<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 18, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SERVICE EXPERTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<C> <C> <C>
DELAWARE 7623 62-1639453
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
1134 MURFREESBORO ROAD
NASHVILLE, TENNESSEE 37217
(615) 391-4600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
ALAN R. SIELBECK
CHIEF EXECUTIVE OFFICER
SERVICE EXPERTS, INC.
1134 MURFREESBORO ROAD
NASHVILLE, TENNESSEE 37217
(615) 391-4600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
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<C> <C>
J. CHASE COLE, ESQ. DONALD I.N. MCKENZIE, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PLLC SHERRARD & ROE, PLC
2100 NASHVILLE CITY CENTER 424 CHURCH STREET
511 UNION STREET SUITE 2000
NASHVILLE, TENNESSEE 37219-1760 NASHVILLE, TENNESSEE 37219
(615) 244-6380 (615) 742-4200
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share............................. 3,680,000 shares $27.75 $102,120,000 $30,946
====================================================================================================================
</TABLE>
(1) Includes up to 480,000 shares of Common Stock which the Underwriters have
the option to purchase from the Company and the Selling Stockholders solely
to cover over-allotments, if any.
(2) Estimated in accordance with Rule 457(c) solely for the purpose of
calculating the registration fee and is based on the average high and low
reported sales prices of the Common Stock on the Nasdaq National Market on
February 14, 1997.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 18, 1997
3,200,000 SHARES
SERVICE EXPERTS LOGO
COMMON STOCK
---------------------
Of the 3,200,000 shares of Common Stock, $.01 par value per share (the
"Common Stock"), of Service Experts, Inc. (the "Company" or "Service Experts")
offered hereby (the "Offering"), 1,850,000 shares are being offered by the
Company and 1,350,000 shares are being offered by certain selling stockholders
of the Company (the "Selling Stockholders"). The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders." The Common Stock of the Company is traded on the
Nasdaq National Market under the symbol "SERX." On February 14, 1997, the last
reported sale price for the Company's Common Stock was $27.88 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
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=================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- -----------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
=================================================================================================================
</TABLE>
(1) See "Underwriting" for a description of the indemnification arrangements
with the Underwriters.
(2) Before deducting expenses estimated at $1,000,000 payable by the Company.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to an additional 380,000 and
100,000 shares of Common Stock, respectively, at the Price to Public, less
the Underwriting Discount, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered to and accepted by them. The
Underwriters reserve the right to reject orders in whole or in part and to
withdraw, cancel or modify the offer without notice. It is expected that
delivery of certificates representing the Common Stock will be made on or about
, 1997.
EQUITABLE SECURITIES CORPORATION
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1997
<PAGE> 3
A map of the continguous 48 states setting forth the location of each
Predecessor Company, Acquired Company, Pending Acquisition and CSG member is
included here.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."
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. Unless otherwise indicated,
the information in this Prospectus does not give effect to the Underwriters'
over-allotment option. The Company completed the initial public offering of its
Common Stock on August 16, 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, 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 23 HVAC businesses (the "Acquired
Companies" and, together with the Predecessor Companies, the "Subsidiaries")
since the IPO with aggregate revenue for the year ended December 31, 1996 of
approximately $76.7 million. The Company currently has agreements in principle
to acquire during the first six months of 1997 eight HVAC businesses (the
"Pending Acquisitions") with aggregate revenue in 1996 of approximately $31.3
million. See "Business -- Acquisitions" for a list of the Acquired Companies and
the companies included in the Pending Acquisitions. The Company's 1996 pro forma
net revenue, giving effect to the acquisition of the Subsidiaries and the
Pending Acquisitions, was approximately $171.9 million.
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 eight companies to be acquired in the Pending Acquisitions, all but two
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 1134 Murfreesboro
Road, Nashville, Tennessee 37217, and its telephone number is (615) 391-4600.
THE OFFERING
Common Stock offered by the Company..... 1,850,000 shares
Common Stock offered by the Selling
Stockholders............................ 1,350,000 shares
Common Stock to be outstanding after the
Offering................................ 13,671,722 shares(1)
Use of Proceeds......................... $15.4 million to fund the cash
portion of the consideration for
the Pending Acquisitions, including
the repayment of certain
indebtedness arising from the
Pending Acquisitions, certain other
indebtedness and capital lease
obligations, and the remainder for
future acquisitions and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol........... SERX
- ---------------
(1) Does not include 758,202 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's stock option plans and
outstanding warrants. See "Management -- Compensation Pursuant to Plans"
and "Description of Capital Stock -- Stock Purchase Warrants." Also does
not include shares of Common Stock to be issued in connection with the
Pending Acquisitions. See "Business -- Acquisitions."
4
<PAGE> 6
SUMMARY FINANCIAL DATA
(DOLLARS 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 ALL
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 $171,910
Cost of goods sold........... 15,999 16,916 30,198 49,250 90,656 110,670
Gross margin................. 6,194 7,960 16,658 27,734 49,998 61,240
Selling, general and
administrative expenses... 5,723 7,162 12,837 18,999 36,619 44,801
Income from operations....... 471 798 3,821 8,735 13,379 16,439
Interest (expense) income,
net....................... (64) (56) 271 459 527 622
Pro forma net income(4)...... 281 466 2,794 6,176 8,487 10,326
Pro forma net income per
share(5).................. $ .63 $ .67 $ .71 $ .81
Pro forma weighted average
shares outstanding(5)..... 4,451 9,245 11,910 12,790
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(3) ADJUSTED(3)(6)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................... $12,387 $(1,112) $ 45,884
Total assets................................... 68,504 99,284 138,801
Total debt..................................... 275 8,344 --
Stockholders' equity........................... 53,071 71,835 119,696
</TABLE>
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(1) Gives effect to the Combination which was accounted for using the historical
cost basis of the Predecessor Companies in accordance with SAB 48.
(2) Gives effect to all transactions completed since the IPO as if such
transactions were completed as of January 1, 1996.
(3) Gives effect to all Pending Acquisitions and transactions completed after
January 1, 1996 as if such transactions were completed as of January 1,
1996. In addition, the pro forma information is based on certain assumptions
and adjustments. See Notes to the Pro Forma Combined Financial Statements.
(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 12,790,388
weighted average shares of Common Stock outstanding, which includes (i)
4,522,546 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) 407,814 shares issued to the former stockholders of the Pooled
Companies, (v) 2,826,672 shares issued to the former stockholders of the
Acquired Companies (other than the Pooled Companies), (vi) 655,381 shares
being issued in this Offering, (vii) 225,406 shares to be issued in the
Pending Acquisitions and (viii) 102,879 shares which reflect the dilutive
effect of the options.
(6) Adjusted to give effect to the application of the net proceeds to the
Company of this Offering, assuming a public offering price of $27.88.
5
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby.
This discussion also identifies important cautionary factors that could
cause the Company's actual results to differ materially from those expressed in
forward-looking statements made 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 23 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 Common
Stock in connection with acquisitions of HVAC businesses. To facilitate its
acquisition strategy, the Company has registered $50 million of additional
equity or debt securities under the Securities Act of 1933, as amended (the
"Securities Act"). 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."
6
<PAGE> 8
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 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."
7
<PAGE> 9
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Following the completion of this Offering, directors, officers and 5%
stockholders of the Company will beneficially own approximately 20.4% of the
outstanding Common Stock. See "Principal and Selling Stockholders." Accordingly,
these persons will have substantial influence over the affairs of the Company,
including the ability to influence the election of directors and other matters
requiring stockholder approval.
CONFLICTS OF INTEREST
Certain executive officers of the Company are owners of HVAC companies that
are not affiliated with the Company. While such executive officers have agreed
to devote their full time efforts to the operations of the Company, there can be
no assurance that they will not periodically devote time and attention to the
operations of HVAC companies that are not affiliated with the Company. Currently
none of the unaffiliated companies owned by such executive officers are located
in geographic areas served by the Company. There can be no assurance that the
Company will not enter the markets served by these companies in the future. See
"Management" and "Certain Transactions."
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
8
<PAGE> 10
salary for the remaining term of the employment agreement. See
"Management -- Employment Agreements."
VOLATILITY OF MARKET PRICE
From time to time, there may be significant volatility in the market price
of the Common Stock. Quarterly operating results of the Company, changes in
earnings estimated by analysts, changes in general conditions in the economy or
the financial markets or other developments affecting the Company could cause
the market price of the Common Stock to fluctuate substantially. In addition, in
recent years the stock market has experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market prices
of securities issued by many companies for reasons unrelated to their operating
performance.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
13,671,722 shares of Common Stock, (14,051,722 shares if the Underwriters'
over-allotment option is exercised in full), of which 5,787,500 shares
(6,267,500 shares if the Underwriters' over-allotment option is exercised in
full) will be 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 will be subject to the resale limitations
of Rule 144 under the Securities Act. Following this Offering, holders of
4,919,275 shares of Common Stock will be eligible to sell such shares pursuant
to Rule 144 (subject to certain limitations) under the Securities Act beginning
in August 1998. The Company, its executive officers and directors and the
Selling Stockholders have agreed not to sell or otherwise dispose of shares of
Common Stock for 120 days after the date of this Prospectus without the prior
approval of Equitable Securities Corporation on behalf of the Underwriters. 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 542,000 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 445,000
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. Following this Offering,
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" and "Underwriting."
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $47.9 million ($57.9 million if
the Underwriters' over-allotment option is exercised in full). The Company will
not receive any of the proceeds from the sale of shares by the Selling
Stockholders.
The Company plans to use approximately $15.4 million of the net proceeds of
the Offering to fund the cash portion of the consideration to be paid in the
Pending Acquisitions, including approximately $7.1 million to repay indebtedness
incurred under the Company's bank credit facilities in connection with the
Pending Acquisitions, and approximately $1.2 million of other indebtedness of
the Company, including debt assumed in connection with the acquisitions and
capital lease obligations. The credit facilities currently bear interest at a
weighted average interest rate of 8.5%. The remaining $32.5 million of the net
proceeds is expected to be used, together with internally generated funds and
borrowings under its credit facility, to fund the acquisition and development of
additional Service Centers and for general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment grade or
government, interest-bearing securities.
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 completed 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)................. $20.25 $15.50
Fourth Quarter............................................ 28.50 19.00
1997
First Quarter (through February 14, 1997)................. $28.25 $25.00
</TABLE>
On February 14, 1997, the last reported sale price of the Common Stock was
$27.88 per share. As of February 14, 1997, there were approximately 168 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."
10
<PAGE> 12
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 Pending Acquisitions and the acquisitions of the Acquired
Companies completed after December 31, 1996 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 Pending Acquisitions, the acquisitions of the Acquired Companies completed
after December 31, 1996 and 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
------- --------- -----------
<S> <C> <C> <C>
Cash........................................................ $10,726 $ 91 $ 39,608
======= ======= ========
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, 12,032,128
shares outstanding pro forma, 13,882,128 shares
outstanding pro forma as adjusted...................... 111 121 140
Additional paid-in capital................................ 48,566 67,320 115,162
Retained earnings......................................... 4,409 4,409 4,409
Equity notes receivable................................... (15) (15) (15)
------- ------- --------
Total stockholders' equity........................ 53,071 71,835 119,696
------- ------- --------
Total capitalization.............................. $53,211 $72,700 $119,696
======= ======= ========
</TABLE>
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS 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 dates of acquisition. The following should be read with
the historical financial statements, the Pro Forma Combined Financial Statements
and 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)........................... (32) (75) (64) (56) 485
Income (loss) before tax......................... 193 63 424 790 4,306
Provision for income taxes....................... 76 (18) 41 82 1,196
------- ------- ------- ------- -------
Net income....................................... $ 117 $ 75 $ 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>
12
<PAGE> 14
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS 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
Subsidiaries and the Pending Acquisitions as if all of these transactions had
been consummated as of January 1, 1996, (ii) the sale of 655,381 shares of
Common Stock in this 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 Pending Acquisitions.
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 $ 31,256
Cost of goods sold.......... 30,198 19,052 49,250 41,406 90,656 20,014
------- ------- ------- ------- -------- --------
Gross margin................ 16,658 11,076 27,734 22,264 49,998 11,242
Selling, general and
administrative expenses... 12,837 6,162 18,999 17,620 36,619 8,182
------- ------- ------- ------- -------- --------
Income from operations...... 3,821 4,914 8,735 4,644 13,379 3,060
Other income (expense):
Interest expense.......... (63) (4) (67) 1 (66) (649)
Interest income........... 334 192 526 67 593 30
Other income (expense).... 214 43 257 (165) 92 55
------- ------- ------- ------- -------- --------
Income before tax........... 4,306 5,145 9,451 4,547 13,998 2,496
Pro forma income tax
expense................... 1,196 2,079 3,275 2,236 5,511 1,100
------- ------- ------- ------- -------- --------
Pro forma net income........ $ 3,110 $ 3,066 $ 6,176 $ 2,311 $ 8,487 $ 1,396
======= ======= ======= ======= ======== ========
Pro forma net income per
share..................... $ 0.67 $ 0.71
Pro forma weighted average
shares outstanding........ 9,245 11,910
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------
PRO FORMA
OFFERING PRO FORMA
ADJUSTMENTS ALL ACQUISITIONS
----------- ----------------
<S> <C> <C>
Net revenues................ -- $171,910
Cost of goods sold.......... -- 110,670
---- --------
Gross margin................ -- 61,240
Selling, general and
administrative expenses... -- 44,801
---- --------
Income from operations...... -- 16,439
Other income (expense):
Interest expense.......... 714(5) --
Interest income........... -- 623
Other income (expense).... -- 147
---- --------
Income before tax........... 714 17,208
Pro forma income tax
expense................... 271(6) 6,882
---- --------
Pro forma net income........ $443 $ 10,326
==== ========
Pro forma net income per
share..................... $ 0.81
Pro forma weighted average
shares outstanding........ 12,790(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 Acquired Companies, other than the Pooled Companies.
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 companies to be acquired in the Pending Acquisitions.
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 12,790,388
weighted average shares of Common Stock outstanding, which includes (i)
4,522,546 shares distributed to the stockholders of the Predecessor
Companies, (ii) 1,462,100 shares outstanding held by existing stockholders
of Service Experts, Inc. (iii) 2,587,500 shares sold in the IPO, (iv)
407,814 shares issued to prior owners of the Pooled Companies, (v)
2,826,672 shares issued to the prior owners of the Acquired Companies,
other than the Pooled Companies, (vi) 655,381 shares being issued in this
Offering, (vii) 225,406 shares to be issued to the owners of the companies
to be acquired in the Pending Acquisitions, and (viii) 102,879 shares which
reflect the dilutive effect of the options.
13
<PAGE> 15
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 12 Service
Centers and CSG 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 23 HVAC businesses. The
consideration paid by the Company for the Acquired Companies was approximately
$58.6 million, consisting of 3.2 million shares of Common Stock and $5.6 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, $45.1 million was allocated to
intangible assets which are to be amortized over a 40-year period. On a pro
forma basis, the Acquired Companies (excluding the Pooled Companies) generated
revenue in 1996 of approximately $63.7 million and contributed operating income
of approximately $4.6 million.
The Company currently has agreements in principle to acquire eight 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 $21.7 million, consisting of 225,406 shares of Common Stock and
$15.4 million in cash. All of the Pending Acquisitions are expected to be
accounted for using the purchase method. Of the purchase price, $16.0 million is
expected to be allocated to intangible assets which are to be amortized over a
40-year period. On a pro forma basis, these companies generated revenue in 1996
of approximately $31.3 million and contributed operating income of approximately
$3.1 million. The Pending Acquisitions are subject to the execution of
definitive agreements containing 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 all completed acquisitions (other than
the acquistion of the Pooled Companies) and the Pending Acquisitions as if they
had occurred on January 1, 1996. 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
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.
14
<PAGE> 16
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.
15
<PAGE> 17
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
Service Centers 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 $1.0 million which was used to repay certain
indebtedness arising from the Combination. The Company has used the remaining
proceeds for working capital and capital expenditures, including the acquisition
of additional Service Centers.
16
<PAGE> 18
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 23 HVAC
businesses for an aggregate of approximately $5.6 million cash and approximately
3.2 million shares of Common Stock. In addition, the Company currently has
agreements in principle to acquire eight HVAC businesses for an aggregate of
approximately $15.4 million cash and approximately 225,406 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. 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 has on file with the Commission a Registration
Statement on Form S-4 (the "Shelf Registration Statement") with a collective
aggregate offering price of $50.0 million for use in future acquisitions of HVAC
businesses. Under the Shelf Registration Statement, the Company may issue shares
of Common Stock, warrants to purchase Common Stock and debt securities in
connection with acquisitions.
Management believes that the proceeds of this 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."
