration Statement, suspending or preventing the use of any
Preliminary Prospectus, the Effective Prospectus or the Final
Prospectus or suspending the qualification of the Shares for offering
or sale in any jurisdiction, or of the institution of any proceedings
for any such purpose; and (vii) use its best efforts to prevent the
issuance of any stop order or other such order and, should a stop
order or other such order be issued, to obtain as soon as possible the
lifting thereof. Any advises delivered by the Company, if requested
by the Representatives, shall be confirmed in writing.
(c) Prior to any public offering of the Shares, the
Company will take or cause to be taken all necessary action and
furnish to counsel for the Underwriters such information as may be
required in connection with qualifying the Shares for offer and sale
under the securities or Blue Sky laws of such jurisdictions as the
Representatives may designate, and the Company will continue such
qualifications in effect for as long as may be necessary to complete
the distribution of the Shares; provided however, that in no event in
connection therewith shall the Company be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction where it is not presently qualified as a foreign
corporation.
(d) The Company will furnish, without charge, to the
Representatives four signed copies of the Registration Statement as
first filed with the Commission and of each amendment to it including
all exhibits, and will furnish to the Representatives or to each
Underwriter designated by the Representatives such number of conformed
copies of the Registration Statement as so filed and of each
amendment, without exhibits, as the Representatives may reasonably
request.
(e) Promptly after the Registration Statement becomes
effective, and from time to time thereafter, for such period as in the
opinion of counsel for the Underwriters, delivery of a prospectus in
connection with sales by an Underwriter or a dealer is required under
the Securities Act, the Company will deliver to, or upon the order of,
the Representatives as many copies of the Prospectus (and of any
amendments or supplements to it), or supplemented, as such Underwriter
or dealer may reasonably request.
(f) Within the time during which a Final Prospectus
relating to the Shares is required to be delivered under the
Securities Act, the Company will comply with the Securities Act and
the Rules and Regulations, as now or hereafter amended or as in effect
from time to time, so far as is necessary to permit the continuance of
sales of or dealing in the Shares as contemplated in this Agreement
and the Prospectus. If during such period any event occurs as a
result of which, in the judgment of the Company or in the opinion of
counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary to amend or
13
<PAGE> 14
supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to
the Registration Statement or supplement to the Prospectus, so that
the statements in the Prospectus as so amended or supplemented will
not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with applicable law,
and to furnish to each Underwriter and to such dealers as the
Representatives shall specify, such number of copies thereof as such
Underwriter or dealer may request (provided however, that, subsequent
to the date nine months after the Registration Statement becomes
effective, any such amendment or supplement shall be at the expense of
the Underwriters.).
(g) The Company shall make generally available to its
securityholders, in the manner contemplated by Rule 158(b) under the
Securities Act, as promptly as practicable and in any event no later
than 45 days after the end of its fiscal quarter in which the first
anniversary of the effective date of the Registration Statement
occurs, an earnings statement covering a period of at least twelve
months beginning after the effective date of the Registration
Statement and complying with the provisions of Section 11(a) of the
Securities Act, and will advise the Representatives in writing when
such statement has been made available.
(h) The Company will furnish to its securityholders
annual reports containing financial statements audited by independent
public accountants and quarterly reports for the first three quarters
of each fiscal year containing unaudited financial statements and
financial information. During the period of five years from the date
hereof, the Company will deliver to the Representatives and, upon
request, to each of the other Underwriters, (i) copies of each annual
report of the Company and each other report (financial or otherwise)
furnished by the Company to its securityholders and (ii) as soon as
they are available, a copy of each report or other publicly available
information of the Company mailed by the Company to its
securityholders generally or filed with any securities exchange or
with the Commission or the NASD.
(i) Except pursuant to this Agreement or with the prior
written consent of the Representatives, for a period of 180 days after
the date of the Prospectus, the Company will not, and the Company has
provided to the Representatives agreements executed by those persons
listed on Schedule C which provide that for a period of 180 days from
the date of the Prospectus, such person or entity will not, directly
or indirectly, offer for sale, sell, grant any options, rights or
warrants with respect to any shares of Common Stock, securities
convertible into Common Stock or any capital stock of the Company, or
otherwise dispose of any shares of Common Stock or such other
securities or capital stock; except that the Company may issue, or
grant options to purchase, shares of Common Stock pursuant to any
option plan existing on the date hereof and described in the
Prospectus.
(j) If at any time during the 25 day period after the
Registration Statement is declared effective, any rumor, publication
or event relating to or affecting the Company shall occur as a result
of which, in the opinion of the Representatives, the market price for
the Shares has been or is likely to be materially affected (regardless
of whether such rumor,
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<PAGE> 15
publication or event necessitates a supplement to or amendment of the
Final Prospectus), the Company will, after written notice from the
Representatives advising it of such effect, promptly prepare, consult
with the Representatives concerning the substance of, and disseminate
a press release or other public statement, reasonably satisfactory to
the Representatives, responding to or commenting on such rumor,
publication or event.
(k) Neither the Company nor any of its officers,
directors of affiliates, will take, directly or indirectly, any action
designed to cause or result in, or which might constitute or be
expected to constitute, stabilization or manipulation of the price of
the Common Stock.
(l) The Company will cause the Shares to be approved for
quotation on the National Association of Securities Dealers Automated
Quotation National Market System at each Closing Date and for at least
one year from the date hereof.
(m) The Company will apply the net proceeds from the sale
of the Shares in the manner set forth under the caption "Use of
Proceeds" in the Prospectus and will file timely and accurate reports
on Form SR with the Commission in accordance with Rule 463 under the
Securities Act.
(n) The Company will use its best efforts to do and
perform all things required or necessary to be done and performed
under this Agreement by it prior to the Closing Date or the Option
Closing Date, as the case may be, and to satisfy all conditions
precedent to the delivery of the Shares.
6. Cost and Expenses. The Company will pay all costs and
expenses incident to the performance of its obligations under this Agreement,
whether or not the transactions contemplated hereby are consummated or this
Agreement is terminated pursuant to Section 11 hereof, including without
limitation all costs and expenses incident to (i) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Securities Act and all other expenses in
connection with the preparation, printing and, if applicable, filing of the
Registration Statement (including all amendments thereto), any Preliminary
Prospectus, the Effective Prospectus, and the Final Prospectus, this Agreement
and any Blue Sky memoranda; (ii) the delivery of copies of the foregoing
documents to the Underwriters; (iii) the filing fees of the Commission and the
NASD relating to the Shares; (iv) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (v) the qualification of the Shares for offering
and sale under state securities and Blue Sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto; (vi)
any listing of the Shares on the Nasdaq National Market System; and (vii) any
expenses for travel, lodging and meals incurred by the Company in connection
with any meetings with prospective investors in the Shares. It is understood,
however, that, except as provided in this Section 6, Section 8 and Section 11
hereof, the Underwriters will pay all of their own costs and expenses,
including the fees of their counsel, stock transfer taxes on resale of any of
the Shares by them, and any advertising expenses relating to the offer and sale
of the Shares.
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<PAGE> 16
7. Conditions of the Underwriters' Obligations. The several
obligations of the Underwriters to purchase and pay for the Shares to be
delivered on each Closing Date shall be subject, in their discretion, to the
accuracy of the representations and warranties of the Company contained herein
as of the date hereof and as of such Closing Date as if made on and as of such
Closing Date, to the accuracy of the statements of the Company's officers made
pursuant to the provisions hereof, to the performance by the Company of all its
covenants and obligations hereunder and to the following additional conditions:
(a) If the Registration Statement as amended to date has
not become effective prior to the execution of this Agreement, such
Registration Statement shall have been declared effective not later
than 10:00 a.m., Nashville time, on the date of this Agreement or such
later date and/or time as shall have been consented to by the
Representatives in writing. The Final Prospectus and any amendment or
supplement thereto shall have been filed with the Commission pursuant
to Rules 424, 430A and 434 within the applicable time period
prescribed for such filing and in accordance with Section 5(a) of this
Agreement; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceedings for that purpose shall have been instituted, threatened
or, to the knowledge by the Company and the Representatives,
contemplated by the Commission; and all requests for additional
information on the part of the Commission shall have been complied
with to the reasonable satisfaction of the Representatives.
(b) No Underwriter shall have advised the Company that
the Registration Statement, Preliminary Prospectus, the Effective
Prospectus or Final Prospectus, or any amendment or any supplement
thereto, contains an untrue statement of fact which, in the opinion of
the Representatives, is or may be material, or omits to state a fact
which, in the opinion of the Representatives, is or may be material
and is or may be required to be stated therein or is or may be
necessary to make the statements therein not misleading and the
Company shall not have cured such untrue statement of fact or stated a
statement of fact required to be stated therein.
(c) You shall have received the opinion of Waller Lansden
Dortch & Davis, counsel for the Company, addressed to the
Underwriters, dated the Closing Date, to the effect that:
(i) The Company has been duly incorporated and
is, after giving effect to the Acquisitions, validly existing
as a corporation in good standing under the laws of the State
of Delaware with the corporate power and authority to own or
lease its properties and conduct its business as described in
the Registration Statement and the Effective Prospectus and
the Final Prospectus and to enter into this Agreement and
perform its obligations hereunder. The Company is duly
qualified to transact business as a foreign corporation and is
in good standing under the laws of each other jurisdiction in
which it owns or leases property, or conducts any business, so
as to require such qualification, except where the failure to
so qualify would not have a material adverse effect on the
financial position, results of operations or business of the
Company and its Subsidiaries.
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<PAGE> 17
(ii) Each of the Subsidiaries of the Company has
been duly incorporated, is validly existing as a corporation
in good standing under the laws of its jurisdiction of
incorporation, and has the corporate power and authority to
own or lease its properties and conduct its business as
described in the Registration Statement and the Effective
Prospectus and the Final Prospectus. Each Subsidiary is duly
qualified to transact business as a foreign corporation and is
in good standing under the laws of each other jurisdiction in
which it owns or leases property, or conducts any business, so
as to require such qualification, except where the failure to
so qualify would not have a material adverse effect on the
financial position, results of operations or business of the
Company and its Subsidiaries.
(iii) The Company's authorized, issued and
outstanding capital stock is as disclosed in the Prospectus.
All of the outstanding shares of Common Stock of the Company
have been duly authorized and validly issued, are fully paid
and nonassessable and conform to the description of such
capital stock contained in the Prospectus. None of the issued
shares of capital stock of the Company or any of its
Subsidiaries has been issued or is owned or held in violation
of any preemptive rights of shareholders or other contractual
rights to purchase, and no person or entity (including any
holder of outstanding shares of capital stock of the Company
or its Subsidiaries) has any preemptive or other rights to
subscribe for any of the Shares.
(iv) All of the outstanding shares of capital
stock of each of the Company's Subsidiaries have been duly
authorized and validly issued, are fully paid and
nonassessable, and are owned beneficially by the Company free
and clear of all liens, security interests, pledges, charges,
encumbrances, shareholders' agreements, voting trusts,
defects, equities or claims of any nature whatsoever. To such
counsel's knowledge, other than the Subsidiaries listed on
Exhibit 21.1 to the Registration Statement, the Company does
not own, directly or indirectly, any capital stock or other
equity securities of any other corporation or any ownership
interest in any partnership, limited liability company, joint
venture or other association other than as disclosed in the
Final Prospectus and the Effective Prospectus.
(v) Except as disclosed in the Preliminary
Prospectus, the Effective Prospectus, and the Final
Prospectus, there are no outstanding (A) securities or
obligations of the Company or any of its subsidiaries
convertible into or exchangeable for any capital stock of the
Company or any of its Subsidiaries, (B) warrants, rights or
options to subscribe for or purchase from the Company or any
such Subsidiary any such capital stock or any such convertible
or exchangeable securities or obligations, or (C) obligations
of the Company or any such Subsidiary to issue any shares of
capital stock, any such convertible or exchangeable securities
or obligations, or any such warrants, rights or options.
(vi) The Shares to be issued and sold by the
Company have been duly authorized and, when issued and
delivered against payment therefor as provided herein, will be
validly issued and fully paid and nonassessable, will conform
to the
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<PAGE> 18
description of the Common Stock contained in the Effective
Prospectus and the Final Prospectus, and no preemptive rights
of shareholders exist with respect to any of the shares or the
issue and sale thereof; the certificates evidencing the Shares
comply with all applicable requirements of Delaware law; and
the Shares have been approved for quotation on the National
Association of Securities Dealers Automated Quotation National
Market System.
(vii) There are no contracts, agreements or
understandings between the Company and any person granting
such person the right to require the Company to file a
registration statement under the Securities Act with respect
to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in
the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or
in any securities being registered pursuant to any other
registration statement filed by the Company under the
Securities Act.
(viii) All offers and sales of the Company's capital
stock prior to the date hereof were at all relevant times duly
registered under the Securities Act or exempt from the
registration requirements of the Securities Act and were duly
registered or the subject of an available exemption from the
registration requirements of the applicable state securities
or Blue Sky laws.
(ix) The execution and delivery by the Company of
this Agreement and each of the Combination Agreements and the
consummation of the transactions herein and therein
contemplated do not and will not conflict with or result in a
breach of any of the terms or provisions of, or constitute a
default under, the Certificate of Incorporation or Bylaws, as
amended, of the Company, or any agreement, lease, contract,
indenture, instrument or obligation of the Company, or by
which the Company may be bound, filed as an exhibit to the
Registration Statement.
(x) The issue and sale of the Shares being issued
at the Closing Date and the performance of this Agreement and
the consummation of the transactions herein contemplated will
not conflict with, or (with or without the giving of notice or
the passage of time or both) result in a breach or violation
of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which the Company or
any of its Subsidiaries is a party or to which any of their
respective properties or assets is subject, nor will such
action conflict with or violate any provision of the Articles
of Incorporation or Bylaws of the Company or any of its
Subsidiaries or any statute, rule or regulation or any order,
judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its
Subsidiaries or any of their respective properties or assets.
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(xi) The Company and its Subsidiaries have and,
after giving effect to the Acquisitions, each shall have good
and marketable title in fee simple to all real property and
good title to all personal property owned by them, in each
case free and clear of all liens, security interests, pledges,
charges, encumbrances, mortgages and defects except such as
are disclosed in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus or such as do not
materially and adversely affect the value of such property and
do not interfere with the use made and proposed to be made of
such property by the Company and its Subsidiaries; and any
real property and buildings held under lease by the Company or
such Subsidiary are and, after giving effect to the
Acquisitions, each shall continue to be held by the Company or
such Subsidiary under valid, existing and enforceable leases
with such exceptions as are disclosed in the Prospectus or are
not material and do not interfere with the use made and
proposed to be made of such property and buildings by the
Company or such Subsidiary.
(xii) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in
connection with the execution and delivery by the Company of
this Agreement and the Combination Agreements and the
consummation of the transactions contemplated herein and
therein (other than as may be required by the NASD or as
required by state securities and Blue Sky laws as to which
such counsel need express no opinion), except such as have
been obtained or made, and except such that, if not obtained,
would not have a material adverse effect on the business or
financial condition of the Company and the Subsidiaries taken
as a whole. No consents or waivers from any other person are
required in connection with the execution and delivery by the
Company of this Agreement and the Combination Agreements and
the consummation of the transactions contemplated herein and
therein, except such as have been obtained or made.
(xiii) To such counsel's knowledge and other than as
disclosed in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus, there is no litigation,
arbitration, claim, proceeding or investigation pending or
threatened in which the Company or any of its Subsidiaries is
a party or of which any of their respective properties or
assets is the subject which, if determined adversely to the
Company or any such Subsidiary, would individually or in the
aggregate have a material adverse effect on the financial
position, results of operations or business of the Company and
its Subsidiaries; and, to such counsel's knowledge, neither
the Company nor any of its Subsidiaries is in violation of, or
in default with respect to, any statute, rule, regulation,
order, judgment or decree, except as described in the
Prospectus, nor is the Company or any Subsidiary required to
take any action in order to avoid any such violation or
default.
(xiv) This Agreement has been duly authorized,
executed and delivered by the Company.
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(xv) The Registration Statement, the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus
and each amendment or supplement thereto (other than the
financial statements and related schedules therein, as to
which such counsel need express no opinion), as of their
respective effective or issue dates, complied as to form in
all material respects with the requirements for registration
statements on Form S-1 under the Securities Act and the rules
and regulations thereunder. The descriptions in the
Registration Statement and the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus of statutes,
legal and governmental proceedings or contracts and other
documents are accurate and fairly present the information
required to be shown; and such counsel do not know of any
statutes, legal or governmental proceedings, or contracts and
other documents required to be described in the Registration
Statement or the Preliminary Prospectus, Effective Prospectus
and the Final Prospectus that are not described as required to
be described in the Registration Statement or Preliminary
Prospectus, Effective Prospectus and the Final Prospectus or
to be filed as exhibits to the Registration Statement which
are not described and filed as required.
(xvi) The Registration Statement is effective under
the Securities Act; any required filing of the Effective
Prospectus and the Final Prospectus pursuant to Rules 424,
430A and 434 has been made in the manner and within the time
period required by such Rules; and no stop order suspending
the effectiveness of the Registration Statement or any part
thereof has been issued and, to such counsel's knowledge, no
proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission.
(xvii) The Company is not, and will not be as a
result of the consummation of the transactions contemplated by
this Agreement, an "investment company," or a company
"controlled" by an "investment company," within the meaning of
the Investment Company Act of 1940.
(xviii) Each Combination Agreement has been duly and
validly authorized, executed and delivered by the Company,
constitutes the valid and binding obligation of the Company
enforceable in accordance with its terms, except as may be
limited by bankruptcy, insolvency or other laws affecting
creditors' rights generally, or as may be modified by a court
of equity, and there are no (i) statutory dissenters' rights
or (ii) to such counsel's knowledge, any other contractual
rights giving any of the owners of the Founding Companies
rights of acquisition, first offer or first refusal with
respect to any of the Acquisitions which, in any case, have
not expired by their terms.
(xix) The Shares to be sold under this Agreement to
the Underwriters have been duly approved for listing on the
Nasdaq National Market.
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<PAGE> 21
(xx) The shares of Acquisition Common Stock have
been duly authorized and, when issued and delivered to the
purchasers thereof against payment therefor as provided in the
Transfer Agreements, will be validly issued, fully paid and
non-assessable, and the issuance of such shares will not be
subject to any preemptive or similar rights. Based solely
upon, as to certain factual matters, the representations and
warranties of all of the parties to the Combination Agreements
and certain other documents delivered in connection therewith
(including, but not limited to, election notices and investor
questionnaires), the sale of the Acquisition Common Stock will
be exempt from the registration requirements of the Act and
will be the subject of an available exemption from the
requirements of all applicable state securities or Blue Sky
laws.
(xxi) Each of the Acquisitions has been consummated
in accordance with the terms of the Combination Agreement
applicable thereto.
Such counsel shall also state that, based upon their
involvement in the preparation of the Registration Statement as
described in such opinion, nothing came to their attention which
caused them to believe that the Registration Statement, or any further
amendment thereto made prior to such Closing Date, on its effective
date and as of such Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading, or that the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus contained or contains
any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading
(provided however, that such counsel need express no belief regarding
the financial statements and related schedules and other financial
data contained in the Registration Statement, any amendment thereto,
or the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus).
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on
certificates of responsible officers of the Company and public
officials and, as to matters of laws of any jurisdiction other than
the state of Tennessee or the United States, upon the opinion of local
counsel reasonably acceptable to the Representatives, provided that
such counsel states such counsel believes that the Underwriters are
justified in relying upon such opinion and copies of such opinion are
delivered to the Representatives and counsel for the Underwriters.
The opinion of Waller Lansden Dortch & Davis shall be rendered
to the Representatives at the request of the Company, and shall so
state therein.
(d) The Representatives shall have received, from counsel
to each of the Combined Companies, the respective opinions, dated the
First Closing Date, addressed to the Underwriters and in form and
substance satisfactory to the Underwriters and counsel to the
Underwriters, required to be delivered under each of the Combination
Agreements.
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<PAGE> 22
(e) The Representatives shall have received from Sherrard
& Roe, PLC, counsel for the Underwriters, an opinion dated the Closing
Date with respect to the incorporation of the Company, the validity of
this Agreement, the validity of the Shares being delivered to the
Underwriters, the Registration Statement, the Preliminary Prospectus,
the Effective Prospectus and the Final Prospectus and other related
matters as the Representatives may reasonably request. Such counsel
shall have received such documents and information from the Company as
they request to enable them to pass upon such matters. In rendering
such opinion, counsel for the Underwriters may rely as to all matters
other than the laws of the states of Delaware and Tennessee or Federal
law upon the opinion of counsel referred to in Paragraph (c) of this
Section 7.
(f) The Representatives shall have received on the
Closing Date or the Option Closing Date, as the case may be, a signed
letter from Ernst & Young LLP, dated the Closing Date or the Option
Closing Date, as the case may be, which shall confirm, on the basis of
a review in accordance with the procedures set forth in the letter
signed by such firm and dated and delivered to the Representatives on
the date hereof, that nothing has come to their attention during the
period from the date five days prior to the date hereof, to a date not
more than five days prior to the Closing Date of the Option Closing
Date, as the case may be, which would require any change in their
letter dated the date hereof if it were required to be dated and
delivered on the Closing Date or the Option Closing Date, as the case
may be. All such letters shall be in form and substance satisfactory
to the Representatives.
(g) Since the date of the latest balance sheet included
in the Registration Statement and the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus, neither the Company nor
any of its Subsidiaries shall have sustained (i) any loss or
interference with their respective businesses from fire, explosion,
flood, hurricane or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as disclosed in the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, or (ii)
any change, or any development involving a prospective change
(including without limitation a change in management or control of the
Company), in or affecting the condition (financial or otherwise),
results of operations, business or prospects of the Company and its
Subsidiaries, otherwise than as disclosed in the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, the
effect of which, in either such case, is in your judgment so material
and adverse as to make it impracticable or inadvisable to proceed with
the purchase, sale and delivery of the Shares being delivered at such
Closing Date as contemplated by the Registration Statement, as amended
as of the date hereof.
(h) The Representatives shall have received a certificate
of the Company, dated the Closing Date and addressed to the
Representatives, signed by the chief executive officer and the
principal financial and accounting officer of the Company, to the
effect that, as of the Closing Date:
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<PAGE> 23
(i) The representations and warranties of the
Company contained in Section 1 of this Agreement are true and
correct, as if made at and as of the Closing Date, and the
Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or
prior to the Closing Date;
(ii) The Registration Statement has become
effective under the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for that purpose have been
initiated or are pending or, to their knowledge, threatened or
contemplated by the Commission;
(iii) All filings required by Rules 424, 430A and
434 of the Rules and Regulations have been made;
(iv) The signers of the certificate have carefully
examined the Registration Statement, the Effective Prospectus
and the Final Prospectus, and any amendments or supplements
thereto, and such documents do not include any untrue
statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein not misleading; and
(v) Since the effective date of the Registration
Statement, there has occurred no event (other than with
respect to the information contained under the caption
"Underwriting") required to be set forth in an amendment or
supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which has not been so set
forth.
(i) The Company shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties contained herein and related matters as
the Representatives may reasonable have requested.
(j) The Shares shall be approved for quotation on the
National Association of Securities Dealers Automated Quotation
National Market System, subject to notice of issuance.
(k) The Company shall have delivered to you written
lock-up agreements from the officers, directors and shareholders of
the Company listed on Schedule C pursuant to which such persons agree
with the Representatives not to offer, sell or dispose of any Common
Stock of the Company, or any securities convertible into or
exercisable or exchangeable therefor or derivative therefrom, for a
period of 180 days after the date of this Agreement, directly or
indirectly, except with the prior consent of Equitable Securities
Corporation.
(l) At or prior to the Closing Date, each Combination
shall have been consummated on terms that conform in all material
respects to the description thereof in the Effective Prospectus and
the Final Prospectus here and the Underwriters shall have received
true and correct copies of all material documents pertaining thereto
and evidence satisfactory to the Underwriters of the consummation
thereof.
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<PAGE> 24
All opinions, certificates, letters and documents delivered pursuant
to this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Representatives and counsel for the
Underwriters. The Company shall furnish to the Representatives such conformed
copies of such opinions, certificates, letters and documents in such quantities
as the Representatives shall reasonably request.
If any of the conditions hereinabove provided for in this Section 7
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company of such termination in writing at
or prior to the Closing Date. In such event, the Company and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 6 and 8 hereof).
The several obligations of the Underwriters to purchase and pay for
the Option Shares hereunder shall be subject, in their discretion, to
satisfaction on and as of the Option Closing Date of each of the foregoing
conditions to purchase the Firm Shares set forth in paragraphs (a) through (h)
above, except that (i) all references to the "Closing Date" shall be deemed to
refer to the Option Closing Date, if it is any date other than the First
Closing Date, and (ii) the opinions required under paragraphs (c) and (d) shall
be revised to reflect the sale of the Option Shares.
8. Indemnification. (a) The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, from and against any and all losses, claims, damages,
liabilities and judgments, joint or several, to which such Underwriter or such
controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the (A)
Registration Statement, any Preliminary Prospectus, the Effective Prospectus
and the Final Prospectus, or (B) any application or other document, or any
amendment or supplement thereto, executed by the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify the Shares under the securities or blue sky laws thereof or
filed with the Commission or any securities association or securities exchange
(each a "Blue Sky Application"); or (ii) the omission or alleged omission to
state in the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus or any Blue Sky Application a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending or appearing as a third-party witness in connection with any such
loss, claim, damage, liability, action or proceeding; provided however, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, or the Final Prospectus, in reliance upon and in conformity with
written information furnished to the Company by any Underwriter specifically
for use therein. This indemnity agreement will be in addition to any liability
which the Company may otherwise have.
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<PAGE> 25
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, its directors, each of its officers
who have signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Effective Prospectus, the Final Prospectus, or
any Blue Sky Application, or caused by the omission or the alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided however, that each
Underwriter will be liable in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter specifically for use therein.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to paragraphs (a) or (b) of this Section 8,
such person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. However, the failure so to notify the indemnifying party will not
relieve the indemnifying party from any liability which it may have to any
indemnified party otherwise than under this Section 8 and will not relieve the
indemnifying party from any liability to the extent it is not materially
prejudiced as a proximate result of such failure. In case any such proceeding
is brought against any indemnified party, the indemnifying party shall be
entitled to participate therein and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof other than reasonable costs of investigation unless
the indemnifying party does not so assume the defense thereof if given the
opportunity to do so. In any such proceeding, any indemnified party shall have
the right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such indemnified party unless (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party or any officers,
directors or controlling persons of the indemnifying party and the indemnified
party and representation of all such parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the reasonable fees and expenses of more than one separate firm for all
Underwriters and all persons, if any, who control Underwriters within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, and (b) the reasonable fees and expenses of more than one
separate firm for the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who
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<PAGE> 26
controls the Company within the meaning of either such Section. It is further
understood that, in any case, the indemnifying party shall, in addition to the
separate firm described above, be responsible for any fees and expenses of
local counsel necessary in connection with any such proceedings and shall pay
all legal fees and expenses promptly as they are incurred. In the case of any
such separate firm for the Underwriters and such control persons of
Underwriters, such firm shall be designated in writing by the Representatives.
In the case of any such separate firm for the Company, and such directors,
officers and control persons of the Company, such firm shall be designated in
writing by the Company. The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment. No
indemnifying party shall, without the prior written consent of the indemnified
party, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action or proceeding, of which indemnification may
be sought hereunder (whether or not any indemnified party is a party to such
claim, action or proceeding) unless such settlement, compromise or consent
includes an unconditional release of the indemnified party from all liability
arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party under any such paragraph shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the indemnified party failed to give the notice required under
Section 8(c) above, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities (or
actions in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Underwriters shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Final Prospectus, bear to the aggregate public offering price of the Shares.
The relative fault of the Company and the Underwriters shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to above in this Section 8(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities
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<PAGE> 27
(or actions in respect thereof) referred to above in this Section 8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omissions or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
in this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus, the Final Prospectus or any
supplement or amendment thereto, each party against whom indemnification may be
sought under this Section 8 hereby consents to the jurisdiction of any court
having jurisdiction over any other indemnifying party, agrees that process
issuing from such court may be served upon him or it by any other indemnifying
party and consents to the service of such process and agrees that any other
indemnifying party may join him or it as an additional defendant in any such
proceeding in which such other indemnifying party is a party.
9. Substitution of Underwriters. If any Underwriter defaults in
its obligation to purchase Shares hereunder and if the total number of Shares
which such defaulting Underwriter agreed but failed to purchase its ten percent
(10%) or less of the total number of Shares to be sold hereunder, the
non-defaulting Underwriters shall be obligated severally to purchase (in the
respective proportions which the number of Shares set forth opposite the name
of each non-defaulting Underwriter in Schedule A hereto bears to the total
number of Shares set forth opposite the names of all the non-defaulting
Underwriters), the Shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase. If any Underwriter so defaults and the total
number of Shares with respect to which such default or defaults occur is more
than ten percent (10%) of the total number of Shares to be sold hereunder, and
arrangements satisfactory to the other Underwriters and the Company for the
purchase of such Shares by other persons (who may include the non-defaulting
Underwriters) are not made within 36 hours after such default, this Agreement,
insofar as it relates to the sale of the Shares, will terminate without
liability on the part of the non-defaulting Underwriters or the Company except
for (i) the provisions of Section 8 hereof, and (ii) the expenses to be paid
or reimbursed by the Company pursuant to Section 6. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section 9. Nothing herein shall relieve shall relieve a defaulting
Underwriter from liability for its default.
