<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
December 21, 1998
SERVICE EXPERTS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 001-13037 62-1639453
- ---------------- ---------------- -----------------
<S> <C> <C>
(State or Other (Commission File (I.R.S. Employer
Jurisdiction of Number) Identification
Incorporation) Number)
</TABLE>
Six Cadillac Drive
Suite 400
Brentwood, Tennessee 37027
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(615) 371-9990
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
Service Experts, Inc., a Delaware corporation (the "Company"), operates
residential heating, ventilating and air conditioning ("HVAC") service and
replacement businesses. In connection with the acquisition of HVAC businesses,
the Company plans to offer shares of the Company's Common Stock, $.01 par value
per share (the "Common Stock"), warrants to purchase shares of Common Stock and
debt securities convertible into shares of Common Stock pursuant to its
Registration Statement on Form S-4 (Registration No. 333-12319). In order to
comply with the disclosure requirements of the Securities and Exchange
Commission regarding the financial statements of businesses acquired or to be
acquired, the Company is filing this Current Report containing the following
audited and pro forma financial statements:
(a) Financial Statements of Businesses Acquired
See Pages F-2 through F-62.
(b) Pro Forma Financial Information
See Pages F-63 through F-69.
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MIDLAND HEATING AND AIR CONDITIONING, INC. -- FINANCIAL STATEMENTS FOR
THE YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1998 (UNAUDITED)
Report of Independent Auditors....................................... F-2
Balance Sheets........................................................F-3
Statements of Operations............................................. F-4
Statement of Stockholders' Equity.................................... F-5
Statements of Cash Flows............................................. F-6
Notes to Financial Statements........................................ F-7
STRAND BROTHERS, INC. -- FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997
Report of Independent Auditors........................................ F-19
Balance Sheet......................................................... F-20
Statement of Operations............................................... F-21
Statement of Stockholders' Equity..................................... F-22
Statement of Cash Flows............................................... F-23
Notes to Financial Statements......................................... F-24
BEN PEER HEATING, INC. -- FINANCIAL STATEMENTS FOR THE YEAR
ENDED APRIL 30, 1998 AND THE FIVE MONTHS ENDED SEPTEMBER
30, 1998 (UNAUDITED)
Report of Independent Auditors....................................... F-35
Balance Sheets....................................................... F-36
Statements of Income................................................. F-38
Statement of Stockholders' Equity.................................... F-39
Statements of Cash Flows............................................. F-40
Notes to Financial Statements........................................ F-41
WOMACK-O'BANNON & CHOCO, INC. d/b/a B&M HEATING AND COOLING
-- FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31,
1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
Report of Independent Auditors....................................... F-50
Balance Sheets....................................................... F-51
Statements of Operations............................................. F-52
Statement of Stockholder's Equity (Deficit).......................... F-53
Statements of Cash Flows............................................. F-54
Notes to Financial Statements........................................ F-55
SERVICE EXPERTS, INC. -- UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
Basis of Presentation............................................... F-63
Unaudited Pro Forma Combined Balance Sheet as of September 30,
1998.............................................................. F-65
Unaudited Pro Forma Combined Statements of Income for the
Nine Months ended September 30, 1998 and for the Twelve
Months ended December 31, 1997.................................... F-66
Notes to Unaudited Pro Forma Combined Financial
Statements........................................................ F-68
</TABLE>
F-1
<PAGE> 4
Report of Independent Auditors
The Stockholders of
Midland Heating and Air Conditioning, Inc.
We have audited the accompanying balance sheet of Midland Heating and Air
Conditioning, Inc. as of December 31, 1997, and the related statements of
operations, stockholders' equity, and cash flows for the year ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Midland Heating and Air
Conditioning, Inc. at December 31, 1997, and the results of its operations and
its cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 4, 1998
F-2
<PAGE> 5
Midland Heating and Air Conditioning, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 212,435 $ 100,825
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $9,500 and $8,600 at
December 31, 1997 and June 30, 1998, respectively 450,542 550,824
Stockholders 195,600 195,600
Employee 4,600 3,939
------------ ------------
650,742 750,363
Inventories 158,158 210,384
Costs and estimated earnings in excess of billings 660 13,062
Prepaid expenses and other current assets 17,275 6,715
------------ ------------
Total current assets 1,039,270 1,081,349
Property, buildings and equipment:
Land 265,829 265,829
Buildings 735,477 796,366
Furniture and fixtures 127,059 144,090
Machinery and equipment 72,147 72,147
Vehicles 745,564 750,260
------------ ------------
1,946,076 2,028,692
Less accumulated depreciation and amortization 535,671 593,510
------------ ------------
1,410,405 1,435,182
------------ ------------
Total assets $ 2,449,675 $ 2,516,531
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 60,000
Trade accounts payable and accrued liabilities 489,115 594,203
Accrued compensation 278,082 300,241
Accrued warranties 49,318 62,044
Deferred revenue 148,832 180,202
Billings in excess of costs and estimated earnings 60,529 51,213
Current portion of long-term debt and capital lease
obligations 144,744 152,792
------------ ------------
Total current liabilities 1,170,620 1,400,695
Long-term debt and capital lease obligations,
net of current 957,281 917,918
Stockholders' equity:
Common stock, $1 par value, 100,000 shares
authorized, 15,600 shares issued and outstanding 15,600 15,600
Retained earnings 306,174 182,318
------------ ------------
Total stockholders' equity 321,774 197,918
------------ ------------
Total liabilities and stockholders' equity $ 2,449,675 $ 2,516,531
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 6
Midland Heating and Air Conditioning, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Six
Year ended months ended
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Net revenue $ 6,231,274 $ 3,704,820
Cost of goods sold 4,804,948 2,961,063
------------ ------------
Gross margin 1,426,326 743,757
Selling, general and administrative expenses 1,527,851 735,110
------------ ------------
Income (loss) from operations (101,525) 8,647
Other income (expense):
Interest expense (65,158) (50,485)
Interest income 9,294 465
Other income (expense) 69,577 (4,532)
------------ ------------
13,713 (54,552)
------------ ------------
Net loss $ (87,812) $ (45,905)
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 7
Midland Heating and Air Conditioning, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
$1 Par Value Retained
Shares Amount Earnings Total
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 15,600 $ 15,600 $ 530,934 $ 546,534
Capital distributions - - (136,948) (136,948)
Net loss - - (87,812) (87,812)
-----------------------------------------------
Balance at December 31, 1997 15,600 15,600 306,174 321,774
Capital distributions
(unaudited) - - (77,951) (77,951)
Net loss (unaudited) - - (45,905) (45,905)
-----------------------------------------------
Balance at June 30, 1998
(unaudited) 15,600 $ 15,600 $ 182,318 $ 197,918
===============================================
</TABLE>
See accompanying notes.
F-5
<PAGE> 8
Midland Heating and Air Conditioning, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Six
Year ended months ended
December 31, June 30,
1997 1998
------------ --------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (87,812) $ (45,905)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 148,362 66,568
Provision for loss on accounts receivable 2,724 (900)
Gain on asset disposals (61,130) -
Changes in assets and liabilities:
Accounts receivable 551,572 (98,721)
Inventories 11,869 (52,226)
Prepaid expenses and other current assets 218,973 10,560
Trade accounts payable and accrued liabilities (200,383) 105,088
Accrued compensation (47,418) 22,159
Accrued warranties (6,466) 12,726
Deferred revenue 6,700 31,370
Costs and estimated earnings in excess of billings
and billings in excess of costs and estimated
earnings (61,206) (21,718)
----------- ----------
Net cash provided by operating activities 475,785 29,001
INVESTING ACTIVITIES
Purchase of property, buildings and equipment (972,888) (78,766)
Proceeds from sale of property, buildings and equipment 99,630 22,463
----------- ----------
Net cash used in investing activities (873,258) (56,303)
FINANCING ACTIVITIES
Distribution to stockholders (136,948) (77,951)
Payments on long-term debt and capital leases (396,618) (66,357)
Proceeds from long-term debt 712,000 -
Proceeds from line of credit - 60,000
----------- ----------
Net cash provided by (used in) financing activities 178,434 (84,308)
----------- ----------
Decrease in cash (219,039) (111,610)
Cash at beginning of period 431,474 212,435
----------- ----------
Cash at end of period $ 212,435 $ 100,825
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 64,169 $ 50,485
=========== ==========
Purchase of equipment through capital leases $ 123,775 $ 35,042
=========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE> 9
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Midland Heating and Air Conditioning, Inc. (the "Company") operates in one
industry segment and is primarily engaged in the installation and servicing of
air conditioning and heating systems for commercial and residential customers in
the Columbia, South Carolina area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of June 30, 1998 and the related statements of operations,
stockholders' equity, and cash flows for the six months then ended (interim
financial statements) have been prepared by the Company's management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1997 audited financial statements appearing herein. The results of the six
months ended June 30, 1998 may not be indicative of operating results for the
full year.