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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, 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 23 HVAC businesses since the IPO with
aggregate revenue for the year ended December 31, 1996 of approximately $76.7
million. The Company currently has agreements in principle to acquire during the
first six months of 1997 eight HVAC businesses with aggregate revenue in 1996 of
approximately $31.3 million. The Company's 1996 pro forma net revenue, giving
effect to the acquisition of the Subsidiaries and the Pending Acquisitions, was
approximately $171.9 million.
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 profitability and
compete effectively with larger operators. Management believes that larger
companies are
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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. See the map appearing on page two of this
Prospectus indicating the location of the current members of CSG. Typically,
these businesses have annual net revenue ranging from $2.0 million to $5.0
million. In evaluating such acquisitions, the Company 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 and Pending Acquisitions
Since the IPO, the Company has acquired 23 HVAC businesses. The
consideration paid by the Company for these businesses was approximately $58.6
million, consisting of 3.2 million shares of Common Stock and $5.6 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, $45.1 million was allocated to intangible assets
which are to be amortized over a 40-year period. On a pro forma basis, these
companies, excluding the Pooled Companies, contributed revenue in 1996 of
approximately $63.7 million and contributed operating income of approximately
$4.6 million.
The Company currently has agreements in principle to acquire eight HVAC
businesses. The transactions are expected to close during the first six months
of 1997. The consideration to be paid by the Company for these businesses is
approximately $21.7 million, consisting of 225,406 shares of Common Stock and
$15.4 million cash. All of these transactions are expected to be accounted for
using the purchase method. Of the purchase price, $16.0 million is expected to
be allocated to intangible assets which are to be amortized over a
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<PAGE> 21
40-year period. On a pro forma basis, these companies generated revenue in 1996
of approximately $31.3 million and contributed operating income of approximately
$3.1 million. The 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.
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 three
HVAC businesses included among the Acquired Companies were consolidated
following acquisition) in 31 market areas in 17 states.
The following table sets forth certain information with respect to the
Company's existing Service Centers and the Pending Acquisitions:
<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
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, Inc............. Norman, OK December 1, 1996
Pardee Refrigeration Company Incorporated... Charleston, SC December 1, 1996
Sanders Indoor Comfort, Inc................. Greeneville, SC December 1, 1996
</TABLE>
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<TABLE>
<CAPTION>
COMPANY MARKET EFFECTIVE DATE
- ------- ------ --------------
<S> <C> <C>
ACQUIRED COMPANIES (CONT'D)
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
PENDING ACQUISITIONS
C. Iapaluccio Co., Inc...................... Danbury, CT
Claire's Air Conditioning and Refrigeration,
Inc....................................... Midland, TX
Claire & Sanders, Inc....................... Midland, TX
Royden, Inc................................. Provo, UT
Piedmont Air Conditioning, Inc.............. Raleigh, NC
Roland Down, Inc............................ Albany, NY
Stark Services Company, Inc................. Dallas, TX
Lewis & Guymon, Inc. ....................... Orem, UT
</TABLE>
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, random
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 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
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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. 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.
In addition, 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 has a cash
bonus program for each Service Center pursuant to which managers may earn
bonuses based on the performance of the Service Center and the Company relative
to established goals set by the Service Center's president and the Company. The
Service Centers 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 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
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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 $3.2 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, 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 CSG-member 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
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<PAGE> 25
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 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 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
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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.
Maintenance and Service Agreements
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, warranties provided for in the Company's service agreements may be
deemed insurance contracts by applicable state insurance regulatory agencies
thereby subjecting the Company and the service agreements to the insurance laws
and regulations of any such state. In such states, the Company insures its
service agreements through licensed insurers. Management believes that the
Company has made adequate provision for potential claims under these agreements.
See "Regulation."
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
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<PAGE> 27
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 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 each
Service Center by two corporate trainers.
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<PAGE> 28
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 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
27
<PAGE> 29
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 1,250 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
in 1996 was approximately $295,000. The Company generally plans to continue to
lease rather than purchase space for the Service Centers to maximize the
Company's available capital.
The Company's corporate headquarters are located in approximately 6,580
square feet of space in Nashville, 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 Service Centers may, from time to time, be parties
to litigation or administrative proceedings which arise in the normal course of
their businesses.
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<PAGE> 30
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. Mr. Abrams has served
as President of CSG, one of the Subsidiaries, since 1996. From 1990 to 1996, Mr.
Abrams served as Chief Executive Officer and a director of CSG. Mr. Abrams has
served as President of Air Experts and Service Experts of Palm Springs, Inc.,
each a Subsidiary, since 1993. Mr. Abrams has served as President and sole
director of Air Comfort Services, Inc., an HVAC service and replacement business
located in Sarasota, Florida, since 1988. Mr. Abrams served, from 1992 to 1996,
as Chairman and President of Service Now, Inc. ("Service Now"), a holding
company that owns several HVAC businesses, and prior to the Combination owned
Air Experts and Service Experts of Palm Springs, Inc. He resigned from his
positions with Service Now prior to the closing of the Combination and the IPO.
Mr. Abrams previously served as Chief Executive Officer and a director of Future
University from 1991 to 1995. Mr. Abrams currently serves on the Advisory Board
of Boatmen's National Bank (Southern Region).
Anthony M. Schofield has served as Chief Financial Officer, Secretary and
Treasurer of the Company since June 1996. From 1982 to 1996, Mr. Schofield
served as Cost Manager, Vice-President-Controller, Senior Vice-President of
Finance, and Division Controller for Perrigo Company of Tennessee, formerly
Cumberland-Swan, Inc., a manufacturer of personal care health and beauty aid
products. Mr. Schofield is
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<PAGE> 31
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. Reese 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> 32
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 $-- 40,000
Chairman of the Board and Chief Executive
Officer
James D. Abrams................................... 1996 86,538 -- 40,000
President and Chief Operating Officer
Anthony M. Schofield.............................. 1996 55,000 -- 40,000
Chief Financial Officer
</TABLE>
- ---------------
(1) Does not include amounts paid by the Company's Subsidiaries prior to the
Combination in August 1996.
Options Granted in Last Fiscal Year
The following table summarizes certain information regarding stock options
issued to the Company's executive officers during 1996. No stock appreciation
rights ("SARs") have been granted by the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK APPRECIATION FOR
SECURITIES OPTIONS GRANTED EXERCISE OPTION TERM
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME OPTIONS GRANTED FISCAL 1996 ($/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 $13.00, the
exercise price of the options granted.
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<PAGE> 33
Options Exercised in Last Fiscal Year, Fiscal Year End Option Values
No options were exercised in the year ended December 31, 1996. The
following table summarizes certain information regarding year end option values
of the Company's executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS HELD AT OPTIONS HELD AT
DECEMBER 31, 1996 DECEMBER 31, 1996($)(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
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<PAGE> 34
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.
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<PAGE> 35
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."
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<PAGE> 36
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 expects to make payments to SuccessWare in
1997 of approximately $200,000. 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.
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.
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
35
<PAGE> 37
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.
36
<PAGE> 38
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of the Common Stock, as of the date hereof and giving effect to the Offering, 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, (iii) all directors and executive officers of the
Company as a group and (iv) the Selling Stockholders. Unless otherwise
indicated, each of the stockholders listed below has sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING(1) BE SOLD OFFERING(1)(2)
------------------- IN THE -------------------------
DIRECTORS, OFFICERS AND 5% STOCKHOLDERS NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------- --------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Alan R. Sielbeck(3).................... 820,255 6.9% --(4) 820,255 6.0%
James D. Abrams(5)..................... 991,914(6) 8.4 200,000 587,900 4.3
John R. Young(7)....................... 970,627(6) 8.2 80,000 686,613 5.0
R. Edward Hutton, Jr.(3)............... 820,256 6.9 266,305 553,951 4.1
Anthony M. Schofield................... 3,000 * -- 3,000 *
Raymond J. De Riggi(8)................. 6,000 * -- 6,000 *
Timothy G. Wallace(8).................. 6,000 * -- 6,000 *
William G. Roth(8)..................... 6,000 * -- 6,000 *
Norman T. Rolf, Jr..................... 138,958 1.1 13,500 125,458 *
All executive officers and directors as
a group (seven persons)(6)........... 1,972,127(6) 16.7% 213,500 1,554,613 11.4%
OTHER SELLING STOCKHOLDERS
Peter G.B. Franck...................... 326,419 2.8 80,000 246,419 1.8
William C. Efird, Jr................... 243,988 2.1 43,988 200,000 1.5
Service Now, Inc....................... 204,014 1.7 204,014 -- --
Donald J. Luedtke...................... 111,888 * 35,000 76,888 *
Michael S. Robinson.................... 111,888 * --(4) 111,888 *
Randall V. Rolf........................ 134,316 1.1 40,000 94,316 *
Steve Burbridge........................ 250,616 2.1 62,654 187,962 1.4
Mark Randall Gilley.................... 164,524 1.4 40,000 124,524 *
Gary L. Anderson....................... 55,465 * 5,000 50,465 *
Kenneth D. Lowe........................ 52,434 * 2,600 49,834 *
Gene Sylvester......................... 77,967 * 19,000 58,967 *
A. Bruce Morain, Jr.................... 129,885 1.1 14,885 115,000 *
Clinton Davenport...................... 77,080 * 17,080 60,000 *
Richard Osgood......................... 77,080 * 20,000 57,080 *
Glenn T. Ratliff....................... 91,206 * 10,000 81,206 *
Alton B. Smith......................... 36,482 * 4,000 32,482 *
Lonald Cassell......................... 36,418 * 10,000 26,418 *
James T. Mann.......................... 17,421 * 2,351 15,070 *
Michele Mann........................... 17,421 * 2,351 15,070 *
David E. Gregg......................... 81,298 * 20,000 61,298 *
Richard Iorio.......................... 260,527 2.2 85,000 175,527 1.3
Russell Deutch......................... 1,272 * 1,272 -- --
Don Wright............................. 190,946 1.6 71,000 119,946 *
Robert E. Reece........................ 45,865 * --(4) 45,865 *
Total Selling Stockholders... 1,350,000
</TABLE>
- ---------------
* Represents less than 1%.
Footnotes on following page.
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<PAGE> 39
(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) Assumes no exercise of the Underwriters' over-allotment option.
(3) The indicated person's address is c/o Service Experts, Inc., 1134
Murfreesboro Road, Nashville, Tennessee 37217.
(4) Messrs. Sielbeck, Robinson and Reece have agreed to sell up to 55,000,
35,000 and 10,000 shares, respectively, pursuant to the Underwriters'
over-allotment option. See "Underwriting."
(5) Mr. Abrams's address is c/o Contractor Success Group, Inc., 16141 North
Outer Forty Drive, Suite 310, Chesterfield, Missouri 63017.
(6) Includes 204,014 shares issued to Service Now, the sole stockholder of two
of the Predecessor Companies, in connection with the Combination. Messrs.
Abrams and Young are principal stockholders of Service Now.
(7) Mr. Young's address is c/o John Young & Associates, 13950 Switzer, Overland
Park, Kansas 66221.
(8) Includes 6,000 shares subject to outstanding options held by such
individuals.
(9) Includes 18,000 shares subject to outstanding options held by such
individuals.
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<PAGE> 40
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 30,000,000 shares of Common Stock, $.01
par value per share, and 10,000,000 shares of preferred stock, $.01 par value
per share (the "Preferred Stock"). Upon completion of the Offering, the Company
will have 13,671,722 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 900,000 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. See "Management -- Compensation Pursuant to Plans." As of February 14,
1997, there were approximately 168 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. For a description of certain registration
rights attached to warrants to purchase Common Stock, see "Underwriting."
PREFERRED STOCK
The Board of Directors has the authority, without any further vote or
action of the stockholders of the Company, to issue shares of the Preferred
Stock in one or more series and to fix the number of shares, designations,
relative rights (including voting rights), preferences and limitations of such
series to the fullest extent now or hereafter permitted by Delaware law. The
Company has no present intention to issue any series of Preferred Stock.
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
39
<PAGE> 41
that eliminate the personal liability of the Company's directors for monetary
damages resulting from breaches of their fiduciary duty other than liability for
breaches of the director's duty of loyalty to the Company or its stockholders,
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, violations under Section 174 of the Delaware
General Corporation Law, or for any transaction from which the director derived
an improper personal benefit. The Company believes that these provisions are
essential to attracting and retaining qualified persons as officers and
directors.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
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 and Directors." 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.
40
<PAGE> 42
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.
Upon completion of the Offering, the Company will have outstanding
13,671,722 shares of Common Stock of which 5,787,500 shares (6,267,500 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restrictions or further registration under the Securities Act,
unless purchased by "affiliates" of the Company as that term is defined in Rule
144 under the Securities Act ("Rule 144").
In connection with the Combination, 4,522,636 shares were issued and sold
by the Company in private transactions in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act and are restricted
securities under Rule 144. These shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, pursuant to Rule 144. In general, under Rule 144 as
currently in effect, a person who has beneficially owned these shares for at
least two years, including "affiliates" of the Company, would be entitled to
sell in broker's transactions or to market makers within any three-month period
a number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock or the average weekly trading volume of the
Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions and
notice requirements and to the availability of current public information
concerning the Company. A person (or person whose shares are aggregated) who is
not an "affiliate" of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned such shares for at least three years, is
currently entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions or notice requirements. The above is a summary of Rule 144 and is not
intended to be a complete description thereof.
In connection with acquisitions completed after the Combination, the
Company issued 3,249,486 shares of Common Stock pursuant to the Shelf
Registration Statement, approximately 542,000 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 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 445,000 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.
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<PAGE> 43
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 the date of this Prospectus without the prior written consent of
Equitable Securities Corporation on behalf of the Underwriters. See
"Underwriting."
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<PAGE> 44
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement"), to purchase from the Company the numbers of shares of
Common Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Equitable Securities Corporation............................
Alex. Brown & Sons Incorporated.............................
A.G. Edwards & Sons, Inc....................................
Morgan Keegan & Company, Inc................................
---------
Total............................................. 3,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase all of the shares of
Common Stock offered hereby if any are purchased.
The Underwriters propose to offer the shares of Common Stock being
purchased directly to the public at the initial offering price set forth on the
cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the Offering, the offering price and other selling
terms may be changed.
The Company and certain Selling Stockholders have granted the Underwriters
a 30-day option to purchase up to an additional 380,000 and 100,000 shares of
Common Stock, respectively, at the offering price less the underwriting discount
set forth on the cover page of this Prospectus to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option to purchase any of the
480,000 additional shares of Common Stock from the Company and certain Selling
Stockholders, the Underwriters have severally agreed, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by each of them as shown in the
above table bears to the 3,200,000 shares of Common Stock offered hereby. The
Underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby.
The Company, its directors and executive officers and certain stockholders
have agreed that they will not offer, pledge, issue, sell, contract to sell,
grant any option for the sale of or otherwise dispose of any shares of Common
Stock or any securities convertible into, or exercisable or exchangeable for,
any shares of Common Stock for a period of 120 days after the date of this
Prospectus without the prior written consent of Equitable Securities Corporation
on behalf of the Underwriters; provided, however, the Company may (i) grant
stock options under, and issue shares of Common Stock upon the exercise of
outstanding stock options granted under, the Company's Incentive Stock Plan, and
(ii) issue securities in connection with acquisitions of Service Centers.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and controlling persons, if any, against, certain liabilities,
including liabilities under the Securities Act or will contribute to the
payments the Underwriters or any controlling persons may be required to make in
respect thereof.
The rules of the Commission generally prohibit the Underwriters from making
a market in the Common Stock during the business day prior to commencement of
sales in a public offering (the "Cooling Off Period"). The Commission has,
however, adopted Rule 103 of Regulation M ("Rule 103") which provides an
exemption from such prohibition for certain passive market making transactions.
Such passive market making transactions must comply with applicable price and
volume limits and must be identified as passive market making transactions. In
general, pursuant to Rule 103, a passive market maker may display its bid for a
security at a price not in excess of the highest independent bid for the
security. If independent bids are lowered below the passive market maker's bid,
however, the bid must then be lowered when certain purchase limits are
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<PAGE> 45
exceeded. Further, net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in a security during a specified prior period and
must be discontinued when this limit is reached. Pursuant to the exemption
provided by Rule 103, certain of the Underwriters and selling group members may
engage in passive market making in the Common Stock during the Cooling Off
Period. Passive market making may stabilize the market price of the Common Stock
at a level above that which might otherwise prevail and if commenced, may be
discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Waller Lansden Dortch & Davis, A
Professional Limited Liability Company, Nashville, Tennessee, counsel to the
Company. Certain legal matters will be passed upon for the Underwriters by
Sherrard & Roe, PLC, Nashville, Tennessee.