10. Notices. All communications hereunder shall be in writing
and, except as otherwise provided herein, will be mailed or delivered as
follows: if to the Underwriters, to Equitable Securities Corporation,
Nashville City Center, Suite 800, 511 Union Street, Nashville, Tennessee
37219, Attention: Philip D. Krebs, with a copy to Sherrard & Roe, PLC, 424
Church Street, Suite 2000, Nashville, Tennessee 37219, Attention: Donald I.
N. McKenzie, Esq.; if to the Company, to Service Experts, Inc., 1134
Murfreesboro Road, P.O. Box 17102, Nashville, Tennessee 37017, Attention:
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<PAGE> 28
Alan R. Sielbeck, with a copy to Waller Lansden Dortch & Davis, 2100 Nashville
City Center, 511 Union Street, Nashville, Tennessee, 37219-1760: Attention:
J. Chase Cole, Esq.
11. Termination. This Agreement may be terminated by the
Representatives by notice to the Company as follows:
(a) At any time prior to the earlier of (i) the time the Shares
are released by the Representatives for sale to the public, or (ii) 11:30 a.m.,
Washington, D.C. time, on the first business day following the date of this
Agreement;
(b) At any time prior to the Closing Date if any of the following
has occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Effective Prospectus and the Final
Prospectus, any material adverse change, or any development, to the reasonable
belief of the Representatives, involving a prospective material adverse change,
in or affecting the condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business affairs, management or
business prospects of the Company and its Subsidiaries taken as a whole,
whether or not arising in the ordinary course of business, (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency after the
date hereof or other national or international calamity or crisis or change in
economic or political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets of
the United States would, in your judgment, make it impracticable or inadvisable
to market the Shares on the terms and in the manner contemplated in the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus,
(iii) suspension of trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market System or
limitation on prices for securities on either such exchange or the Nasdaq
National Market System, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects or will materially and adversely affect the business or
operations of the Company or any of its Subsidiaries, or (v) the declaration of
a banking moratorium by either federal or New York State authorities; (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States; or
(c) As provided in Section 7 of this Agreement.
This Agreement also may be terminated by you, by notice to the
Company, as to any obligation of the Underwriters to purchase the Option
Shares, upon the occurrence at any time prior to the Option Closing Date of any
of the events described in subparagraph (b) above or as provided in Section 7
of this Agreement.
12. Successors. This Agreement has been and is made solely for
the benefit of the Underwriters and the Company and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not
include any purchaser of the
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<PAGE> 29
Shares merely because of such purchase. No purchaser of Shares from any
Underwriter shall be deemed a successor or assign merely because of such
purchase.
13. Miscellaneous. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants of the Company in or pursuant to this Agreement shall
survive the delivery of and payment for the Shares hereunder and shall remain
in full force and effect regardless of (a) any termination of this Agreement,
(b) any investigation made by or on behalf of any Underwriter or controlling
person thereof or by or on behalf of the Company, its directors or officers or
any controlling person of the Company, and (c) acceptance of and payment for
the Shares under this Agreement.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus or the Registration Statement consists of the information set forth
in the last paragraph on the front cover page of the Preliminary Prospectus,
the Effective Prospectus and the Final Prospectus (insofar as such information
relates to the Underwriters), information provided in connection with Item
502(d) of Regulation S-K under the Securities Act and information under the
caption "Underwriting" in the Preliminary Prospectus, the Effective Prospectus
and the Final Prospectus.
You will act for the several Underwriters in connection with the
transactions contemplated by this Agreement, and any action under this
Agreement taken by you jointly or by Equitable Securities Corporation on your
behalf will be binding upon all the Underwriters.
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.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Tennessee, without giving effect to its principles of
conflicts of law.
29
<PAGE> 30
If the foregoing letter is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
SERVICE EXPERTS(R), INC.
By:
-------------------------
Alan R. Sielbeck
Chief Executive Officer
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date
first above written.
Equitable Securities Corporation
Morgan Keegan & Company, Inc.
Acting severally for themselves
and as Representatives of the several
Underwriters listed on Schedule A
By: Equitable Securities Corporation
By:
---------------------------------
Managing Director
30
<PAGE> 31
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF FIRM SHARES
- ----------- ---------------------
TO BE PURCHASED
---------------
<S> <C>
Equitable Securities Corporation..............................................
Morgan Keegan & Company, Inc..................................................
---------
Total......................................................................... 2,250,000
</TABLE>
<PAGE> 32
SCHEDULE B
SCHEDULE OF PREDECESSOR COMPANIES AND SUBSIDIARIES
AFTER GIVING EFFECT TO THE ACQUISITIONS
AC Service & Installation Co., Inc.
Air Experts, a United Services Co., Inc.
Arrow Heating & Air Conditioning, Inc.
Brand Heating & Air Conditioning, Inc.
Coastal Air Conditioning Service, Inc.
Comerford's Heating and Air Conditioning
Contractor Success Group, Inc.
Donelson Air Conditioning Company, Inc.
Gilley's Heating & Cooling, Inc.
Hardwick Air Masters, Inc.
Norrell Heating & Air Conditioning, Inc.
Rolf Coal and Fuel Corp.
Service Experts of Palm Springs, Inc.
Vision Holding Company, Inc.
<PAGE> 33
SCHEDULE C
SCHEDULE OF PERSONS SUBJECT TO LOCK-UP AGREEMENTS
James D. Abrams
Raymond J. De Riggi
R. Edward Hutton, Jr.
Anthony M. Schofield
Alan R. Sielbeck
Timothy G. Wallace
John R. Young
<PAGE> 1
EXHIBIT 2.1
COMBINATION AGREEMENT
This COMBINATION AGREEMENT (this "Agreement") is made and entered into
this ______ day of June, 1996, by and among each of the shareholders
(individually, a "Shareholder" and collectively, the "Shareholders") of
__________________________, a __________________ corporation (the "Company"),
the Company and Service Experts, Inc., a Delaware corporation ("SEI").
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 Shareholders own all of the issued and outstanding shares
of capital stock of the Company (the "Shares");
WHEREAS, SEI has adopted a plan under Section 351 of the Internal
Revenue Code of 1986, as amended (the "Code"), pursuant to which (i) the
Shareholders, the shareholders of certain other HVAC service and replacement
companies similar to the Company and the shareholders of Contractor Success
Group, Inc., a corporation providing proprietary products and marketing,
management, educational and consulting services to over 270 subscribing HVAC
companies, will contribute all of their shares of capital stock to SEI in
exchange for shares of Common Stock, $.01 par value per share, of SEI (the "SEI
Common Stock") and cash and (ii) such transferees of such shares of Common
Stock will, together with purchasers of shares of Common Stock in the initial
public offering of SEI Common Stock (the "IPO"), control SEI upon the Closing
(the "Exchange");
WHEREAS, in accordance with the Exchange, the Shareholders desire to
transfer the Shares to SEI, and SEI desires to purchase the Shares from the
Shareholders, upon the terms and conditions set forth in this Agreement;
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 the Shares. In accordance with the terms
and conditions set forth in this Agreement, the Shareholders will transfer,
convey, assign and deliver all of the Shares, free and clear of all liens,
encumbrances and claims whatsoever, to SEI in exchange for a combination of
shares of SEI Common Stock and cash.
Section 2. Purchase Price.
(a) Determination of Purchase Price. The
purchase price (the "Purchase Price") for the Shares shall be an
amount equal to the "Company's Percentage" of 80% of the value of SEI
at the time of the IPO, as agreed to by the managing underwriters of
the IPO and management of SEI, assuming the Exchange, less the amount
of the net proceeds of the IPO remaining after cash payments made in
connection with the Exchange. The Company's Percentage shall be equal
to the percentage the Company's "Adjusted Net Income" represents of
the sum of the Adjusted Net Incomes of all of the HVAC companies
participating in the Exchange. Schedule 2(a)(i) sets forth a list of
each company expected to participate in the Exchange and its
respective Adjusted Net Income and Percentage. Adjusted Net Income
was calculated from the Company's net income presented in its
financial statements for the 1995
<PAGE> 2
calendar year (prepared in accordance with generally accepted
accounting principles), adjusted to exclude all nonrecurring income
and expenses 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 though the Company had been subject to
corporate income taxes in calendar year 1995 and (iv) such additional
adjustments as are reflected on Schedule 2(a)(ii).
(b) Adjustments to Purchase Price.
(i) In the event the Company's
shareholders' equity (based on the Company's unaudited
financial statements as of June 30, 1996) as a percentage of
net sales (based on the Company's audited financial statements
as of December 31, 1995) 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%).
(ii) 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 (as
hereinafter defined) portion of the Purchase Price and then to
the shares of the SEI Common Stock.
(iii) In the event the Company has any
indebtedness, other than indebtedness incurred in connection
with the purchase of fixed assets after December 31, 1995, the
Purchase Price will be reduced by an amount equal to the
indebtedness outstanding 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.
In the event the Company's shareholders' equity (based on the
Company's unaudited financial statements as of June 30, 1996)
as a percentage of net sales (based on the Company's audited
financial statements as of December 31, 1995) is greater than
ten percent (10%), any reduction in Purchase Price pursuant to
this subsection (iii) shall be offset up to the amount equal
to the distribution required to result in shareholders' equity
as a percentage of net sales equaling ten percent (10%).
(c) Payment of Purchase Price. The Purchase
Price shall be payable to the Shareholders at Closing as follows:
(i) SEI shall pay to the Shareholders up
to an aggregate of 25% of the Purchase Price by certified or
official bank check, in next day funds, or in such other form
and manner as may be mutually satisfactory (the "Cash"). Each
Shareholder shall be entitled to elect the percentage of the
Purchase Price to be paid in Cash up to a maximum of 25%.
Such percentage shall be set forth on the line below such
Shareholder's signature on page 31 of this Agreement.
(ii) SEI shall pay the remainder of the
Purchase Price by issuing shares of SEI Common Stock to the
Shareholders. SEI shall issue to the Shareholders that number
of shares, rounded to the nearest whole number, of SEI Common
Stock which is equal to the quotient of (i) the Purchase Price
less Cash, divided by (ii) the offering price per share of the
SEI Common Stock in the IPO.
2
<PAGE> 3
(iii) The Purchase Price shall be
allocated among the Shareholders as set forth on Schedule
2(c)(iii) attached hereto.
(iv) An aggregate of 10% of the shares of
SEI Common Stock to be issued to the Shareholders shall be
held in escrow pursuant to the terms and conditions of the
escrow agreement attached hereto as Schedule 2(c)(iv) (the
"Escrow Agreement").
Section 3. 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 9 and 10 hereof, or
the waiver thereof, simultaneously with the closing of the IPO as described in
Section 9(k) hereof (the "Closing Date"), at the offices of Waller Lansden
Dortch & Davis, in Nashville, Tennessee, or at such other location as the
parties shall mutually agree.
Section 4. Shareholder Acknowledgments. The Shareholders hereby
acknowledge the following:
(a) The issuance of the SEI Common Stock will not
be registered under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon exemptions from registration
contained in the Securities Act, and SEI's reliance upon such
exemptions is based in part upon the Shareholders' representations,
warranties and agreements contained in this Agreement.
(b) The following legends shall appear on the
certificates for the shares of SEI Common Stock issued hereunder. The
undersigned agrees not to transfer the shares, that SEI may refuse to
permit transfer of the shares and that the shares must be held
indefinitely in the absence of compliance with the terms of such
legends:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ISSUED AND SOLD IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND MAY NOT BE SOLD,
OFFERED FOR SALE OR OTHERWISE DISPOSED OF OTHER THAN
(i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
OR AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OR (ii) AN OPINION OF COUNSEL
ACCEPTABLE TO THE ISSUER OF COMPLIANCE WITH THE
SECURITIES ACT AND APPLICABLE SECURITIES LAWS OF ANY
OTHER JURISDICTION. THE ISSUER SHALL BE ENTITLED TO
REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT WITH
RESPECT TO COMPLIANCE WITH THE ABOVE LAWS.
(c) An investment in the shares of SEI Common
Stock involves a high degree of risk of loss by the Shareholders.
There are substantial restrictions on the transferability of the
shares of Common Stock acquired pursuant hereto.
(d) SEI is under no obligation to register the
shares of SEI Common Stock under the Securities Act or take any other
action necessary in order to make any exemption available for the sale
without registration of the shares issued hereunder.
(e) While it is the mutual intention of the
parties hereto that the Exchange shall be a part of an overall
transaction intended to be characterized under Section 351 of the
3
<PAGE> 4
Code, (i) SEI makes no representation or warranty regarding the tax
treatment of this Agreement or the Exchange, (ii) the Closing is not
subject to a condition that an Internal Revenue Service ruling be
obtained as to the federal income tax consequences of this Agreement
or the Exchange and (iii) the Company and the Shareholders shall look
to their respective advisors for advice concerning the tax
consequences of this Agreement and the Exchange.
Section 5. Representations and Warranties of the Shareholders.
Each Shareholder, severally and not jointly, represents and warrants to SEI as
follows as of the date hereof and also as of the Closing Date:
(a) Title to the Shares. 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. The Shareholders own the number of Shares set
forth opposite their respective names on Schedule 5(a) attached
hereto, which Shares collectively represent all of the outstanding
capital stock of the Company.
(b) Organization, Authority and Capacity. If
Shareholder is a natural person, Shareholder has the full authority
and capacity necessary to execute, deliver and perform his or her
obligations under this Agreement and all other agreements, instruments
and documents to be executed and delivered in connection with this
Agreement and the transactions contemplated hereby (the "Transaction
Documents") to be executed and delivered by Shareholder. If
Shareholder is not a natural person, (i) 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 Shareholder, and
(ii) 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
Shareholder's ability to perform its obligations under the Transaction
Documents to be executed and delivered by Shareholder.
(c) Authorization and Validity. If Shareholder
is a natural person, Shareholder has the legal capacity required for
executing, delivering and performing the Transaction Documents to be
executed and delivered by Shareholder. If Shareholder is married and
Shareholder's interest in the Company constitutes community property,
the Transaction Documents to be executed and delivered by
Shareholder's spouse have been or will be, as the case may be, duly
executed and delivered by Shareholder's spouse and constitute or will
constitute the legal, valid and binding obligations of 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 Shareholder is not a natural
person, (i) the execution, delivery and performance of the Transaction
Documents to be executed and delivered by Shareholder have been duly
authorized by all necessary action on the part of Shareholder, and
(ii) the Transaction Documents to be executed and delivered by
Shareholder have been or will be, as the case may be, duly executed
and delivered by Shareholder and constitute or will constitute the
legal, valid and binding obligations of 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. Except as set forth on Schedule 5(d), the execution,
delivery and performance by Shareholder of the Transaction Documents
to be executed and delivered by Shareholder (i) do not require the
consent
4
<PAGE> 5
of or notice to any governmental or regulatory authority or any other
third party; (ii) if Shareholder is not a natural person, will not
conflict with any organizational document of 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 Shareholder is subject or by
which 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 Exchange; and
(v) will not create any encumbrance or restriction upon the Shares.
(e) Interested Transaction. Except as set forth
on Schedule 5(e), Shareholder is not a party to any contract, loan or
other transaction with the Company and does not have 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
5(e), Shareholder is not an employee, consultant, partner, principal,
director or owner of, and does not have 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) Investment Intent.
(i) Each Shareholder is exchanging the
Shares owned by such Shareholder for shares of SEI Common
Stock to be held for the Shareholder's own account for
investment and not as agent or nominee, with no present
intention of dividing his participation with others or
reselling any such shares, and not with a view to the resale
or distribution in whole or in part thereof. Nothing herein
contained, however, shall prevent a Shareholder from
requesting SEI to register the shares so issued in the name of
either the Shareholder's nominee, members of the immediate
family of the Shareholder or an "affiliate" of the Shareholder
as such term is defined in the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or in regulations
promulgated thereunder. If a Shareholder submits such a
request, SEI will not withhold its consent unreasonably. Each
Shareholder acknowledges that appropriate stop transfer
instructions will be entered in the stock transfer records of
SEI. Each Shareholder recognizes that, in view of the matters
set forth in this Section 5, he must bear the economic risk of
the investment represented by the Exchange for an indefinite
period.
(ii) Each Shareholder hereby acknowledges
receipt of the Confidential Private Placement Memorandum dated
as of June 11, 1996, as supplemented, amended or revised at
the date hereof (the "Memorandum"), containing information
relating to SEI, its business, the Company and the Exchange.
Each Shareholder agrees that he will promptly advise SEI of
any information concerning him or the Company contained in the
Memorandum, or any prior draft thereof, which he believes is
or may be materially incorrect or which does or may omit any
information that would be necessary to make such statements
therein not misleading, in each case so as to permit SEI to
provide a supplement to the Memorandum with respect to such
matters. Each Shareholder represents that his financial
condition is such that he can indefinitely bear the economic
risk of the investment in SEI Common Stock and such
Shareholder, either alone or with his representatives, has
such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and risks
of an investment in SEI.
(g) Suitability. Each Shareholder has carefully
considered and has, to the extent he believes such discussion
necessary, discussed with his professional legal, tax and
5
<PAGE> 6
financial advisers the suitability of the transaction hereunder for
his particular tax and financial situation.
(h) Access to Information. Each Shareholder
represents that he has had access during the course of this
transaction to such information relating to SEI as he has desired,
that he has had the opportunity to ask questions of and receive
answers from SEI and its representatives concerning the terms and
conditions of the transaction 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 6. Representations and Warranties of the Company and the
Shareholders. The Company and the Shareholders jointly and severally represent
and warrant 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
6(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 the Transaction Documents to be executed and
delivered by the Company 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
stockholders, the Board of Directors and committees of the
Board of Directors of the Company, and no meeting of any such
stockholders, 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. The Shares, constituting all
authorized and outstanding capital stock of the Company, are
accurately described on Schedule 6(b). 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(a) 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 any of the Shares. Except as set forth in Schedule 6(b) ,
to the knowledge of the Company and the Shareholders, there has been
no transaction or action taken with respect to any Shares in
contemplation of the Exchange that
6
<PAGE> 7
would prevent the Company from accounting for the Exchange on a
"reorganization accounting" basis pursuant to Section 351 of the Code.
(c) Authorization and Validity. The execution,
delivery and performance by the Company 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 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. Neither
the Company nor the Shareholders are 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 either the Company or the
Shareholders are 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 6(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 6(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 6(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 Ernst & Young LLP,
independent auditors, copies of which are attached hereto as Schedule
6(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 6(f)(i) are collectively, together with the
notes thereto, referred to as the "Financial Statements." Except as
reflected on Schedule 6(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.
7
<PAGE> 8
(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 6(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 6(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;
(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;
8
<PAGE> 9
(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 6(h).
(i) Ownership of Properties. Schedule 6(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 6(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 6(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 6(j), the Company has paid all taxes and
assessments (including, without limitation, income, excise,
unemployment, social security, occupation, franchise, property, sales
and use
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<PAGE> 10
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 6(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 6(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
Exchange. Except as set forth on Schedule 6(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 6(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 6(l)(iv).
(v) Neither the Company nor any
Shareholder has 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,
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<PAGE> 11
presence or disposal of any Hazardous Substances that could
form the basis of any Environmental Claim against the Company,
and neither the Company nor any Shareholder knows of any such
actions, activities, circumstances, conditions, events or
incidents.
(vii) The Real Property and, to the best
knowledge of the Shareholders and 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 6(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 6(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
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<PAGE> 12
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 and the Shareholders,
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 either the Company or the Shareholders 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 to SEI of the Shares
or which could inhibit or prevent the Shareholders in their ability
effectively to transfer to or vest in SEI good and marketable title to
the Shares.
(n) No Undisclosed Liabilities. With the
exception of the liabilities set forth on Schedule 6(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
neither the Company nor the Shareholders know or have any 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 6(n).
(o) Employees and Labor Matters.
(i) Schedule 6(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
Shareholders' 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 6(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 and the Shareholders,
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<PAGE> 13
threatened before any federal, state or local agency
or court, and, to the knowledge of the Company and
the Shareholders, 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 and the Shareholders, 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 6(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 6(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 "multiemployer
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
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<PAGE> 14
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 6(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. Neither the Company
nor any of the Shareholders is currently in receipt of any notice of
any violation of, and each 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
6(r), there is no litigation, arbitration, governmental claim,
investigation or proceeding pending or threatened against the Company
or the Shareholders, at law or in equity, before any court,
arbitration tribunal or governmental agency. No such proceeding set
forth in Schedule 6(r) concerns the ownership or other rights with
respect to the Shares. The Shareholders know of no facts on which
material claims may be hereafter made against the Company or the
Shareholders. All claims and litigation against the Company or the
Shareholders are fully covered by insurance, except as indicated on
Schedule 6(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, the Shareholders or the
Shares. The Company and the Shareholders are 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 6(s) hereof. Neither the Company, nor, to the knowledge
of the Company and the Shareholders, 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, to the
Shareholders' knowledge, no such investigation or proceeding is
pending or being threatened.
(t) Certain Payments. Neither the Shareholders,
the Company nor any 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
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<PAGE> 15
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 6(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. Neither the Shareholders
nor the Company has 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.
(w) Disclosure.
(i) No representation or warranty made
herein by the Company or any of the Shareholders, nor in any
statement, certificate or instrument to be furnished to SEI by
the Company or any of the Shareholders 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 any of the
Shareholders that has specific application to either the
Shareholders or the Company (other than general economic or
industry conditions) and that materially adversely affects the
transferability of 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
Shareholders and the Company understand and intend that SEI and its
management will rely upon the representations of the Shareholders and
the Company made in this Agreement, and they are entitled to rely upon
each and all of the same without further inquiry.
Section 7. Representations and Warranties of SEI. SEI hereby
represents and warrants to the Shareholders 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 the State of Delaware. SEI 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 and (ii) 10,000,000 shares of Preferred Stock, $.01 par
value per share. The shares of SEI Common Stock being issued
hereunder have been duly and validly authorized, and upon receipt of
the Shares and issuance pursuant to this Agreement, will be validly
issued, fully paid and nonassessable. No stockholder of SEI has any
preemptive rights with respect to the issuance of the shares of SEI
Common Stock to the Shareholders hereunder.
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<PAGE> 16
(c) Authorization and Validity. The execution,
delivery and performance by SEI 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 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) 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 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) Governing Documents. True and correct copies
of the organizational documents and all amendments thereto of SEI
(certified by the Secretary of State of the State of Delaware) and
copies of the Bylaws of SEI have been provided to the Company and the
Shareholders. The Company and the Shareholders have previously been
provided with access to SEI's minutes, and such minutes accurately
reflect all proceedings of the shareholders and board of directors of
SEI (and all committees thereof). The stock record books of SEI,
which have been made available to the Company and the Shareholders for
review, contain true, complete and accurate records of the stock
ownership of SEI.
(f) No Operations to Date. As of the date
hereof, SEI has conducted no business operations other than planning
for future operations, negotiating transactions similar to those
contemplated hereby and planning and preparing for the IPO.
(g) 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.
(h) No Broker's Fees. Except as set forth on
Schedule 7(h), 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.
(i) 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 or any of the
Shareholders 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.
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<PAGE> 17
Section 8. Additional Covenants and Agreements.
(a) Access to Information. The Shareholders and
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 the Shareholders, and
their representatives, access, upon reasonable notice, to all of SEI's
properties, books and records and available information concerning the
other Combining Companies as the Company and the Shareholders 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 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,
neither the Company nor the Shareholders will, 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;
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<PAGE> 18
(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;
(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 Sections 5 or 6 untrue, or
prevent the satisfaction of any condition set forth in Section
9;
(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 and
the Shareholders 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 and each of the
Shareholders 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 and each of
the Shareholders 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, the Shareholders and SEI hereunder.
(f) Licenses; Permits. The Company and each of
the Shareholders 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.
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(g) No Solicitation of Other Offers. Neither the
Company, acting through any director, officer or other agent
(including any investment banker, attorney, accountant or other
representative retained by it), nor any of the Shareholders shall
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. Neither the Company nor the
Shareholders will, 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 ordinary
course of business. The Company and the Shareholders shall promptly
advise SEI in writing of any such inquiries, proposals or discussions
received by the Company after the date hereof.
(h) Lock-Up of Acquired Stock. Each Shareholder
and the Company agrees that he, she or it will not, directly or
indirectly, without the prior written consent of SEI, 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 SEI Common Stock or any securities convertible
into, or exchangeable or exercisable for, SEI Common Stock for a
period of 180 days after the Closing Date, except as contemplated
hereby. Each Shareholder and the Company agrees that the agreement in
the previous sentence shall inure to the benefit of the prospective
managing underwriters (the "Underwriters") of the IPO and further
agrees to confirm in writing said agreement specifically for the
benefit of the Underwriters.
(i) Availability of Rule 144 Information. SEI
shall register the SEI Common Stock under the Exchange Act
simultaneously with the registration of the IPO under the Securities
Act, or as soon as practicable thereafter, and, for so long as SEI is
subject to the Exchange Act, shall take all actions necessary to
enable the Shareholders to sell any shares of SEI Common Stock
received by them without registration under the Securities Act within
the limitations of the safe harbor provided by Rule 144 under the
Securities Act, as such rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Securities and
Exchange Commission (the "Commission"), including filing on a timely
basis all reports required to be filed by the Exchange Act. Upon the
request of a Shareholder, SEI shall deliver to such Shareholder a
written statement as to whether it has complied with such requirement.
(j) Approval of Transactions. Subject to Section
10, each Shareholder, through the execution and delivery of this
Agreement, irrevocably votes for and approves this Agreement and the
transactions contemplated hereby in its capacity as a holder of
Shares, and each such Shareholder does hereby waive any required
notice for any meeting concerning such matters. Subject to Section
10, at any further meeting of the Shareholders of the Company called
to vote on this Agreement and the transactions contemplated hereby or
in any other circumstances upon which a vote, consent or other
approval with respect to this Agreement and the transactions
contemplated hereby is sought, such Shareholder shall vote (or cause
to be voted) such Shareholder's Shares in favor of this Agreement and
the transactions contemplated hereby. Each Shareholder acknowledges
and agrees that he, she or it has had adequate opportunity to review
the terms and conditions of this Agreement and to seek independent
legal, tax and financial advice.
(k) Cooperation in Preparation of the
Registration Statement. The Shareholders and the Company shall
furnish or cause to be furnished to SEI and the Underwriters all
information concerning the Company and the Shareholders reasonably
required for inclusion
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<PAGE> 20
in, and will cooperate with SEI and the Underwriters in the
preparation of, a registration statement on Form S-1 to be filed with
the Commission in connection with the IPO (the "Registration
Statement") and the prospectus included therein (including audited
financial statements of the Company, prepared in accordance with
generally accepted accounting principles, in form suitable for
inclusion in the Registration Statement). The Company and the
Shareholders agree promptly to advise SEI at any time during the
period in which the prospectus related to the IPO is required to be
delivered under the Securities Act, if any information contained in
the Prospectus concerning the Company or the Shareholders is or
becomes incorrect or incomplete in any material respect and to provide
the information needed to correct such inaccuracy. Each of the
Company and the Shareholders represents, warrants and agrees that the
information provided for inclusion in the Registration Statement will
not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. If requested, the Company will
cause its executive and financial officers to execute any
documentation reasonably required by SEI's independent public
accountants or by any stock exchange or automated trading system on
which the SEI Common Stock is traded, confirming any matters as may be
required in connection with the IPO or involving the tax or accounting
treatment concerning the Exchange.
(l) Contingent Nature of the Public Offering. The
Company and the Shareholders acknowledge and agree that there exists
no firm commitment, binding agreement, promise or other assurance of
any kind, whether express or implied, that the Registration Statement
will be filed with or declared effective by the Commission or that the
IPO will occur at a particular price, within a particular range of
price or at all, and neither SEI nor any of its officers, directors,
agents or representatives nor any prospective underwriter of the IPO
shall have any liability to the Company or the Shareholders, or any
person affiliated therewith, for any failure of the Registration
Statement to be filed with or declared effective by the Commission or
for any failure of the IPO to occur at a particular price, within a
particular range of prices, or at all. Further, the Company and the
Shareholders acknowledge that the decision of the Company and the
Shareholders to enter into this Agreement has been made independent
of, and without reliance on, any statements, opinions, general
solicitation, advertising or other communications of any prospective
underwriter, or due diligence investigations which have been or will
be made or performed by any prospective underwriter in connection with
the IPO, concerning the prospects of completing the IPO or the
business condition or prospects of SEI.
(m) Confidentiality and Public Announcements. The
Company and each of the Shareholders agree not to take, fail to take
or permit any action, the result of which would be violative or in
conflict with any of the terms and conditions of those certain
Confidentiality Agreements between the Company, each of the
Shareholders and SEI (the "Confidentiality Agreements"). Neither the
Company nor the Shareholders, nor any of their representatives, shall
make any public announcement with respect to this Agreement, the
Combination or the IPO without the prior written consent of SEI.
