<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
SERVICE EXPERTS, INC.
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(Name of Registrant as Specified in Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction
applies:
-----------------------------------------------------.
(2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------.
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
---------------------------------------------------------------
--------------------------------------------------------------.
(4) Proposed maximum aggregate value of transaction:
--------------.
(5) Total fee paid:
-----------------------------------------------.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------.
(2) Form, Schedule or Registration Statement No.:
-----------------.
(3) Filing Party:
-------------------------------------------------.
(4) Date Filed:
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<PAGE> 2
[LOGO]
111 WESTWOOD PLACE
SUITE 420
BRENTWOOD, TENNESSEE 37027
To Our Stockholders:
You are cordially invited to attend the Annual Meeting of
Stockholders, which is to be held on Friday, May 2, 1997, at 9:00 a.m. at the
SunTrust Financial Center, Fifth Floor, 424 Church Street, Nashville,
Tennessee. The following pages contain the formal notice of the Annual Meeting
and our Proxy Statement which describe the specific business to be considered
and voted upon at the Annual Meeting.
It is important that your shares be represented at the
meeting. Whether or not you expect to attend in person, we would greatly
appreciate your efforts to return the enclosed Proxy as soon as possible. If
you decide to attend the Annual Meeting, you may withdraw your Proxy should you
wish to vote in person.
We look forward to seeing you at the Annual Meeting.
Sincerely yours,
[SIG]
ALAN R. SIELBECK
Chairman of the Board and
Chief Executive Officer
<PAGE> 3
SERVICE EXPERTS, INC.
111 WESTWOOD PLACE
SUITE 420
BRENTWOOD, TENNESSEE 37027
-----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
FRIDAY, MAY 2, 1997
-----------------
Notice is hereby given that the Annual Meeting of Stockholders
(the "Annual Meeting") of Service Experts, Inc. (the "Company") will be held on
Friday, May 2, 1997 at 9:00 a.m. at the SunTrust Financial Center, Fifth Floor,
424 Church Street, Nashville, Tennessee, for the following purposes:
(1) To approve the proposed amendment to the
Company's 1996 Incentive Stock Plan to (i) increase from
700,000 to 1,300,000 the number of shares of Common Stock
authorized thereunder, (ii) require that no more than 250,000
shares of Common Stock be awarded to any person in a
three-year period and (iii) eliminate the requirement of
stockholder approval of certain administrative amendments;
(2) To approve the proposed amendment to the
Company's 1996 Employee Stock Purchase Plan to increase from
100,000 to 200,000 the number of shares of Common Stock
authorized thereunder;
(3) To adopt the Company's 1997 Nonqualified
Stock Option Plan;
(4) To elect two nominees as Class I directors of
the Company;
(5) To certify the appointment of Ernst & Young
LLP as independent public accountants to audit the
consolidated financial statements of the Company and its
subsidiaries for the year ended December 31, 1997; and
(6) To transact such other business as may
properly come before the meeting or any adjournments thereof.
Only stockholders of record at the close of business on March
26, 1997 will be entitled to vote at the Annual Meeting.
The enclosed Proxy Statement contains more information
pertaining to matters to be voted on at the Annual Meeting. Please read the
Proxy Statement carefully.
Each stockholder who does not plan to attend the Annual
Meeting is requested to date, sign and return the accompanying Proxy in the
enclosed, postage-paid envelope.
By Order of the Board of Directors,
[SIG]
ANTHONY M. SCHOFIELD
Chief Financial Officer,
Secretary and Treasurer
Nashville, Tennessee
April 7, 1997
<PAGE> 4
SERVICE EXPERTS, INC.
111 WESTWOOD PLACE
SUITE 420
BRENTWOOD, TENNESSEE 37027
-----------------
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 2, 1997
-----------------
This Proxy Statement is furnished to the holders of Common
Stock, $.01 par value per share ("Common Stock"), of Service Experts, Inc. (the
"Company") in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board of Directors") to be voted at the annual
meeting of stockholders of the Company (the "Annual Meeting") to be held on
Friday, May 2, 1997 at 9:00 a.m. at the SunTrust Financial Center, Fifth Floor,
424 Church Street, Nashville, Tennessee, and at any adjournments or
postponements thereof.
Only the holders of Common Stock of record at the close of
business on March 26, 1997 will be entitled to vote at the Annual Meeting. On
such date, 13,694,377 shares of Common Stock were outstanding. Each
stockholder is entitled to one vote per share held of record on the record
date. This Proxy Statement and the accompanying proxy are first being mailed
on or about April 7, 1997.
A majority of the shares of Common Stock entitled to vote,
represented in person or by proxy, is required to constitute a quorum. If a
quorum is not present at the time of the Annual Meeting, or if for any reason
the Company believes that additional time should be allowed for the
solicitation of proxies, the Company may adjourn or postpone the Annual Meeting
with or without a vote of the stockholders. If adjournment is proposed by the
Company, the person named on the enclosed proxy card will vote such shares for
which they have voting authority in favor of adjournment.
All shares of Common Stock represented at the Annual Meeting
by properly executed proxies received prior to or at the Annual Meeting and not
properly revoked will be voted at the Annual Meeting in accordance with the
instructions indicated thereon. If no specification is made, the proxies will
be voted in favor of the matters listed on the proxy card. Directors must be
elected by a plurality of votes cast (in person or by proxy) by the holders of
Common Stock entitled to vote at the Annual Meeting if a quorum is present.
All other matters shall be determined based upon the vote of the majority of
votes cast (in person or by proxy) by the holders of Common Stock entitled to
vote at the Annual Meeting if a quorum is present. Abstentions and broker
non-votes will not have the effect of voting in opposition to a director or of
a vote against the other proposals.
All expenses of the Annual Meeting, including the cost of
soliciting proxies, will be paid by the Company. The Company may reimburse
persons holding shares in their names for others, or holding shares for others
who have the right to give voting instructions, such as brokers, banks,
fiduciaries and nominees, for such persons' reasonable expenses in forwarding
the proxy materials to their principals.
Any stockholder giving a proxy may revoke it by delivering a
written notice of such revocation to the Secretary of the Company at 111
Westwood Place, Suite 420, Brentwood, Tennessee 37027 prior to the Annual
Meeting, by submitting to the Company a more recently dated proxy or by
attending the Annual Meeting and voting at any time before it is exercised.
In voting by proxy for the election of two nominees as Class I
directors to serve three year terms, stockholders may vote in favor of both
nominees, withhold their votes as to both nominees or withhold their votes as
to a specific nominee. If no instructions are indicated, such proxies will be
voted FOR the election of both nominees as directors.
<PAGE> 5
PROPOSAL 1: APPROVAL OF AMENDMENTS TO THE COMPANY'S 1996 INCENTIVE STOCK
PLAN
The Board of Directors adopted, subject to the approval of the
stockholders, amendments to the Company's 1996 Incentive Stock Plan (the
"Incentive Plan") (i) increasing the number of authorized shares of Common
Stock that may be issued under the Incentive Plan to 1,300,000, (ii) requiring
that no more than 250,000 shares of Common Stock be awarded to any person in a
three-year period and (iii) eliminating the requirement of stockholder approval
of certain administrative amendments.
DESCRIPTION OF PROPOSED AMENDMENTS
Currently, 700,000 shares of Common Stock have been reserved
for issuance pursuant to options granted under the Incentive Plan, of which
657,811 are subject to outstanding options. If the amendments are approved, an
additional 600,000 shares would be available for grant under the Incentive
Plan. The Incentive Plan currently does not restrict the number of shares that
may be granted to any person. The amendments, if approved, would require that
no more than 250,000 shares of Common Stock be awarded under an option to any
person during a three-year period. In addition, the Incentive Plan currently
requires stockholder approval of any amendment that could materially increase
benefits accruing to option holders, as that term is used in Rule 16b-3
promulgated by the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934 ("Rule 16b-3"). If approved, the amendments
would limit the requirement of stockholder approval to those matters that are
enumerated in Sections 422 and 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code").
REASONS FOR CHANGES
The Board of Directors believes that additional shares should
be authorized under the Incentive Plan so that the Company will continue to
have a mechanism to attract and motivate quality employees as the Company
continues to implement its growth strategy. The limit on the number of shares
that can be awarded to an individual under an option is recommended, since
there currently is no such limit under the Incentive Plan, and this restriction
will enable the Company to treat compensation recognized by option holders as
"performance based" pay under Section 162(m) of the Code. Compensation that is
not performance based pay cannot be deducted for tax purposes to the extent it
exceeds $1 million in a year. This amendment is intended to preserve the
Company's right to deduct compensation recognized by option holders, as
described under "Federal Income Tax Consequences." Finally, the Board of
Directors believes that it is appropriate to eliminate the Rule 16b-3
requirements for stockholder approval of future amendments because Rule 16b-3
has been itself amended to delete these stockholder approval requirements.
Instead, consistent with the requirements of the Code, the amended Incentive
Plan will require stockholder approval of amendments that increase the
aggregate number of shares that can be issued pursuant to the Incentive Plan,
change the class of employees eligible to receive "incentive stock options"
(described in Section 422 of the Code), change the maximum number of shares
that can be awarded to any employee under an option, or increase the period
during which options may be granted or exercised.
DESCRIPTION OF INCENTIVE PLAN
The purpose of the Incentive Plan is to provide a performance
incentive to employees and others who perform services that enhance the value
of stockholders' equity. Plan participants, from time to time, are awarded (i)
incentive stock options ("ISOs") as defined in Section 422 of the Code, (ii)
options that are not so qualified as incentive stock options ("NQSOs") and
(iii) stock appreciation rights ("SARs"). These awards are intended to serve
as an encouragement to participants in the Incentive Plan to remain with the
Company and to more closely align their interests with the interests of the
Company and its stockholders. The Incentive Plan will terminate in 2006 if not
terminated earlier.
The compensation committee of the Board of Directors (the
"Compensation Committee") is authorized to administer the Incentive Plan and to
award options and SARs to Company employees and to certain others who provide
significant services to the Company. ISOs may be granted only to Company
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employees. If the stockholders approve a proposal to adopt the Company's 1997
Nonqualified Stock Option Plan, it is anticipated that the Compensation
Committee will award only ISOs under the Incentive Plan.
The Compensation Committee determines which individuals are to
receive awards under the Incentive Plan, whether to award ISOs, NQSOs or SARs
and the exercise prices and vesting dates of award. The exercise price of
NQSOs may not be less than 85% of the fair market value of the Common Stock on
the date of grant. The exercise price of ISOs 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 the grant, owns more than 10% of the total
outstanding Common Stock, as determined in good faith by the Compensation
Committee). The aggregate fair market value of Common Stock with regard to
which ISOs are exercisable by an individual for the first time during any
calendar year may not exceed $100,000. No option shall be exercisable after
the expiration of ten years from the date the option is granted (five years in
the case of ISOs granted to employees who at the time of grant own more than
10% of the total outstanding Common Stock).
The Company has granted options to purchase 657,811 shares of
Common Stock under the Incentive Plan. The exercise price under which options
have been granted has been the fair market value of the Company's Common Stock
on the date of grant, which has ranged from $13.00 to $27.88 per share. All
awards of options have been made so that one-third of the award becomes
exercisable on each anniversary date of the award, commencing with the second
anniversary. As of March 26, 1997, the aggregate market value of the 657,811
shares of Common Stock underlying the options issued pursuant to the Incentive
Plan was approximately $14.2 million.
Once an option has become exercisable, the participant may
purchase shares of Common Stock from the Company by paying the exercise price
in cash or in other consideration acceptable to the Compensation Committee.
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.
SARs entitle the holder to receive a cash payment equal to the
fair market value of a specified number of shares of Common Stock, minus a
specified price that is at least 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 NQSOs. No SAR is exercisable more than ten years after it is
granted. As of March 26, 1997, no SARs had been granted by the Company.
Options and SARs awarded under the Incentive Plan become
exercisable without regard to the applicable vesting schedule in the event of
the death, permanent disability or retirement of the recipient. Subject to
limitations on deductibility of "golden parachute" payments described in
Section 280G of the Code, options also become fully exercisable upon the
occurrence of a merger or certain other corporate transactions in which the
Company is not the survivor.
The amount of any award under the Incentive Plan is subject to
the discretion, within the terms of the Incentive Plan, of the Compensation
Committee and, therefore, cannot be determined in advance. Similarly, the
dollar value of such awards cannot be determined prior to their grant. The
table below provides information for 1996 regarding the dollar value and the
number of shares underlying awards granted under the Incentive Plan.
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NEW PLAN BENEFITS
1996 INCENTIVE STOCK PLAN
<TABLE>
<CAPTION>
DOLLAR VALUE NUMBER OF SHARES
OF 1996 UNDERLYING 1996
NAME AND POSITION STOCK OPTIONS(1) STOCK OPTIONS
----------------- --------------- -------------
<S> <C> <C>
Alan R. Sielbeck . . . . . . . . . . . . $ 350,000 40,000
Chairman of the Board and
Chief Executive Officer
James D. Abrams . . . . . . . . . . . . . 350,000 40,000
President and Chief Operating Officer
Anthony M. Schofield . . . . . . . . . . 520,000 40,000
Chief Financial Officer, Secretary and
Treasurer
Executive Group . . . . . . . . . . . . . 1,220,000 120,000
Non-Executive Director Group . . . . . . -- --
Non-Executive Officer 4,705,846 537,811
Employee Group . . . . . . . . . . . . .
</TABLE>
__________________________
(1) Based upon the closing sale price of the Company's Common Stock of
$26.00 as reported on The Nasdaq Stock Market's National Market (the
"Nasdaq National Market") on December 31, 1996, less the exercise price.
FEDERAL INCOME TAX CONSEQUENCES
Tax consequences to the Company and to participants of awards
of options will vary with the type of option awarded. A participant will not
recognize income, and the Company is not entitled to take a deduction, upon the
grant of an ISO, NQSO or SAR under the Incentive Plan. If the participant does
not sell the Common Stock acquired through the option for at least two years
after the date of grant of an ISO and one year after exercising the ISO, he
will not recognize ordinary income on the purchase of Common Stock. Any gain
or loss on the sale of the Common Stock after these holding periods will be
subject to capital gains treatment.