EXPERTS
The financial statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1, including
amendments thereto, relating to the Common Stock offered hereby (the
"Registration Statement") with the Commission. This Prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to 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 Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules.
The Company is subject to the information requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. The Registration Statement, as well as such
reports, proxy statements and other information, may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. In addition, the Commission maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission at
http://www.sec.gov. The Company's Common Stock is quoted on the Nasdaq National
Market, and such reports, proxy statements and other information may be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
44
<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINING
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-8
Consolidated Balance Sheet.................................. F-9
Consolidated Statements of Income........................... F-11
Consolidated Statements of Stockholders' Equity............. F-12
Consolidated Statements of Cash Flows....................... F-13
Notes to Consolidated Financial Statements.................. F-14
</TABLE>
F-1
<PAGE> 47
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 Subsidiaries
in the Combination. In accordance with the provisions of SAB 97, the historical
financial statements of the Company for periods prior to August 21, 1996 are the
combined financial statements of the Acquiring Company. 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
date 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 the Acquired Companies and the 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 23 additional acquisitions (the "Acquired Companies"), of which two
have been accounted for as poolings of interests. The 23 Acquired Companies are
Freschi Air Systems, Inc., Dial One Raymond's Plumbing, Heating & Cooling, Inc.,
Gaddis Co., Custom Air Conditioning, Inc., 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 Pending Acquisitions are C. Iapaluccio Co., Inc., Claire's
Air Conditioning and Refrigeration, Inc., Clair & Sanders, Inc., Royden, Inc.,
Piedmont Air Conditioning, Inc., Roland Down, Inc., Stark Services Company, Inc.
and Lewis & Guymon, Inc.
The unaudited pro forma combined financial statements have been prepared by
the Company based on the historical financial statements of the Company, the
Subsidiaries, and the Pending Acquisitions included elsewhere in this
Prospectus, and certain preliminary estimates and assumptions deemed appropriate
by management of the Company. These pro forma combined financial statements may
not be indicative of actual results as if the Combination and the Pending
Acquisitions had occurred on the dates indicated or which may be realized in the
future. Neither expected benefits nor cost reductions anticipated by the Company
following consummation of the acquisitions of the Subsidiaries have been
reflected in such pro forma combining financial statements. The pro forma
combining balance sheet as of December 31, 1996, gives effect to the acquisition
of the Pending Acquisitions 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 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> 48
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 PRO FORMA OFFERING PRO FORMA
COMPANY DECEMBER 31, 1996 AS ADJUSTED ADJUSTMENTS AS ADJUSTED ADJUSTMENTS AS ADJUSTED
------- ----------------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $10,726 $ 1,257 $ 605 $(15,389)(c) $ 91 $47,861(d) $ 39,608
(673)(a) (8,344)(e) --
(3,535)(b) -- --
7,100(c) -- --
------- ------- ------- -------- ------- ------- --------
Receivables:
Trade receivables,
net................... 9,048 1,044 2,813 -- 12,905 -- 12,905
Related party........... 129 23 12 -- 164 -- 164
Employee................ 113 25 6 -- 144 -- 144
Other................... 208 (8) 84 -- 284 -- 284
------- ------- ------- -------- ------- ------- --------
9,498 1,084 2,915 -- 13,497 -- 13,497
Inventories............... 3,923 870 2,179 -- 6,972 -- 6,972
Cost and estimated
earnings in excess of
billings................ 283 -- 22 -- 305 -- 305
Prepaid expenses and other
current assets.......... 697 137 725 -- 1,559 -- 1,559
Current portion of notes
receivable -- related
parties................. 14 -- 14 -- 14
Current portion of notes
receivable -- other..... 286 -- 247 -- 533 -- 533
Deferred income taxes..... 1,893 222 -- -- 2,115 -- 2,115
------- ------- ------- -------- ------- ------- --------
Total current
assets.......... 27,320 3,570 6,693 (12,497) 25,086 39,517 64,603
Property, buildings and
equipment, net.......... 6,329 1,289 1,634 1,000(c) 10,252 -- 10,252
Notes
receivable -- related
parties................. 352 -- 15 -- 367 -- 367
Notes
receivable -- other..... 500 -- -- -- 500 -- 500
Investment in affiliate... 674 5 1 -- 680 -- 680
Long-term deferred income
taxes................... 3 3 -- 3
Goodwill.................. 33,032 85 1 12,817(b) 61,928 -- 61,928
15,993(c)
Other assets.............. 297 46 125 -- 468 -- 468
------- ------- ------- -------- ------- ------- --------
Total assets...... $68,504 $ 4,998 $ 8,469 $ 17,313 $99,284 $39,517 $138,801
======= ======= ======= ======== ======= ======= ========
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 2,244 -- 8,473 -- 8,473
Cash consideration
payable............... 1,495 -- -- (1,495)(b) -- -- --
Accrued compensation.... 1,601 756 80 (673)(a) 1,764 -- 1,764
Accrued warranties...... 963 121 -- -- 1,084 -- 1,084
Income taxes payable.... 1,723 57 150 -- 1,930 -- 1,930
Deferred revenue........ 3,502 909 24 -- 4,435 -- 4,435
Billings in excess of
costs and estimated
earnings.............. 340 5 688 -- 1,033 -- 1,033
Current portion of
long-term debt and
capital lease
obligations........... 135 59 15 -- 209 (209)(e) --
------- ------- ------- -------- ------- ------- --------
Total current
liabilities..... 14,933 3,110 3,223 4,932 26,198 (7,479) 18,719
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 -- 386
Common stock.............. 111 -- -- 8(b) 121 19(d) 140
2(c)
Additional
paid-in-capital......... 48,566 -- -- 12,473(b) 67,320 47,842(d) 115,162
6,281(c) --
Retained earnings......... 4,409 1,704 4,679 (4,679)(c) 4,409 -- 4,409
(1,704)(b) --
Equity note receivable.... (15) -- -- -- (15) -- (15)
------- ------- ------- -------- ------- ------- --------
$68,504 $ 4,998 $ 8,469 $ 17,313 $99,284 $39,517 $138,801
======= ======= ======= ======== ======= ======= ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-3
<PAGE> 49
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 PENDING
COMPANY PREDECESSOR ADJUSTMENTS COMPANIES COMPANIES ADJUSTMENTS COMPANIES ACQUISITIONS
------- ----------- ----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues......... $46,856 $30,128 $ -- $76,984 $63,670 $ -- $140,654 $31,256
Cost of goods sold... 30,198 19,052 -- 49,250 41,547 (141)(j) 90,656 19,997
------- ------- ------- ------- ------- ------- -------- -------
Gross margin......... 16,658 11,076 -- 27,734 22,123 141 49,998 11,259
Selling, general and
administrative
expenses........... 12,837 8,670 (2,508)(f) 18,999 20,613 (2,993)(k) 36,619 8,410
------- ------- ------- ------- ------- ------- -------- -------
Income from
operations......... 3,821 2,406 2,508 8,735 1,510 3,134 13,379 2,849
Other income
(expense):
Interest expense... (63) (216) 212(g) (67) (237) 238(l) (66) (45)
Interest income.... 334 192 -- 526 67 -- 593 30
Other income
(expense)........ 214 3 40(h) 257 (165) -- 92 55
------- ------- ------- ------- ------- ------- -------- -------
485 (21) 252 716 (335) 238 619 40
------- ------- ------- ------- ------- ------- -------- -------
Income before tax.... 4,306 2,385 2,760 9,451 1,175 3,372 13,998 2,889
Provision for income
taxes.............. 1,196 324 1,755(i) 3,275 40 2,196(m) 5,511 16
------- ------- ------- ------- ------- ------- -------- -------
Net income $3,110 $ 2,061 $ 1,005 $ 6,176 $ 1,135 $ 1,176 $ 8,487 $ 2,873
======= ======= ======= ======= ======= ======= ======== =======
Pro forma net income
per share.......... $ 0.67 $ 0.71
Pro forma weighted
average shares
outstanding........ 9,245 11,910
<CAPTION>
PRO FORMA
PENDING PRO FORMA PRO FORMA
ACQUISITIONS PENDING OFFERING PRO FORMA
ADJUSTMENTS ACQUISITIONS ADJUSTMENTS ALL ACQUISITIONS
------------ ------------ ----------- ----------------
<S> <C> <C> <C> <C>
Net revenues......... $ -- $171,910 $ -- $171,910
Cost of goods sold... 17(n) 110,670 -- 110,670
------- -------- ---- --------
Gross margin......... (17) 61,240 -- 61,240
Selling, general and
administrative
expenses........... (228)(o) 44,801 -- 44,801
------- -------- ---- --------
Income from
operations......... 211 16,439 -- 16,439
Other income
(expense):
Interest expense... (604)(p) (715) 714 (1)
Interest income.... -- 623 -- 623
Other income
(expense)........ -- 147 -- 147
------- -------- ---- --------
(604) 55 714 769
------- -------- ---- --------
Income before tax.... (393) 16,494 714 17,208
Provision for income
taxes.............. 1,084(q) 6,611 271 6,882
------- -------- ---- --------
Net income $(1,477) $ 9,883 $443 $ 10,326
======= ======== ==== ========
Pro forma net income
per share.......... $ 0.81
Pro forma weighted
average shares
outstanding........ 12,790
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-4
<PAGE> 50
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 $15,389,000
in cash and 225,406 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
($1,000,000) and underwriting commissions ($2,707,000). The net proceeds are
reflected as: (i) $47,861,000 of cash, (ii) $18,500 of 1,850,000 shares of
common stock, (iii) $47,843,000 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 owner's 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 such 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> 51
<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 owner's 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> 52
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 owner's compensation.............. $ (885)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 506
(iii) Elimination of administrative expense allocation............ (249)
(iv) Goodwill amortization....................................... 400
-------
$ (228)
=======
(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................................................ $ 700
(ii) Additional income taxes on adjustments (n) thru (p)......... 232
(iii) Additional tax provision for state and federal taxes due to
the non-deductibility of goodwill........................... 152
-------
$ 1,084
=======
PRO FORMA STATEMENT OF INCOME ADJUSTMENTS -- OFFERING ADJUSTMENTS
(r) REFLECTS THE FOLLOWING ADJUSTMENT TO INTEREST EXPENSE:
(i) Elimination of interest expense on debt retired............. $ 714
=======
(s) REFLECTS THE FOLLOWING ADJUSTMENT TO INCOME TAXES:
(i) Additional income taxes on adjustment (r)................... $ 271
=======
</TABLE>
F-7
<PAGE> 53
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-8
<PAGE> 54
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-9
<PAGE> 55
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; 50,000,000 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-10
<PAGE> 56
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-11
<PAGE> 57
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-12
<PAGE> 58
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 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-13
<PAGE> 59
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-14
<PAGE> 60
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-15
<PAGE> 61
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-16
<PAGE> 62
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,
the Company exchanged 1,462,100 shares of Common Stock to the promoters of the
IPO and 3,369,448 shares of Common Stock and a distribution of $18,699,000 in
cash 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 & Air Conditioning, 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") for 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 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
F-17
<PAGE> 63
SERVICE EXPERTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-18
<PAGE> 64
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-19
<PAGE> 65
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 prohibits 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 14).
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-20
<PAGE> 66
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-21
<PAGE> 67
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-22
<PAGE> 68
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-23
<PAGE> 69
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-24
<PAGE> 70
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 letters of intent
to acquire eight HVAC businesses. Pursuant to these agreements, 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-25
<PAGE> 71
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY UNDERWRITER. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 10
Price Range of Common Stock and
Dividend Policy..................... 10
Capitalization........................ 11
Selected Consolidated Financial
Data................................ 12
Selected Pro Forma Combined Financial
Data................................ 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 18
Management............................ 29
Certain Transactions.................. 35
Principal and Selling Stockholders.... 37
Description of Capital Stock.......... 39
Shares Eligible for Future Sale....... 41
Underwriting.......................... 43
Legal Matters......................... 44
Experts............................... 44
Available Information................. 44
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
3,200,000 SHARES
SERVICE EXPERTS LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
EQUITABLE SECURITIES
CORPORATION
ALEX. BROWN & SONS
INCORPORATED
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN &
COMPANY, INC.
, 1997
======================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 30,946
National Association of Securities Dealers, Inc. Fee........ 10,712
Nasdaq National Market Fee.................................. 17,500
*State Qualification Expenses (including legal fees)........ 10,000
*Printing Expenses.......................................... 250,000
*Legal Fees and Expenses.................................... 250,000
*Auditors' Fees and Expenses................................ 250,000
*Transfer Agent and Registrar Fees.......................... 5,000
*Miscellaneous Expenses..................................... 175,842
----------
*Total............................................ $1,000,000
==========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person made party to an action by reason of such
person's status as a director, officer, employee or agent of the corporation
against expenses, judgments, fines and settlements provided such person acted
(i) in good faith, (ii) in a manner reasonably believed to be in or not opposed
to the best interests of the Corporation and (iii) with respect to a criminal
action, had no reasonable cause to believe such person's conduct was unlawful.
The termination of an action by a judgment, order, settlement, conviction or
plea of nolo contendere shall not create a presumption that a person did not
meet the standard of conduct set forth above. In actions brought by or in the
right of the corporation, however, the DGCL provides that no indemnification may
be made if the person was adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery or the court in which such action
was brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which the court shall
deem proper. To the extent that a person is successful, on the merits or
otherwise, in the defense of any proceeding instigated because of his or her
status as a director, officer, employee or agent of a corporation, the DGCL
mandates that the corporation indemnify such person against reasonable expenses
incurred in the proceeding. A corporation may advance litigation expenses,
including attorneys' fees, to a person who is a party to a proceeding upon such
person undertaking to repay such amount if it shall ultimately be determined
that such person is not entitled to indemnification. The indemnification and
advancement of expenses under the DGCL are not deemed exclusive of any other
rights to which a person may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
(b) Article VII of the Registrant's Restated Certificate of Incorporation
provides as follows:
(i) The Corporation shall indemnify, and upon request shall advance
expenses (including attorneys' fees) to, in the manner and to the fullest
extent permitted by law, any officer or director (or the estate of any such
person) who was or is a party to, or is threatened to be made a party to,
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, investigative or otherwise, by reason of
the fact that such person is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan (an "indemnitee"). The Corporation may, to the
fullest extent permitted by law, purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, other enterprise or
employee benefit plan against
II-1
<PAGE> 73
any liability which may be asserted against such person. To the fullest
extent permitted by law, the indemnification and advances provided for
herein shall include expenses (including attorneys' fees), judgments,
penalties, fines and amounts paid in settlement. The indemnification
provided herein shall not be deemed to limit the right of the Corporation
to indemnify any other person for any such expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement to the fullest
extent permitted by law, both as to action in his official capacity and as
to action in another capacity while holding such office.
(ii) Notwithstanding the foregoing, the Corporation shall not
indemnify any such indemnitee who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or
in the right of the Corporation to secure a judgment in its favor against
such indemnitee with respect to any claim, issue or matter as to which the
indemnitee shall have been adjudged to be liable to the Corporation, unless
and only to the extent that, the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances
of the case, such indemnitee is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall
deem proper.
(iii) The rights to indemnification and advancement of expenses set
forth in this Article VII are intended to be greater than those which are
otherwise provided for in the General Corporation Law of the State of
Delaware, are contractual between the Corporation and the person being
indemnified, his heirs, executors and administrators, and, with respect to
this Article VII are mandatory, notwithstanding a person's failure to meet
the standard of conduct required for permissive indemnification under the
General Corporation Law of the State of Delaware, as amended from time to
time. The rights to indemnification and advancement of expenses set forth
in this Article VII are nonexclusive of other similar rights which may be
granted by law, this Certificate, the Bylaws, a resolution of the Board of
Directors or stockholders or an agreement with the Corporation, which means
of indemnification and advancement of expenses are hereby specifically
authorized.
(iv) Any repeal or modification of the provisions of this Article VII,
either directly or by the adoption of an inconsistent provision of this
Certificate, shall be prospective only and shall not adversely affect any
right or protection set forth herein existing in favor of a particular
individual at the time of such repeal or modification. In addition, if an
amendment to the General Corporation Law of the State of Delaware limits or
restricts in any way the indemnification rights permitted by law as of the
date hereof, such amendment shall apply only to the extent mandated by law
and only to activities of persons subject to indemnification under this
Article VII which occur subsequent to the effective date of such amendment.
(c) The Underwriting Agreement (set forth in Exhibit 1 hereto) provides for
the indemnification by the Underwriters of the Company, each of the Company's
directors, each of the Company's officers who signs this Registration Statement
and each person who controls the Company within the meaning of the Securities
Act, solely with respect to information provided by the Underwriters for
inclusion in this Registration Statement.