RECOGNITION OF REVENUE
Revenue on all of the Company's heating and air conditioning installation
contracts ("Contracts") for commercial buildings are recognized on the
percentage-of-completion method in the ratio that total incurred costs bear to
total estimated costs. Revenue on all of the Company's Contracts for residential
installation and service and maintenance revenue are recognized upon completion
of the services, which is usually within one to two days.
F-7
<PAGE> 10
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE (CONTINUED)
Earnings and estimated costs on Contracts are reviewed throughout the terms of
the Contracts, and any required adjustments are reflected in the periods in
which they first become known. When estimates indicate a probable loss on a
Contract, the full amount thereof is accrued in the period in which it is first
determined. Most Contracts are completed within six to 12 months.
Trade accounts receivable includes billings and billed retainage on Contracts.
Trade accounts receivable also includes unbilled retainage of approximately
$22,000 at December 31, 1997. The Company classifies these amounts as current
assets because all balances are expected to be collected in the current year.
The asset, "cost and estimated earnings in excess of billings", represents
revenue recognized in excess of amounts billed on in-progress Contracts. The
liability, "billings in excess of costs and estimated earnings", represents
billings in excess of revenue recognized on in-progress Contracts.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amount reported in the balance sheet for cash approximates fair
value.
Accounts Receivable, Notes Payable, Accounts Payable and Accrued Liabilities.
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
F-8
<PAGE> 11
'
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. At December 31, 1997, the Company had approximately $169,000 on deposit
with a bank in excess of FDIC insurance limits.
The Company primarily purchases units and parts that are manufactured by The
Trane Company and York International Corporation. Total purchases of equipment
and parts from these manufacturers during 1997 totaled approximately $1,040,000.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out ("FIFO") method for all inventories.
F-9
<PAGE> 12
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are stated on the basis of cost. Depreciation
and amortization are provided on the straight-line and declining-balance methods
over the following useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building 39
Furniture and fixtures 5
Machinery and equipment 7
Vehicles 5
</TABLE>
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of," requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property, buildings and equipment and has
determined that there were no indications of impairment as of December 31, 1997.
F-10
<PAGE> 13
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
WARRANTIES
The Company provides the retail customer with a one year warranty on parts and
labor from the date of installation of the heating and air conditioning unit.
This warranty runs concurrent with the manufacturer's warranty on parts. The
Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
The stockholders of the Company have elected under Subchapter S of the Internal
Revenue Code to include their respective percentage of the Company's income in
their own income for federal and state income tax purposes. Accordingly, the
Company is not subject to federal and state income tax.
F-11
<PAGE> 14
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled $2,724, and accounts written off, net of recoveries, was $33,224.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $107,000.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in stockholders'
equity (except those arising from transactions from owners) and includes net
income, net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. The adoption of SFAS No. 130 did
not have an effect on the Company's financial statements.
F-12
<PAGE> 15
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
2. CONTRACTS IN PROCESS
Information relative to contracts in process is as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Contracts on the percentage-of-completion method:
Expenditures on uncompleted contacts $ 103,750
Estimated earnings 59,898
---------
163,648
Less applicable billings 223,517
---------
$ (59,869)
=========
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 660
Billings in excess of costs and estimated earnings on (60,529)
uncompleted contracts ---------
$ (59,869)
=========
</TABLE>
Progress billings on contracts bear a relation to costs incurred, but are not
indicative of the ultimate profit or loss on a contract.
F-13
<PAGE> 16
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
3. DEBT
Debt consists of:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Mortgage note payable $712,000
Equipment note 15,334
--------
727,334
Less current portion 32,852
--------
$694,482
========
</TABLE>
The Company has a line of credit with a financial institution with a total
borrowing limit of $100,000. The line of credit bears interest at a variable
rate of the Prime Lending Rate plus 1% (9.5% at December 31, 1997). At December
31, 1997, the line of credit was unused.
The Company has a mortgage note payable which is secured by the related office
building and land. This loan requires monthly installments of $7,435, including
principal and interest (9.5% at December 31, 1997) through September 2000 with
the remaining balance due October 2000.
The Company has an equipment note which is secured by various computers. The
loan bears interest at the Prime Lending Rate plus 1% (9.5% at December 31,
1997) and is guaranteed by a stockholder of the Company. The loan requires
monthly payments of $667 plus interest through November 1999.
F-14
<PAGE> 17
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
As of December 31, 1997, the aggregate amounts of annual principal maturities of
long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 32,852
1999 32,345
2000 662,137
--------
$727,334
========
</TABLE>
4. LEASES
Total rental expense for all operating leases was $14,660 for 1997. The Company
leases certain vehicles and equipment under terms of noncancelable operating and
capital lease agreements which expire at various dates through 2002. Minimum
rental commitments at December 31, 1997 under capital and operating leases
having an initial noncancelable term of one year or more are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------------- -------------
<S> <C> <C>
1998 $ 141,330 $ 12,867
1999 106,125 5,249
2000 103,971 4,488
2001 50,457 748
2002 42,048 --
Thereafter --
------------- -------------
443,931 $ 23,352
Amounts representing interest 69,240 =============
Present value of net minimum rentals -------------
(including $111,892 classified as current) $ 374,691
=============
</TABLE>
F-15
<PAGE> 18
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
4. LEASES (CONTINUED)
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheet, are as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------
<S> <C>
Vehicles and equipment $ 780,439
Less accumulated amortization 482,396
-------------
Net vehicles and equipment under capital leases $ 298,043
=============
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
5. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Generally, employees
of the Company must be twenty-one years of age and complete one year of service
to be eligible to participate in the plan. Under the plan's provisions, a plan
member may make contributions, on a tax deferred basis, not to exceed the
maximum established by the Internal Revenue Service. The Company may elect to
make matching contributions and additional contributions at its discretion.
There were no contributions made during 1997.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
F-16
<PAGE> 19
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Company operates under Subchapter S of the Internal Revenue Code and is not
subject to corporate federal and state income tax. In connection with the sale
of the Company (see Note 9), the Subchapter S election will be terminated. As a
result, the Company will be subject to corporate income taxes subsequent to the
termination of S corporation status. The Company had taxable income of $50,918
for 1997. Had the Company filed federal and state income tax returns as a
regular corporation for 1997, income tax benefit under the provisions of SFAS
No. 109 would have been approximately $39,000.
At the date of termination of S corporation status, the Company will be required
to provide deferred taxes for cumulative temporary differences between financial
reporting and tax reporting basis of assets and liabilities. Such deferred taxes
will be based on the cumulative temporary differences at the date of termination
of S corporation status. The effect of recognizing the deferred taxes will be
recorded as an adjustment to goodwill in purchase accounting. If the termination
of S corporation status had occurred at June 30, 1998, the deferred tax
liability would have been approximately $6,500.
F-17
<PAGE> 20
Midland Heating and Air Conditioning, Inc.
Notes to Financial Statements (continued)
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated effect on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed and does not expect the Year 2000 issue to have
a material adverse effect on the financial position, results of operations or
cash flows of the Company in future periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
9. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Asset Purchase Agreement with
Service Experts, Inc. ("Service Experts") to sell all of the Company's assets to
a wholly-owned subsidiary of Service Experts. In accordance with the Asset
Purchase Agreement, the sale of the assets was effective June 30, 1998.
In connection with the business combination of the Company with Service Experts,
Service Experts repaid the line of credit and all long term notes payable
outstanding.
F-18
<PAGE> 21
Report of Independent Auditors
The Stockholders of
Strand Brothers, Inc.
We have audited the accompanying balance sheet of Strand Brothers, Inc. as of
December 31, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Strand Brothers, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
November 27, 1998
F-19
<PAGE> 22
Strand Brothers, Inc.
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 78,498
Trade, net of allowance for doubtful accounts of $1,000 at
December 31, 1997
114,110
Inventories 369,499
Prepaid expenses and other current assets 1,600
Deferred income taxes 30,966
--------
Total current assets 594,673
Property and equipment:
Furniture and fixtures 76,944
Machinery and equipment 32,207
Vehicles 350,102
Leasehold improvements 5,907
--------
465,160
Less accumulated depreciation and amortization 285,180
--------
179,980
--------
Total assets $774,653
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $244,040
Accrued compensation 16,724
Accrued warranties 49,741
Deferred revenue 34,896
Related party notes payable 180,000
Current portion of long-term debt 24,068
--------
Total current liabilities 549,469
Long-term debt, net of current portion 10,000
Deferred income taxes 1,233
Stockholders' equity:
Common stock, no par value, 5,000,000 shares authorized, 8,333
shares issued and outstanding 134,810
Preferred stock, $10 par value; 2,000,000 shares authorized; no shares
issued and outstanding -
Retained earnings 79,141
--------
Total stockholders' equity 213,951
--------
Total liabilities and stockholders' equity $774,653
========
</TABLE>
See accompanying notes.