A participant who disposes of the Common Stock before these
holding periods are satisfied will have engaged in a "disqualifying
disposition" and will recognize taxable compensation on the difference between
the exercise price of the ISO and the fair market value of the Common Stock at
the time the ISO was exercised. The participant's basis in the Common Stock
after a disqualifying disposition is its fair market value at the time of
exercise. The participant will also be subject to tax on capital gain, if any,
upon the sale of the Common Stock on the amount realized in excess of the
increased basis. Generally, the Company is not entitled to a tax deduction
upon the grant of an option or the exercise of an ISO under the Incentive Plan.
However, if the participant engages in a disqualifying disposition, the Company
may take a tax deduction for the amount of ordinary income recognized by the
participant.
Upon exercise of a NQSO, the participant recognizes taxable
compensation on the difference between the fair market value of the Common
Stock and the exercise price paid under the NQSO. The Company is entitled to
deduct this amount for tax purposes, provided that the Company pays an
appropriate amount of withholding tax to the Internal Revenue Service for the
income recognized by the participant. The participant is also subject to
capital gains treatment on the subsequent sale of the Common Stock acquired
through the exercise of an option.
The tax consequences of SARs are similar to those for NQSOs.
No income is recognized by the participant on the award of an SAR.
Compensation income is recognized on the difference between the exercise price
of the SAR and the fair market value of Common Stock on the date the SAR is
exercised,
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or the date that the value of the SAR is no longer subject to adjustment for
changes in the value of Common Stock. The Company is entitled to a
corresponding deduction for the compensation paid to the participant. Such
amounts are treated as ordinary compensation and are subject to normal tax
withholding requirements.
Corporate deductions for reasonable compensation paid to
certain executive officers are limited to $1 million per year under Section
162(m) of the Code. The Company's 1997 Nonqualified Stock Option Plan is
intended to be a "performance-based compensation plan" under Section 162(m) of
the Code so that all compensation amounts recognized through the exercise of
options will be deductible by the Company.
REGISTRATION UNDER THE SECURITIES ACT OF 1933
The Company intends to register the additional shares of
Common Stock authorized for issuance under the Incentive Plan on a Registration
Statement on Form S-8 as soon as practicable after approval by the
stockholders.
REQUIRED VOTE
Approval of the proposed amendments to the Incentive Plan
requires the affirmative vote of the majority of the votes cast (in person or
by proxy) by the holders of Common Stock entitled to vote at the Annual
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
AMENDMENTS TO THE 1996 INCENTIVE STOCK PLAN.
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PROPOSAL 2: APPROVAL OF AMENDMENT TO THE COMPANY'S 1996 EMPLOYEE STOCK
PURCHASE PLAN
The Board of Directors adopted, subject to approval of the
stockholders, an amendment to the Company's 1996 Employee Stock Purchase Plan
(the "Employee Plan") increasing the number of authorized shares of Common
Stock under the Employee Plan from 100,000 to 200,000.
DESCRIPTION OF PROPOSED AMENDMENT
The Employee Plan, as amended, will provide for an increase in
the number of shares of Common Stock reserved for purchase under the Employee
Plan from 100,000 to 200,000. The purpose of the Employee Plan is to provide
an opportunity for employees of the Company and its subsidiaries (collectively,
the "Employees") to share in the growth and prosperity of the Company and its
subsidiaries by acquiring a proprietary interest in the Company through
acquisition of shares of the Company's Common Stock. Of the 100,000 shares
reserved for issuance under the Employee Plan, 22,655 shares have been issued
under the Employee Plan.
DESCRIPTION OF THE EMPLOYEE PLAN
The Employee Plan grants to all eligible Employees an option
to purchase shares of Common Stock at a modest discount from market value. The
option is granted on January 1 of each year. As of December 31, 1996, the
Company employed approximately 1,250 Employees, including 20 Employees at its
corporate offices. The Employee Plan is administered by the Compensation
Committee. No member of the Compensation Committee is eligible to participate
in the Employee Plan.
All Employees who have been employed for at least six months
are eligible to participate in the Plan, except: (i) Employees who are
regularly scheduled to work less than 20 hours per week, (ii) Employees who are
regularly scheduled to work fewer than 5 months during the year or (iii)
Employees who directly or indirectly own (or would own upon exercise of
options) 5% or more of the voting power or the value of all classes of the
Company's capital stock.
The Employee Plan operates on a yearly basis running from
January 1 to December 31 of each year (a "Plan Year"). On the first business
day of each year (the "Grant Date"), each eligible Employee is granted an
option to purchase shares of Common Stock on the last business day of that year
(the "Exercise Date"). The purchase price of the Common Stock under the option
is 85% of the Common Stock's market price on either the Grant Date or the
Exercise Date, whichever is lower. This right to purchase Common Stock is
limited to the number of shares that may be purchased with 10% of the eligible
Employee's compensation during the year. Moreover, the amount of Common Stock
acquired through the Employee Plan during a calendar year cannot exceed $25,000
(based on the fair market value of the Common Stock on the Grant Date). In
order to exercise the option granted under the Employee Plan, an Employee must
execute an election to participate form authorizing the Company to
automatically deduct a portion of the Employee's regular pay to be held for the
purchase of Common Stock. The payroll deductions are deposited in an account
established on the records of the Company on behalf of each Employee (the
"Contribution Account"). On each Exercise Date, the funds in the participating
Employee's Contribution Account are used to purchase shares of Common Stock.
Options which are not exercised by the participating Employee terminate on the
Exercise Date. In the event an outstanding option expires for any reason, the
shares of Common Stock allocable to the unexercised portion of the option may
again be subject to option under the Employee Plan.
FEDERAL INCOME TAX CONSEQUENCES
The Employee Plan is intended to qualify as an employee stock
purchase plan within the meaning of Section 423 of the Code. As a consequence,
neither the grant nor the exercise of the options will result in taxable income
to a participating Employee or a tax deduction for the Company if the Common
Stock purchased under the Employee Plan is held for at least one year after the
date of purchase. When the
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Employee sells the Common Stock after the one-year holding period (or in the
event of death), the Employee will recognize ordinary income equal to the
lesser of (i) the excess of fair market value at disposition over the amount
paid under the option or (ii) the excess of fair market value at the time the
option was granted over the option price. The ordinary income recognized will
be added to the adjusted basis of the stock and any additional gain will be
capital gain. If the Employee sells Common Stock purchased under the Employee
Plan before the completion of the one-year holding period, the difference
between the fair market value at exercise and the amount paid under the option
will be taxable as ordinary income. This amount will be added to the adjusted
basis of the Common Stock, and any additional gain or loss will be capital
gain. If the shares are sold prior to expiration of the one-year holding
period, the Company will be entitled to a tax deduction equal to the amount
included as ordinary income to the Employee.
REGISTRATION UNDER THE SECURITIES ACT OF 1933
The Company intends to register the additional shares of
Common Stock authorized for issuance under the Employee Plan on a Registration
Statement on Form S-8 as soon as practicable after approval by the
stockholders.
REQUIRED VOTE
Approval of the proposed amendment to the Employee Plan
requires the affirmative vote of the majority of the votes cast (in person or
by proxy) by the holders of Common Stock entitled to vote at the Annual
Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
AMENDMENT TO THE 1996 EMPLOYEE STOCK PURCHASE PLAN.
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PROPOSAL 3: ADOPTION OF THE COMPANY'S 1997 NONQUALIFIED STOCK OPTION PLAN
DESCRIPTION OF 1997 PLAN
The Board of Directors has adopted the Service Experts, Inc. 1997 Nonqualified
Stock Option Plan (the "1997 Plan"). The purpose of the 1997 Plan is to
provide a performance incentive to employees and others who perform services
that enhance the value of stockholders' equity. Plan participants are from
time to time awarded options to purchase shares of Common Stock of the Company
as an encouragement to remain with the Company and to more closely align their
interests with the interests of the Company and its stockholders.
The Compensation Committee is authorized to administer the 1997 Plan and to
award options to employees of the Company and certain others who provide
significant services to the Company. The Compensation Committee determines
which individuals are to receive options, the number of shares of Common Stock
that may be purchased thereunder, the exercise price of an option, and the
vesting and termination dates of the option. Under the 1997 Plan, options
granted at any time by the Compensation Committee may not exceed that number of
shares which equals the sum of (i) 9.5% of the total number of outstanding
shares of Common Stock at that time, minus (ii) the number of shares of Common
Stock that are authorized for issuance under the Incentive Plan. In other
words, the combined number of shares of Common Stock that may be subject to
options at any time under the 1997 Plan and the Incentive Plan will not exceed
9.5% of the total number of outstanding shares of Common Stock.
Options granted under the 1997 Plan will not be treated as "incentive stock
options" for purposes of Section 422 of the Code. Once an option has become
exercisable in whole or in part, under the terms of an option agreement, the
holder may purchase shares of Common Stock from the Company by paying the
exercise price in cash or in other consideration acceptable to the Compensation
Committee. No participant may receive options to purchase more than 250,000
shares of Common Stock during any three-year period under the 1997 Plan.
Subject to limitations on deductibility of "golden parachute" payments
described in Section 280G of the Code, options will become fully exercisable
upon the occurrence of certain corporate transactions in which the Company is
not the survivor. The number of shares of Common Stock that may be purchased
under an option is automatically adjusted for certain corporate changes,
including stock dividends, recapitalizations, stock splits and consolidations.
The 1997 Plan may be amended by the Board of Directors at any time, provided
that stockholder approval is required for any amendment that increases the
number of shares that may be purchased under an option by any individual or
that increases the total number of shares that may be subject to options
awarded under the 1997 Plan.
FEDERAL INCOME TAX CONSEQUENCES
The Company is not entitled to take a tax deduction, and a participant does not
recognize income, at the time an option is awarded under the 1997 Plan. Upon
exercise of the option, the participant recognizes taxable compensation on the
difference between the fair market value of the Common Stock and the exercise
price paid under the option. The Company is entitled to take a tax deduction
on this amount, provided that the Company pays an appropriate amount of
withholding tax to the Internal Revenue Service for the income recognized by
the participant. The participant is subject to capital gains treatment on the
subsequent sale of the Common Stock acquired through the exercise of an option.
Corporate deductions for reasonable compensation paid to certain executive
officers are limited to $1 million per year under Section 162(m) of the Code.
The 1997 Plan is intended to be a "performance-based compensation plan" under
Section 162(m) of the Code so that all compensation amounts recognized through
the exercise of options will be deductible by the Company.
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REGISTRATION UNDER THE SECURITIES ACT OF 1933
The Company intends to register the shares of Common Stock authorized for
issuance under the 1997 Plan on a Registration Statement on Form S-8 as soon as
practicable after approval by the stockholders of the Company.
REQUIRED VOTE
Approval of the proposed 1997 Plan requires the affirmative
vote of the majority of the votes cast (in person or by proxy) by the holders
of Common Stock entitled to vote at the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
1997 NONQUALIFIED STOCK OPTION PLAN.
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PROPOSAL 4: ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation ("Restated
Certificate") provides that the Board of Directors shall be divided into three
classes of as nearly equal size as possible. Approximately one-third of the
directors are elected each year. The Board of Directors has nominated the two
individuals named below under the caption "Class I Nominees" for election as
directors to serve until the annual meeting of stockholders in 2000 or until
their successors have been elected and qualified. All of the Class I nominees
are currently serving on the Board of Directors of the Company with terms
expiring at this Annual Meeting.
The Company's Bylaws provide that the Board of Directors shall
consist of not less than two nor more than 11 directors as established by the
Board of Directors. The size of the Board of Directors has been established at
six directors.
REQUIRED VOTE
Directors are elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. The Company's Restated Certificate does not provide for cumulative
voting and, accordingly, the holders of the Company's Common Stock do not have
cumulative voting rights with respect to the election of directors.
Consequently, each stockholder may cast one vote per share for each nominee.
Unless a proxy specifies otherwise, the persons named in the proxy will vote
the shares covered thereby FOR the nominees designated by the Board of
Directors listed below. Should any nominee become unavailable for election, an
event not now anticipated, shares covered by a proxy will be voted for a
substitute nominee selected by the current Board of Directors.
CLASS I NOMINEES:
RAYMOND J. DE RIGGI
Age -- 49
Director 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.
NORMAN T. ROLF, JR.
Age -- 50
Director since August 1996
Since 1988, Mr. Rolf has served as President of Rolf Coal and
Fuel Corp., a subsidiary of the Company for which he previously served as a
director and has been employed in various positions since 1966.
CONTINUING DIRECTORS:
The persons named below will continue to serve as directors
until the annual meeting of stockholders in the year indicated and until their
successors are elected and take office. Stockholders are not voting at this
Annual Meeting on the election of Class II and Class III directors. The
following shows the names, ages and principal occupations of each continuing
director and the year in which each was first elected to the Board of
Directors.
10
<PAGE> 14
CLASS II DIRECTORS SERVING UNTIL 1998:
JAMES D. ABRAMS
Age -- 49
Director since March 1996
Mr. Abrams has served as President, Chief Operating Officer
and as a director of the Company since its inception in March 1996. From 1990
to 1996, Mr. Abrams served as Chief Executive Officer and a director of
Contractor Success Group, Inc. ("CSG"), one of the subsidiaries of the Company.
Mr. Abrams has served as President of Air Experts, a United Services Co., Inc.
("Air Experts") and Service Experts of Palm Springs, Inc., each a subsidiary of
the Company, since 1993. Mr. Abrams has served as President and sole director
of Air Comfort Services, Inc., a heating, ventilating and air conditioning
("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 owned Air Experts and Service Experts of Palm Springs, Inc.
prior to their combinations with the Company. He resigned from his positions
with Service Now prior to the closing of the initial public offering of the
Company on August 21, 1996 (the "IPO"). From 1991 to 1995, Mr. Abrams served
as Chief Executive Officer and a director of Future University, Inc. ("Future
University"). Mr. Abrams currently serves on the Advisory Board of Boatmen's
National Bank (Southern Region).
WILLIAM G. ROTH
Age -- 58
Director since August 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 Officer of Dravo Corporation from 1987 to 1989. From 1985 to 1987,
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 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.
CLASS III DIRECTORS SERVING UNTIL 1999:
ALAN R. SIELBECK
Age -- 44
Director since March 1996
Mr. 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 of the Company, since 1990 and 1991, respectively. From 1985 to
1990, Mr. Sielbeck served as President of RC Mathews Contractor, Inc., a
commercial building general contractor, and Chief Financial Officer of RCM
Interests, Inc., a commercial real estate developing company.
11
<PAGE> 15
TIMOTHY G. WALLACE
Age -- 38
Director 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.