(d) The Company has obtained insurance for its directors and executive
officers in amounts of $3,000,000 per claim and $3,000,000 for aggregate claims.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as described in this section, no securities of the Company have been
sold by the Company within the past three years without registration under the
Securities Act.
On March 27, 1996, the Company issued an aggregate of 1,000,000 shares of
Common Stock to Alan R. Sielbeck, James D. Abrams, John R. Young and R. Edward
Hutton, Jr. for their services in forming the Company, developing its business
plans and procedures and in acquiring the Predecessor Companies. The private
placement transaction did not involve a public offering and was, therefore,
exempt from the registration requirements of the Securities Act in reliance upon
Section 4(2).
II-2
<PAGE> 74
On August 21, 1996, upon closing of the Combination, the Company issued
4,522,636 shares of Common Stock in a private placement transaction exempt from
the registration requirements of the Securities Act in reliance upon Section
4(2) and Regulation D promulgated thereunder. The private placement of
securities in connection with the Combination is exempt under Section 4(2)
because the transaction did not involve any public offering. No general
solicitation or advertising was utilized in connection with the private
placement. The shares were issued in exchange for ownership interests in the
Predecessor Companies.
In August 1996, the Company granted options to purchase 40,000 shares under
the Incentive Plan and 15,000 shares under its Director Plan. Such grants were
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2).
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4 -- Form of Common Stock Certificate(b)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
10.1 -- Registrant's 1996 Incentive Stock Plan(a)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(a)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(a)
10.4 -- Form of Combination Agreement by and among each of the
Predecessor Companies, each of its respective stockholders
and the Registrant(a)
10.5 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Alan R. Sielbeck(a)
10.6 -- Employment Agreement, dated June 26, 1996, between the
Registrant and James D. Abrams(a)
10.7 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Anthony M. Schofield(a)
10.8 -- Form of Employment Agreement between the Registrant and
certain of its employees(a)
10.9 -- Form of Escrow Agreement between the Registrant, each of the
stockholders of the Subsidiaries and the escrow agent(a)
10.10 -- Form of Equitable Securities Corporation Stock Purchase
Warrant(a)
10.11 -- Loan Agreement, dated September 10, 1996, between the
Registrant and SunTrust Bank, Nashville, N.A.(c)
10.12 -- Form of Agreement and Plan of Merger among certain of the
Subsidiaries, a wholly-owned subsidiary of the Registrant
and the Registrant(c)
10.13 -- Form of Combination Agreement between certain of the
Subsidiaries and the Registrant(c)
11 -- Statement re Computation of Per Share Earnings
21 -- List of subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
24 -- Power of Attorney (set forth on Page II-5)
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, File No. 333-12319.
II-3
<PAGE> 75
(b) Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on February 18, 1997.
SERVICE EXPERTS, INC.
By: /s/ ALAN R. SIELBECK
------------------------------------
Alan R. Sielbeck
Chairman and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan R. Sielbeck and Anthony M. Schofield, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, and resubstitution, for him in his name, place and stead, in
any and all capacities (until revoked in writing), to sign any and all
amendments to this Registration Statement (including post-effective amendments
and amendments thereto) and any registration statement relating to the same
offering as this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
---- -------- ----
<C> <S> <C>
/s/ ALAN R. SIELBECK Chairman of the Board and February 18, 1997
- ----------------------------------------------------- Chief Executive Officer
Alan R. Sielbeck (principal executive
officer)
/s/ JAMES D. ABRAMS President, Chief Operating February 18, 1997
- ----------------------------------------------------- Officer and Director
James D. Abrams
/s/ ANTHONY M. SCHOFIELD Chief Financial Officer February 18, 1997
- ----------------------------------------------------- (principal financial and
Anthony M. Schofield accounting officer)
/s/ RAYMOND J. DE RIGGI Director February 18, 1997
- -----------------------------------------------------
Raymond J. De Riggi
/s/ NORMAN T. ROLF Director February 18, 1997
- -----------------------------------------------------
Norman T. Rolf
/s/ WILLIAM G. ROTH Director February 18, 1997
- -----------------------------------------------------
William G. Roth
/s/ TIMOTHY G. WALLACE Director February 18, 1997
- -----------------------------------------------------
Timothy G. Wallace
</TABLE>
II-5
<PAGE> 77
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1 -- Form of Underwriting Agreement
3.1 -- Restated Certificate of Incorporation of the Registrant(a)
3.2 -- Bylaws of the Registrant(a)
4 -- Form of Common Stock Certificate(b)
5 -- Opinion of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company
10.1 -- Registrant's 1996 Incentive Stock Plan(a)
10.2 -- Registrant's 1996 Non-Employee Director Stock Option Plan(a)
10.3 -- Registrant's 1996 Employee Stock Purchase Plan(a)
10.4 -- Form of Combination Agreement by and among each of the
Predecessor Companies, each of its respective stockholders
and the Registrant(a)
10.5 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Alan R. Sielbeck(a)
10.6 -- Employment Agreement, dated June 26, 1996, between the
Registrant and James D. Abrams(a)
10.7 -- Employment Agreement, dated June 26, 1996, between the
Registrant and Anthony M. Schofield(a)
10.8 -- Form of Employment Agreement between the Registrant and
certain of its employees(a)
10.9 -- Form of Escrow Agreement between the Registrant, each of the
stockholders of the Subsidiaries and the escrow agent(a)
10.10 -- Form of Equitable Securities Corporation Stock Purchase
Warrant(a)
10.11 -- Loan Agreement, dated September 10, 1996, between the
Registrant and SunTrust Bank, Nashville, N.A.(c)
10.12 -- Form of Agreement and Plan of Merger among certain of the
Subsidiaries, a wholly-owned subsidiary of the Registrant
and the Registrant(c)
10.13 -- Form of Combination Agreement between certain of the
Subsidiaries and the Registrant(c)
11 -- Statement re Computation of Per Share Earnings
21 -- List of subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Waller Lansden Dortch & Davis, A Professional
Limited Liability Company (included in Exhibit 5)
24 -- Power of Attorney (set forth on Page II-5)
27 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-07037.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A, File No. 000-21173.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, File No. 333-12319.
<PAGE> 1
Exhibit 1
3,200,000 SHARES
SERVICE EXPERTS(R), INC.
COMMON STOCK
UNDERWRITING AGREEMENT
EQUITABLE SECURITIES CORPORATION
ALEX. BROWN & SONS INCORPORATED
A.G. EDWARDS & SONS, INC.
MORGAN KEEGAN & COMPANY, INC. ____________, 1997
c/o Equitable Securities Corporation
Nashville City Center, Suite 800
511 Union Street
Nashville, Tennessee 37219
Ladies and Gentlemen:
Service Experts(R), Inc., a Delaware corporation (the "Company"), and
certain stockholders of the Company named in Schedule B hereto (the "Selling
Stockholders") severally propose to sell to the underwriters named in Schedule A
hereto (the "Underwriters") an aggregate of 3,200,000 shares (the "Firm Shares")
of the common stock, $.01 par value (the "Common Stock"), of the Company. The
Firm Shares consist of 1,850,000 shares to be issued and sold by the Company and
1,350,000 shares outstanding to be sold by the Selling Stockholders as set forth
opposite their names in Schedule B hereto. The Company and certain of the
Selling Stockholders also propose to sell to the several Underwriters an
aggregate of up to 450,000 additional shares of the Company's Common Stock (the
"Option Shares") if requested by the Underwriters as provided in Section 3
below. You have advised the Company and the Selling Stockholders that Equitable
Securities Corporation ("Equitable") is authorized to enter into this Agreement
on behalf of the Underwriters. The Underwriters, severally and not jointly, are
willing to purchase the number of Firm Shares set forth opposite their names in
Schedule A, and their pro rata portion of the Option Shares if Equitable elects
to exercise the over-allotment option in whole or in part. The Company and the
Selling Stockholders are sometimes referred to herein collectively as the
"Sellers." The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein
<PAGE> 2
collectively called the "Shares." The Shares to be issued and sold by the
Company are sometimes referred to as the "Company Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter as follows:
(a) A registration statement on Form S-1 (File No. 333-_______) with
respect to the Shares has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations thereunder
(the "Rules and Regulations"), including a preliminary prospectus. Copies
of such registration statement and any amendments, including any
post-effective amendments, and all forms of the related prospectuses
contained therein and any supplements thereto, have been delivered to the
Underwriters. Such registration statement, including the prospectus, Part
II, all financial statements and schedules, exhibits, and all other
documents filed as or deemed to be a part thereto, as amended at the time
when it shall become effective and all information deemed to be a part
thereof as of the time of effectiveness pursuant to Rule 430A or Rule 434
of the Rules and Regulations, is herein referred to as the "Registration
Statement" and the prospectus included as part of the Registration
Statement on file with the Commission that discloses all the information
that was omitted from the prospectus on the effective date pursuant to Rule
430A or Rule 434 of the Rules and Regulations and in the form filed
pursuant to Rule 424(b) under the Securities Act is herein referred to as
the "Final Prospectus." The prospectus included as part of the Registration
Statement on the date when the Registration Statement became effective is
referred to herein as the "Effective Prospectus." Any prospectus included
as part of the Registration Statement and in any amendment thereto prior to
the effective date of the Registration Statement is referred to herein as a
"Preliminary Prospectus." For purposes of this Agreement, "Rules and
Regulations" mean the rules and regulations promulgated by the Commission
under either the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as applicable.
(b) No order preventing or suspending the use of any Preliminary
Prospectus, Effective Prospectus or Final Prospectus has been issued and no
proceeding for that purpose has been instituted or threatened by the
Commission or the securities authority of any state or other jurisdiction.
If the Registration Statement has become effective under the Securities
Act, no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no proceeding for that
purpose has been instituted or threatened or, to the best knowledge of the
Company, contemplated by the Commission or the securities authority of any
state or other jurisdiction.
(c) Each Preliminary Prospectus, at the time of filing thereof,
complied with the requirements of the Securities Act and the Rules and
Regulations, and did not include any untrue
2
<PAGE> 3
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading; except
that the foregoing does not apply to statements or omissions made in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter specifically for use therein (it being
understood that the only information so provided is the information in
Section 15 of this Agreement). When the Registration Statement becomes
effective and at all times subsequent thereto up to and including the First
Closing Date (as hereinafter defined), (i) the Registration Statement, the
Effective Prospectus and Final Prospectus and any amendments or supplements
thereto will contain all statements which are required to be stated therein
in accordance with the Securities Act, the Exchange Act, and the Rules and
Regulations and will comply with the requirements of the Securities Act,
the Exchange Act and the Rules and Regulations, and (ii) neither the
Registration Statement, the Effective Prospectus, the Final Prospectus nor
any amendment or supplement thereto will include any untrue statement of
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading; except that the
foregoing does not apply to statements or omissions made in reliance upon
and in conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the only
information so provided is the information in Section 15 of this
Agreement).
(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
full power and authority (corporate and other) to own or lease its
properties and conduct its business as it is currently being conducted;
each of the subsidiaries of the Company set forth on Exhibit 21 to the
Registration Statement (collectively, the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation and in good standing
under the laws of the jurisdiction of its incorporation, with full power
and authority (corporate and other) to own or lease its properties and
conduct its business as it is currently being conducted; the Company and
each of the Subsidiaries are duly qualified or authorized to transact
business as a foreign corporation in all jurisdictions in which the conduct
of its business or the ownership or leasing of property requires such
qualification, except where the failure to so qualify would not have a
material adverse effect on the financial condition, results of operations
or the business of the Company and the Subsidiaries taken as a whole. The
Company and its subsidiaries hold all licenses, consents and approvals, and
have satisfied all eligibility and other similar requirements imposed by
federal and state regulatory bodies, administrative agencies or other
governmental bodies, agencies or officials, in each case as material to the
conduct of the business in which it is engaged as described in the
Effective Prospectus and the Final Prospectus.
(e) The capitalization of the Company as of December 31, 1996, is as
set forth under the caption "Capitalization" in the Effective Prospectus,
and the Company's capital stock conforms to the description thereof
contained under the caption "Description of Capital Stock" in the Effective
Prospectus. All the outstanding shares of capital stock, including the
shares of
3
<PAGE> 4
Common Stock to be sold by the Selling Stockholders, have been duly
authorized and validly issued and are fully paid and non-assessable. None
of the issued shares of capital stock of the Company have been issued in
violation of any preemptive or similar rights. No person or entity holds a
right to require or participate in the registration under the Securities
Act of shares of Common Stock of the Company which right has not been
waived by the holder thereof as to the offering contemplated hereby and by
the Registration Statement, or satisfied by participation by such holder in
the offering. No person or entity has any preemptive or other right of
participation or first refusal with respect to any of the Shares or the
issue and sale thereof by the Company or the sale of Shares by the Selling
Stockholders, which rights have not been waived. The Company's Common Stock
is registered with the Commission under Section 12(b) or 12(g) of the
Exchange Act.
(f) The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and such shares of capital stock in each Subsidiary are
wholly owned by the Company free and clear of all liens, encumbrances and
security interests; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding, except to the extent set forth in the
Registration Statement, the Preliminary Prospectus, and the Effective
Prospectus, including the exhibits thereto. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company.
(g) Ernst & Young LLP, who have certified certain financial statements
of the Company and its consolidated subsidiaries, are, and were during the
periods covered by their reports included in the Registration Statement and
the Effective Prospectus, independent public accountants as required by the
Securities Act and the Rules and Regulations.
(h) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules included in the
Registration Statement, present fairly the financial position, the results
of operations and cash flows of the Company and its Subsidiaries, on a
consolidated basis, at the dates and for the periods presented. These
financial statements have been prepared in accordance with generally
accepted accounting principles, applied on a consistent basis throughout
the periods indicated, and all adjustments necessary for a fair
presentation of results for such periods have been made. The pro forma
financial statements set forth in the Registration Statement fairly present
the information required to be presented therein, and such statements meet
the requirements of the Securities Act. The selected financial and
statistical data set forth in the Prospectus under the captions "Selected
Consolidated Financial Data," "Selected Pro Forma Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Principal and Selling Stockholders" fairly
present, on the basis stated in the Preliminary Prospectus and the
Effective Prospectus, the information set forth therein.
4
<PAGE> 5
(i) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Articles of Incorporation or Bylaws (or similar
organizational instruments) or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it or any of its properties is bound except for such defaults as do
not have a material adverse effect on the business or financial condition
of the Company and the Subsidiaries taken as a whole. The consummation of
the transactions contemplated herein and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, (i) any indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or any
Subsidiary is a party, except for any such breach or default which would
not have a material adverse effect on the Company or any of the
Subsidiaries, singly or in the aggregate, (ii) the Articles of
Incorporation or Bylaws of the Company or any Subsidiary, or (iii) any
order, rule or regulation applicable to the Company or any Subsidiary of
any court or of any regulatory body or administrative agency or other
governmental body having jurisdiction over the Company or any Subsidiary or
any of their respective properties or assets.
(j) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Company Shares to the
Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and constitutes a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms.
(k) Each approval, consent, order, authorization, designation,
declaration or filing by or with any court or regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions contemplated herein (except such additional steps as may be
required by the National Association of Securities Dealers, Inc. (the
"NASD") or may be necessary to qualify the Shares for public offering by
the Underwriters under state securities or blue sky laws), has been or will
be obtained or made as of the Closing Date (as defined below) and is or
will be in full force and effect as of the Closing Date (as defined below).
All consents and waivers from all other persons required in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions contemplated herein have been obtained or
made and are in full force and effect as of the Closing Date (as defined
below).
(l) Other than as disclosed in the Preliminary Prospectus and the
Effective Prospectus, there is no litigation, arbitration, claim, audit,
proceeding or investigation pending or, to the knowledge of the Company,
threatened or contemplated in which the Company or any of the Subsidiaries
is a party or of which any of their respective properties or assets are the
subject which, if determined adversely to the Company or any such
Subsidiary, would individually or in the aggregate have a material, adverse
effect on the condition (financial or otherwise), results of operations,
business or prospects of the Company and the Subsidiaries taken as a whole.
Neither the Company nor any of the Subsidiaries is in violation of, or in
default with respect to, any
5
<PAGE> 6
statute, rule, regulation, order, judgment or decree, which violation might
have a material adverse effect on the condition (financial or otherwise),
results of operations, business or prospects of the Company and the
Subsidiaries taken as a whole.
(m) The Company and the Subsidiaries have good and marketable title in
fee simple to all real property, if any, and good title to all personal
property owned by them, in each case free and clear of all liens, security
interests, pledges, charges, encumbrances, mortgages and defects, except
such as are disclosed in the Preliminary Prospectus and the Effective
Prospectus or which would not have a material, adverse effect on the
business or financial condition of the Company and the Subsidiaries taken
as a whole; and any real property and buildings held under lease by the
Company or any of its Subsidiaries are held under valid, existing and
enforceable leases, with such exceptions as are disclosed in the
Preliminary Prospectus and the Effective Prospectus or which would not have
a material, adverse effect on the business or financial condition of the
Company and the Subsidiaries taken as a whole.
