<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1997
REGISTRATION NO. 333-12319
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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SERVICE EXPERTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7623 62-1639453
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
111 WESTWOOD PLACE, SUITE 420
BRENTWOOD, TENNESSEE 37027
(615) 371-9990
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
ALAN R. SIELBECK
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
SERVICE EXPERTS, INC.
111 WESTWOOD PLACE, SUITE 420
BRENTWOOD, TENNESSEE 37027
(615) 371-9990
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------
COPY TO:
J. CHASE COLE, ESQ.
WALLER LANSDEN DORTCH & DAVIS,
A PROFESSIONAL LIMITED LIABILITY COMPANY
2100 NASHVILLE CITY CENTER
511 UNION STREET
NASHVILLE, TENNESSEE 37219
(615) 244-6380
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after the effective date of this Registration Statement.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
PROSPECTUS
$50,000,000
SERVICE EXPERTS LOGO
COMMON STOCK, COMMON STOCK WARRANTS AND DEBT SECURITIES
---------------------
This Prospectus relates to the offer by Service Experts, Inc., a Delaware
corporation (the "Company"), of shares of the Company's Common Stock, $.01 par
value per share ("Common Stock"), warrants to purchase Common Stock ("Common
Stock Warrants") and the shares of Common Stock issued thereunder upon the
exercise of such Common Stock Warrants, or debt securities ("Debt Securities"),
and the shares of Common Stock issued thereunder upon the conversion thereof,
with a collective aggregate offering price of up to $50,000,000 on terms to be
determined at the time of any such offering. The Company may offer Common Stock,
Common Stock Warrants or Debt Securities (collectively, "Securities") from time
to time in connection with the acquisitions of the assets or stock of heating,
ventilating and air conditioning ("HVAC") service and replacement businesses.
The consideration for the acquisition of the assets or stock of such entities
may consist of cash, the assumption of liabilities, Securities, or any
combination thereof, as determined pursuant to arms-length negotiations between
the Company and the sellers of the assets or stock to be acquired. The
Securities may be offered in such amounts, at such prices and on such terms to
be set forth in a supplement to this Prospectus (a "Prospectus Supplement") or
post-effective amendment (a "Post-Effective Amendment"), and will include, where
applicable: (i) in the case of Common Stock, the specific number of shares and
issuance price per share, (ii) in the case of Common Stock Warrants, the
duration, offering price, exercise price and detachability, and (iii) in the
case of Debt Securities, the specific title, aggregate principal amount, form,
authorized denomination, maturity, rate (or manner of calculation thereof) and
time of payment of interest, terms for any sinking fund payments and terms, if
any for conversion into Common Stock.
Common Stock issued pursuant to this Prospectus and any applicable
Prospectus Supplement or Post-Effective Amendment to acquire the assets or stock
of individual HVAC service and replacement businesses, as described above, may
be reoffered pursuant hereto by the holders thereof (the "Selling Stockholders")
from time to time in transactions on the Nasdaq Stock Market's National Market
(the "Nasdaq National Market"), in negotiated transactions, through the writing
of options on Securities, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, at
prices relating to the prevailing market prices, or negotiated prices. The
Selling Stockholders may effect such transactions by selling the Common Stock to
or through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Stockholders
or the purchasers of shares from whom such broker-dealer may act as agent or to
whom they may sell as principal or both. See "Selling Stockholders."
The Company will not receive any part of the proceeds from the resale by
the Selling Stockholders of any Common Stock thereof pursuant hereto. The
Company will bear all expenses (other than selling discounts and commissions and
fees and expenses of the Selling Stockholders) in connection with the
registration of the Common Stock being reoffered by the Selling Stockholders.
The terms for the issuance of Securities may include provisions for the
indemnification of the Selling Stockholders for certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
---------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" APPEARING ON PAGES 6 THROUGH 9.
---------------------
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.
---------------------
The date of this Prospectus is March , 1997
<PAGE> 3
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-4, including
amendments thereto, if any, with respect to the Securities (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission"). This
Prospectus and any accompanying Prospectus Supplement do not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus and any accompanying
Prospectus Supplement concerning the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or as previously filed with the Commission and
incorporated herein by reference. For further information with respect to the
Company and the Securities, reference is made to the Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected by
anyone without charge at the Commission's principal office at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part
thereof may be obtained from the Commission upon payment of certain fees
prescribed by the Commission.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, as well as the following Commission Regional Offices:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material also can be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains an Internet Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission, and the address of such site is
http://www.sec.gov. The Company's Common Stock is listed on the Nasdaq National
Market, and such reports, proxy statements and other information can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., located at 1735 K Street, N.W., Washington, D.C. 20549, at prescribed
rates.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless the context otherwise requires, all references to the "Company" or
"Service Experts" shall mean Service Experts, Inc. The Company completed the
initial public offering of its Common Stock on August 21, 1996 (the "IPO").
Simultaneously with the closing of the IPO, the Company acquired 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").
See "Business -- Acquisitions" for a list of the Predecessor Companies. The term
"Service Centers" refers to HVAC service and replacement businesses operated by
the Company.
THE COMPANY
The Company is one of the leading providers of residential HVAC services
and replacement equipment in the United States, and management believes that the
Company will continue to be a leading consolidator of the fragmented HVAC
service and replacement industry. The Company currently operates 32 Service
Centers in 17 states. The Service Centers install, service and maintain central
air conditioners, furnaces and heat pumps, primarily in existing homes.
Management estimates that over 80% of the Company's pro forma net revenue in
1996, after giving effect to all completed and pending acquisitions, was derived
from replacing, maintaining and servicing HVAC equipment at existing residences.
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 offers higher margins and exposes the Company to
less credit risk. The service and replacement segment offers 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's products and services are designed to provide
its members with a competitive advantage by utilizing proven marketing and
operational strategies and by enabling members to operate their businesses with
a higher degree of professionalism. All of the Service Centers are members of
CSG and operate in accordance with its recommended methods and procedures. 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.
The HVAC service and replacement industry is large and growing. Management
estimates, based upon industry information, that the market for the service and
replacement of HVAC systems in existing homes is approximately $24 billion
annually. The service and replacement segment of the industry has increased in
size as a result of the aging of the installed base of residential systems, the
introduction of new, energy efficient systems and the upgrading of existing
homes to central air conditioning.
Management believes that the fragmentation of the HVAC industry creates an
opportunity for further acquisitions of HVAC companies. According to Air
Conditioning, Heating and Refrigeration News, over 30,000 independent HVAC
contractors are currently operating in the United States. Management believes
that these businesses are typically closely held, single-center operations that
serve a limited geographic area. The businesses are heavily dependent upon
referrals to generate business. In many cases, these businesses are operated by
service technicians who lack the business and marketing expertise to expand
their businesses, increase their profitability and compete effectively with
larger operators.
3
<PAGE> 5
ACQUISITION STRATEGY AND RECENT ACQUISITIONS
Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. In
addition, management believes that the Company's visibility within the industry
and its operational philosophy of decentralized operations and centralized
administration provide the Company with a competitive advantage, particularly in
enabling the Company to identify and acquire well-managed, profitable HVAC
businesses. By allowing former owners of Service Centers the opportunity to
continue managing their business after acquisition and to increase their focus
on customer service rather than administration, management believes that the
Company offers owners of independent HVAC businesses an attractive alternative.
Management intends to develop a national presence through acquisitions and a
national reputation for superior, high quality service that will enable the
Company to appeal to a large number of customers. The Company has implemented an
aggressive acquisition strategy, acquiring 25 HVAC businesses (the "Acquired
Companies" and, together with the Predecessor Companies, the "Subsidiaries")
since the IPO with aggregate revenue for the 12 months ended December 31, 1996
of approximately $79.1 million. The Company currently has agreements in
principle to acquire 11 HVAC businesses (the "Pending Acquisitions" or
"Combining Companies") with aggregate revenue in 1996 of approximately $35.7
million. The Pending Acquisitions are expected to close during the first six
months of 1997. See "Business -- Acquisitions" for a list of the Acquired
Companies and the Combining Companies. The Company's 1996 pro forma net revenue,
reflecting the acquisition of the Subsidiaries and eight Combining Companies,
was approximately $172.3 million. See the Pro Forma Combined Financial
Statements and the Notes thereto for a listing of the companies included.
Management targets for acquisition as "hubs" CSG members that are
geographically desirable, financially stable and whose management is experienced
in the industry and CSG operating methods. Of the Company's 32 Service Centers
and the 11 Combining Companies, all but four are CSG members. The Company also
plans to increase its market presence through acquisitions of other HVAC
businesses that have large customer bases and that present opportunities for
overhead savings or asset sales to improve profitability. In many cases, the
assets of acquired "spoke" companies will be combined with the operations of
existing Service Centers. In addition, management believes that it will be able
to improve the performance of these acquired companies through the
implementation of the methods and procedures developed by CSG.
The Company's principal executive offices are located at 111 Westwood
Place, Suite 420, Brentwood, Tennessee 37027, and its telephone number is (615)
371-9990.
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents summary financial data of the Company. The
Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneously with the closing of the IPO, the Company acquired the Predecessor
Companies in the Combination. The acquisitions of the Predecessor Companies have
been accounted for using the historical cost basis of the Predecessor Companies
in accordance with the Securities and Exchange Commission (the "Commission")
Staff Accounting Bulletin No. 48 ("SAB 48"). In accordance with the provisions
of Commission Staff Accounting Bulletin No. 97 ("SAB 97"), the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of AC Service & Installation Co., Inc. and
Donelson Air Conditioning Company, Inc. (collectively, the "Acquiring Company").
In addition, the historical financial statements of the Company for all periods
presented include the financial statements of Custom Air Conditioning, Inc. and
Freschi Air Systems, Inc. (collectively, the "Pooled Companies"), which were
acquired effective December 1, 1996 in business combinations accounted for as
poolings of interests, and the operations of all other Subsidiaries are included
from their respective effective dates of acquisition. The following should be
read with the historical financial statements and the Pro Forma Combined
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA YEAR ENDED DECEMBER 31, 1996,
GIVING EFFECT TO:
YEAR ENDED DECEMBER 31, ---------------------------------------------
--------------------------- PREDECESSOR ACQUIRED PENDING
1994 1995 1996 COMPANIES(1) COMPANIES(2) ACQUISITIONS(3)
------- ------- ------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue..................... $22,193 $24,876 $46,856 $76,984 $140,654 $172,303
Cost of goods sold.............. 15,999 16,916 30,198 49,250 90,656 113,627
Gross margin.................... 6,194 7,960 16,658 27,734 49,998 58,676
Selling, general and
administrative expenses....... 5,723 7,162 12,837 18,999 36,619 42,487
Income from operations.......... 471 798 3,821 8,735 13,379 16,189
Interest (expense) income,
net........................... (64) (56) 271 459 527 610
Pro forma net income(4)......... 281 466 2,794 6,176 8,487 10,166
Pro forma net income per
share(5)...................... $ .63 $ .67 $ .71 $ .72
Pro forma weighted average
shares outstanding(5)......... 4,451 9,220 11,885 14,057
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(6)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $12,387 $(1,157) $ 35,644
Total assets...................................... 68,504 100,434 129,756
Total debt........................................ 275 8,344 --
Stockholders' equity.............................. 53,071 72,656 110,322
</TABLE>
- ---------------
(1) Gives effect to the Combination which was accounted for using the historical
cost basis of the Predecessor Companies in accordance with SAB 48. In
addition, the pro forma information is based on certain assumptions and
adjustments. See Notes to the Pro Forma Combined Financial Statements.
(2) Gives effect to the acquisition of the Predecessor Companies and the
Acquired Companies (excluding the Pooled Companies) as if such transactions
were completed as of January 1, 1996. In addition, the pro forma information
is based on certain assumptions and adjustments. Does not include the
results of two Acquired Companies which are immaterial to the pro forma
presentation. See the Pro Forma Combined Financial Statements and the Notes
thereto.
(3) Gives effect to the acquisition of the Predecessor Companies and the
Acquired Companies (excluding the Pooled Companies) and to the Pending
Acquisitions, as if such transactions were completed as of January 1, 1996.
In addition, the pro forma information is based on certain assumptions and
adjustments. Does not give effect to the acquisition of two Acquired
Companies and three Pending Acquisitions which are immaterial to the pro
forma presentation. See the Pro Forma Combined Financial Statements and the
Notes thereto.
(4) Historical net income and income tax expense have been omitted because these
amounts are not meaningful as a result of the different tax status of the
Subsidiaries. Pro forma net income represents the effect of taxing the
entities under Subchapter C of the Internal Revenue Code.
(5) The computation of pro forma net income per share is based upon 14,057,426
weighted average shares of Common Stock outstanding, which includes (i)
4,522,636 shares distributed to the former stockholders of the Predecessor
Companies, (ii) 1,462,100 shares outstanding held by existing stockholders
of the Company prior to the IPO, (iii) 2,587,500 shares sold in the IPO,
(iv) 3,557,395 shares issued to former stockholders of the 23 Acquired
Companies and in the eight Pending Acquisitions listed on page F-2 hereof,
(v) 1,850,000 shares sold in the public offering of the Company's Common
Stock completed on March 21, 1997 (the "Offering") and (vi) 77,795 shares
which reflect the dilutive effect of the options and warrants.
(6) Adjusted to give effect to the application of the net proceeds to the
Company of the Offering.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby and any accompanying
Prospectus Supplement or Post-Effective Amendment, as applicable.
This discussion also identifies important cautionary factors that could
cause the Company's actual results to differ materially from those expressed in
forward-looking statements made elsewhere herein by, or on behalf of, the
Company. In particular, the Company's forward-looking statements in this
Prospectus, including those regarding the successful integration of the
businesses of the Subsidiaries, the effective implementation of the Company's
strategy, the availability of additional HVAC businesses for acquisition, the
adequacy of the Company's capital resources and other statements regarding
trends relating to the HVAC industry and various revenue and expense items,
could be affected by a number of risks and uncertainties including those
described below.
LIMITED COMBINED OPERATING HISTORY
The Company was incorporated in March 1996 and, simultaneously with the
closing of the IPO, consummated the acquisition of the Predecessor Companies.
Since the IPO, the Company has acquired 25 additional HVAC businesses. Because
of the limited operating history of the Company as a combined entity, there can
be no assurance that the Company will be able to integrate successfully the
businesses of the Subsidiaries or to operate profitably. There can be no
assurance that the Company's management will be able to effectively manage the
combined entity and effectively implement the Company's operating and
acquisition strategies. Failure to integrate successfully the Subsidiaries and
to implement the Company's operating and acquisition strategies could have a
material adverse effect on the Company's net revenue and earnings. See
"Business -- Acquisitions."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY AND FINANCING
The success of the Company's acquisition strategy will depend on a number
of factors, including (i) the Company's ability to locate and successfully
negotiate the acquisition of HVAC businesses and to successfully integrate the
operations of acquired Service Centers into the Company's operations and (ii)
the availability of adequate financing to develop or acquire additional HVAC
businesses. In addition, the Company competes with other HVAC and residential
service companies for desirable acquisition candidates. Some of these companies
may have access to capital, personnel and other resources equal to or greater
than those of the Company. The Company expects that its capital needs over the
next several years, primarily for acquisitions, will exceed capital generated
from operations. The Company plans to incur indebtedness and to issue, from time
to time, additional debt or equity securities, including the issuance of
Securities in connection with the types of transactions identified on the cover
page of this Prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." In the
event that the Common Stock does not maintain a sufficient market value, or
potential acquisition candidates are unwilling to accept Common Stock as part of
the consideration for the sale of their businesses, the Company may be required
to utilize more of its cash resources, if available, in order to maintain its
acquisition program. In addition, the closing of the Pending Acquisitions is
subject to customary conditions, and there can be no assurance that the Company
will be able to consummate all of the Pending Acquisitions or to successfully
integrate the businesses of its Service Centers. 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 -- Acquisitions."
RISKS ASSOCIATED WITH DEVELOPMENT, IMPLEMENTATION, AND INTEGRATION OF OPERATING
SYSTEMS AND POLICIES
As a rapidly growing provider of HVAC services, the Company is faced with
the development, implementation and integration of Company-wide policies and
systems related to its operations. Each of the
6
<PAGE> 8
Subsidiaries and companies to be acquired may need, to some extent, to modify or
adopt certain systems and policies they have utilized historically in order to
implement the Company's systems and policies, which management is currently
formulating. The Company has implemented a uniform general ledger system and
electronic mail system at each of the Service Centers. The Company plans to
implement and integrate certain other information and operating systems and
procedures for the Service Centers including, but not limited to, employment and
human resources policies, uniform purchasing programs and certain centralized
marketing programs. The Company may experience delays, complications and
expenses in implementing, integrating and operating such systems, any of which
could have a material adverse effect on the Company's operations, net revenue
and earnings. See "Business -- Services and Operations."
COMPETITION
The HVAC service and replacement industry is highly competitive. The
Company's Service Centers compete with other full-service HVAC businesses
primarily on the basis of quality, reliability, customer service and price. In
certain markets, the Company competes with utility companies which have access
to capital, personnel, marketing and technological resources that are equal to
or greater than those of the Company. Because of the fragmented nature of the
industry and relatively low barriers to entry, additional competitors, including
companies that offer other home improvement services in addition to HVAC
services, may emerge that have greater access than the Company to capital,
personnel and technological resources. There can be no assurance that the
Company will be able to compete successfully with such competitors.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is dependent upon the continued services of the
Company's senior management, particularly upon its Chairman of the Board and
Chief Executive Officer, Alan R. Sielbeck, and its President and Chief Operating
Officer, James D. Abrams. The loss of the services of Messrs. Sielbeck, Abrams
or any of the Company's senior management would have a material adverse effect
upon the Company's business and prospects. See "Management -- Executive
Officers, Directors and Key Employees."
LABOR AVAILABILITY
The timely provision of high-quality service by the Service Centers
requires an adequate supply of skilled labor. In addition, the operating costs
of each Service Center may be adversely affected by high turnover in skilled
positions. Accordingly, the Company's ability to increase productivity and net
earnings is limited to a degree by its ability to employ the skilled laborers
necessary to meet the Company's service requirements. There can be no assurance
that the Company will be able to maintain an adequate skilled labor force
necessary to efficiently operate its Services Centers or that the Company's
labor expenses will not increase as a result of a shortage in the supply of
skilled workers.
SEASONAL AND CYCLICAL NATURE OF THE INDUSTRY
The HVAC service industry generally experiences increased demand during the
summer and winter months. The Company may, in certain periods, be affected by
these seasonal trends. The residential HVAC service and replacement industry
historically has been highly cyclical and is influenced by many of the same
national and regional economic and demographic factors which affect demand for
durable consumer goods, including consumer confidence, interest rates,
availability of financing, regional population and employment trends, and
general economic conditions. There can be no assurance that the HVAC service and
replacement industry will not experience future declines or that such declines
will not have a material adverse effect on the Company. See "Business -- HVAC
Service and Replacement Industry."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As of the date of this Prospectus, directors, officers and 5% stockholders
of the Company beneficially own approximately 23.4% of the outstanding Common
Stock. See "Principal Stockholders." Accordingly, these
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<PAGE> 9
persons will have substantial influence over the affairs of the Company,
including the ability to influence the election of directors and other matters
requiring stockholder approval.
CONFLICTS OF INTEREST
Certain executive officers of the Company are owners of HVAC companies that
are not affiliated with the Company. While such executive officers have agreed
to devote their full time efforts to the operations of the Company, there can be
no assurance that they will not periodically devote time and attention to the
operations of HVAC companies that are not affiliated with the Company. Currently
none of the unaffiliated companies owned by such executive officers are located
in geographic areas served by the Company. There can be no assurance that the
Company will not enter the markets served by these companies in the future. See
"Management" and "Certain Transactions."
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 (the "Clean Air Act"), relating to minimum energy efficiency
standards of HVAC systems and the production, servicing and disposal of certain
ozone depleting refrigerants used in such systems. In connection with the entry
into new markets, the Company may become subject to compliance with additional
regulations, and there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future.
Various local, state and federal laws and regulations, including those
implementing the Clean Air Act, 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
("Restated Certificate") and Bylaws and Delaware law may make a change in the
control of the Company more difficult to effect, even if a change in control
were in the stockholders' interest. Section 203 of the Delaware General
Corporation Law would prevent an "interested stockholder" (defined in Section
203, generally, as a person owning 15% or more of the Company's outstanding
voting stock) from engaging in a "business combination" (as defined in Section
203) with the Company for three years following the date such person became an
interested stockholder unless certain conditions, including approval by the
Company's Board of Directors, are met. The Company's Restated Certificate and
Bylaws include certain super-majority voting requirements. The Restated
Certificate also allows the Board to determine the terms of 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 this manner could
enable the Board to prevent changes in management and control of the Company.
The Board of the Company is divided into three classes of directors, with
directors being elected for staggered three-year terms. Such staggered terms may
affect the ability of the holders of the Common Stock to change control of the
Company. See "Description of Capital Stock -- Anti-Takeover Provisions." In
addition, certain provisions of the employment agreements between the Company
and the executive officers of the Company may make a change of control more
difficult. Pursuant to these employment agreements, upon a change in control of
the Company, each executive officer is to be paid as severance pay such
officer's base salary for the remaining term of the employment agreement. See
"Management -- Employment Agreements."
8
<PAGE> 10
VOLATILITY OF MARKET PRICE
From time to time, there may be significant volatility in the market price
of the Common Stock. Quarterly operating results of the Company, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this Prospectus, the Company has outstanding 13,694,377
shares of Common Stock, of which 5,110,155 shares are freely tradeable without
restriction or further registration under the Securities Act, except for those
held by "affiliates" (as defined in the Securities Act) of the Company, which
are subject to the resale limitations of Rule 144 under the Securities Act
("Rule 144"). Holders of 1,462,100 shares of Common Stock are eligible to sell
such shares pursuant to Rule 144 (subject to certain limitations) under the
Securities Act beginning April 29, 1997 and an additional 4,522,546 shares will
become eligible for sale pursuant to Rule 144 in August 1997. In connection with
acquisitions of Service Centers completed after the IPO, 3,249,486 shares of
Common Stock have been issued to stockholders who may be deemed "affiliates" for
purposes of Rule 145 under the Securities Act, approximately 644,000 of which
are eligible for sale in the public market in accordance with Rule 145. In
addition to the resale limitations of Rule 145, certain stockholders of such
acquired companies are subject to lockup agreements limiting the resale of such
shares for a period of two years after the date of acquisition. Under the terms
of these lockup agreements, approximately 343,000 additional shares will become
eligible for sale in the public market subject to Rule 145 between the date of
this Prospectus and July 31, 1997. The Company also plans to issue shares of its
Common Stock that have been registered under the Securities Act in connection
with future acquisitions. The Company anticipates that, upon the issuance
thereof, these shares will generally be freely tradeable unless the resale
thereof is contractually restricted. Sales of substantial amounts of Common
Stock in the public market pursuant to Rule 144, Rule 145 or otherwise, and the
potential of such sales, could adversely affect the prevailing market price of
the Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. See "Shares Eligible for Future Sale."