(n) 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 the Purchase Price 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.
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<PAGE> 21
(o) Shareholder Covenant. Each Shareholder acknowledges
and agrees that such Shareholder does not have and will not claim any
individual interest in the Assets and, after the Closing, will claim
no further equity or other interest in the Company.
(p) Subchapter S Matters. If the Company is an "S"
corporation, the Shareholders shall cause to be prepared and filed, at
their 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 Shareholders 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
Shareholders to complete such returns at no cost to the Shareholders.
(q) Purchase of Capital Stock of Future University. Each
Shareholder agrees to transfer, convey, assign and deliver to SEI all,
if any, shares of capital stock (the "Future Shares") of Future
University, Inc., a Delaware corporation ("Future University"), owned
by such Shareholder, free and clear of all liens, encumbrances and
claims whatsoever, in exchange for $2,000 per Future Share. The
Shareholders own the number of Future Shares set forth opposite their
respective names on Schedule 8(q) attached hereto.
(r) Delivery of Schedules. The Shareholders and the
Company agree to provide to SEI all Schedules required by this
Agreement on or before June 26, 1996. Such Schedules shall be
satisfactory in form and substance to SEI in its sole discretion.
Section 9. Conditions to the Obligations of SEI. The obligation
of SEI to consummate the transactions contemplated by this Agreement is subject
to the following conditions:
(a) Representations and Warranties. The
representations and warranties of the Shareholders and 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.
(b) Performance; Document Delivery. The
Shareholders and 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 5 business days
prior to Closing;
(ii) A certificate dated as of the
Closing Date signed by the duly authorized officers of the
Company and by each of the Shareholders certifying that the
representations and warranties of the Company and the
Shareholders set forth herein are true and correct in all
material respects as of the Closing Date and that the Company
and each of the Shareholders have fulfilled all of the
conditions of this Section 9;
(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;
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<PAGE> 22
(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 purchased by SEI, 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;
(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.
(c) 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.
(d) Legal Matters. SEI shall have received a
favorable review by SEI's counsel of legal matters, including the
transfer of the Shares and the approval of the transaction by the
Board of Directors and Shareholders of the Company, if required.
(e) Opinion of Counsel. SEI shall have been
furnished with a favorable opinion of counsel to the Shareholders,
dated the Closing Date, substantially in the form attached hereto as
Schedule 9(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) Sale of Real Estate and Non-Operating Assets.
Effective as of June 30, 1996, the Company shall have sold or
otherwise disposed of all real property and other Assets listed on
Schedule 9(g)(i) not necessary, required or used in the operation of
the Company's HVAC or other operating business. In addition, the
Company shall have leased the real property listed on Schedule
9(g)(ii) from the owner thereof substantially on the terms and
conditions of the lease agreement attached hereto as Schedule
9(g)(iii).
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<PAGE> 23
(h) 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.
(i) Escrow Agreement. SEI and each of the
Shareholders shall have entered into the Escrow Agreement.
(j) Employment Agreements. SEI and certain
employees of the Company shall have entered into employment agreements
substantially in the form attached hereto as Schedule 9(j).
(k) Effectiveness of the Registration Statement.
The Registration Statement shall have been declared effective by the
Commission, and the underwriters named therein shall have agreed to
acquire and sell to the public, subject to customary conditions set
forth in the underwriting agreement, shares of SEI Common Stock. The
closing and sale of the Common Stock to the underwriters of the IPO
shall occur simultaneously with the Closing hereunder.
(l) The Exchange. SEI shall have closed
combination agreements with other combining companies resulting in
revenue and pre-tax net income on a pro forma basis for SEI of at
least $50 million and $7.5 million, respectively.
(m) 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.
Section 10. Conditions to the Obligations of the Shareholders and
the Company. The obligation of the Shareholders to consummate the transactions
contemplated by this Agreement is subject to the following conditions:
(a) Representations and Warranties. The
representations and warranties of SEI set forth herein in Section 7
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 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 Shareholders and the
Company of the following documents:
(i) The Purchase Price for the Shares;
(ii) A good standing certificate
regarding SEI certified by the Secretary of State of the State
of Delaware dated within 5 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
23
<PAGE> 24
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 10;
(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 Shareholders an opinion of Waller Lansden Dortch & Davis,
counsel to SEI, dated the Closing Date, substantially in the form
attached hereto as Schedule 10(c).
(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.
(e) Minimum Purchase Price. The Purchase Price,
prior to any adjustments pursuant to Section 2(b), shall be at least
$___________; provided, however, that in the event the Purchase Price,
prior to any adjustments pursuant to Section 2(b), is less than
$_________, the Company, in its sole discretion, may pay to the
Shareholders, by certified or official bank check, in next day funds,
or in such other form and manner as may be mutually satisfactory, an
amount required to result in the Purchase Price, prior to any
adjustments pursuant to Section 2(b), equaling $__________.
Section 11. Termination. This Agreement may be terminated at any
time prior to the Closing in the following ways:
(a) by the mutual consent in writing of the
Company and SEI;
(b) by SEI if there has been a material violation
or breach by the Shareholders or 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 Section 9 hereof have not been satisfied by December 31, 1996
or have not been waived by SEI in writing;
(c) 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
Section 10 hereof have not been satisfied by December 31, 1996 or have
not been waived by the Company in writing; or
(d) In the event this Agreement is terminated in
accordance with 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
24
<PAGE> 25
breach or default by such party with respect to its representations,
warranties, covenants or agreements contained in the Transaction
Documents.
Section 12. Expenses. Each of the parties hereto shall bear and
pay all costs and expenses incurred by it or on its behalf in connection with
the Exchange and the IPO, including its own legal, accounting and audit fees;
provided that (i) in the event the IPO is consummated, all audit fees incurred
by the Company will be reimbursed to the Company from the proceeds of the IPO
and (ii) in the event the IPO is consummated and SEI fails to perform its
obligations hereunder, SEI shall pay all audit fees incurred by the Company in
connection with this transaction.
Section 13. Indemnification.
(a) Indemnification of SEI.
(i) Each Shareholder, severally and not
jointly, 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:
(A) the untruth, inaccuracy or
breach of any representation or warranty made by such
Shareholder pursuant to Section 5 of this Agreement
or any other Transaction Document;
(B) the nonfulfillment or breach of
any covenant, agreement or obligation of such
Shareholder contained in this Agreement or any other
Transaction Document;
(C) any untrue statement of a
material fact relating to such Shareholder that was
made in reliance upon and in conformity with
information furnished by such Shareholder to SEI and
is contained in the Memorandum, any preliminary
prospectus, the Registration Statement or any
prospectus forming a part thereof, or any amendment
thereof or supplement thereto, or any omission by
such Shareholder to state therein a material fact
relating to such Shareholder required to be stated
therein or necessary to make such statements therein
not misleading, and which is not provided in writing
to SEI by such Shareholder; and
(D) 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).
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(ii) The Company and the Shareholders
shall jointly and severally indemnify and hold harmless the
Indemnified Parties from and against any and all Losses
suffered or incurred by any such party by reason of or arising
out of any of the following:
(A) the untruth, inaccuracy or
breach by the Company or the Shareholders of any
representation or warranty contained in Section 6
hereof or in any Transaction Document;
(B) the nonfulfillment of any
covenant or agreement of the Company contained in
this Agreement or any other Transaction Document;
(C) any matter on any Schedule
hereto as may be specifically identified for
indemnification in this Agreement or any other
Transaction Document;
(D) any claim or demand by any
person asserting any interest in any Shares or
seeking dissenters' or appraisal rights or any other
claim in respect to the Exchange; and
(E) 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 or a Shareholder to SEI and
is contained in the Memorandum, 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 Company
required to be stated therein or necessary to make
such statements therein not misleading.
(b) Limitations on Shareholders' and the
Company's Indemnity. The Shareholders and 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. SEI's right to indemnification pursuant to Section
13(a) shall not be limited to the escrowed shares under the Escrow
Agreement.
(c) Indemnification of the Shareholders. SEI
shall indemnify and hold harmless each Shareholder and his estate,
successors and assigns (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 or the Shareholders)
contained in the Memorandum, 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
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<PAGE> 27
a material fact relating to SEI (other than the Company or the
Shareholders) 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.
(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
Shareholders or by any Shareholder or the Company to SEI, as the case
may be, or (ii) the escrowed shares 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:
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<PAGE> 28
(a) If to the Shareholders or 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
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 or
the Shareholders by SEI in writing.
Section 15. Shareholder's Representative.
(a) The Shareholders have and do hereby
irrevocably make, constitute and appoint ______________________ as
their agent (the "Shareholder's Representative") and authorize and
empower him to fulfill the role of Shareholder's Representative
hereunder. In the event of the resignation of the Shareholder's
Representative, the resigning Shareholder's Representative shall
appoint a successor from among the Shareholders and who shall agree in
writing to accept such appointment. If the Shareholder's
Representative should die or become incapacitated, his successor shall
be appointed within 15 days of his death or incapacity by a majority
of the Shareholders, and such successor shall be a Shareholder. The
choice of a successor Shareholder's Representative appointed in any
manner permitted above shall be final and binding upon all of the
Shareholders. The decisions and actions of any successor
Shareholder's Representative shall be, for all purposes, those of a
Shareholder's Representative as if originally named in this Agreement.
(b) Each Shareholder has made, constituted and
appointed and by the execution of this Agreement hereby irrevocably
makes, constitutes and appoints the Shareholder's Representative as
such person's true and lawful attorney-in-fact and agent, for such
person and in such person's name, place and stead for all purposes
necessary or desirable in order for the Shareholder's Representative
to take the actions contemplated by the Transaction Documents on
behalf of the Shareholders, with the ability to execute and deliver
all instruments, certificates and other documents of every kind
incident to the foregoing to all intents and purposes and with the
same effect as such Shareholder could do personally, and each such
Shareholder hereby ratifies and confirms as his own act, all that the
Shareholder's Representative shall do or cause to be done pursuant to
the provisions hereof. All notices and communications directed to the
Shareholders under this Agreement shall be given to the Shareholder's
Representative.
(c) The death or incapacity of any Shareholder
shall not terminate the authority and agency of the Shareholder's
Representative.
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<PAGE> 29
(d) The Shareholders hereby agree to indemnify
the Shareholder's Representative and to hold him harmless against any
and all loss, liability or expense incurred without bad faith on the
part of the Shareholder's Representative and arising out of or in
connection with his duties as Shareholder's Representative, including
the reasonable costs and expenses incurred by the Shareholder's
Representative in defending against any claim or liability in
connection herewith.
Section 16. 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 Shareholders and SEI and supersede and cancel all prior agreements
and understandings relating to the subject matter hereof, whether
written or oral, except the Confidentiality Agreements, 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 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.
29
<PAGE> 30
(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]
30
<PAGE> 31
IN WITNESS WHEREOF, the undersigned have executed this Combination
Agreement as of the day and date first above written.
SERVICE EXPERTS, INC.
By:
----------------------------------
Title: Chief Executive Officer
--------------------------------------
[Shareholder], ___% Cash
--------------------------------------
[Shareholder], ___% Cash
--------------------------------------
[Shareholder], ___% Cash
--------------------------------------
[Shareholder], ___% Cash
[COMPANY]
By:
----------------------------------
Title:
-------------------------------
31
<PAGE> 32
LIST OF SCHEDULES TO BE PROVIDED BY COMBINING COMPANIES
<TABLE>
<S> <C>
Schedule 5(a) Ownership of the Shares
Schedule 5(d) Absence of Conflicting Agreements or Required Consents
Schedule 5(e) Interested Transaction
Schedule 6(a) Jurisdictions Where Qualified
Schedule 6(b) Capitalization
Schedule 6(e) Predecessor Companies; Disposition of Assets
Schedule 6(f)(i) Financial Statements
Schedule 6(f)(ii) Exceptions to Financial Statements
Schedule 6(g) Accounts Receivable and Payable
Schedule 6(h) Absence of Certain Changes
Schedule 6(i)(i) Ownership of Properties
Schedule 6(i)(ii) Exceptions to Ownership of Properties
Schedule 6(j) Taxes
Schedule 6(k) Insurance
Schedule 6(l)(iv) Environmental Conditions
Schedule 6(m) Contracts and Commitments
Schedule 6(n) Liabilities
Schedule 6(o) Employees and Labor Matters
Schedule 6(p) Employee Benefit Plans and Agreements
Schedule 6(q) Trademarks, Trade Names, Etc.
Schedule 6(r) Litigation
Schedule 6(s) Compliance with Laws, Regulations and Court Orders
Schedule 6(u) Consents and Approvals
Schedule 8(q) Shares of Capital Stock of Future University
Schedule 9(e) Form of Opinion of Counsel to the Shareholders
Schedule 9(g)(i) Sale of Real Estate and Non-Operating Assets
Schedule 9(g)(ii) Leased Real Property
</TABLE>
32
<PAGE> 33
LIST OF SCHEDULES TO BE PROVIDED BY SEI
<TABLE>
<S> <C>
Schedule 2(a)(i) List of Adjusted Net Income and Percentage
Schedule 2(a)(ii) Additional Adjustments to Adjusted Net Income
Schedule 2(c)(iii) Payment of Purchase Price
Schedule 2(c)(iv) Escrow Agreement
Schedule 7(h) No Broker's Fees
Schedule 9(g)(iii) Lease Agreement
Schedule 9(j) Form of Employment Agreements
Schedule 10(c) Form of Opinion of Waller Lansden Dortch & Davis
</TABLE>
33
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
SERVICE EXPERTS, INC.
Service Experts, Inc., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), does hereby
certify as follows:
(a) The name of the Corporation is Service Experts, Inc.
The original Certificate of Incorporation of the Corporation
was filed with the Delaware Secretary of State on March 27,
1996.
(b) This Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Section 245 of
the Delaware General Corporation Law.
(c) The written consent of the stockholders of the
Corporation and written notice of the taking of the corporate
action have been given in accordance with the provisions of
Section 228 of the Delaware General Corporation Law.
(d) The text of the Restated Certificate of Incorporation
of the Corporation is hereby restated and amended to read in
its entirety as follows:
ARTICLE I
NAME
The name of the corporation is SERVICE EXPERTS, INC. (the
"Corporation").
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle, Delaware 19805. The name of the registered agent of the Corporation in
the State of Delaware at the registered office is Corporation Service Company.
<PAGE> 2
ARTICLE III
PURPOSES
The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage in any and all lawful act or activity
for which corporations may be organized under the General Corporation Law of
the State of Delaware as now or hereinafter in force. The Corporation shall
possess and exercise all of the powers and privileges granted by the General
Corporation Law of the State of Delaware, by any other law or by this
Certificate, together with all such powers and privileges incidental thereto as
may be necessary or convenient to the conduct, promotion or attainment of the
purposes of the Corporation.
ARTICLE IV
CAPITALIZATION
The Corporation shall have authority, acting by its Board of
Directors, to issue not more than forty million (40,000,000) shares of capital
stock divided into classes as follows:
(a) Thirty million (30,000,000) shares of common stock,
$.01 par value per share (the "Common Stock"), such shares entitled to one (1)
vote per share on any matter on which stockholders of the Corporation are
entitled to vote and such shares being entitled to participation in dividends
and to receive the remaining net assets of the Corporation upon dissolution,
subject to the rights of any holders of any shares of Preferred Stock having a
liquidation preference over the Common Stock.
(b) Ten million (10,000,000) shares of preferred stock,
$.01 par value per share (the "Preferred Stock"), which may be issued from time
to time in one or more series and entitled to such preferences to the Common
Stock as to dividends and distribution of assets of the Corporation on
dissolution and shall have such distinctive designations as determined by the
Board of Directors, with full power and authority to fix the number of shares
constituting such series and to fix the relative rights and preferences of the
shares of the series so established to the full extent allowable by law, with
respect to dividends, redemptions, payment on liquidation, sinking fund
provisions, conversion privileges and voting rights. All shares of the
Preferred Stock shall be of equal rank and shall be identical, except in
respect to the particulars that may be fixed by the Board of Directors as
hereinabove provided and which may vary among the series. Different series of
the Preferred Stock shall not be construed to constitute different classes of
stock for the purpose of voting by classes, except when such voting by classes
is expressly required by law.
(c) The number of authorized shares of any class may be
increased or decreased (but not below the number of such shares then
outstanding) by the affirmative vote of the holders of a majority of all
classes of stock of the Corporation entitled to vote.
2
<PAGE> 3
ARTICLE V
BOARD OF DIRECTORS
(a) The initial members of the Board of Directors of the
Corporation, who shall serve until the first annual meeting of the stockholders
of the Corporation and until their successors are elected and qualified, shall
consist of the following two individuals:
Name Address
---- -------
Alan R. Sielbeck 1134 Murfreesboro Road
Nashville, Tennessee 37217
James D. Abrams 16141 North Outer Forty Drive
Suite 310
Chesterfield, Missouri 63017
(b) The Board of Directors of the Corporation shall
consist of not less than two (2) nor more than eleven (11) directors, the exact
number to be fixed and determined from time to time by resolution of a majority
of the Board of Directors. At such time as the Corporation shall have three
(3) or more directors, the directors shall be divided into three (3) classes,
designated Class I, Class II and Class III, of as nearly equal size as
possible, as designated by the Board of Directors. The initial Class I
directors shall be elected for a term expiring at the 1997 annual meeting of
stockholders, the initial Class II directors shall be elected for a term
expiring at the 1998 annual meeting of stockholders, and the initial Class III
directors shall be elected for a term expiring at the 1999 annual meeting of
stockholders. At each succeeding annual meeting, successors to the class of
directors whose term expires at the annual meeting shall be elected for a term
of three years and shall serve until their successors are elected and
qualified. If the number of directors is changed, any increase or decrease
will be apportioned by action of the Board of Directors among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
with any additional director of any class elected to fill a vacancy resulting
from an increase in such class holding office for a term that coincides with
the remaining term of that class, but in no case will a decrease in the number
of directors shorten the term of any incumbent director.
ARTICLE VI
LIMITATION ON PERSONAL LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director except for liability: (a) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (b) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) under Section 174 of the General Corporation Law
of the
3
<PAGE> 4
State of Delaware (or the corresponding provision of any successor act or law);
and (d) for any transaction from which the director derived an improper
personal benefit. If the law of the State of Delaware is hereafter amended to
authorize corporate action further limiting or eliminating the personal
liability of directors, then the liability of directors to the Corporation or
its stockholders shall be limited or eliminated to the fullest extent permitted
by law of the State of Delaware as so amended from time to time. Any repeal or
modification of the provisions of this Article VI, 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.
ARTICLE VII
INDEMNIFICATION
(a) 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, or is threatened to be made 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 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.
(b) 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 respect to any claim, issue or matter as to which the
indemnitee shall have been 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 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.
4
<PAGE> 5
(c) 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 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.
(d) 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.
ARTICLE VIII
REMOVAL OF DIRECTORS
Any director of the Corporation may be removed only for cause
by the vote of holders of a majority of the voting power of the Corporation.
Cause shall mean the director's willful dishonesty towards, fraud upon, or
deliberate injury or attempted injury to, the Corporation.
ARTICLE IX
ACTION BY STOCKHOLDERS
Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called meeting of
stockholders of the Corporation and may not be effected by consent in writing
by such stockholders.
5
<PAGE> 6
ARTICLE X
AMENDMENTS
(a) Notwithstanding any of the provisions of this
Certificate or the Bylaws of the Corporation (and notwithstanding the fact that
a lesser percentage may be specified by law, this Certificate or the Bylaws of
the Corporation), the affirmative vote of the holders of at least two-thirds
(2/3) of the voting power of the Corporation shall be required to repeal, or
amend or adopt any provision inconsistent with, Articles V, VI, VII, VIII, IX
or X.
(b) The Board of Directors reserves the right from time
to time to amend, alter, change or repeal any provision contained in this
Certificate in the manner now or hereinafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, said Service Experts, Inc. has caused this
Restated Certificate of Incorporation to be signed by Alan R. Sielbeck, its
President, and attested by R. Edward Hutton, Jr., its Secretary, as of the 1st
day of May, 1996.
SERVICE EXPERTS, INC.
By:
-------------------------------------
Alan R. Sielbeck, President
ATTEST:
- --------------------------------
R. Edward Hutton, Jr., Secretary
6
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
SERVICE EXPERTS, INC.
ARTICLE I
OFFICES
SECTION 1.1. PRINCIPAL OFFICE. The principal office of the
Corporation shall be 1134 Murfreesboro Road, Nashville, Tennessee 37217.
SECTION 1.2. OTHER OFFICES. The Corporation may also have offices at
such other places within or without the State of Delaware as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
MEETINGS OF THE STOCKHOLDERS
SECTION 2.1. PLACE OF MEETINGS. Meetings of the stockholders shall
be held at such place within or without the State of Delaware as shall be
specified in the notice of the meeting or in a waiver thereof.
SECTION 2.2. ANNUAL MEETING. An annual meeting of the stockholders,
commencing in the year 1997, shall be held on a date and time designated by the
Board of Directors and as set forth in the notice of the meeting, for the
purpose of electing directors and transacting such other business as may
properly be brought before the meeting.
SECTION 2.3. SPECIAL MEETINGS. Special meetings of the stockholders
may be called by the Chairman of the Board, President, Board of Directors, or
by such person or persons as may be authorized by the Certificate of
Incorporation or by these Bylaws. A request for a special meeting shall state
the purpose of the meeting and the matters proposed to be acted on at it.
SECTION 2.4. NOTICE. Not less than ten (10) nor more than sixty (60)
days before each meeting of the stockholders, the Secretary of the Corporation
shall give written notice of the meeting to each stockholder of record entitled
to vote at the meeting. The notice shall state the date, hour and place of the
meeting and the purpose of the meeting, if the meeting is a special meeting or
notice of the purpose is required by the General Corporation Law of the State
of Delaware.
SECTION 2.5. QUORUM. The holders of shares entitled to vote as a
separate voting group may take action on a matter at a meeting only if a quorum
exists with respect to that matter. The presence in person or by proxy of
stockholders entitled to cast a majority of all the votes entitled to be cast
on a matter by a voting group, shall constitute a quorum at meetings of
<PAGE> 2
stockholders except as otherwise provided by statute or by the Certificate of
Incorporation. Once a share is represented for any purpose at a meeting, the
holder is deemed present for quorum purposes for the remainder of the meeting
and for any adjournment of that meeting, unless a new record date is or must be
set for that adjourned meeting.
SECTION 2.6. ADJOURNMENT. If a quorum shall not be present or
represented at any meeting of the stockholders, the stockholders present in
person, or represented by proxy, shall have the power to adjourn the meeting
from time to time, without further notice, to a date not more than thirty (30)
days after the original record date if the time and place thereof are announced
at the meeting at which adjournment is taken, unless after the adjournment a
new record date is fixed for the adjourned meeting. At such adjourned meeting
at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the original meeting.
SECTION 2.7. MAJORITY RULE. A majority of all the votes cast at a
meeting of stockholders at which a quorum is present is sufficient to approve
any matter which properly comes before the meeting, unless the vote of a
greater number is required by the General Corporation Law of the State of
Delaware, the Certificate of Incorporation or these Bylaws.
SECTION 2.8. ELECTION OF DIRECTORS. Directors shall be elected by a
plurality of all the votes cast at a meeting of stockholders at which a quorum
is present.
SECTION 2.9. VOTING. Each outstanding share of stock, regardless of
class, is entitled to one (1) vote on each matter submitted to a vote at a
meeting of stockholders, unless otherwise provided by the General Corporation
Law of the State of Delaware, the Certificate of Incorporation or these Bylaws.
SECTION 2.10. PROXIES. Each stockholder entitled to vote at a
meeting of the stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him by proxy by signing an appointment form, either personally or by
his attorney-in-fact, but no such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A
duly executed proxy shall be irrevocable if it conspicuously states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be irrevocable
regardless of whether the interest with which it is coupled is an interest in
the stock itself or an interest in the Corporation generally.
SECTION 2.11. LIST OF STOCKHOLDERS. The officer who has charge of
the stock ledger books of the Corporation shall prepare and make, at least ten
(10) days before each meeting of the stockholders, a complete list of the
stockholders entitled to vote at such meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the
2
<PAGE> 3
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
Such list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, to be included in the list
required by this Section 2.11 or to vote in person or by proxy at any meeting
of stockholders.
SECTION 2.12. INSPECTORS. The Board of Directors shall, in advance
of any meeting of the stockholders, appoint one or more inspectors to act at
such meeting or any adjournment thereof. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
meeting shall appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to execute faithfully the
duties of inspector at such meeting with strict impartiality and according to
the best of his ability. The inspectors shall determine the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine
all challenges and questions arising in connection with the right to vote,
count and tabulate all votes, ballots or consents, determine the result, and do
such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting or any stockholder
entitled to vote thereat, the inspectors shall make a report in writing of any
challenge, request or matter determined by them and shall execute a certificate
of any fact found by them. No director or candidate for the office of director
shall act as inspector of an election of directors. Inspectors need not be
stockholders.
SECTION 2.13. ORGANIZATION. At every meeting of the stockholders,
the Chairman of the Board, or in the case of a vacancy in the office or absence
of the Chairman of the Board, one of the following persons present in the order
stated: the President, the Vice Presidents in their order of rank, a chairman
designated by the Board of Directors, or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as chairman of the meeting,
and the Secretary, or, in his absence, an Assistant Secretary, if any, or any
person appointed by the chairman of the meeting, shall act as secretary of the
meeting.
ARTICLE III
DIRECTORS
SECTION 3.1. NUMBER. Except as set forth below, and except as
otherwise provided in the Certificate of Incorporation, the number of directors
of the Corporation shall be not less than two (2) nor more than eleven (11), as
determined from time to time by the Board of Directors of the Corporation.
Members of the Board of Directors shall be elected at the annual meeting of
stockholders. Any action by the Board of Directors or stockholders to reduce
the number of directors shall not affect the tenure of office of any director.
3
<PAGE> 4
At such time as the Corporation shall have three (3) or more
directors, the directors shall be divided into three (3) classes, designated
Class I, Class II and Class III, of as nearly equal size as possible, as
designated by the Board of Directors. The initial Class I directors shall be
elected for a one-year term expiring at the 1997 annual meeting of
stockholders, the initial Class II directors shall be elected for a two-year
term expiring at the 1998 annual meeting of stockholders, and the initial Class
III directors shall be elected for a three-year term expiring at the 1999
annual meeting of stockholders. At each successive annual meeting, successors
to the class of directors whose term expires at the annual meeting shall be
elected for a term of three (3) years and shall serve until their successors
are elected and qualified. If the number of directors is changed, any increase
or decrease will be apportioned by action of the Board of Directors among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, with any additional director of any class elected to fill a
vacancy resulting from an increase in such class holding office for a term that
coincides with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director.
SECTION 3.2. ELECTION AND TENURE. Until the first annual meeting of
stockholders and until successors are elected and qualified, the Board of
Directors shall consist of the individuals named as initial directors in the
Certificate of Incorporation. Unless the Certificate of Incorporation or these
Bylaws provide otherwise, directors are elected by a plurality of all votes
cast at a meeting of stockholders at which a quorum is present and each
director elected shall hold office until the end of his term as provided herein
and until his successor is elected and qualified or until his earlier
resignation or removal. Each share of stock may be voted for as many
individuals as there are directors to be elected and for whose election the
share is entitled to be voted. Stockholders shall not have any cumulative
voting rights.
SECTION 3.3. QUALIFICATIONS. Each director of the Corporation shall
have the qualifications required by the Certificate of Incorporation or these
Bylaws. Directors need not be residents of the State of Delaware or
stockholders in the Corporation.
SECTION 3.4. REMOVAL. Any director may be removed only for cause by
vote of the holders of a majority of the shares of the Corporation entitled to
vote. Cause shall mean the director's willful dishonesty towards, fraud upon,
or deliberate injury or attempted injury to the Corporation.
SECTION 3.5. VACANCIES. Any vacancy and newly created directorship
occurring in the Board of Directors which results from an increase in the
authorized number of directors elected by all of the stockholders having the
right to vote may be filled by the affirmative vote of a majority of the
remaining directors or director, whether or not sufficient to constitute a
quorum. When one or more directors shall resign from the Board of Directors,
effective at a future date, a majority of the directors then in office,
including those who have resigned, shall have the power to fill such vacancy or
vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective.
4
<PAGE> 5
SECTION 3.6. LACK OF DIRECTORS. If at any time, by reason of death
or resignation or other cause, the Corporation should have no directors in
office, then any officer may call a special meeting of stockholders in
accordance with the provisions of the Certificate of Incorporation or these
Bylaws, and an election of directors may be held in the manner provided by the
Certificate of Incorporation, these Bylaws or applicable law.
SECTION 3.7. RESIGNATION. A director may resign at any time by
delivering written notice to the Corporation, the Board of Directors, the
Chairman of the Board or the President. A resignation is effective when notice
is delivered, unless the notice specifies a later effective date.
SECTION 3.8. POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by applicable law, the Certificate of Incorporation or by
these Bylaws conferred on or reserved to the stockholders.