INFORMATION REGARDING THE BOARD OF DIRECTORS
The Board of Directors held three meetings during 1996,
including regular and special meetings. Each director attended at least 75% of
the meetings of the Board of Directors and committees thereof on which the
director serves. In addition, the Board of Directors took seven actions by
unanimous written consent during 1996.
The Committees of the Board of Directors consist of an Audit
Committee, on which Messrs. De Riggi and Wallace serve, and a Compensation
Committee, on which Messrs. Roth and Wallace serve. During 1996, the Audit
Committee did not meet. The Compensation Committee did not meet in 1996, but
took two actions by written consent. The Audit Committee is responsible for
recommending the independent public accountants to the Board of Directors,
reviewing audit fees and supervising matters relating to audit functions and
other financial controls. The Compensation Committee is responsible for
approving compensation arrangements for executive officers of the Company,
reviewing compensation plans, granting stock options and SARs and reviewing
employee compensation policies. The Board of Directors has no standing
nominating committee.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no
additional compensation for serving on the Board of Directors. Non-employee
directors are 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, non-employee directors are entitled to receive (i) a fee
of $10,000 per year and (ii) options for the purchase of 1,000 shares of Common
Stock automatically issued as of January 1 of each year during which the
non-employee director serves the Company at a per share price equal to the
closing price of the Common Stock on the date of grant. Such newly granted
options are immediately exercisable for all shares subject to such options.
Board members are reimbursed for their expenses for each meeting attended.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE ELECTION OF ALL OF THE PROPOSED CLASS I NOMINEES
TO THE BOARD OF DIRECTORS.
12
<PAGE> 16
PROPOSAL 5: SELECTION OF AUDITORS
Upon the recommendation of the Audit Committee, the Board of
Directors of the Company has appointed, subject to the approval of the
stockholders, the firm of Ernst & Young LLP as independent public accountants
to audit the Company's consolidated financial statements for the year ended
December 31, 1997. If the appointment of Ernst & Young LLP is not approved by
the stockholders, the matter will be referred to the Audit Committee for
further review.
It is anticipated that representatives of Ernst & Young LLP
will attend the Annual Meeting and will have an opportunity to make a
statement, if they determine to do so, and will be available to respond to
questions at that time.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE
SELECTION OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS TO AUDIT THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997.
13
<PAGE> 17
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding
beneficial ownership as of March 26, 1997 by (i) each director, nominee for
director and executive officer, (ii) each person known by the Company to be the
beneficial owner of more than 5% of the Common Stock of the Company, and (iii)
all directors and executive officers as a group. Except as otherwise
indicated, the beneficial owners listed below have sole voting and investment
power with respect to all shares owned by them, except to the extent such power
is shared by a spouse under applicable law.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
NAME OF BENEFICIAL OWNER OWNED(1) SHARES
------------------------ -------- ------
<S> <C> <C>
Alan R. Sielbeck(2) . . . . . . . . . . . . . . . . . . . . . . . 820,255 6.0%
James D. Abrams(2) . . . . . . . . . . . . . . . . . . . . . . . 803,044(3) 5.9
John R. Young(4) . . . . . . . . . . . . . . . . . . . . . . . . 837,855(3) 6.1
R. Edward Hutton, Jr.(2) . . . . . . . . . . . . . . . . . . . . 695,763 5.1
Anthony M. Schofield . . . . . . . . . . . . . . . . . . . . . . 3,000 *
Raymond J. De Riggi . . . . . . . . . . . . . . . . . . . . . . . 6,000(5) *
Timothy G. Wallace . . . . . . . . . . . . . . . . . . . . . . . 6,000(5) *
William G. Roth . . . . . . . . . . . . . . . . . . . . . . . . . 11,000(5) *
Norman T. Rolf, Jr. . . . . . . . . . . . . . . . . . . . . . . . 132,647 *
All directors and executive officers as a group (seven persons) . 1,781,946(3)(6) 13.0
</TABLE>
- ----------------------------
* Less than 1%.
(1) Includes shares of Common Stock subject to options which may be exercised
within 60 days of March 26, 1997. Such shares are deemed to be
outstanding for the purposes of computing 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 in the
table.
(2) The indicated person's address is c/o Service Experts, Inc., 111 Westwood
Place, Suite 420, Brentwood, Tennessee 37027.
(3) Includes 108,641 shares owned by Service Now, of which Messrs. Abrams
and Young are principal stockholders.
(4) Mr. Young's address is c/o John Young & Associates, 13950 Switzer,
Overland Park, Kansas 66221.
(5) Includes 6,000 shares subject to outstanding options held by such
individuals.
(6) Includes 18,000 shares subject to outstanding options held by such
individuals.
COMPLIANCE WITH REPORTING REQUIREMENTS OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers, directors and persons who own more than 10% of a
registered class of the Company's securities to file reports of ownership and
changes in ownership with the SEC.
Based solely on a review of copies of reports filed with the SEC
and written representations from certain of the Company's directors and
executive officers that no other reports were required, the Company notes that
William G. Roth filed a report on Form 4 after inadvertently failing to report
in a timely manner the purchase of 5,000 shares of Common Stock.
14
<PAGE> 18
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning
compensation paid or accrued by or on behalf of the Company's (i) Chief
Executive Officer and (ii) the two other executive officers of the Company
(hereinafter, collectively referred to as the "Named Executive Officers") for
services rendered in all capacities to the Company for the year ended December
31, 1996:
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ----------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION($)(2) OPTIONS(#)
------------------ ---- ------------ ------------------ ----------------
<S> <C> <C> <C> <C>
Alan R. Sielbeck . . . . . . . . . 1996 $86,538 -- 40,000
Chairman of the Board and
Chief Executive Officer
James D. Abrams . . . . . . . . . . 1996 86,538 -- 40,000
President and
Chief Operating Officer
Anthony M. Schofield . . . . . . . 1996 58,385 -- 40,000
Chief Financial Officer,
Secretary and Treasurer
</TABLE>
- --------------
(1) Does not include amounts paid by the Company's subsidiaries prior to being
acquired by the Company on August 21, 1996.
(2) Perquisites and other personal benefits paid to each of the Named
Executive Officers is less than $50,000 or 10% of the total salary and
bonus reported for the Named Executive Officers, and, therefore, the
amount of such other annual compensation is not reported.
The following table sets forth information concerning the stock options
granted to the Named Executive Officers in 1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES
SECURITIES PERCENT OF OF STOCK PRICE
UNDERLYING TOTAL OPTIONS EXERCISE APPRECIATION
OPTIONS GRANTED TO OF BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------------
NAME (#)(1) FISCAL YEAR ($/SH) 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 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 $13.00, the
exercise price of the options granted.
15
<PAGE> 19
No options were exercised in the year ended December 31, 1996.
The following table summarizes certain information with respect to unexercised
options held as of the end of the fiscal year by the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END(#) AT FISCAL YEAR-END($)(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) Based upon the closing sale price of the Company's Common Stock of
$26.00 per share as reported on the Nasdaq National Market on December
31, 1996, less the exercise price for the options.
The Company has not awarded SARs to any employee of the Company
and has no long-term incentive plans, as such term is defined in SEC
regulations.
EMPLOYMENT CONTRACTS AND TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
Pursuant to employment agreements, effective as of August 21,
1996, Messrs. Sielbeck, Abrams and Schofield 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 Named 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
Named 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 a Named Executive Officer is terminated upon a
"change-in-control" (as defined in the employment agreement), such Named
Executive Officer 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, such Named 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
16
<PAGE> 20
foregoing, the Company is not required to pay any amount which is not
deductible for federal income tax purposes.
Each Named 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 a Named Executive Officer is terminated for cause
(as defined in the employment 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 Named Executive Officer's employment agreement
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 a Named Executive Officer becomes disabled for a
period of 60 consecutive days, he is entitled to receive his base salary,
insurance, bonus and other benefits for a period of six months from the date
such disability began or for such shorter period as he is unable to perform his
duties hereunder. In the event he is unable to perform his duties hereunder
after the expiration of the six-month period, his employment agreement will
terminate.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors during 1996
consisted of Mr. Roth and Mr. Wallace. None of the members of the Compensation
Committee have at any time been an officer or employee of the Company.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan R. Sielbeck . . . . . . . 44 Chairman of the Board and Chief Executive Officer
James D. Abrams . . . . . . . . 49 President and Chief Operating Officer
Anthony M. Schofield . . . . . 42 Chief Financial Officer, Secretary and Treasurer
</TABLE>
See "Proposal 4: Election of Directors -- Continuing Directors"
for information regarding the backgrounds of Messrs. Sielbeck and Abrams.
Mr. Schofield has served as Chief Financial Officer, Secretary
and Treasurer of the Company since June 1996. From 1982 to 1996, Mr. Schofield
served as Cost Manager, Vice-President-Controller, Senior Vice-President of
Finance, and Division Controller for Perrigo Company of Tennessee, formerly
Cumberland-Swan, Inc., a manufacturer of personal care health and beauty aid
products. Mr. Schofield is certified by the American Institute of Certified
Public Accountants as well as the Institute of Management Accountants, holding
both CPA and CMA designations.
17
<PAGE> 21
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is submitted by the Compensation Committee of the
Company at the direction of the Board of Directors pursuant to rules
established by the SEC. This report provides certain data and information
regarding the compensation and benefits provided to Mr. Sielbeck, the Company's
Chief Executive Officer, as well as to Messrs. Abrams and Schofield. The
Compensation Committee is responsible for establishing and administering the
Company's executive compensation policies and programs within the guidelines of
the Company's compensation philosophy.
Prior to the formation of the Compensation Committee on August
15, 1996, each Named Executive Officer entered into an Employment Agreement
with the Company that established his base salary for 1996. The Compensation
Committee did not establish or recommend the base salary or bonus for the Named
Executive Officers in 1996. Under the terms of the Employment Agreements, the
Compensation Committee will determine increases in base salaries and bonus
compensation paid to the Named Executive Officers beginning in 1997.
COMPENSATION PHILOSOPHY
At the direction of the Board of Directors and the Compensation
Committee, William M. Mercer, Incorporated ("Mercer") was engaged in late 1996
as an independent compensation consultant for the purpose of assisting the
Compensation Committee in developing a comprehensive compensation policy for
executives and other key employees that would address the immediate and
long-term goals of the Company as a publicly traded corporation. The
Compensation Committee's philosophy is to provide significant ownership
opportunity to the Named Executive Officers and other key employees so that
they will continue to be motivated towards stockholder return and increased
stockholder value. With respect to key employees of the HVAC companies owned
and operated by the Company, Mercer has recommended and the Compensation
Committee is considering performance incentives based on the net revenue and
profitability of the individual companies. The compensation policies and
programs to be utilized by the Compensation Committee with respect to the Named
Executive Officers will be designed to motivate and retain such officers and
are expected to consist generally of the following:
- Base salaries competitive with those paid to executive
officers of companies comparable in size and performance
to the Company;
- Annual incentive compensation that reflect the executive
officer's contribution to the Company's short-term
objectives; and
- Long-term incentive compensation in the form of stock
options and SARs that reflect the executive officer's
contribution to the Company's long-term goals.
The compensation program of the Company for its Named Executive
Officers currently consists of (i) base salary and annual incentive
compensation in the form of cash bonuses, (ii) long-term incentive compensation
in the form of stock options and (iii) use of an automobile with respect to
Messrs. Sielbeck and Abrams.
COMPENSATION
Mercer is currently reviewing compensation practices in selected
companies of comparable size and performance and will recommend base salaries,
annual incentive target guidelines, equity grant
18
<PAGE> 22
practices and share ownership guidelines for the Named Executive Officers of
the Company. In reviewing Mercer's recommendations and determining the
Company's executive compensation policies, the Compensation Committee may
continue to seek outside data and recommendations of other compensation
consultants.
The following briefly describes the sources of compensation:
Base Salary. Each of the Named Executive Officers entered into
an employment agreement effective August 21, 1996 that established his
respective base salary. Under the terms of the employment agreements, the
Compensation Committee has the sole discretion to increase the base salaries of
the Named Executive Officers. Such increases, if any, to base salary will be
made after receiving the recommendation of Mercer and comparisons to the base
salaries of executive officers of selected companies similar in size and
performance to the Company located in various parts of the United States. In
addition, increases to base salaries will be based upon an assessment,
reflecting competitive market practices, experience, tenure in position and
individual and corporate performance.
Annual Incentive Compensation. The Named Executive Officers'
annual incentive compensation will consist of cash bonuses. Such compensation
will be made after receiving the recommendation of Mercer and will reflect the
degree to which the Named Executive Officer contributes to the realization of
established short-term objectives of the Company. These bonuses are intended
to be a substantial incentive for the Named Executive Officers to achieve those
objectives. This pay policy will provide annual incentive compensation that is
substantially measured as a percentage of base salary, thus enhancing the
performance based component of the total cash compensation. The Compensation
Committee intends to utilize a formula based upon performance factors,
including, but not limited to, a comparison of actual net revenue, pre-tax
earnings, profit margins and cash flow from operations achieved during the year
compared to targeted amounts for such results. Each of these factors will
generally be weighted equally in application of the bonus formula. Annual
incentive compensation and the total annual cash compensation are intended to
be competitive with prevailing market practices.
Long-Term Incentive Compensation. The Company's long-term
compensation strategy includes the grant of stock options and SARs. The
Company grants stock options and SARs to provide a total compensation package
which rewards contributions by the Named Executive Officers to the Company's
long-term stock performance. These grants are intended not only to motivate
and retain the Named Executive Officers in the service of the Company, but to
induce them to direct their efforts toward optimizing total return to
stockholders as measured over an extended period of time and to more closely
align the Named Executive Officers' interests with those of the Company's
stockholders.
Based on Mercer's recommendation, the Compensation Committee will
prepare long-term target objectives for the Company and determine the long-term
incentive awards to be made to the Named Executive Officers relating to the
attainment of these objectives. In 1996, the Compensation Committee granted
options to purchase 40,000 shares of the Company's Common Stock to each of the
Named Executive Officers. The amounts awarded to the Named Executive Officers
reflect their vital role in the formation of the Company and the development of
its business plans and procedures.