F-20
<PAGE> 23
Strand Brothers, Inc.
Statement of Operations
Year ended December 31, 1997
<TABLE>
<S> <C>
Net revenue $4,620,528
Cost of goods sold 2,916,583
----------
Gross margin 1,703,945
Selling, general and administrative expenses 1,746,983
----------
Loss from operations (43,038)
Other income (expense):
Interest expense (23,098)
Interest income 7,737
Other income 26,857
----------
11,496
----------
Loss before taxes (31,542)
Benefit for income tax:
Current --
Deferred (9,478)
----------
Total income taxes (9,478)
----------
Net loss $ (22,064)
==========
</TABLE>
See accompanying notes.
F-21
<PAGE> 24
Strand Brothers, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
No Par Value Retained
Shares Amount Earnings Total
--------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 8,333 $134,810 $ 109,538 $229,682
Capital distributions -- -- (8,333) (8,333)
Capital contributions -- -- -- 14,666
Net loss -- -- (22,064) (22,064)
--------------------------------------------------
Balance at December 31, 1997 8,333 $134,810 $ 79,141 $213,951
==================================================
</TABLE>
See accompanying notes.
F-22
<PAGE> 25
Strand Brothers, Inc.
Statement of Cash Flows
Year ended December 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (22,064)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 75,511
Benefit for deferred income taxes (9,478)
Provision for loss on accounts receivable 4,519
Gain on asset disposals (9,500)
Changes in assets and liabilities:
Accounts and notes receivable (28,440)
Inventories (104,586)
Prepaid expenses and other current assets 24,309
Trade accounts payable and accrued liabilities 84,664
Accrued compensation (12,846)
Accrued warranties (1,411)
Deferred revenue 12,713
---------
Net cash flow provided by operating activities 13,391
INVESTING ACTIVITIES
Purchase of property and equipment (68,167)
Proceeds from sale of property and equipment 9,500
---------
Net cash used in investing activities (58,667)
FINANCING ACTIVITIES
Capital contribution from stockholder 14,666
Distribution to stockholders (8,333)
Payments on long-term debt (41,701)
Proceeds from long-term debt 22,733
Payments on related party notes payable (325,000)
Proceeds from related party notes payable 335,000
---------
Net cash used in financing activities (2,635)
Decrease in cash and cash equivalents (47,911)
Cash and cash equivalents at beginning of period 126,409
---------
Cash and cash equivalents at end of period $ 78,498
=========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 23,098
=========
</TABLE>
See accompanying notes.
F-23
<PAGE> 26
Strand Brothers, Inc.
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Strand Brothers, Inc. (the "Company") operates in one industry segment and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential customers in the Austin, Texas area.
RECOGNITION OF REVENUE
Revenue on all of the Company's Contracts for residential installation and
service and maintenance revenue are recognized upon completion of the services,
which is usually within one to two days.
F-24
<PAGE> 27
Strand Brothers, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amount reported in the balance sheet for cash approximates fair
value.
Accounts Receivable, Notes Payable, Accounts Payable and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
F-25
<PAGE> 28
Strand Brothers, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. The Company primarily purchases HVAC units and parts from Lennox
Industries, Inc. Total purchases of equipment and parts from this manufacturer
during 1997 totaled approximately $1,384,000.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled $4,519, and accounts written off, net of recoveries, was $12,356.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out ("FIFO") method for all inventories.
F-26
<PAGE> 29
Strand Brothers, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Furniture and fixtures 5
Machinery and equipment 5
Vehicles 5
Leasehold improvements 7
</TABLE>
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of," requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property, buildings and equipment and has
determined that there were no indications of impairment as of December 31, 1997.
F-27
<PAGE> 30
Strand Brothers, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
WARRANTIES
The Company generally provides the retail customer with a one year warranty on
parts and labor from the date of installation of the heating and air
conditioning unit. This warranty runs concurrent with the manufacturer's
warranty on parts. The Company provides an accrual for future warranty costs
based upon the relationship of prior years' sales to actual warranty costs. It
is the Company's practice to classify the entire warranty accrual as a current
liability.
PREFERRED STOCK
Preferred stockholders are entitled to such preferences to the Common Stock as
to dividends and distributions of assets of the Company on dissolution.
Preferred stockholders have no voting rights except that these stockholders have
the right to vote as a class on such matters as merger and consolidation,
voluntary dissolution and revocations of voluntary dissolution proceedings. The
Company has the power and authority to redeem preferred stock at par value.
Preferred stockholders are entitled to a noncumulative dividend of 12% in any
year that a dividend is paid and before any dividends paid on any other class of
stock. As of December 31, 1997, no shares of preferred stock were issued and
outstanding.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state income
taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed approximately $168,000.
F-28
<PAGE> 31
Strand Brothers, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in stockholders'
equity (except those arising from transactions from owners) and includes net
loss, net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. The adoption of SFAS No. 130 did
not have an effect on the Company's financial statements.
F-29
<PAGE> 32
Strand Brothers, Inc.
Notes to Financial Statements (continued)
2. DEBT
Debt consists of:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Installment and equipment notes $34,068
Less current portion 24,068
-------
$10,000
=======
</TABLE>
The Company has a line of credit with a financial institution with a total
borrowing limit of $100,000. The line of credit bears interest at a variable
rate determined by the Prime Lending Rate. At December 31, 1997, the Company had
no outstanding balance on this line of credit.
The Company has various installment and equipment loans to various lenders which
are secured by vehicles and equipment. These loans bear interest at various
fixed rates ranging from 6.75% to 8.00% per annum at December 31, 1997. These
loans require monthly payments ranging from $584 to $958 and are due through
March 22, 2000.
As of December 31, 1997, the aggregate amounts of annual principal maturities of
long-term debt are as follows:
<TABLE>
<S> <C>
1999 $24,068
2000 10,000
Thereafter --
-------
$34,068
=======
</TABLE>
F-30
<PAGE> 33
Strand Brothers, Inc.
Notes to Financial Statements (continued)
3. EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code. Substantially all
employees of the Company are eligible to participate in the plan. Under the
plan's provisions, a plan member may make contributions, on a tax deferred
basis, not to exceed the maximum established by the Internal Revenue Service.
The Company provides matching contributions of 50% of total contributions by a
plan member, to a maximum of 3% of the employee's total calendar year
compensation. The Company's matching contributions totaled approximately $22,000
for 1997.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
F-31
<PAGE> 34
Strand Brothers, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES
Income taxes benefit consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal $ --
State --
Deferred (9,478)
---------
$ (9,478)
=========
</TABLE>
Significant components of the deferred tax assets and liabilities as of December
31, 1997, are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Depreciation and amortization $ 7,062
Deferred tax assets:
Accounts receivable 370
Warranty reserve 18,389
Accrued expenses 12,207
Net operating loss carryforward 5,829
-------
Total gross deferred tax assets 36,795
Valuation allowance --
-------
Deferred tax assets 36,795
-------
Net deferred tax assets $29,733
=======
</TABLE>
Management has evaluated the need for a valuation allowance for all or a portion
of the deferred tax assets and believes that the deferred tax assets will likely
be realized from taxable income resulting from reversing temporary differences
and future pretax book income. Accordingly, no valuation allowance has been
recognized for the year ended December 31, 1997.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $16,000 for federal and state income tax purposes that expire in
2012.
F-32
<PAGE> 35
Strand Brothers, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
The benefit for income taxes differs from the amounts computed by applying the
statutory federal income tax rate of 34% to loss before income taxes. The
differences are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997
------------
<S> <C>
Tax benefit at statutory rate $(10,724)
State income tax benefit less applicable federal tax benefit (762)
Nondeductible expenses 2,008
--------
$ (9,478)
========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases its office facility from its stockholders on a month-to-month
basis. Rental payments of $72,000 related to this lease were made during the
year ended December 31, 1997.
The Company has a 10% interest bearing notes payable to the stockholders
totaling $180,000 at December 31, 1997. This note matures in 1998.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
F-33
<PAGE> 36
Strand Brothers, Inc.