SECTION 3.9. QUORUM. A majority of the entire Board of Directors
shall constitute a quorum for the transaction of business. If a quorum shall
not be present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 3.10. ANNUAL MEETING. The annual meeting of the Board of
Directors for the purpose of electing officers and transacting such other
business as may be brought before the meeting shall be held each year
immediately following the annual meeting of stockholders.
SECTION 3.11. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such places, within or without the
State of Delaware, on such dates and at such times as may from time to time be
determined by the Board.
SECTION 3.12. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board or the President and shall
be called by the Secretary on the written request of two directors. Written
notice of special meetings of the Board of Directors shall be given to each
director at least 24 hours before the meeting. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting. Such meetings shall be held at such places, within or without the
State of Delaware, on such dates and at such times as may be stated in the
notice.
SECTION 3.13. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of the Board of Directors or of a committee
of the Board of Directors may be taken without a meeting if a written consent
which sets forth the action is: (a) signed by each member of the Board of
Directors or committee; and (b) filed with the minutes of proceedings
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of the Board of Directors or committee. The affirmative written consent of the
number of directors that would be necessary to authorize or take action at a
meeting pursuant to Section 3.15 hereof is the act of the Board of Directors
without a meeting. Action taken by written consent is effective when the last
director signs the consent unless the consent specifies a different effective
date.
SECTION 3.14. MEETINGS BY TELEPHONE. Members of the Board of
Directors or any committee may participate in a meeting by means of a telephone
conference or similar communications equipment provided all persons
participating in the meeting can hear each other at the same time. A director
participating in such a meeting is deemed to be present in person at the
meeting.
SECTION 3.15. MAJORITY RULE. The action of a majority of the
directors present at a meeting at which a quorum is present is the action of
the Board of Directors unless the Certificate of Incorporation or these Bylaws
shall require a greater proportion.
SECTION 3.16. INTERESTED DIRECTOR TRANSACTIONS. No contract or
transaction between the Corporation and any of its directors, or between the
Corporation and any other corporation, firm or entity in which any of its
directors is a director, or has a material financial interest, shall be void or
voidable solely for this reason, or solely because the director is present at
the meeting of the Board of Directors or committee which authorizes, approves
or ratifies the contract or transaction, or solely because his or their votes
are counted for such purpose, if such interested director complies with
statutory disclosure requirements or the contract or transaction is fair and
reasonable to the Corporation. Common or interested directors or the stock
owned by them or by an interested corporation, firm or other entity may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee or at a meeting of stockholders, as the case may
be, which authorizes, approves or ratifies the contract or transaction.
SECTION 3.17. COMPENSATION. The Board of Directors or a committee
thereof shall have the authority to fix the compensation of directors.
Directors shall be entitled to reimbursement for any reasonable expenses
incurred in attending meetings and otherwise carrying out their duties.
SECTION 3.18. ORGANIZATION. At every meeting of the Board of
Directors, the Chairman of the Board, or in the case of a vacancy in the office
or absence of the Chairman of the Board, one of the following officers present
in the order stated: the President, the Vice Presidents in their order of rank,
or a chairman chosen by a majority of the directors present, shall act as
chairman of the meeting, and the Secretary, or, in the absence of the
Secretary, an Assistant Secretary, if any, or any other person appointed by the
chairman of the meeting, shall act as secretary of the meeting.
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ARTICLE IV
COMMITTEES
SECTION 4.1. APPOINTMENTS AND POWERS. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board of Directors,
designate an Executive Committee, an Audit Committee, a Compensation Committee
and one or more other committees, each consisting of two or more directors.
The Board of Directors may designate one or more directors as alternative
members of a committee who may replace any absent or disqualified member at any
meeting of the committee. Such alternate members shall not be counted for
purposes of determining a quorum unless acting for an absent or disqualified
member, in which case they shall be counted in the place of the absent or
disqualified member. The committee, to the extent provided in said resolution
or resolutions or in these Bylaws, shall have and may exercise the powers of
the Board of Directors in the management of the business and affairs of the
Corporation and may have power to authorize the seal of the Corporation to be
affixed to all papers which may require it, except that a committee may not:
(i) amend the Certificate of Incorporation; (ii) adopt an agreement of merger,
share exchange or consolidation; (iii) recommend to the stockholders of the
Corporation the sale, lease or exchange of all or substantially all of the
Corporation's property or assets; (iv) recommend to the stockholders of
Corporation a dissolution of the Corporation or revocation of a dissolution;
(v) amend these Bylaws; (vi) declare a dividend; (vii) issue stock; or (viii)
adopt a certificate of ownership and merger. Such committee or committees
shall have such name or names as may be stated in these Bylaws or as may be
determined from time to time by resolution adopted by the Board of Directors.
Sections 3.11 through 3.15 applicable to the Board of Directors shall also
apply to all committees.
SECTION 4.2. MINUTES. Committees shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
ARTICLE V
NOTICES
SECTION 5.1. NOTICE. Notices to directors and stockholders shall be
in writing, shall specify the date, time and place of the meeting and shall be
delivered personally, left at his or her residence or usual place of business,
or mailed to the directors or stockholders at their addresses appearing on the
records of the Corporation. Notice by mail shall be deemed to be given at the
time when deposited in the United States mail, postage prepaid, and directed to
the directors or stockholders at their addresses appearing on the records of
the Corporation. Notice to directors may also be given by telegram, facsimile
or overnight courier, and shall be deemed to be given upon receipt at their
addresses appearing on the records of the Corporation.
SECTION 5.2. WAIVER OF NOTICE. Whenever any notice of the time,
place or purpose of a meeting is required to be given to any stockholder or
director under the General Corporation Law of the State of Delaware or the
Certificate of Incorporation or these Bylaws,
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a written waiver, signed by the person entitled to notice and delivered to the
Corporation and filed with the Corporation's minutes or records, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of the stockholders, Board of Directors or members of a
committee of the Board of Directors need be specified in any written waiver of
notice unless required by the Certificate of Incorporation or these Bylaws.
SECTION 5.3. ATTENDANCE CONSTITUTES WAIVER. Attendance of a person
at a meeting in person or by proxy shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
ARTICLE VI
OFFICERS
SECTION 6.1. OFFICERS. The officers of the Corporation shall consist
of a President and a Secretary, and may include a Chairman of the Board, Vice
Chairman of the Board and one or more Vice Presidents (any one or more of which
may be designated as a senior or executive vice president), Chief Financial
Officer and one or more assistant vice presidents, assistant treasurers,
assistant financial officers and assistant secretaries, each of whom shall be
elected by the Board of Directors. Any number of offices may be held by the
same person.
SECTION 6.2. REMOVAL. If the Board of Directors in its judgment
finds that the best interests of the Corporation will be served, it may remove
any officer or agent of the Corporation at any time with or without cause. The
removal of an officer or agent does not prejudice any of his or her contract
rights, if any.
SECTION 6.3. TERM OF OFFICE; RESIGNATION. An officer of the
Corporation shall serve for the term provided within any applicable contract
for employment, or absent such contract shall serve for such term as determined
by the Board of Directors and until his or her successor is elected and
qualified or until his or her earlier resignation or removal. Any officer may
resign at any time upon written notice to the Corporation. A resignation is
effective when the notice is delivered, unless the notice specifies a later
effective date. If a resignation is made effective at a later date and the
Corporation accepts such later date, the Board of Directors may fill the
pending vacancy before the effective date if it provides that the successor
does not take office until the effective date. An officer's resignation does
not affect the Corporation's contract rights, if any, with the officer. Any
vacancy occurring in any office of the Corporation by death, resignation,
removal or otherwise shall be filled by the Board of Directors or by such
officer or agent of the Corporation to whom the Board of Directors may
expressly delegate such authority.
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SECTION 6.4. PRESIDENT. The President shall have general powers and
duties of supervision and management usually vested in the office of president
of a corporation, including the authority to make contracts on behalf of the
Corporation in the ordinary course of the Corporation's business. The
President shall have general supervision, direction and control of the business
of the Corporation, and shall see that all orders and resolutions of the Board
of Directors are carried into effect. In the absence of the Chairman of the
Board, the President shall preside at all meetings of the stockholders and the
Board of Directors. The President shall execute bonds, mortgages and other
contracts, except where required or permitted by law to be otherwise signed and
executed, and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation. The President shall have the power to appoint, remove and suspend
subordinate officers, agents and factors upon such terms and conditions as he
deems reasonable and appropriate. The President shall have such powers and
duties as usually pertain to such office, except as the same may be modified by
the Board of Directors.
SECTION 6.5. VICE PRESIDENTS. The Vice Presidents, in the order of
their seniority, unless otherwise determined by the Board of Directors, shall,
in the absence or disability of the President, perform the duties and exercise
the powers of the President. They shall perform such other duties and have
such other powers as the Board of Directors may from time to time prescribe or
as the President may from time to time delegate.
SECTION 6.6. SECRETARY. The Secretary shall attend meetings of the
Board of Directors and stockholders, and record all the proceedings of such
meetings in a book to be kept for that purpose. The Secretary shall give, or
cause to be given, notice of all meetings of the stockholders and special
meetings of the Board of Directors, and shall perform such other duties as may
be prescribed by the Board of Directors or President, under whose supervision
the Secretary shall be.
SECTION 6.7. ASSISTANT SECRETARIES. The Assistant Secretaries, in
the order of their seniority, unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the power of the Secretary. They shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or as the President may from time to time delegate.
SECTION 6.8. TREASURER. The Treasurer shall have custody of the
corporate funds and securities, and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
Corporation. The Treasurer shall perform such other duties and have such other
authority and
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powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
SECTION 6.9. ASSISTANT TREASURERS. The Assistant Treasurers, in the
order of their seniority, unless otherwise determined by the Board of
Directors, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer. They shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe or the President may from time to time delegate.
SECTION 6.10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall be the chief accounting officer of the Corporation with general
supervision over the accounting books and records of the Corporation and shall
be responsible for maintaining proper internal controls over the assets of the
Corporation and preparing accurate financial statements. The Chief Financial
Officer shall perform such other duties and have such other authority and
powers as the Board of Directors may from time to time prescribe or as the
President may from time to time delegate.
SECTION 6.11. OTHER OFFICERS. The duties of other officers elected
by the Board of Directors shall be such as are customary to the respective
offices as shall be given to them by the President.
ARTICLE VII
CERTIFICATES REPRESENTING SHARES
SECTION 7.1. CERTIFICATES FOR SHARES. The shares of the Corporation
shall be represented by certificates which shall be in a form approved by the
Board of Directors and contain such information as may be required by the
General Corporation Law of the State of Delaware or any securities exchanges on
which any shares of the Corporation may be listed.
SECTION 7.2. FACSIMILE SIGNATURES. Any or all the signatures on the
certificate may be a facsimile. In case any officer who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer at the date of
issue.
SECTION 7.3. LOST CERTIFICATES. The Board of Directors may determine
the conditions for issuing a new stock certificate in place of any certificate
issued by it, alleged to have been lost, stolen or destroyed. The Board of
Directors may require the owner of the lost, stolen or destroyed certificate to
give to the Corporation a bond with sufficient surety to indemnify the
Corporation against any loss or claim arising as a result of the issuance of a
new certificate. The issuance of a new certificate under this Section 7.3 does
not constitute an overissue of the shares it represents.
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SECTION 7.4. TRANSFER OF SHARES. Upon surrender to the Corporation
or the transfer agent of the Corporation of a certificate for shares duly
endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
SECTION 7.5. RECORD DATE FOR NOTICE AND VOTING. For the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may set a
record date or direct that the stock transfer books be closed for a stated
period for the purpose of making any proper determination with respect to
stockholders. The record date shall be not more than sixty (60) days nor less
than ten (10) days before the date on which the action requiring the
determination will be taken. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be the close of business on the
day next preceding the day on which notice of the meeting is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholder shall apply to any
adjournment of the meeting; providing, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
SECTION 7.6. RECORD DATE FOR DIVIDENDS. For the purpose of
determining stockholders entitled to receive payment of any dividend or an
allotment of any rights, the record date is the close of business on the day on
which the Board of Directors adopts the resolution declaring the dividend or
allotment of rights. The payment or allotment may not be made more than sixty
(60) days after the date on which the resolution is adopted.
SECTION 7.7. STOCKHOLDERS OF RECORD. The Corporation shall be
entitled to recognize the exclusive rights of a person registered on its books
as the owner of shares to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by the laws
of the State of Delaware.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. DIVIDENDS. Subject to the provisions of the Certificate
of Incorporation and the General Corporation Law of the State of Delaware, the
Board of Directors of the Corporation may, at any regular or special meeting,
declare dividends upon the capital stock of the Corporation as and when the
Board of Directors may deem expedient.
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SECTION 8.2. CHECKS; DRAFTS. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
SECTION 8.3. FISCAL YEAR. The fiscal year of the Corporation shall
be the calendar year, unless otherwise fixed by the Board of Directors.
SECTION 8.4. ANNUAL STATEMENT OF AFFAIRS. The President, or any
other officer of the Corporation designated by the Board of Directors, shall
prepare annually a full and correct statement of the affairs of the
Corporation, to include a balance sheet and a financial statement of operations
for the preceding fiscal year.
ARTICLE IX
AMENDMENTS
Notwithstanding any of the provisions of these Bylaws (and
notwithstanding the fact that a lesser percentage may be specified by law, or
these Bylaws) the affirmative vote of the holders of at least two-thirds (2/3)
of the Common Stock shall be required to repeal or amend any provision of these
Bylaws. The Board of Directors may amend or repeal these Bylaws unless the
Certificate of Incorporation or the General Corporation Law of the State of
Delaware reserves this power exclusively to the stockholders.
ARTICLE X
EMERGENCY BYLAW
In the event that a quorum of directors cannot be readily assembled
because of a catastrophic event, the Board of Directors may take action by the
affirmative vote of a majority of those directors present at a meeting and may
exercise any emergency power granted to a board of directors under the General
Corporation Law of the State of Delaware not inconsistent with these Bylaws.
Special meetings of the Board of Directors may be called in an emergency by the
director or, if no director is present at the Corporation's principal offices,
by the officer present having the greatest seniority as an officer. The
director or directors in attendance at the meeting shall constitute a quorum.
If less than three (3) regularly elected directors are present, the director
present having the greatest seniority as a director may appoint one (1) or more
persons (not to exceed the number most recently fixed by the Board pursuant to
Section 3.1) from among the officers or other executive employees of the
Corporation to serve as substitute directors. If no regularly elected director
is present, the officer present having the greatest seniority as an officer
shall serve as a substitute director and shall appoint up to four (4)
additional persons from among the officers or other executive employees of the
Corporation to serve as substitute directors. The Board of Directors, either
before or during any such emergency, may provide, and from time to time modify,
lines of succession in the event that during such emergency any or all officers
or agents of the Corporation shall for any reason be
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rendered incapable of discharging their duties. The Board of Directors, either
before or during such emergency, may, effective during the emergency, change
the principal office of the Corporation or designate several alternative
principal or regional offices or authorize the officers to do so. No officer
or employee acting in accordance with the Emergency Bylaw shall be liable
except for wilful misconduct. To the extent not inconsistent with the
Emergency Bylaw, the Bylaws of the Corporation shall remain in effect during
any emergency, and upon termination of the emergency, the Emergency Bylaw shall
cease to be operative. Notice of any meeting of the Board of Directors during
such emergency may be given only to such of the directors as it may be feasible
to reach at the time and by such means as may be feasible at the time,
including publication or radio.
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EXHIBIT 10.1
SERVICE EXPERTS, INC.
1996 INCENTIVE STOCK PLAN
1. The Purpose of the Plan. This incentive stock plan (the
"Plan") is intended to provide an opportunity for the employees and officers of
Service Experts, Inc., a Delaware corporation (the "Corporation"), and its
subsidiaries, as subsidiaries are defined in section 424 of the Code1 (its
"subsidiaries"), to acquire shares of the Corporation's stock and to provide
for additional compensation based on appreciation of the Corporation's stock.
The Plan provides for the grant of incentive stock options, as defined in
Section 422 of the Code ("Incentive Stock Options"), and stock options not
qualifying as Incentive Stock Options ("Non-Qualified Stock Options") providing
an equity interest in the Corporation's business and the grant of stock
appreciation rights, as defined in paragraph 8 ("Stock Appreciation Rights"),
as an incentive to service or continued service with the Corporation and to aid
the Corporation in retaining and obtaining key personnel of outstanding
ability. As used herein, "Stock Incentives" refers to Incentive Stock Options,
Non-Qualified Stock Options, and Stock Appreciation Rights.
2. Stock Subject to the Plan. The maximum number of shares of
the Common Stock, $.01 par value per share, of the Corporation (the "Stock")
which may be issued under Incentive Stock Options and Non-Qualified Stock
Options granted under the Plan (the "Options")
- ---------------------
(1) The "Code" herein refers to the Internal Revenue Code of
1986, as amended.
<PAGE> 2
and made subject to Stock Appreciation Rights shall be a total of 700,000
shares of Stock, which may be either authorized and unissued Stock or Stock
held in the treasury of the Corporation, as shall be determined by the Board of
Directors of the Corporation. If an Option or Stock Appreciation Right expires
or terminates for any reason without being exercised in full, the unpurchased
shares subject to such Option or the shares as to which such Stock Appreciation
Right is not exercised shall again be available for purposes of the Plan.
3. Administration of the Plan. This Plan shall be administered
by the Board of Directors or a committee of the Board of Directors consisting
of not less than two directors who are "disinterested persons" within the
meaning of that term as used in Rule 16b-3 promulgated by the Securities and
Exchange Commission ("Rule 16b-3"). As used herein, the term "Committee"
refers to such committee or, in the absence of appointment of such committee,
to the Board of Directors. The Board of Directors shall administer the Plan
only if each member is a disinterested person. Subject to the provisions of
the Plan, the Committee shall have full and conclusive authority to interpret
the Plan; to prescribe, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of the respective Stock Incentive
agreements (which need not be identical); to determine the restrictions on
transferability of Stock acquired upon exercise of Options (which restrictions
need not be identical); and to make all
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other determinations necessary or advisable for the proper administration of
the Plan.
4. Eligibility and Limits. Stock Incentives may be granted to
employees and officers as are selected by the Committee. Incentive Stock
Options may, however, only be granted to employees of the Corporation and its
present or future subsidiaries. The aggregate fair market value (determined as
of the time an Incentive Stock Option is granted) of the Stock with respect to
which Incentive Stock Options are exercisable by an individual for the first
time during any calendar year, taking into account Incentive Stock Options
granted under this Plan and under all other plans of the Corporation and its
parent or subsidiary corporations (as defined in Section 424 of the Code),
shall not exceed $100,000.
5. Incentive Stock Options and Non-Qualified Stock Options. At
the time any Option is granted under this Plan, the Committee shall determine
whether said Option is to be an Incentive Stock Option or a Non-Qualified Stock
Option, and the Option shall be clearly identified as to its status as an
Incentive Stock Option or a Non-Qualified Stock Option. The number of shares
as to which Incentive Stock Options and Non-Qualified Stock Options shall be
granted shall be determined by the Committee in its sole discretion, subject to
the provisions of paragraph 4 above with respect to the aggregate fair market
value of the Stock for which Incentive Stock Options held by any individual may
become exercisable in any calendar year and subject to the provisions of
paragraph 2 above as to the total number of shares for which Stock
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Incentives may be granted under the Plan. At the time any Incentive Stock
Option granted under this Plan is exercised, the certificates representing the
shares of Stock purchased pursuant to said Option shall be clearly identified
by legend as representing shares purchased upon exercise of an Incentive Stock
Option.
6. Terms and Conditions of Options. Subject to the following
provisions, all Options shall be in such form and upon such terms and
conditions as the Committee, in its discretion, may from time to time
determine.
(a) Option Price.
(i) Incentive Stock Options. The Option price per share shall in
no event be less than 100% of the fair market value per share of Stock (as
determined in good faith by the Committee based on the most recent stock prices
available to the Committee) on the date the Option is granted. If the employee
owns (as defined in Code Section 424) more than 10% of the total combined
voting power of all classes of the Corporation's stock or of the stock of its
parent or subsidiary, the Option price per share shall not be less than 110% of
the fair market value per share of the Stock as determined in good faith by the
Committee based on the most recent stock prices available to the Committee on
the date the Option is granted.
(ii) Non-Qualified Stock Options. The option price per share shall
not be less than 85% of the fair market
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value per share of the Stock as determined in good faith by the
Committee based on the most recent stock prices available to the
Committee on the date the Option is granted.
(b) Date of Grant. For purposes of this subparagraph 6, the date
the Option is granted shall be the date on which the Committee has approved the
terms and conditions of a stock option agreement evidencing the Option,
determined the recipient of the Option, the number of shares covered by the
Option, and has taken all such other action as is necessary to complete the
grant of the Option.
(c) Option Term. No Option shall be exercisable after the
expiration of ten years from the date the Option is granted. No Incentive
Stock Option granted to an employee who at the time of grant owns (as defined
in Code Section 424) more than 10% of the total combined voting power of all
classes of the Corporation's stock or of the stock of its parent or subsidiary
shall be exercisable after the expiration of five years from the date it is
granted.
(d) Payment. Payment for all shares purchased pursuant to
exercise of an Option shall be made in cash or, if approved by the Committee
either at the time of grant or at the time of exercise, by delivery of (i)
outstanding shares of Stock, or (ii) currently exercisable Options, or (iii)
any combination of cash, Stock or Options each at its fair market value, as
determined by the Committee, on the date of delivery and in an amount equal to
the exercise price of the Options being exercised. For purposes of
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this subparagraph 6, the fair market value of an Option shall be equal to the
product of (i) the amount by which the fair market value of the Stock, as
determined by the Committee, on the date of exercise exceeds the exercise price
contained in the Option and (ii) the number of shares of Stock subject to the
Option relinquished. Such payment shall be made at the time that the Option or
any part thereof is exercised, and no shares shall be issued until full payment
therefor has been made. The holder of an Option shall, as such, have none of
the rights of a shareholder.
(e) Nontransferability of Stock Incentives. Stock Incentives
shall not be transferable or assignable except by will or by the laws of
descent and distribution and shall be exercisable, during the holder's
lifetime, only by him; provided, however, that Non-Qualified Stock Options and
Stock Appreciation Rights may be transferred pursuant to a qualified domestic
relations order as defined by the Code of Title I of the Employee Retirement
Income Security Act.
(f) Termination of Employment or Death. Except as provided below,
an Option may not be exercised by a holder unless he has been an employee or
officer of the Corporation, its parent, or one of its subsidiaries continually
from the date of the grant until the date ending three months before the date
of exercise. If a holder ceases to be an employee or officer by reason of
disability, within the meaning of Section 422(c)(6) of the Code, the holder may
exercise an Option (to the extent that the holder shall have been entitled to
do so at the date of his disability) at any time during
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the twelve month period after the date he ceases to be an employee or removed
as an officer or until the expiration of the stated term of such Option,
whichever is shorter. If the holder of an Option dies, such Option may be
exercised (to the extent that the holder shall have been entitled to do so at
the date of his death) by a legatee or legatees of the holder under his will,
or by his personal representative or distributees, at any time during the
twelve-month period following his death or until the expiration of the stated
term of such Option, whichever is shorter. If a holder is discharged as an
employee or officer for cause, as determined by the Committee, Options held by
him shall not be exercisable after such discharge or removal. Notwithstanding
this subparagraph (f), no Option may be exercised more than ten years after the
date on which such Option was granted. For purposes of this subparagraph (f),
a holder shall be deemed to be an employee or officer so long as the holder is
an employee or officer of a parent or subsidiary of the Corporation or by
another corporation (or a parent or subsidiary corporation of such other
corporation) which has assumed the Option of the holder in a transaction to
which Section 424(a) of the Code is applicable.
(g) Limited Right of Exercise. An Option may be exercised during
the Option term as to the full number of shares covered by the Option upon the
occurrence of any of the following events (each a "Change in Control"): (1) a
tender offer or exchange offer has been made for shares of Stock, provided that
the corporation, person, or other entity making such offer purchases or
otherwise
7
<PAGE> 8
acquires shares of Stock representing 50% or more of the outstanding shares of
Stock pursuant to such offer; (2) the shareholders of the Corporation have
approved a definitive agreement (the "Agreement") to merge or consolidate with
or into another corporation pursuant to which the Corporation will not survive
or will survive only as a subsidiary of another corporation, or to sell or
otherwise dispose of all or substantially all of its assets; or (3) any person
or group, as such terms are defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), becomes the holder of
50% or more of the outstanding shares of Stock. If a Change in Control has
occurred, the Option shall be fully exercisable: (x) in the event of (1)
above, during the term of the tender or exchange offer; (y) in the event of (2)
above, within a 30-day period commencing on the date of approval by the
shareholders of the Agreement; or (z) in the event of (3) above, within a
30-day period commencing on the date upon which the Corporation is provided a
copy of Schedule 13D (filed pursuant to Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder) indicating that any person or
group has become the holder of 50% or more of the outstanding shares of Stock
or, if the Corporation is not subject to Section 13(d) of the Exchange Act,
within a 30-day period commencing on the date upon which the Corporation
receives written notice that any person or group has become the holder of 50%
or more of the outstanding shares of Stock. Notwithstanding the foregoing, no
person subject to Section 16(a) of the Exchange Act
8
<PAGE> 9
with respect to the Stock may sell or otherwise dispose of Stock acquired
pursuant to an Option granted within six months of the date of sale or other
disposition.
7. Guarantees and Loans. The Corporation is hereby authorized to
guarantee or make loans to the holder of an Option to enable him to exercise
such Option. Any loan made or guaranteed herein shall be in such amount as
determined by the Committee but shall not exceed the exercise price of the
Options being exercised by the holder. Any loans made or guaranteed shall be
with full recourse against the borrower, shall be secured by the Stock received
from exercise of the related Option, shall provide for a market rate of
interest, and shall contain such other terms and conditions as are acceptable
to the Committee. The determination of whether loans are to be made or
guaranteed shall be made by the Committee.
8. Stock Appreciation Rights.
(a) Award. A Stock Appreciation Right shall entitle the grantee
to receive, upon exercise, the excess of (a) the fair market value of a
specified number of shares of Stock at the time of exercise over (b) a
specified price which shall be not less than 85% of the fair market value of
the Stock at the time the Stock Appreciation Right is granted. The
determination of the fair market value of shares of Stock at the time of grant
of a Stock Appreciation Right shall be made by the Committee in good faith
based on the most recent stock prices available to the Committee. A Stock
Appreciation Right may be granted in connection with all or
9
<PAGE> 10
any portion of a previously or contemporaneously granted Non-Qualified Stock
Option or not in connection with a Non-Qualified Stock Option.
(b) Terms. Subject to the following provisions, Stock
Appreciation Rights shall be in such form and on such terms and conditions as
the Committee, in its discretion, may from time to time determine:
(i) No Stock Appreciation Right shall be exercisable more than ten
years after it is granted.
(ii) Except as provided below, Stock Appreciation Rights may not be
exercisable by the grantee unless he has been an employee or officer
continually from the date of the grant until the date ending three months
before the date of exercise. If a grantee ceases to be an employee or officer
by reason of disability within the meaning of subparagraph 6(f) hereof, the
grantee may exercise the Stock Appreciation Right (to the extent that the
holder shall have been entitled to do so at the date of his disability) at any
time during the twelve month period after the date he ceases to be an employee
or officer or until expiration of the stated term of such Stock Appreciation
Right, whichever is shorter. If the grantee of a Stock Appreciation Right
dies, the grantee's legal successor shall have the right to exercise the Stock
Appreciation Right (to the extent that the holder shall have been entitled to
do so at his death) during
10
<PAGE> 11
the lesser of its term and a period of twelve months commencing on the
death of the grantee. If a grantee is discharged as an employee or
officer for cause, as determined by the Committee, his Stock
Appreciation Rights shall not be exercisable after such discharge or
removal. For purposes of this subparagraph (b)(ii), a grantee shall
be deemed to be an employee or officer so long as the grantee is an
employee or officer of a parent or subsidiary of the Corporation or of
another corporation (or a parent or subsidiary corporation of such
other corporation) which has assumed the Stock Appreciation Right of
the grantee in a transaction to which Section 424(a) of the Code is
applicable. Stock Appreciation Rights may contain such other
limitations with respect to the time when such rights may be exercised
as the Committee may determine, and such limitations may vary.
(c) Payment. Upon exercise of a Stock Appreciation Right, payment
shall be made in cash or Stock (at fair market value on the date of exercise)
as provided in the Stock Appreciation Right agreement or, in the absence of
such provision, as the Committee may determine.
9. Changes in Capitalization; Merger; Liquidation. (a) The
number of shares of Stock as to which Stock Incentives may be granted, the
number of shares covered by each outstanding Stock Incentive, and the exercise
price per share in each outstanding
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<PAGE> 12
Option or used in determining the amount of payment upon exercise of each
outstanding Stock Appreciation Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Stock resulting from a
subdivision or combination of shares, the payment of a stock dividend in shares
of Stock to holders of outstanding shares of Stock, or any other increase or
decrease in the number of such shares effected without receipt of consideration
by the Corporation.