19
<PAGE> 23
COMPENSATION PAID IN 1996 TO THE CHIEF EXECUTIVE OFFICER
Under Alan R. Sielbeck's employment agreement, Mr. Sielbeck's
annual base salary is subject to annual increases at the discretion of the
Compensation Committee. Mr. Sielbeck is entitled to participate in the
Incentive Plan and the 1997 Plan and all other benefit programs generally
available to executive officers of the Company. The Company does not provide
Mr. Sielbeck with incidental perquisites such as club memberships, financial
planning or other similar items, other than use of an automobile. The
Compensation Committee did not establish Mr. Sielbeck's 1996 base salary.
Pursuant to the terms of his employment agreement entered into prior to the
formation of the Compensation Committee, Mr. Sielbeck's base salary for 1996
was $250,000, of which a total of $86,538 was paid to him in 1996. As Chief
Executive Officer, Mr. Sielbeck is entitled to earn a bonus on the same basis
as all other executive officers of the Company. In 1996, no bonus was paid to
Mr. Sielbeck or any of the Company's Named Executive Officers. Mr. Sielbeck
was granted options in 1996 to purchase 40,000 shares under the Company's
Incentive Plan.
Compliance with Internal Revenue Code Section 162(m). Section
162(m) of the Internal Revenue Code, enacted in 1993, generally disallows a tax
deduction to public companies for compensation over $1 million paid to the
company's chief executive officer and the four other most highly compensated
executive officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The Company
intends to structure the performance-based portion of the compensation of its
executive officers in a manner that complies with this statute.
COMPENSATION COMMITTEE
Timothy G. Wallace (Chairman)
William G. Roth
20
<PAGE> 24
COMPARATIVE PERFORMANCE GRAPH
The following graph compares the percentage change of cumulative
total stockholder return on the Company's Common Stock with (a) the performance
of a broad equity market indicator, the Russell 2000 Index (the "Broad Index")
and (b) the performance of a published industry index, MG Industry Group 059 -
Plumbing, Heating and Air Conditioning (the "Industry Index"). The graph
begins on August 16, 1996, the date on which the Company's Common Stock first
began trading on the Nasdaq National Market, and assumes the investment of $100
on such date in the Company's Common Stock, and the investment of $100 on
August 31, 1996 with respect to the Broad Index and the Industry Index.
[INSERT GRAPH]
21
<PAGE> 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the IPO, Mr. Abrams, Mr. Sielbeck, John R. Young, a
principal stockholder of CSG, and R. Edward Hutton, Jr., a principal
stockholder of AC Service and Installation Co., Inc. and Donelson Air
Conditioning Company, Inc., two of the Company's subsidiaries (together,
"ACDAC"), 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
12 HVAC service and replacement businesses and CSG (collectively, the
"Predecessor Companies") acquired in connection with the IPO (the
"Combination). 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 arm's 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.
Service Now, of which Mr. Abrams and Mr. Young are principal
stockholders, is a 48% stockholder of SuccessWare, Inc., a corporation that
provides management and financial information systems software to the Company
("SuccessWare"). The Company has implemented a general ledger system utilizing
SuccessWare software in all of its service centers (the "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 $220,000. In connection with the Combination, the Company
acquired all of the capital stock of Air Experts 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 Company's subsidiaries. The Company has not entered into any definitive
agreements with Fusion, but certain Service Centers purchase filters from
Fusion from time to time. In 1996, the Company's Service Centers made
aggregate payments to Fusion of approximately $450,000. The
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Company and many of its subsidiaries also utilize, from time to time, the
services of Travel Now, Inc., a travel agency, of which Mr. Abrams and Mr.
Young are principal stockholders.
At March 31, 1996, Mr. Sielbeck had outstanding indebtedness
payable to ACDAC 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 ACDAC 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 ACDAC the building and underlying real estate on which ACDAC is located
and certain residential property for approximately $826,000 and $61,000,
respectively. ACDAC 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. ACDAC purchased the residential
property in 1994 for approximately $61,000. The sale price for such properties
was determined by the board of directors of ACDAC. ACDAC has entered into a
lease with Messrs. Sielbeck and Hutton whereby ACDAC 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 ACDAC 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.
STOCKHOLDER PROPOSALS
If a stockholder wishes to have a proposal considered for
inclusion in the Company's proxy materials for the 1998 annual meeting of
stockholders, the proposal must comply with the SEC's proxy rules, be stated in
writing and be submitted on or before November 30, 1997. Any proposals should
be mailed to the Company at 111 Westwood Place, Suite 420, Brentwood, Tennessee
37027, Attention: Anthony M. Schofield, Chief Financial Officer, Secretary and
Treasurer.
OTHER MATTERS
The Board of Directors is not aware of any other matters to be
brought before the Annual Meeting. If any other matters, however, are properly
brought before the Annual Meeting, the persons named in the enclosed form of
proxy will have discretionary authority to vote all proxies with respect to
such matters in accordance with their best judgment.
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UPON THE WRITTEN REQUEST OF ANY HOLDER OF THE COMPANY'S COMMON
STOCK ENTITLED TO VOTE AT THE 1997 ANNUAL MEETING OF STOCKHOLDERS, THE COMPANY
WILL FURNISH, WITHOUT CHARGE, A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. REQUESTS SHOULD BE DIRECTED TO ANTHONY M. SCHOFIELD,
CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER, SERVICE EXPERTS, INC., 111
WESTWOOD PLACE, SUITE 420, BRENTWOOD, TENNESSEE 37027.
By Order of the Board of Directors,
[Sig]
Anthony M. Schofield
Chief Financial Officer,
Secretary and Treasurer
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Appendix A
SERVICE EXPERTS, INC.
1996 INCENTIVE STOCK PLAN
1. The Purpose of the Plan. This incentive stock plan (the "Plan") is
intended to provide an opportunity for the employees and officers of Service
Experts, Inc., a Delaware corporation (the "Corporation"), and its subsidiaries,
as subsidiaries are defined in section 424 of the Code1 (its "subsidiaries"), to
acquire shares of the Corporation's stock and to provide for additional
compensation based on appreciation of the Corporation's stock. The Plan provides
for the grant of incentive stock options, as defined in Section 422 of the Code
("Incentive Stock Options"), and stock options not qualifying as Incentive Stock
Options ("Non-Qualified Stock Options") providing an equity interest in the
Corporation's business and the grant of stock appreciation rights, as defined in
paragraph 8 ("Stock Appreciation Rights"), as an incentive to service or
continued service with the Corporation and to aid the Corporation in retaining
and obtaining key personnel of outstanding ability. As used herein, "Stock
Incentives" refers to Incentive Stock Options, Non-Qualified Stock Options, and
Stock Appreciation Rights.
2. Stock Subject to the Plan. The maximum number of shares of the Common
Stock, $.01 par value per share, of the Corporation (the "Stock") which may be
issued under Incentive Stock Options and
- --------
1 The "Code" herein refers to the Internal Revenue Code of 1986, as amended.
<PAGE> 29
Non-Qualified Stock Options granted under the Plan (the "Options") and made
subject to Stock Appreciation Rights shall be a total of 1,300,000 shares of
Stock, which may be either authorized and unissued Stock or Stock held in the
treasury of the Corporation, as shall be determined by the Board of Directors of
the Corporation. If an Option or Stock Appreciation Right expires or terminates
for any reason without being exercised in full, the unpurchased shares subject
to such Option or the shares as to which such Stock Appreciation Right is not
exercised shall again be available for purposes of the Plan.
3. Administration of the Plan. This Plan shall be administered by the
"Committee" that is appointed by the Board of Directors and consists of not less
than two individuals who are members of the Board of Directors and are not
employees of the Company or an "affiliate" of the Company (as defined in Section
424(f) of the Code), or such other composition that satisfies Section
162(m)(4)(C) of the Code and Rule 16b-3 promulgated by the Securities and
Exchange Commission ("Rule 16b-3"). Subject to the provisions of the Plan, the
Committee shall have full and conclusive authority to interpret the Plan; to
prescribe, amend and rescind rules and regulations relating to the Plan; to
determine the terms and provisions of the respective Stock Incentive agreements
(which need not be identical); to determine the restrictions on transferability
of Stock acquired upon exercise of Options (which restrictions need not be
identical); and to make all
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<PAGE> 30
other determinations necessary or advisable for the proper administration of the
Plan.
4. Eligibility and Limits. Stock Incentives may be granted to employees and
officers as are selected by the Committee. Incentive Stock Options may, however,
only be granted to employees of the Corporation and its present or future
subsidiaries. The aggregate fair market value (determined as of the time an
Incentive Stock Option is granted) of the Stock with respect to which Incentive
Stock Options are exercisable by an individual for the first time during any
calendar year, taking into account Incentive Stock Options granted under this
Plan and under all other plans of the Corporation and its parent or subsidiary
corporations (as defined in Section 424 of the Code), shall not exceed $100,000.
No person may receive an Option to purchase more than 250,000 shares of Stock
(subject to increases and adjustments for changes in the capitalization of the
Company) during any three year period.
5. Incentive Stock Options and Non-Qualified Stock Options. At the time any
Option is granted under this Plan, the Committee shall determine whether said
Option is to be an Incentive Stock Option or a Non-Qualified Stock Option, and
the Option shall be clearly identified as to its status as an Incentive Stock
Option or a Non-Qualified Stock Option. The number of shares as to which
Incentive Stock Options and Non-Qualified Stock Options shall be granted shall
be determined by the Committee in its sole discretion, subject to the provisions
of paragraph 4 above with respect to the aggregate fair market value of the
Stock for which
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<PAGE> 31
Incentive Stock Options held by any individual may become exercisable in any
calendar year and subject to the provisions of paragraph 2 above as to the total
number of shares for which Stock Incentives may be granted under the Plan. At
the time any Incentive Stock Option granted under this Plan is exercised, the
certificates representing the shares of Stock purchased pursuant to said Option
shall be clearly identified by legend as representing shares purchased upon
exercise of an Incentive Stock Option.
6. Terms and Conditions of Options. Subject to the following provisions,
all Options shall be in such form and upon such terms and conditions as the
Committee, in its discretion, may from time to time determine.
(a) Option Price.
(i) Incentive Stock Options. The Option price per share shall in no
event be less than 100% of the fair market value per share of Stock (as
determined in good faith by the Committee based on the most recent stock
prices available to the Committee) on the date the Option is granted. If
the employee owns (as defined in Code Section 424) more than 10% of the
total combined voting power of all classes of the Corporation's stock or of
the stock of its parent or subsidiary, the Option price per share shall not
be less than 110% of the fair market value per share of the Stock as
determined in good faith by the Committee based on the most recent stock
prices
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<PAGE> 32
available to the Committee on the date the Option is granted.
(ii) Non-Qualified Stock Options. The option price per share shall not
be less than 85% of the fair market value per share of the Stock as
determined in good faith by the Committee based on the most recent stock
prices available to the Committee on the date the Option is granted.
(b) Date of Grant. For purposes of this subparagraph 6, the date the Option
is granted shall be the date on which the Committee has approved the terms and
conditions of a stock option agreement evidencing the Option, determined the
recipient of the Option, the number of shares covered by the Option, and has
taken all such other action as is necessary to complete the grant of the Option.
(c) Option Term. No Option shall be exercisable after the expiration of ten
years from the date the Option is granted. No Incentive Stock Option granted to
an employee who at the time of grant owns (as defined in Code Section 424) more
than 10% of the total combined voting power of all classes of the Corporation's
stock or of the stock of its parent or subsidiary shall be exercisable after the
expiration of five years from the date it is granted.
(d) Payment. Payment for all shares purchased pursuant to exercise of an
Option shall be made in cash or, if approved by the Committee either at the time
of grant or at the time of exercise, by delivery of (i) outstanding shares of
Stock, or (ii) currently
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<PAGE> 33
exercisable Options, or (iii) any combination of cash, Stock or Options each at
its fair market value, as determined by the Committee, on the date of delivery
and in an amount equal to the exercise price of the Options being exercised. For
purposes of this subparagraph 6, the fair market value of an Option shall be
equal to the product of (i) the amount by which the fair market value of the
Stock, as determined by the Committee, on the date of exercise exceeds the
exercise price contained in the Option and (ii) the number of shares of Stock
subject to the Option relinquished. Such payment shall be made at the time that
the Option or any part thereof is exercised, and no shares shall be issued until
full payment therefor has been made. The holder of an Option shall, as such,
have none of the rights of a shareholder.
(e) Nontransferability of Stock Incentives. Stock Incentives shall not be
transferable or assignable except by will or by the laws of descent and
distribution and shall be exercisable, during the holder's lifetime, only by
him; provided, however, that Non-Qualified Stock Options and Stock Appreciation
Rights may be transferred pursuant to a qualified domestic relations order as
defined by the Code of Title I of the Employee Retirement Income Security Act.
(f) Termination of Employment or Death. Except as provided below, an Option
may not be exercised by a holder unless he has been an employee or officer of
the Corporation, its parent, or one of its subsidiaries continually from the
date of the grant until the date ending three months before the date of
exercise. If a
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<PAGE> 34
holder ceases to be an employee or officer by reason of disability, within the
meaning of Section 422(c)(6) of the Code, the holder may exercise an Option (to
the extent that the holder shall have been entitled to do so at the date of his
disability) at any time during the twelve month period after the date he ceases
to be an employee or removed as an officer or until the expiration of the stated
term of such Option, whichever is shorter. If the holder of an Option dies, such
Option may be exercised (to the extent that the holder shall have been entitled
to do so at the date of his death) by a legatee or legatees of the holder under
his will, or by his personal representative or distributees, at any time during
the twelve-month period following his death or until the expiration of the
stated term of such Option, whichever is shorter. If a holder is discharged as
an employee or officer for cause, as determined by the Committee, Options held
by him shall not be exercisable after such discharge or removal. Notwithstanding
this subparagraph (f), no Option may be exercised more than ten years after the
date on which such Option was granted. For purposes of this subparagraph (f), a
holder shall be deemed to be an employee or officer so long as the holder is an
employee or officer of a parent or subsidiary of the Corporation or by another
corporation (or a parent or subsidiary corporation of such other corporation)
which has assumed the Option of the holder in a transaction to which Section
424(a) of the Code is applicable.