(n) The Company and the Subsidiaries have filed all foreign, federal,
state and local income, excise and franchise tax returns which have been
required to be filed and have paid all taxes indicated as due on said
returns and all assessments and charges received by them or any of them to
the extent that such have become due and payable. No material deficiency
with respect to any such return has been assessed or proposed.
(o) Since the respective dates as of which information is given in the
Registration Statement and the Effective Prospectus, (i) neither the
Company nor any of the Subsidiaries has incurred any liabilities or
obligations, direct or contingent, or entered into any transactions, other
than transactions in the ordinary course business, that are material to the
Company and the Subsidiaries, (ii) the Company has not purchased any of its
outstanding capital stock or declared, paid or otherwise made any dividend
or distribution of any kind on its capital stock, (iii) there has not been
any material change in the capital stock, long-term debt or short-term debt
of the Company or any of the Subsidiaries, and (iv) there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition (financial or otherwise),
results of operations, business or prospects of the Company and the
Subsidiaries taken as a whole, whether or not occurring in the ordinary
course of business, in each case other than as disclosed in the
Registration Statement and the Effective Prospectus. The Company and the
Subsidiaries have no material contingent obligations which are not
disclosed in the Registration Statement and the Effective Prospectus.
(p) The Company and each of the Subsidiaries operate their businesses
in material conformity with all of the statutes, common laws, ordinances,
decrees, orders, rules and regulations of the jurisdictions in which each
such entity is conducting business. Without limiting the foregoing, the
Company and each of the Subsidiaries own or possess and the Company and
each of the Subsidiaries are in material compliance with the terms,
provisions, and conditions of all permits, licenses, franchises, operating
certificates, orders, authorizations,
6
<PAGE> 7
registrations, qualifications, consents or approvals of any court,
arbitrator or arbitral body, or any federal, state, local or foreign
governmental agency, instrumentality or similar organization, domestic or
foreign (hereinafter each individually a "Permit" and collectively,
"Permits") necessary to own and use the properties and assets of the
Company and each of the Subsidiaries, respectively, and to operate their
respective businesses in all locations in which these businesses are
currently being operated and as described in the Effective Prospectus and
the Final Prospectus; as to the Company and each Subsidiary, each Permit is
in full force and effect and there is no litigation, arbitration, audit,
claim, investigation or other proceeding pending or, to the Company's
knowledge, threatened which may cause any Permit of and from all
authorities to be revoked, withdrawn, canceled, suspended or not renewed.
Neither the Company nor any of the Subsidiaries is aware of any existing or
imminent matter that may have a material adverse effect on any of their
operations or business prospects other than as specifically disclosed in
the Preliminary Prospectus and the Effective Prospectus. No director,
officer, agent or employee of the Company or any of the Subsidiaries, or to
the Company's knowledge any other person associated with or acting for or
on behalf of the Company or any of the Subsidiaries, has directly or
indirectly made any contribution, gift, bribe, rebate, payoff, influence
payment, kickback, or other payment to any person, private or public,
regardless of form, whether in money, property or services (i) to obtain
favorable treatment in securing business, (ii) to pay for favorable
treatment for business obtained, or (iii) to obtain special concessions or
for special concessions already obtained for or in respect of the Company.
(q) Neither the Company nor any of the Subsidiaries is in violation of
any federal or state law or regulation relating to occupational safety and
health or to the storage, handling or transportation of hazardous or toxic
material. Neither the Company nor any of the Subsidiaries is in violation
of any federal or state law or regulation relating to environmental
regulation, including, but not limited to, laws and regulations
implementing the Clean Air Act, as amended. The Company and each Subsidiary
have received all permits, licenses or other approvals required of them
under applicable federal and state occupational safety and health and
environmental laws and regulations to conduct their respective businesses,
and the Company and each Subsidiary are in compliance with all the terms
and conditions of any such permit, license or approval, except any
violation of law or regulation, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals which would not, singly
or in the aggregate, result in a material adverse change in or affecting
the condition (financial or otherwise), of the Company and the Subsidiaries
taken as a whole, except as described in the Preliminary Prospectus and the
Effective Prospectus.
(r) The Company and each of the Subsidiaries own or possess adequate
licenses or other rights to use all patents, patent applications,
trademarks, trademark applications, service marks, service mark
applications, tradenames, copyrights, trade secrets and know-how or other
information (collectively, "Intellectual Property") described in the
Preliminary
7
<PAGE> 8
Prospectus and the Effective Prospectus as owned by or used by it or which
is necessary to the conduct of its business as now conducted or proposed to
be conducted as described in the Preliminary Prospectus and the Effective
Prospectus. Neither the Company nor any of the Subsidiaries is aware of any
infringement of or conflict with the rights or claims of others with
respect to any of the Company's or any Subsidiaries' Intellectual Property
which management of the Company believes could have a material adverse
effect on the condition (financial or otherwise), business or prospects of
the Company and the Subsidiaries taken as a whole. Neither the Company nor
any of the Subsidiaries is aware of any infringement of any of the
Company's or any of the Subsidiaries' Intellectual Property rights by any
third party which management of the Company believes could have a material
adverse effect on the condition (financial or otherwise), business or
prospects of the Company and the Subsidiaries taken as a whole.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Shares.
(t) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its
business in a manner that would cause it to become an "investment company"
or a company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the Company is not, nor
will be, subject to regulation under the Investment Company Act of 1940.
(u) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after
the date the Registration Statement becomes or has become effective with
the Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in
any Prospectus, if any, concerning the Company's business with Cuba or with
any person or affiliate located in Cuba changes in any material way, the
Company will provide the Department with notice of such business or change,
as appropriate, in a form acceptable to the Department.
(v) None of the employees of the Company or the Subsidiaries are
covered by collective bargaining agreements. No labor dispute with the
employees of the Company or any Subsidiary exists or, to the best knowledge
of the Company, is threatened or imminent that could result in a material
adverse change in or affecting the condition, financial or otherwise, of
the Company and the Subsidiaries taken as a whole, except as described in
the Preliminary Prospectus and the Effective Prospectus.
(w) The Company and each of the Subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which they
are engaged; all such policies of insurance insuring the
8
<PAGE> 9
Company and each of the Subsidiaries and their respective businesses,
assets, employees, officers and directors are in full force and effect;
there are no claims by the Company or any Subsidiary under any such policy
as to which any insurer is denying liability or defending under a
reservation of rights clause; neither the Company nor any Subsidiary has
been refused any insurance coverage sought or applied for; and neither the
Company nor any Subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely change or affect the condition, financial or otherwise, of the
Company and the Subsidiaries taken as a whole, except as described in the
Preliminary Prospectus and the Effective Prospectus.
(x) No Subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such Subsidiary's capital stock, from repaying to the
Company any loans or advances to such Subsidiary from the Company or from
transferring any of such Subsidiary's property or assets to the Company or
any other Subsidiary of the Company, except as described in the Preliminary
Prospectus and the Effective Prospectus.
(y) The Company and each of the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability of assets of
the Company and the Subsidiaries; (iii) access to said assets is permitted
only in accordance with management's general or specific authorizations;
and (iv) the recorded accountability for said assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(z) All offers and sales of the Company's capital stock prior to the
date hereof were at all relevant times exempt from the registration
requirements of the Securities Act or were duly registered under the
Securities Act, and were the subject of an available exemption from the
requirements of all applicable state securities or Blue Sky laws or were
duly registered thereunder.
(aa) The Company has obtained for the benefit of the Company and the
Underwriters from each of the persons listed on Schedule C a written
agreement that for a period of 120 days from the date of this Agreement,
they will not, without the prior written consent of the Underwriters,
offer, pledge, sell, contract to sell, grant any option for the sale of or
otherwise dispose of (or announce any offer, pledge, sale, grant of an
option to purchase or other disposition), directly or indirectly, any
shares of Common Stock of the Company, or securities convertible into,
exercisable for or exchangeable for, any shares of Common Stock or
derivative therefrom owned by them.
9
<PAGE> 10
(bb) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each
Underwriter as to the matters covered thereby.
2. Representations and Warranties of the Selling Stockholders. Each of the
Selling Stockholders, severally and not jointly, represents and warrants to each
Underwriter as follows:
(a) Each Selling Stockholder is the lawful owner of the number of
Shares to be sold thereby, and on the Closing Date (as defined herein) each
Selling Stockholder will have good and clear title to such Shares, free of
all restrictions on transfer, liens, encumbrances, security interests and
claims, and full right, power and authority to effect the sale and delivery
of such Shares; and upon the delivery of and payment for such Shares
pursuant to this Agreement, good and clear title to these Shares will pass
to the Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests and claims.
(b) Each Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority to enter into this Agreement, and to
sell, assign, transfer and deliver the Shares in the manner provided
herein. This Agreement has been duly authorized, executed and delivered by
one or more of the Attorneys-in-Fact on behalf of each Selling Stockholder,
and this Agreement is a valid and binding agreement of each Selling
Stockholder enforceable against each Selling Stockholder in accordance with
its terms, except as rights to indemnity and contribution hereunder may be
limited by applicable law.
(c) Each Selling Stockholder has duly executed and delivered the
Custody Agreement and Power of Attorney in the forms previously delivered
to the Underwriters, appointing ______________ and ______________, and each
of them as each Selling Stockholder's attorney-in-fact (the
"Attorney-in-Fact"), and the respective Custody Agreement and Power of
Attorney are valid and binding agreements of such Selling Stockholder. The
Attorney-in-Fact is authorized to execute, deliver and perform this
Agreement on behalf of the Selling Stockholder, and to deliver the Shares
to be sold by such Selling Stockholder hereunder, to accept payment
therefor and otherwise to act on behalf of such Selling Stockholder in
connection with this Agreement. Certificates, in suitable form for transfer
by delivery or accompanied by duly executed instruments of transfer or
assignment in blank, representing the Shares to be sold by such Selling
Stockholder hereunder have been deposited with the Custodian pursuant to
the Custody Agreement for the purpose of delivery pursuant to this
Agreement. Such Selling Stockholder agrees that the shares of Common Stock
represented by the certificates on deposit with the Custodian are subject
to the interest of the Underwriters hereunder, that the arrangements made
for such custody and the appointment of the Attorney-in-Fact are to that
extent irrevocable, and that the obligations of such Selling Stockholder
hereunder shall not be terminated except as provided in this Agreement and
the Custody Agreement. If such Selling Stockholder should die or become
incapacitated or if any other event should occur, before the
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<PAGE> 11
delivery of the Shares of such Selling Stockholder hereunder, the
certificates for such Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian or the
Attorney-in-Fact shall have received notice thereof.
(d) All authorizations and consents necessary for the execution and
delivery of this Agreement, the Custody Agreement, and Power of Attorney on
behalf of such Selling Stockholder and for the sale and delivery of the
Shares to be sold by such Selling Stockholder hereunder had been given or
obtained, except as may be required by the Securities Act or state
securities laws; and the performance of this Agreement, the Custody
Agreement, and Power of Attorney and the consummation of the transactions
contemplated hereby and thereby by each Selling Stockholder will not result
in a breach or violation of, or conflict with, any of the terms or
provisions of, or constitute a default by a Selling Stockholder under, any
indenture, mortgage, deed of trust, trust (constructive or other), loan
agreement, lease, franchise, license or other agreement or instrument to
which the Selling Stockholder or any of his or its properties is bound, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling Stockholder or any
of his properties.
(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Shares pursuant to the distribution contemplated by this Agreement, and
other than as permitted by the Securities Act, such Selling Stockholder has
not distributed and will not distribute any prospectus or other offering
material in connection with the offering and sale of the Shares.
(f) To the knowledge of such Selling Stockholder, the representations
and warranties of the Company contained in Section 1 of this Agreement are
true and correct; such Selling Stockholder has reviewed and is familiar
with the Registration Statement as originally filed with the Commission and
the Preliminary Prospectus contained therein; the Preliminary Prospectus
does not include any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; and
such Selling Stockholder is not prompted to sell the Shares to be sold by
such Selling Stockholder by any information concerning the Company that is
not set forth in the Preliminary Prospectus or the Effective Prospectus.
(g) At the time the Registration Statement becomes effective (i) such
parts of the Registration Statement and any amendments and supplements
thereto as specifically refer to such Selling Stockholder will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading and (ii) such parts of the Preliminary Prospectus and
Effective Prospectus as specifically refer to such Selling Stockholder will
not include an untrue statement of a material fact or omit to state a
material
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<PAGE> 12
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(h) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or
other governmental body is necessary in connection with the execution and
delivery of this Agreement by such Selling Stockholder, and the
consummation by such Selling Stockholder of the transactions herein
contemplated (other than as required by the Securities Act or by state
securities laws).
(i) For a period of 120 days from the effective date of the
Registration Statement, such Selling Stockholder will not, directly or
indirectly, sell, offer to sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock, other than to the
Underwriters pursuant to this Agreement, without the prior written consent
of Equitable, on behalf of the Underwriters.
(j) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, with respect to the transactions herein contemplated, such
Selling Stockholder agrees to deliver to you prior to or at the First
Closing Date (as hereinafter defined), a properly completed and executed
United States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
3. Purchase and Sale of the Shares.
(a) On the basis of the representations, warranties, and covenants
contained in this Agreement, and subject to its terms and conditions, (i)
the Company agrees to issue and sell 1,850,000 Firm Shares, (ii) each
Selling Stockholder agrees, severally and not jointly, to sell the number
of Firm Shares set forth opposite such Selling Stockholder's name in
Schedule B, and (iii) each Underwriter agrees, severally and not jointly,
to purchase from the Company and each of the Selling Stockholders, at a
purchase price of $_____ per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule A hereof. The obligations
of the Company and the Selling Stockholder shall be several and not joint.
(b) On the basis of the representations, warranties, and covenants
contained in this Agreement, and subject to its terms and conditions, the
Company and the Selling Stockholders hereby grant to the several
Underwriters an option to purchase, solely for the purpose of covering
over-allotments made in connection with the distribution and sale of the
Firm Shares, the Option Shares, in amounts and proportions to be determined
by the Company, at the purchase price per share as set forth in clause (a)
of this Section 3. The maximum number of Option Shares to be sold by the
Company and certain of the Selling Stockholders (as set forth on Schedule
B) is 450,000. The option granted hereby may be exercised in whole or in
part at any time (but only once) upon written notice delivered by
the Underwriters to the Company and the Selling Stockholders within 30
days after the date of this
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<PAGE> 13
Agreement setting forth the aggregate number of Option Shares to be
purchased and the time and date for delivery and payment for such Option
Shares, as determined by the Underwriters, but in no event earlier than
either the First Closing Date (as defined in Section 5(a) below) or the
second full business day after the exercise of such option, nor later than
the tenth business day after the date of such notice (such time and date
being referred to herein as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the First Closing Date,
the notice of exercise shall set the First Closing Date as the Option
Closing Date. Upon exercise of the option, the Company and the Selling
Stockholders shall become obligated to sell to the Underwriters, and,
subject to the terms and conditions of this Agreement, the Underwriters
shall become obligated, severally and not jointly, to purchase, for the
account of each Underwriter, from the Company and the Selling Stockholders,
the number of Option Shares specified in such notice. Option Shares shall
be purchased for the accounts of the Underwriters in proportion to the
number of Firm Shares set forth opposite such Underwriter's name in
Schedule A hereto, except that the respective purchase obligations of each
Underwriter shall be adjusted so that no Underwriter shall be obligated to
purchase fractional Option Shares.
4. Offering by the Underwriters. It is understood that the several
Underwriters are to make a public offering of the Firm Shares as soon after the
effective date of the Registration Statement as the Underwriters deem it
advisable to do so. The Firm Shares are to be offered to the public at the
offering price set forth in the Prospectus. To the extent, if at all, that any
Option Shares are purchased pursuant to Section 3 hereof, the Underwriters will
offer them to the public on the foregoing terms. It is further understood that
Equitable will act on behalf of the Underwriters in the offering and sale of the
Shares in accordance with an Agreement Among Underwriters entered into by
Equitable and the several other Underwriters.