(b) If the Corporation shall be the surviving corporation in any
merger or consolidation, recapitalization, reclassification of shares, or
similar reorganization, the holder of each outstanding Option shall be entitled
to purchase, at the same times and upon the same terms and conditions as are
then provided in the Option, the number and class of shares of Stock or other
securities to which a holder of the number of shares of Stock subject to the
Option at the time of such transaction would have been entitled to receive as a
result of such transaction, and a corresponding adjustment shall be made in
connection with determining the value of each outstanding Stock Appreciation
Right.
(c) In the event of any change in capitalization of the
Corporation, the Committee may make such additional adjustments in the number
and class of shares of Stock or other securities with respect to which
outstanding Options and Stock Appreciation Rights are exercisable and with
respect to which future Options and Stock Appreciation Rights may be granted as
the Committee in its sole
12
<PAGE> 13
discretion shall deem equitable or appropriate, subject to the provisions of
this paragraph 9.
(d) A dissolution or liquidation of the Corporation shall cause
each outstanding Option and Stock Appreciation Right to terminate.
(e) In the event of any Change in Control in which shares of Stock
are purchased for cash in a tender offer or are to be converted into cash in a
merger, then, unless the Committee otherwise determines, each Option (other
than an Option granted within the last six months held by a person subject to
Section 16(b) of the Exchange Act) shall be converted into a fully exercisable
right to receive an amount in cash per share subject to such Option equal to
(A) in the case of a tender offer or merger, the excess, if any, of the price
paid in such tender offer or merger over the exercise price of such Option and
(B) in the case of conversion, the excess, if any, of the highest market price
of the Stock on the date of conversion over the exercise price of such Option.
Upon a merger or consolidation, other than a cash merger or consolidation, in
which the Corporation is not the surviving corporation, the surviving
corporation shall substitute another Option with equivalent value for an
outstanding Option in a transaction to which Section 424(a) of the Code is
applicable and shall substitute another Stock Appreciation Right with
equivalent value for an outstanding Stock Appreciation Right.
(f) In the event of a change of the Corporation's shares of Stock
with par value into the same number of shares with a
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<PAGE> 14
different par value or without par value, the shares resulting from any such
change shall be deemed to be Stock within the meaning of the Plan. Except as
expressly provided in this paragraph 9, the holder of a Stock Incentive shall
have no rights by reason of any subdivision or combination of shares of Stock
of any class, the payment of any stock dividend, any other increase or decrease
in the number of shares of Stock of any class, or by reason of any dissolution,
liquidation, merger or consolidation, or distribution to the Corporation's
shareholders of assets or stock of another corporation, and any issue by the
Corporation of shares of Stock of any class, or securities convertible into
shares of Stock of any class, shall not affect, and no adjustment by reasons
thereof shall be made with respect to, the number or price of shares of Stock
subject to the Stock Incentive. The existence of the Plan and the Stock
Incentives granted pursuant to the Plan shall not affect in any way the right
or power of the Corporation to make or authorize any adjustment,
reclassification, reorganization, or other change in its capital or business
structure, any merger or consolidation of the Corporation, any issue of debt or
equity securities having preferences or priorities as to the Stock or the
rights thereof, the dissolution or liquidation of the Corporation, any sale or
transfer of all or any part of its business or assets, or any other corporate
act or proceeding.
10. Termination and Amendment of the Plan. The Plan shall
terminate on the date ten years after adoption of the Plan by the Board of
Directors and no Stock Incentive shall be granted under
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<PAGE> 15
the Plan after that date, but Stock Incentives granted before termination of
the Plan shall remain exercisable thereafter until they expire or lapse
according to their terms. The Plan may be terminated, modified, or amended by
the Board of Directors of the Corporation; provided, however, that:
(a) no such termination, modification, or amendment without the
consent of the holder of a Stock Incentive shall adversely affect his rights
under such Stock Incentive; and
(b) any modification or amendment which would (1) increase the
aggregate number of shares of Stock which may be issued under the Plan (other
than an increase merely reflecting a change in capitalization such as a stock
dividend or stock split), (2) modify the designation of the persons eligible to
receive Stock Incentives under the Plan, or (3) materially increase the
benefits accruing to holders of Stock Incentives granted or to be granted under
the Plan, within the meaning of Rule 16b-3, shall be effective only if it is
approved by the shareholders of the Corporation within the twelve month period
after the date of adoption by the Board of Directors of such modification or
amendment.
11. Approval. This Plan is subject to the approval of the holders
of a majority of the outstanding shares of common stock of the Corporation and,
unless so approved within twelve months of its adoption by the Board of
Directors, this Plan and any Stock Incentives granted hereunder shall become
void thereafter.
12. Incentive Stock Option. All Incentive Stock Options to be
granted hereunder are intended to comply with Sections 422 and
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<PAGE> 16
424 of the Code, and all provisions of this Plan and all Incentive Stock
Options granted hereunder shall be construed in such manner as to effectuate
that intent.
13. General Provisions.
(a) Legends; Restrictions on Transfer. The Committee may
require each person purchasing shares pursuant to a Stock Incentive to
represent to and agree with the Corporation in writing that the shares are
acquired without a view to distribution thereof. The certificates for such
shares may include any legend which the Committee deems appropriate to reflect
any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed, and any applicable Federal or state securities
law, and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(b) Other Compensation. Nothing contained in this Plan
shall prevent the Board of Directors from adopting other or additional
compensation arrangements, subject to shareholder approval if such approval is
required, and such arrangements may be either generally applicable or
applicable only in specific cases.
(c) No Rights to Continued Employment. Neither the
adoption of the Plan, nor the granting of any Stock Incentive
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<PAGE> 17
hereunder, shall confer upon any employee of the Corporation or any subsidiary
any right to continued employment with the Corporation or a subsidiary, as the
case may be, nor shall it interfere in any way with the right of the
Corporation or a subsidiary to terminate the employment of any of its employees
at any time.
(d) Governing Law. The Plan and all awards made and
actions taken thereunder shall be governed by and construed in accordance with
the laws of the State of Delaware.
(e) Compliance with Section 16(b). This Plan is intended
to comply with, and to the extent necessary or appropriate shall be interpreted
to comply with, Rule 16b-3.
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EXHIBIT 10.2
SERVICE EXPERTS, INC.
1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
R E C I T A L S:
A. Effective as of ______________, 1996, (the "Effective Date"), the
Board of Directors (the "Board of Directors") of Service Experts, Inc., a
Delaware corporation (the "Company"), hereby adopts this Service Experts, Inc.
1996 Non-Employee Director Stock Option Plan (the "Plan").
B. The purposes of the Plan are to provide to each of the directors
of the Company who is not also either an employee or an officer of the Company
added incentive to continue in the service of the Company and a more direct
interest in the future success of the operations of the Company by granting to
such directors options (the "Options", or individually, the "Option"), to
purchase shares of the Company's Common Stock, $.01 par value (the "Common
Stock"), subject to the terms and conditions described below.
ARTICLE I
GENERAL
1.01. Definitions. For purposes of this Plan and as used herein,
"non-employee director" shall mean an individual who (a) is now, or hereafter
becomes, a member of the Board of Directors by virtue of an election by the
shareholders of the Company, (b) is neither an employee nor an officer of the
Company and (c) has not elected to decline to participate in the Plan pursuant
to the next succeeding sentence. A director otherwise eligible to participate
in the Plan may make an irrevocable, one-time election, by written notice to
the Company within 30 days after his initial election to the Board of Directors
or, in the case of the directors in office on the Effective Date, prior to
December 31, 1996, to decline to participate in the Plan. For purposes of this
Plan, "employee" shall mean an individual whose wages are subject to the
withholding of federal income tax under Section 3401 of the Internal Revenue
Code of 1986, as amended from time to time (the "Code"), and "officer" shall
mean an individual elected or appointed by the Board of Directors or chosen in
such other manner as may be prescribed in the Bylaws of the Company to serve as
such, except that for the purposes of this Plan any individual serving as the
Chairman of the Board, but in no other capacity as an officer or employee, will
not be deemed to be an officer of the Company.
For purposes of this Plan, and as used herein, the "fair market value"
of a share of Common Stock is the closing sales price of the Common Stock as
reported on The Nasdaq Stock Market's National Market on the Grant Date, as
hereinafter defined, of the Options (or, if there was no reported sale on such
date, on the last preceding day on which any reported sale occurred).
<PAGE> 2
1.02. Options. The Options granted hereunder shall be options that
are not qualified under Section 422 of the Code.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Board of Directors or the
Compensation Committee thereof. The Board of Directors shall have no
authority, discretion or power to select the participants who will receive
Options, to set the number of shares to be covered by each Option, or to set
the exercise price or the period within which the Options may be exercised, or
to alter any other terms or conditions specified herein, except in the sense of
administering the Plan subject to the express provisions of the Plan and except
in accordance with sections 3.02(a) and 5.02 hereof. Subject to the foregoing
limitations, the Board of Directors or the Compensation Committee shall have
authority and power to adopt such rules and regulations and to take such action
as it shall consider necessary or advisable for the administration of the Plan,
and to construe, interpret and administer the Plan. The decisions of the Board
of Directors or Compensation Committee relating to the Plan shall be final and
binding upon the Company, the Holders, as defined hereinafter, and all other
persons. No member of the Board of Directors shall incur any liability by
reason of any action or determination made in good faith with respect to the
Plan or any stock option agreement entered into pursuant to the Plan.
ARTICLE III
OPTIONS
3.01. Participation. Each non-employee director shall be granted
Options to purchase Common Stock under the Plan on the terms and conditions
herein described.
3.02. Stock Option Agreements. Each Option granted under the Plan
shall be evidenced by a written stock option agreement, which agreement shall
be entered into by the Company and the non-employee director to whom the Option
is granted (the "Holder"), and which agreement shall include, incorporate or
conform to the following terms and conditions, and such other terms and
conditions not inconsistent therewith or with the terms and conditions of this
Plan as the Board of Directors considers appropriate in each case:
(a) Option Grant Date; Number. An Option to purchase
5,000 shares of Common Stock (subject to adjustment in accordance with section
4.02 hereof) shall be granted initially as of the date the Company commences
its initial public offering of Common Stock to each non-employee director
serving the Company as a director on such date. In addition, an Option to
purchase 5,000 shares of Common Stock (subject to adjustment in accordance with
2
<PAGE> 3
section 4.02 hereof) shall be granted to each non-employee director elected
after the Company commences its initial public offering as of the date of such
director's initial election to the Board of Directors. Thereafter, on January
1 of each year during the term of the Plan, beginning on January 1, 1997, an
Option to purchase 1,000 shares of Common Stock (subject to adjustment in
accordance with section 4.02 hereof) shall be granted automatically to the
non-employee directors serving the Company as directors on such date. The date
of grant of an Option pursuant to the Plan shall be referred to hereinafter as
the "Grant Date" of such Option. Notwithstanding anything herein to the
contrary, the Board of Directors may revoke, on or prior to each Grant Date,
the next automatic grant of Options otherwise provided for by the Plan if no
options have been granted to employees since the preceding Grant Date under the
Company's 1996 Incentive Stock Plan or any other employee stock option plan
that the Company might adopt hereafter.
If, on any Grant Date during the term of the Plan, fewer than
1,000 shares of Common Stock (subject to adjustment in accordance with section
4.02 hereof) multiplied by the then number of non-employee directors remain
available for grant on such date pursuant to Section 4.01 hereof, the remaining
shares shall be allocated pro rata in determining the number of shares of
Common Stock to be subject to each Option to be granted to each non-employee
director on such date.
(b) Price. The price at which each share of Common Stock
covered by an Option may be purchased pursuant to this Plan shall be the fair
market value of the shares (as determined in good faith by the Board of
Directors or the Compensation Committee thereof) on the Grant Date of such
Option.
(c) Option Period. The period within which each Option
may be exercised shall expire, in all cases, ten years from the Grant Date of
such Option (the "Option Period"), unless terminated sooner pursuant to section
3.02(d) below.
(d) Termination of Service, Death, Etc. Each stock option
agreement shall provide as follows with respect to the exercise of the Option
granted thereby in the event that the Holder ceases to be a non-employee
director for the reasons described in this section 3.02(d):
(i) If the directorship of the Holder is terminated
within the Option Period on account of fraud, dishonesty or other acts
detrimental to the interests of the Company or any direct or indirect
majority-owned subsidiary of the Company, the Option shall
automatically terminate as of the date of such termination;
(ii) If the Holder shall die during the Option Period
while a director of the Company (or during the additional three-month
period provided by paragraph (iii) of this section 3.02(d)), the
Option may be exercised, to the extent that the Holder was entitled to
exercise it at the date of Holder's death, within
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<PAGE> 4
one year after such date (if otherwise within the Option Period), but
not thereafter, by the executor or administrator of the estate of
Holder, or by any person or persons who shall have acquired the Option
directly from the Holder by bequest or inheritance; or
(iii) If the directorship of a Holder is terminated for any
reason (other than the circumstances specified in paragraphs (i) and
(ii) of this Section 3.02(d)) within the Option Period, the Option may
be exercised, to the extent Holder was able to do so at the date of
termination of the directorship, within three months after such
termination (if otherwise within the Option Period), but not
thereafter.
(e) Transferability. An Option granted under the Plan
shall not be transferable by the Holder, otherwise than by will or by the laws
of descent and distribution, and during the lifetime of Holder, is exercisable
only by Holder.
(f) Agreement to Continue in Service. Each Holder shall
agree to remain in the service of the Company, at the pleasure of the Company's
shareholders, for a continuous period of at least one year after the Grant Date
of any Option, at the retainer rate then in effect or at such changed rate as
the Company from time to time may establish.
(g) Exercise, Payments, Etc. Each stock option agreement
shall provide that the method for exercising the Option granted thereby shall
be by delivery to the Company of, or by sending by United States registered or
certified mail, postage prepaid, addressed to the Company (for the attention of
its secretary), written notice signed by Holder specifying the number of shares
of Common Stock with respect to which such Option is being exercised. Such
notice shall be accompanied by the full amount of the purchase price of such
shares. Payment may be made at the election of the Holder as follows: (i) in
cash; (ii) in outstanding shares of Common Stock at their fair market value, as
determined by the Board of Directors, on the date of exercise; or (iii) by
delivery of Options with a value equal to the exercise price, such value to be
equal to the difference between the fair market value of the Common Stock on
the exercise date subject to such Option and the exercise price thereof. Any
such notice shall be deemed to be given three days after the same was deposited
in a regularly maintained receptacle for the deposit of United States mail,
addressed and sent as above stated. In addition to the foregoing, promptly
after demand by the Company, the exercising Holder shall pay to the Company an
amount equal to applicable withholding taxes, if any, due in connection with
such exercise.
(h) Delivery and Exercise. Each Option shall be
exercisable in full upon receipt.
4
<PAGE> 5
ARTICLE IV
AUTHORIZED COMMON STOCK
4.01 Authorized Shares. The total number of shares of Common Stock as
to which Options may be granted pursuant to the Plan shall be 100,000, in the
aggregate, except as such number of shares shall be adjusted from and after the
Effective Date in accordance with the provisions of Section 4.02 hereof. If
any outstanding Option under the Plan shall expire or be terminated for any
reason before the end of the Option Period, the shares of Common Stock
allocable to the unexercised portion of such Option may again be subject to the
Plan. The Company shall, at all times during the life of any outstanding
Options, retain as authorized and unissued Common Stock at least the number of
shares from time to time included in the outstanding Options or otherwise
assure itself of its ability to perform its obligations under the Plan.
4.02. Adjustments Upon Changes in Common Stock. In the event the
Company shall effect a split of the Common Stock or dividend payable in Common
Stock, or in the event the outstanding Common Stock shall be combined into a
smaller number of shares, the maximum number of shares as to which Options may
be granted under the Plan shall be increased or decreased proportionately. In
the event that before delivery by the Company of all of the shares of Common
Stock in respect of which any Option has been granted under the Plan, the
Company shall have effected such a split, dividend or combination, the shares
still subject to the Option shall be increased or decreased proportionately and
the purchase price per share shall be increased or decreased proportionately so
that the aggregate purchase price for all the then optioned shares shall remain
the same as immediately prior to such split, dividend or combination.
In the event of a reclassification of the Common Stock not covered by
the foregoing, or in the event of a liquidation or reorganization, including a
merger, consolidation or sale of assets, the Board of Directors of the Company
shall make such adjustments, if any, as it may deem appropriate in the number,
purchase price and kind of shares covered by the unexercised portions of
Options theretofore granted under the Plan. The provisions of this Section
4.02 shall only be applicable if, and only to the extent that, the application
thereof does not conflict with any valid governmental statute, regulation or
rule.
ARTICLE V
GENERAL PROVISIONS
5.01. Termination of Plan. The Plan shall terminate whenever the
Board of Directors adopts a resolution to that effect. If not sooner terminated
under the preceding sentence, the Plan shall expire at the close of business on
December 31, 2006. After termination
5
<PAGE> 6
of the Plan, no Options shall be granted under the Plan, but the Company shall
continue to recognize Options previously granted.
5.02. Amendment of Plan. The Board of Directors may from time to
time amend, modify, suspend or terminate the Plan; provided, however, that the
Plan may not be amended, modified or suspended more than once every six months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act or the rules thereunder. No amendment, modification, suspension or
termination shall (a) impair any Options theretofore granted under the Plan or
deprive any Holder of any shares of Common Stock which he might have acquired
through or as a result of the Plan, or (b) be made without the approval of the
shareholders of the Company where such change would (i) increase the total
number of shares of Common Stock which may be granted under the Plan or
decrease the purchase price under the Plan (other than as provided in Section
4.02 hereof), (ii) materially alter the class of persons eligible to be granted
Options under the Plan, (iii) materially increase the benefits accruing to
Holders under the Plan or (iv) extend the term of the Plan or the Option
Period.
5.03. Treatment of Proceeds. Proceeds from the sale of Common Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Company.
5.04. Effectiveness. This Plan shall become effective as of the
Effective Date, subject to the conditions stated in the following sentence.
This Plan and each Option granted or to be granted hereunder is conditional on
and shall be of no force and effect, and no Option shall be exercised, unless
and until the Plan is approved by the affirmative votes of the holders of a
majority of the shares of Common Stock present, or represented, and entitled to
vote at a meeting of shareholders duly held not later than the date of the next
annual meeting of shareholders of the Company.
5.05. Paragraph Headings. The paragraph headings included herein
are only for convenience, and they shall have no effect on the interpretation
of the Plan.
5.06. Compliance with Rule 16b-3. The grant and exercise of Options
under the Plan is intended to be exempt under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, and, subject to the limitations on the
exercise of discretion as provided in Article II hereof, this Plan shall be
interpreted so as to comply with Rule 16b-3.
6
<PAGE> 1
EXHIBIT 10.3
SERVICE EXPERTS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
Service Experts, Inc., a Delaware corporation, hereby adopts
the following Employee Stock Purchase Plan for the benefit of its eligible
employees and eligible employees of its subsidiaries. The purpose of this Plan
is to provide an opportunity for eligible employees to share in the growth and
prosperity of the Sponsoring Employer (as defined in Section 1.18) and its
subsidiaries by acquiring a proprietary interest in the Sponsoring Employer
through acquisition of shares of the Sponsoring Employer's common stock. The
Plan is intended to qualify as an "employee stock purchase plan" within the
meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
ARTICLE I
DEFINITIONS
As used herein, the following words and phrases shall have the
meanings specified below, unless a different meaning is plainly required by the
context:
1.1. "Anniversary Date" shall mean [________ 1] of each year.
1.2. "Board of Directors" shall mean the Board of Directors
of Service Experts, Inc.
1.3. The "Committee" shall mean the Compensation Committee of
the Sponsoring Employer's Board of Directors.
1.4. "Continuous Service" shall mean the number of full years
and completed months of continuous employment with an Employer calculated from
an Employee's last hire date to the Employee's date of severance of employment
for any reason. Continuous Service shall not be broken and shall be credited
for absences due to vacation, temporary sickness or injury, other paid leaves
of absence authorized by an Employer, and leaves of absence which would not
cause an individual to cease to be an Employee.
1.5. "Contribution Account" shall mean the account recorded
on the records of the Sponsoring Employer established on behalf of a Member to
which the amount of the Member's contributions made pursuant to Article IV
shall be credited.
1.6. "Effective Date" shall mean [________ 1, 199__].
1.7. "Employee" shall mean each current or future employee of
an Employer as defined in Treasury Regulation Section 1.423-2(b), Section
1.421-7(h) and any other Regulations later finalized.
<PAGE> 2
1.8. "Employer" shall mean the Sponsoring Employer, its
successors, any future parent (as defined in Section 424(e) of the Code) and
each current or future subsidiary (as defined in Section 424(f) of the Code).
1.9. "Exercise Date" shall mean the last trading date during
each Plan Year of the exchange or automated interdealer quotation system on
which the Sponsoring Employer Stock is traded.
1.10. "Grant Date" shall mean the first trading date during
the Plan Year of the exchange or automated interdealer quotation system on
which the Sponsoring Employer Stock is traded.
1.11. "Issue Price" shall mean the purchase price of the
Sponsoring Employer Stock to be charged to participating Members on the
Exercise Date. The Issue Price shall be subject to a Minimum Issue Price as
outlined in Section 5.2 herein.
1.12. "Market Price" shall mean the last reported sale price
for the day upon which the Market Price is to be determined or, if there are no
sales on such date, the last reported sale price for the most recent day
preceding such date, in either case as reported on The Nasdaq Stock Market's
National Market or any other automated interdealer quotation system sponsored
by a registered national securities association on which the Sponsoring
Employer Stock is quoted or an exchange on which the Sponsoring Employer Stock
is traded. Notwithstanding the foregoing, if there shall be any material
alteration in the present system of reporting sale prices of the Sponsoring
Employer Stock, or if the Sponsoring Employer Stock shall no longer be quoted
on an automated interdealer quotation system sponsored by a registered national
securities association or listed on a national securities exchange, the Market
Price of the Sponsoring Employer Stock as of a particular date shall be
determined using such method as shall be determined by the Committee provided
such method is appropriate to qualify the Plan as an employee stock purchase
plan under Section 423 of the Code.
1.13. "Member" shall mean any Employee of an Employer who has
met the conditions and provisions for becoming a Member as provided in Article
III.
1.14. "Member's Contribution Rate" shall be an exact number
of dollars elected by the Member to be contributed by regular payroll
deductions to his Contribution Account as outlined in Section 4.1.
1.15. "Normal Monthly Pay" for purposes of determining the
amount of a Member's contributions for any Plan Year shall be (i) for hourly
paid Employees, an amount computed by adding (a) the Member's hourly base pay
multiplied by the Member's regular scheduled hours of work for the calendar
year immediately preceding
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<PAGE> 3
the first day of the Plan Year divided by twelve (12) and (b) the amount
obtained from dividing the amount of all commissions paid to the Member in the
calendar year immediately preceding the first day of the Plan Year by twelve
(12), and (ii) for salaried employees, an amount computed by adding (a) the
Member's monthly base pay for the calendar month immediately preceding the
first day of the Plan Year and (b) the amount obtained from dividing the
amount of all commissions paid to the Member in the calendar year immediately
preceding the first day of the Plan Year by twelve (12); provided, however,
that with respect to any Member who on the Effective Date has been employed for
less than the applicable time periods set forth above, the Sponsoring Employer
may calculate "Normal Monthly Pay" by any reasonable method consistently
applied to all such Members.
1.16. "Plan" shall mean the Service Experts, Inc. 1996
Employee Stock Purchase Plan as set forth herein and all subsequent amendments
hereto.
1.17. "Plan Year" shall mean a twelve (12) month period
beginning on January 1 and ending on December 31 of each year.
1.18. "Sponsoring Employer" shall mean Service Experts, Inc.,
a Delaware corporation, or its successors, the Plan sponsor for all purposes.
1.19. "Sponsoring Employer Stock" shall mean, subject to
adjustment as provided in Article X, those shares of the Sponsoring Employer's
Common Stock, $.01 par value per share, which pursuant to Article II are
reserved for issuance upon the exercise of the options granted under this Plan.
ARTICLE II
ISSUANCE OF STOCK
The Sponsoring Employer hereby reserves one hundred thousand
(100,000) shares of Sponsoring Employer Stock for issuance upon the exercise of
the options granted hereunder; provided, that the class and aggregate number of
shares which may be issued upon exercise of options granted hereunder shall be
subject to adjustment in accordance with the provisions of Article X of the
Plan. These shares may be authorized and unissued shares, issued shares held
in or acquired for the treasury of the Sponsoring Employer, or shares of stock
reacquired by the Sponsoring Employer upon purchase in the open market or
otherwise.
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<PAGE> 4
ARTICLE III
ELIGIBILITY
3.1. Every Employee whose customary employment with an
Employer on the Effective Date is at least twenty (20) hours per week and more
than five (5) months in a calendar year shall be eligible to participate as of
the Effective Date. Every other Employee whose customary employment is at
least twenty (20) hours per week and more than five (5) months in a calendar
year shall be eligible to participate as of any Anniversary Date coincident
with or immediately following his completion of at least six (6) months of
Continuous Service. An Employee shall not be eligible to participate, however,
if immediately after the options are granted such Employee would own stock
possessing five percent (5%) or more of the total combined voting power or
value of all classes of the Sponsoring Employer or a subsidiary corporation or
parent corporation (as those terms are defined in Section 424(e) and (f) of the
Code). For purposes of this paragraph, the ownership attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
Employee and stock which the Employee may purchase under outstanding options
(under this or any other agreement) shall be treated as stock owned by the
Employee.
3.2. Upon becoming a Member, the Employee shall be bound by
the terms of this Plan, including any amendments hereto. Each Employee who
becomes eligible to participate shall be furnished a summary of the Plan and a
form for election to participate. If the Employee elects to participate, he
shall complete such form and file it with the Employer no later than thirty
(30) days prior to the next Anniversary Date (or no later than ______________
in the first Plan Year). The completed request for participation shall
indicate the amount of the Member's Contribution Rate authorized by the Member
in accordance with Section 4.1. If any Employee does not elect to participate
in any given Plan Year he or she may elect to participate as of any future
Anniversary Date if he or she continues to meet the eligibility requirements
and files an election to participate at least fifteen (15) days prior to such
Anniversary Date.
ARTICLE IV
CONTRIBUTIONS
4.1. In order to participate in this Plan and be granted an
option hereunder, a Member must file with the Employer an election to
participate in accordance with Section 3.2 and must authorize his Employer to
deduct through a payroll deduction an exact number of dollars per month, but
not less than $10.00 per month, being the Member's "Contribution Rate." The
maximum deduction which a Member may authorize shall be ten percent (10%) of
the Member's Normal Monthly Pay. Such authorization shall be in
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<PAGE> 5
writing and on such forms as are provided by the Committee. Payroll deductions
shall begin as of the first pay period on or after the first day of the Plan
Year. For all purposes of this Plan, a Member's contributions shall be
allocated to and deemed a part of the Member's Contribution Account. Member
contributions will not be permitted to begin at any time other than the
beginning of a Plan Year. The Employers shall transfer all withheld amounts to
the Sponsoring Employer which may use such amounts for any valid corporate
purposes. No interest shall accrue or be paid on any amounts withheld under
this Plan.
4.2. The Member's Contribution Rate, once established, shall
remain in effect for all Plan Years unless changed by the Member in writing on
such forms as are provided by the Committee and filed with the Employer at
least thirty (30) days prior to the next Anniversary Date.
4.3. At any time during the Plan Year, a Member may notify
the Employer that he or she wishes to discontinue his or her contributions.
This notice shall be in writing and on such forms as are provided by the
Committee and shall become effective as of a date not more than thirty (30)
days following its receipt by the Employer.
4.4. Members may elect to withdraw any or all of their
contributions at any time during the Plan Year except on the Exercise Date.
Any such withdrawal will be made by request in writing on such forms as are
provided by the Committee. If contributions are withdrawn during the Plan
Year, however, no further contributions will be permitted during that Plan
Year.
ARTICLE V
GRANT OF OPTIONS
5.1. Every participating Member, on the Grant Date of each
Plan Year, shall be granted options to purchase that number of whole shares of
Sponsoring Employer Stock for the Plan Year that have a value on that date of
$25,000. Options granted under this Plan shall be subject to such amendments
or modifications as the Sponsoring Employer shall deem necessary to comply with
any applicable law or regulation, and shall contain such other provisions as
the Sponsoring Employer shall from time to time approve and deem necessary.
Options not exercised pursuant to Section 6.1 shall terminate at 11:59 p.m.
(Eastern Time) on the Exercise Date. In the event an outstanding option shall
for any reason expire, the shares of Sponsoring Employer Stock allocable to the
unexercised portion of such option may again be subject to option under the
Plan. This Plan is subject to stockholder approval as provided in Section
11.11 and unless so approved on or before the date which is twelve (12) months
after the date this Plan is adopted by the Board of Directors, this Plan and
all
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<PAGE> 6
options granted hereunder shall terminate and become void thereafter.
5.2. The Issue Price of the Sponsoring Employer Stock under
this Plan shall be equal to the lesser of: (i) eighty-five percent (85%) of the
Market Price on the Exercise Date of each Plan Year; or (ii) eighty-five
percent (85%) of the Market Price on the Grant Date of each Plan Year. The
issue price is subject, however, to a "Minimum Issue Price" for each Plan Year.