(g) Limited Right of Exercise. Upon the occurrence of any of the following
events (each a "Change in Control"), an Option may be
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<PAGE> 35
exercised during the Option term as to the lesser of (a) the full number of
shares covered by the Option and (b) the maximum number of shares covered by the
Option to extent that any acceleration of the right to exercise upon the Change
in Control would not cause the grantee or holder of such Option to be liable for
the payment of taxes pursuant to Section 4999 of the Code: (1) a tender offer or
exchange offer has been made for shares of Stock, provided that the corporation,
person, or other entity making such offer purchases or otherwise acquires shares
of Stock representing 50% or more of the outstanding shares of Stock pursuant to
such offer; (2) the shareholders of the Corporation have approved a definitive
agreement (the "Agreement") to merge or consolidate with or into another
corporation pursuant to which the Corporation will not survive or will survive
only as a subsidiary of another corporation, or to sell or otherwise dispose of
all or substantially all of its assets; or (3) any person or group, as such
terms are defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), becomes the holder of 50% or more of the
outstanding shares of Stock. If a Change in Control has occurred, the Option
shall be fully exercisable: (x) in the event of (1) above, during the term of
the tender or exchange offer; (y) in the event of (2) above, within a 30-day
period commencing on the date of approval by the shareholders of the Agreement;
or (z) in the event of (3) above, within a 30-day period commencing on the date
upon which the Corporation is provided a copy of Schedule 13D (filed pursuant to
8
<PAGE> 36
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder) indicating that any person or group has become the holder of 50% or
more of the outstanding shares of Stock or, if the Corporation is not subject to
Section 13(d) of the Exchange Act, within a 30-day period commencing on the date
upon which the Corporation receives written notice that any person or group has
become the holder of 50% or more of the outstanding shares of Stock.
Notwithstanding the foregoing, no person subject to Section 16(a) of the
Exchange Act with respect to the Stock may sell or otherwise dispose of Stock
acquired pursuant to an Option granted within six months of the date of sale or
other disposition.
7. Guarantees and Loans. The Corporation is hereby authorized to guarantee
or make loans to the holder of an Option to enable him to exercise such Option.
Any loan made or guaranteed herein shall be in such amount as determined by the
Committee but shall not exceed the exercise price of the Options being exercised
by the holder. Any loans made or guaranteed shall be with full recourse against
the borrower, shall be secured by the Stock received from exercise of the
related Option, shall provide for a market rate of interest, and shall contain
such other terms and conditions as are acceptable to the Committee. The
determination of whether loans are to be made or guaranteed shall be made by the
Committee.
8. Stock Appreciation Rights.
(a) Award. A Stock Appreciation Right shall entitle the grantee to receive,
upon exercise, the excess of (a) the fair
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<PAGE> 37
market value of a specified number of shares of Stock at the time of exercise
over (b) a specified price which shall be not less than 85% of the fair market
value of the Stock at the time the Stock Appreciation Right is granted. The
determination of the fair market value of shares of Stock at the time of grant
of a Stock Appreciation Right shall be made by the Committee in good faith based
on the most recent stock prices available to the Committee. A Stock Appreciation
Right may be granted in connection with all or any portion of a previously or
contemporaneously granted Non-Qualified Stock Option or not in connection with
a Non-Qualified Stock Option.
(b) Terms. Subject to the following provisions, Stock Appreciation Rights
shall be in such form and on such terms and conditions as the Committee, in its
discretion, may from time to time determine:
(i) No Stock Appreciation Right shall be exercisable more than ten
years after it is granted.
(ii) Except as provided below, Stock Appreciation Rights may not be
exercisable by the grantee unless he has been an employee or officer
continually from the date of the grant until the date ending three months
before the date of exercise. If a grantee ceases to be an employee or
officer by reason of disability within the meaning of subparagraph 6(f)
hereof, the grantee may exercise the Stock Appreciation Right (to the
extent that the holder shall have been entitled to do so at the date
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<PAGE> 38
of his disability) at any time during the twelve month period after the date he
ceases to be an employee or officer or until expiration of the stated term of
such Stock Appreciation Right, whichever is shorter. If the grantee of a Stock
Appreciation Right dies, the grantee's legal successor shall have the right to
exercise the Stock Appreciation Right (to the extent that the holder shall have
been entitled to do so at his death) during the lesser of its term and a period
of twelve months commencing on the death of the grantee. If a grantee is
discharged as an employee or officer for cause, as determined by the Committee,
his Stock Appreciation Rights shall not be exercisable after such discharge or
removal. For purposes of this subparagraph (b)(ii), a grantee shall be deemed to
be an employee or officer so long as the grantee is an employee or officer of a
parent or subsidiary of the Corporation or of another corporation (or a parent
or subsidiary corporation of such other corporation) which has assumed the Stock
Appreciation Right of the grantee in a transaction to which Section 424(a) of
the Code is applicable. Stock Appreciation Rights may contain such other
limitations with respect to the time when such rights may be exercised as the
Committee may determine, and such limitations may vary.
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<PAGE> 39
(c) Payment. Upon exercise of a Stock Appreciation Right, payment shall be
made in cash or Stock (at fair market value on the date of exercise) as provided
in the Stock Appreciation Right agreement or, in the absence of such provision,
as the Committee may determine.
9. Changes in Capitalization; Merger; Liquidation. (a) The number of shares
of Stock as to which Stock Incentives may be granted, the number of shares
covered by each outstanding Stock Incentive, and the exercise price per share in
each outstanding Option or used in determining the amount of payment upon
exercise of each outstanding Stock Appreciation Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Stock
resulting from a subdivision or combination of shares, the payment of a stock
dividend in shares of Stock to holders of outstanding shares of Stock, or any
other increase or decrease in the number of such shares effected without receipt
of consideration by the Corporation.
(b) If the Corporation shall be the surviving corporation in any merger or
consolidation, recapitalization, reclassification of shares, or similar
reorganization, the holder of each outstanding Option shall be entitled to
purchase, at the same times and upon the same terms and conditions as are then
provided in the Option, the number and class of shares of Stock or other
securities to which a holder of the number of shares of Stock subject to the
Option at the time of such transaction would have been entitled to receive as a
result of such transaction, and a corresponding
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<PAGE> 40
adjustment shall be made in connection with determining the value of each
outstanding Stock Appreciation Right.
(c) In the event of any change in capitalization of the Corporation, the
Committee may make such additional adjustments in the number and class of shares
of Stock or other securities with respect to which outstanding Options and Stock
Appreciation Rights are exercisable and with respect to which future Options and
Stock Appreciation Rights may be granted as the Committee in its sole discretion
shall deem equitable or appropriate, subject to the provisions of this
paragraph 9.
(d) A dissolution or liquidation of the Corporation shall cause each
outstanding Option and Stock Appreciation Right to terminate.
(e) In the event of any Change in Control in which shares of Stock are
purchased for cash in a tender offer or are to be converted into cash in a
merger, then, unless the Committee otherwise determines, each Option (other than
an Option granted within the last six months held by a person subject to Section
16(b) of the Exchange Act) shall be converted into a fully exercisable right to
receive an amount in cash per share subject to such Option equal to (A) in the
case of a tender offer or merger, the excess, if any, of the price paid in such
tender offer or merger over the exercise price of such Option and (B) in the
case of conversion, the excess, if any, of the highest market price of the Stock
on the date of conversion over the exercise price of such Option; provided,
however, that any acceleration of the right to
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<PAGE> 41
exercise an Option that occurs under this Section 6(e) shall be limited to the
maximum number of shares covered by the Option for which the right of
acceleration upon the Change in Control will not cause the grantee or holder of
such Option to be liable for the payment of taxes pursuant to Section 4999 of
the Code.
(f) In the event of a change of the Corporation's shares of Stock with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be Stock
within the meaning of the Plan. Except as expressly provided in this paragraph
9, the holder of a Stock Incentive shall have no rights by reason of any
subdivision or combination of shares of Stock of any class, the payment of any
stock dividend, any other increase or decrease in the number of shares of Stock
of any class, or by reason of any dissolution, liquidation, merger or
consolidation, or distribution to the Corporation's shareholders of assets or
stock of another corporation, and any issue by the Corporation of shares of
Stock of any class, or securities convertible into shares of Stock of any class,
shall not affect, and no adjustment by reasons thereof shall be made with
respect to, the number or price of shares of Stock subject to the Stock
Incentive. The existence of the Plan and the Stock Incentives granted pursuant
to the Plan shall not affect in any way the right or power of the Corporation to
make or authorize any adjustment, reclassification, reorganization, or other
change in its capital or business structure, any merger or consolidation of the
Corporation, any issue of debt or equity securities having
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<PAGE> 42
preferences or priorities as to the Stock or the rights thereof, the dissolution
or liquidation of the Corporation, any sale or transfer of all or any part of
its business or assets, or any other corporate act or proceeding.
10. Termination and Amendment of the Plan. The Plan shall terminate on the
date ten years after the adoption of the Plan by the Board of Directors and no
Stock Incentive shall be granted under the Plan after that date, but Stock
Incentives granted before termination of the Plan shall remain exercisable
thereafter until they expire or lapse according to their terms. The Board of
Directors may otherwise sooner amend or terminate this Plan at any time;
provided, however, an amendment that would have a material adverse effect on the
rights of a holder of an existing Stock Incentive is not valid with respect to
such Stock Incentive without the Participant's consent. Provided further that
the shareholders of the Corporation must approve any amendment:
(a) 12 months before or after the date an amendment is adopted that
increases the aggregate number of shares of Stock that may be issued under
Incentive Stock Options or changes the employees (or class of employees)
eligible to receive Incentive Stock Options.
(b) Before the effective date of an amendment that changes the number of
shares in the aggregate which may be issued pursuant to Stock Incentives granted
under the Plan or the maximum number of shares with respect to which any
individual may receive Stock
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<PAGE> 43
Incentives during any period specified herein, except pursuant to Article VIII.
(c) Before the effective date of an amendment that increases the period
during which Stock Incentives may be granted or exercised.
11. Approval. This Plan is subject to the approval of the holders of a
majority of the outstanding shares of common stock of the Corporation and,
unless so approved within twelve months of its adoption by the Board of
Directors, this Plan and any Stock Incentives granted hereunder shall become
void thereafter.
12. Incentive Stock Option. All Incentive Stock Options to be granted
hereunder are intended to comply with Sections 422 and 424 of the Code, and all
provisions of this Plan and all Incentive Stock Options granted hereunder shall
be construed in such manner as to effectuate that intent.
13. General Provisions.
(a) Legends; Restrictions on Transfer. The Committee may require each
person purchasing shares pursuant to a Stock Incentive to represent to and agree
with the Corporation in writing that the shares are acquired without a view to
distribution thereof. The certificates for such shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules,
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<PAGE> 44
regulations, and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Stock is then listed, and any applicable
Federal or state securities law, and the Committee may cause a legend or legends
to be put on any such certificates to make appropriate reference to such
restrictions.
(b) Other Compensation. Nothing contained in this Plan shall prevent the
Board of Directors from adopting other or additional compensation arrangements,
subject to shareholder approval if such approval is required, and such
arrangements may be either generally applicable or applicable only in specific
cases.
(c) No Rights to Continued Employment. Neither the adoption of the Plan,
nor the granting of any Stock Incentive hereunder, shall confer upon any
employee of the Corporation or any subsidiary any right to continued employment
with the Corporation or a subsidiary, as the case may be, nor shall it interfere
in any way with the right of the Corporation or a subsidiary to terminate the
employment of any of its employees at any time.
(d) Governing Law. The Plan and all awards made and actions taken
thereunder shall be governed by and construed in accordance with the laws of the
State of Delaware.
(e) Compliance with Section 16(b). This Plan is intended to comply with,
and to the extent necessary or appropriate shall be interpreted to comply with,
Rule 16b-3.
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Appendix B
SERVICE EXPERTS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
Service Experts, Inc., a Delaware corporation, hereby adopts the Service
Experts, Inc. Employee Stock Purchase Plan for the benefit of its eligible
employees and eligible employees of its subsidiaries. The purpose of this Plan
is to provide an opportunity for eligible employees to share in the growth and
prosperity of the Sponsoring Employer (as defined in Section ) and its
subsidiaries by acquiring a proprietary interest in the Sponsoring Employer
through acquisition of shares of the Sponsoring Employer's common stock. The
Plan is intended to qualify as an "employee stock purchase plan" within the
meaning of Section 423(b) of the Internal Revenue Code of 1986, as amended (the
"Code").
ARTICLE I.
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below, unless a different meaning is plainly required by the context:
1.1. "Anniversary Date" shall mean the first day of each Plan Year.
1.2. "Board of Directors" shall mean the Board of Directors of Service
Experts, Inc.
1.3. The "Committee" shall mean the Compensation Committee of the
Sponsoring Employer's Board of Directors.
1.4. "Continuous Service" shall mean the number of full years and completed
months of continuous employment with an Employer calculated from an Employee's
last hire date to the Employee's date of severance of employment for any reason.
Continuous Service shall not be broken and shall be credited for absences due to
vacation, temporary sickness or injury, other paid leaves of absence authorized
by an Employer, and leaves of absence which would not cause an individual to
cease to be an Employee.
1.5. "Contribution Account" shall mean the account recorded on the records
of the Sponsoring Employer established on behalf of a Member to which the amount
of the Member's contributions made pursuant to Article IV shall be credited.
1.6. "Effective Date" shall mean August 16, 1996.
1.7. "Employee" shall mean each current or future employee of an Employer
as defined in Treasury Regulation Section
<PAGE> 46
1.423-2(b), Section 1.421-7(h) and any other Regulations later finalized.
1.8. "Employer" shall mean the Sponsoring Employer, its successors, any
future parent (as defined in Section 424(e) of the Code) and each current or
future subsidiary (as defined in Section 424(f) of the Code).
1.9. "Exercise Date" shall mean the last trading date during each Plan Year
of the exchange or automated interdealer quotation system on which the
Sponsoring Employer Stock is traded.
1.10. "Grant Date" shall mean the first trading date during the Plan Year
of the exchange or automated interdealer quotation system on which the
Sponsoring Employer Stock is traded.
1.11. "Issue Price" shall mean the purchase price of the Sponsoring
Employer Stock to be charged to participating Members on the Exercise Date. The
Issue Price shall be subject to a Minimum Issue Price as outlined in Section 5.2
herein.
1.12. "Market Price" shall mean the last reported sale price for the day
upon which the Market Price is to be determined or, if there are no sales on
such date, the last reported sale price for the most recent day preceding such
date, in either case as reported on The Nasdaq Stock Market's National Market or
any other automated interdealer quotation system sponsored by a registered
national securities association on which the Sponsoring Employer Stock is quoted
or an exchange on which the Sponsoring Employer Stock is traded. Notwithstanding
the foregoing, if there shall be any material alteration in the present system
of reporting sale prices of the Sponsoring Employer Stock, or if the Sponsoring
Employer Stock shall no longer be quoted on an automated interdealer quotation
system sponsored by a registered national securities association or listed on a
national securities exchange, the Market Price of the Sponsoring Employer Stock
as of a particular date shall be determined using such method as shall be
determined by the Committee provided such method is appropriate to qualify the
Plan as an employee stock purchase plan under Section 423 of the Code.