5. Delivery of and Payment for the Shares. Certificates in definitive form
for the Shares to be purchased by each Underwriter hereunder, and in such
denominations and registered in such names as Equitable may request upon at
least two business days' prior notice to the Company, shall be delivered by or
on behalf of the Company and the Selling Stockholders to Equitable for the
account of each Underwriter, against payment by such Underwriter on its behalf
of the purchase price therefor by: (i) official bank check or checks (payable in
same day funds) payable to the order of the Company and the Custodian (for the
Selling Stockholders), as their interests appear; or (ii) wire transfer of same
day available funds to an account designated in writing by the Company upon at
least two business days notice. In lieu of physical delivery of certificates
representing the Shares, the Shares may be posted to The Depository Trust
Company account of Equitable for further transfer to the account of the
respective Underwriters against payment of the purchase price for the Shares as
described above. The closing of the sale and purchase of the Shares shall be
held at the offices of Sherrard & Roe, PLC, 424 Church Street, Suite 2000,
Nashville, Tennessee 37219, except that if certificates representing the Shares
are physically delivered to the Underwriters, such delivery shall be made at the
office of The Depository Trust Company, 55 Water Street, New York, New York
10041. The time and date of such delivery and payment shall be, (a) with respect
to the Firm Shares, at 9:00 a.m., Nashville time, on the third full business day
after the execution of this Agreement or at such other time and date as the
Underwriters, the
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<PAGE> 14
Company, and the Selling Stockholders may agree upon in
writing, and, (b) with respect to the Option Shares, at 9:00 a.m., Nashville
time, on the date specified by the Underwriters in the written notice given by
the Underwriters of the election of the Underwriters to purchase all or part of
such Option Shares, or at such other time and date as the Underwriters, the
Company, and the Selling Stockholders may agree upon in writing. Such time and
date for delivery of the Firm Shares is herein called the "First Closing Date",
such time and date for delivery of the Option Shares, if not the First Closing
Date, is herein called the "Option Closing Date", and each such time and date
for delivery is herein called a "Closing Date". Such certificates will be
available for inspection no later than 9:30 a.m., New York City time, on the
business day preceding the respective Closing Date at the office of The
Depository Trust Company, 55 Water Street, New York, New York 10041 or at such
other location in New York, New York specified by Equitable in writing at least
two business days prior to such Closing Date. It is understood that the
Underwriters may (but shall not be obligated to) make payment on behalf of any
Underwriter or Underwriters for the Shares to be purchased by such Underwriter
or Underwriters. No such payment shall relieve such Underwriter or Underwriters
from any of its or their obligations hereunder.
6. Covenants of the Company. The Company covenants and agrees with each of
the Underwriters that:
(a) The Company shall (i) use its best efforts to cause the
Registration Statement to become effective under the Securities Act as soon
as practicable after the execution and delivery of this Agreement; or (ii)
if the Registration Statement has been declared effective prior to the
execution and delivery of this Agreement, comply with the provisions of and
make all requisite filings with the Commission pursuant to Rules 424, 430A,
and 434 of the Rules and Regulations and to notify the Underwriters
promptly (in writing, if requested) of all such filings.
(b) The Company will (i) advise the Underwriters and the Selling
Stockholders promptly when the Registration Statement or any post-effective
amendment thereto shall have become effective; (ii) advise the Underwriters
and the Selling Stockholders promptly of the receipt of any comments from
the Commission; (iii) advise the Underwriters and the Selling Stockholders
promptly of any request by the Commission for any amendment of or
supplement to the Registration Statement, the Effective Prospectus or the
Final Prospectus or for additional information; (iv) prepare and file with
the Commission, promptly upon the Underwriters' request, any amendments of
or supplements to the Registration Statement, the Effective Prospectus or
the Final Prospectus which, in the Underwriters' opinion, may be necessary
or advisable in connection with the distribution of the Shares and will use
its best efforts to cause any such amendment to the Registration Statement
to be declared effective as promptly as possible; (v) not file any
amendment of the Registration Statement, or supplement to the Effective
Prospectus or the Final Prospectus unless the Underwriters have received a
reasonable time to review any such proposed amendment or supplement or to
which the Underwriters shall have objected in writing; (vi) advise the
Underwriters and the Selling Stockholders promptly of the issuance by the
Commission or any jurisdiction or other regulatory body of any stop order
or other order suspending the effectiveness of the Registration Statement,
suspending or preventing the use of
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<PAGE> 15
any Preliminary Prospectus, the Effective Prospectus or the Final
Prospectus or suspending the qualification of the Shares for offering or
sale in any jurisdiction, or of the institution of any proceedings for any
such purpose; and (vii) use its best efforts to prevent the issuance of any
stop order or other such order and, should a stop order or other such order
be issued, to obtain as soon as possible the lifting thereof. Any advice
delivered by the Company, if requested by the Underwriters or any Selling
Stockholder, shall be confirmed in writing.
(c) Prior to any public offering of the Shares, the Company will take
or cause to be taken all necessary action and furnish to counsel for the
Underwriters such information as may be required in connection with
qualifying the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as the Underwriters may designate, and the
Company will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Shares; provided, however,
that in no event in connection therewith shall the Company be required to
qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not presently qualified as a
foreign corporation.
(d) The Company will furnish, without charge, to the Underwriters six
(6) signed copies of the Registration Statement as first filed with the
Commission and of each amendment to it including all exhibits, and will
furnish to the Underwriters and to each Selling Stockholder the number of
conformed copies of the Registration Statement so filed and of each
amendment, without exhibits, as the Underwriters or any Selling Stockholder
may reasonably request.
(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter, for such period as in the opinion of counsel
for the Underwriters, delivery of a prospectus in connection with sales by
an Underwriter or a dealer is required under the Securities Act, the
Company will deliver to, or upon the order of, the Underwriters as many
copies of the Prospectus (and of any amendments or supplements to it), as
such Underwriter or dealer may reasonably request.
(f) Within the time during which a Final Prospectus relating to the
Shares is required to be delivered under the Securities Act, the Company
will comply with the Securities Act and the Rules and Regulations, as now
or hereafter amended or as in effect from time to time, so far as is
necessary to permit the continuance of sales of or dealing in the Shares as
contemplated in this Agreement and the Final Prospectus. If during such
period any event occurs as a result of which, in the judgment of the
Company or in the opinion of counsel for the Underwriters or of counsel for
the Selling Stockholders, it becomes necessary to amend or supplement the
Final Prospectus in order to make the statements therein, in the light of
the circumstances existing when the Final Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary to amend or supplement
the Final Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Final Prospectus, so that the
statements in the Final Prospectus as so amended or supplemented will not,
in the light of the circumstances existing when it is so delivered, be
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<PAGE> 16
misleading, or so that the Final Prospectus will comply with applicable
law, and to furnish to each Underwriter and to such dealers as the
Underwriters shall specify, such number of copies thereof as such
Underwriter or dealer may request and to furnish to counsel for the Selling
Stockholders such numbers of copies as such counsel may request (provided,
however, that, subsequent to the date nine months after the Registration
Statement becomes effective, any such amendment or supplement shall be at
the expense of the Underwriters.).
(g) The Company shall make generally available to its securityholders,
in the manner contemplated by Rule 158(b) under the Securities Act, as
promptly as practicable and in any event no later than 45 days after the
end of its fiscal quarter in which the first anniversary of the effective
date of the Registration Statement occurs, an earnings statement covering a
period of at least twelve months beginning after the effective date of the
Registration Statement and complying with the provisions of Section 11(a)
of the Securities Act, and will advise the Underwriters in writing when
such statement has been made available.
(h) The Company will furnish to its securityholders annual reports
containing financial statements audited by independent public accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited financial statements and financial information. During
the period of five years from the date hereof, the Company will deliver to
the Underwriters and, upon request, to each of the other Underwriters, (i)
copies of each annual report of the Company and each other report
(financial or otherwise) furnished by the Company to its securityholders
and (ii) as soon as they are available, a copy of each report or other
publicly available information of the Company mailed by the Company to its
securityholders generally or filed with any securities exchange, the
Commission, or the NASD.
(i) Except pursuant to this Agreement or with the prior written
consent of Equitable, on behalf of the Underwriters, for a period of 120
days after the date of the Prospectus, the Company will not, and the
Company has provided to the Underwriters agreements executed by those
persons listed on Schedule C which provide that for a period of 120 days
from the date of the Prospectus, such person or entity will not, directly
or indirectly, offer for sale, sell, grant any options, rights or warrants
with respect to any shares of Common Stock, securities convertible into
Common Stock or any capital stock of the Company, or otherwise dispose of
any shares of Common Stock or such other securities or capital stock;
except that the Company may issue, or grant options to purchase, shares of
Common Stock pursuant to any option plan existing on the date hereof and
described in the Final Prospectus, and in connection with acquisitions of
new businesses, issue shares of Common Stock registered under the Company's
registration statement on Form S-4 provided that all such shares issued in
connection with acquisitions of new businesses are subject to the
restrictions set forth in this Section.
(j) If at any time during the 2 day period after the Registration
Statement is declared effective, any rumor, publication or event relating
to or affecting the Company shall occur as a result of which, in the
opinion of the Underwriters, the market price for the Shares has been or is
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<PAGE> 17
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the Final
Prospectus), the Company will, to the extent permitted under applicable
law, after written notice from the Underwriters advising it of such effect,
promptly prepare, consult with the Underwriters concerning the substance
of, and disseminate a press release or other public statement, reasonably
satisfactory to the Underwriters, responding to or commenting on such
rumor, publication or event.
(k) Neither the Company nor any of its officers, directors of
affiliates, will take, directly or indirectly, any action designed to cause
or result in, or which might constitute or be expected to constitute,
stabilization or manipulation of the price of the Common Stock.
(l) The Company will cause the Shares to be approved for quotation on
the Nasdaq Stock Market's National Market System at each Closing Date and
for at least one year from the date of this Agreement.
(m) The Company will apply the net proceeds from the sale of the
Shares in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(n) The Company will use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by it
prior to the Closing Date or the Option Closing Date, as the case may be,
and to satisfy all conditions precedent to the delivery of the Shares.
7. Cost and Expenses. The Company will pay all costs and expenses incident
to the performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 12 hereof, including without limitation all costs and
expenses incident to (i) the fees, disbursements and expenses of the Company's
and Selling Stockholders' counsel and accountants in connection with the
registration of the Shares under the Securities Act and all other expenses in
connection with the preparation, printing and, if applicable, filing of the
Registration Statement (including all amendments thereto), any Preliminary
Prospectus, the Effective Prospectus, and the Final Prospectus, this Agreement
and any Blue Sky memoranda; (ii) the delivery of copies of the foregoing
documents to the Underwriters; (iii) the filing fees of the Commission and the
NASD relating to the Shares; (iv) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (v) the qualification of the Shares for offering
and sale under state securities and Blue Sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters relating thereto; (vi)
any listing of the Shares on the Nasdaq National Market System and (vii) any
expenses for travel, lodging and meals incurred by the Company in connection
with any meetings with prospective investors in the Shares. It is understood,
however, that, except as provided in this Section 7, Section 9, and Section 12
hereof, the Underwriters will pay all of their own costs and expenses, including
the fees of their counsel, stock transfer taxes on resale of any of the Shares
by them, and any advertising expenses relating to the offer and sale of the
Shares.
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<PAGE> 18
8. Conditions of the Underwriters' Obligations. The several obligations of
the Underwriters to purchase and pay for the Shares to be delivered on each
Closing Date shall be subject, in their discretion, to the accuracy of the
representations and warranties of the Company and the Selling Stockholders
contained herein as of the date hereof and as of such Closing Date as if made on
and as of such Closing Date, to the accuracy of the statements of the Company's
officers made pursuant to the provisions hereof, to the performance by the
Company and the Selling Stockholders of all their covenants and obligations
hereunder and to the following additional conditions:
(a) If the Registration Statement as amended to date has not become
effective prior to the execution of this Agreement, such Registration
Statement shall have been declared effective not later than 10:00 a.m.,
Nashville time, on the date of this Agreement or such later date and/or
time as shall have been consented to by the Underwriters in writing. The
Final Prospectus and any amendment or supplement thereto shall have been
filed with the Commission pursuant to Rules 424, 430A, and 434 within the
applicable time period prescribed for such filing and in accordance with
Section 6(a) of this Agreement; no stop order suspending the effectiveness
of the Registration Statement or any part thereof shall have been issued
and no proceedings for that purpose shall have been instituted, threatened
or, to the knowledge of the Company and the Underwriters, contemplated by
the Commission; and all requests for additional information on the part of
the Commission shall have been complied with to the reasonable satisfaction
of the Underwriters.
(b) No Underwriter shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or any supplement thereto, contains an
untrue statement of fact which, in the opinion of the Underwriters, is or
may be material, or omits to state a fact which, in the opinion of the
Underwriters, is or may be material and is or may be required to be stated
therein or is or may be necessary to make the statements therein not
misleading and the Company shall not have cured such untrue statement or
omission.
(c) The Underwriters shall have received the opinion of Waller Lansden
Dortch & Davis, a Professional Limited Liability Company, counsel for the
Company, addressed to the Underwriters, dated the Closing Date, to the
effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware with the corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement and the Effective Prospectus and the Final Prospectus and to
enter into this Agreement and perform its obligations hereunder. The
Company is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other
jurisdiction in which it owns or leases property, or conducts any
business, so as to require such qualification, except where the
failure to so qualify would
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<PAGE> 19
not have a material adverse effect on the financial position, results
of operations or business of the Company and its Subsidiaries.
(ii) Each of the Subsidiaries of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement, the
Effective Prospectus, and the Final Prospectus. None of the
Subsidiaries is qualified to transact business as a foreign
corporation, and none owns or leases property or conducts any business
in any jurisdiction so as to require such qualification, except where
the failure to so qualify would not have a material adverse effect on
the financial position, results of operations or business of the
Company and its Subsidiaries.
(iii) The Company's authorized, issued and outstanding capital
stock as of the date of the Final Prospectus is as disclosed therein.
All of such outstanding shares of Common Stock of the Company,
including the shares to be sold by the Selling Stockholders, have been
duly authorized and validly issued, are fully paid and nonassessable
and conform to the description of such capital stock contained in the
Prospectus and Final Prospectus. None of such issued shares of capital
stock of the Company or any of its Subsidiaries has been issued or is
owned or held in violation of any statutory preemptive rights of
Stockholders or, to the best of such counsel's knowledge, any other
rights to purchase, and no person or entity (including any holder of
outstanding shares of capital stock of the Company or the
Subsidiaries) has any preemptive or other rights to subscribe for any
of such shares.
(iv) All of the outstanding shares of capital stock of each of
the Company's Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned beneficially
by the Company free and clear of all liens, security interests,
pledges, charges, encumbrances, Stockholders' agreements, voting
trusts, defects, equities or claims known to such counsel. To such
counsel's knowledge, other than the subsidiaries listed on Exhibit 21
to the Registration Statement, the Company does not own, directly or
indirectly, any capital stock or other equity securities of any other
corporation or any ownership interest in any partnership, limited
liability company, joint venture or other association other than as
disclosed in the Effective Prospectus and the Final Prospectus.
(v) Except as disclosed in the Preliminary Prospectus, the
Effective Prospectus, and the Final Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of its
Subsidiaries convertible into or exchangeable for any capital stock of
the Company or any of its Subsidiaries, (B) warrants, rights or
options to subscribe for or purchase from the Company or any of its
Subsidiaries any such capital stock or any such convertible or
exchangeable securities or obligations, or
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<PAGE> 20
(C) obligations of the Company or any of its Subsidiaries to issue any
shares of capital stock, any such convertible or exchangeable
securities or obligations, or any such warrants, rights or options.
(vi) The Shares to be issued and sold by the Company have been
duly authorized and, when issued and delivered against payment
therefor as provided herein, will be validly issued and fully paid and
nonassessable, will conform to the description of the Common Stock
contained in the Effective Prospectus and the Final Prospectus, and no
statutory preemptive rights of Stockholders or, to the best of such
counsel's knowledge, any other rights to purchase exist with respect
to any of the Shares or the issue and sale thereof; the certificates
evidencing the Shares comply with all applicable requirements of
Delaware law; and the Shares have approved for quotation on the Nasdaq
Stock Market's National Market System.
(vii) Except as disclosed in the Effective Prospectus and the
Final Prospectus, there are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or
to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the Registration
Statement (or any such right has been effectively waived) or in any
securities being registered pursuant to any other registration
statement filed by the Company under the Securities Act.
(viii) All offers and sales of the Company's capital stock by the
Company prior to the date hereof were at all relevant times duly
registered under the Securities Act or exempt from the registration
requirements of the Securities Act and were duly registered or the
subject of an available exemption from the registration requirements
of the applicable state securities or Blue Sky laws.
(ix) The execution and delivery by the Company of this Agreement
and the consummation of the transactions contemplated herein do not
and will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, the Certificate of
Incorporation or Bylaws, as amended, of the Company, or any agreement,
lease, contract, indenture, instrument or obligation of the Company,
filed as an exhibit to the Registration Statement.