9
<PAGE> 11
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give
effect to the acquisition of eight Acquired Companies completed subsequent to
December 31, 1996 and to the eight Pending Acquisitions listed on page F-2
hereof as if they had been completed as of December 31, 1996 and (iii) on a pro
forma as adjusted basis to give effect to the sale of the 1,850,000 shares of
Common Stock offered by the Company in the Offering and the application of the
net proceeds therefrom. The following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
related Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash........................................................ $10,726 $ 970 $ 30,292
======= ======= ========
Short-term debt, including current portion of long-term
debt, capital lease obligations and notes payable to
related parties........................................... $ 135 $ 7,479 $ --
======= ======= ========
Long-term debt and capital lease obligations, less current
portion................................................... $ 140 $ 734 $ --
Notes payable to related parties............................ -- 131 --
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; 11,050,326 shares outstanding, 11,328,440
shares outstanding pro forma, 13,254,975 shares
outstanding pro forma as adjusted...................... 111 122 141
Additional paid-in capital................................ 48,566 68,140 105,787
Retained earnings......................................... 4,409 4,409 4,409
Equity notes receivable................................... (15) (15) (15)
------- ------- --------
Total stockholders' equity........................ 53,071 72,656 110,322
------- ------- --------
Total capitalization.............................. $53,211 $73,521 $110,322
======= ======= ========
</TABLE>
10
<PAGE> 12
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected financial data of the Company. The
Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneously with the closing of the IPO, the Company acquired the Predecessor
Companies in the Combination. The acquisitions of the Predecessor Companies have
been accounted for using the historical cost basis of the Predecessor Companies
in accordance with SAB 48. In accordance with the provisions of SAB 97, the
historical financial statements of the Company for periods prior to August 21,
1996 are the combined financial statements of the Acquiring Company. In
addition, the historical financial statements of the Company for all periods
presented include the financial statements of the Pooled Companies, which were
acquired effective December 1, 1996 in business combinations accounted for as
poolings of interests, and the operations of all other Subsidiaries are included
from their respective effective dates of acquisition. The following should be
read with the historical financial statements, the Pro Forma Combined Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus.
The selected financial data for the fiscal years ended December 31, 1993,
1994, 1995 and 1996 (except for pro forma amounts) have been derived from the
financial statements of the Acquiring Company and the Pooled Companies. The
selected financial data of the Company for the fiscal year ended December 31,
1992 have been derived from unaudited financial statements not included
elsewhere in this Prospectus. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the combined financial
position and combined results of operations for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net revenue...................................... $14,507 $16,339 $22,193 $24,876 $46,856
Cost of goods sold............................... 10,095 11,716 15,999 16,916 30,198
------- ------- ------- ------- -------
Gross margin..................................... 4,412 4,623 6,194 7,960 16,658
Selling, general and administrative expenses..... 4,241 4,584 5,723 7,162 12,837
------- ------- ------- ------- -------
Income from operations........................... 171 39 471 798 3,821
Other income (expense)........................... 22 24 (47) (8) 485
------- ------- ------- ------- -------
Income before tax................................ 193 63 424 790 4,306
Provision for income taxes....................... 76 18 41 82 1,196
------- ------- ------- ------- -------
Net income....................................... $ 117 $ 45 $ 383 $ 708 $ 3,110
======= ======= ======= ======= =======
Net income per share............................. $ .70
Weighted average shares outstanding.............. 4,451
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $1,231 $1,226 $ 850 $1,336 $ 12,387
Total assets........................................ 3,935 4,605 5,431 6,020 68,504
Total debt.......................................... 1,390 1,374 1,317 1,530 275
Stockholders' equity................................ 1,524 1,452 1,550 2,064 53,071
</TABLE>
11
<PAGE> 13
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma statements of operations of the Company
for the year ended December 31, 1996 give effect to (i) the acquisition of the
Predecessor Companies and the 23 Acquired Companies (excluding the Pooled
Companies) and to the eight Pending Acquisitions listed on page F-2 hereof as if
all of these transactions had been consummated as of January 1, 1996, (ii) the
sale of 1,850,000 shares of Common Stock in the Offering and the application of
the net proceeds therefrom to repay all assumed indebtedness and (iii) the
issuance of shares of the Company's Common Stock and cash proceeds to complete
the eight Pending Acquisitions listed on page F-2 hereof. See the Pro Forma
Combined Financial Statements and the Notes thereto. The unaudited pro forma
financial information set forth below is qualified by reference to and should be
read in conjunction with the historical financial statements of the Company and
the Pro Forma Combined Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The unaudited pro forma financial information set
forth below is not necessarily indicative of the results of operations that
might have occurred if the transactions had taken place on such date or of the
Company's results of operations for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------------
PREDECESSOR PRO FORMA ACQUIRED PRO FORMA PENDING
COMPANIES PREDECESSOR COMPANIES ACQUIRED ACQUISITIONS
COMPANY(1) AS ADJUSTED(2) COMPANIES AS ADJUSTED(3) COMPANIES AS ADJUSTED(4)
---------- -------------- ----------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues................ $46,856 $30,128 $76,984 $63,670 $140,654 $ 31,649
Cost of goods sold.......... 30,198 19,052 49,250 41,406 90,656 22,971
------- ------- ------- ------- -------- --------
Gross margin................ 16,658 11,076 27,734 22,264 49,998 8,678
Selling, general and
administrative expenses... 12,837 6,162 18,999 17,620 36,619 5,868
------- ------- ------- ------- -------- --------
Income from operations...... 3,821 4,914 8,735 4,644 13,379 2,810
Other income (expense):
Interest expense.......... (63) (4) (67) 1 (66) (649)
Interest income........... 334 192 526 67 593 17
Other income (expense).... 214 43 257 (165) 92 73
------- ------- ------- ------- -------- --------
Income before tax........... 4,306 5,145 9,451 4,547 13,998 2,251
Pro forma income tax
expense................... 1,512 1,763 3,275 2,236 5,511 1,015
------- ------- ------- ------- -------- --------
Pro forma net income........ $ 2,794 $ 3,382 $ 6,176 $ 2,311 $ 8,487 $ 1,236
======= ======= ======= ======= ======== ========
Pro forma net income per
share..................... $ 0.63 $ 0.67 $ 0.71
Pro forma weighted average
shares outstanding........ 4,451 9,220 11,885
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS ALL ACQUISITIONS
----------- ----------------
<S> <C> <C>
Net revenues................ -- $172,303
Cost of goods sold.......... -- 113,627
---- --------
Gross margin................ -- 58,676
Selling, general and
administrative expenses... -- 42,487
---- --------
Income from operations...... -- 16,189
Other income (expense):
Interest expense.......... 715(5) --
Interest income........... -- 610
Other income (expense).... -- 165
---- --------
Income before tax........... 715 16,964
Pro forma income tax
expense................... 272(6) 6,798
---- --------
Pro forma net income........ $443 $ 10,166
==== ========
Pro forma net income per
share..................... $ 0.72
Pro forma weighted average
shares outstanding........ 14,057(7)
</TABLE>
- ---------------
(1) See "Summary Financial Data" for a description of the Company's historical
financial statements.
(2) Gives effect to the Predecessor Companies for the period January 1, 1996 to
August 21, 1996.
(3) Gives effect to the 23 Acquired Companies (excluding the Pooled Companies)
listed on page F-2 hereof. Reflects adjustments to expense items in
connection with the acquisitions. See Pro Forma Combined Financial
Statements and the Notes thereto for information regarding these
adjustments.
(4) Gives effect to the eight Pending Acquisitions listed on page F-2 hereof.
Reflects adjustments to expense items in connection with the acquisitions.
See Pro Forma Combined Financial Statements and the Notes thereto for
information regarding these adjustments.
(5) Reflects adjustments to interest expense for the elimination of debt.
(6) Reflects the adjustment to income taxes.
(7) The computation of pro forma net income per share is based upon 14,057,426
weighted average shares of Common Stock outstanding, which includes (i)
4,522,636 shares distributed to the former stockholders of the Predecessor
Companies, (ii) 1,462,100 shares outstanding held by existing stockholders
of the Company prior to the IPO (iii) 2,587,500 shares sold in the IPO,
(iv) 3,557,395 shares issued to former stockholders of the 23 Acquired
Companies and in the eight Pending Acquisitions listed on page F-2 hereof,
(v) 1,850,000 shares sold in the Offering and (vi) 77,795 shares which
reflect the dilutive effect of the options and warrants.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
contained in the Company's Consolidated Financial Statements and Pro Forma
Combined Financial Statements, including the Notes thereto, and the other
financial information appearing elsewhere in this Prospectus.
OVERVIEW
Simultaneous with the IPO in August 1996, the Company acquired the
Predecessor Companies in the Combination. Prior to the Combination, the Company
had no operations. The consideration paid by the Company for the Predecessor
Companies was approximately $77.5 million, consisting of 4.5 million shares of
Common Stock and $18.7 million in cash. No intangible assets were recorded as a
result of the Combination due to the accounting treatment in accordance with SAB
48. On a pro forma basis, these companies, together with the Pooled Companies,
generated revenue in 1996 of approximately $77.0 million and contributed
operating income of approximately $8.7 million.
Since the IPO, the Company has acquired 25 HVAC businesses. The
consideration paid by the Company for the Acquired Companies was approximately
$59.6 million, consisting of 3.2 million shares of Common Stock and $6.2 million
in cash. Two of the transactions were accounted for using the pooling of
interests method of accounting, and the remainder were accounted for using the
purchase method. Of the purchase price, $45.6 million was allocated to
intangible assets which are to be amortized over a 40-year period. The Acquired
Companies' aggregate revenue and operating income for the 12 months ended 1996
were approximately $79.1 million and $3.8 million, respectively.
The Company currently has entered into agreements in principle to acquire
11 HVAC businesses. The Pending Acquisitions are expected to close during the
first six months of 1997. The consideration to be paid by the Company for these
businesses is approximately $24.0 million, consisting of 376,492 shares of
Common Stock and $15.5 million in cash. All of the Pending Acquisitions are
expected to be accounted for using the purchase method. Of the purchase price,
$18.6 million is expected to be allocated to intangible assets which are to be
amortized over a 40-year period. On a pro forma basis, the eight companies
listed as Pending Acquisitions on page F-2 hereof generated revenue in 1996 of
approximately $31.6 million and contributed operating income of approximately
$2.8 million. The Pending Acquisitions are subject to customary conditions, and
there can be no assurance that the Company will be able to consummate all of the
acquisitions or to successfully integrate the businesses of the acquired
companies.
FINANCIAL STATEMENT PRESENTATION
Since the IPO, the financial presentation of the Company has changed. The
Combination was accounted for using the historical cost basis of the Predecessor
Companies in accordance with SAB 48. On July 31, 1996, SAB 97 was adopted to
replace SAB 48 for certain combination transactions. In accordance with the
provisions of SAB 97, the presentation of financial information for the Company
reflects the Acquiring Company as the acquiror of the other Predecessor
Companies. Prior financial statements of the combined Predecessor Companies are
not included in the Company's historical financial presentation. The operation
of the Predecessor Companies and other acquired companies (except for those
companies acquired under the pooling of interests method) have been included in
the Company's financial statements from their respective effective dates of
acquisition.
The Pro Forma Combined Financial Statements and "Selected Pro Forma
Combined Financial Data" give effect to the acquisition of the Predecessor
Companies and the Acquired Companies (excluding the Pooled Companies) and to
eight Pending Acquisitions as if they had occurred on January 1, 1996. The pro
forma presentation does not give effect to the acquisition of two Acquired
Companies and to three Pending Acquisitions which are immaterial to such
presentation. The pro forma analysis adjusts the combined financial statements
to give effect to the accounting treatment of the respective transactions,
including the use of cash or issuance of shares of Common Stock and the
elimination or adjustment of certain expenses which
13
<PAGE> 15
management expects will result from the acquisition. The pro forma statements
contain estimates and may not be indicative of actual results of the Company in
the future.
The Subsidiaries historically have been managed 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. Owners and certain key employees of the Subsidiaries have
agreed to certain reductions in their compensation in connection with the
acquisitions. These reductions equaled approximately $8.1 million based upon
1996 actual compensation expense. The pro forma financial data have been
adjusted to reflect this expense reduction. The pro forma financial statements
have also been adjusted to reflect the addition of a corporate headquarters and
management team. These additional costs equaled approximately $1.3 million.
Other adjustments, in the aggregate, increased the Company's expenses associated
with these companies by approximately $1.3 million.
COMPONENTS OF INCOME
Net revenue of the Subsidiaries has been derived primarily from the
following sources (i) the installation of central air conditioners, furnaces and
heat pumps primarily in existing homes and (ii) the service and maintenance of
central air conditioners, furnaces and heat pumps primarily in existing homes.
Net revenue and associated income from operations are subject to seasonal
fluctuations resulting from increased demand for the Company's services during
warmer weather in the summer months and during colder weather in winter months,
particularly in the beginning of each season. Cost of goods sold primarily
consists of purchased materials such as replacement air conditioning units and
heat pumps and the labor associated with both installations and repair orders.
The main components of selling, general and administrative expenses include
administrative salaries, insurance expense and promotion and advertising
expenses.
RESULTS OF OPERATIONS
Because of the significant effect of the Combination, the acquisitions of
the Acquired Companies and the anticipated effect of the Pending Acquisitions on
the Company's results of operations, the Company's historical results of
operations and period-to-period comparisons will not be indicative of future
results and may not be meaningful. The Company plans to continue acquiring
Service Centers in the future. The integration of acquired Service Centers and
the addition of management personnel to support existing and future acquisitions
may positively or negatively affect the Company's results of operations during
the period immediately following acquisition.
The following table sets forth certain selected financial data as a
percentage of net revenue for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Net revenue................................................. 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 72.1 68.0 64.4
----- ----- -----
Gross margin................................................ 27.9 32.0 35.6
Selling, general and administrative expenses................ 25.8 28.8 27.4
----- ----- -----
Income from operations...................................... 2.1% 3.2% 8.2%
===== ===== =====
</TABLE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Revenue. Net revenue increased $22.0 million, or 88.4%, from $24.9
million for the year ended December 31, 1995 to $46.9 million for the year ended
December 31, 1996. This increase is primarily attributable to the acquisitions
completed during 1996.
Cost of Goods Sold. Cost of goods sold increased $13.3 million, or 78.5%,
from $16.9 million for the year ended December 31, 1995 to $30.2 million for the
year ended December 31, 1996. As a percentage of net revenue, cost of goods sold
decreased from 68.0% for the year ended December 31, 1995 to 64.4% for the year
ended December 31, 1996.
14
<PAGE> 16
Gross Margin. Gross margin increased $8.7 million, or 109.3%, from $8.0
million for the year ended December 31, 1995 to $16.7 million for the year ended
December 31, 1996. As a percentage of net revenue, gross margin increased from
32.0% for the year ended December 31, 1995 to 35.6% for the year ended December
31, 1996. The increase in gross margin as a percentage of net revenue is
attributable to the inclusion of Acquired Companies that operated at a higher
margin.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5.7 million, or 79.2%, from $7.2 million for
the year ended December 31, 1995 to $12.8 million for the year ended December
31, 1996. This increase is attributable to the inclusion of the Acquired
Companies and an increase in management personnel since the IPO. As a percentage
of net revenue, general and administrative expenses decreased from 28.8% for the
year ended December 31, 1995 to 27.4% for the year ended December 31, 1996.
Income from Operations. Income from operations increased $3.0 million, or
378.8%, from $798,000 for the year ended December 31, 1995 to $3.8 million for
the year ended December 31, 1996. Income from operations as a percent of net
revenue increased from 3.2% in the 1995 period to 8.2% in the 1996 period.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Revenue. Net revenue increased $2.7 million, or 12.1%, from $22.2
million in 1994 to $24.9 million in 1995. The increase in net revenue was
primarily attributable to promotion of service contracts and increased
advertising.
Cost of Goods Sold. Cost of goods sold increased $917,000, or 5.7%, from
$16.0 million in 1994 to $16.9 million in 1995. As a percentage of net revenue,
cost of goods sold decreased from 72.1% in 1994 to 68.0% in 1995. The decrease
as a percentage of net revenue was primarily attributable to an emphasis on more
profitable products, improved employee training and volume purchasing discounts.
Gross Margin. Gross margin increased $1.8 million, or 28.5%, from $6.2
million for the twelve months ended December 31, 1994 to $8.0 million for the
twelve months ended December 31, 1995. As a percentage of net revenue, gross
margin increased 4.1% from 27.9% for the twelve months ended December 31, 1994
to 32.0% for the twelve months ended December 31, 1995. The increase as a
percentage of net revenue was primarily attributable to the emphasis on more
profitable products, improved employee training and volume purchasing discounts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.4 million, or 25.1%, from $5.7 million in
1994 to $7.2 million in 1995. As a percentage of net revenue, selling, general
and administrative expenses increased from 25.8% in 1994 to 28.8% in 1995. The
increase as a percentage of net revenue was primarily attributable to increased
management personnel added to support recent growth.
Income from Operations. Income from operations increased $327,000, or
69.4%, from $471,000 in 1994 to $798,000 in 1995. As a percentage of net
revenue, income from operations increased from 2.1% in 1994 to 3.2% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs arise from the acquisition of new
HVAC businesses and the costs associated with such expansion. Cash used in
investing activities was primarily attributable to the acquisition of HVAC
businesses. Cash provided by financing activities consisted primarily of
proceeds from the IPO.
On August 21, 1996, the Company completed the IPO at $13.00 per share. The
proceeds to the Company, net of expenses and underwriting discounts and
commissions, were approximately $28.1 million. Of the net proceeds, $18.7
million was used to pay the cash portion of the consideration for the
Predecessor Companies, including $1.2 million which was used to repay certain
indebtedness arising from the Combination. The Company is using the remaining
proceeds for working capital and capital expenditures, including the acquisition
of additional Service Centers.
15
<PAGE> 17
The Company's ability to acquire new HVAC businesses will depend on a
number of factors, including the ability of management of the Company to
identify target businesses and to negotiate acceptable acquisition terms, the
availability of adequate financing and other factors, many of which are beyond
the control of the Company. Since the IPO, the Company has acquired 25 HVAC
businesses for an aggregate of approximately $6.2 million cash and approximately
3.2 million shares of Common Stock. In addition, the Company currently has
agreements in principle to acquire 11 HVAC businesses for an aggregate of
approximately $15.5 million cash and approximately 376,492 shares of Common
Stock. There can be no assurance that the Company will be successful in
identifying and acquiring new HVAC businesses, that the Company can integrate
such new Service Centers into the Company's operations or that the Company's new
Service Centers will generate sales revenue or profit margins consistent with
those of the Company's existing Service Centers.
The Company has a $10 million unsecured revolving credit facility and an
additional $10 million unsecured discretionary revolving credit facility with
SunTrust Bank, Nashville, N.A. ("SunTrust") available through September 10, 1998
(together, the "Credit Facilities"). Borrowings under the Credit Facilities bear
interest at a variable rate equal to the 30-day LIBOR, as such rate changes from
time to time, plus a variable margin of from 125 to 250 basis points depending
on the Company's funded debt to EBITDA ratio determined on a quarterly basis.
Certain of the Subsidiaries have guaranteed the repayment of indebtedness under
the Credit Facilities. At December 31, 1996, there were no amounts outstanding
on the above lines of credit. The Credit Facilities contain covenants with
respect to the maintenance of certain financial ratios and specified net worth
and limiting the incurrence of additional indebtedness, the sale of substantial
assets, consolidations or mergers by the Company and the payments of dividends.
The Company currently is negotiating with SunTrust to increase the amount
available under the Credit Facilities, but there can be no assurance that such
negotiations will be successful.
Management believes that the proceeds of the Offering, the Company's
existing cash balances, cash generated from operations and additional borrowings
will be sufficient to fund the Company's operating needs, planned capital
expenditures and debt service requirements for the next 12 months. Management
continually evaluates potential strategic acquisitions as part of the Company's
growth strategy. To date, such acquisitions have been predominantly funded by
issuing shares of Common Stock, although future acquisitions could be effected
using greater amounts of cash. Although the Company believes that its financial
resources will enable it to consider potential acquisitions, should the
Company's actual results of operations fall short of, or its rate of expansion
significantly exceed, its plans, or should its costs or capital expenditures
exceed expectations, the Company may need to seek additional financing in the
future. In negotiating such financing, there can be no assurance that the
Company will be able to raise additional capital on terms satisfactory to the
Company. Failure to obtain additional financing on reasonable terms could have a
negative effect on the Company's plans to acquire additional HVAC businesses.
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 or any other newly
issued pronouncements would have a significant impact on the Company's financial
statements.
The Company has elected to adopt the pro forma provisions of the Statement
of Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation."
16
<PAGE> 18
BUSINESS
GENERAL
The Company is one of the leading providers of residential HVAC services
and replacement equipment in the United States, and management believes that the
Company will continue to be a leading consolidator of the fragmented HVAC
service and replacement industry. The Company currently operates 32 Service
Centers in 17 states. The Service Centers install, service and maintain central
air conditioners, furnaces and heat pumps, primarily in existing homes.
Management estimates that over 80% of the Company's pro forma net revenue in
1996, after giving effect to all completed and Pending Acquisitions, was derived
from replacing, maintaining and servicing HVAC equipment at existing residences.
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 offers higher margins and exposes the Company to
less credit risk. The service and replacement segment offers more attractive
pricing because of customers' demands for immediate, convenient and reliable
service.
Management believes that the Company is positioned to capitalize on the
fragmentation and growth of the HVAC service and replacement industry. In
addition, management believes that the Company's visibility within the industry
and its operational philosophy of decentralized operations and centralized
administration provide the Company with a competitive advantage, particularly in
enabling the Company to identify and acquire well-managed, profitable HVAC
businesses. By allowing former owners of Service Centers the opportunity to
continue managing their business after acquisition and to increase their focus
on customer service rather than administration, management believes that the
Company offers owners of independent HVAC businesses an attractive alternative.
Management intends to develop a national presence through acquisitions and a
national reputation for superior, high quality service which will enable the
Company to appeal to a large number of customers. The Company has implemented an
aggressive acquisition strategy, acquiring 25 HVAC businesses since the IPO with
aggregate revenue for the year ended December 31, 1996 of approximately $79.1
million. The Company currently has agreements in principle to acquire 11 HVAC
businesses with aggregate revenue in 1996 of approximately $35.7 million. The
Pending Acquisitions are expected to close during the first six months of 1997.
The Company's 1996 pro forma net revenue, reflecting the acquisition of the
Subsidiaries and eight Pending Acquisitions, was approximately $172.3 million.
See Pro Forma Combined Financial Statements and the Notes thereto for a listing
of the companies included.
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 nine
million heat pumps in operation in homes in the United States. Management
estimates, based on industry information, that the market for the service and
replacement of HVAC systems in existing homes is approximately $24 billion
annually. The installation and replacement segment of the industry has increased
in size as a result of the aging of the installed base of residential systems,
the introduction of new, energy efficient systems and the upgrading of existing
homes to central air conditioning. According to the Air Conditioning and
Refrigeration Institute, over 61 million central air conditioners have been
installed in the United States since 1975. Many of the units installed from the
mid-1970s to the mid-1980s are reaching the end of their useful lives, thus
providing a growing replacement market. In addition, in recent years, increased
governmental regulation restricting the use of ozone depleting refrigerants in
HVAC systems has contributed to the growing replacement market. See
"Regulation."
According to Air Conditioning, Heating, and Refrigeration News, over 30,000
HVAC contractors are currently operating in the United States. 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
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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. Management believes that 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.
ACQUISITIONS
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 businesses and the
continued revenue and profit growth of its Service Centers.
Strategy
The Company has implemented an aggressive acquisition program utilizing a
"hub and spoke" strategy for expansion into new geographic areas and further
penetration into existing markets. The U.S. residential HVAC service industry is
currently highly fragmented. Management believes that many HVAC businesses,
which lack the capital necessary to expand operations and the ability to exit
their business profitably, will desire to affiliate with the Company because the
Company will provide (i) business and marketing systems that enable a company to
operate more profitably, (ii) the opportunity to increase the operator's focus
on customer service rather than administration, (iii) the potential for national
name recognition and (iv) the opportunity for the owner to gain liquidity while,
in some cases, continuing to manage the operations of the business. By expanding
geographically, management believes the Company will be able to offset certain
seasonal and economic trends that affect different regions of the country
periodically. See "Risk Factors -- Seasonal and Cyclical Nature of the
Industry."
Expanding Geographic Presence through Hub Acquisitions. The Company plans
to continue to make "hub" acquisitions of existing HVAC businesses in new
markets that are not being served by the Company. Management targets 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 considers candidates that are in attractive markets,
financially stable, experienced in the industry and characterized by strong
management.
Expanding Market Penetration of Hubs through the Acquisition of Other HVAC
Businesses. The Company expects to increase market share through "spoke"
acquisitions of other HVAC businesses that have large customer bases 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.