The "Minimum Issue Price" for any Plan Year shall be the book value of the
Sponsoring Employer Stock as of December 31 for the calendar year preceding the
calendar year during which the Grant Date for the Plan Year occurs.
Notwithstanding any provision to the contrary, if the Issue Price for any Plan
Year is less than the Minimum Issue Price, the options granted for that Plan
Year shall be considered null and void and the payroll deductions credited to
the Member's Contribution Account shall be returned to the Member.
5.3. Notwithstanding any provision of this Plan, no Employee
shall receive options to purchase Sponsoring Employer Stock which permit the
rights of an Employee to purchase stock under all "employee stock purchase
plans" of the Sponsoring Employer and its parent corporation and subsidiary
corporations (as the terms "parent corporation" and "subsidiary corporation"
are defined in Section 424(e) and (f) of the Code) to accrue at a rate which
exceeds $25,000 of fair market value of such stock (determined at the time the
option is granted) for each calendar year in which the option is outstanding at
any time. For purposes of this Section 5.3 (i) the right to purchase stock
under an option accrues when the option (or any portion thereof) first becomes
exercisable during the calendar year, (ii) the right to purchase stock under an
option accrues at the rate provided in the option but in no case may such rate
exceed $25,000 of fair market value of such stock (determined at the time such
option is granted) for any one calendar year, and (iii) a right to purchase
stock which has accrued under one option granted pursuant to the Plan may not
be carried over to any other option.
5.4. Notwithstanding any other provisions of this Plan, if
a Member is subject to Section 16(a) of the Securities Exchange Act of 1934, as
amended, with respect to the Sponsoring Employer Stock (any such Member being
referred to herein as a "Statutory Insider"), then, if the Statutory Insider
discontinues or withdraws contributions less than six months prior to any
Exercise Date, the Statutory Insider will not be permitted to participate in
the Plan until the first Plan Year that begins at least six months following
such discontinuance or withdrawal unless the Sponsoring Employer, upon advice
of counsel, consents in advance. Any shares of Sponsoring Employer Stock
received by a Statutory Insider under this Plan may not be sold, assigned, or
otherwise transferred by such Statutory Insider for a period of six months
following the date such shares of Sponsoring Employer Stock are received by the
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<PAGE> 7
Statutory Insider unless the Sponsoring Employer, upon advice of counsel,
consents in advance.
ARTICLE VI
EXERCISE OF OPTIONS
6.1. On each Exercise Date, the Member's Contribution Account
shall be used to purchase the maximum number of whole shares of Sponsoring
Employer Stock determined by dividing the Issue Price into the balance of the
Member's Contribution Account (subject to the limitations set forth in Section
5.3). Any money remaining in a Member's Contribution Account after the
Exercise Date which was not needed to exercise the Member's option to the
fullest extent as calculated pursuant to Section 5.1 shall be returned to the
Member. Any money remaining in a Member's Contribution Account solely as a
result of an amount representing a fractional share, however, shall remain in
the Member's Contribution Account unless the return of such amount is requested
by the Member in writing on a form supplied by the Committee. If such return
is not requested, the balance will remain in the Member's Contribution Account
to be used in the next Plan Year along with new contributions made in that Plan
Year.
If the total number of shares to be purchased under option by
all Members exceeds the number of shares authorized under Article II of this
Plan, a pro-rata allocation of the available shares will be made among all
Members authorizing such payroll deductions based on the amount of their
respective payroll deductions through the Exercise Date.
6.2. The certificates for Sponsoring Employer Stock purchased
through the exercise of the option granted hereunder shall be issued as soon as
practicable after the Exercise Date.
ARTICLE VII
TERMINATION OF EMPLOYMENT
7.1. Any Employee whose employment with all Employers is
terminated for any reason, except death or retirement, during the Plan Year
shall cease being a Member immediately. The balance of the Member's
Contribution Account shall be paid to such Member, or to such Member's legal
representative, as soon as practicable after such Member's termination. Any
right to purchase Sponsoring Employer Stock under the option granted to such
Member by participation in this Plan shall be deemed null and void.
7.2. If a Member dies during a Plan Year no further
contributions on behalf of the deceased Member shall be accepted under the
Plan. The personal representative of the estate of the deceased Member may
elect to withdraw the balance in the Member's
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<PAGE> 8
Contribution Account by notifying the Committee in writing prior to the
Exercise Date. In the event no election to withdraw has been made before the
Exercise Date, the balance accumulated in the deceased Member's Contribution
Account shall be used to purchase Sponsoring Employer Stock in accordance with
Article VI.
7.3. If a Member retires for reasons of age or disability
under the then established rules of the Employer during a Plan Year, no further
contributions on behalf of the retired Member shall be accepted under the Plan.
The Member may elect to withdraw the balance in his Contribution Account by
notifying the Committee in writing prior to the Exercise Date. In the event no
election to withdraw has been made before the Exercise Date, the balance
accumulated in the retired Member's Contribution Account shall be used to
purchase Sponsoring Employer's Stock in accordance with Article VI.
ARTICLE VIII
DISPOSITION OF STOCK
If a Member or former Member disposes of any shares of
Sponsoring Employer Stock obtained under this Plan (i) prior to two (2) years
after the Grant Date of such share, or (ii) prior to one (1) year after the
Exercise Date of such share, that Member or former Member must notify the
Committee immediately of such disposition in writing. All dispositions of
Sponsoring Employer Stock shall be made in compliance with applicable federal
and state securities laws.
ARTICLE IX
ADMINISTRATION
The Plan shall be administered by the Committee. No member of
the Committee shall be eligible to participate in the Plan while a member of
the Committee. Meetings shall be held at such times and places as shall be
determined by the Committee. A majority of the members of the Committee shall
constitute a quorum for the transaction of business, and the vote of a majority
of those members present at any meeting shall decide any question brought under
the Plan. No member of the Committee shall be liable for any act or omission
of any other member of the Committee or for any act or omission on his own part
related to the Plan, including but not limited to the exercise of any power or
discretion given to him under the Plan, except those resulting from his own
gross negligence or willful misconduct. All questions of interpretation and
application of the Plan, or of options granted hereunder, shall be subject to
the determination, which shall be final and binding, of a majority of the whole
Committee. The Plan shall be administered in order to qualify the options
granted hereunder as
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<PAGE> 9
options granted pursuant to an "employee stock purchase plan" described in
Section 423 of the Code.
ARTICLE X
CHANGES IN COMPANY'S CAPITAL STRUCTURE
10.1. The existence of this Plan shall not affect in any way
the right or power of the Sponsoring Employer or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Sponsoring Employer's capital structure or its business, or any
merger or consolidation of the Sponsoring Employer, or any issue of bonds,
debentures, preferred or prior preference stock ahead of or affecting the
Sponsoring Employer Stock or rights thereof, or the dissolution or liquidation
of the Sponsoring Employer, or any sale or transfer of all or part of its
assets or business, or any other corporate act or proceeding, whether of
similar character or otherwise.
10.2. In the event of a subdivision or consolidation of
shares or other capital readjustment, the payment of a stock dividend or other
increase or decrease of the number of shares of the Sponsoring Employer's Stock
outstanding without receiving compensation in money, services, or property,
then the class of shares of the Sponsoring Employer's Stock set forth in
Section 1.19 of the Plan, the number of shares of stock reserved pursuant to
Article II, and the number of options granted a Member shall be appropriately
adjusted as determined by the Committee. The Committee's determination shall
be final, binding, and conclusive, provided that each option granted pursuant
to this Plan shall not be adjusted in a manner that causes the option to fail
to continue to qualify as an option issued pursuant to an "employee stock
purchase plan" within the meaning of Section 423 of the Code.
10.3. Subject to any required action by the stockholders, if
the Sponsoring Employer is the surviving corporation in any merger or
consolidation, each outstanding option shall pertain to and apply to the
securities to which a holder of the number of shares of Sponsoring Employer
Stock subject to the option would have been entitled. Unless adopted by the
surviving corporation, a dissolution or liquidation of the Sponsoring Employer
or a merger or consolidation in which the Sponsoring Employer is not the
surviving corporation, shall cause each outstanding option to terminate;
provided that the Committee in its sole discretion, immediately prior to such
dissolution or liquidation, or merger or consolidation in which the Corporation
is not the surviving corporation, may direct that the Plan Year end on a date
immediately prior to the effective date of such event.
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<PAGE> 10
ARTICLE XI
MISCELLANEOUS
11.1. Each Member, former Member, or any other person who
shall claim a right or benefit under this Plan, shall be entitled only to look
to such Member's Employer for such benefit.
11.2. The Board of Directors may at any time or from time to
time amend the Plan in any respect, except that, without approval of the
stockholders of the Sponsoring Employer within twelve (12) months prior to or
after the date the amendment is adopted by the Board of Directors, no amendment
may (i) increase the number of shares reserved under the Plan other than as
provided in Article X, (ii) modify the class of employees eligible to
participate in the Plan, (iii) reduce the Issue Price per share as defined
herein, (iv) materially increase the benefits accruing to Statutory Insiders
under the Plan, or (v) materially modify the requirements as to eligibility of
Statutory Insiders in the Plan. The Sponsoring Employer may terminate the Plan
at any time. If the Plan is terminated, the date of termination shall be
treated as the Exercise Date and all funds in a Member's Contribution Account
not expended to purchase Sponsoring Employer Stock shall be refunded to the
Member.
11.3. The Employers will pay all expenses that may arise in
connection with the administration of this Plan.
11.4. Any headings or subheadings in this Plan are inserted
for convenience of reference only and are to be disregarded in the construction
of any provisions hereof. All references in this Plan to Articles and Sections
are to Articles and Sections of this Plan unless specified otherwise.
11.5. This Plan shall be construed in accordance with the
laws of the state of incorporation of the Sponsoring Employer to the extent
federal law does not supersede and preempt such law.
11.6. A misstatement in the age, length of Continuous
Service, date of employment or any other such matter shall be corrected when it
becomes known that any such misstatement of fact has occurred.
11.7. The option to purchase Sponsoring Employer Stock
arising by participation in this Plan is not transferable by a Member other
than by will or the laws of descent and distribution and is exercisable during
his lifetime only by him.
11.8. This Plan will not be deemed to constitute a contract
between an Employer and any Member or to be in consideration of or an
inducement for the employment of any Member or Employee. Nothing contained in
this Plan shall be deemed to give any Member or Employee the right to be
retained in the service
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<PAGE> 11
of an Employer or to interfere with the right of an Employer to discharge any
Member or Employee at any time regardless of the effect which such discharge
shall have upon him as a Member of the Plan.
11.9. No liability whatsoever shall attach to or be incurred
by any past, present or future stockholders, officers, or directors, as such,
of an Employer, under or by reason of any of the terms, conditions, or
agreements contained in this Plan or implied therefrom, and any and all
liabilities of, and any and all rights and claims against an Employer, or any
stockholder, officer, or director, as such, whether arising at common law or in
equity or created by statute or constitution or otherwise, pertaining to this
Plan, are hereby expressly waived and released by every Member, as a part of
the consideration for any benefits provided by the Employers under this Plan.
11.10. With respect to administration of the Plan, the
Sponsoring Employer shall indemnify each present and future member of the
Committee and the Board of Directors against, and each member of the Committee
and the Board of Directors shall be entitled without further act on his or her
part to indemnity from the Sponsoring Employer, for all expenses (including the
amount of judgments and the amount of approved settlements made with a view to
the curtailment of costs of litigation, other than amounts paid to the
Sponsoring Employer itself) reasonably incurred by him or her in connection
with or arising out of any action, suit or proceeding in which he or she may be
involved by reason of his or her being or having been a member of the Committee
and the Board of Directors, whether or not he or she continues to be such a
member of the Committee and the Board of Directors at the time of incurring
such expenses; provided, however, that such indemnity shall not include any
expenses incurred by any such member of the Committee and the Board of
Directors (a) in respect of matters as to which he shall be finally adjudged in
any such action, suit, or proceeding to have been guilty of gross negligence or
willful misconduct in the performance of his or her duty as such a member of
the Committee and the Board of Directors, or (b) in respect of any matter in
which any settlement is effected, to an amount in excess of the amount approved
by the Sponsoring Employer on the advice of its legal counsel; and provided
further, that no right of indemnification under the provisions set forth herein
shall be available to or enforceable by any such member of the Committee and
the Board of Directors unless, within sixty (60) days after institution of any
such action, suit, or proceeding, he or she shall have offered the Sponsoring
Employer, in writing, the opportunity to handle and defend same at its own
expense. The foregoing right of indemnification shall inure to the benefit of
the heirs, executors, or administrators of each such member of the Committee
and the Board of Directors and shall be in addition to all other rights to
which such member of the Committee and the Board of Directors may be entitled
as a matter of law, contract, or otherwise.
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<PAGE> 12
11.11. Notwithstanding any other provisions of this Plan, in
order for this Plan to continue as effective, it must be approved by the
stockholders holding at least a majority of the voting stock of the Sponsoring
Employer on or before the date which is twelve (12) months after the date it is
adopted by the Board of Directors.
11.12. The Sponsoring Employer's obligation to sell and
deliver stock under the Plan is at all times subject to all approvals of any
governmental authorities required in connection with the authorization,
issuance, offer, sale, or delivery of such stock and compliance with applicable
state and federal securities laws.
11.13. Whenever any notice is required or permitted
hereunder, such notice must be in writing and personally delivered or sent by
mail. Any notice required or permitted to be delivered hereunder shall be
deemed to be delivered on the date which it is personally delivered, or,
whether actually received or not, on the third business day after it is
deposited in the United States mail, certified or registered, postage prepaid,
addressed to the person who is to receive it at the address which such person
has theretofore specified by written notice delivered in accordance herewith.
Notwithstanding any of the foregoing, any notice required or permitted to be
given by or on behalf of a Member under Section 7.2 or Article IV hereof, shall
only be effective as of the date of its actual receipt. Any party may change,
at any time and from time to time, by written notice to the other, the address
which it, he, or she had theretofore specified for receiving notices. Until
changed in accordance herewith, the Sponsoring Employer shall be entitled to
use the address of a Member in the Employer's records. Any person entitled to
notice hereunder may waive such notice.
11.14. In the event the Sponsoring Employer should receive
notice that this Plan fails to qualify as an "employee stock purchase plan"
under Section 423 of the Code, the Sponsoring Employer shall have the option of
returning all then existing Members' Contribution Accounts to the Members and
terminating the Plan.
11.15. Any words herein used in the masculine shall be read
and construed in the feminine where they would so apply. Words in the singular
shall be read and construed as though in the plural in all cases where they
would so apply.
11.16. This Plan is intended to comply with Rule 16b-3 under
the Securities Exchange Act of 1934, as amended, and to the extent necessary or
appropriate shall be interpreted to comply with such Rule 16b-3.
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EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This Agreement is made this _____ day of June, 1996, between
Service Experts, Inc., a Delaware corporation (the "Company"), and Alan R.
Sielbeck ("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive
offices at 1134 Murfreesboro Road, Nashville, Tennessee 37217, owns and
operates heating, ventilating and air conditioning ("HVAC") service and
replacement businesses under the name "Service Experts(R)";
WHEREAS, the Company desires to employ Employee and Employee
desires to accept such employment by the Company subject to the terms and
conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee
will participate in the use and development of confidential proprietary
information about the Company, its customers and suppliers, and the methods
used by the Company and its employees in competition with other companies, as
to which the Company desires to protect fully its rights;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto agree as
follows:
1. Employment. The Company hereby employs Employee and
Employee accepts such employment with the Company, subject to the terms and
conditions set forth herein. Employee shall be employed as Chief Executive
Officer of the Company, shall perform all duties and services incident to such
position, and such other duties and services as may be assigned or delegated to
him by the Board of Directors of the Company from time to time including the
negotiation and execution of contracts on behalf of the Company in the ordinary
course of the Company's business, general supervision, direction and control of
the Company's business, execution of bonds, mortgages and other contracts,
except where required to be otherwise signed and executed and hiring,
appointment, termination, removal and suspension of subordinate officers,
agents and employees upon such terms and conditions as Employee deems
reasonable and appropriate; provided, however, that without Employee's consent,
the duties and services of Employee hereunder shall not be materially increased
or altered in a manner inconsistent with Employee's position and original
duties hereunder. During his employment hereunder, Employee shall devote his
best efforts and attention, on a full-time basis, to the performance of the
duties required of him as an employee of the Company.
2. Compensation. As compensation for services rendered
by Employee hereunder, Employee shall receive:
<PAGE> 2
(a) An annual salary as set forth on Appendix I
hereto, or such higher salary as shall be established by the
Compensation Committee of the Board of Directors of the
Company, which salary shall be payable in arrears in equal
monthly installments, plus insurance and other benefits
equivalent to the benefits provided other similar employees of
the Company, which are set forth in Appendix I hereto;
(b) Compensated vacation time, for such duration
as set forth on Appendix I hereto, to be taken at any time
during each year of the term of this Agreement;
(c) Bonus compensation to be determined in the
sole discretion of the Compensation Committee; and
(d) Reimbursement for all reasonable expenses
incurred by Employee in the performance of his duties under
this Agreement, provided that Employee submits verification of
such expenses in accordance with the policies of the Company.
Prior to the end of each anniversary of the effective date of
this Agreement, the Compensation Committee shall review with Employee his
compensation hereunder. Any increases in salary or changes in fringe benefits
agreed upon by Employee and the Compensation Committee at such annual review
shall become effective the following month unless otherwise agreed to by the
Company and Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the
Company requires considerable responsibility and trust, and, in reliance on
Employee's loyalty, the Company may entrust Employee with highly sensitive
confidential, restricted and proprietary information involving Trade Secrets
and Confidential Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is
any scientific or technical information, design, process, procedure, formula or
improvement that is valuable and not generally known to competitors of the
Company. "Confidential Information" is any data or information, other than
Trade Secrets, that is important, competitively sensitive, and not generally
known by the public, including, but not limited to, the Company's business
plan, business prospects, customer lists, training manuals, product development
plans, bidding and pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information concerning
employees of the Company, supplier data, operational or administrative plans,
policy manuals, and terms and conditions of contracts and agreements. The
terms "Trade Secret" and "Confidential Information" shall not apply to
information which is (i) received by Employee from a third party with no
restriction on disclosure, or (ii) required to be disclosed by any applicable
law.
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<PAGE> 3
3.3 Except as required to perform Employee's duties
hereunder, Employee will not use or disclose any Trade Secrets or Confidential
Information of the Company during employment, at any time after termination of
employment and prior to such time as they cease to be Trade Secrets or
Confidential Information through no act of Employee in violation of this
Agreement.
3.4 Upon the request of the Company and, in any event,
upon the termination of employment hereunder, Employee will surrender to the
Company all memoranda, notes, records, manuals or other documents pertaining to
the Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company
that during the term hereof and for a period expiring two years after the
termination or expiration of this Agreement, Employee will not directly or
indirectly (i) operate, develop or own any interest other than the ownership of
less than five percent (5%) of the equity securities of a publicly traded
company, in any business which has significant (viewed in relation to the
business of the Company) activities relating to the ownership, management or
operation of, or consultation regarding an HVAC service and replacement company
(an "HVAC Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any HVAC Business within fifty
(50) miles of any HVAC Business owned by the Company; (iii) be employed by or
consult with any business which owns, manages or operates an HVAC Business
within fifty (50) miles of any HVAC Business owned by the Company; (iv)
interfere with, solicit, disrupt or attempt to disrupt any past, present or
prospective relationship, contractual or otherwise, between the Company, or its
subsidiaries or affiliates, and any customer, client, supplier or employee of
the Company, or its subsidiaries or affiliates; or (v) solicit any past,
present or prospective management employee (including all corporate officers
and managers, all regional managers and all general managers) of the Company,
or its subsidiaries or affiliates, to leave their employment with the Company
or its subsidiaries or affiliates, or hire any such employee to work in any
capacity; provided, however, that this provision shall not apply if Employee's
employment hereunder is terminated without cause prior to the expiration of the
Agreement.
4.2 If a judicial determination is made that any of the
provisions of this Section 4 constitutes an unreasonable or otherwise
unenforceable restriction against Employee, the provisions of this Section 4
shall be rendered void only to the extent that such judicial determination
finds such provisions to be unreasonable or otherwise unenforceable. In this
regard, the parties hereto hereby agree that any judicial authority construing
this Agreement shall be empowered to sever any portion of the territory or
prohibited business activity from the coverage of this Section 4 and to apply
the provisions of this Section 4 to the remaining portion
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<PAGE> 4
of the territory or the remaining business activities not so severed by such
judicial authority. Moreover, notwithstanding the fact that any provisions of
this Section 4 are determined not to be specifically enforceable, the Company
shall nevertheless be entitled to recover monetary damages as a result of the
breach of such provision by Employee. The time period during which the
prohibitions set forth in this Section 4 shall apply shall be tolled and
suspended as to Employee for a period equal to the aggregate quantity of time
during which Employee violates such prohibitions in any respect.
5. Specific Enforcement. Employee specifically
acknowledges and agrees that the restrictions set forth in Sections 3 and 4
hereof are reasonable and necessary to protect the legitimate interests of the
Company and that the Company would not have entered into this Agreement in the
absence of such restrictions. Employee further acknowledges and agrees that
any violation of the provisions of Sections 3 or 4 hereof will result in
irreparable injury to the Company, that the remedy at law for any violation or
threatened violation of such Sections will be inadequate and that in the event
of any such breach, the Company, in addition to any other remedies or damages
available to it at law or in equity, shall be entitled to temporary injunctive
relief before trial from any court of competent jurisdiction as a matter of
course and to permanent injunctive relief without the necessity of proving
actual damages.
6. Term. This Agreement shall be effective on the date
that the Company closes the initial public offering of its common stock and
continue for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of
this Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or
Death of the Employee. In the event the Company ceases its operations or the
Employee dies during the term of this Agreement, this Agreement shall
immediately terminate and neither the Employee nor the Company shall have any
further obligations hereunder, except that (a) the Company shall continue to be
obligated under Section 2(a) hereof for any unpaid salary, bonus, unreimbursed
expenses or payments pursuant to Section 10 hereof owed to Employee or his
estate that have accrued but not been paid as of the Termination Date and (b)
in the event of death of the Employee during the term of this Agreement, the
Company shall pay to Employee's estate an amount equal to three months salary.
8. Termination by Employee. Employee may at any time
terminate his employment by giving the Company ninety (90) days prior written
notice of his intent to terminate the Agreement. At the Termination Date, the
Company shall have no further obligation to Employee and Employee shall have no
further rights or obligations hereunder, except as set forth in Sections 3 and
4 above, and except for the Company's obligation under Section 2(a) hereof for
unpaid salary, bonus or unreimbursed expenses that have accrued but have not
been paid as of the Termination Date.
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<PAGE> 5
9. Termination for Cause. The Company shall have the
right at any time to terminate Employee's employment immediately for cause,
which shall include any of the following reasons:
(a) If Employee shall violate the provisions of
Sections 3 or 4 of this Agreement, or shall fail to comply
with any other material term or condition of this Agreement
which materially and adversely affects the business or affairs
of the Company; or
(b) If Employee shall commit (i) a felony or (ii)
an act of dishonesty, willful mismanagement, fraud or
embezzlement against the Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event
Employee's employment hereunder is terminated in accordance with this Section,
the Company shall have no further obligation to make any payments to Employee
hereunder except for unpaid salary, bonus or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company
breaches this Agreement or Employee is terminated without cause during the term
hereof (which shall not include a termination pursuant to Sections 7, 8, 9, 11
or 12), the Company shall (a) pay Employee all bonuses and unreimbursed
expenses owed to Employee that have accrued but have not been paid as of the
Termination Date; (b) continue to pay to Employee his salary set forth in
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement; and (c) continue to provide the insurance and other benefits of
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement. The Company's obligations pursuant to this Section 10 shall
terminate immediately if Employee obtains employment which would have been in
violation of Section 4 hereof, as determined in good faith by the Board of
Directors. If Employee is terminated without cause, the provisions of Section
4 will be void and of no effect. In addition to the severance payment payable
under this Section 10, Employee shall be paid an amount equal to two (2) times
the average annual bonus earned by Employee in the two (2) years immediately
preceding the date of termination. Employee shall also be entitled to an
accelerated vesting of any awards granted to Employee under the Company's 1996
Incentive Stock Plan.
11. Termination Upon a Change in Control.
11.1 For purposes of this Agreement, a "Change in Control"
shall mean (a) the time that the Company first determines that any person and
all other persons who constitute a group (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), have acquired within any twelve (12) month period (i) direct or
indirect beneficial ownership (within the meaning of Section 13(d)(3) under the
Exchange Act) of twenty percent (20%) or more of the Company's outstanding
securities or (ii) assets of the Company having a fair market value in excess
of one-third of the Company's total assets, unless a majority of the Continuing
Directors, as hereinafter defined, approves the acquisition not later
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<PAGE> 6
than ten (10) business days after the Company makes that determination or (b)
the first day on which a majority of the members of the Company's Board of
Directors are not Continuing Directors.
11.2 For purposes of this Agreement, "Continuing
Directors" shall mean, as of any date of determination, any member of the Board
of Directors of the Company who (i) was a member of the Board of Directors on
June ___, 1996, (ii) has been a member of the Board of Directors for the two
years immediately preceding such date of determination or (iii) was nominated
for election or elected to the Board of Directors with the affirmative vote of
a majority of Continuing Directors who were members of the Board at the time of
such nomination or election.
11.3 In the event of a termination upon a Change in
Control, Employee shall immediately be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans (including accelerated
vesting of any awards granted to Employee under the Company's 1996 Incentive
Stock Plan), accrued vacation pay and any appropriate business expenses
incurred by Employee in connection with his duties hereunder, all to the date
of termination, and all severance compensation provided in Section 11.4, but no
other compensation or reimbursement of any kind.
11.4 In addition, Employee shall be paid as severance
compensation his base salary in monthly installments (at the rate payable at
the time of such termination) through the remaining term of this Agreement and
any extensions hereof; provided, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
is receiving from the new employer. Employee is under no obligation to
mitigate the amount owed Employee pursuant to this Section 11.4 by seeking
other employment or otherwise. Notwithstanding anything in this Section 11.4
to the contrary, Employee may in Employee's sole discretion, by delivery of a
notice to the Company within thirty (30) days following a termination upon a
Change in Control, elect to receive from the Company a lump sum severance
payment by bank cashier's check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section
11.4. Such present value shall be determined as of the date of delivery of the
notice of election by Employee and shall be based on a discount rate equal to
the interest rate on 90-day U.S. Treasury bills, as reported in the Wall Street
Journal (or similar publication), on the date of delivery of the election
notice. If Employee elects to receive a lump sum severance payment, the
Company shall make such payment to Employee within ten (10) days following the
date on which Employee notifies the Company of Employee's election. In
addition to the severance payment payable under this Section 11.4, Employee
shall be paid an amount equal to two (2) times the average annual bonus earned
by Employee in the two (2) years immediately preceding the date of termination.
Employee shall also be entitled to an accelerated vesting of any awards granted
to Employee under the Company's 1996 Incentive Stock Plan. Employee shall
continue to accrue retirement benefits and shall continue to enjoy any benefits
under any plans of the Company in which
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<PAGE> 7
Employee is a participant to the full extent of Employee's rights under such
plans, including any perquisites provided under this Agreement, through the
remaining term of this Agreement; provided, however, that the benefits under
any such plans of the Company in which Employee is a participant, including any
such perquisites, shall cease upon re-employment by a new employer.
11.5 Notwithstanding anything else in this Agreement and
solely in the event of a termination upon a Change in Control, the amount of
severance compensation paid to Employee under this Section 11, but exclusive of
any payments to Employee in respect of any stock options then held by Employee
(or any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time), shall not include any amount the
Company is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor provision.
12. Disability of Employee. If, on account of physical
or mental disability, Employee shall fail or be unable to perform his assigned
duties in any material respect for a period of 60 consecutive days, the Company
shall pay Employee his full salary as set forth in Section 2(a) hereof and
shall provide the insurance, bonus and other benefits of Section 2(a) for a
period of six (6) months from the date such disability began or for such
shorter period as Employee is unable to perform his duties hereunder; provided,
however, that Employee's salary shall be reduced by any disability income paid
to him pursuant to any disability insurance policy maintained under this
Agreement. In the event Employee is unable to perform his duties hereunder
after the expiration of the six-month period, this Agreement shall
automatically terminate. Employee shall not be required to perform his
obligations under Section 1 hereof during any period of disability.
13. Assignment.
(a) The rights and benefits of Employee under
this Agreement, other than accrued and unpaid amounts due
under Section 2(a) hereof, are personal to him and shall not
be assignable. Discharge of Employee's undertakings in
Sections 3 and 4 hereof shall be an obligation of Employee's
executors, administrators, or other legal representatives or
heirs.
(b) This Agreement may not be assigned by the
Company except to an affiliate of the Company, provided,
however, that if the Company shall merge or effect a share
exchange with or into, or sell or otherwise transfer
substantially all its assets to, another corporation, the
Company shall assign its rights hereunder to that corporation
and cause such corporation to assume the Company's obligations
under this Agreement.