(x) The issue and sale of the Shares being issued at the Closing
Date and the performance of this Agreement and the consummation of the
transactions herein contemplated will not conflict with, or (with or
without the giving of notice or the passage of time or both) result in
a breach or violation of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument known to such
counsel to which the Company or
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<PAGE> 21
any of its Subsidiaries is a party or to which any of their respective
properties or assets is subject, nor will such action conflict with or
violate any provision of the Certificates of Incorporation or Bylaws,
as amended, of the Company or any of its Subsidiaries or any statute,
rule or regulation or any order, judgment or decree of any court or
governmental agency or body known to such counsel having jurisdiction
over the Company or any of its Subsidiaries or any of their respective
properties or assets.
(xi) The Company and its Subsidiaries good title to all personal
property owned by them, in each case free and clear of all liens,
security interests, pledges, charges, encumbrances, mortgages and
defects except such as are disclosed in the Effective Prospectus and
the Final Prospectus or such as do not materially and adversely affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its
Subsidiaries; and any real property and buildings held under lease by
the Company or any of its Subsidiaries are held by the Company or
Subsidiary under valid, existing and enforceable leases with the
exceptions as are disclosed in the Effective Prospectus and the Final
Prospectus or are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company
or Subsidiary.
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery by the Company of this Agreement and the consummation of
the transactions contemplated by this Agreement (other than as may be
required by the NASD or as required by state securities and Blue Sky
laws as to which such counsel need express no opinion), except such as
have been obtained or made, and except such that, if not obtained,
would not have a material adverse effect on the business or financial
condition of the Company and the Subsidiaries taken as a whole. No
consents or waivers from any other person are required in connection
with the execution and delivery by the Company of this Agreement and
the consummation of the transactions contemplated herein except such
as have been obtained or made.
(xiii) To counsel's knowledge and other than as disclosed in the
Preliminary Prospectus, the Effective Prospectus, and the Final
Prospectus, there is no litigation, arbitration, claim, proceeding or
investigation pending or threatened in which the Company or any of its
Subsidiaries is a party or of which any of their respective properties
or assets is the subject which, if determined adversely to the Company
or the affected Subsidiary, would individually or in the aggregate
have a material adverse effect on the financial position, results of
operations or business of the Company and its Subsidiaries; and, to
counsel's knowledge, neither the Company nor any of its Subsidiaries
is in violation of, or in default with respect to, any statute, rule,
regulation, order, judgment or decree, except as described in the
Effective Prospectus and Final
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Prospectus, nor is the Company or any Subsidiary required to take any
action in order to avoid any such violation or default.
(xiv) This Agreement has been duly authorized, executed, and
delivered by the Company.
(xv) The Registration Statement, the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus and each amendment or
supplement thereto (other than the financial statements and related
schedules therein, as to which such counsel need express no opinion),
as of their respective effective or issue dates, complied as to form
in all material respects with the requirements for registration
statements on Form S-1 under the Securities Act and the Rules and
Regulations. The descriptions in the Registration Statement and the
Preliminary Prospectus, the Effective Prospectus, and the Final
Prospectus of statutes, legal and governmental proceedings or
contracts, and other documents are accurate in all material respects
and fairly present the information required to be shown; and counsel
does not know of any statutes, legal or governmental proceedings or
contracts and other documents required to be described in the
Registration Statement, the Preliminary Prospectus, the Effective
Prospectus or the Final Prospectus that are not described as required
to be described therein or to be filed as exhibits to the Registration
Statement which are not described and filed as required.
(xvi) The Registration Statement is effective under the
Securities Act; any required filing of the Effective Prospectus and
the Final Prospectus pursuant to Rules 424, 430A and 434 has been made
in the manner and within the time period required by such Rules; and
no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and, to counsel's
knowledge, no proceedings for that purpose have been instituted or
threatened or are contemplated by the Commission.
(xvii) The Company is not, and will not be as a result of the
consummation of the transactions contemplated by this Agreement, an
"investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940.
Counsel shall also state that, based upon their involvement in the
preparation of the Registration Statement as described in its opinion, no facts
have come to their attention which cause them to believe that the Registration
Statement, or any amendment thereto made prior to the Closing Date, on its
Effective Date and as of the Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or that the Preliminary Prospectus, the Effective Prospectus or the
Final Prospectus contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading
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(provided, however, that counsel need make no statement regarding
the financial statements and related schedules and other financial data
contained in the Registration Statement, any amendment thereto, or the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus).
In rendering its opinion, counsel may rely, as to matters of fact, to the
extent that counsel deems proper, on certificates of responsible officers of the
Company and public officials and, as to matters of laws of any jurisdiction
other than the state of Tennessee or the United States, upon the opinion of
local counsel reasonably acceptable to the Underwriters, provided that counsel
must state that counsel believes that the Underwriters are justified in relying
upon the opinion and copies of the opinion are delivered to the Underwriters and
counsel for the Underwriters.
(d) The Underwriters shall have received an opinion addressed to the
Underwriters satisfactory to the Underwriters and counsel for the Underwriters,
of ___________________, counsel for the Selling Stockholders, dated the Closing
Date, to the effect that:
(i) This Agreement has been duly authorized, executed and delivered by
each Selling Stockholder.
(ii) The Custody Agreement and the Power of Attorney have been duly
authorized, executed and delivered by or on behalf of each Selling
Stockholder and are valid and binding obligations of each of them,
enforceable against each of them in accordance with their respective terms,
except as enforceability may subject to general principles of equity.
(iii) Each individual Selling Stockholder has the requisite legal
capacity, and each other Selling Stockholder has full legal right, power
and authority, and any approval required by law applicable to the
respective Selling Stockholder (other than any approval required by federal
or state securities or Blue Sky laws), to sell, assign, transfer and
deliver the Shares to be sold by the Selling Stockholder in the manner
provided in this Agreement, the Custody Agreement, and the Power of
Attorney.
(iv) Each of the Selling Stockholders has, to the best of counsel's
knowledge based solely on certificates executed by Selling Stockholders,
good and clear title to the Shares to be sold by him or her or it pursuant
to this Agreement and upon delivery of certificates for the Shares to be
sold by each Selling Stockholder pursuant hereto and payment for the
Shares, good and clear title thereto will pass to the Underwriters,
severally, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever, assuming that none of the
Underwriters has any notice of any adverse claim or defect with respect to
any Selling Stockholders Shares.
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<PAGE> 24
In rendering such opinion, such counsel may rely (i) as to matters of fact,
to the extent counsel deems proper, upon certificates of the Selling
Stockholders provided that the extent of such reliance is specified in its
opinion, and (ii) as to matters of laws of any jurisdiction other than ________
or the United States, upon the opinion of local counsel reasonably acceptable to
the Underwriters provided that the extent of this reliance is specified in the
opinion and that counsel shall state that the opinion or opinions of local
counsel are satisfactory to them and that they believe they and you are
justified in relying thereon.
The opinions of Waller Lansden Dortch & Davis, a Professional Limited
Liability Company, and __________ described in paragraphs (c) and (d) above
shall be rendered to the Underwriters at the request of the Company or one or
more of the Selling Stockholders, as the case may be, and shall so state
therein.
(e) The Underwriters shall have received from Sherrard & Roe, PLC, counsel
for the Underwriters, an opinion dated the Closing Date with respect to the
incorporation of the Company, the validity of this Agreement, the validity of
the Shares being delivered to the Underwriters, the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus and
other related matters as the Underwriters may reasonably request. Such counsel
shall have received such documents and information from the Company as they
request to enable them to pass upon such matters. In rendering such opinion,
counsel for the Underwriters may rely as to all matters other than the laws of
the state of Tennessee or Federal law upon the opinion of counsel referred to in
Paragraphs (c) and (d) of this Section 8.
(f) You shall have received from Ernst & Young LLP letters dated,
respectively, the date hereof (or, if the Registration Statement has been
declared effective prior the execution and delivery of this Agreement, dated
such effective date and the date of this Agreement) and each Closing Date, in
form and substance satisfactory to you, to the effect that:
(i) they are independent public accountants with respect to the
Company and its Subsidiaries within the meaning of the Securities Act and
the Rules and Regulations;
(ii) in their opinion, the consolidated financial statements and
schedules of the Company and its Subsidiaries audited by them and included
in the Preliminary Prospectus, the Effective Prospectus, the Final
Prospectus, and the Registration Statement comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act and the Rules and Regulations;
(iii) On the basis of limited procedures, not constituting an audit in
accordance with generally accepted auditing standards, consisting of a
reading of the latest available interim financial statements of the Company
and its Subsidiaries, an inspection of the minute books of the Company and
its Subsidiaries since the date of the latest audited financial statements
included in the Preliminary Prospectus, the Effective
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<PAGE> 25
Prospectus and the Final Prospectus, inquiries of officials of the Company
and its Subsidiaries responsible for financial accounting matters and such
other inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) as of a specified date not more than five (5) days prior to
the date of such letter, there were any changes in the capital stock
(other than the issuance of common stock upon exercise of employee
stock options that were outstanding on the date of the latest balance
sheet included in the Preliminary Prospectus, the Effective Prospectus
and the Final Prospectus) or any increase in inventories or the
long-term debt or short-term debt of the Company and its Subsidiaries,
or any decreases in net current assets or net assets or other items
specified by the Underwriters, or any increases in any other items
specified by the Underwriters, in each case as compared with amounts
shown in the latest balance sheet included in the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus, except
in each case for changes, increases or decreases which the Preliminary
Prospectus, the Effective Prospectus and the Final Prospectus disclose
have occurred or may occur, or which are described in such letter; and
(B) for the period from the date of the latest financial
statements included in the Preliminary Prospectus, the Effective
Prospectus and the Final Prospectus to the specified date referred to
in Clause (A) there were any decreases in revenues or operating income
or the total or per share amounts of net income or other items
specified by the Underwriters, or any increases in any items specified
by the Underwriters, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Underwriters, except in each
case for increases or decreases which the Preliminary Prospectus, the
Effective Prospectus and the Final Prospectus disclose have occurred
or may occur, or which are described in such letter; and
(iv) In addition to the audit referred to in their reports included in
the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus and the limited procedures, inspection of minute books,
inquiries and other procedures referred to in paragraph (iii) above, they
have carried out certain specified procedures, not constituting an audit in
accordance with generally accepted auditing standards, with respect to
certain amounts, percentages and financial information specified by the
Underwriters that are included in the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus,
or which appear in Part II of, or in exhibits or schedules to, the
Registration Statement and have compared certain of such amounts,
percentages and financial information with the accounting records of the
Company and its Subsidiaries and have found them to be in agreement;
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<PAGE> 26
(v) on the basis of a reading of the unaudited pro forma consolidated
financial statements included in the Registration Statement, the
Preliminary Prospectus, the Effective Prospectus, and the Final Prospectus,
carrying out certain specified procedures that would not necessarily reveal
matters of significance with respect to the comments set forth in this
paragraph (v), inquiries of certain officials of the Company and its
Subsidiaries who have responsibility for financial and accounting matters
and preparing the pro forma consolidated condensed financial statements,
nothing came to their attention that caused them to believe that the
unaudited pro forma consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements
of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not
been properly applied to the historical amounts in the compilation of such
statements.
In the event that the letters referred to in this Section 8(f) set forth
any changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (I) such letters shall be accompanied by a
written explanation by the Company as to the significance thereof, unless the
Underwriters deem such explanation unnecessary, and (II) such changes, decreases
or increases do not, in your sole judgment, make it impracticable or inadvisable
to proceed with the purchase, sale and delivery of the Shares being delivered at
such Closing Date as contemplated by the Registration Statement, as amended as
of the date of such letter.
(g) Since the date of the latest balance sheet included in the Registration
Statement, the Preliminary Prospectus, the Effective Prospectus and the Final
Prospectus, neither the Company nor any of its Subsidiaries shall have sustained
(i) any loss or interference with their respective businesses from fire,
explosion, flood, hurricane or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order or
decree, otherwise than as disclosed in the Preliminary Prospectus, the Effective
Prospectus, and the Final Prospectus, or (ii) any change, or any development
involving a prospective change (including without limitation a change in
management or control of the Company), in or affecting the condition (financial
or otherwise), results of operations, business or prospects of the Company and
its Subsidiaries, otherwise than as disclosed in the Preliminary Prospectus, the
Effective Prospectus, and the Final Prospectus, the effect of which, in either
such case, is in your judgment so material and adverse as to make it
impracticable or inadvisable to proceed with the purchase, sale and delivery of
the Shares being delivered at such Closing Date as contemplated by the
Registration Statement, as amended as of the date hereof.
(h) The Underwriters shall have received a certificate of the Company,
dated the Closing Date and addressed to the Underwriters, signed by the chief
executive officer and the principal financial and accounting officer of the
Company, to the effect that, as of the Closing Date:
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<PAGE> 27
(i) The representations and warranties of the Company contained in
Section 1 of this Agreement are true and correct, as if made at and as of
the Closing Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date;
(ii) The Registration Statement has become effective under the
Securities Act, no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been initiated or are pending, or to their knowledge, threatened or
contemplated by the Commission;
(iii) All filings required by Rules 424, 430A, and 434 of the Rules
and Regulations have been made;
(iv) The signers of the certificate have carefully examined the
Registration Statement and the Final Prospectus and any amendments or
supplements thereto, and these documents do not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading; and
(v) Since the effective date of the Registration Statement, there has
occurred no event (other than with respect to the information contained
under the caption "Underwriting") required to be set forth in an amendment
or supplement to the Registration Statement, the Effective Prospectus or
the Final Prospectus which has not been so set forth.
(i) The representations and warranties of each Selling Stockholder in
Section 2 of this Agreement shall be true and correct, as if made at and as of
the Closing Date, each Selling Stockholder shall have complied with all the
agreements and satisfied all the conditions on his part to be performed or
satisfied at or prior to the Closing Date, and the Selling Stockholders shall
deliver to the Underwriters a certificate to that effect, dated the Closing
Date, signed by such Selling Stockholder or his or her duly appointed
attorney-in-fact.
(j) The Shares shall be approved for quotation on the Nasdaq Stock Market's
National Market System.
(k) The Company shall have furnished to the Underwriters such further
certificates and documents confirming the representations and warranties
contained herein and related matters as the Underwriters may reasonably have
requested.
(l) The Company shall have delivered to the Underwriters written lock-up
agreements from those persons listed on Schedule C pursuant to which such
persons agree with the Underwriters not to offer, sell or dispose of any Common
Stock of the Company, or any
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<PAGE> 28
securities convertible into or exercisable or exchangeable therefor or
derivative therefrom, for a period of 120 days after the date of this
Agreement, directly or indirectly, except with the prior written consent of
Equitable on behalf of the Underwriters.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory to the Underwriters and counsel for the Underwriters.
The Company shall furnish to the Underwriters such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Underwriters shall reasonably request.
If any of the conditions hereinabove provided for in this Section 8 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Underwriters by notifying the Company and the Selling Stockholder(s) of such
termination in writing at or prior to the Closing Date.
In such event, the Selling Stockholders, the Company, and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 7 and 9 hereof).
The several obligations of the Underwriters to purchase and pay for the
Option Shares hereunder shall be subject, in their discretion, to satisfaction
on and as of the Option Closing Date of each of the foregoing conditions to
purchase the Firm Shares set forth in paragraphs (a) through (l) above, except
that (i) all references to the "Closing Date" shall be deemed to refer to the
Option Closing Date, if it is any date other than the First Closing Date, and
(ii) the opinions required under paragraphs (c), (d) and (e) shall be revised to
reflect the sale of the Option Shares.