Notes to Financial Statements (continued)
7. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated effect on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed and does not expect the Year 2000 issue to have
a material adverse effect on the financial position, results of operations or
cash flows of the Company in future periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
8. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Agreement and Plan of Merger with
Service Experts, Inc. ("Service Experts"). In accordance with the Agreement and
Plan of Merger, the Company merged with and into a wholly-owned subsidiary of
Service Experts effective March 11, 1998.
In connection with the business combination of the Company with Service Experts,
Service Experts paid all notes payable outstanding.
F-34
<PAGE> 37
Report of Independent Auditors
The Stockholders
Ben Peer Heating, Inc.
We have audited the accompanying balance sheet of Ben Peer Heating, Inc. as of
April 30, 1998, and the related statements of income, stockholders' equity, and
cash flows for the year ended April 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ben Peer Heating, Inc. at April
30, 1998, and the results of its operations and its cash flows for the year
ended April 30, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 11, 1998
F-35
<PAGE> 38
Ben Peer Heating, Inc.
Balance Sheets
<TABLE>
<CAPTION>
April 30, September
1998 30, 1998
---------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 174,968 $ 233,825
Accounts receivable:
Trade, net of allowance for doubtful accounts
of $1,000 at April 30, 1998 and $2,800 at
September 30, 1998 (unaudited) 41,900 75,530
Employee - 4,812
Other 599 -
---------------------------------------
42,499 80,342
Current portion stockholders note receivable 3,234 2,500
Inventories 103,520 144,500
Prepaid expenses and other current assets 5,400 10,615
Investments 288,389 289,453
Deferred income taxes 2,143 22,256
---------------------------------------
Total current assets 620,153 783,491
Property and equipment:
Furniture and fixtures 29,084 29,084
Machinery and equipment 96,005 106,005
Vehicles 271,217 237,478
---------------------------------------
396,306 372,567
Less accumulated depreciation and amortization 249,039 232,658
---------------------------------------
147,267 139,909
Stockholders note receivable, net of
current portion 41,487 30,221
Other assets, net of accumulated amortization of
$17,949 and $24,699 at April 30, 1998 and
September 30, 1998 (unaudited) 48,051 41,481
---------------------------------------
Total assets $ 856,958 $ 995,102
=======================================
</TABLE>
F-36
<PAGE> 39
<TABLE>
<CAPTION>
April 30, September
1998 30, 1998
---------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable and accrued liabilities $ 99,687 $ 53,862
Accrued compensation 12,200 13,000
Accrued warranties 15,100 16,500
Income taxes payable 11,123 76,003
Deferred revenue 5,800 24,300
---------------------------------------
Total current liabilities 143,910 183,665
Deferred income taxes 6,958 5,035
Stockholders' equity:
Common stock, no par value, 200 shares
authorized, 100 shares issued and outstanding 17,469 17,469
Retained earnings 649,637 757,287
Accumulated other comprehensive income 38,984 31,646
---------------------------------------
Total stockholders' equity 706,090 806,402
---------------------------------------
Total liabilities and stockholders' equity $ 856,958 $ 995,102
=======================================
</TABLE>
See accompanying notes.
F-37
<PAGE> 40
Ben Peer Heating, Inc.
Statements of Income
<TABLE>
<CAPTION>
Five Months
Year Ended April 30, Ended
1998 September
30, 1998
--------------------------------------
(Unaudited)
<S> <C> <C>
Net revenue $2,153,752 $959,232
Cost of goods sold 1,480,757 577,960
--------------------------------------
Gross margin 672,995 381,272
Selling, general and administrative expenses 606,598 229,722
--------------------------------------
Income from operations 66,397 151,550
Other income:
Interest income 13,802 7,896
Other income 24,917 6,918
--------------------------------------
38,719 14,814
--------------------------------------
Income before taxes 105,116 166,364
Provision (benefit) for income tax:
Current 40,836 76,003
Deferred (20,103) (17,289)
--------------------------------------
Total income taxes 20,733 58,714
--------------------------------------
Net income $ 84,383 $107,650
======================================
</TABLE>
See accompanying notes.
F-38
<PAGE> 41
Ben Peer Heating, Inc.
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Other
No Par Value Retained Comprehensive
Shares Amount Earnings Income Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at May 1, 1997 100 $ 17,469 $ 565,254 $ 20,628 $ 603,351
---------
Net income - - 84,383 - 84,383
Net unrealized gain on marketable
securities - - - 18,356 18,356
---------
Comprehensive income 102,739
------------------------------------------------------------------------
Balance at April 30, 1998 100 17,469 649,637 38,984 706,090
Net income (unaudited) - - 107,650 - 107,650
Net unrealized loss on marketable
securities - - - (7,338) (7,338)
---------
Comprehensive income (unaudited) 100,312
-----------------------------------------------------------------------
Balance at September 30, 1998 100 $ 17,469 $ 757,287 $ 31,646 $ 806,402
(unaudited) ========================================================================
</TABLE>
See accompanying notes.
F-39
<PAGE> 42
Ben Peer Heating, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Five Months
Year Ended Ended
April 30, September 30,
1998 1998
--------------------------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 84,383 $ 107,650
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 65,581 26,952
Benefit for deferred income taxes (20,103) (17,289)
Provision for loss on accounts receivable 1,000 2,800
Gain on asset disposals - (3,024)
Changes in assets and liabilities:
Accounts and notes receivable (19,892) (28,643)
Inventories (73,655) (40,980)
Prepaid expenses and other current assets (4,500) (5,215)
Trade accounts payable and accrued liabilities 62,797 (45,825)
Accrued compensation 2,100 800
Accrued warranties 1,400 1,400
Deferred revenue 12,666 18,500
Income taxes payable 2,900 64,880
--------------------------------------------
Net cash flow provided by operating activities 114,677 82,006
Investing activities
Purchase of property, buildings and equipment (75,255) (10,000)
Purchase of marketable equity securities (66,902) (76,415)
Payment of cash for acquired company (112,955) -
Proceeds from sale of marketable equity securities 187,343 63,266
--------------------------------------------
Net cash used in investing activities (67,769) (23,149)
Increase in cash and cash equivalents 46,908 58,857
Cash and cash equivalents at beginning of period 128,060 174,968
--------------------------------------------
Cash and cash equivalents at end of period $ 174,968 $ 233,825
============================================
Supplemental cash flow information
============================================
Income taxes paid $ 29,714 $ -
============================================
Acquisition of company
Fair value of assets acquired $ 127,000 $ -
Cash paid (112,955) -
============================================
Liabilities assumed $ (14,045) $ -
============================================
</TABLE>
See accompanying notes.
F-40
<PAGE> 43
Ben Peer Heating, Inc.
Notes to Financial Statements
April 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Ben Peer Heating, Inc. (the "Company") operates in one industry segment and is
primarily engaged in the installation and servicing of air conditioning and
heating systems for residential customers in the Rochester, New York area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the related statements of income,
stockholders' equity, and cash flows for the five months then ended (interim
financial statements) have been prepared by the Company's management and are
unaudited. The interim financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary for a fair presentation of the
interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the April 30,
1998 audited financial statements appearing herein. The results of the five
months ended September 30, 1998 may not be indicative of operating results for
the full year.
RECOGNITION OF REVENUE
Revenue on all of the Company's contracts for residential installation and
service and maintenance revenue are recognized upon completion of the services,
which is usually within one to two days.
F-41
<PAGE> 44
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates fair value.
Accounts Receivable, Notes Payable, Accounts Payable, and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
CONCENTRATIONS OF CREDIT
At times, cash balances in the Company's accounts may exceed FDIC insurance
limits. At April 30, 1998, the Company had approximately $28,385 on deposit with
a bank in excess of FDIC Insurance limits.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended April 30, 1998, amounts charged to bad debt expense
totaled $500. No accounts were written off during the year ended April 30, 1998.
INVENTORIES
Inventories which consist entirely of finished goods are stated at cost, which
is not in excess of market. Cost is determined by the first-in, first-out (FIFO)
method for all inventories.
F-42
<PAGE> 45
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
--------------------
<S> <C>
Furniture and fixtures 7-10
Machinery and equipment 5
Vehicles 5
</TABLE>
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of", requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property, equipment and other assets has
determined that there were no indications of impairment as of April 30, 1998.
OTHER ASSETS
In connection with two separate acquisitions, the Company recorded goodwill
resulting from the excess of purchase price over the fair value of acquired
tangible and identifiable intangible assets. The Company also required that the
former owners enter into non-compete agreements. The non-compete agreements are
being amortized on the straight-line method over the life of the agreements. The
goodwill is being amortized on the straight line method over a period of fifteen
years.
F-43
<PAGE> 46
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
WARRANTIES
The Company generally provides the customer with a one year warranty on parts
and labor from the date of installation of the heating and air conditioning
unit. This warranty runs concurrent with the manufacturer's warranty on parts.