1.13. "Member" shall mean any Employee of an Employer who has met the
conditions and provisions for becoming a Member as provided in Article III.
1.14. "Member's Contribution Rate" shall be an exact number of dollars
elected by the Member to be contributed by regular payroll deductions to his
Contribution Account as outlined in Section 4.1.
1.15. "Normal Pay" for purposes of determining the number of shares that
can be obtained in any Plan Year shall be (i) for hourly paid Employees, an
amount computed by adding (a) the
2
<PAGE> 47
Member's hourly base pay multiplied by the Member's regular scheduled hours of
work for the Plan Year and (b) the amount of all commissions paid to the Member
in the Plan Year, and (ii) for salaried employees, an amount computed by adding
(a) the Member's monthly base pay for the Plan Year and (b) the amount
commissions paid to the Member in the Plan Year.
1.16. "Plan" shall mean the Service Experts, Inc. 1996 Employee Stock
Purchase Plan as set forth herein and all subsequent amendments hereto.
1.17. "Plan Year" shall mean a twelve (12) month period beginning on
January 1 and ending on December 31 of each year.
1.18. "Sponsoring Employer" shall mean Service Experts, Inc., a Delaware
corporation, or its successors, the Plan sponsor for all purposes.
1.19. "Sponsoring Employer Stock" shall mean, subject to adjustment as
provided in Article X, those shares of the Sponsoring Employer's Common Stock,
$.01 par value per share, which pursuant to Article II are reserved for issuance
upon the exercise of the options granted under this Plan.
ARTICLE II
ISSUANCE OF STOCK
The Sponsoring Employer hereby reserves two hundred thousand (200,000)
shares of Sponsoring Employer Stock for issuance upon the exercise of the
options granted hereunder; provided, that the class and aggregate number of
shares which may be issued upon exercise of options granted hereunder shall be
subject to adjustment in accordance with the provisions of Article X of the
Plan. These shares may be authorized and unissued shares, issued shares held in
or acquired for the treasury of the Sponsoring Employer, or shares of stock
reacquired by the Sponsoring Employer upon purchase in the open market or
otherwise.
ARTICLE III
ELIGIBILITY
3.1. Every Employee whose customary employment with an Employer on the
Effective Date is at least twenty (20) hours per week and more than five (5)
months in a calendar year shall be eligible to participate as of the Effective
Date. Every other Employee whose customary employment is at least twenty (20)
hours per week and more than five (5) months in a calendar year shall be
eligible to participate as of any Anniversary Date coincident with or
immediately following his completion of at least six (6) months
3
<PAGE> 48
of Continuous Service. An Employee shall not be eligible to participate,
however, if immediately after the options are granted such Employee would own
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of the Sponsoring Employer or a subsidiary corporation or
parent corporation (as those terms are defined in Section 424(e) and (f) of the
Code). For purposes of this paragraph, the ownership attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
Employee and stock which the Employee may purchase under outstanding options
(under this or any other agreement) shall be treated as stock owned by the
Employee.
3.2. Upon becoming a Member, the Employee shall be bound by the terms of
this Plan, including any amendments hereto. Each Employee who becomes eligible
to participate shall be furnished a summary of the Plan and a form for election
to participate. If the Employee elects to participate, he shall complete such
form and file it with the Employer no later than fifteen (15) days prior to the
next Anniversary Date (or no later than October 15, 1996 in the first Plan
Year). The completed request for participation shall indicate the amount of the
Member's Contribution Rate authorized by the Member in accordance with Section
4.1. If any Employee does not elect to participate in any given Plan Year he or
she may elect to participate as of any future Anniversary Date if he or she
continues to meet the eligibility requirements and files an election to
participate at least fifteen (15) days prior to such Anniversary Date.
ARTICLE IV
CONTRIBUTIONS
4.1. In order to participate in this Plan and exercise any option granted
hereunder, a Member must file with the Employer an election to participate in
accordance with Section 3.2 and must authorize his Employer to deduct through a
payroll deduction an exact number of dollars or percentage of Normal Pay (in
whole percentages) on each payroll date, but not less than $10.00 per month,
such being the Member's "Contribution Rate." Such authorization shall be in
writing and on such forms as are provided by the Committee. Payroll deductions
shall begin as of the first pay period on or after the first day of the Plan
Year. For all purposes of this Plan, a Member's contributions shall be allocated
to and deemed a part of the Member's Contribution Account. Member contributions
will not be permitted to begin at any time other than the beginning of a Plan
Year. The Employers shall transfer all withheld amounts to the Sponsoring
Employer which may use such amounts for any valid corporate purposes. No
interest shall accrue or be paid on any amounts withheld under this Plan.
4.2. The Member's Contribution Rate, once established, shall remain in
effect for all Plan Years unless changed by the
4
<PAGE> 49
Member in writing on such forms as are provided by the Committee and filed with
the Employer at least thirty (30) days prior to the next Anniversary Date.
4.3. At any time during the Plan Year, a Member may notify the Employer
that he or she wishes to discontinue his or her contributions. This notice shall
be in writing and on such forms as are provided by the Committee and shall
become effective as of a date not more than thirty (30) days following its
receipt by the Employer.
4.4. Members may elect to withdraw any or all of their contributions at any
time during the Plan Year except on the Exercise Date. Any such withdrawal will
be made by request in writing on such forms as are provided by the Committee. If
contributions are withdrawn during the Plan Year, however, no further
contributions will be permitted during that Plan Year.
ARTICLE V
GRANT OF OPTIONS
5.1. Every Employee who is otherwise eligible to become a Member hereunder
shall, on the Grant Date of each Plan Year and without further action of the
Committee, be granted an option to purchase a number of whole shares of
Sponsoring Employer Stock that, in the aggregate, have an Issue Price that is
not more than 10% of such Employee's Normal Pay during the Plan Year; provided,
however, that the option is limited so that the total Market Price of Sponsoring
Employer Stock that can be purchased under such option does not exceed $25,000
(determined on the date that the option is granted). Options granted under this
Plan shall be subject to such amendments or modifications as the Sponsoring
Employer shall deem necessary to comply with any applicable law or regulation,
and shall contain such other provisions as the Sponsoring Employer shall from
time to time approve and deem necessary. Options not exercised pursuant to
Section 6.1 shall terminate at 11:59 p.m. (Eastern Time) on the Exercise Date.
In the event an outstanding option shall for any reason expire, the shares of
Sponsoring Employer Stock allocable to the unexercised portion of such option
may again be subject to option under the Plan. This Plan is subject to
stockholder approval as provided in Section 11.11 and unless so approved on or
before the date which is twelve (12) months after the date this Plan is adopted
by the Board of Directors, this Plan and all options granted hereunder shall
terminate and become void.
5.2. The Issue Price of the Sponsoring Employer Stock under this Plan shall
be equal to the lesser of: (i) eighty-five percent (85%) of the Market Price on
the Exercise Date of each Plan Year; or (ii) eighty-five percent (85%) of the
Market Price on the Grant Date of each Plan Year. The issue price is subject,
however,
5
<PAGE> 50
to a "Minimum Issue Price" for each Plan Year. The "Minimum Issue Price" for any
Plan Year shall be the book value of the Sponsoring Employer Stock as of
December 31 for the calendar year preceding the calendar year during which the
Grant Date for the Plan Year occurs. Notwithstanding any provision to the
contrary, if the Issue Price for any Plan Year is less than the Minimum Issue
Price, the options granted for that Plan Year shall be considered null and void
and the payroll deductions credited to the Member's Contribution Account shall
be returned to the Member.
5.3. Notwithstanding any provision of this Plan, no Employee shall receive
options to purchase Sponsoring Employer Stock which permit the rights of an
Employee to purchase stock under all "employee stock purchase plans" of the
Sponsoring Employer and its parent corporation and subsidiary corporations (as
the terms "parent corporation" and "subsidiary corporation" are defined in
Section 424(e) and (f) of the Code) to accrue at a rate which exceeds $25,000 of
fair market value of such stock (determined at the time the option is granted)
for each calendar year in which the option is outstanding at any time. For
purposes of this Section 5.3 (i) the right to purchase stock under an option
accrues when the option (or any portion thereof) first becomes exercisable
during the calendar year, (ii) the right to purchase stock under an option
accrues at the rate provided in the option but in no case may such rate exceed
$25,000 of fair market value of such stock (determined at the time such option
is granted) for any one calendar year, and (iii) a right to purchase stock which
has accrued under one option granted pursuant to the Plan may not be carried
over to any other option.
ARTICLE VI
EXERCISE OF OPTIONS
6.1. On each Exercise Date, the Member's Contribution Account shall be used
to purchase the maximum number of whole shares of Sponsoring Employer Stock
determined by dividing the Issue Price into the balance of the Member's
Contribution Account (subject to the limitations set forth in Section 5.3). Any
money remaining in a Member's Contribution Account after the Exercise Date which
was not needed to exercise the Member's option to the fullest extent as
calculated pursuant to Section 5.1 shall be returned to the Member. Any money
remaining in a Member's Contribution Account solely as a result of an amount
representing a fractional share, however, shall remain in the Member's
Contribution Account unless the return of such amount is requested by the Member
in writing on a form supplied by the Committee. If such return is not requested,
the balance will remain in the Member's Contribution Account to be used in the
next Plan Year along with new contributions made in that Plan Year.
6
<PAGE> 51
If the total number of shares to be purchased under option by all Members
exceeds the number of shares authorized under Article II of this Plan, a
pro-rata allocation of the available shares will be made among all Members
authorizing such payroll deductions based on the amount of their respective
payroll deductions through the Exercise Date.
6.2. The certificates for Sponsoring Employer Stock purchased through the
exercise of the option granted hereunder shall be issued as soon as practicable
after the Exercise Date.
ARTICLE VII
TERMINATION OF EMPLOYMENT
7.1. Any Employee whose employment with all Employers is terminated for any
reason, except death or retirement, during the Plan Year shall cease being a
Member immediately. The balance of the Member's Contribution Account shall be
paid to such Member, or to such Member's legal representative, as soon as
practicable after such Member's termination. Any right to purchase Sponsoring
Employer Stock under the option granted to such Member by participation in this
Plan shall be deemed null and void.
7.2. If a Member dies or retires for reasons of age or disability during a
Plan Year, no further contributions on behalf of the Member shall be accepted
under the Plan. If the Member's termination of employment with all Employers is
more than three months prior to the Exercise Date during such Plan Year, the
Committee will direct that the balance of the Member's Contribution Account be
paid to the Member (or his personal representative if deceased) as soon as
administratively feasible. If the Member's termination of employment occurs not
more than three months prior to the Exercise Date during such Plan Year, the
balance accumulated in the Member's Contribution Account shall be used to
purchase Sponsoring Employer Stock in accordance with Article VI, unless the
Member (or his personal representative) notifies the Committee in writing of his
election to withdraw the balance of his Contribution Account prior to the
Exercise Date.
ARTICLE VIII
DISPOSITION OF STOCK
If a Member or former Member disposes of any shares of Sponsoring Employer
Stock obtained under this Plan (i) prior to two (2) years after the Grant Date
of such share, or (ii) prior to one (1) year after the Exercise Date of such
share, that Member or former Member must notify the Committee immediately of
such disposition in writing. All dispositions of Sponsoring Employer
7
<PAGE> 52
Stock shall be made in compliance with applicable federal and state securities
laws.
ARTICLE IX
ADMINISTRATION
The Plan shall be administered by the Committee. No member of the Committee
shall be eligible to participate in the Plan while a member of the Committee.
Meetings shall be held at such times and places as shall be determined by the
Committee. A majority of the members of the Committee shall constitute a quorum
for the transaction of business, and the vote of a majority of those members
present at any meeting shall decide any question brought under the Plan. No
member of the Committee shall be liable for any act or omission of any other
member of the Committee or for any act or omission on his own part related to
the Plan, including but not limited to the exercise of any power or discretion
given to him under the Plan, except those resulting from his own gross
negligence or willful misconduct. All questions of interpretation and
application of the Plan, or of options granted hereunder, shall be subject to
the determination, which shall be final and binding, of a majority of the whole
Committee. The Plan shall be administered in order to qualify the options
granted hereunder as options granted pursuant to an "employee stock purchase
plan" described in Section 423 of the Code.
ARTICLE X
CHANGES IN COMPANY'S CAPITAL STRUCTURE
10.1. The existence of this Plan shall not affect in any way the right or
power of the Sponsoring Employer or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Sponsoring Employer's capital structure or its business, or any merger or
consolidation of the Sponsoring Employer, or any issue of bonds, debentures,
preferred or prior preference stock ahead of or affecting the Sponsoring
Employer Stock or rights thereof, or the dissolution or liquidation of the
Sponsoring Employer, or any sale or transfer of all or part of its assets or
business, or any other corporate act or proceeding, whether of similar character
or otherwise.
10.2. In the event of a subdivision or consolidation of shares or other
capital readjustment, the payment of a stock dividend or other increase or
decrease of the number of shares of the Sponsoring Employer's Stock outstanding
without receiving compensation in money, services, or property, then the class
of shares of the Sponsoring Employer's Stock set forth in Section 1.19 of the
Plan, the number of shares of stock reserved pursuant to Article II, and the
number of options granted a Member shall be
8
<PAGE> 53
appropriately adjusted as determined by the Committee. The Committee's
determination shall be final, binding, and conclusive, provided that each option
granted pursuant to this Plan shall not be adjusted in a manner that causes the
option to fail to continue to qualify as an option issued pursuant to an
"employee stock purchase plan" within the meaning of Section 423 of the Code.
10.3. Subject to any required action by the stockholders, if the Sponsoring
Employer is the surviving corporation in any merger or consolidation, each
outstanding option shall pertain to and apply to the securities to which a
holder of the number of shares of Sponsoring Employer Stock subject to the
option would have been entitled. Unless adopted by the surviving corporation, a
dissolution or liquidation of the Sponsoring Employer or a merger or
consolidation in which the Sponsoring Employer is not the surviving corporation,
shall cause each outstanding option to terminate; provided that the Committee in
its sole discretion, immediately prior to such dissolution or liquidation, or
merger or consolidation in which the Corporation is not the surviving
corporation, may direct that the Plan Year end on a date immediately prior to
the effective date of such event.