Recent Acquisitions
Since the IPO, the Company has acquired 25 HVAC businesses. The
consideration paid by the Company for these businesses was approximately $59.5
million, consisting of 3.2 million shares of Common Stock and $6.2 million in
cash. Two of the transactions were accounted for using the pooling of interests
method of accounting, and the remainder were accounted for using the purchase
method. Of the purchase price, $45.6 million was allocated to intangible assets
which are to be amortized over a 40-year period. The Acquired Companies'
aggregate revenue and operating income for the 12 months ended December 31, 1996
were $79.1 million and $3.8 million, respectively.
The Company's acquisitions since the IPO expanded the geographic coverage
of the Company by providing entry to the Florida, Illinois, Maryland,
Mississippi, New York, Oklahoma, South Carolina and Texas markets and increasing
the Company's market presence in Arkansas, California, Indiana, Louisiana and
Tennessee. The Company now operates 32 Service Centers (the operations of five
HVAC businesses included among the Acquired Companies were consolidated
following acquisition) in 31 market areas in 17 states.
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The following table sets forth certain information with respect to the
Company's existing Service Centers:
<TABLE>
<CAPTION>
COMPANY MARKET EFFECTIVE DATE
- ------- ------ --------------
<S> <C> <C>
PREDECESSOR COMPANIES
Norrell Heating and Air Conditioning
Company, Inc.............................. Birmingham, AL August 21, 1996
Hardwick Air Masters, Inc................... Little Rock, AR August 21, 1996
Service Experts of Palm Springs, Inc........ Palm Springs, CA August 21, 1996
Comerford's Heating and Air Conditioning,
Inc....................................... Pleasanton, CA August 21, 1996
Coastal Air Conditioning Service, Inc....... Savannah, GA August 21, 1996
Rolf Coal and Fuel Corp..................... Fort Wayne, IN August 21, 1996
Brand Heating & Air Conditioning, Inc....... Lafayette, IN August 21, 1996
Gilley's Heating & Cooling, Inc............. Monroe, LA August 21, 1996
Vision Holding Company, Inc................. Kansas City, MO August 21, 1996
Air Experts, a United Services Co., Inc..... St. Louis, MO August 21, 1996
AC Service & Installation Co., Inc./
Donelson Air Conditioning Company, Inc.... Nashville, TN August 21, 1996
Arrow Heating & Air Conditioning, Inc....... Racine, WI August 21, 1996
ACQUIRED COMPANIES
AirCon Air Conditioning, Inc. .............. Little Rock, AR January 2, 1997
Mark's Air Conditioning, Inc................ Little Rock, AR February 1, 1997
Freschi Air Systems, Inc.................... Antioch, CA December 1, 1996
Dial One Raymond's Plumbing, Heating &
Cooling, Inc. ............................ Auburn, CA January 2, 1997
Gaddis Co................................... El Centro, CA January 2, 1997
Custom Air Conditioning, Inc................ Jupiter, FL December 1, 1996
Automated Air, Inc. ........................ Champaign, IL January 2, 1997
Bauer Heating & Air Conditioning, Inc....... Decatur, IL January 2, 1997
Sylvester's Corp............................ Anderson, IN January 2, 1997
Bryant-Allen, Inc........................... Indianapolis, IN January 2, 1997
Paul E. Smith Co., Inc...................... Indianapolis, IN December 1, 1996
B. W. Heating & Cooling, Inc................ Mishawaka, IN January 2, 1997
Quality Air Conditioning & Heating of West
Monroe, Inc............................... Monroe, LA December 1, 1996
Frees Service Experts, Inc.................. Shreveport, LA December 1, 1996
Parker Heating & Air Conditioning,
Incorporated.............................. Gaithersburg, MD January 2, 1997
Comfortech, Inc............................. Jackson, MS December 1, 1996
Sunbeam Service Experts, Inc................ Buffalo, NY December 1, 1996
Falso Service Experts, Inc.................. East Syracuse, NY December 17, 1996
Gordon's Specialty Company.................. Norman, OK December 1, 1996
Pardee Refrigeration Company Incorporated... Charleston, SC December 1, 1996
Sanders Indoor Comfort, Inc................. Greeneville, SC December 1, 1996
Island Air Conditioning, Inc................ Isle of Palms, SC December 1, 1996
Air-Conditioning and Heating Unlimited,
Inc....................................... Memphis, TN December 1, 1996
B & B Air Conditioning, Inc................. Dallas, TX December 1, 1996
Eisenbach Enterprises, Inc.................. Tyler, TX December 1, 1996
</TABLE>
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OPERATING STRATEGY
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, national company. The Company's operating strategy
incorporates the successful methods developed by CSG and capitalizes on the
operating efficiencies resulting from the integration of the operations of the
Subsidiaries. The key elements of the Company's operating strategy are as
follows:
Providing Superior, High Quality Service in a Professional Manner. The
Service Centers provide high quality service at a competitive price and in a
friendly, professional manner. In order to provide such service, service
technicians, maintenance technicians and installers employed by the Company
complete comprehensive training programs designed to teach employees the
Company's operating procedures. These 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 standardized policies and
operating procedures intended to result in a uniform level of professional, high
quality service, including installation and maintenance procedures, drug-testing
of employees, the technician's appearance and the use of "Carpet Saver" shoe
coverings when inside a customer's home. The Service Centers utilize a flat rate
billing system that advises the customer of the cost of service before work
begins and charges the quoted price regardless of the actual time necessary to
repair the system. The Service Centers are generally open for business from 8:00
a.m. to 8:00 p.m. on weekdays, and most are open on Saturday from 8:00 a.m. to
4:00 p.m. Management believes that by providing evening and Saturday service, in
addition to 24 hour emergency service, the Service Centers are able to better
accommodate customers than most of its competitors. In addition, the Company
guarantees complete customer satisfaction and plans to establish a toll-free
"Customer Can't Lose" phone line during the second quarter of 1997 to address
customer complaints and questions.
Increasing Revenue at Service Centers. The Company actively promotes its
maintenance agreements to both new and existing customers. See "Service
Centers -- Maintenance and Service Agreements." The sale of maintenance
agreements not only generates recurring revenue through the payment of fees, but
also helps the Company develop a committed, loyal customer base and provides the
opportunity for cross-marketing of the Company's other services and products.
The Company offers a wide assortment of financing packages designed to enable
customers to purchase equipment and services from the Company in the most
convenient and cost-effective manner possible. Certain Service Centers also
offer their customers a Professional Courtesy(TM) credit card solely for use in
purchasing equipment and services from the Company. This 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 a variety of 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 these marketing efforts will result in increased business for its Service
Centers. In 1996, advertising and marketing expenditures (net of marketing
expenditures by manufacturers) were 3.4% as a percentage of the Company's net
revenue.
The Company's Service Centers offer 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.
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The Company offers and actively promotes a variety of IAQ services designed to
detect and correct unhealthy air quality. 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 is currently discussing purchase terms for HVAC equipment
with certain manufacturers on a national basis. Management believes that the
Company will be able to increase the discounts and rebates previously available
to the individual Service Centers. Since the IPO, the Company has achieved
increased operating efficiencies by consolidating certain functions at the
corporate level, including the purchase of insurance, the provision of legal
support and the utilization of corporate trainers in the areas of marketing and
IAQ. The Company intends to review the desirability of consolidating other
functions at the corporate level, including the purchasing and leasing of
service vehicles and national marketing. A portion of any operating efficiencies
will be offset by increased general and administrative expenses at the Company's
corporate headquarters.
Since the IPO, the Company has implemented a uniform system of budgets,
forecasts, reports and financial controls, including a uniform general ledger
system and electronic mail system, for its Service Centers. In addition, each of
the Service Centers generates and provides to the Company a daily management
report of revenue and expense information and certain billing and collection
data. The Company uses this information to prepare and provide to each Service
Center monthly and quarterly comparative financial data, which enable each
Service Center to track and compare its performance with the other Service
Centers.
Attracting and Retaining Quality Employees. Management believes the
Service Centers attract and retain quality employees by providing (i) an
environment that emphasizes professionalism and customer satisfaction, (ii)
extensive training that allows employees to advance to higher-earning positions
and (iii) stability of income because the Service Centers do not experience the
cyclical lay-offs typically found in the HVAC industry. The Company intends to
establish 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 generally 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 of most Service Centers must pass extensive interviews
and background checks, where permitted, as well as technical tests prior to
being hired. Service technicians, maintenance technicians and installers
employed by the Company are required to complete training programs designed to
teach employees the Company's operating procedures. These training programs are
conducted both at the Service Centers and at CSG sponsored seminars. Since the
IPO, the Company has implemented training programs relating to marketing and IAQ
products that are conducted at Service Centers by the Company's corporate
trainers. Management believes that these policies have resulted in a low rate of
employee turnover. See "Contractor Success Group."
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 1996, CSG collected fees totaling approximately $3.4 million. CSG
members are granted exclusive rights to the territory in which they operate.
Although the Company has acquired 32 CSG members since its formation, other HVAC
companies have joined CSG. 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 the aspects of owning and operating an HVAC service and
replacement company, including residential replacement sales,
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residential maintenance, service contracts, residential installation, business
planning and service dispatch. In addition, CSG members receive materials
containing, and attend conferences discussing, methods and procedures to operate
an efficient, profitable company, including (i) daily report forms designed to
provide accurate and timely sales and cost information essential to determining
the performance of an HVAC business, (ii) "Scorecard," a monthly report
distributed to CSG members comparing top producers among members, (iii)
contracts and forms, including non-competition agreements for employees, sales
and service contracts, (iv) marketing promotions that are tested and proven with
specific instructions on how to tailor advertising for the member's market and
(v) quarterly projects introducing to CSG members new products and services
designed to increase productivity.
Seminars and Services
Potential CSG subscribers are invited to attend an informational seminar at
CSG's facility in St. Louis, Missouri where they are introduced to the CSG
concept and are invited to join the organization. Upon paying the initial fee,
CSG subscribers attend "Boot Camp" which is an intensive four-day workshop
conducted by CSG three times each year. At Boot Camp, HVAC contractors are
educated on all aspects of operating an HVAC service and replacement business.
Attendees receive presentations and materials that explain in specific detail
the methods and procedures successfully utilized by CSG members. Topics covered
include administration, sales, service, advertising, direct marketing,
maintenance, service contracts, acquisitions and accounting. CSG members may
also attend "Success Convention," which is a quarterly two-day convention of CSG
members designed to allow the members to compare ideas and projects and at which
quarterly projects are presented, and "Sales Extravaganza," which is an annual
convention designed to encourage and motivate a member's salespeople, selling
technicians and telemarketers.
Future University
In connection with the acquisition of its Service Centers, the Company has
acquired approximately 37% of the issued and outstanding Common Stock of Future
University, Inc. ("Future University(R)"). The remaining shares of Future
University's Common Stock are held by a number of CSG members and their
shareholders. Future University is a corporation formed in 1991 that offers to
CSG members for an additional enrollment fee technical and operational
educational programs designed to improve the profitability of the CSG member's
business. The technical programs offer installers and technicians a combination
of classroom and on-the-job-training during one and two week sessions.
Technicians receive skills training that will enable them to effectively analyze
customer problems and offer efficient solutions. In the maintenance training
classes, for example, technicians are trained to maximize the operating
efficiency of HVAC systems, assure safe operation of systems and reduce the
chances of future breakdowns. In the sales training classes, technicians are
trained to deal with customer expectations, use and promote various products and
services, develop leads, explain financing programs and improve on various
customer relations skills. In sending technicians to the Future University
program, CSG members are able to develop a high level of commitment in their
employees. The technical programs are held in Little Rock, Arkansas under an
exclusive licensing arrangement with Hardwick Air Masters, Inc., one of the
Company's Subsidiaries. Pursuant to the current licensing arrangement, Hardwick
Air Masters, Inc. receives 70% of the revenue from the technical programs and
Future University receives 30% of such revenue. The operational programs offer
to general managers and salespeople a variety of classes covering residential
sales training, replacement sales, marketing and promotions, telemarketing and
general operations. These programs are held in Houston, Texas.
Management believes that Future University is the only comprehensive
training school for management, salespeople, installers and technicians in the
residential HVAC industry. Since 1994, over 1,000 students per year have
completed Future University's technical and operational training programs.
SERVICE CENTERS
General
Management estimates that during 1996 the Service Centers' service and
maintenance technicians responded to over 350,000 maintenance, repair and
service calls. The services offered by each Service Center
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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 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 1996 the
installation and servicing of plumbing systems represented less than 1% of the
Company's pro forma net revenue. The Company anticipates that these Service
Centers will continue to offer, and that Service Centers acquired in the future
may offer, plumbing services, but currently does not intend to expand this
business.
All of the Service Centers' technicians are trained to promote the
Company's preventive maintenance agreements, and many technicians are trained to
cross-market IAQ equipment and other ancillary services and products offered by
the Company. Service technicians are trained to perform service and maintenance
in a professional manner, to identify problems with existing HVAC systems and to
offer customers the most practical, cost-effective solution to their problem,
whether that involves repairing the existing system or suggesting a replacement
system or part. Often this involves providing customers with information on
products to upgrade their system and improve efficiency as well as informing
them about the advantages and disadvantages of a particular product or service.
Maintenance technicians perform routine maintenance examinations of HVAC systems
in an effort to keep the systems in working order and to identify potential
problems before they become too costly to correct.
Management believes that most HVAC contractors charge the cost of the
materials and the hourly rate for the actual time it takes to install or repair
the system. In contrast, the Company utilizes a flat rate pricing system that
advises the customer of the cost of service for the particular job before work
begins and charges the quoted price regardless of the time necessary to repair
the system. While this may result in parts, labor and other costs incurred in
repairing a customer's system exceeding the quoted price from time to time, the
Company is able to alter its pricing on a per job basis. The Company's
experience is that customers generally prefer this pricing method because it
eliminates surprise or hidden costs. This pricing method also creates an
incentive for the Company to hire quality technicians and to provide them with
the training necessary to service customer needs efficiently.
Sale of Replacement Units
The replacement market for residential HVAC equipment is dependent upon the
base of installed units, the mechanical life and usage of the equipment and
technological advances in the efficiency of newer units. Management 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 maintains 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.
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Maintenance and Service Agreements
Management estimates that the Company currently has approximately 64,000
maintenance agreements with customers. These agreements are for a term of one to
three years and generally provide for two diagnostic and precision maintenance
visits during the year at an average cost to the customer of approximately $135
per year. The sale of maintenance agreements not only generates recurring
revenue through the payment of fees, but also helps the Company develop a
committed, loyal customer base and provides the opportunity for cross-marketing
of the Company's other services and products. Management believes that customers
with maintenance agreements are the Company's most satisfied customers because
of the many benefits offered by these agreements, including (i) energy savings
resulting from a more efficient HVAC system, (ii) fewer and less costly
emergency repairs, (iii) longer useful life for the HVAC system, (iv) discounted
rates for service and (v) guaranteed same-day service in the event of an
emergency repair. Maintenance agreements also allow the Company to more fully
utilize its technicians during the historically slower spring and fall months by
scheduling maintenance appointments during such time. Because systems under
maintenance agreements are less likely to require emergency repairs, the Service
Centers are able to provide more prompt service to emergency and new service
calls.
The Company's service agreements are generally for a term of one year and
provide for the repair of any problem with the customer's system at no
additional cost to the customer. Pursuant to the terms of the 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, certain 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
will insure its service agreements through licensed insurers or otherwise comply
with applicable laws and regulations. Management believes that the Company has
made adequate provision for potential claims under these agreements. See
"Regulation."
Commercial Service and Replacement
Some of the Service Centers offer HVAC services to small and medium-sized
businesses. In 1996, revenues generated from the provision of services and sale
of products to commercial customers represented less than 20% of the Company's
pro forma net revenue. The Service Centers target restaurants, small office
buildings, warehouses and theaters as potential prospects for its commercial
services. The Company's commercial sales representatives receive extensive
training designed to enable the representatives to promote the Company's
services and products effectively. The services offered to commercial customers
are generally the same as services offered to residential customers, including
the analysis, maintenance and repair of existing HVAC systems, the sale of
replacement systems and the sale of ancillary products, including IAQ devices
and services. While management does not plan to further develop its commercial
HVAC business beyond existing operations given the potential for growth in the
residential service and replacement market, the Company intends to continue to
provide, and may acquire Service Centers that provide, commercial HVAC services.
SERVICES AND OPERATIONS
The Company provides management, financial and accounting services for all
of the Service Centers' operations, as well as insurance and certain marketing
and legal support. Management provides certain financial control support,
including budgets, forecasts and reports, while allowing each general manager of
a Service Center to manage its day-to-day operations.
Since the IPO, the Company has added various corporate management and staff
personnel including three regional vice presidents, a controller, a human
resources manager, a management information systems director, a general counsel,
a regional accountant, a staff accountant and two corporate trainers.
In order to better organize its corporate support structure, the Company
has divided its Service Centers into three regions. Each Service Center in a
region reports directly to a regional vice president. In addition, the Company
intends to appoint area presidents who will coordinate various functions among
groups of Service
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Centers located in the same geographic area while continuing to operate as
president of a Service Center. These individuals will report to their respective
regional vice presidents.
The Company provides the following services:
Purchasing
Each Service Center generally purchases the HVAC units, parts and supplies
it uses from distributors. Because of the number of Service Centers operated by
the Company, management believes that it will be able to negotiate at a lower
cost the purchase of these items. The principal manufacturers of the products
sold by the Company include The Trane Company, Carrier Air Conditioning, Inc.,
Lennox Industries, Inc. and Rheem Manufacturing Company. The Service Centers
generally order equipment only upon receipt of a contract for purchase from a
customer, enabling them to maintain low inventory.
Management Information Systems
The Service Centers currently utilize various compatible management and
financial information systems. The Company intends to convert the Service
Centers' current systems to an integrated system within the next 12 months. The
Company has recently implemented a general ledger system utilizing SuccessWare
software at each of its Service Centers. See "Certain Transactions." The
implementation of an integrated system will allow the Company to maintain
greater control over the operations of its Service Centers. The Company tracks
important data related to the Service Centers' operations and financial
performance and monitors all advertising expenditures. In addition, the Service
Centers generate and provide to the Company a daily management report of revenue
and expense information and certain billing and collection data. The Company
uses such information to prepare and provide to each Service Center monthly and
quarterly comparative financial data, which enable each Service Center to track
and compare its performance with the other Service Centers.
Employee Screening and Training
Prior to employment, potential employees of the Company are tested to
determine their technical expertise. In addition, as permitted by local law,
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 generally 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." The Company has recently established training
programs relating to marketing and IAQ products that are conducted at the
Company's Service Centers by two corporate trainers.
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 various means, including local
print advertising, yellow page advertising and direct mail campaigns followed up
by telemarketing. In 1996, advertising and marketing expenditures (net of
marketing expenditures by manufacturers) were 3.4% as a percentage of the
Company's net revenue. The Company intends, over time, to develop the Service
Experts name as a key element of its marketing strategy. As a part of this
strategy, management intends gradually to integrate the Company's name and logo
in advertising while continuing to utilize established local brand names.
REGULATION
HVAC systems are subject to various environmental statutes and regulations,
including, but not limited to, laws and regulations implementing the Clean Air
Act, relating to minimum energy efficiency standards of
25
<PAGE> 27
HVAC systems and the production, servicing and disposal of certain ozone
depleting refrigerants used in such systems. In connection with the entry into
new markets, the Company may become subject to compliance with additional
regulations. Although, there can be no assurance that the regulatory environment
in which the Company operates will not change significantly in the future,
compliance with existing regulatory requirements has not had a material effect
on the Company.
Various local, state and federal laws and regulations, including, but not
limited to, laws and regulations implementing the Clean Air Act, impose
licensing standards on technicians who service heating and air conditioning
units. While the installers and technicians employed by the Service Centers are
duly certified by applicable local, state and federal agencies and have been
able to meet or exceed such standards to date, there can be no assurance that
they will be able to meet stricter future standards. In addition, installers
must comply with local building codes when installing HVAC units in residences
and commercial buildings.
In some states, warranties provided for in the Company's service agreements
may be deemed insurance contracts by applicable state insurance regulatory
agencies thereby subjecting the Company and the service agreements to the
insurance laws and regulations of any such state.
TRADEMARKS
"Service Experts" is registered as a federal trademark with the United
States Patent and Trademark Office. The Company currently licenses the Service
Experts name and logo to two companies that are members of CSG. The Company owns
and licenses numerous proprietary products used by the Service Centers and other
CSG members. See "Contractor Success Group." In addition, the Company owns
approximately 37% of the issued and outstanding common stock of "Future
University," which is registered as a federal trademark with the United States
Patent and Trademark Office. See "Contractor Success Group -- Future
University." The Company regards its trademarks as having significant value and
being an important factor in the development and marketing of its operations.
The Company's policy is to pursue registration of its trademarks whenever
possible and to oppose vigorously any infringement of its trademarks.
COMPETITION
The HVAC service and replacement industry is highly competitive in each of
the markets in which the Company operates. The Company's Service Centers compete
with utility companies and other full-service HVAC businesses primarily on the
basis of quality, reliability, customer service and price. Some of these
companies 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. Certain of these companies
are pursuing a consolidation strategy in the industry and compete with the
Company for potential acquisitions as well as for customers.
EMPLOYEES
Management estimates that the Company has approximately 1,300 employees,
all but approximately 20 of which are employed at Service Centers. None of the
Company's employees is represented by a collective bargaining agreement.
PROPERTIES
The Company currently occupies the building and underlying real estate on
which all of its Service Centers are located pursuant to leases with terms
generally ranging from five to ten years on terms the Company believes to be
commercially reasonable. Total rental expense for the Company's leased centers,
including certain leased vehicles and equipment, in 1996 was approximately
$490,000 and is expected to be approximately $2.0 million in 1997. The Company
generally plans to continue to lease rather than purchase space for the Service
Centers to maximize the Company's available capital.
26
<PAGE> 28
The Company's corporate headquarters are located in approximately 6,580
square feet of space in Brentwood, Tennessee. The remaining term of the lease on
this office space is approximately five years, and the Company pays annual rent
of $115,200. 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 eight months, and the Company pays
annual rent of approximately $60,000.
INSURANCE
The Company maintains general liability, workers compensation and property
insurance. The costs of insurance coverage varies, and the availability of
certain coverage has fluctuated in recent years. As of February 1, 1997, the
Company consolidated the purchase of insurance for its operations under a single
policy, excluding major medical insurance which will continue to be provided by
existing plans until a consolidated plan can be negotiated. This coverage will
result in savings from the amounts previously paid by the Subsidiaries. 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 Subsidiaries may, from time to time, be parties to
litigation or administrative proceedings which arise in the normal course of
their businesses.
THE PENDING ACQUISITIONS
OVERVIEW
The Company has entered into agreements in principle to acquire 11 HVAC
businesses. The Company plans to enter into an Agreement and Plan of Merger (the
"Merger Agreements") with seven Combining Companies pursuant to which such
Combining Companies will be merged with wholly-owned subsidiaries of the
Company. The Company plans to enter into Combination Agreements (the
"Combination Agreements") with three Combining Companies pursuant to which the
Company will acquire all of the issued and outstanding capital stock of such
Combining Companies (the Merger Agreements and the Combination Agreements are
hereinafter referred to collectively as the "Agreements"). The Company plans to
enter into an Asset Purchase Agreement with one Combining Company pursuant to
which the Company will purchase certain assets in exchange for cash and the
assumption of certain liabilities of such Combining Company.
Pursuant to the terms of the Merger Agreements, the shares of capital stock
of the Combining Companies outstanding immediately prior to the closing, other
than treasury shares and shares held by dissenting stockholders, will be
converted into the right to receive shares of Common Stock and cash. Pursuant to
the terms of the Combination Agreements, the Company will acquire all of the
issued and outstanding capital stock of the Combining Companies in exchange for
shares of Common Stock.
The aggregate consideration to be paid by the Company in connection with
the Pending Acquisitions is estimated to be approximately 376,000 shares of
Common Stock and $15.5 million cash. In general, the purchase price to be paid
to each of the Combining Companies is based on the Combining Company's after tax
net income for its most recent fiscal year or such other 12 month period as
agreed to by the parties (the "Valuation Period"), adjusted to exclude all
nonrecurring income and expense and to include (i) all adjustments necessary to
present rents at market, (ii) such adjustments to salary as are agreed to by the
parties, (iii) all adjustments necessary to give effect to federal and state
income taxes as if a Combining Company that is not a C corporation had been a C
corporation during the year, and (iv) certain other adjustments agreed to by the
parties.