The Company provides an accrual for future warranty costs based upon the
relationship of prior years' sales to actual warranty costs. It is the Company's
practice to classify the entire warranty accrual as a current liability.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
INCOME TAXES
The Company uses the liability method of accounting for federal and state income
taxes as provided by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, the deferred tax liability or asset is based on temporary
differences between the financial statement and income tax bases of assets and
liabilities, measured at tax rates that will be in effect when the differences
reverse.
F-44
<PAGE> 47
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
The Company expenses advertising costs as incurred. For the fiscal year ended
April 30, 1998, the Company expensed approximately $34,000.
NEWLY ISSUED ACCOUNTING STANDARD
As of May 1, 1998, the Company adopted SFAS 130, Reporting Comprehensive Income.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this SFAS had no impact on
the Company's net income or stockholders' equity. SFAS 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in stockholders' equity, to be included in
other comprehensive income. The April 30, 1998 financial SFASs have been
reclassified to conform to the requirements of SFAS 130.
The components of comprehensive income during the year ended April 30, 1998
were:
<TABLE>
<S> <C>
Net income $ 84,383
Change in net unrealized gain
on marketable securities $ 18,356
--------------------
Comprehensive income $ 102,739
====================
</TABLE>
The change in net unrealized gain on marketable securities is net of income tax
expense of $11,874.
2. MARKETABLE EQUITY SECURITIES
The Company's investments consist of marketable equity securities. These
investments are accounted for in accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." It is the Company's intent
not to hold these investments to maturity.
The Company's investment securities are classified as available-for-sale under
SFAS No. 115. On securities classified as available-for-sale, the carrying
amount is a reasonable estimate of fair value. As of April 30, 1998, investments
consisted of the following:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. corporate securities $224,186 $66,526 $2,323 $288,389
</TABLE>
F-45
<PAGE> 48
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
3. EMPLOYEE BENEFIT PLANS
The Company has both a defined-contribution employee benefit plan incorporating
provisions of Section 401(k) of the Internal Revenue Code and a profit sharing
plan. Substantially all employees of the Company are eligible to participate in
both plans. Under the defined-contribution plan provisions, the Company
contributes 10% of an employee's wages each year. Employees cannot make
contributions to this plan. The Company also maintains a discretionary profit
sharing plan in which the Company contributes 0-15% of an employee's wages. The
allocation is solely at the discretion of the Company and based on financial
results. The Company's contributions totaled approximately $122,000 for the year
ended April 30, 1998.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
5. INCOME TAXES
Income tax expense (benefit) consists of the following for the year ended April
30, 1998:
<TABLE>
<S> <C>
Current:
Federal $ 30,020
State 10,816
Deferred (20,103)
------------
$ 20,733
============
</TABLE>
F-46
<PAGE> 49
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
Significant components of the deferred tax assets and liabilities as of April
30, 1998, are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Deferred revenue $ 550
Depreciation and amortization 6,958
-----------
Total deferred tax liabilities 7,508
Deferred tax assets:
Accrued expenses 21,981
Warranty reserves 5,931
-----------
Total gross deferred tax assets 27,912
Valuation allowance --
-----------
Deferred tax assets 27,912
-----------
Net deferred tax assets $ 20,404
===========
</TABLE>
Management has evaluated the need for a valuation allowance against the gross
deferred tax assets and determined that the deferred tax assets will likely be
realized through taxable income from reversing taxable temporary differences
and future pretax book income. Accordingly, no valuation allowance was recorded
at April 30, 1998.
The provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate of 34% to income before income taxes. The
differences are summarized as follows:
<TABLE>
<CAPTION>
April 30, 1998
--------------
<S> <C>
Tax provision at statutory rate of 34% $ 35,738
State income tax less applicable federal tax benefit 5,599
Effect of graduated tax rates and nondeductible expenses (20,604)
--------------
$ 20,733
==============
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company leases its office facility from its stockholders on a month to month
basis. Total rental payments amounted to $55,000 during the year ended April 30,
1998.
The Company has a note receivable outstanding at April 30, 1998 totaling $44,721
due from its stockholders. Monthly payments consist of $729 which includes
interest calculated at 9%. Any unpaid portion remaining is due in full on March
1, 2004.
F-47
<PAGE> 50
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
7. ACQUISITION
On May 28, 1997, the Company purchased certain assets of DiPrima Heating &
Cooling, Inc. for cash in the amount of $112,955, and the assumption of
liabilities totaling $14,045. The acquisition has been accounted for using the
purchase method of accounting, and accordingly, the purchase price has been
allocated to the assets purchased based upon the fair values at the date of
acquisition. The operating results of DiPrima Heating & Cooling, Inc. have been
included in the 1998 income statement from the date of the acquisition.
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and implemented a plan which will
include testing, modifying and replacing portions of its software so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter. According to management estimates, the total Year 2000 project
cost will not materially affect the operating results or the financial position
of the Company.
The planned project is estimated to be completed not later than June 30, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made or are not completed in a timely manner, the Year 2000 issue could have a
material effect on the operations of the Company.
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed and does not expect the Year 2000 issue to have
a material adverse effect on the financial position, results of operations or
cash flows of the Company in future periods.
F-48
<PAGE> 51
Ben Peer Heating, Inc.
Notes to Financial Statements (continued)
8. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
9. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Agreement and Plan of Merger with
Service Experts, Inc. ("Service Experts"). In accordance with the Agreement and
Plan of Merger, the Company merged with and into a wholly-owned subsidiary of
Service Experts effective October 1, 1998.
F-49
<PAGE> 52
Report of Independent Auditors
The Stockholders
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
We have audited the accompanying balance sheet of Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling as of December 31, 1997, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling at December 31, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 10, 1998
F-50
<PAGE> 53
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
-----------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 23,944 $ 46,221
Accounts receivable:
Trade, net of allowance for doubtful accounts of $2,770
at December 31, 1997 and $1,248 at September 30, 1998
(unaudited) 56,164 25,297
Inventories 5,000 5,000
-----------------------------------------
Total current assets 85,108 76,518
Property and equipment:
Furniture and fixtures 18,117 18,117
Vehicles 179,480 179,480
-----------------------------------------
197,597 197,597
Less accumulated depreciation and amortization 65,142 96,246
-----------------------------------------
132,455 101,351
Other assets 2,925 2,925
-----------------------------------------
Total assets $220,488 $ 180,794
=========================================
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable and accrued liabilities $ 70,324 $ 6,543
Accrued compensation 18,450 50,924
Deferred revenue 39,181 92,000
Current portion of long-term debt and capital lease
obligations 57,059 30,912
-----------------------------------------
Total current liabilities 185,014 180,379
Long-term debt and capital lease obligations, net of current 29,403 12,134
Stockholders' Equity (Deficit):
Common stock, $1.00 par value, 1,000,000 shares authorized,
600 shares issued and outstanding 600 600
Retained earnings (deficit) 5,471 (12,319)
-----------------------------------------
Total stockholders' equity (deficit) 6,071 (11,719)
-----------------------------------------
Total liabilities and stockholders' equity (deficit) $220,488 $ 180,794
=========================================
</TABLE>
See accompanying notes.
F-51
<PAGE> 54
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Statements of Operations
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1997 1998
--------------------------------------------
(Unaudited)
<S> <C> <C>
Net revenue $ 1,837,657 $ 1,500,570
Cost of goods sold 853,131 739,610
--------------------------------------------
Gross margin 984,526 760,960
Selling, general and administrative expenses 916,604 774,161
--------------------------------------------
Income (loss) from operations 67,922 (13,201)
Other income (expense):
Interest expense (9,244) (4,589)
--------------------------------------------
Net income (loss) $ 58,678 $ (17,790)
============================================
</TABLE>
See accompanying notes.
F-52
<PAGE> 55
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Common Stock Retained
$1.00 Par Value Earnings
Shares Amount (Deficit) Total
----------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 600 $ 600 $(53,207) $(52,607)
Net income -- -- 58,678 58,678
----------------------------------------------------------
Balance at December 31, 1997 600 600 5,471 6,071
--
Net loss (unaudited) -- -- (17,790) (17,790)
----------------------------------------------------------
Balance at September 30, 1998 (unaudited) 600 $ 600 $(12,319) $(11,719)
==========================================================
</TABLE>
See accompanying notes.