14. Notices. Any notice or other communications under
this Agreement shall be in writing, signed by the party making the same, and
shall be delivered personally or sent by certified or registered mail, postage
prepaid, addressed as follows:
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(a) If to Employee, to such address furnished to
SEI or at such other address as may be furnished by him to SEI
in writing.
<TABLE>
<S> <C> <C>
(b) If to the Company: Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217
Attention: Chief Executive Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis
2100 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
</TABLE>
or to such other address as may hereafter be designated by
either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
15. Governing Law. This Agreement shall be interpreted
and enforced in accordance with the laws of the State of Tennessee.
16. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid, but if any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability for any such provisions in every other
respect and of the remaining provisions of this Agreement shall not be in any
way impaired.
17. Modification. No waiver of modification of this
Agreement or of any covenant, condition, or limitation herein contained shall
be valid unless in writing and duly executed by the party to be charged
therewith and no evidence of any waiver or modification shall be offered or
received in evidence of any proceeding, arbitration or litigation between the
parties hereunder, unless such waiver or modification is in writing, duly
executed as aforesaid and the parties further agree that the provisions of this
section may not be waived except as herein set forth.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter contained
herein. There are no restrictions, promises, covenants or undertakings, other
than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter. This Agreement may not be changed except by a writing executed by the
parties.
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<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this
Employment Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By
----------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
------------------------------------
Alan R. Sielbeck
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APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $250,000
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<PAGE> 1
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
This Agreement is made this _____ day of June, 1996, between
Service Experts, Inc., a Delaware corporation (the "Company"), and James D.
Abrams ("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive
offices at 1134 Murfreesboro Road, Nashville, Tennessee 37217, owns and
operates heating, ventilating and air conditioning ("HVAC") service and
replacement businesses under the name "Service Experts(R)";
WHEREAS, the Company desires to employ Employee and Employee
desires to accept such employment by the Company subject to the terms and
conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee
will participate in the use and development of confidential proprietary
information about the Company, its customers and suppliers, and the methods
used by the Company and its employees in competition with other companies, as
to which the Company desires to protect fully its rights;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto agree as
follows:
1. Employment. The Company hereby employs Employee and
Employee accepts such employment with the Company, subject to the terms and
conditions set forth herein. Employee shall be employed as Chief Operating
Officer of the Company, shall perform all duties and services incident to such
position, and such other duties and services as may be assigned or delegated to
him by the Board of Directors of the Company from time to time; provided,
however, that without Employee's consent, the duties and services of Employee
hereunder shall not be materially increased or altered in a manner inconsistent
with Employee's position and original duties hereunder. During his employment
hereunder, Employee shall devote his best efforts and attention, on a full-time
basis, to the performance of the duties required of him as an employee of the
Company.
2. Compensation. As compensation for services rendered
by Employee hereunder, Employee shall receive:
(a) An annual salary as set forth on Appendix I
hereto, or such higher salary as shall be established by the
Compensation Committee of the Board of Directors of the
Company, which salary shall be payable in arrears in equal
monthly installments, plus insurance and other benefits
equivalent to the benefits
<PAGE> 2
provided other similar employees of the Company, which are set
forth in Appendix I hereto;
(b) Compensated vacation time, for such duration
as set forth on Appendix I hereto, to be taken at any time
during each year of the term of this Agreement;
(c) Bonus compensation to be determined in the
sole discretion of the Compensation Committee; and
(d) Reimbursement for all reasonable expenses
incurred by Employee in the performance of his duties under
this Agreement, provided that Employee submits verification of
such expenses in accordance with the policies of the Company.
Prior to the end of each anniversary of the effective date of
this Agreement, the Compensation Committee shall review with Employee his
compensation hereunder. Any increases in salary or changes in fringe benefits
agreed upon by Employee and the Compensation Committee at such annual review
shall become effective the following month unless otherwise agreed to by the
Company and Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the
Company requires considerable responsibility and trust, and, in reliance on
Employee's loyalty, the Company may entrust Employee with highly sensitive
confidential, restricted and proprietary information involving Trade Secrets
and Confidential Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is
any scientific or technical information, design, process, procedure, formula or
improvement that is valuable and not generally known to competitors of the
Company. "Confidential Information" is any data or information, other than
Trade Secrets, that is important, competitively sensitive, and not generally
known by the public, including, but not limited to, the Company's business
plan, business prospects, customer lists, training manuals, product development
plans, bidding and pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information concerning
employees of the Company, supplier data, operational or administrative plans,
policy manuals, and terms and conditions of contracts and agreements. The
terms "Trade Secret" and "Confidential Information" shall not apply to
information which is (i) received by Employee from a third party with no
restriction on disclosure, or (ii) required to be disclosed by any applicable
law.
3.3 Except as required to perform Employee's duties
hereunder, Employee will not use or disclose any Trade Secrets or Confidential
Information of the Company during employment, at any time after termination of
employment and prior to such time as they cease
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<PAGE> 3
to be Trade Secrets or Confidential Information through no act of Employee in
violation of this Agreement.
3.4 Upon the request of the Company and, in any event,
upon the termination of employment hereunder, Employee will surrender to the
Company all memoranda, notes, records, manuals or other documents pertaining to
the Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company
that during the term hereof and for a period expiring two years after the
termination or expiration of this Agreement, Employee will not directly or
indirectly (i) operate, develop or own any interest other than the ownership of
less than five percent (5%) of the equity securities of a publicly traded
company, in any business which has significant (viewed in relation to the
business of the Company) activities relating to the ownership, management or
operation of, or consultation regarding an HVAC service and replacement company
(an "HVAC Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any HVAC Business within fifty
(50) miles of any HVAC Business owned by the Company; (iii) be employed by or
consult with any business which owns, manages or operates an HVAC Business
within fifty (50) miles of any HVAC Business owned by the Company; (iv)
interfere with, solicit, disrupt or attempt to disrupt any past, present or
prospective relationship, contractual or otherwise, between the Company, or its
subsidiaries or affiliates, and any customer, client, supplier or employee of
the Company, or its subsidiaries or affiliates; or (v) solicit any past,
present or prospective management employee (including all corporate officers
and managers, all regional managers and all general managers) of the Company,
or its subsidiaries or affiliates, to leave their employment with the Company
or its subsidiaries or affiliates, or hire any such employee to work in any
capacity; provided, however, that this provision shall not apply if Employee's
employment hereunder is terminated without cause prior to the expiration of the
Agreement.
4.2 If a judicial determination is made that any of the
provisions of this Section 4 constitutes an unreasonable or otherwise
unenforceable restriction against Employee, the provisions of this Section 4
shall be rendered void only to the extent that such judicial determination
finds such provisions to be unreasonable or otherwise unenforceable. In this
regard, the parties hereto hereby agree that any judicial authority construing
this Agreement shall be empowered to sever any portion of the territory or
prohibited business activity from the coverage of this Section 4 and to apply
the provisions of this Section 4 to the remaining portion of the territory or
the remaining business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this Section 4 are
determined not to be specifically enforceable, the Company shall nevertheless
be entitled to recover monetary
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<PAGE> 4
damages as a result of the breach of such provision by Employee. The time
period during which the prohibitions set forth in this Section 4 shall apply
shall be tolled and suspended as to Employee for a period equal to the
aggregate quantity of time during which Employee violates such prohibitions in
any respect.
5. Specific Enforcement. Employee specifically
acknowledges and agrees that the restrictions set forth in Sections 3 and 4
hereof are reasonable and necessary to protect the legitimate interests of the
Company and that the Company would not have entered into this Agreement in the
absence of such restrictions. Employee further acknowledges and agrees that
any violation of the provisions of Sections 3 or 4 hereof will result in
irreparable injury to the Company, that the remedy at law for any violation or
threatened violation of such Sections will be inadequate and that in the event
of any such breach, the Company, in addition to any other remedies or damages
available to it at law or in equity, shall be entitled to temporary injunctive
relief before trial from any court of competent jurisdiction as a matter of
course and to permanent injunctive relief without the necessity of proving
actual damages.
6. Term. This Agreement shall be effective on the date
that the Company closes the initial public offering of its common stock and
continue for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of
this Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or
Death of the Employee. In the event the Company ceases its operations or the
Employee dies during the term of this Agreement, this Agreement shall
immediately terminate and neither the Employee nor the Company shall have any
further obligations hereunder, except that (a) the Company shall continue to be
obligated under Section 2(a) hereof for any unpaid salary, bonus, unreimbursed
expenses or payments pursuant to Section 10 hereof owed to Employee or his
estate that have accrued but not been paid as of the Termination Date and (b)
in the event of death of the Employee during the term of this Agreement, the
Company shall pay to Employee's estate an amount equal to three months salary.
8. Termination by Employee. Employee may at any time
terminate his employment by giving the Company ninety (90) days prior written
notice of his intent to terminate the Agreement. At the Termination Date, the
Company shall have no further obligation to Employee and Employee shall have no
further rights or obligations hereunder, except as set forth in Sections 3 and
4 above, and except for the Company's obligation under Section 2(a) hereof for
unpaid salary, bonus or unreimbursed expenses that have accrued but have not
been paid as of the Termination Date.
9. Termination for Cause. The Company shall have the
right at any time to terminate Employee's employment immediately for cause,
which shall include any of the following reasons:
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<PAGE> 5
(a) If Employee shall violate the provisions of
Sections 3 or 4 of this Agreement, or shall fail to comply
with any other material term or condition of this Agreement
which materially and adversely affects the business or affairs
of the Company; or
(b) If Employee shall commit (i) a felony or (ii)
an act of dishonesty, willful mismanagement, fraud or
embezzlement against the Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event
Employee's employment hereunder is terminated in accordance with this Section,
the Company shall have no further obligation to make any payments to Employee
hereunder except for unpaid salary, bonus or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company
breaches this Agreement or Employee is terminated without cause during the term
hereof (which shall not include a termination pursuant to Sections 7, 8, 9, 11
or 12), the Company shall (a) pay Employee all bonuses and unreimbursed
expenses owed to Employee that have accrued but have not been paid as of the
Termination Date; (b) continue to pay to Employee his salary set forth in
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement; and (c) continue to provide the insurance and other benefits of
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement. The Company's obligations pursuant to this Section 10 shall
terminate immediately if Employee obtains employment which would have been in
violation of Section 4 hereof, as determined in good faith by the Board of
Directors. If Employee is terminated without cause, the provisions of Section
4 will be void and of no effect. In addition to the severance payment payable
under this Section 10, Employee shall be paid an amount equal to two (2) times
the average annual bonus earned by Employee in the two (2) years immediately
preceding the date of termination. Employee shall also be entitled to an
accelerated vesting of any awards granted to Employee under the Company's 1996
Incentive Stock Plan.
11. Termination Upon a Change in Control.
11.1 For purposes of this Agreement, a "Change in Control"
shall mean (a) the time that the Company first determines that any person and
all other persons who constitute a group (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), have acquired within any twelve (12) month period (i) direct or
indirect beneficial ownership (within the meaning of Section 13(d)(3) under the
Exchange Act) of twenty percent (20%) or more of the Company's outstanding
securities or (ii) assets of the Company having a fair market value in excess
of one-third of the Company's total assets, unless a majority of the Continuing
Directors, as hereinafter defined, approves the acquisition not later than ten
(10) business days after the Company makes that determination or (b) the first
day on which a majority of the members of the Company's Board of Directors are
not Continuing Directors.
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11.2 For purposes of this Agreement, "Continuing
Directors" shall mean, as of any date of determination, any member of the Board
of Directors of the Company who (i) was a member of the Board of Directors on
June ___, 1996, (ii) has been a member of the Board of Directors for the two
years immediately preceding such date of determination or (iii) was nominated
for election or elected to the Board of Directors with the affirmative vote of
a majority of Continuing Directors who were members of the Board at the time of
such nomination or election.
11.3 In the event of a termination upon a Change in
Control, Employee shall immediately be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans (including accelerated
vesting of any awards granted to Employee under the Company's 1996 Incentive
Stock Plan), accrued vacation pay and any appropriate business expenses
incurred by Employee in connection with his duties hereunder, all to the date
of termination, and all severance compensation provided in Section 11.4, but no
other compensation or reimbursement of any kind.
11.4 In addition, Employee shall be paid as severance
compensation his base salary in monthly installments (at the rate payable at
the time of such termination) through the remaining term of this Agreement and
any extensions hereof; provided, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
is receiving from the new employer. Employee is under no obligation to
mitigate the amount owed Employee pursuant to this Section 11.4 by seeking
other employment or otherwise. Notwithstanding anything in this Section 11.4
to the contrary, Employee may in Employee's sole discretion, by delivery of a
notice to the Company within thirty (30) days following a termination upon a
Change in Control, elect to receive from the Company a lump sum severance
payment by bank cashier's check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section
11.4. Such present value shall be determined as of the date of delivery of the
notice of election by Employee and shall be based on a discount rate equal to
the interest rate on 90-day U.S. Treasury bills, as reported in the Wall Street
Journal (or similar publication), on the date of delivery of the election
notice. If Employee elects to receive a lump sum severance payment, the
Company shall make such payment to Employee within ten (10) days following the
date on which Employee notifies the Company of Employee's election. In
addition to the severance payment payable under this Section 11.4, Employee
shall be paid an amount equal to two (2) times the average annual bonus earned
by Employee in the two (2) years immediately preceding the date of termination.
Employee shall also be entitled to an accelerated vesting of any awards granted
to Employee under the Company's 1996 Incentive Stock Plan. Employee shall
continue to accrue retirement benefits and shall continue to enjoy any benefits
under any plans of the Company in which Employee is a participant to the full
extent of Employee's rights under such plans, including any perquisites
provided under this Agreement, through the remaining term of this Agreement;
provided, however, that the benefits under any such plans of the Company in
which Employee
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is a participant, including any such perquisites, shall cease upon
re-employment by a new employer.
11.5 Notwithstanding anything else in this Agreement and
solely in the event of a termination upon a Change in Control, the amount of
severance compensation paid to Employee under this Section 11, but exclusive of
any payments to Employee in respect of any stock options then held by Employee
(or any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time), shall not include any amount the
Company is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor provision.
12. Disability of Employee. If, on account of physical
or mental disability, Employee shall fail or be unable to perform his assigned
duties in any material respect for a period of 60 consecutive days, the Company
shall pay Employee his full salary as set forth in Section 2(a) hereof and
shall provide the insurance, bonus and other benefits of Section 2(a) for a
period of six (6) months from the date such disability began or for such
shorter period as Employee is unable to perform his duties hereunder; provided,
however, that Employee's salary shall be reduced by any disability income paid
to him pursuant to any disability insurance policy maintained under this
Agreement. In the event Employee is unable to perform his duties hereunder
after the expiration of the six-month period, this Agreement shall
automatically terminate. Employee shall not be required to perform his
obligations under Section 1 hereof during any period of disability.
13. Assignment.
(a) The rights and benefits of Employee under
this Agreement, other than accrued and unpaid amounts due
under Section 2(a) hereof, are personal to him and shall not
be assignable. Discharge of Employee's undertakings in
Sections 3 and 4 hereof shall be an obligation of Employee's
executors, administrators, or other legal representatives or
heirs.
(b) This Agreement may not be assigned by the
Company except to an affiliate of the Company, provided,
however, that if the Company shall merge or effect a share
exchange with or into, or sell or otherwise transfer
substantially all its assets to, another corporation, the
Company shall assign its rights hereunder to that corporation
and cause such corporation to assume the Company's obligations
under this Agreement.
14. Notices. Any notice or other communications under
this Agreement shall be in writing, signed by the party making the same, and
shall be delivered personally or sent by certified or registered mail, postage
prepaid, addressed as follows:
(a) If to Employee, to such address furnished to
SEI or at such other address as may be furnished by him to SEI
in writing.
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<PAGE> 8
(b) If to the Company: Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217
Attention: Chief Executive Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis
Nashville City Center
511 Union Street
Nashville, Tennessee 37219
or to such other address as may hereafter be designated by
either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
15. Governing Law. This Agreement shall be interpreted
and enforced in accordance with the laws of the State of Tennessee.
16. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid, but if any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability for any such provisions in every other
respect and of the remaining provisions of this Agreement shall not be in any
way impaired.
17. Modification. No waiver of modification of this
Agreement or of any covenant, condition, or limitation herein contained shall
be valid unless in writing and duly executed by the party to be charged
therewith and no evidence of any waiver or modification shall be offered or
received in evidence of any proceeding, arbitration or litigation between the
parties hereunder, unless such waiver or modification is in writing, duly
executed as aforesaid and the parties further agree that the provisions of this
section may not be waived except as herein set forth.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter contained
herein. There are no restrictions, promises, covenants or undertakings, other
than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter. This Agreement may not be changed except by a writing executed by the
parties.
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<PAGE> 9
IN WITNESS WHEREOF, the undersigned have executed this
Employment Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By
---------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
-----------------------------------
James D. Abrams
9
<PAGE> 10
APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $250,000
10
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
This Agreement is made this _____ day of June, 1996, between
Service Experts, Inc., a Delaware corporation (the "Company"), and Anthony M.
Schofield ("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive
offices at 1134 Murfreesboro Road, Nashville, Tennessee 37217, owns and
operates heating, ventilating and air conditioning ("HVAC") service and
replacement businesses under the name "Service Experts(R)";
WHEREAS, the Company desires to employ Employee and Employee
desires to accept such employment by the Company subject to the terms and
conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee
will participate in the use and development of confidential proprietary
information about the Company, its customers and suppliers, and the methods
used by the Company and its employees in competition with other companies, as
to which the Company desires to protect fully its rights;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto agree as
follows:
1. Employment. The Company hereby employs Employee and
Employee accepts such employment with the Company, subject to the terms and
conditions set forth herein. Employee shall be employed as Chief Financial
Officer of the Company, shall perform all duties and services incident to such
position, and such other duties and services as may be assigned or delegated to
him by the Board of Directors of the Company from time to time; provided,
however, that without Employee's consent, the duties and services of Employee
hereunder shall not be materially increased or altered in a manner inconsistent
with Employee's position and original duties hereunder. During his employment
hereunder, Employee shall devote his best efforts and attention, on a full-time
basis, to the performance of the duties required of him as an employee of the
Company.
2. Compensation. As compensation for services rendered
by Employee hereunder, Employee shall receive:
(a) An annual salary as set forth on Appendix I
hereto, or such higher salary as shall be established by the
Compensation Committee of the Board of Directors of the
Company, which salary shall be payable in arrears in equal
monthly installments, plus insurance and other benefits
equivalent to the benefits
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<PAGE> 2
provided other similar employees of the Company, which are set
forth in Appendix I hereto;
(b) Compensated vacation time, for such duration
as set forth on Appendix I hereto, to be taken at any time
during each year of the term of this Agreement;
(c) Bonus compensation to be determined in the
sole discretion of the Compensation Committee; and
(d) Reimbursement for all reasonable expenses
incurred by Employee in the performance of his duties under
this Agreement, provided that Employee submits verification of
such expenses in accordance with the policies of the Company.
Prior to the end of each anniversary of the effective date of
this Agreement, the Compensation Committee shall review with Employee his
compensation hereunder. Any increases in salary or changes in fringe benefits
agreed upon by Employee and the Compensation Committee at such annual review
shall become effective the following month unless otherwise agreed to by the
Company and Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the
Company requires considerable responsibility and trust, and, in reliance on
Employee's loyalty, the Company may entrust Employee with highly sensitive
confidential, restricted and proprietary information involving Trade Secrets
and Confidential Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is
any scientific or technical information, design, process, procedure, formula or
improvement that is valuable and not generally known to competitors of the
Company. "Confidential Information" is any data or information, other than
Trade Secrets, that is important, competitively sensitive, and not generally
known by the public, including, but not limited to, the Company's business
plan, business prospects, customer lists, training manuals, product development
plans, bidding and pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information concerning
employees of the Company, supplier data, operational or administrative plans,
policy manuals, and terms and conditions of contracts and agreements. The
terms "Trade Secret" and "Confidential Information" shall not apply to
information which is (i) received by Employee from a third party with no
restriction on disclosure, or (ii) required to be disclosed by any applicable
law.
3.3 Except as required to perform Employee's duties
hereunder, Employee will not use or disclose any Trade Secrets or Confidential
Information of the Company during employment, at any time after termination of
employment and prior to such time as they cease
2
<PAGE> 3
to be Trade Secrets or Confidential Information through no act of Employee in
violation of this Agreement.
3.4 Upon the request of the Company and, in any event,
upon the termination of employment hereunder, Employee will surrender to the
Company all memoranda, notes, records, manuals or other documents pertaining to
the Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company
that during the term hereof and for a period expiring two years after the
termination or expiration of this Agreement, Employee will not directly or
indirectly (i) operate, develop or own any interest other than the ownership of
less than five percent (5%) of the equity securities of a publicly traded
company, in any business which has significant (viewed in relation to the
business of the Company) activities relating to the ownership, management or
operation of, or consultation regarding an HVAC service and replacement company
(an "HVAC Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any HVAC Business within fifty
(50) miles of any HVAC Business owned by the Company; (iii) be employed by or
consult with any business which owns, manages or operates an HVAC Business
within fifty (50) miles of any HVAC Business owned by the Company; (iv)
interfere with, solicit, disrupt or attempt to disrupt any past, present or
prospective relationship, contractual or otherwise, between the Company, or its
subsidiaries or affiliates, and any customer, client, supplier or employee of
the Company, or its subsidiaries or affiliates; or (v) solicit any past,
present or prospective management employee (including all corporate officers
and managers, all regional managers and all general managers) of the Company,
or its subsidiaries or affiliates, to leave their employment with the Company
or its subsidiaries or affiliates, or hire any such employee to work in any
capacity; provided, however, that this provision shall not apply if Employee's
employment hereunder is terminated without cause prior to the expiration of the
Agreement.
4.2 If a judicial determination is made that any of the
provisions of this Section 4 constitutes an unreasonable or otherwise
unenforceable restriction against Employee, the provisions of this Section 4
shall be rendered void only to the extent that such judicial determination
finds such provisions to be unreasonable or otherwise unenforceable. In this
regard, the parties hereto hereby agree that any judicial authority construing
this Agreement shall be empowered to sever any portion of the territory or
prohibited business activity from the coverage of this Section 4 and to apply
the provisions of this Section 4 to the remaining portion of the territory or
the remaining business activities not so severed by such judicial authority.
Moreover, notwithstanding the fact that any provisions of this Section 4 are
determined not to be specifically enforceable, the Company shall nevertheless
be entitled to recover monetary
3
<PAGE> 4
damages as a result of the breach of such provision by Employee. The time
period during which the prohibitions set forth in this Section 4 shall apply
shall be tolled and suspended as to Employee for a period equal to the
aggregate quantity of time during which Employee violates such prohibitions in
any respect.
5. Specific Enforcement. Employee specifically
acknowledges and agrees that the restrictions set forth in Sections 3 and 4
hereof are reasonable and necessary to protect the legitimate interests of the
Company and that the Company would not have entered into this Agreement in the
absence of such restrictions. Employee further acknowledges and agrees that
any violation of the provisions of Sections 3 or 4 hereof will result in
irreparable injury to the Company, that the remedy at law for any violation or
threatened violation of such Sections will be inadequate and that in the event
of any such breach, the Company, in addition to any other remedies or damages
available to it at law or in equity, shall be entitled to temporary injunctive
relief before trial from any court of competent jurisdiction as a matter of
course and to permanent injunctive relief without the necessity of proving
actual damages.
6. Term. This Agreement shall be effective on the date
that the Company closes the initial public offering of its common stock and
continue for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of
this Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or
Death of the Employee. In the event the Company ceases its operations or the
Employee dies during the term of this Agreement, this Agreement shall
immediately terminate and neither the Employee nor the Company shall have any
further obligations hereunder, except that (a) the Company shall continue to be
obligated under Section 2(a) hereof for any unpaid salary, bonus, unreimbursed
expenses or payments pursuant to Section 10 hereof owed to Employee or his
estate that have accrued but not been paid as of the Termination Date and (b)
in the event of death of the Employee during the term of this Agreement, the
Company shall pay to Employee's estate an amount equal to three months salary.
8. Termination by Employee. Employee may at any time
terminate his employment by giving the Company ninety (90) days prior written
notice of his intent to terminate the Agreement. At the Termination Date, the
Company shall have no further obligation to Employee and Employee shall have no
further rights or obligations hereunder, except as set forth in Sections 3 and
4 above, and except for the Company's obligation under Section 2(a) hereof for
unpaid salary, bonus or unreimbursed expenses that have accrued but have not
been paid as of the Termination Date.
9. Termination for Cause. The Company shall have the
right at any time to terminate Employee's employment immediately for cause,
which shall include any of the following reasons:
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<PAGE> 5
(a) If Employee shall violate the provisions of
Sections 3 or 4 of this Agreement, or shall fail to comply
with any other material term or condition of this Agreement
which materially and adversely affects the business or affairs
of the Company; or
(b) If Employee shall commit (i) a felony or (ii)
an act of dishonesty, willful mismanagement, fraud or
embezzlement against the Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event
Employee's employment hereunder is terminated in accordance with this Section,
the Company shall have no further obligation to make any payments to Employee
hereunder except for unpaid salary, bonus or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company
breaches this Agreement or Employee is terminated without cause during the term
hereof (which shall not include a termination pursuant to Sections 7, 8, 9, 11
or 12), the Company shall (a) pay Employee all bonuses and unreimbursed
expenses owed to Employee that have accrued but have not been paid as of the
Termination Date; (b) continue to pay to Employee his salary set forth in
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement; and (c) continue to provide the insurance and other benefits of
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement. The Company's obligations pursuant to this Section 10 shall
terminate immediately if Employee obtains employment which would have been in
violation of Section 4 hereof, as determined in good faith by the Board of
Directors. If Employee is terminated without cause, the provisions of Section
4 will be void and of no effect. In addition to the severance payment payable
under this Section 10, Employee shall be paid an amount equal to two (2) times
the average annual bonus earned by Employee in the two (2) years immediately
preceding the date of termination. Employee shall also be entitled to an
accelerated vesting of any awards granted to Employee under the Company's 1996
Incentive Stock Plan.
11. Termination Upon a Change in Control.
11.1 For purposes of this Agreement, a "Change in Control"
shall mean (a) the time that the Company first determines that any person and
all other persons who constitute a group (within the meaning of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), have acquired within any twelve (12) month period (i) direct or
indirect beneficial ownership (within the meaning of Section 13(d)(3) under the
Exchange Act) of twenty percent (20%) or more of the Company's outstanding
securities or (ii) assets of the Company having a fair market value in excess
of one-third of the Company's total assets, unless a majority of the Continuing
Directors, as hereinafter defined, approves the acquisition not later than ten
(10) business days after the Company makes that determination or (b) the first
day on which a majority of the members of the Company's Board of Directors are
not Continuing Directors.
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11.2 For purposes of this Agreement, "Continuing
Directors" shall mean, as of any date of determination, any member of the Board
of Directors of the Company who (i) was a member of the Board of Directors on
June ___, 1996, (ii) has been a member of the Board of Directors for the two
years immediately preceding such date of determination or (iii) was nominated
for election or elected to the Board of Directors with the affirmative vote of
a majority of Continuing Directors who were members of the Board at the time of
such nomination or election.
11.3 In the event of a termination upon a Change in
Control, Employee shall immediately be paid all accrued salary, bonus
compensation to the extent earned, vested deferred compensation (other than
plan benefits which will be paid in accordance with the applicable plan), any
benefits under any plans of the Company in which Employee is a participant to
the full extent of Employee's rights under such plans (including accelerated
vesting of any awards granted to Employee under the Company's 1996 Incentive
Stock Plan), accrued vacation pay and any appropriate business expenses
incurred by Employee in connection with his duties hereunder, all to the date
of termination, and all severance compensation provided in Section 11.4, but no
other compensation or reimbursement of any kind.
11.4 In addition, Employee shall be paid as severance
compensation his base salary in monthly installments (at the rate payable at
the time of such termination) through the remaining term of this Agreement and
any extensions hereof; provided, however, that if Employee is employed by a new
employer during such period, the severance compensation payable to Employee
during such period will be reduced by the amount of compensation that Employee
is receiving from the new employer. Employee is under no obligation to
mitigate the amount owed Employee pursuant to this Section 11.4 by seeking
other employment or otherwise. Notwithstanding anything in this Section 11.4
to the contrary, Employee may in Employee's sole discretion, by delivery of a
notice to the Company within thirty (30) days following a termination upon a
Change in Control, elect to receive from the Company a lump sum severance
payment by bank cashier's check equal to the present value of the flow of cash
payments that would otherwise be paid to Employee pursuant to this Section
11.4. Such present value shall be determined as of the date of delivery of the
notice of election by Employee and shall be based on a discount rate equal to
the interest rate on 90-day U.S. Treasury bills, as reported in the Wall Street
Journal (or similar publication), on the date of delivery of the election
notice. If Employee elects to receive a lump sum severance payment, the
Company shall make such payment to Employee within ten (10) days following the
date on which Employee notifies the Company of Employee's election. In
addition to the severance payment payable under this Section 11.4, Employee
shall be paid an amount equal to two (2) times the average annual bonus earned
by Employee in the two (2) years immediately preceding the date of termination.