27
<PAGE> 29
Prior to the closing of a Pending Acquisition, the Company will make an
initial adjustment to the purchase price based on the difference between the
Combining Company's net income for the Valuation Period, as presented in the
Combining Company's financial statements for such period, with such adjustments
as set forth above, and the Combining Company's net income for the Valuation
Period, as presented in the Final Valuation Statement (as defined in the
Agreements) to be prepared by the Company's independent certified public
accountants. Promptly following the closing of a Pending Acquisition, final
adjustments to the purchase price for each Combining Company will be made based
on a Closing Balance Sheet (as defined in the Agreements) to be prepared by the
Company's independent certified public accountants. The consideration to be paid
by the Company will be reduced by (i) the amount of outstanding indebtedness of
a Combining Company at the time of the closing of a Pending Acquisition, other
than indebtedness incurred subsequent to the Valuation Period for the purchase
of fixed assets, and (ii) in the case of any stockholder, the amount of any
indebtedness of such stockholder payable to the Combining Company at the time of
closing.
The following table sets forth certain information with respect to the
Combining Companies:
<TABLE>
<CAPTION>
PURCHASE
COMBINING COMPANY MARKET PRICE(1)
----------------- ---------------- -----------
<S> <C> <C>
C. Iapaluccio Co., Inc.(4).................................. Danbury, CT 2,073,426
Griffin Heating & Air Conditioning, Inc.(2)................. Fort Wayne, IN 890,400
The Air Comfort Center, Inc.(3)............................. Shreveport, LA 600,000
Roland J. Down, Inc.(3)..................................... Albany, NY 11,200,000
Piedmont Air Conditioning, Inc.(3).......................... Raleigh, NC 2,838,264
Superior Air Conditioning Co., Inc.(2)...................... Duncanville, TX 837,021
Stark Services Co., Inc.(2)................................. Fort Worth, TX 1,200,792
Claire's Air Conditioning & Refrigeration, Inc.(2).......... Midland, TX 2,224,536
Claire & Sanders, Inc.(2)................................... Midland, TX 292,938
Lewis & Guymon, Inc.(2)..................................... Orem, UT 871,720
Royden, Inc.(4)............................................. Provo, UT 1,531,470
-----------
Total............................................. $24,560,567
===========
</TABLE>
- ---------------
(1) Assumes that there is no adjustment (as described above) to the
consideration to be paid by the Company.
(2) The stockholders of this Combining Company will receive consideration
consisting of shares of Common Stock and, at such stockholder's election,
cash of up to 33% of the purchase price.
(3) The stockholders of this Combining Company will receive only cash.
(4) The stockholders of this Combining Company will receive only shares of
Common Stock.
The consideration to be paid to each Combining Company was determined
through arm's length negotiations between the parties. The terms of the
Agreements entered into by the Combining Companies are substantially the same,
including the procedures used to determine the consideration to be paid to each
Combining Company, based on the adjusted net income of the Combining Company.
The factors considered by the Company in determining the consideration to be
paid included, among others, the historical operating results, the net worth,
the levels and type of indebtedness and the future prospects of each of the
Combining Companies.
THE AGREEMENTS
Representations and Warranties of the Combining Companies
Each of the Agreements contains customary representations and warranties
relating to, among other things, due organization and good standing of the
Combining Company, good and marketable title to the shares of capital stock of
the Combining Company, the absence of preemptive rights, the absence of any
options, warrants or other rights to acquire the stock of the Combining Company,
good and marketable title to all of the Combining Company's assets, adequate
insurance, the accuracy of the Combining Company's financial statements, the
absence of litigation and compliance with applicable laws.
28
<PAGE> 30
Common Stock Issued to Affiliates
Certain stockholders of the Combining Companies may be deemed to be
"affiliates" for purposes of Rule 145 of the Securities Act. Pursuant to the
Agreements, the Combining Companies acknowledge and agree with respect to each
person who is deemed to be an affiliate that (i) the Common Stock issuable to
such person will be held pursuant to the provisions of the Securities Act and
the rules and regulations thereunder, (ii) no sale or disposition of such shares
of Common Stock will be made except pursuant to the terms of the Registration
Statement, the Securities Act and Rule 145(d) thereunder, and (iii) the
certificates representing the Common Stock issued to such person will bear a
restrictive legend setting forth the restrictions on transfer referred to above.
In addition, persons deemed affiliates of one Combining Company the
acquisition of which will be accounted for as a pooling of interests will be
subject to further limitations. See "Accounting Treatment." Each such person
will be required to deliver to the Company a letter agreement pertaining to the
limitations on the transferability of such affiliate's shares of Common Stock
received in the Pending Acquisition, and whereby such affiliate shall represent
and warrant, among other things, that he or she shall not sell, pledge,
transfer, or otherwise dispose of such shares of Common Stock (i) in violation
of the Securities Act or the rules and regulations thereunder, and (ii) until
such time as financial results covering at least 30 days of combined operations
of the Combining Company and the Company have been published within the meaning
of Section 201.01 of the Commission's Codification of Financial Reporting
Policies.
Indemnification
Pursuant to the terms of the Agreements, each Combining Company agrees to
indemnify and hold harmless the Company and its officers, directors, employees
or agents thereof against any and all claims, losses, damages, liabilities and
expenses, including reasonable attorney's fees, suffered because of (i) the
untruth, inaccuracy, misrepresentation, omission, or breach or nonfulfillment by
the Combining Company of any representation, warranty, covenant or other
agreement contained in the Agreement or (ii) any untrue statement of a material
fact relating to the Combining Company that is contained in any preliminary
prospectus, the Registration Statement or any prospectus forming a part thereof,
or any amendment thereof or supplement thereto, or any omission to state therein
a material fact relating to the Combining Company required to be stated therein
or necessary to make such statements therein not misleading.
Pursuant to indemnification agreements ("Indemnification Agreements") to be
entered into between the stockholders of the Combining Companies and the Company
on or prior to closing, the stockholders of the Combining Companies will agree
to indemnify and hold harmless the Company and its officers, directors,
employees and agents thereof against any and all claims, losses, damages,
liabilities and expenses, including reasonable attorney's fees, suffered because
of (i) the untruth, inaccuracy, misrepresentation, omission, or breach or
nonfulfillment by the Combining Company of any representation, warranty,
covenant or other agreement contained in the Agreement, (ii) any untrue
statement of a material fact relating to the Combining Company that is contained
in any preliminary prospectus, the Registration Statement or any prospectus
forming a part thereof, or any amendment thereof or supplement thereto, or any
omission to state therein a material fact relating to the Combining Company
required to be stated therein or necessary to make such statements therein not
misleading, (iii) any and all amounts of federal, state and/or local income,
franchise, property and/or sales and use taxes that may be assessed against the
Company with respect to any taxable period ending on or before the date of the
Agreement, for which adequate provisions therefor have not been made through the
date of closing, and the amount of any interest and/or penalties relating to
such tax assessments or (iv) any claim or demand by any person asserting any
interest in any share of capital stock of the Combining Company. Each Combining
Company and its stockholders have indemnification obligations only to the extent
that the aggregate of all indemnifiable claims, losses, damages, liabilities and
expenses, including reasonable attorney's fees, for such Combining Company or
stockholder exceeds $25,000.
The Company agrees to indemnify, defend and hold harmless each of the
stockholders of the Combining Companies against any and all claims, losses,
damages, liabilities and expenses, including reasonable attorney's fees,
suffered because of (i) the untruth, inaccuracy, misrepresentation, omission,
breach or
29
<PAGE> 31
nonfulfillment by the Company of any representation, warranty, covenant or other
agreement contained in the Agreements or (ii) any untrue statement of a material
fact relating to the Company that is contained in the preliminary prospectus,
the Registration Statement or any prospectus forming a part thereof, or any
amendment thereof or supplement thereto, or arising out of or based on any
omission or alleged omission to state therein a material fact relating to the
Company required to be stated therein or necessary to make the statements
therein not misleading.
Employment Agreements and Covenants Not to Compete
In connection with the Pending Acquisitions, the president and/or general
manager of each Combining Company will enter into an employment agreement with
the Company. The annual salaries pursuant to such agreements are expected to
range from $75,000 to $150,000 based upon the size of the market served by such
service center and the duties of the president/general manager. In addition,
each president/general manager will be eligible for cash bonuses based on the
performance of his service center and the Company relative to established goals
set by the president/general manager and the Company. Most employment agreements
will have a term of three years and generally provide, among other things, that
such employee will not compete with the Company during the term of such
employment and for a period of two years thereafter within 50 miles of any
Service Center.
Escrow Agreement
Pursuant to the terms of the Agreements, each of the stockholders of the
Combining Companies is required to enter into an escrow agreement (the "Escrow
Agreement") with the Company and an escrow agent to be selected by the Company
(the "Escrow Agent"). Each Escrow Agreement provides that the stockholders of a
Combining Company will deliver to the Escrow Agent stock certificates or cash,
as the case may be (the "Escrow Funds"), representing 10% of the purchase price
paid in the Pending Acquisition. Under the terms of the Escrow Agreement, the
Escrow Agent will hold the Escrow Funds for a period of one year commencing upon
consummation of the Pending Acquisition, and during such period, the Company
will be entitled to receive reimbursement and recovery from the Escrow Funds for
any loss, liability, damage or expense for which the Company is indemnified
under the Agreement or for any reduction in purchase price after the closing.
The Escrow Funds will not be the Company's exclusive remedy in the event of such
loss, liability, damage, expense or reduction. During the period stock
certificates are held by the Escrow Agent, the stockholders of the Combining
Companies will be entitled to receive any dividends paid on, and have the right
to vote, such stock.
Lockup Agreement
Pursuant to the terms of the Agreements, certain stockholders of the
Combining Companies who receive shares of Common Stock as consideration will be
required to enter into a lockup agreement (the "Lockup Agreement") with the
Company. The Lockup Agreements generally provide that the stockholders of a
Combining Company will not sell, offer to sell, grant any option for the sale
of, or otherwise dispose of any shares of Common Stock, any options, rights or
warrants to purchase any shares of Common Stock, or any other securities
convertible into or exchangeable for shares of Common Stock owned directly by
such stockholder or with respect to which he has the power of disposition, for a
period of six months following the effective time of the Pending Acquisition,
without the prior written consent of the Company. Beginning six months after the
closing of the Pending Acquisition, the stockholders of the Combining Company
will be entitled to sell or otherwise dispose of up to 25% of the shares of
Common Stock held by such stockholder, and an additional 25% of the shares of
Common Stock held by such stockholder during each of the three successive six
month periods until the twenty-fourth month following the closing of the Pending
Acquisition, at which time such stockholder will be entitled to sell all shares
of Common Stock held by such stockholder.
Conditions Precedent to Closing of the Agreements
The obligation of the Company to consummate each Pending Acquisition is
subject to certain conditions, including a satisfactory due diligence review of
the operations and financial condition of the Combining
30
<PAGE> 32
Company, delivery of the schedules to the Agreement and a satisfactory review
thereof, the stockholders of the Combining Company having good and marketable
title, free and clear of any material liens, encumbrances or restrictions, to
the capital stock of such Combining Company, the Combining Company's audited
financial statements complying in all material respects with all applicable
accounting requirements and being fairly presented in conformity with generally
accepted accounting principles, delivery of a favorable opinion of counsel to
the stockholders of the Combining Company, the receipt of all necessary
consents, the execution of Lockup Agreements, Indemnification Agreements and
Escrow Agreements by the stockholders of the Combining Company, the approval of
the transaction by the Company's board of directors and the effectiveness of the
Registration Statement. The obligation of a Combining Company and its
stockholders to consummate a Pending Acquisition is subject to certain
conditions, including the approval of the transaction by the stockholders of the
Combining Company, the accuracy of the representations and warranties of the
Company contained in the Agreement and delivery of a favorable opinion of
counsel to the Company.
Expenses
Each of the Agreements provides that each of the parties shall bear its
respective expenses incurred in connection with the preparation, execution and
performance of the Agreement and the transactions contemplated therein, provided
that the Company will reimburse each of the Combining Companies for fees paid by
it for professional accounting services upon closing.
ACCOUNTING TREATMENT
The Company expects to account for ten of the Pending Acquisitions pursuant
to the purchase method of accounting. One effect of such accounting treatment is
that the earnings of such Combining Companies will be combined with the earnings
of the Company only from and after the closing of such Pending Acquisitions.
Furthermore, the earnings of such Combining Companies will, for purposes of the
earnings or losses of the Company, be reduced by certain depreciation and
amortization changes arising out of purchase accounting adjustments.
The Company expects to account for one of the Pending Acquisitions as a
pooling of interests. Under the pooling of interests method of accounting, the
recorded amounts of the assets and liabilities of such Combining Company and the
Company will be carried forward at their previously recorded amounts. For
information concerning certain restrictions to be imposed on the transferability
of the shares of Common Stock received by the affiliates of such Combining
Company in the Pending Acquisitions in order, among other things, to assure the
availability of pooling of interests accounting treatment, see "Common Stock
Issued to Affiliates."
31
<PAGE> 33
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The table below sets forth certain information concerning each of the
executive officers, directors and other key employees of the Company.
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS AND DIRECTORS AGE POSITION
- -------------------------------- --- --------
<S> <C> <C>
Alan R. Sielbeck.......................... 44 Chairman of the Board and Chief Executive Officer
James D. Abrams........................... 49 President, Chief Operating Officer and Director
Anthony M. Schofield...................... 42 Chief Financial Officer, Secretary and Treasurer
Raymond J. De Riggi(1).................... 49 Director
Timothy G. Wallace(1)(2).................. 38 Director
William G. Roth(2)........................ 58 Director
Norman T. Rolf, Jr........................ 50 Director
<CAPTION>
OTHER KEY EMPLOYEES
- ------------------------------------------
<S> <C> <C>
Louis N. Laderman......................... 45 Vice President and General Counsel
Robert E. Reece........................... 41 Regional Vice President
Michael S. Robinson....................... 37 Regional Vice President
Peter J. Zabaski.......................... 48 Regional Vice President
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
The Company's Board of Directors is divided into three classes, each
consisting of two members. At each annual stockholders meeting, directors of one
class are elected to three year terms. The terms of Messrs. De Riggi and Rolf
expire in 1997, Messrs. Abrams and Roth in 1998 and Messrs. Sielbeck and Wallace
in 1999. See "Description of Capital Stock -- Anti-Takeover Provisions."
Alan R. Sielbeck has served as Chairman of the Board and Chief Executive
Officer of the Company since its inception in March 1996. Mr. Sielbeck has
served as Chairman of the Board and President of AC Service and Installation
Co., Inc. and Donelson Air Conditioning Company, Inc., each a Subsidiary, since
1990 and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as President
of RC Mathews Contractor, Inc., a commercial building general contractor, and
Chief Financial Officer of RCM Interests, Inc., a commercial real estate
developing company.
James D. Abrams has served as President, Chief Operating Officer and as a
director of the Company since its inception in March 1996. From 1990 to 1996,
Mr. Abrams served as Chief Executive Officer and a director of CSG. Mr. Abrams
has served as President of Air Experts and Service Experts of Palm Springs,
Inc., each a Subsidiary, since 1993. Mr. Abrams has served as President and sole
director of Air Comfort Services, Inc., an HVAC service and replacement business
located in Sarasota, Florida, since 1988. Mr. Abrams served, from 1992 to 1996,
as Chairman and President of Service Now, Inc. ("Service Now"), a holding
company that owns several HVAC businesses, and prior to the Combination owned
Air Experts and Service Experts of Palm Springs, Inc. He resigned from his
positions with Service Now prior to the closing of the Combination and the IPO.
Mr. Abrams previously served as Chief Executive Officer and a director of Future
University from 1991 to 1995. Mr. Abrams currently serves on the Advisory Board
of Boatmen's National Bank (Southern Region).
Anthony M. Schofield has served as Chief Financial Officer, Secretary and
Treasurer of the Company since June 1996. From 1982 to 1996, Mr. Schofield
served as Cost Manager, Vice-President-Controller, Senior Vice-President of
Finance, and Division Controller for Perrigo Company of Tennessee, formerly
Cumberland-Swan, Inc., a manufacturer of personal care health and beauty aid
products. Mr. Schofield is
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<PAGE> 34
certified by the American Institute of Certified Public Accountants as well as
the Institute of Management Accountants holding both CPA and CMA designations.
Raymond J. De Riggi has served as a director of the Company since June
1996. Mr. De Riggi has served as President of United Specialty Food Ingredients
Companies, a subsidiary of ConAgra Food Products, a diversified food processing
company, since November 1995. From 1992 to 1995, Mr. De Riggi served as
Executive Vice President of Pet, Incorporated, a diversified food processing
company, and from 1990 to 1992, he served as its Vice President of Operations.
From 1987 to 1990, Mr. De Riggi served as President of Whitman's Chocolates, a
division of Pet, Incorporated.
Timothy G. Wallace has served as a director of the Company since June 1996.
Mr. Wallace has served as Vice President of Finance and Chief Financial Officer
of Healthcare Realty Trust Incorporated, a company operating as a real estate
investment trust, since January 1993. Mr. Wallace was a Senior Manager with
responsibility for healthcare and real estate in the Nashville, Tennessee office
of Ernst & Young LLP from June 1989 to January 1993. Prior to joining Ernst &
Young LLP, he was employed by Arthur Andersen & Co. from September 1980 to June
1989.
William G. Roth has served as a director of the Company since July 1996.
Mr. Roth served as Chairman of the Board of Directors of Dravo Corporation, a
natural resources company that is the largest producer of lime in the United
States, from 1989 to 1994. Mr. Roth also served as Chief Executive of Dravo
Corporation from 1987 to 1989. Prior to that time, Mr. Roth served as President,
Chief Operating Officer and a director of American Standard, Inc., a worldwide
manufacturer of air conditioning, plumbing and transportation system products,
from 1985 to 1987. From 1978 to 1985, Mr. Roth served as Chairman and Chief
Executive Officer of The Trane Company, an international manufacturer and
marketer of HVAC systems. Mr. Roth currently serves as a director of Amcast
Industrial Corporation and Teknowledge Corporation.
Norman T. Rolf, Jr. has served as a director of the Company since July
1996. Since 1988, Mr. Rolf has served as President of Rolf Coal and Fuel Corp.,
a Subsidiary, where he also has previously served as a director and has been
employed in various positions since 1966.
Louis N. Laderman has served as Vice President and General Counsel of the
Company since January 1997. Since 1996, Mr. Laderman has served as general
counsel of CSG, Service Now, Future University and SuccessWare. From 1986 to
1996, Mr. Laderman practiced law as a member of McCarthy, Leonard, Kaemmerer,
Owen, Laderman & Lamkin, LLC in St. Louis, Missouri.
Robert E. Reece has served as a Regional Vice President of the Company
since January 1997. From 1991 to 1997, Mr. Reece served as Vice President and a
director of Pardee Refrigeration Company Incorporated and Island Air
Conditioning, Inc., each a Subsidiary, and as Secretary and a director of
Sanders Indoor Comfort, Inc., a Subsidiary.
Michael S. Robinson has served as a Regional Vice President of the Company
since January 1997. From 1993 to 1996, Mr. Robinson served as Vice President and
a director of Arrow Heating & Air Conditioning, Inc., a Subsidiary. From 1992 to
1993, Mr. Robinson served as a marketing and sales representative for J. D.
Edwards, Inc., a worldwide provider of financial, distribution and manufacturing
software. Prior to that time, Mr. Robinson served as a marketing and sales
representative for IBM from 1988 to 1992. Mr. Robinson is a certified public
accountant in Illinois.
Peter J. Zabaski has served as a Regional Vice President of the Company
since February 1997. From 1994 to 1997, Mr. Zabaski served as Regional Vice
President of Hughes Supply, Inc., a distributor of industrial products and
supplies. From 1990 to 1994, Mr. Zabaski served as President of One Stop Supply
Inc., a HVAC wholesale supplier and subsidiary of Hughes Supply, Inc.
The Compensation Committee of the Board of Directors is responsible for
establishing salaries, bonuses and other compensation for the Company's
executive officers and administering stock option and other employee benefit
plans of the Company. The Audit Committee is responsible for the annual
appointment of the Company's auditors and reviewing the scope of audit and
non-audit assignments and related fees,
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<PAGE> 35
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 AND OTHER INFORMATION
Summary of Compensation Table. The following table sets forth the total
compensation paid or accrued by the Company for the Company's last completed
fiscal year on behalf of the (i) Company's Chief Executive Officer and (ii) the
two other executive officers of the Company as of the end of 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------
NAME AND -------------------- SECURITIES
PRINCIPAL POSITION YEAR SALARY($) BONUS($) UNDERLYING OPTIONS(#)
- -------------------------------------------------- ---- --------- -------- ----------------------
<S> <C> <C> <C> <C>
Alan R. Sielbeck.................................. 1996 $86,538 -- 40,000
Chairman of the Board and Chief Executive
Officer
James D. Abrams................................... 1996 86,538 -- 40,000
President and Chief Operating Officer
Anthony M. Schofield.............................. 1996 58,385 -- 40,000
Chief Financial Officer
</TABLE>
- ---------------
(1) Does not include amounts paid by the Company's Subsidiaries prior to the
Combination in August 1996.
Options Granted in Last Fiscal Year
The following table summarizes certain information regarding stock options
issued to the Company's executive officers during 1996. No stock appreciation
rights ("SARs") have been granted by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OPTION TERM
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME OPTIONS GRANTED FISCAL 1996 ($/SHARE) DATE 5%($) 10%($)
---- --------------- ---------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Sielbeck(1)....... 40,000 7.72% $17.25 9/26/06 $433,937 $1,099,682
James D. Abrams(1)........ 40,000 7.72 17.25 9/26/06 433,937 1,099,682
Anthony M. Schofield(2)... 40,000 7.72 13.00 8/15/06 327,025 828,746
</TABLE>
- ---------------
(1) All options were granted pursuant to the 1996 Incentive Stock Plan (the
"Incentive Plan") and vest in one-third increments annually beginning
September 26, 1998. Potential realizable value is calculated from a base
stock price of $17.25, the exercise price of the options granted.
(2) All options were granted pursuant to the Incentive Plan and vest in
one-third increments annually beginning August 15, 1998. Potential
realizable value is calculated from a base stock price of $13.00, the
exercise price of the options granted.
34
<PAGE> 36
Options Exercised in Last Fiscal Year, Fiscal Year End Option Values
No options were exercised in the year ended December 31, 1996. The
following table summarizes certain information regarding year end option values
of the Company's executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS HELD AT
DECEMBER 31, 1996 DECEMBER 31, 1996($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan R. Sielbeck................................ -- 40,000 -- $350,000
James D. Abrams................................. -- 40,000 -- 350,000
Anthony M. Schofield............................ -- 40,000 -- 520,000
</TABLE>
- ---------------
(1) Reflects the market value of the underlying securities at the closing sales
price reported on the Nasdaq National Market on December 31, 1996 ($26.00),
less the exercise price.
EMPLOYMENT AGREEMENTS
Pursuant to employment agreements, effective as of August 21, 1996, Messrs.
Sielbeck, Abrams and Schofield (the "executive officers") are employed as
executive officers of the Company. The employment agreements of Messrs.
Sielbeck, Abrams and Schofield provide for annual base salaries of $250,000,
$250,000 and $110,000, respectively, which salaries are subject to annual review
by the Compensation Committee, and bonuses, which amounts will be determined by
the Compensation Committee. The term of each employment agreement is three
years.
Each of the executive officers may terminate his respective employment
agreement without cause by giving the Company 90 days prior written notice.
Pursuant to the terms of his respective employment agreement, each executive
officer has agreed not to disclose the Company's confidential information and
not to compete against the Company during the term of his employment agreement
and for a period of two years thereafter.