ARTICLE XI
MISCELLANEOUS
11.1. Each Member, former Member, or any other person who shall claim a
right or benefit under this Plan, shall be entitled only to look to such
Member's Employer for such benefit.
11.2. The Board of Directors may at any time or from time to time amend the
Plan in any respect, except that, without approval of the stockholders of the
Sponsoring Employer within twelve (12) months prior to or after the date the
amendment is adopted by the Board of Directors, no amendment may (i) increase
the number of shares reserved under the Plan other than as provided in Article
X, (ii) modify the class of employees eligible to participate in the Plan, (iii)
reduce the Issue Price per share as defined herein, (iv) materially increase the
benefits accruing to Statutory Insiders under the Plan, or (v) materially modify
the requirements as to eligibility of Statutory Insiders in the Plan. The
Sponsoring Employer may terminate the Plan at any time. If the Plan is
terminated, the date of termination shall be treated as the Exercise Date and
all funds in a Member's Contribution Account not expended to purchase Sponsoring
Employer Stock shall be refunded to the Member.
11.3. The Employers will pay all expenses that may arise in connection with
the administration of this Plan.
11.4. Any headings or subheadings in this Plan are inserted for convenience
of reference only and are to be
9
<PAGE> 54
disregarded in the construction of any provisions hereof. All references in this
Plan to Articles and Sections are to Articles and Sections of this Plan unless
specified otherwise.
11.5. This Plan shall be construed in accordance with the laws of the state
of incorporation of the Sponsoring Employer to the extent federal law does not
supersede and preempt such law.
11.6. A misstatement in the age, length of Continuous Service, date of
employment or any other such matter shall be corrected when it becomes known
that any such misstatement of fact has occurred.
11.7. The option to purchase Sponsoring Employer Stock arising by
participation in this Plan is not transferable by a Member other than by will or
the laws of descent and distribution and is exercisable during his lifetime only
by him.
11.8. This Plan will not be deemed to constitute a contract between an
Employer and any Member or to be in consideration of or an inducement for the
employment of any Member or Employee. Nothing contained in this Plan shall be
deemed to give any Member or Employee the right to be retained in the service of
an Employer or to interfere with the right of an Employer to discharge any
Member or Employee at any time regardless of the effect which such discharge
shall have upon him as a Member of the Plan.
11.9. No liability whatsoever shall attach to or be incurred by any past,
present or future stockholders, officers, or directors, as such, of an Employer,
under or by reason of any of the terms, conditions, or agreements contained in
this Plan or implied therefrom, and any and all liabilities of, and any and all
rights and claims against an Employer, or any stockholder, officer, or director,
as such, whether arising at common law or in equity or created by statute or
constitution or otherwise, pertaining to this Plan, are hereby expressly waived
and released by every Member, as a part of the consideration for any benefits
provided by the Employers under this Plan.
11.10. With respect to administration of the Plan, the Sponsoring Employer
shall indemnify each present and future member of the Committee and the Board of
Directors against, and each member of the Committee and the Board of Directors
shall be entitled without further act on his or her part to indemnity from the
Sponsoring Employer, for all expenses (including the amount of judgments and the
amount of approved settlements made with a view to the curtailment of costs of
litigation, other than amounts paid to the Sponsoring Employer itself)
reasonably incurred by him or her in connection with or arising out of any
action, suit or proceeding in which he or she may be involved by reason of his
or her being or having been a member of the Committee and the Board of
Directors, whether or not he or she continues to be such a member
10
<PAGE> 55
of the Committee and the Board of Directors at the time of incurring such
expenses; provided, however, that such indemnity shall not include any expenses
incurred by any such member of the Committee and the Board of Directors (a) in
respect of matters as to which he shall be finally adjudged in any such action,
suit, or proceeding to have been guilty of gross negligence or willful
misconduct in the performance of his or her duty as such a member of the
Committee and the Board of Directors, or (b) in respect of any matter in which
any settlement is effected, to an amount in excess of the amount approved by the
Sponsoring Employer on the advice of its legal counsel; and provided further,
that no right of indemnification under the provisions set forth herein shall be
available to or enforceable by any such member of the Committee and the Board of
Directors unless, within sixty (60) days after institution of any such action,
suit, or proceeding, he or she shall have offered the Sponsoring Employer, in
writing, the opportunity to handle and defend same at its own expense. The
foregoing right of indemnification shall inure to the benefit of the heirs,
executors, or administrators of each such member of the Committee and the Board
of Directors and shall be in addition to all other rights to which such member
of the Committee and the Board of Directors may be entitled as a matter of law,
contract, or otherwise.
11.11. Notwithstanding any other provisions of this Plan, in order for this
Plan to continue as effective, it must be approved by the stockholders holding
at least a majority of the voting stock of the Sponsoring Employer on or before
the date which is twelve (12) months after the date it is adopted by the Board
of Directors.
11.12. The Sponsoring Employer's obligation to sell and deliver stock under
the Plan is at all times subject to all approvals of any governmental
authorities required in connection with the authorization, issuance, offer,
sale, or delivery of such stock and compliance with applicable state and federal
securities laws.
11.13. Whenever any notice is required or permitted hereunder, such notice
must be in writing and personally delivered or sent by mail. Any notice required
or permitted to be delivered hereunder shall be deemed to be delivered on the
date which it is personally delivered, or, whether actually received or not, on
the third business day after it is deposited in the United States mail,
certified or registered, postage prepaid, addressed to the person who is to
receive it at the address which such person has theretofore specified by written
notice delivered in accordance herewith. Notwithstanding any of the foregoing,
any notice required or permitted to be given by or on behalf of a Member under
Section 7.2 or Article IV hereof, shall only be effective as of the date of its
actual receipt. Any party may change, at any time and from time to time, by
written notice to the other, the address which it, he, or she had theretofore
specified for receiving
11
<PAGE> 56
notices. Until changed in accordance herewith, the Sponsoring Employer shall be
entitled to use the address of a Member in the Employer's records. Any person
entitled to notice hereunder may waive such notice.
11.14. In the event the Sponsoring Employer should receive notice that this
Plan fails to qualify as an "employee stock purchase plan" under Section 423 of
the Code, the Sponsoring Employer shall have the option of returning all then
existing Members' Contribution Accounts to the Members and terminating the Plan.
11.15. Any words herein used in the masculine shall be read and construed
in the feminine where they would so apply. Words in the singular shall be read
and construed as though in the plural in all cases where they would so apply.
11.16. This Plan is intended to comply with Rule 16b-3 under the Securities
Exchange Act of 1934, as amended, and to the extent necessary or appropriate
shall be interpreted to comply with such Rule 16b-3.
12
<PAGE> 57
Appendix C
SERVICE EXPERTS, INC.
1997 NONQUALIFIED STOCK OPTION PLAN
EFFECTIVE APRIL 3, 1997
<PAGE> 58
SERVICE EXPERTS, INC. 1997 NONQUALIFIED STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I. DEFINITIONS
1.1 Affiliate 1
1.2 Agreement 1
1.3 Board 1
1.4 Code 1
1.5 Committee 1
1.6 Company 1
1.7 Date of Exercise 1
1.8 Exchange Act 1
1.9 Fair Market Value 2
1.10 Option 2
1.11 Participant 2
1.12 Plan 2
1.13 Stock 2
1.14 Ten Percent Stockholder 2
ARTICLE II. PURPOSE OF PLAN
ARTICLE III. ADMINISTRATION
3.1 Administration of Plan 2
3.2 Authority to Grant Options 3
3.3 Persons Subject to Section 16(b) 3
ARTICLE IV. ELIGIBILITY AND LIMITATIONS ON GRANTS
4.1 Participation 3
4.2 Grant of Options 3
4.3 Limitations on Grants 3
ARTICLE V. STOCK SUBJECT TO PLAN
5.1 Source of Shares 4
5.2 Maximum Number of Shares 4
5.3 Forfeitures 4
</TABLE>
i
<PAGE> 59
<TABLE>
<S> <C> <C>
ARTICLE VI. EXERCISE OF OPTIONS
6.1 Exercise Price 4
6.2 Right to Exercise 4
6.3 Maximum Exercise Period 4
6.4 Transferability 4
6.5 Employee Status 5
ARTICLE VII. METHOD OF EXERCISE
7.1 Exercise 5
7.2 Payment 5
7.3 Federal Withholding Tax Requirements 5
7.4 Stockholder Rights 5
7.5 Issuance and Delivery of Shares 5
ARTICLE VIII. ADJUSTMENT UPON CORPORATE CHANGES
8.1 Adjustments to Shares 5
8.2 Substitution of Options on Merger or Acquisition 6
8.3 Effect of Certain Transactions 6
8.4 No Preemptive Rights 6
8.5 Fractional Shares 7
ARTICLE IX. COMPLIANCE WITH LAW AND APPROVAL OF
REGULATORY BODIES
9.1 General 7
9.2 Representations by Participants 7
ARTICLE X. GENERAL PROVISIONS
10.1 Effect on Employment 7
10.2 Unfunded Plan 8
10.3 Rules of Construction 8
10.4 Governing Law 8
10.5 Compliance With Section 16 of the Exchange Act 8
10.6 Amendment 8
10.7 Effective Date of Plan 8
</TABLE>
ii
<PAGE> 60
SERVICE EXPERTS, INC. 1997 NONQUALIFIED STOCK OPTION PLAN
PREAMBLE
WHEREAS, Service Experts, Inc. (the "Company") desires to establish a plan
through which the Company may grant options to purchase the common stock of the
Company to directors, officers, employees, and consultants of the Company and
its affiliates;
WHEREAS, the Company intends that all options granted hereunder shall not
be treated as "incentive stock options" within the meaning of section 422 of the
Code; and
WHEREAS, the Company intends that this stock option plan and the options
granted hereunder (i) qualify as "performance-based compensation" described in
section 162(m)(4)(C) of the Code, and (ii) conform to the provisions of Rule
16b-3 of the Securities Exchange Act of 1934, as amended;
NOW, THEREFORE, the Company hereby establishes the Service Experts, Inc.
1997 Nonqualified Stock Option Plan (the "Plan"), effective April 3, 1997:
ARTICLE I. DEFINITIONS
1.1 Affiliate. A "parent corporation," as defined in section 424(e) of the
Code, or "subsidiary corporation," as defined in section 424(f) of the Code, of
the Company.
1.2 Agreement. A written agreement (including any amendment or supplement
thereto) between the Company or Affiliate and a Participant specifying the terms
and conditions of an Option granted to such Participant.
1.3 Board. The board of directors of the Company.
1.4 Code. The Internal Revenue Code of 1986, as amended.
1.5 Committee. A committee composed of at least two individuals (or such
number that satisfies section 162(m)(4)(C) of the Code and Rule 16b-3 of the
Exchange Act) who are members of the Board and are not employees of the Company
or an Affiliate, and who are designated by the Board as the "compensation
committee" or are otherwise designated to administer the Plan.
1.6 Company. Service Experts, Inc. and its successors.
1.7 Date of Exercise. The date that the Company accepts tender of the
Option exercise price.
1.8 Exchange Act. The Securities Exchange Act of 1934, as amended.
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<PAGE> 61
1.9 Fair Market Value. On any given date, Fair Market Value shall be
(unless, where appropriate, the Committee determines in good faith the fair
market value of the Stock to be otherwise) the closing price of the Stock on the
Nasdaq National Market, as so published, on the trading day immediately
preceding the date as of which Fair Market Value is being determined, or the
closing price on the next preceding trading day on which such prices were
published if no Stock was traded on such trading day.
1.10 Option. The right that is granted hereunder to a Participant to
purchase from the Company a stated number of shares of Stock at the price set
forth in an Agreement.
1.11 Participant. A Board member, employee, consultant or advisor of the
Company or of an Affiliate who: either satisfies the requirements of Article and
is selected by the Committee to receive an Option, or receives an Option
pursuant to grant specified in this Plan.
1.12 Plan. The Service Experts, Inc. 1997 Nonqualified Stock Option Plan.
1.13 Stock. The common stock of the Company.
1.14 Ten Percent Stockholder. An individual who owns more than 10% of the
total combined voting power of all classes of stock of the Company or an
Affiliate at the time he is granted an Option. For the purpose of determining if
an individual is a Ten Percent Stockholder, he shall be deemed to own any voting
stock owned (directly or indirectly) by or for his brothers and sisters (whether
by whole or half blood), spouse, ancestors or lineal descendants and shall be
considered to own proportionately any voting stock owned (directly or
indirectly) by or for a corporation, partnership, estate or trust of which such
individual is a stockholder, partner or beneficiary.
ARTICLE II. PURPOSE OF PLAN
The purpose of the Plan is to provide a performance incentive and to
encourage stock ownership by officers, directors, consultants and advisors of
the Company and its Affiliates, and to align the interests of such individuals
with those of the Company, its Affiliates and its stockholders. It is intended
that Participants may acquire or increase their proprietary interests in the
Company and be encouraged to remain in the employ or directorship of the Company
or of its Affiliates. The proceeds received by the Company from the sale of
Stock pursuant to this Plan may be used for general corporate purposes.
ARTICLE III. ADMINISTRATION
3.1 Administration of Plan. The Plan shall be administered by the
Committee. The express grant in the Plan of any specific power to the Committee
shall not be construed as limiting any power or authority of the Committee. Any
decision made or action taken by the Committee to administer the Plan shall be
final and conclusive. No member of the Committee shall be liable for any act
done in good faith with respect to this Plan or any Agreement or
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Option. The Company shall bear all expenses of Plan administration. In addition
to all other authority vested with the Committee under the Plan, the Committee
shall have complete authority to:
(a) Interpret all provisions of this Plan;
(b) Prescribe the form of any Agreement and notice and manner for
executing or giving the same;
(c) Make amendments to all Agreements;
(d) Adopt, amend, and rescind rules for Plan administration; and
(e) Make all determinations it deems advisable for the administration of
this Plan.
3.2 Authority to Grant Options. The Committee shall have authority to grant
Options upon such terms as the Committee deems appropriate and that are not
inconsistent with the provisions of this Plan. Such terms may include conditions
on the exercise of all or any part of an Option.