F-53
<PAGE> 56
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1997 1998
--------------------------------------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss) $ 58,678 $(17,790)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 41,041 31,104
Provision for loss on accounts receivable 2,770 (1,522)
Loss on asset disposals 3,835 --
Changes in operating assets and liabilities:
Accounts receivable (41,167) 32,389
Inventories (2,200) --
Trade accounts payable and accrued liabilities 36,026 (63,781)
Accrued compensation (23,968) 32,474
Deferred revenue (9,670) 52,819
--------------------------------------------
Net cash flow provided by operating activities 65,345 65,693
Investing activities:
Purchase of property and equipment (60,321) --
Proceeds from sale of property and equipment 5,382 --
--------------------------------------------
Net cash used in investing activities (54,939) --
Financing activities:
Proceeds from long-term debt 43,737 --
Payments on long-term debt and capital leases (53,674) (43,416)
--------------------------------------------
Net cash used in financing activities (9,937) (43,416)
Increase in cash 469 22,277
Cash at beginning of period 23,475 23,944
--------------------------------------------
Cash at end of period $ 23,944 $ 46,221
============================================
Supplemental cash flow information:
Interest paid $ 9,244 $ 4,589
============================================
</TABLE>
See accompanying notes.
F-54
<PAGE> 57
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements
December 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REPORTING ENTITY
Womack-O'Bannon & Choco, Inc. d/b/a B&M Heating and Cooling (the "Company")
operates in one industry segment and is primarily engaged in the installation
and servicing of air conditioning and heating systems for residential customers
in the Pinellas County, Florida area.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The balance sheet as of September 30, 1998 and the related statements of
operations, stockholders' equity (deficit), and cash flows for the nine months
then ended (interim financial statements) have been prepared by the Company's
management and are unaudited. The interim financial statements include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the interim results.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted from the interim financial statements. The
interim financial statements should be read in conjunction with the December 31,
1997 audited financial statements appearing herein. The results of the nine
months ended September 30, 1998 may not be indicative of operating results for
the full year.
RECOGNITION OF REVENUE
Revenue on all of the Company's contracts for residential installation and
service and maintenance revenue are recognized upon completion of the services,
which is usually within one to two days.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash
The carrying amount reported in the balance sheet for cash approximates fair
value.
F-55
<PAGE> 58
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable, Notes Payable, Accounts Payable, and Accrued Liabilities
The carrying amounts reported in the balance sheet for accounts receivable,
notes payable, accounts payable, and accrued liabilities approximate fair value.
Accounts receivable are generally unsecured.
The Company primarily purchases HVAC units and parts from H.B. Adams
Distributors, Inc. d/b/a Imperial Supply. Total purchases of equipment and parts
from this supplier during 1997 totaled approximately $430,000.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
During the year ended December 31, 1997, amounts charged to bad debt expense
totaled $2,770, and no accounts were written off.
INVENTORIES
Inventories are stated at cost, which is not in excess of market. Cost is
determined by the first-in, first-out ("FIFO") method for all inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are provided on the straight-line method over the following useful
lives:
<TABLE>
<CAPTION>
YEARS
--------------------
<S> <C>
Furniture and fixtures 7
Vehicles 5
</TABLE>
F-56
<PAGE> 59
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of," requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and has determined that
there were no indications of impairment as of December 31, 1997.
DEFERRED REVENUE
The Company pre-sells maintenance contracts in the form of extended service
agreements ("ESA"). ESA revenue is recorded as deferred revenue and recognized
as income when the service is performed.
WARRANTIES
Customers receive a one year warranty on parts and labor from the date of
installation of the heating and air conditioning unit. This warranty runs
concurrent with the manufacturer's warranty on parts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
F-57
<PAGE> 60
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The stockholders of the Company have elected under Subchapter S of the Internal
Revenue Code to include their respective percentage of the Company's income in
their own income for federal income tax purposes. Accordingly, the Company is
not subject to federal and state income tax.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. During 1997, the Company
expensed $1,029.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in stockholders'
equity (except those arising from transactions from owners) and includes net
income, net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. The adoption of SFAS No. 130 in
1998 did not have an effect on the Company's financial statements.
F-58
<PAGE> 61
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
2. DEBT
Debt consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------------
<S> <C>
Installment and equipment notes $ 83,976
Less current portion 54,573
---------------------
$ 29,403
=====================
</TABLE>
The Company has various installment and equipment loans to various lenders which
are secured by vehicles and equipment. These loans bear interest at various
fixed rates ranging from 9.25% to 10.50% per annum at December 31, 1997. These
loans require monthly payments ranging from $425 to $656 and are due through
October 2000.
As of December 31, 1997, the aggregate amounts of annual principal maturities of
long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ 54,573
1999 23,025
2000 6,378
Thereafter --
---------------------
$ 83,976
=====================
</TABLE>
3. LEASES
Total rental expense for all operating leases was $13,396 for 1997. The Company
leases certain equipment and office and warehouse facilities under terms of
noncancelable operating and capital lease agreements which expire at various
dates through February 2000. The building lease has a three year renewal option
which may be exercised at the Company's discretion provided there have been no
defaults under the terms of the lease agreement. The renewal period calls for a
4% increase per year in the base rent, as defined in the lease agreement.
Minimum rental commitments at December 31, 1997 under capital and operating
leases having an initial noncancelable term of one year or more are as follows:
F-59
<PAGE> 62
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
3. LEASES(CONTINUED)
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-----------------------------------------
<S> <C> <C>
1998 $2,837 $ 10,534
1999 -- 1,772
2000 -- 295
Thereafter -- --
-----------------------------------------
$ 12,601
=====================
Amounts representing interest 351
--------------------
Present value of net minimum rentals
(all of which is classified as current) $2,486
====================
</TABLE>
The carrying values of assets under capital leases, which are included with
owned assets in the accompanying balance sheet, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------------
<S> <C>
Furniture and fixtures $5,183
Less accumulated amortization 987
---------------------
Net equipment under capital leases $4,196
=====================
</TABLE>
Amortization of the assets under capital leases is included in depreciation
expense.
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company maintains general liability insurance coverage and umbrella policies
to insure itself against any liabilities occurring in the normal course of
business. The Company believes that its insurance coverage is adequate.
F-60
<PAGE> 63
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
5. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The Company operates under Subchapter S of the Internal Revenue Code and is not
subject to corporate federal and state income tax. In connection with the sale
of the Company (See Note 7), the Subchapter S election will be terminated. As a
result, the Company will be subject to corporate income taxes subsequent to the
termination of S corporation status. The Company had a tax loss of $55,000 for
1997. Had the Company filed federal and state income tax returns as a regular
corporation for 1997, income tax expense under the provisions of SFAS No. 109
would have been $22,000.
At the date of termination of S corporation status, the Company will be required
to provide deferred taxes for cumulative temporary differences between financial
reporting and tax reporting basis of assets and liabilities. Such deferred taxes
will be based on the cumulative temporary differences at the date of termination
of S corporation status. The effect of recognizing the deferred taxes will be
recorded as an adjustment to goodwill in purchase accounting. If the termination
of S corporation status had occurred at September 30, 1998, the deferred tax
asset would have been approximately $17,500.
6. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed a plan which will included testing, modifying and
replacing portions of its software so that its computer systems will function
properly with respect to dates in the Year 2000 and thereafter. According to
management estimates, any further Year 2000 project costs, if any, will not
materially affect the operating results or the financial position of the
Company.
F-61
<PAGE> 64
Womack-O'Bannon & Choco, Inc.
d/b/a B&M Heating and Cooling
Notes to Financial Statements (continued)
6. IMPACT OF YEAR 2000 (UNAUDITED)(CONTINUED)
If the steps taken by the Company and its material vendors and business partners
to be Year 2000 compliant are not successful, the Company would likely
experience various operational difficulties resulting in a material adverse
effect upon the Company's financial condition and results of operations. These
could include, among other things, processing transactions to an incorrect
accounting period, difficulties in posting general ledger entries and lapses of
service by vendors. If the Company's plan to install new systems which
effectively address the Year 2000 issue is not successfully or timely
implemented, the Company may need to devote more resources to the process and
additional costs may be incurred. The Company believes that the Year 2000 issue
is being appropriately addressed and does not expect the Year 2000 issue to have
a material adverse effect on the financial position, results of operations or
cash flows of the Company in future periods.
The Company currently does not have a contingency plan to address the failure of
the Company's IT or non-IT systems or the systems of material third parties to
be Year 2000 compliant. Should the remaining review of the Company's Year 2000
risks reveal potentially non-compliant computer systems or material third party
risks, contingency plans will be developed to address the deficiencies revealed
at that time.
7. SUBSEQUENT EVENT
Subsequent to year end, the Company signed an Agreement and Plan of Merger with
Service Experts, Inc. ("Service Experts"). In accordance with the Agreement and
Plan of Merger, the Company merged with and into a wholly-owned subsidiary of
Service Experts effective September 30, 1998.
In connection with the business combination of the Company with Service Experts,
Service Experts paid all notes payable outstanding.
F-62
<PAGE> 65
PRO FORMA COMBINED FINANCIAL STATEMENTS OF
SERVICE EXPERTS, INC.
Service Experts, Inc. (the "Company") was incorporated on March 27, 1996.
The Company operates in one industry segment and is primarily engaged in the
replacement and servicing of HVAC units for residential and commercial
customers. The Company has Service Centers located in cities across the United
States. The operations of the Company's subsidiaries other than Pooled Companies
(as defined below) have been included in the Company's financial statements from
their respective effective dates of acquisition. The Company's historical
financial statements have been restated for all periods presented by including
the historical results of the 1997 Pooled Companies and the 1998 Pooled Company
(see Table I).
The following unaudited pro forma combined financial statements give effect
to the acquisition by the Company of 39 Acquired Companies (as defined below)
in exchange for shares of the Company's Common Stock, cash, warrants to purchase
shares of Common Stock, convertible subordinated notes and the assumption of
certain debt.
The unaudited pro forma combined balance sheet as of September 30, 1998
gives effect to the acquisition of 13 Acquired Companies closed effective after
September 30, 1998 (see Table I). The unaudited pro forma combined statement of
income for the nine months ended September 30, 1998 gives effect to the
acquisition of 26 Acquired Companies closed effective during the nine month
period ended September 30, 1998 (see Table I), and the 13 Acquired Companies
which were closed effective after September 30, 1998 as if such transactions had
occurred as of January 1, 1998. The unaudited pro forma combined statement of
income for the 12 months ended December 31, 1997 gives effect to the acquisition
of the 1997 and 1998 Pooled Companies as described below, 32 Acquired Companies
closed during 1997 (see Table I), the 26 Acquired Companies closed effective
during the nine month period ended September 30, 1998 and the 13 Acquired
Companies closed effective after September 30, 1998 as if such transactions had
occurred on January 1, 1997.
TABLE I
The 1997 Pooled Companies
*1. C. Iapaluccio Company, Inc.
2. Hawk Heating & Air Conditioning, Inc.
*3. TML, Inc.
*4. Parrott Mechanical, Inc.
5. McAlister Heat & Air, Inc.
The 1998 Pooled Company
*1. Dodge Heating and Air Conditioning, Inc., et al. and
DH&A, Inc.
13 Acquired Companies closed subsequent to September 30, 1998
*1. Climate Design Systems, Inc.
2. Eveready Corporation
3. Austin Brothers, Inc.
4. Womack - O'Bannon, Inc.
*5. Womack - O'Bannon & Choco, Inc.
*6. Ben Peer Heating, Inc.
*7. PTM Enterprises, Inc.
8. Jansen's Heating & Air Conditioning, Inc.
9. Local Furnance Co., Inc.
10. R&M Climate Control, Incorporated
11. Climate Masters Service Company, Inc.
12. McPhee, Inc.
13. Shelburne Refrigeration, Inc.
26 Acquired Companies closed during the nine month period ended
September 30, 1998
1. Gulf Coast Cooling, Inc.
2. Jack Nelson Co., Inc.
3. Dan Jacobs Heating & Cooling, Inc.
4. Becht Heating & Cooling, Inc.
*5. Davis the Plumber, Inc.
6. Lee Voisard Plumbing & Heating, Inc.
7. Climate Control, Inc.
8. Triton Mechanical, Inc.
*9. Strand Brothers, Inc.
10. Astron Residential, Inc.
11. Doler Plumbing & Heating, Inc.
12. Atlantic Air Conditioning and Heating, Inc.
*13. Steel City Heating & Air, Inc.
14. Deland Heating & Air Conditioning Company
15. Kozon, Inc.
16. Royden Commercial Services, Inc.
17. Albritten Plumbing Heating and Air Conditioning, Inc.
18. Alert Heating Service, Inc.
19. Russell Mechanical, Inc.
20. Andros Refrigeration, Inc.
21. Epperson, Inc.
*22. Midland Heating & Air Conditioning, Inc.
23. Economy Heating and Air Conditioning, Inc.
24. The Mathews Air Conditioning and Heating, Inc.
25. Matz Sheet Metal Works, Inc. and Right Way Heating
and Air Conditioning Service, Inc.
26. Warshaw's Energy Savings Design, Inc.
32 Acquired Companies closed during 1997
*1. B.W. Heating & Cooling, Inc.
*2. Chief/Bauer Heating & Air Conditioning, Inc.
*3. Gaddis Co.
*4. Dial One Raymond Plumbing, Heating & Cooling, Inc.
*5. Parker Heating & Air Conditioning Incorporated
*6. Sylvester Corp.
*7. Roland J. Down, Inc.
*8. Stark Services Company, Inc.
*9. Claire's Air Conditioning and Refrigeration, Inc.
*10. Claire & Sanders, Inc.
*11. Piedmont Air Conditioning Company
12. Royden, Inc.
13. Superior Air Conditioning, Inc.
*14. ProAir Services, Inc.
*15. Artic Aire of Chico, Inc.
16. A-1 Air Conditioning, Inc.
*17. Mid Fla Heating & Air, Inc.
18. All American Air Conditioning & Heating, Inc.
19. The McElroy Service Company
20. Bill Ingraham Service Company, Inc.
*21. S & W Conditioning, Inc.
*22. Berkshire Air Conditioning Company
*23. J.M. Jenks Incorporated
*24. Teays Valley Heating and Cooling, Inc.
25. Ainsley & Son Heating, Inc.
26. Knochelmann, Inc.
27. Stanley Heating and Air Conditioning, Inc.
28. George B. Givens Company, Inc.
*29. Holmes Sales & Service, Inc.
*30. Getzschman Heating & Sheet Metal Contractors
31. Thompson and Sons Heating and Air Conditioning Company
32. Air Experts, Inc.
* Indicates that audited financial statements for the Acquired Companies
previously have been filed in a Form 8-K or Form S-4.
F-63
<PAGE> 66
The unaudited pro forma combined financial statements have been prepared by
the Company based on the historical financial statements of the Company and of
the companies referred to in Table I and certain preliminary estimates and
assumptions deemed appropriate by management of the Company. The pro forma
combined financial statements presented herein have been prepared based on
certain assumptions and include certain pro forma adjustments. The Company has
not completed all the evaluations necessary for the final purchase price
allocations related to certain of the acquired businesses; accordingly, actual
adjustments that reflect final evaluations of the purchased assets and assumed
liabilities may differ from the pro forma adjustments reflected herein.
These pro forma combined financial statements may not be indicative of
results that would have been achieved had these acquisitions occurred on the
dates indicated or of results which may be realized in the future.
The pro forma combined financial statements should be read in conjunction
with the historical financial statements of the Company.