In the event the executive officer is terminated upon a "change-in-control"
(as defined in the employment agreement), each of the executive officers will be
paid all accrued base salary, bonus compensation to the extent earned, vested
deferred compensation (other than plan benefits which will be paid in accordance
with the applicable plan) and other benefits through the date of termination. In
addition, each executive officer will receive as severance pay his base salary
in monthly installments through the remaining term of the agreement, or at his
election, a lump sum severance payment equal to the present value of the flow of
severance payments that would otherwise be paid to him. Notwithstanding the
foregoing, the Company is not required to pay any amount which is not deductible
for federal income tax purposes.
Each executive officer is entitled to receive his accrued base salary,
earned bonus, vested deferred compensation (other than plan benefits which will
be paid in accordance with the applicable plan) and other benefits through the
date of termination in the event that the Company terminates his employment
without cause. In addition, he will receive as severance compensation his base
salary for the greater of two years or the remaining term of his employment
agreement.
In the event the executive officer is terminated for cause (as defined in
the agreement), he is entitled to receive all accrued base salary, earned bonus
compensation, vested deferred compensation (other than plan benefits which will
be payable in accordance with the applicable plan) and other benefits through
the date of termination, but shall receive no other severance benefits. Each
executive officer's employment agreements may also be terminated if he dies, in
which event his estate will receive these same payments and severance payments
equal to three months' salary.
In the event the executive officer becomes disabled for a period of 60
consecutive days, he is entitled to receive his base salary, insurance, bonus
and other benefits for a period of six months from the date such disability
began or for such shorter period as he is unable to perform his duties
hereunder. In the event he is
35
<PAGE> 37
unable to perform his duties hereunder after the expiration of the six-month
period, his employment agreement will terminate.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors of
the Company are entitled to receive a fee of $10,000 per year. All directors are
also entitled to reimbursement for their actual out-of-pocket expenses incurred
in connection with attending meetings. In addition, each of the non-employee
directors of the Company is entitled to participate in the Service Experts, Inc.
1996 Non-Employee Director Stock Option Plan (the "Director Plan").
COMPENSATION PURSUANT TO PLANS
Incentive Stock Plan. In June 1996, the Company adopted the Incentive
Plan. The Company has reserved 700,000 of the authorized shares of Common Stock
for issuance pursuant to stock options and SARs to be granted under the
Incentive Plan. Under the Incentive Plan and pursuant to action of the Board,
the Compensation Committee appointed by the Board of Directors will administer
the Incentive Plan and may grant to officers and key employees (i)
non-transferable options to purchase shares of Common Stock and (ii) SARs. The
options are for terms not longer than ten years (five years in the case of
incentive stock options granted to an individual who, at the time of the grant,
owns more than 10% of the total combined voting power of all classes of stock of
the Company), at prices to be determined by the Board of Directors or the
Compensation Committee. Such prices may not be less than 100% of the fair market
value of the Common Stock on the date of grant (110% in the case of an
individual who, at the time of grant of incentive stock options, owns more than
10% of the total combined voting power of all classes of stock of the Company)
in the case of incentive stock options under Section 422 of the Code. Incentive
stock options may be granted only to employees and may not be less than 85% of
the fair market value of the Common Stock on the date of grant in the case of
non-qualified stock options. Options granted under the Incentive Plan may be
exercisable in installments. The Company is authorized to loan, or guarantee
loans of, the purchase price of shares issuable upon exercise of options granted
under the Incentive Plan. Unless terminated earlier, the Incentive Plan will
terminate in 2006. The aggregate fair market value of Common Stock with regard
to which incentive stock options are exercisable by an individual for the first
time during any calendar year may not exceed $100,000. The Company has granted
options to purchase 657,811 shares of Common Stock under the Incentive Plan.
These options are exercisable at prices ranging from $13.00 to $27.88 per share
and vest one-third per year commencing on the second anniversary of the date of
grant.
SARs will entitle the holder to receive an amount equal to the excess of
the fair market value of a specified number of shares of Common Stock as of the
date such right is exercised over a specified price which shall not be less than
85% of the fair market value of the Common Stock at the time the SAR is granted.
SARs may be granted separately or in connection with a non-qualified stock
option. No SAR is exercisable more than ten years after it is granted.
Non-Employee Director Stock Option Plan. In June 1996, the Company adopted
the Director Plan. The Company has reserved for issuance under the Director Plan
100,000 shares of Common Stock. The Director Plan provides for the granting of
nonqualified stock options to each director of the Company who is not also an
employee or officer of the Company ("Non-Employee Directors") at an exercise
price equal to the fair market value of the Common Stock on the date the options
are granted. The Director Plan contains provisions providing for adjustment of
the number of shares available for option and subject to unexercised options in
the event of stock splits, dividends payable in Common Stock, business
combinations or certain other events. The Board shall have no authority,
discretion or power to select the participants who will receive options pursuant
to the Director Plan, to set the number of shares of Common Stock to be covered
by each option, to set the exercise price or the period within which the options
may be exercised or to alter other terms or conditions specified in the options.
36
<PAGE> 38
Pursuant to the Director Plan, each Non-Employee Director is granted
options to purchase 5,000 shares of Common Stock on the date of such director's
election to the Board of Directors at an exercise price equal to the fair market
value of the Common Stock on the date the options are granted. In addition, the
Director Plan provides for the grant to each Non-Employee Director of options to
purchase 1,000 shares of Common Stock on each January 1 (each date of grant
being referred to as the "Grant Date"). The Board of Directors may revoke, on or
prior to each January 1, the next automatic grant of options otherwise provided
for by the Director Plan if no options have been granted to employees since the
preceding January 1 under the Incentive Plan or any other employee stock option
plan that the Company might adopt. Each option shall be exercisable in full upon
receipt and shall expire ten years after the Grant Date (the "Option Period"),
unless cancelled sooner due to termination of service or death, or unless the
option is fully exercised prior to the end of the Option Period. The Company has
granted options to purchase 18,000 shares of Common Stock under the Director
Plan, of which 15,000 options have an exercise price of $13.00 and 3,000 options
have an exercise price of $26.00.
Employee Stock Purchase Plan. The Service Experts, Inc. 1996 Employee
Stock Purchase Plan (the "Purchase Plan") was adopted in June 1996 and became
effective simultaneously with the IPO. A total of 100,000 shares of Common Stock
have been reserved for issuance under the Purchase Plan, which is intended to
qualify under Section 423 of the Code. The Purchase Plan allows participants to
purchase shares of Common Stock in connection with option periods commencing on
the first trading date of each year and ending the following December 31.
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.
In September 1996, the Company filed a registration statement on Form S-8
with respect to 900,000 shares of Common Stock covered by the Incentive Plan,
the Director Plan and the Purchase Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of directors who are not employees
of the Company. The Compensation Committee is responsible for establishing
salaries, bonuses and other compensation for the Company's officers.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Restated Certificate 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."
37
<PAGE> 39
CERTAIN TRANSACTIONS
Prior to the IPO, Mr. Abrams, Mr. Sielbeck, John R. Young, a principal
stockholder of CSG, and R. Edward Hutton, Jr., a principal stockholder of the
Acquiring Company, received 500,695, 243,706, 473,992 and 243,707 shares of
Common Stock, respectively, as founders of the Company for their services in
forming the Company, developing its business plans and procedures and in
acquiring the Predecessor Companies. These shares do not include the shares of
Common Stock received in exchange for their interests in certain of the
Predecessor Companies. Following the issuance of such shares, Messrs. Abrams and
Young transferred 103,407 and 97,891 shares, respectively, to the other
stockholders of Service Now.
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 received cash and shares of Common Stock as
follows: Mr. Sielbeck -- $2,513,959 and 576,549 shares; Mr. Abrams -- $2,000,505
and 390,612 shares; Mr. Young -- $2,000,505 and 390,612 shares; Mr.
Hutton -- $2,513,959 and 576,549 shares; and Norman T. Rolf, Jr. -- $636,217 and
133,661 shares. Such amounts were determined on the basis of the evaluation by
the Company and the representatives of the underwriters of the IPO of the
following factors: the financial and operational history and trends of the
Predecessor Companies, 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, 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 36%
of the issued and outstanding common stock of Future University in exchange for
$2,000 per share in cash, an aggregate of $590,000. The consideration paid was
determined by arms length negotiations between the Company and the stockholders
of Future University who agreed to sell their shares to the Company. Mr. Abrams
and Mr. Young, who were principal stockholders of Future University, each
received $248,000 in the transaction. The Company intends to continue to send
its employees to Future University for training. See "Business -- Contractor
Success Group."
Service Now, of which Mr. Abrams and Mr. Young are principal stockholders,
is a 48% stockholder of SuccessWare, a corporation that provides management and
financial information systems software to the Company. The Company has
implemented a general ledger system utilizing SuccessWare software in all of its
Service Centers and plans to expand its use of other SuccessWare products. In
1996, the Company and its Subsidiaries made aggregate payments to SuccessWare of
approximately $50,000. The Company has entered into a letter of intent with
SuccessWare to license its software and expects to make payments to SuccessWare
in 1997 of approximately $220,000. 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. Service Now continues to
own and operate other HVAC companies, none of which are located in geographic
areas served by existing Service Centers. In addition, the Company purchased
from Service Now the exclusive rights to the name "Service Experts" in exchange
for $60,000.
Mr. Abrams and Mr. Young are the sole stockholders of Fusion Filters, Inc.
("Fusion"), which licenses air filters and other products from manufacturers and
sublicenses them to HVAC contractors, including certain of the Subsidiaries. The
Company has not entered into any definitive agreements with Fusion, but certain
Service Centers purchase filters from Fusion from time to time. In 1996, the
Company's Service Centers made aggregate payments to Fusion of approximately
$450,000. The Company and many of the Subsidiaries also utilize, from time to
time, the services of Travel Now, Inc., a travel agency, of which Mr. Abrams and
Mr. Young are principal stockholders.
At March 31, 1996, Mr. Sielbeck had outstanding indebtedness payable to the
Acquiring Company in the amount of $133,800, consisting of a note payable in the
principal amount of $100,000, bearing annual interest at 5% and payable upon
demand, and an interest-free advance of $33,800. At March 31, 1996, Mr. Hutton
had outstanding indebtedness payable to the Acquiring Company in the amount of
$133,800, consisting of a note payable in the principal amount of $100,000,
bearing annual interest at 5% and payable upon demand, and an interest-free
advance of $33,800. All of this indebtedness was repaid during 1996.
38
<PAGE> 40
Prior to the Combination, Messrs. Sielbeck and Hutton purchased from the
Acquiring Company the building and underlying real estate on which the Acquiring
Company is located and certain residential property for approximately $826,000
and $61,000, respectively. The Acquiring Company purchased the building and real
estate for its main facility in 1992 for approximately $729,000 and made certain
improvements to such property costing approximately $78,000. The Acquiring
Company purchased the residential property in 1994 for approximately $61,000.
The sale price for such properties was determined by the board of directors of
the Acquiring Company. The Acquiring Company has entered into a lease with
Messrs. Sielbeck and Hutton whereby the Acquiring Company will make annual
rental payments of approximately $140,000 to Messrs. Sielbeck and Hutton.
Management of the Company believes such transactions are on terms that are
commercially reasonable and no less favorable to the Acquiring Company than
those which could be obtained from unaffiliated third parties.
On June 20, 1996, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors or principal
stockholders or affiliates thereof, must be on terms no less favorable than
those which could be obtained from unaffiliated parties and must be approved by
a majority of the disinterested members of the Board of Directors. The Audit
Committee of the Board of Directors is responsible for reviewing all related
party transactions on a continuing basis and potential conflict of interest
situations where appropriate.
39
<PAGE> 41
PRINCIPAL STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof, by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock, (ii) each director and executive officer of the Company and (iii)
all directors and executive officers of the Company as a group. Unless otherwise
indicated, each of the stockholders listed below has sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
BENEFICIAL OWNER NUMBER PERCENT
---------------- ----------- ---------
<S> <C> <C>
Alan R. Sielbeck(2)......................................... 820,255 6.0%
James D. Abrams(2).......................................... 803,044(3) 5.9
John R. Young(4)............................................ 837,855(3) 6.1
R. Edward Hutton, Jr.(2).................................... 695,763 5.1
Anthony M. Schofield........................................ 3,000 *
Raymond J. De Riggi......................................... 6,000 *
Timothy G. Wallace.......................................... 6,000 *
William G. Roth............................................. 11,000 *
Norman T. Rolf, Jr.......................................... 132,647 *
All executive officers and directors as a group (seven
persons).................................................. 1,781,946(3)(6) 13.0
</TABLE>
- ---------------
* Represents less than 1%.
(1) The table above includes shares of the Company's Common Stock which an
individual has a right to acquire, whether upon conversion of convertible
securities or upon exercise of options and warrants, within 60 days of the
date of this Prospectus. Such shares are deemed to be outstanding for the
purposes of calculating the percentage ownership of the individual holding
such shares, but are not deemed outstanding for purposes of computing the
percentage of any other person shown on the table.
(2) The indicated person's address is c/o Service Experts, Inc., 111 Westwood
Place, Suite 420, Brentwood, Tennessee 37027.
(3) Includes 108,641 shares owned by Service Now, of which Messrs. Abrams and
Young are principal stockholders.
(4) Mr. Young's address is c/o John Young & Associates, 13950 Switzer, Overland
Park, Kansas 66221.
(5) Includes 6,000 shares subject to outstanding options held by such
individuals.
(6) Includes 18,000 shares subject to outstanding options held by such
individuals.
40
<PAGE> 42
RATIO OF EARNINGS TO FIXED CHARGES(1)
Set forth below is the ratio of earnings to fixed charges for the Company
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges..................... 3.31 1.67 5.71 8.90 69.35
</TABLE>
- ---------------
(1) Because the Company has no shares of Preferred Stock outstanding, the ratio
of earnings to combined fixed charges and preferred stock dividends is
identical to the ratio of earnings to fixed charges for each period listed
above.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The following table sets forth the reported high and low sales prices of
the Common Stock for the quarters indicated as reported on the Nasdaq National
Market. The Company commenced its IPO on August 16, 1996 at a price per share of
$13.00. The Common Stock is traded on the Nasdaq National Market under the
symbol "SERX."
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1996
Third Quarter (beginning August 16, 1996)................. $20.75 $13.75
Fourth Quarter............................................ 28.50 19.00
1997
First Quarter (through March 20, 1997).................... $28.25 $21.25
</TABLE>
On March 20, 1997, the last reported sale price of the Common Stock was
$21.50 per share. As of March 20, 1997, there were approximately 182 holders of
record of the Company's Common Stock.
The Company has never declared or paid dividends on its Common Stock. The
Company expects that future earnings will be retained to finance the growth and
development of the Company's business and, accordingly, does not intend to
declare or pay any dividends on the Common Stock for the foreseeable future. The
declaration, payment and amount of future dividends, if any, will be subject to
the discretion of the Company's Board of Directors and will depend upon the
future earnings, results of operations, financial condition and capital
requirements of the Company, among other factors. Under Delaware law, the
Company is prohibited from paying any dividends unless it has capital surplus or
net profits available for this purpose. In addition, the Company's credit
facilities impose restrictions on the ability of the Company to pay dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
41
<PAGE> 43
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 30,000,000 shares of Common Stock, $.01
par value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share (the "Preferred Stock"). As of the date of this Prospectus, the
Company has 13,694,377 shares of Common Stock and no shares of Preferred Stock
outstanding. The following description of capital stock of the Company is
qualified in its entirety by reference to the Company's Restated Certificate, a
copy of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. An additional 800,000 shares of Common Stock are
reserved for issuance upon exercise of employee and director stock options, of
which options to purchase 675,811 shares have been granted as of the date
hereof, and 100,000 shares have been reserved under the Purchase Plan. See
"Management -- Compensation Pursuant to Plans." As of March 20, 1997, there were
approximately 182 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 gives the holders of Common
Stock no preemptive or other subscription or conversion rights, and there are no
redemption provisions with respect to such shares. All outstanding shares of
Common Stock are, and the shares offered hereby will be, when issued and paid
for, fully paid and non-assessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely effected by, the
rights of holders of shares of any series of Preferred Stock which the Company
may designate and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or
action of the stockholders of the Company, to issue shares of the Preferred
Stock in one or more series and to fix the number of shares, designations,
relative rights (including voting rights), preferences and limitations of such
series to the fullest extent now or hereafter permitted by Delaware law. The
Company has no present intention to issue any series of Preferred Stock.
STOCK PURCHASE WARRANTS
Equitable Securities Corporation was engaged to provide financial advisory
and investment banking services in the formation of the Company and the
structuring of the Combination. In connection with this engagement, Equitable
Securities Corporation received warrants (the "ESC Warrants") to purchase 82,391
shares of the Common Stock. The ESC Warrants are exercisable until August 16,
2001, in whole or in part, are subject to anti-dilution adjustments, and the
holder is entitled to one demand registration right for the underlying Common
Stock exercisable until August 16, 2001 and incidental registration rights
exercisable until August 16, 2003.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Company's Restated Certificate 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 contains provisions
that eliminate the personal liability of the Company's directors for monetary
damages resulting from breaches
42
<PAGE> 44
of their fiduciary duty other than liability for breaches of the director's duty
of loyalty to the Company or its stockholders, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
violations under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the director derived an improper personal benefit. The
Company believes that these provisions are essential to attracting and retaining
qualified persons as officers and directors.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
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 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 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, Directors and Key Employees." The Company's
Restated Certificate eliminates the right of stockholders to take action by
written consent. In addition, the Company's Restated Certificate allows the
Board to determine the terms of the Preferred Stock which may be issued by the
Company without approval of the holders of the Company's Common Stock. The
ability of the Company to issue Preferred Stock in such manner could enable the
Board of Directors to prevent changes in management and control of the Company.
These provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company first to negotiate with the Company. Management
believes that the benefits of increased protection of the Company's potential
ability to negotiate with the proponent of an unfriendly or unsolicited proposal
to acquire or restructure the Company outweigh the disadvantages of discouraging
such proposals. Management believes that negotiations of such proposals, among
other things, could result in an improvement of their terms.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Boatmen's Trust Company.
43
<PAGE> 45
DESCRIPTION OF COMMON STOCK WARRANTS
The Company may issue Common Stock Warrants for the purchase of Common
Stock. Common Stock Warrants may be issued independently or together with any
other Securities pursuant to any Prospectus Supplement or Post-Effective
Amendment, as applicable, and may be attached to or separate from such
Securities. Each series of Common Stock Warrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between the
Company and the warrant recipient or, if the recipients are numerous, a warrant
agent identified in the Prospectus Supplement or Post-Effective Amendment, as
applicable (the "Warrant Agent"). The Warrant Agent, if engaged, will act solely
as an agent of the Company in connection with the Common Stock Warrants of such
series and will not assume any obligation or relationship of agency or trust for
or with any holders or beneficial owners of Common Stock Warrants. Further terms
of the Common Stock Warrants and the applicable Warrant Agreements will be set
forth in the Prospectus Supplement or Post-Effective Amendment, as applicable.
The Prospectus Supplement or Post-Effective Amendment, as applicable, will
describe the terms of any Common Stock Warrants in respect of which this
Prospectus is being delivered, including, where applicable, the following: (a)
the title of such Common Stock Warrants; (b) the aggregate number of such Common
Stock Warrants; (c) the price or prices at which such Common Stock Warrants will
be issued; (d) the designation, number and terms of the shares of Common Stock
purchasable upon exercise of such Common Stock Warrants; (e) the designation and
terms of the other Securities with which such Common Stock Warrants are issued
and the number of such Common Stock Warrants issued with each such offered
Security; (f) the date, if any, on and after which such Common Stock Warrants
and the related Common Stock will be separately transferable; (g) the price at
which each share of Common Stock purchasable upon exercise of such Common Stock
Warrants may be purchased; (h) the date on which the right to exercise such
Common Stock Warrants shall commence and the date on which such right shall
expire; (i) the minimum or maximum amount of such Common Stock Warrants which
may be exercised at any one time; (j) information with respect to book-entry
procedures, if any; (k) a discussion of certain federal income tax
considerations; and (l) any other terms of such Common Stock Warrants, including
terms, procedures and limitations relating to the exchange and exercise of such
Common Stock Warrants.
As of the date of this Prospectus, no Common Stock Warrants are
outstanding.
DESCRIPTION OF DEBT SECURITIES
The Company may issue Debt Securities under one or more trust indentures
(each an "Indenture") to be executed by the Company and a specified trustee. The
terms of Securities will include those stated in an Indenture and those made a
part of an Indenture (before any supplements) by reference to the Trust
Indenture Act of 1939, as amended (the "TIA"). The Indenture will be qualified
under the TIA.
The following description sets forth certain anticipated general terms and
provisions of the Debt Securities to which any Prospectus Supplement or
Post-Effective Amendment, as applicable, may relate. The particular terms of the
Debt Securities offered by any Prospectus Supplement or Post-Effective
Amendment, as applicable (which terms may be different than those stated below)
and the extent, if any, to which such general provisions may apply to the Debt
Securities so offered will be described in the Prospectus Supplement or
Post-Effective Amendment, as applicable, relating to such Debt Securities.
Accordingly, for a description of the terms of a particular issue of Debt
Securities, reference must be made to both the Prospectus Supplement or
Post-Effective Amendment, as applicable, relating thereto and the following
description. A form of Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
GENERAL
The indebtedness represented by Debt Securities will be subordinated in
right of payment to the prior payment in full of the Senior Debt (as such term
is defined in the Indenture) of the Company. The Debt Securities will be issued
pursuant to an Indenture between the Company and a trustee.
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<PAGE> 46
Except as set forth in an Indenture and described in a Prospectus
Supplement or Post-Effective Amendment, as applicable, relating thereto, the
Debt Securities may be issued without limit as to aggregate principal amount, in
one or more series, secured or unsecured, in each case as established from time
to time in or pursuant to authority granted by a resolution of the Board of
Directors of the Company or as established in an Indenture. All Debt Securities
of one series need not be issued at the time and, unless otherwise provided, a
series may be reopened, without the consent of the holders of the Debt
Securities of such series, for issuance of additional Debt Securities of such
series.
The Prospectus Supplement or Post-Effective Amendment, as applicable,
relating to any series of Debt Securities being offered will contain the
specific terms thereof, including, without limitation:
(a) the title of such Debt Securities;
(b) the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
(c) the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or (if applicable) the portion of the
principal amount of such Debt Securities which is convertible into Common
Stock, or the method by which any such portion shall be determined;
(d) if convertible, any applicable limitations on the ownership or
transferability of the Common Stock into which such Debt Securities are
convertible;
(e) the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable;
(f) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
(g) the date or dates, or the method for determining such date or
dates, from which any interest will accrue, the interest payment dates on
which any such interest will be payable, the regular record dates for such
interest payment dates, or the method by which any such date shall be
determined, the person to whom such interest shall be payable, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(h) the place or places where the principal of (and premium, if any)
and interest, if any, on such Debt Securities will be payable, such Debt
Securities may be surrendered for conversion or registration of transfer or
exchange and notices or demands to or upon the Company in respect of such
Debt Securities and an Indenture may be served;
(i) the period or periods within which, the price or prices at which
and the terms and conditions upon which such Debt Securities may be
redeemed, as a whole or in part, at the option of the Company, if the
Company is to have such an option;
(j) the obligation, if any, of the Company to redeem, repay or
purchase such Debt Securities pursuant to any sinking fund or analogous
provision or at the option of a holder thereof, and the period or periods
within which, the price or prices at which and the terms and conditions
upon which such Debt Securities will be redeemed, repaid or purchased, as a
whole or in part, pursuant to such obligation;
(k) if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(l) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on such Debt Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency unit
or units or composite currency or currencies) and the manner in which such
amounts shall be determined;
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<PAGE> 47
(m) any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default (as defined in
an Indenture) or covenants set forth in an Indenture;
(n) any provisions for collateral security for repayment of such Debt
Securities;
(o) whether such Debt Securities will be issued in certificated and/or
book-entry form;
(p) whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof and terms and conditions relating thereto;
(q) the applicability, if any, of defeasance and covenant defeasance
provisions of an Indenture;
(r) the terms, if any, upon which such Debt Securities may be
convertible into Common Stock of the Company and the terms and conditions
upon which such conversion will be effected, including, without limitation,
the initial conversion price or rate and the conversion period;
(s) whether and under what circumstances the Company will pay
additional amounts as contemplated in an Indenture on such Debt Securities
in respect of any tax assessment or governmental charge and, if so, whether
the Company will have the option to redeem such Debt Securities in lieu of
making such payment; and
(t) any other terms of such Debt Securities not inconsistent with the
provisions of the applicable Indenture.