3.3 Persons Subject to Section 16(b). Notwithstanding anything in the Plan
to the contrary, the Committee, in its absolute discretion, may bifurcate the
Plan so as to restrict, limit or condition the use of any provision of the Plan
to participants who are officers and directors subject to section 16(b) of the
Exchange Act, without so restricting, limiting or conditioning the Plan with
respect to other Participants.
ARTICLE IV. ELIGIBILITY AND LIMITATIONS ON GRANTS
4.1 Participation. The Committee may from time to time designate employees,
consultants and advisors to whom Options are to be granted and who are eligible
to become Participants. Such designation shall specify the number of shares of
Stock, if any, subject to each Option. All Options granted under this Plan shall
be evidenced by Agreements which shall be subject to applicable provisions of
this Plan or such other provisions as the Committee may adopt that are not
inconsistent with the Plan.
4.2 Grant of Options. An Option shall be deemed to be granted to a
Participant at the time that the Committee designates in a writing that is
adopted by the Committee as the grant of an Option, and that makes reference to
the name of the Participant and the number of shares of Stock that may be
purchased under the Option. Accordingly, an Option may be deemed to be granted
prior to the approval of this Plan by the stockholders of the Company and prior
to the time that an Agreement is executed by the Participant and the Company.
4.3 Limitations on Grants. A person who is not an employee of the Company
or an Affiliate is not eligible to receive an Option. No person may receive an
Option to purchase
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more than 250,000 shares of stock (subject to increases and adjustments as
provided in Article VIII) in any three year period.
ARTICLE V. STOCK SUBJECT TO PLAN
5.1 Source of Shares. Upon the exercise of an Option, the Company shall
deliver to the Participant authorized but unissued Stock.
5.2 Maximum Number of Shares. The maximum number of shares of Stock that
may be issued pursuant to an award of Options at any time, when aggregated with
the shares subject to outstanding Options at such time, is 9.5% of the total
number of shares of Stock outstanding, subject to increases and adjustments as
provided in this Article and Article , minus the number of shares of Stock
authorized for issuance under the Company's 1996 Incentive Stock Plan (the
"Incentive Plan") (as of April 3, 1997, 700,000 shares of Stock are authorized
for issuance under the Incentive Plan, and the Company is seeking to amend the
Incentive Plan to increase the number of shares of Stock authorized for issuance
from 700,000 to 1,300,000 shares).
5.3 Forfeitures. If any Option granted hereunder expires or terminates for
any reason without having been exercised in full, the unpurchased shares subject
thereto shall again be available for issuance under this Plan.
ARTICLE VI. EXERCISE OF OPTIONS
6.1 Exercise Price. The exercise price of an Option shall be the price
determined by the Committee at the time the Option is granted. If the exercise
price of an Option is changed after the date it is granted, such change shall be
deemed to be a termination of the existing Option and the issuance of a new
Option.
6.2 Right to Exercise. An Option shall be exercisable on the date of grant
or on any other date established by the Committee or provided for in an
Agreement.
6.3 Maximum Exercise Period. The maximum period in which an Option may be
exercised shall be determined by the Committee on the date of grant. All Options
shall terminate on the date the Participant's employment with the Company
terminates, except as otherwise provided in the Agreement with respect to
termination of employment, death, disability or a "change of control" (as
defined in any change of control agreement to which the Company and any such
Participant are parties).
6.4 Transferability. Any Option granted under this Plan shall be
transferable by will or by the laws of descent and distribution only, except as
otherwise expressly provided for in an Agreement. No right or interest of a
Participant in any Option shall be liable for, or subject to, any lien,
obligation or liability of such Participant.
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6.5 Employee Status. The Committee shall determine the extent to which a
leave of absence for military or government service, illness, temporary
disability, or other reasons shall be treated as a termination or interruption
of employment for purposes of determining questions of forfeiture and exercise
of an Option after termination of employment.
ARTICLE VII. METHOD OF EXERCISE
7.1 Exercise. An Option granted hereunder shall be deemed to have been
exercised on the Date of Exercise. Subject to the provisions of Articles and,
an Option may be exercised in whole or in part at such times and in compliance
with such requirements as the Committee shall determine.
7.2 Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or, to the extent approved by the Committee,
Stock that was acquired prior to the exercise of the Option, other consideration
acceptable to the Committee, or a combination thereof.
7.3 Federal Withholding Tax Requirements. Upon exercise of an Option by a
Participant who is an employee of the Company or an Affiliate, the Participant
shall, upon notification of the amount due and prior to or concurrently with the
delivery of the certificates representing the shares, pay to the Company amounts
necessary to satisfy applicable federal, state and local withholding tax
requirements or shall otherwise make arrangements satisfactory to the Company
for such requirements.
7.4 Stockholder Rights. No Participant shall have any rights as a
stockholder with respect to shares subject to his Option prior to the Date of
Exercise of such Option.
7.5 Issuance and Delivery of Shares. Shares of Stock issued pursuant to the
exercise of Options hereunder shall be delivered to Participants by the Company
(or its transfer agent) as soon as administratively feasible after a Participant
exercises an Option hereunder and executes any applicable stockholder agreement
or agreement described in Section that the Company requires at the time of
exercise.
ARTICLE VIII. ADJUSTMENT UPON CORPORATE CHANGES
8.1 Adjustments to Shares. The maximum number and kind of shares of stock
with respect to which Options hereunder may be granted and which are the subject
of outstanding Options shall be adjusted by way of increase or decrease as the
Committee determines (in its sole discretion) to be appropriate, in the event
that:
(a) the Company or an Affiliate effects one or more stock dividends, stock
splits, reverse stock splits, subdivisions, consolidations or other
similar events;
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(b) the Company or an Affiliate engages in a transaction to which section
424 of the Code applies; or
(c) there occurs any other event which in the judgment of the Committee
necessitates such action.
Provided, however, that if an event described in paragraph (a) or (b) occurs,
the Committee shall make adjustments to the limits on Options specified in
Section that are proportionate to the modifications of the Stock that are on
account of such corporate changes.
8.2 Substitution of Options on Merger or Acquisition. The Committee may
grant Options in substitution for stock awards, stock options, stock
appreciation rights or similar awards held by an individual who becomes an
employee of the Company or an Affiliate in connection with a transaction to
which section 424(a) of the Code applies. The terms of such substituted Options
shall be determined by the Committee in its sole discretion, subject only to the
limitations of Article.
8.3 Effect of Certain Transactions. Upon a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
the Company, as a result of which the stockholders of the Company receive cash,
stock or other property in exchange for their shares of Stock (but not a public
offering of Stock by the Company), and the Company is not the surviving entity,
any Option granted hereunder shall terminate, provided that the Participant
shall have the right immediately prior to any such merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation to
exercise his Options in whole or in part whether or not the vesting requirements
set forth in any Agreement have been satisfied, unless the Committee elects to
convert all Options hereunder into options to purchase stock of an acquiring
corporation. Provided, however, that, notwithstanding the foregoing, a portion
of the acceleration of exercisability of Options shall not occur with respect to
any holder to the extent that such portion of acceleration would cause the
grantee or holder of such Option to be liable for the payment of taxes pursuant
to section 4999 of the Code. If the Committee so elects to convert the Options,
the amount and price of such converted options shall be determined by adjusting
the amount and price of the Options granted hereunder in the same proportion as
used for determining the number of shares of stock of the acquiring corporation
the holders of the Stock receive in such merger, consolidation, acquisition of
property or stock, separation or reorganization, and the vesting schedule set
forth in the Agreement shall continue to apply to the converted options.
8.4 No Preemptive Rights. The issuance by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, for cash
or property, or for labor or services rendered, either upon direct sale or upon
the exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, outstanding Options.
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8.5 Fractional Shares. Only whole shares of Stock may be acquired through
the exercise of an Option. Any amounts tendered in the exercise of an Option
remaining after the maximum number of whole shares have been purchased will be
returned to the Participant.
ARTICLE IX. COMPLIANCE WITH LAW AND APPROVAL OF
REGULATORY BODIES
9.1 General. No Option shall be exercisable, no Stock shall be issued, no
certificates for shares of Stock shall be delivered, and no payment shall be
made under this Plan except in compliance with all federal or state laws and
regulations (including, without limitation, withholding tax requirements),
federal and state securities laws and regulations and the rules of all
securities exchanges or self-regulatory organizations on which the Company's
shares may be listed. The Company shall have the right to rely on an opinion of
its counsel as to such compliance. Any certificate issued to evidence shares of
Stock for which an Option is exercised may bear such legends and statements as
the Committee upon advice of counsel may deem advisable to assure compliance
with federal or state laws and regulations. No Option shall be exercisable, no
Stock shall be issued, no certificate for shares shall be delivered and no
payment shall be made under this Plan until the Company has obtained such
consent or approval as the Committee may deem advisable from any regulatory
bodies having jurisdiction over such matters.
9.2 Representations by Participants. As a condition to the exercise of an
Option, the Company may require a Participant to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares,
if, in the opinion of counsel for the Company, such representation is required
by any relevant provision of the laws referred to in Section . At the option of
the Company, a stop transfer order against any shares of stock may be placed on
the official stock books and records of the Company, and a legend indicating
that the stock may not be pledged, sold or otherwise transferred unless an
opinion of counsel was provided (concurred in by counsel for the Company) and
stating that such transfer is not in violation of any applicable law or
regulation may be stamped on the stock certificate in order to assure exemption
from registration. The Committee may also require such other action or agreement
by the Participants as may from time to time be necessary to comply with federal
or state securities laws. This provision shall not obligate the Company or any
Affiliate to undertake registration of Options or stock hereunder.
ARTICLE X. GENERAL PROVISIONS
10.1 Effect on Employment. Neither the adoption of this Plan, its
operation, nor any documents describing or referring to this Plan (or any part
thereof) shall confer upon any employee any right to continue in the employ of
the Company or an Affiliate or in any way affect any right and power of the
Company or an Affiliate to terminate the employment of any employee at any time
with or without assigning a reason therefor.
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10.2 Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets that may
at any time be represented by grants under this Plan. Any liability of the
Company to any person with respect to any grant under this Plan shall be based
solely upon contractual obligations that may be created hereunder. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
10.3 Rules of Construction. Headings are given to the articles and sections
of this Plan solely as a convenience to facilitate reference. The masculine
gender when used herein refers to both masculine and feminine. The reference to
any statute, regulation or other provision of law shall be construed to refer to
any amendment to or successor of such provision of law.
10.4 Governing Law. The laws of the State of Tennessee shall apply to all
matters arising under this Plan, to the extent that federal law does not apply.
10.5 Compliance With Section 16 of the Exchange Act. With respect to
persons subject to section 16 of the Exchange Act, transactions under this Plan
are intended to comply with all applicable conditions of Rule 16b-3 or its
successors under the Exchange Act. To the extent any provision of this Plan or
action by Committee fails to so comply, it shall be deemed null and void to the
extent permitted by law and deemed advisable by the Committee.
10.6 Amendment. The Board may amend or terminate this Plan at any time;
provided, however, an amendment that would have a material adverse effect on the
rights of a Participant under an outstanding Option is not valid with respect to
such Option without the Participant's consent. Provided further that the
stockholders of the Company must approve any amendment:
(a) Before the effective date of an amendment that changes the number of
shares in the aggregate which may be issued pursuant to Options
granted under the Plan or the maximum number of shares with respect to
which any individual may receive Options during any period specified
herein, except pursuant to Article.
(b) Before the effective date of an amendment that increases the period
during which Options may be granted or exercised.
10.7 Effective Date of Plan. This Plan shall be effective on the date of
its adoption by the Board, and Options may be granted hereunder at any time
after such adoption; provided, however, that the effectiveness of this Plan will
be retroactively revoked if it is not approved by the stockholders of the
Company within 12 months of the date that the Board took action to adopt the
Plan. All Options granted under the Plan will become void immediately following
the 12-month anniversary of the date the Board adopted the Plan if such approval
by stockholders has not yet been obtained.
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APPENDIX D
SERVICE EXPERTS, INC.
ANNUAL MEETING OF STOCKHOLDERS
MAY 2, 1997
The undersigned hereby appoints Alan R. Sielbeck and Anthony M.
Schofield, or either of them, with power of substitution, as proxies to vote
all stock of Service Experts, Inc. (the "Company") owned by the undersigned at
the Annual Meeting of Stockholders to be held at the SunTrust Financial Center,
Fifth Floor, 424 Church Street, Nashville, Tennessee, at 9:00 a.m. on May 2,
1997, and any adjournment thereof, on the following matters as indicated below
and such other business as may properly come before the meeting.
<TABLE>
<S> <C> <C> <C>
1. Proposal to amend the Company's 1996 4. [ ] FOR the election as director of all nominees
Incentive Stock Plan. listed: Raymond J. De Riggi and Norman T. Rolf,
[ ] FOR [ ] AGAINST [ ] ABSTAIN Jr. (except as marked to the contrary below).
2. Proposal to amend the Company's 1996 [ ] WITHHOLD AUTHORITY to vote for all nominees
Employee Stock Purchase Plan. listed: Raymond J. De Riggi and Norman
[ ] FOR [ ] AGAINST [ ] ABSTAIN T. Rolf, Jr.
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR AN
3. Proposal to adopt the Company's 1997 INDIVIDUAL NOMINEE, WRITE HIS NAME IN THE SPACE
Nonqualified Stock Option Plan. PROVIDED BELOW:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
---------------------------------------------------------------
5. Proposal to ratify the appointment of Ernst & Young
LLP as the independent public accountants of the
Company for 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
IN THEIR DISCRETION, THE PROXIES NAMED ABOVE MAY VOTE UPON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY
ADJOURNMENT THEREOF.
THIS PROXY MUST BE DATED AND SIGNED ON THE REVERSE SIDE
THIS PROXY IS SOLICITED ON BEHALF OF THE COMPANY'S BOARD OF DIRECTORS.
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder. If no direction is made, this
Proxy will be voted (i) FOR the amendments to the Company's 1996 Incentive
Stock Plan; (ii) FOR the amendment to the Company's 1996 Employee Stock
Purchase Plan; (iii) FOR the proposal to adopt the Company's 1997 Nonqualified
Stock Option Plan; (iv) FOR the two nominees as Class I directors of the
Company; and (v) FOR the proposal to ratify the appointment of Ernst & Young
LLP as the independent public accountants of the Company for 1997.
Please sign exactly as your name appears on this Proxy Card.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such. If a corporation, please sign in full corporate name
by President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
Dated: _______________________________________,1997
__________________, Signature of Stockholder
_________________, Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE