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9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, from
and against any and all losses, claims, damages, liabilities and judgments,
joint or several, to which such Underwriter or such controlling person may
become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in (A) the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, or the Final Prospectus, or (B) any application or other
document, or any amendment or supplement thereto, executed by the Company
or based upon written information furnished by or on behalf of the Company
filed in any jurisdiction in order to qualify the Shares under the
securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange (each a "Blue Sky
Application"); or (ii) the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus or any Blue Sky Application a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter and each such
controlling person upon demand for any legal or other expenses reasonably
incurred by such Underwriter or such controlling person in connection with
investigating, defending or appearing as a third-party witness in
connection with any such loss, claim, damage, liability, action or
proceeding; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration
Statement, any Preliminary Prospectus, the Effective Prospectus, or the
Final Prospectus, in reliance upon and in conformity with written
information furnished to the Company by any Underwriter specifically for
use therein; provided, further, however, that the Company shall not be
liable to any Underwriter in respect of any Preliminary Prospectus to the
extent that (i) the Effective Prospectus or Final Prospectus did not
contain the untrue statement or alleged untrue statement or omission or
alleged omission giving rise to such loss, claim, damage, liability or
action, (ii) the Preliminary Prospectus was not sent or given to the
purchaser of the Shares in question at or prior to the time at which the
written confirmation of the sale of such Shares was sent or given to such
person, and (iii) the failure to deliver such Final Prospectus was not the
result of the Company's noncompliance with its obligations under Sections
6(a), 6(e), and 6(f) hereof. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) Each Selling Stockholder agrees, severally and not jointly, to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities and judgments, joint or several, caused by any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, any Preliminary Prospectus, the Effective
Prospectus, the Final Prospectus or any
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<PAGE> 30
Blue Sky Application, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but in all such cases only with
reference to information relating to such Selling Stockholder furnished by
or on behalf of such Selling Stockholder in its capacity as a Selling
Stockholder expressly for use in the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or the Final Prospectus;
provided, however, that nothing in this subsection (b) shall limit the
obligation of the Company to indemnify the Underwriters in the manner set
forth in subsection (a) relating to information provided by any Selling
Stockholder acting in his or her capacity as an officer, director or
employee of the Company. This indemnity agreement will be in addition to
any liability which any Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, its directors, each of its officers who have
signed the Registration Statement, the Selling Stockholders, and each
person, if any, who controls the Company or a Selling Stockholder within
the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities to which
the Company or any such director, officer, Selling Stockholder or
controlling person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus, the Final Prospectus, or any Blue Sky Application, or
caused by the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that each Underwriter will be
liable in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished
to the Company by any Underwriter specifically for use therein.
(d) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to paragraphs (a), (b) or (c) of this Section 9, such
person (the "indemnified party") shall promptly notify the person against
whom such indemnity may be sought (the "indemnifying party") in writing and
the indemnifying party, upon request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others the indemnifying party may designate in
such proceeding and shall pay the fees and disbursements of such counsel
related to such proceeding. However, the failure so to notify the
indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this Section 9 and will not
relieve the indemnifying party from any liability to the extent it is not
materially prejudiced as a proximate result of such failure. In case any
such proceeding is brought against any indemnified party, the indemnifying
party shall be entitled to participate therein and, to the extent that it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, and after notice from the
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<PAGE> 31
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation unless the
indemnifying party does not so assume the defense thereof if given the
opportunity to do so. In any such proceeding, any indemnified party shall
have the right to retain its own counsel, but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of such counsel, or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the indemnifying
party or any officers, directors or controlling persons of the indemnifying
party and the indemnified party and representation of all such parties by
the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for (a) the reasonable fees and
expenses of more than one separate firm for all Underwriters and all
persons, if any, who control Underwriters within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, (b) the
reasonable fees and expenses of more than one separate firm for the
Company, its directors, its officers who sign the Registration Statement,
and each person, if any, who controls the Company within the meaning of
either such Section, and (c) the reasonable fees and expenses of more than
one separate firm for all Selling Stockholders and all persons, if any who
control Selling Stockholders within the meaning of either such Section. It
is further understood that, in any case, the indemnifying party shall, in
addition to the separate firm described above, be responsible for any fees
and expenses of local counsel necessary in connection with any such
proceedings and shall pay all legal fees and expenses promptly as they are
incurred. In the case of any such separate firm for the Underwriters and
such controlling persons of the Underwriters, such firm shall be designated
in writing by the Underwriters. In the case of any such separate firm for
the Company, and such directors, officers and controlling persons of the
Company, such firm shall be designated in writing by the Company. In the
case of any such separate firm for the Selling Stockholders and such
controlling persons of the Selling Stockholders, such firm shall be
designated in writing by the attorneys-in-fact for the Selling Stockholders
under the Power of Attorney referred to in Section 2(c). The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent but if settled with such consent or if there be
a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. No indemnifying party shall, without
the prior written consent of the indemnified party, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action or proceeding, of which indemnification may be sought hereunder
(whether or not any indemnified party is a party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of the indemnified party from all liability arising
out of such claim, action or proceeding.
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(e) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 9(a), (b) or (c) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party under any such paragraph shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by
the Company, the Selling Stockholders, and the Underwriters from the
offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law or if the
indemnified party failed to give the notice required under Section 9(d)
above, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company, the Selling Stockholders, and the Underwriters in connection with
the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Stockholders, and the Underwriters shall be deemed to
be in the same proportion as the total net proceeds from the offering
(before deducting expenses) received by each of the Company and the Selling
Stockholders and the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover
page of the Final Prospectus, bear to the aggregate public offering price
of the Shares. The relative fault of the Company, the Selling Stockholders,
and the Underwriters shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company, the Selling Stockholders, and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this
Section 9(e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to above in this Section 9(e). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to above in this
Section 9(e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at
which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omissions or alleged omission. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. No Selling Stockholder
shall be required to contribute any amount in excess of the proceeds
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received by that Selling Stockholder from the Underwriters in the offering.
The Underwriters' obligations in this Section 9(e) to contribute are
several in proportion to their respective underwriting obligations and not
joint.
(f) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus, the Final Prospectus or
any supplement or amendment thereto, each party against whom
indemnification may be sought under this Section 9 hereby consents to the
jurisdiction of any court having jurisdiction over any other indemnifying
party, agrees that process issuing from such court may be served upon him
or it by any other indemnifying party and consent to the service of such
process and agrees that any other indemnifying party may join him or it as
an additional defendant in any such proceeding in which such other
indemnifying party is a party.
10. Substitution of Underwriters. If any Underwriter defaults in its
obligation to purchase Shares hereunder and if the total number of Shares which
such defaulting Underwriter agreed but failed to purchase is ten percent (10%)
or less of the total number of Shares to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the number of Shares set forth opposite the name of each
non-defaulting Underwriter in Schedule A hereto bears to the total number of
Shares set forth opposite the names of all the non-defaulting Underwriters), the
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase. If any Underwriter so defaults and the total number of Shares with
respect to which such default or defaults occur is more than ten percent (10%)
of the total number of Shares to be sold hereunder, and arrangements
satisfactory to the other Underwriters and the Company for the purchase of such
Shares by other persons (who may include the non-defaulting Underwriters) are
not made within 36 hours after such default, this Agreement, insofar as it
relates to the sale of the Shares, will terminate without liability on the part
of the non-defaulting Underwriters, the Selling Stockholders or the Company
except for (i) the provisions of Section 9 hereof, and (ii) the expenses to be
paid or reimbursed by the Company pursuant to Section 7. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 10. Nothing herein shall relieve shall relieve a
defaulting Underwriter from liability for its default.
11. Default by Selling Stockholders. If one or more of the Selling
Stockholders shall fail to sell and deliver to the Underwriters the number of
Firm Shares or Option Shares, as the case may be, to be sold and delivered by
such Selling Stockholder or Selling Stockholders at the First Closing Date under
the terms of this Agreement, the Company and the remaining Selling Stockholders
shall have the right to increase the numbers of Shares to be sold by them
hereunder, pro rata or otherwise, to the total number set forth for sale by all
of the Selling Stockholders in Schedule B, on such Closing Date. If the Company
and such remaining Selling Stockholders do not exercise such right, then the
Underwriters may at their option, by written notice from the Underwriters to the
Company and the Selling Stockholders, either (a) terminate this Agreement
without any liability on the part of any non-defaulting party or (b) purchase
the Shares which the Company and the other Selling Stockholders have agreed to
sell and deliver in accordance with the terms hereof.
33
<PAGE> 34
In the event of a failure by one or more of the Selling Stockholders to
sell and deliver as referred to in this Section, either the Underwriters, the
Company or, by joint action only, the non-defaulting Selling Stockholders shall
have the right to postpone the Closing Date for a period of not exceeding seven
days in order that any required changes in the Registration Statement or in the
Final Prospectus or in any other documents or arrangements may be effected.
12. Termination. This Agreement may be terminated by the Underwriters by
written notice to the Company and the Selling Stockholders as follows:
(a) At any time prior to the earlier of (i) the time the Shares are
released by the Underwriters for sale to the public, or (ii) 11:30 a.m.,
Washington, D.C. time, on the first business day following the date of this
Agreement;
(b) At any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement, the Effective Prospectus and the Final
Prospectus, any material adverse change, or any development, to the
reasonable belief of the Underwriters, involving a prospective material
adverse change, in or affecting the condition, financial or otherwise, of
the Company and its Subsidiaries taken as a whole or the earnings, business
affairs, management or business prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business; (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency after the date hereof or other
national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States which would, in your judgment, make it impracticable
or inadvisable to market the Shares on the terms and in the manner
contemplated in the Preliminary Prospectus, the Effective Prospectus and
the Final Prospectus; (iii) suspension of trading in securities generally
on the New York Stock Exchange, the American Stock Exchange or the Nasdaq
National Market System or limitation on prices (other than limitations on
hours or numbers of days of trading) for securities on either such exchange
or the Nasdaq National Market System; (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation,
rule or order of any court or other governmental authority which in your
opinion materially and adversely affects, or will materially and adversely
affect, the business or operations of the Company or any of its
Subsidiaries; (v) the declaration of a banking moratorium by either federal
or New York State authorities; or (vi) the taking of any action by any
federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States; or
(c) As provided in Sections 8, 10, and 11 of this Agreement.
This Agreement also may be terminated by the Underwriters, by notice to the
Company, as to any obligation of the Underwriters to purchase the Option Shares,
upon the occurrence at any time prior
34
<PAGE> 35
to the Option Closing Date of any of the events described in subparagraph (b)
above or as provided in Sections 8, 10, and 11 of this Agreement.
13. Successors. This Agreement has been and is made solely for the benefit
of the Underwriters, the Company, the Selling Stockholders, and their respective
successors, executors, administrators, heirs, and assigns, and the officers,
directors, and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares merely because of such purchase. No purchaser of
Shares from any Underwriter shall be deemed a successor or assign merely because
of such purchase.
14. Notices. All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed or delivered as follows: (a) if to
the Underwriters, to Equitable Securities Corporation, Nashville City Center,
Suite 800, 511 Union Street, Nashville, Tennessee 37219, Attention: Mr. Philip
D. Krebs, with a copy to Sherrard & Roe, PLC, 424 Church Street, Suite 2000,
Nashville, Tennessee 37219, Attention: Donald I.N. McKenzie, Esq.; (b) if to the
Company, to Service Experts, Inc., 1134 Murfreesboro Road, Nashville, Tennessee
37017, Attention, Mr. Alan R. Sielbeck, with a copy to Waller Lansden Dortch &
Davis, a Professional Limited Liability Company, 2100 Nashville City Center, 511
Union Street, Nashville, Tennessee, 37219-1760, Attention: J. Chase Cole, Esq.;
and (c) if to the Selling Stockholders, to ___________________________.
15. Miscellaneous. The reimbursement, indemnification, and contribution
agreements contained in this Agreement and the representations, warranties and
covenants of the Company and the Selling Stockholders in or pursuant to this
Agreement shall survive the delivery of and payment for the Shares hereunder and
shall remain in full force and effect regardless of (a) any termination of this
Agreement, (b) any investigation made by or on behalf of any Underwriter or
controlling person thereof, or by or on behalf of the Company, its directors or
officers or any controlling person of the Company, any Selling Stockholders or
any controlling person of any Selling Stockholders, and (c) acceptance of and
payment for the Shares under this Agreement the other covenants of the Company
in this Agreement shall remain in full force and effect regardless of (i) any
investigation made by or on behalf of any underwriter or controlling person and
(ii) delivery of any payment for the Shares under this Agreement.
The Company, the Selling Stockholders, and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any Underwriter
to the Company for inclusion in the Preliminary Prospectus, the Effective
Prospectus, and the Final Prospectus or the Registration Statement consists of
the information set forth in the last paragraph on the front cover page of the
Preliminary Prospectus, the Effective Prospectus, and the Final Prospectus
(insofar as such information relates to the Underwriters), information provided
in connection with Item 502(d) of Regulation S-K under the Securities Act and
information under the caption "Underwriting" in the Preliminary Prospectus, the
Effective Prospectus, and the Final Prospectus.
Any action under this Agreement taken by Equitable on behalf of the
Underwriters will be binding upon all the Underwriters.
35
<PAGE> 36
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Tennessee, without giving effect to its principles of
conflicts of law.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Stockholders, the
Company, and the several Underwriters in accordance with its terms.
Very truly yours,
SERVICE EXPERTS, INC.
By: _______________________________
Name:
Title:
Selling Stockholders listed on Schedule B
By: _______________________________
Attorney-in-Fact
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the
date first above written.
Equitable Securities Corporation
Alex. Brown & Sons Incorporated
A.G. Edwards & Sons, Inc.
Morgan Keegan & Company, Inc.
By: Equitable Securities Corporation
By: ______________________________
Managing Director
36
<PAGE> 37
SCHEDULE A
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
UNDERWRITERS TO BE PURCHASED
<S> <C>
Equitable Securities Corporation . . . . . . . . . . . .
Alex. Brown & Sons Incorporated . . . . . . . . . . . .
A.G. Edwards & Sons, Inc. . . . . . . . . . . . . . . .
Morgan Keegan & Company, Inc. . . . . . . . . . . . . .
---------
Total 3,200,000
=========
</TABLE>
37
<PAGE> 38
SCHEDULE B
SCHEDULE OF SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Firm Number of
Shares to be Option
Name of Selling Stockholder Sold Shares
- --------------------------- -------------- ---------
<S> <C> <C>
Total
--------- --------
1,350,000 100,000
========= ========
</TABLE>
38
<PAGE> 39
SCHEDULE C
SCHEDULE OF PERSONS REQUIRED TO EXECUTE LOCK-UP AGREEMENTS
39
<PAGE> 1
EXHIBIT 5
[WALLER LANSDEN DORTCH & DAVIS LETTERHEAD]
February 18, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Service Experts, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as counsel to Service Experts, Inc., a Delaware corporation
(the "Registration"), in connection with the preparation of a Registration
Statement on Form S-1 (the "Registration Statement") to be filed with the
Securities and Exchange Commission registering up to 3,680,000 shares of the
Common Stock, $.01 par value per share (the "Common Stock"), of the Registrant
to be sold by the Registrant and certain selling stockholders to Equitable
Securities Corporation, Alex. Brown & Sons Incorporated, A.G. Edwards & Sons,
Inc. and Morgan Keegan & Company, Inc. (the "Underwriters"), pursuant to the
Underwriting Agreement between the Registrant and the Underwriters, a form of
which was filed as Exhibit 1 to the Registration Statement (the "Underwriting
Agreement").
In connection with this opinion, we have examined and relied upon such
records, documents and other instruments as in our judgment are necessary and
appropriate in order to express the opinion hereinafter set forth, and have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, and the conformity to original documents of all
documents submitted to us as certified or photostatic copies.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock being sold by the Registrant will be, when issued and delivered in the
manner and on the terms described in the Registration Statement and the
Underwriting Agreement (after the Registration Statement is declared effective),
and the shares of Common Stock being sold by certain selling stockholders are,
duly authorized, validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and further consent to the reference to us under the
caption "Legal Matters" in the prospectus included in the Registration
Statement.
Very truly yours,
Waller Lansden Dortch & Davis
A Professional Limited Liability
Company
<PAGE> 1
SERVICE EXPERTS, INC.
EXHIBIT 11 -- COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1995 1996
------ ------ ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding.................................. 1,561 1,561 4,424
Net effect of dilutive stock options based on the treasury
stock method using average market price................... -- -- 27
------ ------ ------
Totals................................................. 1,561 1,561 4,451
====== ====== ======
Net income.................................................. $ 383 $ 708 $3,110
====== ====== ======
Net income per common share................................. $ .25 $ .45 $ .70
====== ====== ======
</TABLE>
<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 reports dated February 12, 1997, in the Registration Statement
(Form S-1) and related Prospectus of Service Experts, Inc. for the registration
of 3,680,000 shares of its common stock.
ERNST & YOUNG LLP
Nashville, Tennessee
February 17, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC. FOR THE TWELVE MONTHS ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,726
<SECURITIES> 0
<RECEIVABLES> 9,498
<ALLOWANCES> 620
<INVENTORY> 3,923
<CURRENT-ASSETS> 27,320
<PP&E> 8,790
<DEPRECIATION> 2,461
<TOTAL-ASSETS> 68,504
<CURRENT-LIABILITIES> 14,933
<BONDS> 0
0
0
<COMMON> 111
<OTHER-SE> 52,960
<TOTAL-LIABILITY-AND-EQUITY> 68,504
<SALES> 0
<TOTAL-REVENUES> 46,856
<CGS> 30,198
<TOTAL-COSTS> 43,035
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63
<INCOME-PRETAX> 4,306
<INCOME-TAX> 1,196
<INCOME-CONTINUING> 3,110
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,110
<EPS-PRIMARY> .70
<EPS-DILUTED> .69
</TABLE>