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
("Original Issue Discount Securities"). Special federal income tax, accounting
and other considerations applicable to Original Issue Discount Securities will
be described in the applicable Prospectus Supplement or Post-Effective
Amendment, as applicable.
Except as set forth in an Indenture, an Indenture will not contain any
provisions that would limit the ability of the Company to incur indebtedness or
that would afford holders of Debt Securities protection in the event of a highly
leveraged or similar transaction involving the Company or in the event of a
change of control. Reference is made to the applicable Prospectus Supplement or
Post-Effective Amendment, as applicable, for information with respect to any
deletions from, modifications of or additions to the Events of Default or
covenants of the Company that are described below, including any addition of a
covenant or other provision providing event risk or similar protection.
MERGER, CONSOLIDATION OR SALE
It is expected that an Indenture will provide that the Company may
consolidate with, or sell, lease or convey all or substantially all of its
assets to, or merge with or into, any other corporation, provided that (a)
either the Company shall be the continuing corporation, or the successor
corporation (if other than the Company) formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such assets
shall expressly assume payment of the principal of (and premium, if any), and
interest on, all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in an Indenture; (b)
immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of the Company or any subsidiary as a
result thereof as having been incurred by the Company or such subsidiary at the
time of such transaction, no Event of Default under an Indenture, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the trustee.
COVENANTS
An Indenture will contain covenants requiring the Company to take certain
actions and prohibiting the Company from taking certain actions. The covenants
with respect to any series of Debt Securities will be described in the
Prospectus Supplement or Post-Effective Amendment, as applicable, relating
thereto.
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EVENTS OF DEFAULT, NOTICE AND WAIVER
An Indenture will describe specific "Events of Defaults" with respect to
any series of Debt Securities issued thereunder. Such "Events of Defaults" are
likely to include (with grace and cure periods): (i) default in the payment of
any installment of interest on any Debt Security of such series; (ii) default in
the payment of principal of (or premium, if any, on) any Debt Security of such
series at its maturity; (iii) default in making any required sinking fund
payment, if any, for any Debt Security of such series; (iv) default in the
performance or breach of any other covenant or warranty of the Company contained
in the Indenture (other than a covenant added to the Indenture solely for the
benefit of a series of Debt Securities issued thereunder other than such series)
that is continued for a specified period of days after written notice as
provided in the Indenture; (v) default in the payment of specified amounts of
indebtedness of the Company or any mortgage, indenture or other instrument under
which such indebtedness is issued or by which such indebtedness is secured, such
default having occurred after the expiration of any applicable grace period and
having resulted in the acceleration of the maturity of such indebtedness, but
only if such indebtedness is not discharged or such acceleration is not
rescinded or annulled; and (vi) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of the
Company or any significant subsidiary or the property of either.
If an Event of Default under an Indenture with respect to Debt Securities
of any series at the time outstanding occurs and is continuing, then in every
such case, subject to the rights of the holder of Senior Debt, the applicable
trustee or the holders of not less than 25% of the principal amount of the
outstanding Debt Securities of that series will have the right to declare the
principal amount (or, if the Debt Securities of that series are Original Issue
Discount Securities or indexed securities, such portion of the principal amounts
as may be specified in the terms thereof) of all the Debt Securities of that
series to be due and payable immediately by written notice thereof to the
Company (and to the applicable trustee if given by the holders). However, at any
time after such a declaration of acceleration with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under any Indenture, as
the case may be) has been made, but before a judgment or decree for payment of
the money due has been obtained by the applicable trustee, the holders of not
less than a majority in principal amount of outstanding Debt Securities of such
series (or of all Debt Securities then outstanding under an Indenture, as the
case may be) may rescind and annul such declaration and its consequences if (a)
the Company shall have deposited with the trustee all required payments of the
principal of (and premium, if any) and interest on the Debt Securities of such
series (or of all Debt Securities then outstanding under an Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances of the
trustee and (b) all events of default, other than the non-payment of accelerated
principal (or specified portion thereof), with respect to Debt Securities of
such series (or of all Debt Securities then outstanding under an Indenture, as
the case may be) have been cured or waived as provided in such Indenture. An
Indenture also will provide that the holders of not less than a majority in
principal amount of the outstanding Debt Securities of any series (or of all
Debt Securities then outstanding under an Indenture, as the case may be) may
waive any past default with respect to such series and its consequences, except
a default (x) in the payment of the principal of (or premium, if any) or
interest on any Debt Security of such series or (y) in respect of a covenant or
provision contained in an Indenture that cannot be modified or amended without
the consent of the holder of each outstanding Debt Security affected thereby.
The trustee will be required to give notice to the holders of Debt
Securities within 90 days of a default under an Indenture unless such default
shall have been cured or waived; provided, however, that such trustee may
withhold notice to the holders of any series of Debt Securities of any default
with respect to such series (except a default in the payment of the principal of
(or premium, if any) or interest on any Debt Security of such series or in the
payment of any sinking fund installment in respect of any Debt Security of such
series) if specified responsible officers of such trustee consider such
withholding to be in the interest of such holders.
An Indenture will provide that no holders of Debt Securities of any series
may institute any proceedings, judicial or otherwise, with respect to the
Indenture or for any remedy thereunder, except in the cases of failure of the
trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an Event of Default from the holders of not
less than 25% in principal amount of the outstanding Debt Securities of such
series, as well as an offer of indemnity reasonably satisfactory to it. This
provision will not prevent,
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<PAGE> 49
however, any holder of Debt Securities from instituting suit for the enforcement
of payment of the principal of (and premium, if any) and interest on such Debt
Securities at the respective due dates thereof.
Subject to provisions in an Indenture relating to its duties in case of
default, the trustee will not be under any obligation to exercise any of its
rights or powers under such Indenture at the request or direction of any holders
of any series of Debt Securities then outstanding under such Indenture, unless
such holders shall have offered to the trustee thereunder reasonable security or
indemnity. The holders of not less than a majority in principal amount of the
outstanding Debt Securities of any series (or of all Debt Securities then
outstanding under an Indenture, as the case may be) shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or of exercising any trust or power conferred upon the
trustee. However, the trustee may refuse to follow any direction which is in
conflict with any law or an Indenture, which may involve the trustee in personal
liability or which may be unduly prejudicial to the holders of Debt Securities
of such series not joining therein.
Within 120 days after the close of each fiscal year, the Company will be
required to deliver to the trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under an Indenture and, if so, specifying each such default and the
nature and status thereof.
MODIFICATION OF AN INDENTURE
It is anticipated that modifications and amendments of an Indenture may be
made by the Company and the trustee, with the consent of the holders of not less
than a majority in aggregate principal amount of each series of the outstanding
Debt Securities issued under an Indenture which are affected by the modification
or amendment, provided that no such modification or amendment may, without the
consent of each holder of such Debt Securities affected thereby, (a) change the
stated maturity date of the principal of (or premium, if any) or any installment
of interest, if any, on any such Debt Security; (b) reduce the principal amount
of (or premium, if any) or the interest, if any, on any such Debt Security or
the principal amount due upon acceleration of an Original Issue Discount
Security; (c) change the place or currency of payment of principal of (or
premium, if any) or interest, if any, on any such Debt Security; (d) impair the
right to institute suit for the enforcement of any such payment on or with
respect to any such Debt Security; (e) reduce the above stated percentage of
holders of Debt Securities necessary to modify or amend such Indenture; or (f)
modify the foregoing requirements or reduce the percentage of outstanding Debt
Securities necessary to waive compliance with certain provisions of an Indenture
or for waiver of certain defaults. A record date may be set for any act of the
holders with respect to consenting to any amendment.
The holders of not less than a majority in principal amount of outstanding
Debt Securities of each series affected thereby will have the right to waive
compliance by the Company with certain covenants in an Indenture.
An Indenture will contain provisions for convening meetings of the holders
of Debt Securities of a series to take permitted action.
CONVERSION OF SECURITIES
The terms and conditions, if any, upon which the Debt Securities are
convertible into Common Stock will be set forth in the applicable Prospectus
Supplement or Post-Effective Amendment, as applicable, relating thereto. Such
terms will include whether such Debt Securities are convertible into Common
Stock, the conversion price (or manner of calculation thereof), the conversion
period, provisions as to whether conversion will be at the option of the holders
or the Company or such conversion will be automatic, the events requiring an
adjustment of the conversion price and provisions affecting conversion in the
event of the redemption of such Debt Securities.
SUBORDINATION
Upon any distribution to creditors of the Company in a liquidation,
dissolution or reorganization, the payment of the principal of and interest on
any Debt Securities will be subordinated to the extent provided in
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<PAGE> 50
an Indenture in right of payment to the prior payment in full of all Senior
Debt. No payment of principal or interest will be permitted to be made on Debt
Securities at any time if a default in Senior Debt exists that permits the
holders of such Senior Debt to accelerate their maturity and the default is the
subject of judicial proceedings or the Company receives notice of the default.
After all Senior Debt is paid in full and until the Debt Securities are paid in
full, holders of Debt Securities will be subrogated to the right of holders of
Senior Debt to the extent that distributions otherwise payable to holders of
Debt Securities have been applied to the payment of Senior Debt. By reason of
such subordination, in the event of a distribution of assets upon insolvency,
certain general creditors of the Company may recover more, ratably, than holders
of Debt Securities. If this Prospectus is being delivered in connection with a
series of Debt Securities, the accompanying Prospectus Supplement or
Post-Effective Amendment, as applicable, or the information incorporated herein
by reference will contain the approximate amount of Senior Debt outstanding as
of the end of the Company's most recent fiscal quarter.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction 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.
As of the date of this Prospectus, the Company has outstanding 13,694,377
shares of Common Stock of which 5,110,155 shares are freely tradeable without
restrictions or further registration under the Securities Act, unless purchased
by "affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act .
On March 27, 1996, the Company issued 1,462,100 shares of Common Stock to
Messrs. Sielbeck, Abrams, Young and Hutton as founders of the Company. These
shares and 4,522,636 shares issued in connection with the Combination 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 effective April 29, 1997, a person who has beneficially owned these
shares for at least one year, 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 two years, would
be 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.
In connection with acquisitions completed after the Combination, the
Company issued 3,249,486 shares of Common Stock registered under the Securities
Act, approximately 644,000 of which are eligible for sale in the public market
in accordance with Rule 145. Certain stockholders of such acquired companies may
be deemed "affiliates" for purposes of Rule 145 under the Securities Act. In
general, under Rule 145 as currently in effect, a shareholder who is an
"affiliate" may sell shares in broker's transactions subject to the volume
limitations and requirements as to the manner and notice of sale and the
availability of public information described above. In addition to the
requirements of Rule 145, certain stockholders of such acquired companies are
subject to lockup agreements that generally prohibit a shareholder from selling,
offering to sell, granting any option for the sale of, or otherwise disposing of
any shares of Common Stock, any options, rights or warrants to purchase any
shares of Common Stock, or any other securities convertible into or exchangeable
for
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shares of Common Stock owned directly by such stockholder or with respect to
which he has the power of disposition, for a period of six months following the
effective time of the acquisition, without the prior written consent of the
Company. Beginning six months after the closing of the acquisition, such
stockholders will be entitled to sell or otherwise dispose of up to 25% of the
shares of Common Stock held by such stockholder, and an additional 25% of the
shares of Common Stock held by such stockholder during each of the three
successive six month periods until the twenty-fourth month following the closing
of the acquisition, at which time such stockholder will be entitled to sell all
shares of Common Stock held by such stockholder. Under the terms of these lockup
agreements, approximately 343,000 additional shares will become eligible for
sale in the public market subject to Rule 145 between the date of this
Prospectus and July 31, 1997. The Company also plans to issue shares of its
Common Stock that have been registered under the Securities Act in connection
with future acquisitions. The Company anticipates that, upon the issuance
thereof, these shares will generally be freely tradeable unless the resale
thereof is contractually restricted.
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 120
days after March 18, 1997 without the prior written consent of Equitable
Securities Corporation on behalf of the underwriters in the Offering.
SELLING STOCKHOLDERS
The Company intends to offer Securities, from time to time, pursuant to
this Prospectus in connection with its acquisition of the assets or stock of
HVAC service and replacement businesses, as described herein. The recipients of
the Securities issued in connection with such transactions may determine to
reoffer the Common Stock issued in such transactions, the Common Stock issued
upon the exercise of the Common Stock Warrants or Common Stock issued upon the
conversion of the Debt Securities from time to time. Specific information
regarding the resale transactions by Selling Stockholders who may be deemed to
be "underwriters" as defined in the Securities Act, the identity of the Selling
Stockholders, and the number of shares of Common Stock to be reoffered shall be
provided at the time of such acquisition by means of a Post-Effective Amendment
or Prospectus Supplement, as applicable. See "The Pending
Acquisitions -- Overview" and "The Pending Acquisitions -- The
Agreements -- Common Stock Issued to Affiliates."
LEGAL MATTERS
Certain legal matters with respect to the validity of the Securities
offered hereby will be passed upon for the Company by Waller Lansden Dortch &
Davis, A Professional Limited Liability Company, Nashville, Tennessee.
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.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation....................................... F-2
Unaudited Pro Forma Combined Balance Sheet as of December
31, 1996.................................................. F-3
Unaudited Pro Forma Combined Statement of Income for the
Twelve Months ended December 31, 1996..................... F-4
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-5
SERVICE EXPERTS, INC. -- AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
Report of Independent Auditors.............................. F-9
Consolidated Balance Sheets................................. F-10
Consolidated Statements of Income........................... F-12
Consolidated Statements of Stockholders' Equity............. F-13
Consolidated Statements of Cash Flows....................... F-14
Notes to Consolidated Financial Statements.................. F-15
</TABLE>
F-1
<PAGE> 53
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
The Company was incorporated on March 27, 1996. On August 21, 1996, and
simultaneous with the closing of the IPO, the Company acquired the Predecessor
Companies in the Combination. In accordance with the provisions of SAB 97, the
historical financial statements of the Company for periods prior to August 21,
1996 are the combined financial statements of the Acquiring Company. Such
historical financial statements have been restated for Custom Air Conditioning,
Inc. and Freschi Air Systems, Inc. (collectively "Pooled Companies"), which were
acquired in December 1996 in business combinations accounted for as poolings of
interests. The operations of the Subsidiaries other than the Pooled Companies
have been included in the Company's financial statements from their respective
effective dates of acquisition. The acquisitions of the Predecessor Companies
have been accounted for using the historical cost basis of the Predecessor
Companies in accordance with SAB 48. The Predecessor Companies are the Acquiring
Company; Hardwick Air Masters, Inc. d/b/a Airmasters, Inc.; Norrell Heating and
Air Conditioning Company, Inc.; Vision Holding Company, Inc.; Comerford's
Heating and Air Conditioning, Inc.; Rolf Coal and Fuel Corp.; Brand Heating &
Air Conditioning, Inc.; Coastal Air Conditioning Service, Inc.; Contractor
Success Group, Inc.; Arrow Heating & Air Conditioning, Inc.; Air Experts, a
United Services Co., Inc.; Gilley's Heating & Cooling, Inc.; and Service Experts
of Palm Springs, Inc.
The following unaudited pro forma combined financial statements give effect
to the acquisition by the Company of certain Acquired Companies and certain
Pending Acquisitions in exchange for shares of the Company's Common Stock, cash,
and the assumption of certain debt.
Since the acquisition of the Predecessor Companies, the Company has
completed 25 additional acquisitions (the "Acquired Companies"), of which two
have been accounted for as poolings of interests. The pro forma combined
financial statements give effect to the acquisition of the following Acquired
Companies: Dial One Raymond's Plumbing, Heating & Cooling, Inc., Gaddis Co.,
Automated Air, Inc., Bauer Heating & Air Conditioning, Inc., Sylvester's Corp.,
Bryant-Allen, Inc., Paul E. Smith Co., Inc., Quality Air Conditioning & Heating
of West Monroe, Inc., Frees Service Experts, Inc., Parker Heating & Air
Conditioning, Incorporated, Comfortech, Inc., Sunbeam Service Experts, Inc.,
Falso Service Experts, Inc., Gordon's Specialty Company, Inc., Pardee
Refrigeration Company Incorporated, Sanders Indoor Comfort, Inc., Island Air
Conditioning, Inc., Air-Conditioning and Heating Unlimited, Inc., B&B Air
Conditioning, Inc. and Eisenbach Enterprises, Inc. The pro forma combined
financial statements give effect to the following eight Pending Acquisitions: C.
Iapaluccio Co., Inc., Claire's Air Conditioning and Refrigeration, Inc., Claire
& Sanders, Inc., Royden, Inc., Piedmont Air Conditioning, Inc., Roland J. Down,
Inc., Stark Services Company, Inc. and Lewis & Guymon, Inc. The pro forma
combined financial statements do not give effect to the acquisition of two
Acquired Companies or to three Pending Acquisitions which are immaterial to the
pro forma presentation.
The unaudited pro forma combined financial statements have been prepared by
the Company based on the historical financial statements of the Company and the
companies referred to above and certain preliminary estimates and assumptions
deemed appropriate by management of the Company. These pro forma combined
financial statements may not be indicative of results that would have been
achieved had these acquisitions occurred on the dates indicated or of results
which may be realized in the future. Neither expected benefits nor cost
reductions anticipated by the Company following consummation of these
acquisitions have been reflected in the pro forma combining financial
statements. The pro forma combining balance sheet as of December 31, 1996, gives
effect to the eight Pending Acquisitions listed above as if such transactions
had occurred on December 31, 1996. The pro forma combined statements of income
for the year ended December 31, 1996 assume the acquisitions of the Subsidiaries
and the eight Pending Acquisitions were completed on January 1, 1996.
The pro forma combined financial statements should be read in conjunction
with the historical financial statements of the Company, 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-2
<PAGE> 54
PRO FORMA COMBINED BALANCE SHEET OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
ACQUIRED
COMPANIES PENDING PRO FORMA
EFFECTIVE AFTER ACQUISITIONS PRO FORMA OFFERING
COMPANY DECEMBER 31, 1996 AS ADJUSTED ADJUSTMENTS PRO FORMA ADJUSTMENTS
-------- ----------------- ------------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $10,726 $ 1,257 $ 663 $(14,568)(c) $ 970 $37,666(d)
(673)(a) (8,344)(e)
(3,535)(b) --
7,100(c) --
------- ------- ------- -------- -------- -------
Receivables:
Trade receivables, net................... 9,048 1,044 2,625 -- 12,717 --
Related party............................ 129 23 12 -- 164 --
Employee................................. 113 25 19 -- 157 --
Other.................................... 208 (8) 67 -- 267 --
------- ------- ------- -------- -------- -------
9,498 1,084 2,723 -- 13,305 --
Inventories................................ 3,923 870 1,502 -- 6,295 --
Cost and estimated earnings in excess of
billings................................. 283 -- 610 -- 893 --
Prepaid expenses and other current
assets................................... 697 137 526 -- 1,360 --
Current portion of notes
receivable -- related parties............ 14 -- -- -- 14 --
Current portion of notes
receivable -- other...................... 286 -- 131 -- 417 --
Deferred income taxes...................... 1,893 222 1 -- 2,116 --
------- ------- ------- -------- -------- -------
Total current assets............... 27,320 3,570 6,156 (11,676) 25,370 29,322
Property, buildings and equipment, net..... 6,329 1,289 1,603 1,000(c) 10,221 --
Notes receivable -- related parties........ 352 -- 15 -- 367 --
Notes receivable -- other.................. 500 -- -- -- 500 --
Investment in affiliate.................... 674 5 1 -- 680 --
Long-term deferred income taxes............ -- 3 -- -- 3 --
Goodwill................................... 33,032 85 1 12,817(b) 62,825 --
16,890(c)
Other assets............................... 297 46 125 -- 468 --
------- ------- ------- -------- -------- -------
Total assets....................... $68,504 $ 4,998 $ 7,901 $ 19,031 $100,434 $29,322
======= ======= ======= ======== ======== =======
Current liabilities:
Short-term debt.......................... $ -- $ 148 $ 22 $ 7,100(c) $ 7,270 $(7,270)(e)
Trade accounts payable and accrued
liabilities............................ 5,174 1,055 1,298 -- 7,527 --
Cash consideration payable............... 1,495 -- -- (1,495)(b) -- --
Accrued compensation..................... 1,601 756 1,100 (673)(a) 2,,784 --
Accrued warranties....................... 963 121 213 -- 1,297 --
Income taxes payable..................... 1,723 57 26 -- 1,806 --
Deferred revenue......................... 3,502 909 617 -- 5,028 --
Billings in excess of costs and estimated
earnings............................... 340 5 261 -- 606 --
Current portion of long-term debt and
capital lease obligations.............. 135 59 15 -- 209 (209)(e)
------- ------- ------- -------- -------- -------
Total current liabilities.......... 14,933 3,110 3,552 4,932 26,527 (7,479)
Long-term debt and capital lease
obligations, net of current.............. 140 108 486 -- 734 (734)(e)
Related parties notes...................... -- 50 81 -- 131 (131)(e)
Deferred income taxes...................... 360 26 -- -- 386 --
Common stock............................... 111 -- -- 8(b) 122 19(d)
3(c)
Additional paid-in-capital................. 48,566 -- -- 12,473(b) 68,140 37,647(d)
7,101(c)
Retained earnings.......................... 4,409 1,704 3,782 (3,782)(c) 4,409 --
(1,704)(b)
Equity notes receivable.................... (15) -- -- -- (15) --
------- ------- ------- -------- -------- -------
$68,504 $ 4,998 $ 7,901 $ 19,031 $100,434 $29,322
======= ======= ======= ======== ======== =======
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
<S> <C>
Current assets:
Cash and cash equivalents................ $ 30,292
==
--
--------
Receivables:
Trade receivables, net................... 12,717
Related party............................ 164
Employee................................. 157
Other.................................... 267
--------
13,305
Inventories................................ 6,295
Cost and estimated earnings in excess of
billings................................. 893
Prepaid expenses and other current
assets................................... 1,360
Current portion of notes
receivable -- related parties............ 14
Current portion of notes
receivable -- other...................... 417
Deferred income taxes...................... 2,116
--------
Total current assets............... 54,692
Property, buildings and equipment, net..... 10,221
Notes receivable -- related parties........ 367
Notes receivable -- other.................. 500
Investment in affiliate.................... 680
Long-term deferred income taxes............ 3
Goodwill................................... 62,825
Other assets............................... 468
--------
Total assets....................... $129,756
========
Current liabilities:
Short-term debt.......................... $ --
Trade accounts payable and accrued
liabilities............................ 7,527
Cash consideration payable............... --
Accrued compensation..................... 2,784
Accrued warranties....................... 1,297
Income taxes payable..................... 1,806
Deferred revenue......................... 5,028
Billings in excess of costs and estimated
earnings............................... 606
Current portion of long-term debt and
capital lease obligations.............. --
--------
Total current liabilities.......... 19,048
Long-term debt and capital lease
obligations, net of current.............. --
Related parties notes...................... --
Deferred income taxes...................... 386
Common stock............................... 141
Additional paid-in-capital................. 105,787
--
Retained earnings.......................... 4,409
--
Equity notes receivable.................... (15)
--------
$129,756
========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-3
<PAGE> 55
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PREDECESSOR PRO FORMA ACQUIRED PRO FORMA
COMPANIES PREDECESSOR ACQUIRED COMPANIES ACQUIRED
COMPANY PREDECESSOR ADJUSTMENTS COMPANIES COMPANIES ADJUSTMENTS COMPANIES
-------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $46,856 $30,128 $ -- $76,984 $63,670 $ -- $140,654
Cost of goods sold... 30,198 19,052 -- 49,250 41,547 (141)(j) 90,656
------- ------- ------- ------- ------- ------- --------
Gross margin......... 16,658 11,076 -- 27,734 22,123 141 49,998
Selling, general and
administrative
expenses........... 12,837 8,670 (2,508)(f) 18,999 20,613 (2,993)(k) 36,619
------- ------- ------- ------- ------- ------- --------
Income from
operations......... 3,821 2,406 2,508 8,735 1,510 3,134 13,379
Other income
(expense):
Interest expense... (63) (216) 212(g) (67) (237) 238(l) (66)
Interest income.... 334 192 -- 526 67 -- 593
Other income
(expense)........ 214 3 40(h) 257 (165) -- 92
------- ------- ------- ------- ------- ------- --------
485 (21) 252 716 (335) 238 619
------- ------- ------- ------- ------- ------- --------
Income before tax.... 4,306 2,385 2,760 9,451 1,175 3,372 13,998
Provision for income
taxes.............. 1,196 324 1,755(i) 3,275 40 2,196(m) 5,511
------- ------- ------- ------- ------- ------- --------
Net income $ 3,110 $ 2,061 $ 1,005 $ 6,176 $ 1,135 $ 1,176 $ 8,487
======= ======= ======= ======= ======= ======= ========
Pro forma net income
per share.......... $ 0.67 $ 0.71
Pro forma weighted
average shares
outstanding........ 9,220 11,885
<CAPTION>
PRO FORMA
PENDING PRO FORMA PRO FORMA
PENDING ACQUISITIONS PENDING OFFERING PRO FORMA
ACQUISITIONS ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ALL ACQUISITIONS
------------ ------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
Net revenues......... $31,649 $ -- $172,303 $ -- $172,303
Cost of goods sold... 22,954 17(n) 113,627 -- 113,627
------- ------- -------- ---- --------
Gross margin......... 8,695 (17) 58,676 -- 58,676
Selling, general and
administrative
expenses........... 6,421 (553)(o) 42,487 -- 42,487
------- ------- -------- ---- --------
Income from
operations......... 2,274 536 16,189 -- 16,189
Other income
(expense):
Interest expense... (45) (604)(p) (715) 715(r) --
Interest income.... 17 -- 610 -- 610
Other income
(expense)........ 73 -- 165 -- 165
------- ------- -------- ---- --------
45 (604) 60 715 775
------- ------- -------- ---- --------
Income before tax.... 2,319 (68) 16,249 715 16,964
Provision for income
taxes.............. 32 983(q) 6,526 272(s) 6,798
------- ------- -------- ---- --------
Net income $ 2,287 $(1,051) $ 9,723 $443 $ 10,166
======= ======= ======== ==== ========
Pro forma net income
per share.......... $ 0.76
Pro forma weighted
average shares
outstanding........ 13,333
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-4
<PAGE> 56
SERVICE EXPERTS, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the distribution of equity in excess of minimum required per merger
agreements
(b) Reflects the payments to owners of the Subsidiaries of $3,535,000 in cash
and 756,396 shares of Common Stock
(c) Reflects the payments to owners of the Predecessor Companies of $14,568,000
in cash and 322,909 shares of common stock for the Pending Acquisitions and
debt incurred associated with the transaction.