Employee shall also be entitled to an accelerated vesting of any awards granted
to Employee under the Company's 1996 Incentive Stock Plan. Employee shall
continue to accrue retirement benefits and shall continue to enjoy any benefits
under any plans of the Company in which Employee is a participant to the full
extent of Employee's rights under such plans, including any perquisites
provided under this Agreement, through the remaining term of this Agreement;
provided, however, that the benefits under any such plans of the Company in
which Employee
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<PAGE> 7
is a participant, including any such perquisites, shall cease upon
re-employment by a new employer.
11.5 Notwithstanding anything else in this Agreement and
solely in the event of a termination upon a Change in Control, the amount of
severance compensation paid to Employee under this Section 11, but exclusive of
any payments to Employee in respect of any stock options then held by Employee
(or any compensation deemed to be received by Employee in connection with the
exercise of any stock options at any time), shall not include any amount the
Company is prohibited from deducting for federal income tax purposes by virtue
of Section 280G of the Internal Revenue Code or any successor provision.
12. Disability of Employee. If, on account of physical
or mental disability, Employee shall fail or be unable to perform his assigned
duties in any material respect for a period of 60 consecutive days, the Company
shall pay Employee his full salary as set forth in Section 2(a) hereof and
shall provide the insurance, bonus and other benefits of Section 2(a) for a
period of six (6) months from the date such disability began or for such
shorter period as Employee is unable to perform his duties hereunder; provided,
however, that Employee's salary shall be reduced by any disability income paid
to him pursuant to any disability insurance policy maintained under this
Agreement. In the event Employee is unable to perform his duties hereunder
after the expiration of the six-month period, this Agreement shall
automatically terminate. Employee shall not be required to perform his
obligations under Section 1 hereof during any period of disability.
13. Assignment.
(a) The rights and benefits of Employee under
this Agreement, other than accrued and unpaid amounts due
under Section 2(a) hereof, are personal to him and shall not
be assignable. Discharge of Employee's undertakings in
Sections 3 and 4 hereof shall be an obligation of Employee's
executors, administrators, or other legal representatives or
heirs.
(b) This Agreement may not be assigned by the
Company except to an affiliate of the Company, provided,
however, that if the Company shall merge or effect a share
exchange with or into, or sell or otherwise transfer
substantially all its assets to, another corporation, the
Company shall assign its rights hereunder to that corporation
and cause such corporation to assume the Company's obligations
under this Agreement.
14. Notices. Any notice or other communications under
this Agreement shall be in writing, signed by the party making the same, and
shall be delivered personally or sent by certified or registered mail, postage
prepaid, addressed as follows:
(a) If to Employee, to such address furnished to
SEI or at such other address as may be furnished by him to SEI
in writing.
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<PAGE> 8
(b) If to the Company: Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217
Attention: Chief Executive Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis
2100 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
or to such other address as may hereafter be designated by
either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
15. Governing Law. This Agreement shall be interpreted
and enforced in accordance with the laws of the State of Tennessee.
16. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid, but if any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability for any such provisions in every other
respect and of the remaining provisions of this Agreement shall not be in any
way impaired.
17. Modification. No waiver of modification of this
Agreement or of any covenant, condition, or limitation herein contained shall
be valid unless in writing and duly executed by the party to be charged
therewith and no evidence of any waiver or modification shall be offered or
received in evidence of any proceeding, arbitration or litigation between the
parties hereunder, unless such waiver or modification is in writing, duly
executed as aforesaid and the parties further agree that the provisions of this
section may not be waived except as herein set forth.
18. Entire Agreement. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter contained
herein. There are no restrictions, promises, covenants or undertakings, other
than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter. This Agreement may not be changed except by a writing executed by the
parties.
8
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IN WITNESS WHEREOF, the undersigned have executed this
Employment Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By
----------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
------------------------------------
Anthony M. Schofield
9
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APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $110,000
10
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Agreement is made this _____ day of June, 1996, between
Service Experts, Inc., a Delaware corporation (the "Company"), and __________
________________________ ("Employee").
W I T N E S S E T H:
WHEREAS, the Company, which maintains its principal executive
offices at 1134 Murfreesboro Road, Nashville, Tennessee 37217, owns and
operates heating, ventilating and air conditioning ("HVAC") service and
replacement businesses under the name "Service Experts(R)," including _______
________________________________ (the "Subsidiary");
WHEREAS, the Company desires to employ Employee and Employee
desires to accept such employment by the Company subject to the terms and
conditions contained herein; and
WHEREAS, in serving as an employee of the Company, Employee
will participate in the use and development of confidential proprietary
information about the Company, its customers and suppliers, and the methods
used by the Company and its employees in competition with other companies, as
to which the Company desires to protect fully its rights;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements herein set forth, the parties hereto agree as
follows:
1. Employment. The Company hereby employs Employee and
Employee accepts such employment with the Company, subject to the terms and
conditions set forth herein. Employee shall be employed as __________________
_____________________ of the Subsidiary, shall perform all duties and services
incident to such position, and such other duties and services as may be
assigned or delegated to him by the Board of Directors or Chief Executive
Officer of the Company from time to time; provided, however, that without
Employee's consent, the duties and services of Employee hereunder shall not be
materially increased or altered in a manner inconsistent with Employee's
position and original duties hereunder. During his employment hereunder,
Employee shall devote his best efforts and attention, on a full-time basis, to
the performance of the duties required of him as an employee of the Company.
2. Compensation. As compensation for services rendered
by Employee hereunder, Employee shall receive:
(a) An annual salary as set forth on Appendix I
hereto, or such higher salary as shall be established by the
Compensation Committee of the Board of
<PAGE> 2
Directors or Chief Executive Officer of the Company, which
salary shall be payable in arrears in equal monthly
installments, plus insurance and other benefits equivalent to
the benefits provided other similar employees of the Company,
which are set forth in Appendix I hereto;
(b) Compensated vacation time, for such duration
as set forth on Appendix I hereto, to be taken at any time
during each year of the term of this Agreement;
(c) Bonus compensation to be determined in the
sole discretion of the Compensation Committee or Chief
Executive Officer; and
(d) Reimbursement for all reasonable expenses
incurred by Employee in the performance of his duties under
this Agreement, provided that Employee submits verification of
such expenses in accordance with the policies of the Company.
Prior to the end of each anniversary of the effective date of
this Agreement, the Compensation Committee or Chief Executive Officer shall
review with Employee his compensation hereunder. Any increases in salary or
changes in fringe benefits agreed upon by Employee and the Compensation
Committee or Chief Executive Officer at such annual review shall become
effective the following month unless otherwise agreed to by the Company and
Employee.
3. Confidential Information and Trade Secrets.
3.1 Employee recognizes that Employee's position with the
Company requires considerable responsibility and trust, and, in reliance on
Employee's loyalty, the Company may entrust Employee with highly sensitive
confidential, restricted and proprietary information involving Trade Secrets
and Confidential Information (as hereinafter defined).
3.2 For purposes of this Agreement, a "Trade Secret" is
any scientific or technical information, design, process, procedure, formula or
improvement that is valuable and not generally known to competitors of the
Company. "Confidential Information" is any data or information, other than
Trade Secrets, that is important, competitively sensitive, and not generally
known by the public, including, but not limited to, the Company's business
plan, business prospects, customer lists, training manuals, product development
plans, bidding and pricing procedures, market strategies, internal performance
statistics, financial data, confidential personnel information concerning
employees of the Company, supplier data, operational or administrative plans,
policy manuals, and terms and conditions of contracts and agreements. The
terms "Trade Secret" and "Confidential Information" shall not apply to
information which is (i) received by Employee from a third party with no
restriction on disclosure, or (ii) required to be disclosed by any applicable
law.
2
<PAGE> 3
3.3 Except as required to perform Employee's duties
hereunder, Employee will not use or disclose any Trade Secrets or Confidential
Information of the Company during employment, at any time after termination of
employment and prior to such time as they cease to be Trade Secrets or
Confidential Information through no act of Employee in violation of this
Agreement.
3.4 Upon the request of the Company and, in any event,
upon the termination of employment hereunder, Employee will surrender to the
Company all memoranda, notes, records, manuals or other documents pertaining to
the Company's business or Employee's employment (including all copies thereof).
Employee will also leave with the Company all materials involving any Trade
Secrets or Confidential Information of the Company. All such information and
materials, whether or not made or developed by Employee, shall be the sole and
exclusive property of the Company, and Employee hereby assigns to the Company
all of Employee's right, title and interest in and to any and all of such
information and materials.
4. Covenant Not to Compete.
4.1 Employee hereby covenants and agrees with the Company
that during the term hereof and for a period expiring two years after the
termination or expiration of this Agreement, Employee will not directly or
indirectly (i) operate, develop or own any interest other than the ownership of
less than five percent (5%) of the equity securities of a publicly traded
company, in any business which has significant (viewed in relation to the
business of the Company) activities relating to the ownership, management or
operation of, or consultation regarding an HVAC service and replacement company
(an "HVAC Business"); (ii) compete with the Company or its subsidiaries and
affiliates in the operation or development of any HVAC Business within fifty
(50) miles of any HVAC Business owned by the Company. (iii) be employed by or
consult with any business which owns, manages or operates an HVAC Business
within fifty (50) miles of any HVAC Business owned by the Company. (iv) or
interfere with, solicit, disrupt or attempt to disrupt any past, present or
prospective relationship, contractual or otherwise, between the Company, or its
subsidiaries or affiliates, and any customer, client, supplier or employee of
the Company, or its subsidiaries or affiliates; or (v) solicit any past,
present or prospective management employee (including all corporate officers
and managers, all regional managers and all general managers) of the Company,
or its subsidiaries or affiliates, to leave their employment with the Company
or its subsidiaries or affiliates, or hire any such employee to work in any
capacity; provided, however, that this provision shall not apply if Employee's
employment hereunder is terminated without cause prior to the expiration of the
Agreement.
4.2 If a judicial determination is made that any of the
provisions of this Section 4 constitutes an unreasonable or otherwise
unenforceable restriction against Employee, the provisions of this Section 4
shall be rendered void only to the extent that such judicial determination
finds such provisions to be unreasonable or otherwise unenforceable. In this
regard, the parties hereto hereby agree that any judicial authority construing
this Agreement shall
3
<PAGE> 4
be empowered to sever any portion of the territory or prohibited business
activity from the coverage of this Section 4 and to apply the provisions of
this Section 4 to the remaining portion of the territory or the remaining
business activities not so severed by such judicial authority. Moreover,
notwithstanding the fact that any provisions of this Section 4 are determined
not to be specifically enforceable, the Company shall nevertheless be entitled
to recover monetary damages as a result of the breach of such provision by
Employee. The time period during which the prohibitions set forth in this
Section 4 shall apply shall be tolled and suspended as to Employee for a period
equal to the aggregate quantity of time during which Employee violates such
prohibitions in any respect.
5. Specific Enforcement. Employee specifically
acknowledges and agrees that the restrictions set forth in Sections 3 and 4
hereof are reasonable and necessary to protect the legitimate interests of the
Company and that the Company would not have entered into this Agreement in the
absence of such restrictions. Employee further acknowledges and agrees that
any violation of the provisions of Sections 3 or 4 hereof will result in
irreparable injury to the Company, that the remedy at law for any violation or
threatened violation of such Sections will be inadequate and that in the event
of any such breach, the Company, in addition to any other remedies or damages
available to it at law or in equity, shall be entitled to temporary injunctive
relief before trial from any court of competent jurisdiction as a matter of
course and to permanent injunctive relief without the necessity of proving
actual damages.
6. Term. This Agreement shall be effective on the date
that the Company closes the initial public offering of its common stock and
continue for an initial period of three (3) years from such date, unless sooner
terminated by either party in the manner set forth herein. The date upon which
this Agreement and Employee's employment hereunder shall terminate, whether
pursuant to the terms of this Section or pursuant to any other provision of
this Agreement shall hereafter be referred to as the "Termination Date."
7. Termination Upon Cessation of Company's Operations or
Death of the Employee. In the event the Company ceases its operations or the
Employee dies during the term of this Agreement, this Agreement shall
immediately terminate and neither the Employee nor the Company shall have any
further obligations hereunder, except that (a) the Company shall continue to be
obligated under Section 2(a) hereof for any unpaid salary, bonus, unreimbursed
expenses or payments pursuant to Section 10 hereof owed to Employee or his
estate that have accrued but not been paid as of the Termination Date and (b)
in the event of death of the Employee during the term of this Agreement, the
Company shall pay to Employee's estate an amount equal to three months salary.
8. Termination by Employee. Employee may at any time
terminate his employment by giving the Company ninety (90) days prior written
notice of his intent to terminate the Agreement. At the Termination Date, the
Company shall have no further obligation to Employee and Employee shall have no
further rights or obligations hereunder, except as set forth in Sections 3 and
4 above, and except for the Company's obligation under
4
<PAGE> 5
Section 2(a) hereof for unpaid salary, bonus or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
9. Termination for Cause. The Company shall have the
right at any time to terminate Employee's employment immediately for cause,
which shall include any of the following reasons:
(a) If Employee shall violate the provisions of
Sections 3 or 4 of this Agreement, or shall fail to comply
with any other material term or condition of this Agreement or
shall engage in any material misconduct, neglect of duties or
failure to act which materially and adversely affects the
business or affairs of the Company; or
(b) If Employee shall commit (i) a felony or (ii)
an act of dishonesty, willful mismanagement, fraud or
embezzlement against the Company.
Employee's obligations under Sections 3 and 4 hereof shall survive the
termination of the Agreement pursuant to this Section 9. In the event
Employee's employment hereunder is terminated in accordance with this Section,
the Company shall have no further obligation to make any payments to Employee
hereunder except for unpaid salary, bonus or unreimbursed expenses that have
accrued but have not been paid as of the Termination Date.
10. Termination Without Cause. In the event that Company
breaches this Agreement or Employee is terminated without cause during the term
hereof (which shall not include a termination pursuant to Sections 7, 8, 9 or
11), the Company shall (a) pay Employee all bonuses and unreimbursed expenses
owed to Employee that have accrued but have not been paid as of the Termination
Date; (b) continue to pay to Employee his salary set forth in Section 2(a)
hereof for the greater of two (2) years or the remaining term of this
Agreement; and (c) continue to provide the insurance and other benefits of
Section 2(a) hereof for the greater of two (2) years or the remaining term of
this Agreement. The Company's obligations pursuant to this Section 10 shall
terminate immediately if Employee obtains employment which would have been in
violation of Section 4 hereof, as determined in good faith by the Board of
Directors. If Employee is terminated without cause, the provisions of Section
4 will be void and of no effect.
11. Disability of Employee. If, on account of physical
or mental disability, Employee shall fail or be unable to perform his assigned
duties in any material respect for a period of 60 consecutive days, the Company
shall pay Employee his full salary as set forth in Section 2(a) hereof and
shall provide the insurance, bonus and other benefits of Section 2(a) for a
period of six (6) months from the date such disability began or for such
shorter period as Employee is unable to perform his duties hereunder; provided,
however, that Employee's salary shall be reduced by any disability income paid
to him pursuant to any disability insurance policy maintained under this
Agreement. In the event Employee is unable to perform his duties hereunder
after the expiration of the six-month period, this Agreement shall
automatically
5
<PAGE> 6
terminate. Employee shall not be required to perform his obligations under
Section 1 hereof during any period of disability.
12. Assignment.
(a) The rights and benefits of Employee under
this Agreement, other than accrued and unpaid amounts due
under Section 2(a) hereof, are personal to him and shall not
be assignable. Discharge of Employee's undertakings in
Sections 3 and 4 hereof shall be an obligation of Employee's
executors, administrators, or other legal representatives or
heirs.
(b) This Agreement may not be assigned by the
Company except to an affiliate of the Company, provided,
however, that if the Company shall merge or effect a share
exchange with or into, or sell or otherwise transfer
substantially all its assets to, another corporation, the
Company shall assign its rights hereunder to that corporation
and cause such corporation to assume the Company's obligations
under this Agreement.
13. Notices. Any notice or other communications under
this Agreement shall be in writing, signed by the party making the same, and
shall be delivered personally or sent by certified or registered mail, postage
prepaid, addressed as follows:
(a) If to Employee, to such address furnished to
SEI or at such other address as may be furnished by him to SEI
in writing.
(b) If to the Company: Service Experts, Inc.
1134 Murfreesboro Road
Nashville, Tennessee 37217
Attention: Chief Executive
Officer
With a copy to: J. Chase Cole, Esq.
Waller Lansden Dortch & Davis
2100 Nashville City Center
511 Union Street
Nashville, Tennessee 37219
or to such other address as may hereafter be designated by
either party hereto. All such notices shall be deemed given
on the date personally delivered or mailed.
14. Governing Law. This Agreement shall be interpreted
and enforced in accordance with the laws of the State of Tennessee.
6
<PAGE> 7
15. Severability. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and
valid, but if any one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability for any such provisions in every other
respect and of the remaining provisions of this Agreement shall not be in any
way impaired.
16. Modification. No waiver of modification of this
Agreement or of any covenant, condition, or limitation herein contained shall
be valid unless in writing and duly executed by the party to be charged
therewith and no evidence of any waiver or modification shall be offered or
received in evidence of any proceeding, arbitration or litigation between the
parties hereunder, unless such waiver or modification is in writing, duly
executed as aforesaid and the parties further agree that the provisions of this
section may not be waived except as herein set forth.
17. Entire Agreement. This Agreement contains the entire
agreement of the parties hereto with respect to the subject matter contained
herein. There are no restrictions, promises, covenants or undertakings, other
than those expressly set forth herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter. This Agreement may not be changed except by a writing executed by the
parties.
IN WITNESS WHEREOF, the undersigned have executed this
Employment Agreement on the day and year first above written.
SERVICE EXPERTS, INC.
By
-----------------------------------
Alan R. Sielbeck
Its Chief Executive Officer
EMPLOYEE
--------------------------------------
[Name]
7
<PAGE> 8
APPENDIX I
COMPENSATION AND BENEFITS
Annual Salary - $_____________
8
<PAGE> 1
EXHIBIT 10.9
[FORM OF ESCROW AGREEMENT]
This ESCROW AGREEMENT (this "Agreement") is entered into this ___ day
of ___________, 1996, by and among ______________________ (the "Escrow Agent"),
Service Experts, Inc., a Delaware corporation ("SEI"), and__________________
__________________________________ and __________________________________
(collectively, the "Shareholders").
W I T N E S S E T H:
WHEREAS, SEI, the Shareholders and __________________________, a
_____________________________ corporation (the "Company"), have entered into a
Combination Agreement dated as of June ___, 1996 (the "Combination Agreement"),
an executed copy of which has been delivered to the Escrow Agent, pursuant to
which all of the issued and outstanding shares of capital stock of the Company
shall be exchanged for shares of Common Stock, $.01 par value per share, of SEI
(the "SEI Common Stock") and cash;
WHEREAS, the Shareholders own all of the issued and outstanding shares
of capital stock of the Company; and
WHEREAS, Section 2(c)(iv) of the Combination Agreement provides for
the execution of an escrow agreement by the parties hereto;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties agree as follows:
1. Definitions. All capitalized terms appearing herein that are
not otherwise defined shall have the meanings ascribed to them in the
Combination Agreement.
2. Delivery of Escrow Stock. On the Closing Date, SEI shall
deliver to the Escrow Agent stock certificates representing ten percent (10%)
of the shares of SEI Common Stock issued to the Shareholders in the Combination
(the "Escrow Stock") to be held pursuant to the terms and conditions of this
Agreement.
3. Distribution of Dividends. Escrow Agent shall distribute all,
if any, cash dividends paid on the Escrow Stock, during the period the Escrow
Stock is held by Escrow Agent, to the Shareholders in accordance with each
Shareholder's respective ownership interest in the Escrow Stock, as such
ownership interest is set forth on the certificates representing the Escrow
Stock.
<PAGE> 2
4. Distributions of Escrow Stock.
(a) Subject to Section 4(b) below, the Escrow Agent shall
retain the Escrow Stock until the expiration of a period of one year commencing
on the Closing Date (the "Expiration Date"), at which time the Escrow Agent
shall distribute the remaining Escrow Stock to the Shareholders in accordance
with each Shareholder's respective ownership interest in the Escrow Stock, as
such ownership is set forth on the certificates representing the Escrow Stock.
(b) Pursuant to the Combination Agreement, the
Shareholders have made certain representations, warranties, covenants and
agreements. If, prior to the termination of this Agreement as set forth in
Section 9 hereof, SEI shall suffer any loss, liability, damage or expense for
which SEI is indemnified under Section 13 of the Combination Agreement, SEI
shall be entitled to receive reimbursement and recovery of any such loss,
liability, damage or expense from the Escrow Stock, but such entitlement shall
not be SEI's exclusive remedy in the event of such loss, liability, damage or
expense. SEI shall assert any claim against the Escrow Stock by giving written
notice thereof to the Escrow Agent and the Shareholders. Unless any
Shareholder shall, within ten (10) days after the date of such notice, give to
the Escrow Agent and SEI written notice of objection to the payment of such
claim, the Escrow Agent shall deliver to SEI, subject to Section 5 hereof, such
number of shares of Escrow Stock as shall equal in value the amount of such
claim. The shares of Escrow Stock to be delivered to SEI under this Section
4(b) shall be treated as having the same value as the value given to such
shares on the Closing Date. If, within ten (10) days after the date of the
notice by SEI, any Shareholder files a written objection to the delivery of the
Escrow Stock with the Escrow Agent and SEI, the Escrow Agent shall hold all or
the remaining balance of the Escrow Stock and make delivery with respect
thereto only in accordance with (i) joint written instructions of SEI and the
Shareholders or (ii) a final, non-appealable order of a court having
jurisdiction disposing of such claim.
5. Fractional Shares. No fractional shares of Escrow Stock shall
be distributed hereunder. The Escrow Agent shall pay any claims hereunder by
rounding any such claim up or down to the nearest number which equals a whole
number of shares of Escrow Stock.
6. Voting of Escrow Stock. During the term of this Agreement,
the Shareholders shall have the right to vote the Escrow Stock.
7. Escrow Agent's Fees and Expenses. The Escrow Agent shall be
entitled to compensation for its services hereunder in accordance with Exhibit
A hereto. Any fees and expenses incurred by the Escrow Agent in connection
with this Agreement, including legal fees and expenses, shall be borne by SEI.
<PAGE> 3
8. Rights, Duties and Liabilities of Escrow Agent. The
acceptance by the Escrow Agent of its duties under this Agreement is subject to
the following terms and conditions, which the parties to this Agreement agree
shall govern and control with respect to the rights, duties and liabilities of
the Escrow Agent:
(a) The duties of the Escrow Agent hereunder are only
such as are herein specifically provided, being purely ministerial in nature,
and it shall have no responsibility in respect of any of the Escrow Stock
deposited with it other than to accept and hold the Escrow Stock and faithfully
to follow the instructions herein contained or delivered to it.
(b) The Escrow Agent is not responsible or liable in any
manner whatever for the computations to be delivered to it by the parties
hereto.
(c) The Escrow Agent shall be protected in acting upon
any written notice, request, waiver, consent, receipt or other paper or
document which the Escrow Agent in good faith believes to be genuine.
(d) The Escrow Agent shall not be liable for any act done
or omitted by it in good faith or for anything which it may do or refrain from
doing in connection herewith, except its own negligence or misconduct.
(e) The Escrow Agent is authorized to and may consult
with and obtain advice from legal counsel in the event any dispute, conflict or
question arises as to the construction of any of the provisions hereof or its
duties hereunder. The Escrow Agent shall incur no liability and shall be fully
protected for acting in good faith in accordance with the written opinion and
instructions of such counsel. Copies of all such opinions shall be made
available to the other parties hereto upon request.
(f) The Escrow Agent may, but shall not be required to,
defend itself in any legal proceedings which may be instituted against it or it
may, but shall not be required to, institute legal proceedings in respect of
the Escrow Stock or any part thereof. The Escrow Agent shall be indemnified
and held harmless by SEI and the Shareholders against the cost and expense of
any such defense or action.
(g) The Escrow Agent shall make payment to or for, or
deliver certificates to, any party only if in its judgment such payment or
delivery may be made under the terms of this Escrow Agreement without the
Escrow Agent's incurring any liability. If conflicting demands not expressly
provided for in this Escrow Agreement are made or notices served upon the
Escrow Agent with respect to its action or omission under this Escrow
Agreement, the parties hereto agree that the Escrow Agent shall have the
absolute right to elect to file a suit in interpleader or for instructions or
for a declaratory judgment or for other relief and obtain an order from the
proper court requiring the parties to litigate in such court their conflicting
claims and demands. In the event any such action is taken, the Escrow Agent
shall
3
<PAGE> 4
by fully released and discharged from all obligations to perform any duties or
obligations imposed upon it by this Escrow Agreement unless and until otherwise
ordered by the court.
9. Termination of Agreement. This Escrow Agreement shall
terminate upon the distribution by the Escrow Agent of all the Escrow Stock
held by it hereunder pursuant to Section 4 of this Agreement.
10. Notices. All notices, requests, and demands or other
communications hereunder shall be made in writing and shall be deemed to have
been duly given on the date personally delivered or mailed by certified mail,
return receipt requested, to the persons at the addresses reflected below or to
such different person or address as notice is given hereafter:
(a) If to the Escrow Agent, to:
--------------------------
--------------------------
--------------------------
(b) If to Shareholders, to:
--------------------------
--------------------------
--------------------------
with copies to:
--------------------------
--------------------------
--------------------------
(c) If to SEI, to:
Service Experts, Inc.
--------------------------
Nashville, Tennessee
--------
Attention: Alan R. Sielbeck
4
<PAGE> 5
with copies to:
Waller Lansden Dortch & Davis
Nashville City Center
511 Union Street, Suite 2100
Nashville, Tennessee 37219
Attention: J. Chase Cole, Esq.
11. Parties Bound. This Agreement shall be binding upon and shall
inure to the benefit of the parties, their respective executors,
administrators, legal representatives, successors and assigns.
12. Applicable Law. This Agreement and all of the rights of the
parties hereunder shall be construed and determined in accordance with the laws
of the State of Tennessee.
13. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original and all of which taken
together shall constitute one and the same document.
14. Effective Date. This Agreement shall not become effective
until the consummation of the transactions contemplated by the Combination
Agreement.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties executed this Escrow Agreement
effective as of the date set forth above.
[ESCROW AGENT]
By:
---------------------------------
Its:
-------------------------------
SERVICE EXPERTS, INC.
By:
---------------------------------
Its:
-------------------------------
--------------------------------------
(Shareholder)
--------------------------------------
(Shareholder)
6
<PAGE> 7
EXHIBIT A
COMPENSATION OF ESCROW AGENT
Basic fee - $________________
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Combined Financial Data" and "Experts" and the use of our report dated June 7,
1996 with respect to the financial statements of Service Experts, Inc., the use
of our report dated June 7, 1996 with respect to the financial statements of the
Combined Predecessor Companies, the use of our report dated May 5, 1996, with
respect to the financial statements of the Combined AC Service & Installation
Co., Inc. and Donelson Air Conditioning Company, Inc., the use of our report
dated May 10, 1996 with respect to the financial statements of Hardwick Air
Masters, Inc., the use of our report dated May 6, 1996 with respect to the
financial statements of Norrell Heating & Air Conditioning, Inc., the use of our
report dated May 6, 1996 with respect to the financial statements of Vision
Holding Company, Inc., the use of our report date May 15, 1996 with respect to
the financial statements of Comerford's Heating and Air Conditioning, Inc., the
use of our report date May 19, 1996 with respect to the financial statements of
Rolf Coal and Fuel Corp., the use of our report dated May 14, 1996 with respect
to the financial statements of Brand Heating & Air Conditioning, Inc., the use
of our report date May 10, 1996 with respect to the financial statements of
Coastal Air Conditioning Service, Inc., the use of our report dated May 10, 1996
with respect to the financial statements of Contractor Success Group, Inc., the
use of our report dated May 10, 1996 with respect to the financial statements of
Arrow Heating & Air Conditioning, Inc., the use of our report dated May 10, 1996
with respect to the financial statements of Air Experts, a United Services Co.,
Inc., the use of our report dated May 10, 1996 with respect to the financial
statements of Gilley's Heating & Cooling, Inc. and the use of our report dated
May 10, 1996 with respect to the financial statements of Service Experts of Palm
Springs, Inc., in the Registration Statement (Form S-1) and related Prospectus
of Service Experts, Inc. and for the registration of shares of its common stock.
ERNST & YOUNG LLP
Nashville, Tennessee
June 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> MAR-27-1996
<PERIOD-END> MAR-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 25,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,000
<CURRENT-LIABILITIES> 25,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0<F1>
<FN>
<F1>SERVICE EXPERTS, INC. WAS FORMED ON MARCH 27, 1996 FOR THE PURPOSE OF
ACQUIRING UNRELATED HEATING AND AIR CONDITIONING COMPANIES IN EXCHANGE
FOR SHARES OF ITS COMMON STOCK. THE COMPANY DID NOT HAVE ANY OPERATIONS
AS OF MARCH 31, 1996 (LATEST BALANCE SHEET DATE).
</FN>
</TABLE>