F-64
<PAGE> 67
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Acquired Pro Forma Pro Forma
Company Companies Adjustments As Adjusted
-------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 6,024 $ 1,495 $ (10,445) (a) $ 885
(1,189) (b)
5,000 (c)
Receivables:
Trade Receivables, net............. 46,454 3,155 -- 49,609
Related Party...................... 340 23 -- 363
Employee........................... 533 99 -- 632
Other.............................. 4,999 15 -- 5,014
------------ ------------- -------------- -------------
52,326 3,292 -- 55,618
Inventories 25,594 1,596 -- 27,190
Cost and estimated earnings in excess 4,885 64 -- 4,949
Prepaid expenses and other current assets 5,675 177 -- 5,852
Current portion of notes receivable --
related parties................... -- -- -- --
Current portion of notes receivable 191 -- -- 191
Deferred income taxes 3,972 -- -- 3,972
------------ ------------- -------------- ------------
Total current assets..... 98,667 6,624 (6,634) 98,657
Property, buildings and equipment, net 34,940 2,351 -- 37,291
Notes receivable--related parties........ 334 2 -- 336
Notes receivable--other.................. 567 -- -- 567
Goodwill................................. 169,766 1,232 16,188 (a) 187,186
Unallocated purchase price............... -- -- --
Other assets............................. 6,889 502 -- 7,391
------------ -------------- -------------- ------------
Total assets $ 311,163 $ 10,711 $ 9,554 $ 331,428
============ ============== ============== ============
Liabilities and Stockholders Equity
Current liabilities:
Short-term debt...................... $ -- $ 104 $ (104) (b) $ (0)
Trade accounts payable & accrued..... 16,292 3,801 -- 20,093
Accrued compensation................. 8,287 146 -- 8,433
Accrued warranties................... 3,260 239 -- 3,499
Income taxes payable................. 1,118 10 -- 1,128
Deferred revenue..................... 10,295 521 -- 10,816
Deferred income taxes................ 80 5 -- 85
Billings in excess of costs and 1,663 2 1,665
Current portion of long-term debt.... 274 313 (190) (b) 5,397
5,000 (c)
------------ ------------- --------------- -----------
Total current liabilities: 41,269 5,141 4,706 51,116
Long-term debt, and capital lease
obligations, net of current.......... 73,302 894 3,769 (a) 77,071
(894) (b)
Deferred income taxes.................... 1,875 -- 1,875
Common stock......................... 171 641 (638) (a) 174
Additional paid-in-capital........... 155,424 209 6,437 (a) 162,070
Treasury stock....................... (146) 146 (a) --
Retained earnings.................... 39,122 3,972 (3,972) (a) 39,122
----------- -------------- --------------- -----------
194,717 4,676 1,973 201,366
----------- -------------- --------------- -----------
$ 311,163 $ 10,711 $ 9,554 $ 331,428
=========== ============== =============== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-65
<PAGE> 68
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACQUIRED PRO FORMA PRO FORMA
COMPANY COMPANIES ADJUSTMENTS ADJUSTED
-----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Revenue.................................... $ 293,604 $ 52,364 -- $ 345,968
Cost of goods sold ............................ 188,083 30,783 -- 218,866
---------- --------- ------- ----------
Gross margin .................................. 105,521 21,581 -- 127,102
Selling, general and administrative ........... 73,660 17,801 (1,327) (d) 90,134
---------- --------- ------- ----------
Income from operations ........................ 31,861 3,780 1,327 36,968
Other income (expense):
Interest expense ............................ (2,395) (223) (147) (e) (2,765)
Interest income ............................. 355 69 -- 424
Other income ................................ 483 427 -- 910
---------- --------- ------- ----------
(1,557) 273 (147) (1,431)
---------- --------- ------- ----------
Income before taxes ........................... 30,304 4,053 1,180 35,537
Provision for income taxes .................... 12,141 1,442 1,045 (f) 14,628
---------- --------- ------- ----------
Net income .................................... $ 18,163 $ 2,611 $ 135 $ 20,909
========== ========= ======= ==========
Pro forma net income per share:
Basic ....................................... $ 1.09 $ 1.20
Diluted ..................................... $ 1.07 $ 1.19
Pro forma weighted average shares outstanding:
Basic ....................................... 16,684 672 (g) 17,356
Diluted ..................................... 16,922 674 (h) 17,596
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements.
F-66
<PAGE> 69
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Acquired Pro Forma
Company Companies Adjustments Adjusted
-------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net Revenue......................... $248,110 $165,360 $ -- $413,470
Cost of goods sold.................. 161,281 103,752 -- 265,033
-------- -------- -------- --------
Gross margin........................ 86,829 61,608 -- 148,437
Selling, general and administrative. 62,103 51,884 (1,775)(d) 112,212
-------- -------- -------- --------
Income from operations.............. 24,726 9,724 1,775 36,225
Other income (expense):
Interest expense.................. (772) (943) 450 (e) (1,265)
Interest income................... 793 128 -- 921
Other income...................... 578 544 -- 1,122
-------- -------- -------- --------
.................................... 599 (271) 450 778
-------- -------- -------- --------
Income before taxes................. 25,325 9,453 2,225 37,003
Provision for income taxes.......... 9,380 2,789 2,473 (f) 14,642
-------- -------- -------- --------
Net income.......................... $ 15,945 $ 6,664 $ (248) $ 22,361
======== ======== ======== ========
Pro forma net income per share:
Basic............................. $ 1.08 $ 1.33
Diluted........................... $ 1.07 $ 1.32
Pro forma weighted average shares
outstanding:
Basic............................. 14,774 2,029 (i) 16,803
Diluted........................... 14,922 2,070 (j) 16,992
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Statements
F-67
<PAGE> 70
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
PRO FORMA BALANCE SHEET ADJUSTMENTS
(a) Reflects the payments to owners of eight Acquired Companies of
$10,445,000 in cash, 265,000 shares of Common Stock and $3,769,000 in
convertible debt resulting in an increase in Goodwill of $16,188,000 which is
amortized over 40 years. The allocation of the purchase price associated with
the acquisitions has been determined by the Company based on available
information and is subject to further refinement.
(b) Reflects the assumed payment of all acquired outstanding debt.
(c) Reflects borrowings on line-of-credit.
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
PRO FORMA STATEMENTS OF INCOME ADJUSTMENTS
(d) REFLECTS THE FOLLOWING ADJUSTMENTS TO SELLING, GENERAL, AND
ADMINISTRATIVE:
(i) Elimination of historical owners' compensation.............. $ (9,858) $ (3,599)
(ii) Additional compensation relating to new agreements with
previous owners............................................. 6,023 2,185
(iii) Adjust rent expense per new leases.......................... 39 64
(iv) Corporate office overhead expenses.......................... 1,653 523
(v) Goodwill amortization....................................... 2,378 691
(vi) Elimination of general and administrative expenses.......... (2,010) (1,191)
-------- --------
$ (1,775) $ (1,327)
======== ========
</TABLE>
F-68
<PAGE> 71
PRO FORMA COMBINED FINANCIAL STATEMENTS OF SERVICE EXPERTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
TWELVE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
(e) REFLECTS THE FOLLOWING ADJUSTMENTS TO INTEREST EXPENSE RELATED TO:
(i) Elimination of all other debt assumed in the transaction to
be paid at closing.......................................... $ 943 $ 223
(ii) Additional interest on debt incurred with transaction....... (493) (370)
-------- --------
$ 450 $ (147)
======== ========
(f) REFLECTS THE FOLLOWING ADJUSTMENTS TO INCOME TAXES:
(i) Additional income tax provision for state and federal taxes
at a combined effective rate of 40% as certain Acquired
Companies previously taxed as Subchapter S corporations..... $ 992 $ 179
(ii) Additional income taxes on adjustments (c) and (d).......... 530 589
(iii) Additional income tax provision for state and federal taxes
due to the non-deductibility of goodwill.................... 951 277
-------- --------
$ 2,473 $ 1,045
======== ========
(g) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 672,000 shares issued to the owners of the Acquired
Companies.
(h) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 672,000 shares issued to the owners of the Acquired
Companies.
(ii) 2,000 shares representing dilutive effect of warrants
issued to the owners of the Acquired Companies.
(i) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 2,029,000 shares issued to the owners of the Acquired
Companies.
(j) Reflects adjustments to weighted average shares outstanding as
follows:
(i) 2,029,000 shares issued to the owners of the Acquired
Companies.
(ii) 41,000 shares representing dilutive effect of warrants
issued to the owners of the Acquired Companies.
</TABLE>
F-69
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SERVICE EXPERTS, INC.
By: /s/ Anthony M. Schofield
----------------------------------
Anthony M. Schofield
Chief Financial Officer and
Secretary
Date: December 21, 1998
<PAGE> 73
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
23 Consent of Ernst & Young LLP
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Post-Effective Amendment No.
6 to the Registration Statement on Form S-4 (No. 333-12319) and related
Prospectus of Service Experts, Inc. related to $50,000,000 aggregate amount of
shares of its $.01 par value common stock, warrants to purchase its common stock
("Common Stock Warrants") and the shares of its common stock issued thereunder
upon the exercise of such Common Stock Warrants or debt securities ("Debt
Securities"), and the shares of common stock issued thereunder upon the
conversion thereof; in the Shelf Registration Statement on Form S-3 (No.
333-43917) and related Prospectus pertaining to the resale of up to 500,000
shares of the Company's Common Stock issued without registration under the
Securities Act of 1933; in the Registration Statement on Form S-8 (No.
333-11791) pertaining to the Service Experts, Inc. 1996 Incentive Stock Plan,
1996 Non-Employee Director Stock Option Plan, and 1996 Employee Stock Purchase
Plan; in the Registration Statement on Form S-8 (No. 333-59711) pertaining to
the Service Experts, Inc. Amended 1996 Incentive Stock Plan, Amended 1996
Employee Stock Purchase Plan, 1997 Nonqualified Stock Option Plan, Amended 1997
Nonqualified Stock Purchase Plan and Amended Service Center Stock Option Plan;
of our report dated December 4, 1998 with respect to the financial statements of
Midland Heating and Air Conditioning, Inc., of our report dated November 27,
1998 with respect to the financial statements of Strand Brothers, Inc., of our
report dated December 11, 1998 with respect to the financial statements of Ben
Peer Heating, Inc. and of our report dated December 10, 1998 with respect to the
financial statements of Womack-O'Bannon & Choco, Inc. d/b/a B&M Heating and
Cooling included in this Current Report on Form 8-K dated December 21, 1998,
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Nashville, Tennessee
December 21, 1998