(d) Reflects the proceeds of the Offering, net of estimated expenses of
$1,000,000 and underwriting commissions of $2,035,000. The net proceeds are
reflected as: (i) $37,666,000 of cash, (ii) $18,500 of par value of
1,850,000 shares of common stock, (iii) $37,647,000 of additional paid-in
capital.
(e) Reflects the elimination of all outstanding debt
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS -- SERVICE EXPERTS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
<C> <C> <S> <C>
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $(4,416)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 1,322
(iii) Additional lease expense on real estate sold by AC Service &
Installation Co., Inc. and Vision Holding Company, Inc...... 53
(iv) Elimination of depreciation expense on real estate sold by
AC Service & Installation Co., Inc. and Vision Holding
Company, Inc................................................ (24)
(v) Elimination of non-competition fees resulting from buyout of
non-compensation agreements................................. (43)
(vi) Corporate office overhead expenses.......................... 270
(vii) Corporate office compensation............................... 366
(viii) Elimination of management fees paid by Air Experts, a United
Services Co., Inc. and Service Experts of Palm Springs, Inc.
to parent companies or affiliates which are part of the
corporate office adjustments................................ (36)
-------
$(2,508)
=======
(g) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE
RELATED TO:
(i) Elimination of debt distributed to shareholder of Vision
Holding Company, Inc........................................ $ 45
(ii) Elimination of interest on debt distributed to shareholders
of AC Service & Installation Co., Inc. and Custom Air
Conditioning, Inc. ......................................... 15
(iii) Elimination of all other debt assumed in the transaction to
be paid at closing.......................................... 152
-------
$ 212
=======
(h) REFLECTS THE FOLLOWING ADJUSTMENT TO OTHER INCOME:
(i) The addition of income from its 37% investment in Future
University.................................................. $ 40
=======
</TABLE>
F-5
<PAGE> 57
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
--------------
<C> <C> <S> <C>
(i) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 38% as certain Predecessor
Companies previously were taxed as Subchapter S
corporations................................................ $ 706
(ii) Additional income taxes on adjustments (f) thru (h)......... 1,049
-------
$ 1,755
=======
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS -- ACQUIRED COMPANIES
(j) REFLECTS THE FOLLOWING ADJUSTMENTS TO COST OF GOODS SOLD:
(i) Adjust rent expense per new leases.......................... $ (122)
(ii) Elimination of real estate depreciation..................... (19)
-------
$ (141)
=======
(k) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $(6,739)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 1,752
(iii) Three regional vice presidents and one MIS director......... 700
(iv) Goodwill amortization....................................... 1,294
-------
$(2,993)
=======
(l) REFLECTS THE FOLLOWING ADJUSTMENT TO INTEREST EXPENSE:
(i) Elimination of interest expense on debt retired............. $ 238
=======
(m) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 38% as certain Acquired
Companies previously were taxed as Subchapter S
corporations................................................ $ 480
(ii) Additional income taxes on adjustments (j) thru (l)......... $ 1,281
(iii) Additional income tax provision for state and federal taxes
due to the non-deductibility of goodwill.................... $ 435
-------
$ 2,196
=======
</TABLE>
F-6
<PAGE> 58
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS -- PENDING ACQUISITIONS
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
DECEMBER 31,
1996
-------------
(IN
THOUSANDS)
<C> <C> <S> <C>
(n) REFLECTS THE FOLLOWING ADJUSTMENT TO COST OF GOODS SOLD:
(i) Adjust rent expense per new leases.......................... $ 17
=======
(o) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $ (925)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 506
(iii) Elimination of general and administrative expenses.......... (556)
(iv) Goodwill amortization....................................... 422
-------
$ (553)
=======
(p) REFLECTS THE FOLLOWING ADJUSTMENT TO INTEREST EXPENSE:
(i) Additional interest on debt incurred associated with the
transactions................................................ $ 604
=======
(q) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 38% as certain Acquisition
Companies previously were taxed as Subchapter S
corporations................................................ $ 849
(ii) Additional income taxes on adjustments (n) thru (p)......... (26)
(iii) Additional tax provision for state and federal taxes due to
the non-deductibility of goodwill........................... 160
-------
$ 983
=======
PRO FORMA STATEMENT OF INCOME ADJUSTMENTS -- OFFERING ADJUSTMENTS
(r) REFLECTS THE FOLLOWING ADJUSTMENT TO INTEREST EXPENSE:
(i) Elimination of interest expense on debt retired............. $ 715
=======
(s) REFLECTS THE FOLLOWING ADJUSTMENT TO INCOME TAXES:
(i) Additional income taxes on adjustment (r)................... $ 272
=======
</TABLE>
F-7
<PAGE> 59
(This page intentionally left blank)
F-8
<PAGE> 60
REPORT OF INDEPENDENT AUDITORS
The Stockholders
Service Experts, Inc.
We have audited the accompanying consolidated balance sheets of Service
Experts, Inc. (formerly AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company -- see Note 1) as of December 31, 1995 and 1996, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Service Experts, Inc. (formerly AC Service & Installation Co., Inc. and Donelson
Air Conditioning Company -- see Note 1) at December 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
February 12, 1997
F-9
<PAGE> 61
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 445 $10,726
Accounts Receivable:
Trade, net of allowance for doubtful accounts of
$135,000 in 1995 and $620,000 in 1996................. 2,334 9,048
Related party.......................................... 298 129
Employee............................................... 66 113
Other.................................................. 77 208
------- -------
2,775 9,498
Inventories............................................... 472 3,923
Costs and estimated earnings in excess of billings........ 31 283
Prepaid expenses and other current assets................. 265 697
Current portion of notes receivable -- related parties.... -- 14
Current portion of notes receivable -- other.............. -- 286
Deferred income taxes..................................... 17 1,893
------- -------
Total current assets.............................. 4,005 27,320
Property, buildings and equipment:
Land...................................................... 105 10
Buildings................................................. 767 67
Furniture and fixtures.................................... 472 841
Machinery and equipment................................... 364 1,913
Vehicles.................................................. 2,149 5,339
Leasehold improvements.................................... 80 620
------- -------
3,937 8,790
Less accumulated depreciation and amortization.............. (2,002) (2,461)
------- -------
1,935 6,329
Notes receivable -- related parties, net of current
portion................................................... -- 352
Notes receivable -- other, net of current portion........... -- 500
Investment in affiliate..................................... -- 674
Goodwill.................................................... -- 33,032
Other assets................................................ 80 297
------- -------
Total assets...................................... $ 6,020 $68,504
======= =======
See accompanying notes.
</TABLE>
F-10
<PAGE> 62
SERVICE EXPERTS, INC.
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities............ $ 740 $ 5,174
Cash consideration payable................................ -- 1,495
Accrued compensation...................................... 743 1,601
Accrued warranties........................................ 169 963
Income taxes payable...................................... 67 1,723
Deferred revenue.......................................... 471 3,502
Billings in excess of costs and estimated earnings........ 228 340
Current portion related party notes....................... 7 --
Current portion of long-term debt and capital lease
obligations............................................ 244 135
------- -------
Total current liabilities......................... 2,669 14,933
Long-term debt and capital lease obligations, net of current
portion................................................... 610 140
Related party notes, net of current portion................. 669 --
Deferred income taxes....................................... 8 360
Commitments (Note 10).......................................
Stockholders' equity:
Common stock $.01 par value; 30,000,000 shares authorized;
1,560,912 and 11,050,326 shares issued and outstanding
at December 31, 1995 and 1996, respectively............ 16 111
Preferred stock, $.01 par value; 10,000,000 shares
authorized, no shares issued and outstanding........... -- --
Additional paid-in capital................................ 241 48,566
Retained earnings......................................... 1,807 4,409
Equity notes receivable................................... -- (15)
------- -------
Total stockholders' equity........................ 2,064 53,071
------- -------
Total liabilities and stockholders' equity........ $ 6,020 $68,504
======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE> 63
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net revenues................................................ $22,193 $24,876 $46,856
Cost of goods sold.......................................... 15,999 16,916 30,198
------- ------- -------
Gross margin................................................ 6,194 7,960 16,658
Selling, general and administrative expenses................ 5,723 7,162 12,837
------- ------- -------
Income from operations...................................... 471 798 3,821
Other income (expense):
Interest expense.......................................... (90) (100) (63)
Interest income........................................... 26 44 334
Other income.............................................. 17 48 214
------- ------- -------
(47) (8) 485
Income before federal and state income taxes................ 424 790 4,306
Provision (benefit) for income taxes:
Current................................................... 48 105 2,675
Deferred.................................................. (7) (23) (1,479)
------- ------- -------
41 82 1,196
------- ------- -------
Net income................................................ $ 383 $ 708 $ 3,110
======= ======= =======
Net income per common share................................. $ .25 $ .45 $ .70
======= ======= =======
Weighted average shares used in earnings per share
computation............................................... 1,561 1,561 4,451
======= ======= =======
</TABLE>
See accompanying notes.
F-12
<PAGE> 64
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL EQUITY
--------------- PAID-IN RETAINED NOTES
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE TOTAL
------ ------ ---------- --------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994................... 1,561 $ 16 $ 241 $ 1,193 -- $ 1,450
Capital distributions...................... -- -- -- (284) -- (284)
Net income................................. -- -- -- 383 -- 383
------ ---- ------- --------- --------- ---------
Balance at December 31, 1994................. 1,561 16 241 1,292 -- 1,549
Capital distributions...................... -- -- -- (193) -- (193)
Net income................................. -- -- -- 708 -- 708
------ ---- ------- --------- --------- ---------
Balance at December 31, 1995................. 1,561 16 241 1,807 -- 2,064
Issuance of stock at initial public
offering................................. 2,588 26 28,087 -- -- 28,113
Predecessor Companies (see Note 3)
Issuance of stock........................ 4,832 48 6,462 -- (15) 6,495
Cash distributions......................... -- -- (18,699) -- -- (18,699)
Issuance of stock for Acquired Companies
(see Note 4)........................... 2,069 21 32,475 -- -- 32,496
Capital distributions...................... -- -- -- (508) -- (508)
Net income................................. -- -- -- 3,110 -- 3,110
------ ---- ------- --------- --------- ---------
Balance at December 31, 1996................. 11,050 $111 $48,566 $ 4,409 $ (15) $ 53,071
====== ==== ======= ========= ========= =========
</TABLE>
See accompanying notes.
F-13
<PAGE> 65
SERVICE EXPERTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 383 $ 708 $ 3,110
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 449 572 650
Equity in affiliate earnings.............................. -- -- (30)
Benefit for deferred income taxes......................... (7) (23) (1,479)
(Loss) gain on asset disposals............................ 8 (13) (40)
Changes in assets and liabilities:
Receivables............................................. (752) (232) 115
Inventories............................................. (76) (2) (203)
Prepaid expenses and other current assets............... 28 (7) (336)
Trade accounts payable and accrued liabilities.......... 227 (227) (1,745)
Accrued compensation.................................... 156 50 (910)
Accrued warranties...................................... 15 56 148
Deferred revenue........................................ 225 (44) 404
Income taxes payable.................................... 4 41 363
Costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings.... 59 18 (128)
------ ------ --------
Net cash flow provided by (used in) operating
activities....................................... 719 897 (81)
INVESTING ACTIVITIES
Advances on notes receivable................................ -- -- (250)
Purchase of property, buildings, and equipment.............. (630) (766) (638)
Proceeds from sale of property, buildings, and equipment.... 9 30 225
Cash acquired through acquisitions.......................... -- -- 3,961
Payment of cash portion of consideration to Predecessor
Companies................................................. -- -- (18,699)
(Increase) decrease in other assets......................... (96) (96) (304)
------ ------ --------
Net cash used in investing activities.............. (717) (832) (15,705)
FINANCING ACTIVITIES
Proceeds from notes payable to shareholders and related
parties................................................... -- -- 59
Payments on notes payable to shareholders and related
parties................................................... -- -- (886)
Issuance of stock, net of issuance costs.................... -- -- 28,113
Proceeds of long-term debt and capital leases............... 423 648 104
Payments of long-term debt and capital leases............... (365) (437) (815)
Distributions paid.......................................... (284) (193) (508)
------ ------ --------
Net cash (used in) provided by financing activities......... (226) 18 26,067
------ ------ --------
Increase (decrease) in cash and cash equivalents............ (224) 83 10,281
Cash and cash equivalents at beginning of period............ 586 362 445
------ ------ --------
Cash and cash equivalents at end of period.................. $ 362 $ 445 $ 10,726
====== ====== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 103 $ 100 $ 63
====== ====== ========
Income tax paid............................................. $ 49 $ 67 $ 1,880
====== ====== ========
ACQUISITION OF COMPANIES:
Fair value of assets acquired............................. $ -- $ -- $ 42,333
Cash paid................................................. 1,478
Common stock issued....................................... 34,068
------ ------ --------
Liabilities assumed....................................... $ -- $ -- $ 6,787
====== ====== ========
DISTRIBUTION OF ASSETS TO STOCKHOLDERS
Book value of assets distributed............................ $ -- $ -- $ 1,324
====== ====== ========
Long-term debt assumed by stockholders...................... $ -- $ -- $ 488
====== ====== ========
Notes payable to stockholders retired....................... $ -- $ -- $ 343
====== ====== ========
</TABLE>
See accompanying notes.
F-14
<PAGE> 66
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Service Experts, Inc. was incorporated on March 27, 1996. As a result of
the adoption of Securities and Exchange Commission Staff Accounting Bulletin No.
97 ("SAB 97") on July 31, 1996, the historical financial statements of Service
Experts, Inc. ("the Company") for periods prior to August 21, 1996 are the
combined financial statements of AC Service & Installation Co., Inc. and
Donelson Air Conditioning, Inc. ("the Acquiring Company") and subsequent
acquisitions accounted for under pooling of interests. (See Note 2). AC Service
& Installation Co., Inc. and Donelson Air Conditioning, Inc. were under common
control. On August 21, 1996 and simultaneous with the closing of its initial
public offering, the Company acquired in separate transactions, 12 heating,
ventilating and air conditioning ("HVAC") replacement and service businesses and
Contractor Success Group, Inc. (collectively, the "Predecessor Companies") in
exchange for shares of the Company's Common Stock and cash (the "Combination").
The Acquiring Company was treated as the acquiror entity in this transaction in
accordance with SAB 97. The operations of the acquired companies have been
included in the Company's financial statements from the date of acquisition. The
above-mentioned acquisitions have been accounted for using the historical cost
basis of the acquired companies in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 48 ("SAB 48"). The Company operates in
one industry segment and is primarily engaged in the replacement and servicing
of HVAC for residential and commercial customers. The Company has Service
Centers located in cities across the United States.
PRINCIPALS OF CONSOLIDATION
The consolidated financial statements of Service Experts, Inc. include the
accounts of the Company and its subsidiaries. All intercompany transactions have
been eliminated in consolidation. Investments in affiliates less than 50 percent
owned are generally recorded on the equity method.
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 residential heating and
air conditioning installation, service and maintenance jobs are recognized upon
completion of the services which is usually within one to two days.
Earnings and estimated costs on Contracts are reviewed throughout the terms
of the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within six to 18 months.
Nonidentifiable selling, general, and administrative expenses are charged to
income as incurred and are not allocated to Contract costs.
Trade accounts receivable includes billings and billed retainage on
Contracts. Also included in trade accounts receivable are unbilled retainage
amounts of $76,000 and $359,000 at December 31, 1995 and 1996, respectively. The
Company classifies these amounts as current assets because all balances are
expected to be collected in the current year. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Company's customer base, and their dispersions across many
different industries and geographies.
The asset, "costs and estimated earnings in excess of billings," represents
revenue recognized in excess of amounts billed on in-progress contracts. The
liability, "billings in excess of costs and estimated earnings," represents
billings in excess of revenue recognized on in-progress contracts.
F-15
<PAGE> 67
SERVICE EXPERTS, 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. Accounts receivable are usually
unsecured.
Long-Term Debt
Based upon the borrowing rates currently available to the Company, the
carrying amounts reported in the balance sheets for long-term debt approximate
fair value.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the years ended December 31, 1994, 1995 and 1996 amounts charged to
bad debts expense totaled $95,000, $42,000 and $98,000, respectively and
accounts written off, net of recoveries, were $11,000, $13,000 and $3,000,
respectively.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined principally by the first-in, first-out (FIFO) method for all
inventories.
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...................................... 5-10
Machinery and equipment..................................... 5-10
Vehicles.................................................... 5-10
Leasehold improvements...................................... 7-30
</TABLE>
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when service is performed.
WARRANTIES
The Company provides the retail customer with a warranty ranging from one
to ten years on parts and labor from the date of installation of the heating and
air conditioning unit. This warranty generally runs concurrent with the
manufacturer's warranty on parts and for the first year on labor. The Company
provides an
F-16
<PAGE> 68
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accrual for future warranty costs based upon the relationship of prior years'
sales to actual warranty costs. It is the Company's practice to classify the
entire warranty accrual as a current liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
Donelson Air Conditioning Company, Inc. used the liability method of
accounting for federal and state income taxes as provided by SFAS No. 109,
"Accounting for Income Taxes." Under the liability method, the deferred tax
liability or asset is based on temporary differences between the financial
statement and income tax bases of assets and liabilities, measured at tax rates
that will be in effect when the differences reverse.
The former stockholders of AC Service & Installation Co., Inc., Custom Air
Conditioning, Inc. and Freschi Air Systems, Inc. (see Note 2) 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., Custom Air Conditioning, Inc. and Freschi Air Systems,
Inc. are not subject to federal income taxes. This election is not available for
Tennessee state income tax reporting; accordingly, AC Service & Installation
Co., Inc. used the liability method of accounting for Tennessee state income
taxes.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1994, 1995 and
1996, the Company expensed $530,000, $524,000, and $1,584,000, respectively.
GOODWILL
Goodwill consists of the excess of purchase price over the fair value of
acquired tangible and identifiable intangible assets. Excess cost over the fair
value of net assets acquired (or goodwill) is amortized on a straight-line basis
over 40 years. The carrying value of goodwill is reviewed if the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill will be reduced by the estimated
shortfall of cash flow. Accumulated amortization of goodwill was $87,000 at
December 31, 1996.
INCOME PER COMMON SHARE
Income per common share is based on the weighted average number of shares
of common stock outstanding and common stock equivalents consisting of dilutive
stock options and warrants. Fully diluted earnings per share for 1994, 1995 and
1996 are not materially different from primary earnings per share and,
therefore, are not presented.
RECLASSIFICATIONS
Certain reclassifications have been made in 1994 and 1995 financial
statements to conform to the 1996 presentation. These reclassifications had no
effect on the results of operations previously reported.
F-17
<PAGE> 69
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGERS
In December 1996, the Company completed mergers with Custom Air
Conditioning, Inc. ("Custom") and Freschi Air Systems, Inc. ("Freschi") through
the exchange of 230,049 and 177,765 shares, respectively, of the Company's
Common Stock.
These mergers have been accounted for as poolings of interests and,
accordingly, the consolidated financial statements for the periods presented
have been restated to include the accounts of Custom and Freschi. The following
is a summary of results of operations of the separate entities for periods prior
to the mergers.
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
DECEMBER 31, ENDED
------------------ NOVEMBER 30,
1994 1995 1996
------- ------- --------------
(IN THOUSANDS) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net Revenues
Service Experts......................................... $14,299 $16,453 $29,167
Custom.................................................. 4,638 5,169 5,068
Freschi................................................. 3,256 3,254 4,116
------- ------- -------
Combined................................................ $22,193 $24,876 $38,351
======= ======= =======
Net Income (loss)
Service Experts......................................... $ 179 $ 629 $ 1,751
Custom.................................................. 245 173 213
Freschi................................................. (41) (94) 406
------- ------- -------
Combined................................................ $ 383 $ 708 $ 2,370
======= ======= =======
</TABLE>
3. RECAPITALIZATION AND INITIAL PUBLIC OFFERING
On August 21, 1996, the Company completed an initial public offering
("IPO") of 2,587,500 shares of Common Stock at $13.00 per share. Simultaneously
with the closing of the IPO, the Company issued 3,369,538 shares of Common Stock
and distributed $18,699,000 in cash (exclusive of 1,153,098 shares issued and
$5,027,947 cash distributed to the former stockholders of the Acquiring Company)
in exchange for the stock of Hardwick Air Masters, Inc., Air Experts, a United
Services Co., Inc., Arrow Heating & Air Conditioning, Inc., Brand Heating and
Air Conditioning, Inc., Coastal Air Conditioning Service, Inc., Contractor
Success Group, Inc., Comerford's Heating and Air Conditioning, Inc., Gilley's
Heating & Cooling, Inc., Norrell Heating and Air Conditioning Company, Inc.,
Rolf Coal and Fuel Corp., Service Experts of Palm Springs, Inc. and Vision
Holding Company, Inc. The exchange is being accounted for utilizing the
historical cost basis in accordance with SAB 48 with the stock being valued at
the historical cost of the net assets exchanged. Cash consideration given in
these acquisitions is treated for accounting purposes as a dividend from the
Company.
The Company's stock is currently traded on the Nasdaq Stock Market's
National Market under the symbol SERX.
4. ACQUISITIONS
On November 18, 1996, the Company filed a Registration Statement on Form
S-4 (the "Shelf Registration Statement") covering securities with a collective
aggregate offering price of $50.0 million for use in acquisitions, including the
acquisition of 23 unrelated HVAC replacement and service businesses. Of the 23
companies to be acquired, the Company had completed the acquisition of 15 of
these companies as of December 31, 1996. Two of these acquisitions completed by
December 31, 1996 were accounted for as poolings of interests as discussed in
Note 2. In connection with the 13 acquisitions accounted for using the
F-18
<PAGE> 70
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase method of accounting, the Company issued 2,069,000 shares at a fair
market value of $34,068,000, excluding stock issuance costs of $1,572,000, and
cash of $1,499,000. The Company established an escrow account equal to 10% of
the purchase price for each acquisition subject to final closing adjustments.
The purchase price was allocated to the acquired assets based on the fair values
of those assets as determined by the Company as set forth below (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Current Assets.............................................. $ 7,032
Property, Buildings and Equipment........................... 2,593
Other Assets................................................ 392
Goodwill.................................................... 32,337
Liabilities Assumed......................................... (6,787)
-------
Purchase Price............................... $35,567
=======
</TABLE>
OTHER INFORMATION REGARDING ACQUISITIONS
All of the foregoing acquisitions were accounted for using the purchase
method of accounting except as indicated in Note 3. The allocation of the
purchase price associated with the acquisitions has been determined by the
Company based upon available information and is subject to further refinement.
The operating results of the acquired companies have been included in the
accompanying consolidated statements of income from the respective dates of
acquisition. The following unaudited pro forma results of operations give effect
to the operations of the entities acquired as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the transactions. The pro forma results of operations do not purport to
represent what the Company's results of operations would have been had such
transactions in fact occurred at the beginning of the years presented or to
project the Company's results of operations in any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net revenues................................................ $112,056 $120,083
Net income.................................................. 5,227 6,043
Income per common share..................................... $ .47 $ .55
</TABLE>
Subsequent to December 31, 1996, the Company completed the acquisition of
the remaining eight companies included in the previously mentioned Shelf
Registration Statement by issuing 680,758 shares of stock and paying cash
consideration of $2.0 million. The following unaudited pro forma results of
operations give effect to the operations of the entities acquired during 1996
and subsequent to December 31, 1996 as if the respective transactions had
occurred as of the first day of the fiscal year immediately preceding the year
of the transactions. The pro forma results of operations do not purport to
represent what the Company's results of operations would have been had such
transactions in fact occurred at the beginning of the years presented or to
project the Company's results of operations in any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Net revenues........................................... $131,788 $140,654
Net income............................................. 5,727 8,490
Income per common share................................ $ .52 $ .71
</TABLE>
F-19
<PAGE> 71
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
<S> <C> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts..................... $ 911 $2,903
Estimated earnings....................................... 487 1,147
------ ------
$1,398 $4,050
Less applicable billings................................... $1,595 $4,107
------ ------
$ (197) $ (57)
====== ======
Included in the accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. $ 31 $ 283
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (228) (340)
------ ------
$ (197) $ (57)
====== ======
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are
not indicative of the ultimate profit or loss on a contract.
6. LEASES
Total rental expense for all operating leases was $174,000, $191,000 and
$490,000 for 1994, 1995 and 1996, respectively. The Company leases office and
warehouse space from various stockholders of the Company. These lease agreements
expire at various dates through 2000. Related party rental expense for 1994,
1995 and 1996 was $151,000, $161,000, and $295,000, respectively. The Company
leases certain vehicles and office and warehouse facilities under terms of
noncancelable operating lease agreements which expire at various dates through
2006. Minimum rental commitments at December 31, 1996 under operating leases
having an initial noncancelable term of one year or more are as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING RELATED
LEASES LEASES PARTY TOTAL
------- --------- ------- ------
<S> <C> <C> <C> <C>
1997...................................... $ 60 $ 421 $1,485 $1,966
1998...................................... 55 308 1,483 1,846
1999...................................... 47 239 1,432 1,718
2000...................................... 23 151 1,432 1,606
2001...................................... -- 105 1,112 1,217
Thereafter................................ -- -- 1,171 1,171
---- ------ ------ ------
185 $1,224 $8,115 $9,524
====== ====== ======
Amounts representing interest............. 32
----
Present value of net minimum
rentals (including $45 classified as
current)................................ $153
====
</TABLE>
The carrying value of assets under capital leases, which are included with
owned assets in the accompanying balance sheets is $154,000.
Amortization of the assets under capital leases is included in depreciation
expense.
F-20
<PAGE> 72
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1995 1996
---- ----
<S> <C> <C>
Mortgage note payable....................................... $516 $ --
Installment and equipment notes............................. 314 94
Other....................................................... 24 28
---- ----
854 122
Less current portion........................................ 244 90
---- ----
$610 $ 32
==== ====
</TABLE>
On September 10, 1996, the Company entered into a Revolving Line of Credit
agreement with a Nashville, Tennessee bank for up to $10,000,000 to be used for
working capital purposes and acquisitions. On the same date, the Company also
entered into a Discretionary Line of Credit agreement with a Nashville,
Tennessee bank for up to $10,000,000 to be used for acquisitions or such other
purposes as may be approved by the bank. Any principal amounts outstanding on
the Line of Credit are due on September 10, 1998. On December 31, 1996, there
were no amounts outstanding under the above lines of credit.
Interest on any outstanding portion of the lines of credit is the LIBOR
rate plus applicable rate margin ranging from 125 basis points per annum to 250
basis points per annum (8.5% at December 31, 1996) dependent upon the funded
debt to EBITDA ratio. The Company pays an annual fee of 0.25% of the unused
portion of the available borrowings.
As long as any indebtedness is outstanding, the Lines of Credit require,
among other things, that the Company maintain various financial ratios at
specified levels including minimum levels for stockholders' equity. The Lines of
Credit also limit consolidations and mergers, and incurrence of indebtedness or
liens and prohibit dividends and distributions. At December 31, 1996, the
Company was in compliance with all covenants.
The Company had a mortgage note payable to Free Will Baptist, Inc. that was
secured by the Company's office building and related land. The loan required
monthly installments of $8,400, including fixed principal and imputed interest
(6.1% at December 31, 1995). The mortgage was transferred to the former
shareholders of AC Service & Installation Co., Inc. and Donelson Air
Conditioning Company, Inc. on June 30, 1996 (see Note 12).
The Company has various installment and equipment loans to various lenders
which are secured by vehicles and equipment. These loans bear interest at
various fixed rates ranging from 4.8% to 13% per annum with maturity dates
through 1999.
As of December 31, 1996, the aggregate amounts of annual principal
maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 90
1998........................................................ 29
1999........................................................ 3
----
$122
====
</TABLE>
F-21
<PAGE> 73
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STOCK PLANS
INCENTIVE STOCK OPTION PLAN
The Company has reserved 700,000 shares of common stock under an incentive
stock option plan. A summary of the status of the plan follows:
<TABLE>
<CAPTION>
YEAR ENDED WEIGHTED
DECEMBER 31, AVERAGE
1996 EXERCISE PRICE
--------------- --------------
<S> <C> <C>
Granted....................................... 517,811 $16.92
Exercised..................................... -- --
Canceled...................................... -- --
--------------- ------
Outstanding at end of year.................... 517,811 $16.92
=============== ======
Option price range per share at end of year... $13.00 - $17.25 $16.92
=============== ======
Options exercisable at end of year............ --
===============
</TABLE>
Stock options are exercisable over a period determined by the Board of
Directors, but no longer than ten years after the date of the grant. At December
31, 1996, options to purchase 182,189 shares were available for grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (FAS 123), requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Pro Forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, respectively; risk-free interest rates of 5.97% to 6.34%;
dividends yields of 0.0%; volatility factors of the expected market price of the
Company's common stock of .55 and .25; and a weighted-average expected life of
the options of three years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net income.................................................. $ 3,110
Pro forma compensation expense from stock options, net of
taxes..................................................... (121)
--------
Pro forma net income........................................ $ 2,989
========
Pro forma earnings per common and common equivalent share... $ .67
========
</TABLE>
F-22
<PAGE> 74
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under FAS 123, disclosure of exercise prices is required for the year ended
December 31, 1996 only. The weighted-average fair value of options granted
during 1996 was $4.27. The weighted-average remaining contractual life of those
options is 9.7 years.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has a Director Stock Option Plan that provides for a maximum of
issuance 100,000 shares of Common Stock for grant to non-management members of
the Board of Directors.
Options to purchase a total of 15,000 shares of Common Stock with exercise
price of $13.00 per share were outstanding at December 31, 1996. Each option is
exercisable in full upon receipt and shall expire ten years after the Grant
Date.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan under which the sale of
100,000 shares of Common Stock have been authorized. Employees may designate up
to 10% of their base compensation, at a price equal to 85% of the lessor fair
market value of the Common Stock January 1 or December 31. 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 date of hire. At December 31, 1996 no shares had been issued under this
plan.
WARRANTS
In connection with the Company's IPO, Equitable Securities Corporation
received warrants to purchase 82,391 shares of the Company's Common Stock at an
exercise price of $13.00 per share. The warrants are exercisable for a period of
five years.
9. EMPLOYEE BENEFIT PLANS
The Company has defined-contribution employee benefit plans incorporating
provisions of section 401(k) of the Internal Revenue Code. Generally, employees
of the Company must have one year of service and work 500 hours during the plan
year to be eligible. Under the plans' provisions, a plan member may make
contributions, on a tax-deferred basis, from 1% to 20% of total compensation not
to exceed the maximum established annually by the Internal Revenue Service.
Under the plans matching contributions are made by the Company in amounts
ranging from 1% to 50% of total contributions by a plan member, to a maximum of
between 2% and 6% of the employee's total calendar year compensation. The
Company's matching contributions totaled $126,000, $201,000 and $206,000 as of
December 31, 1994, 1995 and 1996, respectively.
10. 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-23
<PAGE> 75
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................... $40 $ 65 $2,214
State..................................................... 8 40 461
Deferred.................................................... (7) (23) (1,479)
--- ---- ------
$41 $ 82 $1,196
=== ==== ======
</TABLE>
Significant components of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Contract billings......................................... $ 22 $ 136
Depreciation and amortization............................. -- 360
Other-net................................................. -- 63
------ ------
Deferred tax liabilities.................................... 22 559
Deferred tax assets:
Depreciation and amortization............................. 2 --
Bad debts................................................. 18 256
Warranty reserves......................................... 11 330
Deferred revenue.......................................... -- 1,045
Accrued expenses.......................................... -- 365
Other-net................................................. -- 96
------ ------
Total gross deferred tax assets............................. 31 2,092
------ ------
Net deferred tax assets..................................... $ 9 $1,533
====== ======
</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. Accordingly, no valuation allowance has
been recognized.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1994 1995 1996
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision at statutory rate.................... $ 75 $ 241 $1,464
State income tax less applicable federal tax
benefit.......................................... 5 27 147
Less benefit of graduated tax rates and adjustments
to eliminate S corporation....................... (39) (186) (218)
Less benefit recognized upon termination of
Subchapter S election for AC Service &
Installation Co., Inc............................ -- -- (236)
Other-net.......................................... -- -- 39
---- ------ ------
$ 41 $ 82 $1,196
==== ====== ======
</TABLE>
F-24
<PAGE> 76
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As discussed previously, AC Service & Installation Co., Inc.; Custom Air
Conditioning, Inc.; and Freschi Air Systems, Inc. operated under Subchapter S of
the Internal Revenue Code and were not subject to corporate federal income tax.
The Subchapter S elections were terminated upon acquisition by the Company. As a
result, these companies are subject to corporate income taxes subsequent to the
termination of S corporation status. AC Service & Installation Co., Inc.; Custom
Air Conditioning, Inc. and Freschi Air Systems, Inc. had net operating income
for income tax purposes of $133,000, $682,000 and $1,760,000 for 1994, 1995 and
1996, respectively. Had AC Service & Installation Co., Inc.; Custom Air
Conditioning, Inc. and Freschi Air Systems, Inc. filed federal and state income
tax returns as regular C corporations for 1994, 1995, and periods ended during
1996, income tax expense under the provisions of Financial Accounting Standard
No. 109 would have been, $102,000, $242,000 and $316,000, respectively.
At the date of termination of S corporation status, AC Service &
Installation Co., Inc.; Custom Air Conditioning, Inc. and Freschi Air Systems,
Inc. were required to provide deferred taxes for cumulative temporary
differences between financial reporting and tax reporting basis of assets and
liabilities. Such deferred taxes were based on the cumulative temporary
differences at the date of termination of S corporation status.
The termination of S corporation status occurred on August 21, 1996 for AC
Service & Installation Co., Inc., and a deferred tax asset of $236,000 was
recorded. The effect of recognizing the deferred tax asset was included in the
provision for income taxes.
12. RELATED PARTY TRANSACTIONS
Notes Receivable from Related Parties
The Company has one outstanding note receivable of $366,000 from a
stockholder of the Company as of December 31, 1996. The note is payable in 180
monthly installments of $3,905 and bears annual interest of 9%.
Other Related Party Transactions
On June 30, 1996, the Company distributed land, buildings, accounts
receivable and other assets with a net book value of $1,096,000 in satisfaction
of mortgage notes payable of $488,000, shareholder notes payable of $343,000,
and accrued compensation of $365,000 to the former shareholders of AC Service &
Installation Co., Inc. and Donelson Air Conditioning, Inc.
Notes Payable to Related Parties
At December 31, 1995 the Company had notes payable to related parties,
including current and former shareholders, which bear interest ranging from 0.0%
to 12.5% and were due through 2009. These notes were repaid during 1996.
F-25
<PAGE> 77
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the year ended December 31, 1996 is
summarized below:
<TABLE>
<CAPTION>
QUARTER
--------------------------------------
1ST 2ND 3RD 4TH
------ ------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues.................................. $5,134 $7,693 $13,130 $20,899
Income before income taxes.................... 39 59 1,527 2,681
Net income.................................... 33 152 1,239 1,686
Income per common share....................... $ .02 $ .10 $ .25 $ .17
</TABLE>
14. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Company entered into agreements in
principle to acquire eight HVAC businesses. Pursuant to these agreements in
principle, the Company will merge with or acquire the stock of the eight
companies for an aggregate of approximately $15.4 million cash and approximately
225,400 shares of Common Stock. Closing of the transactions is subject to
customary conditions and is expected to take place prior to June 30, 1997.
F-26
<PAGE> 78
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Capitalization........................ 10
Selected Consolidated Financial
Data................................ 11
Selected Pro Forma Combined Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 13
Business.............................. 17
The Pending Acquisitions.............. 27
Management............................ 32
Certain Transactions.................. 38
Principal Stockholders................ 40
Ratio of Earnings to Fixed Charges.... 41
Price Range of Common Stock and
Dividend Policy..................... 41
Description of Capital Stock.......... 42
Description of Common Stock
Warrants............................ 44
Description of Debt Securities........ 44
Shares Eligible for Future Sale....... 49
Selling Stockholders.................. 50
Legal Matters......................... 50
Experts............................... 50
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
(Logo) SERVICE EXPERTS
$50,000,000
COMMON STOCK
COMMON STOCK WARRANTS
AND DEBT SECURITIES
--------------------
PROSPECTUS
--------------------
March , 1997
======================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person made party to an action by reason of such
person's status as a director, officer, employee or agent of the corporation
against expenses, judgments, fines and settlements provided such person acted
(i) in good faith, (ii) in a manner reasonably believed to be in or not opposed
to the best interests of the Corporation and (iii) with respect to a criminal
action, had no reasonable cause to believe such person's conduct was unlawful.
The termination of an action by a judgment, order, settlement, conviction or
plea of nolo contendere shall not create a presumption that a person did not
meet the standard of conduct set forth above. In actions brought by or in the
right of the corporation, however, the DGCL provides that no indemnification may
be made if the person was adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
was brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper. To the extent that a person is successful, on the merits or
otherwise, in the defense of any proceeding instigated because of his or her
status as a director, officer, employee or agent of a corporation, the DGCL
mandates that the corporation indemnify such person against reasonable expenses
incurred in the proceeding. A corporation may advance litigation expenses,
including attorneys' fees, to a person who is a party to a proceeding upon such
person undertaking to repay such amount if it shall ultimately be determined
that such person is not entitled to indemnification. The indemnification and
advancement of expenses under the DGCL are not deemed exclusive of any other
rights to which a person may be entitled under any bylaw, agreement, vote of
shareholders or disinterested directors or otherwise.
(b) Article VII of the Registrant's Restated Certificate of Incorporation
provides as follows:
(i) The Corporation shall indemnify, and upon request shall advance
expenses (including attorneys' fees) to, in the manner and to the fullest
extent permitted by law, any officer or director (or the estate of any such
person) who was or is a party to, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan (an "indemnitee"). The
Corporation may, to the fullest extent permitted by law, purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, other enterprise or employee benefit plan against any liability
which may be asserted against such person. To the fullest extent permitted
by law, the indemnification and advances provided for herein shall include
expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement. The indemnification provided herein shall not
be deemed to limit the right of the Corporation to indemnify and any other
person for any such expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement to the fullest extent permitted by law, both
as to action in his official capacity and as to action in another capacity
while holding such office.
(ii) Notwithstanding the foregoing, the Corporation shall not
indemnify any such indemnitee who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to secure a judgment in its favor against
such indemnitee with the Corporation, unless and only to the extent that,
the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such indemnitee
is fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
(iii) The rights to indemnification and advancement of expenses set
forth in this Article VII are intended to be greater than those which are
otherwise provided for in the General Corporation Law of the
II-1
<PAGE> 80
State of Delaware, are contractual between the Corporation and the person
being indemnified, his heirs, executors and administrators, and, with
respect to this Article VII are mandatory, notwithstanding a person's
failure to meet the standard of conduct required for permissive
indemnification under the General Corporation Law of the State of Delaware,
as amended from time to time. The rights to indemnification and advancement
of expenses set forth in this Article VII are nonexclusive of other similar
rights which may be granted by law, this Certificate, the Bylaws, a
resolution of the Board of Directors or stockholders or an agreement with
the Corporation, which means of indemnification and advancement of expenses
are hereby specifically authorized.
(iv) Any repeal or modification of the provisions of this Article VII,
either directly or by the adoption of an inconsistent provision of this
Certificate, shall be prospective only and shall not adversely affect any
right or protection set forth herein existing in favor of a particular
individual at the time of such repeal or modification. In addition, if an
amendment to the General Corporation Law of the State of Delaware limits or
restricts in any way the indemnification rights permitted by law as of the
date hereof, such amendment shall apply only to the extent mandated by law
and only to activities of persons subject to indemnification under this
Article VII which occur subsequent to the effective date of such amendment.
(c) The Company has obtained insurance for its directors and executive
officers in amounts of $5,000,000 per claim and $5,000,000 for aggregate claims.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
2.1 -- Form of Agreement and Plan of Merger among certain of the
Combining Companies, a wholly-owned subsidiary of the
Registrant and the Registrant(a)
2.2 -- Form of Combination Agreement between certain of the
Combining Companies and the Registrant(a)
3.1 -- Restated Certificate of Incorporation of the Registrant(b)
3.2 -- Bylaws of the Registrant(b)
4.1 -- Form of Common Stock Certificate(c)
4.2 -- Form of Subordinated Indenture(a)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company(a)
10.1 -- Registrant's 1996 Incentive Stock Plan(b)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(b)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(b)
10.4 -- Form of Combination Agreement by and among each of the
Subsidiaries, each of its respective stockholders and the
Registrant(b)
10.5 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Alan R. Sielbeck(b)
10.6 -- Employment Agreement, dated June 26, 1996, between the
Registrant and James D. Abrams(b)
10.7 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Anthony M. Schofield(b)
10.8 -- Form of Employment Agreement between the Registrant and
certain of its employees(b)
10.9 -- Form of Escrow Agreement between the Registrant, each of the
stockholders of the Subsidiaries and the escrow agent(b)
10.10 -- Form of Equitable Securities Corporation Stock Purchase
Warrant(b)
10.11 -- Loan Agreement, dated September 10, 1996, between the
Registrant and SunTrust Bank, Nashville, N.A.(a)
</TABLE>
II-2
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
21 -- List of subsidiaries of the Registrant(d)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)(a)
24 -- Power of Attorney(a)
</TABLE>
- ---------------
(a) Filed previously.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-21971.
(b) Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by
II-3
<PAGE> 82
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as part of an amendment
to the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of section 310 of the Trust Indenture Act (the "TIA") in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the TIA.
II-4
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 2 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Nashville, State of Tennessee, on March 21 1997.
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
---- -------- ----
<C> <S> <C>
/s/ ALAN R. SIELBECK Chairman of the Board and March 21, 1997
- ----------------------------------------------------- Chief Executive Officer
Alan R. Sielbeck (principal executive
officer)
* President and Chief Operating March 21, 1997
- ----------------------------------------------------- Officer; Director
James D. Abrams
/s/ ANTHONY M. SCHOFIELD Chief Financial Officer March 21, 1997
- ----------------------------------------------------- (principal financial and
Anthony M. Schofield accounting officer)
* Director March 21, 1997
- -----------------------------------------------------
Raymond J. DeRiggi
* Director March 21, 1997
- -----------------------------------------------------
Norman T. Rolf
* Director March 21, 1997
- -----------------------------------------------------
William G. Roth
Director
- -----------------------------------------------------
Timothy G. Wallace
* /s/ ANTHONY M. SCHOFIELD March 21, 1997
---------------------------------------------------
Anthony M. Schofield, Attorney-in-Fact
</TABLE>
II-5
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBITS PAGE
- ------- ----------------------- ------------
<C> <C> <S> <C>
2.1 -- Form of Agreement and Plan of Merger among certain of the
Combining Companies, a wholly-owned subsidiary of the
Registrant and the Registrant(a)
2.2 -- Form of Combination Agreement between certain of the
Combining Companies and the Registrant(a)
3.1 -- Restated Certificate of Incorporation of the Registrant(b)
3.2 -- Bylaws of the Registrant(b)
4.1 -- Form of Common Stock Certificate(c)
4.2 -- Form of Subordinated Indenture(a)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company(a)
10.1 -- Registrant's 1996 Incentive Stock Plan(b)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(b)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(b)
10.4 -- Form of Combination Agreement by and among each of the
Subsidiaries, each of its respective stockholders and the
Registrant(b)
10.5 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Alan R. Sielbeck(b)
10.6 -- Employment Agreement, dated June 26, 1996, between the
Registrant and James D. Abrams(b)
10.7 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Anthony M. Schofield(b)
10.8 -- Form of Employment Agreement between the Registrant and
certain of its employees(b)
10.9 -- Form of Escrow Agreement between the Registrant, each of the
stockholders of the Subsidiaries and the escrow agent(b)
10.10 -- Form of Equitable Securities Corporation Stock Purchase
Warrant(b)
10.11 -- Loan Agreement, dated September 10, 1996, between the
Registrant and SunTrust Bank, Nashville, N.A.(a)
21 -- List of subsidiaries of the Registrant(d)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)(a)
24 -- Power of Attorney(a)
</TABLE>
- ---------------
(a) Filed previously.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(d) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-21971.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 12, 1997 with respect to the financial
statements of Service Experts, Inc., in the Post-Effective Amendment No. 2 to
the Registration Statement (Form S-4 No. 333-12319) and related Prospectus of
Service Experts, Inc. related to $50,000,000 aggregate amount of shares of its
$.01 par value common stock, warrants to purchase its common stock ("Common
Stock Warrants") and the shares of its common stock issued thereunder upon the
exercise of such Common Stock Warrants or debt securities ("Debt Securities"),
and the shares of common stock issued thereunder upon the conversion thereof.
Nashville, Tennessee
March 21, 1997
